Death of a Telecom

Christopher Rath

2008-07-27

Northern Telecom, which subsequently changed its name to Nortel Networks (and now operates under the name Nortel), experienced tremendous corporate growth during the the telecom bubble. It is my thesis that Nortel's business practices during the telecom bubble sowed the seeds that have resulted in Nortel's inability to recover from the bursting of the dot-com bubble. The purpose of this article is to discuss those seeds of failure.

During the 1990s, Nortel undertook a number of acquisitions and divestitures. Each activity was executed for its own specific business reason; however, one particular business theme stands out and is worth noting here: the divesting of low-margin, high volume product lines and lines of business. Two notable examples of this particular strategy were the sale of the analogue telephone business to Aastra and the spinoff of NetGear, both in 2000.

This intense focus on high margin products caused Nortel to shed each and every low margin business and product line. The employees responsible for each divested product or business either moved with the divested entity to its new corporate home, or they were laid-off once the work they were previously responsible for had been transitioned to the new owner.

Thus, the side-effect of this divestiture process was to gut the company of everyone possessing the knowledge and experience required to run business operations efficiently. So, when the Dot-com Bubble popped and Nortel's sales plummeted, there was no consciousness within management about the measures that needed to be taken to save the company.

It is interesting to note that the high margin and low margin businesses and products fell into two distinct groups: high margin products that were only in demand when the economy was expanding; and, low margin products that were of the type that would sell through a Dot-com Bubble burst type of event. For example, Nortel's customers were not interested in buying a lot of optical switching gear when the bubble burst (expensive, high margin products), but telephone handsets and home routers continued to sell through the Dot-com downturn (inexpensive, low margin products).

Nortel's complete abandonment of the low margin part of the telecom business meant that during and after the Dot-com collapse there was complete lack of cash flow, in addition to a dearth of managers qualified to take the action needed to shore up Nortel as it waited for future business opportunities.

While the abandonment of the low margin business was-in this writer's opinion-the largest of Nortel's errors, this was not its only mistake. Another major mistake was an extreme amount of outsourcing: for example, the complete outsourcing of Nortel's manufacturing operations, the outsourcing of many of Nortel's business processes (e.g., training and procurement), and the wholesale outsourcing of Nortel's Information Technology work.

Nortel's mistake vis a vis outsourcing was to outsource everything, no matter what, and without executing such outsourcing as a component  Nortel's business strategy. On its own---that is, outside the context of an overall business plan and accompanying strategy---outsourcing does not save money, improve service or operations, increase profits, lower expenses, or otherwise make a company more competitive. That said, targeted outsourcing or out-tasking of certain functions, when they are chosen for execution as part of an overall business plan and strategy, can be a tremendous benefit to the business.

To state this outsourcing mistake in other terms: Nortel embraced outsourcing itself as its business strategy; when, in fact, outsourcing is merely a tool to be utilised by business strategies and cannot itself be a company's business strategy.

Just as with the selling off of low margin business & products, too much outsourcing resulted in too much intellectual capital leaving the company; that is, Nortel no longer possessed employees and managers who were capable of properly managing Nortel's affairs and recovering from the Dot-com bust.

Almost a decade has passed since the Dot-com Bubble collapsed, and Nortel continues to lose market share, shed unprofitable products, layoff employees, and otherwise continue to slide towards bankruptcy.  Nortel's history and current situation should serve as a cautionary tale for others: just as a company shouldn't rely only on one product (or one customer) for its success, a company shouldn't rely only on only one type of business if that company is to be successful over time. Build a balanced business portfolio: yes, seek to diversify your customer base, but also build a portfolio of products and services that will carry your company through the ebb and flow of the economy.


ęCopyright 2008, Jean & Christopher Rath
Telephone: 613-824-4584
Address: 1371 Major Rd., Ottawa, ON, Canada K1E 1H3
Last updated: 2008/08/06 @ 08:20:24 ( )