How Nortel turned on its head and into the abyss

As the telecoms giant seeks bankruptcy protection, Matt Vella charts how it tried, and failed, to innovate its way out of trouble
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Two years ago, managers of Nortel Networks unveiled a risky strategy to transform the troubled telecoms equipment maker through innovation and design. Their agenda included modernising research and development, creating "future-proof" gear and experimenting with emerging technologies, from virtual worlds to Web 2.0. "We're not tweaking, we're turning Nortel on its head," John Roese, Nortel's chief technology officer, said in August.

Nortel was indeed turned on its head: last week it announced it was seeking bankruptcy protection. Analysts and innovation consultants alike say promises and buzzwords could not save the company from sagging demand for phone gear and a crippling $4.5bn (£3bn) debt load.

Nortel had embarked on an ambitious turnaround in 2005 under chief executive Mike Zafirovski, cutting jobs and selling businesses. In mid-2006 he hired Roese, a respected technologist, to revamp the company's flagging research and development.

Roese began by reorganising Nortel's $2bn annual R&D spending, directing 20 per cent towards emerging technologies and 60 per cent at core businesses. Previously, the bulk of spending had gone on supporting ageing telecoms products rather than developing new ones.

Adopting the language of business innovation gurus, he championed a so-called Incubation Program and Innovation Lab to identify and develop new technologies such as Web 2.0 applications that allowed employees to collaborate with one another online. Roese used a public blog to communicate with customers and attempt to re-establish Nortel as an innovator.

But his efforts weren't enough. "Twenty-eight months is hardly very long to change a company culture," says Jeneanne Rae, president of innovation firm Peer Insight. Companies with especially successful R&D outfits, such as Apple, Cisco and Boeing, have perfected the process of taking innovations out of the lab and into the marketplace, he adds.

What's more, Nortel's effort to move into providing services and web-based collaboration software was, according to Morningstar equity analyst Grady Burkett, viewed by many with "an air of scepticism". Many of the technologies championed by the refocused R&D department were also being pursued by competitors such as Alcatel-Lucent and Cisco, both of which boasted deeper pockets, Burkett notes. "The Web 2.0 projects just didn't seem to fit for Nortel," he says, adding that some 40 per cent of the company's business still comes from the core carrier business.

Ultimately, seeking bankruptcy protection may have been an acknowledgment that talk of innovation had failed to produce much that could give Nortel a promising future. Roese left the company on 2 January, writing in a farewell blog post: "I was brought in to help correct many years of neglect on R&D ... I am comfortable with [Nortel's] direction even if I am not a part of the path forward."

This article was sourced from the latest global edition of 'BusinessWeek'.