CEO F DUNN SPEAKS
Frank talk: The reluctant CEO behind Nortel's turnaround opens up at last
James Bagnall and Bert Hill
The Ottawa Citizen
January 15, 2004
Nothing says 'recovery' quite as well as a clear win. Nortel's stock this year has already jumped more than 50 per cent, thanks in part to last week's news of a breakthrough contract with Verizon Communications, the largest regional U.S. phone company. The victory was especially sweet for chief executive Frank Dunn, who has spent more on R&D in the past two years than outside analysts felt was wise. Dunn recently gave a rare, wide-ranging interview with the Citizen, and what follows is an edited digest of the conversation.
Q: Did you ever think Nortel wouldn't make it?
A: I'm a big believer in the concept that you learn from history but you don't worry about history. You have to put all your energy on making the next decision. My mother said to me, 'You'll never take a job that you plan to lose at.' There was not a thought in the Nortel team that we weren't going to make it through. What good is fretting? It's all about focusing energy on something you can control.
Q: Even so, when Nortel was tracking below $1 and you were still losing a lot of money, you must have entertained doubts.
A: It was more of a challenge than I thought it would be. But we've hit a lot of bumps in the road in Nortel's 100-year history. Nortel is about never giving up. I went around to our leadership team and said 'we're not going to let this company fail because the people who created this company, we're not going to let them down.' And we're going to pass on the baton and they'll have a tough time at some point in the future but they'll make sure it succeeds. Anyone who thought we weren't going to win has no idea of the character of a Nortel employee.
Q: You're a very different kind of CEO than John Roth. Is that deliberate?
A: (Pause) No. Everybody's different. There's been a long line of Nortel CEOs and they have different strengths and weaknesses. The trick is to surround yourself with people who will offset the weaknesses and build on the strengths. John had a different background, style and philosophy.
Q: Were you initially reluctant to take on the top job?
A: Back in the spring, 2001 timeframe, when (former chief operating officer) Clarence Chandran, stepped down for health reasons, I said 'no'. The company's CEO selection committee called me in and said 'Hi, Frank. You know why we're here' and I said 'I'm going to give you four reasons why I don't think I'm the guy.' I gave my reasons and I left.
Q: Do you want to share the four reasons with us?
A: No. (laughs). I thought then it would beneficial to look for an external CEO. Later that fall discussions resumed and I changed my mind. A lot of it has to do with this belief that we're a family. And if your family asks you to do something, you think about it.
Q: How has your decision played out at a personal level?
A: It's been a long two years. From Aug. 23 until early December, I was in North America for four days. It's not easy to keep the body clock tuned and to keep in shape. These past two years have been really tough on my family. My son -- he's 24 -- said to me the other day 'Dad, you haven't been around for a year-and-a-half.' Mentally.
Q: When you do get down time, how do you spend it?
A: I spend a lot of time with my family. My son's a golfer, my wife's a golfer, we try to get out to the course. I try to see my daughter who's out in B.C. in university. I try to push work further back a bit -- I don't think you ever forget work. As I go into my third year, I'm going to try to achieve a better balance than I've had in the past two years. In fact, I want everybody at Nortel to enjoy a more balanced life than they've had.
Q: We understand you've re-implemented salary raises for Nortel employees. That should help.
A: We want to go back to running this business in a normal way -- so that people get bonuses when they hit financial targets. A lot of executives have a base salary and variable and long-term compensation. We'll go back to normal. With only a few exceptions, we haven't paid out raises for two years. We gave some raises to junior engineers. Going into 2004, we'll go back to the normal model. There will be a general increase at the lower level. We do benchmark salaries for the different jobs and people who are already well paid against their benchmark may not see a raise.
Q: You talked earlier about the character of a Nortel employee.
A: When we went into this downturn, we said there won't be a bonus for a couple of years, until we start making a profit and so on. Did other companies do that? Yes. And even though some of our competitors paid out retention bonuses to convince executives to stay, we did not. Our view was that we wanted our employees to stay and fight to win because they believe in this company. If we have to plead with them to stay, the next time we hit a bump in the road what's going to happen? So we said we're not going to do that. The people that stayed, stayed because they weren't going to let the company fail. That's the character of Nortel.
Q: How did you decide which business units to drop and which to keep? You had to make a lot of very tough decisions very quickly.
A: We knew we needed to get the size down and we knew intuitively we needed to refocus the company. Nortel was trying to do too many things. We had to get it down to what's really important. So we quickly decided to concentrate on certain things and then created the organization around them. We knew what had to be in, what lay way outside the cut line. Exactly where the cut line was, we would adjust as we went.
Q: So you decided pretty quickly on the four core business units then?
A: We don't have four core businesses. That's a misconception. I have organizations that serve four different market segments (optical, enterprise, wireless and wireline). At the highest level, we decided Nortel is in the business of building broadband-based converged networks -- in other words, high-capacity networks that can handle voice, data and video.
Optical technology is a fundamental foundation. A lot of people have told me optical technology isn't important. They don't understand. For network reliability it's critical. I never, ever wavered on the importance of optical. You also need packet core IP data networking capability. Now, the broadband network might be wireless, it might be Internet over optics. But it's a broadband connection in a single core network. So that's what we've protected. I have one core strategy that looks at four different markets.
Q: How many businesses do you have, or do you look at it that way anymore?
A: No.
Q: You used to have about three dozen businesses.
A: (I tell my engineers) that Nortel has never innovated as a Nortel company. Innovation would flow from its individual business units. The way technology breakthroughs are happening, you've got to take all kinds of different pieces, bring them together and make something really special.
Here's an example. In October, we announced a wireless LAN (a company-wide network), that is something really powerful. It includes special wireless technology, antenna technology, routing capability. It configures itself. To build it, we included wireless guys, some engineers from IP routing, some with expertise in voice. That's what Nortel's innovation engine has to be -- a company-wide effort, not a series of efforts from different business units.
Q: This has been quite a sea-change in the way the organization operates day-to-day, hasn't it?
A: We spend a lot of time on collaboration and we've become much better at working outside of silos and creating virtual teams. Are we anywhere near where we want to be? No. To change the culture, that way of working, I'm on a journey. I told the board of directors that the idea is to think of Nortel as a bullpen of 35,000 people. When you need to do a task, you pull a virtual team out of the bullpen. That's the perfect model.
Q: How are you getting your executives on board with this?
A: Actually, we had the top 200 executives in Ottawa in November. One of the things I wanted to do, I wanted to show them what we have in our labs. A lot of them didn't know; they travel around the world. I knew a lot more about what we could sell and the value proposition and so on, than a lot of my sales executives.
My executives are evaluated on 16 aspects of leadership -- and one aspect concerns their ability to collaborate with other managers. I told all my senior team that their rating on collaboration will make up 10 per cent of their total evaluation marks (which, in turn, affect bonuses and pay). We have got a lot better at collaborating but we still have a long way to go.
Q: How do you spend your time as CEO compared to your previous job as chief financial officer?
A: When I started this job I didn't, as you know, go and talk to the press, I went and talked to my customers and talked to my employees. I travelled 70 per cent to 80 per cent of the time.
Q: When you went to see U.S.-based customers such as Verizon and SBC Communications did you get any surprising messages during your first tour?
A: The message I got is that we had stopped talking to customers and that that engagement was important. Some of them, they never saw us. I'm not talking about the sales people because they were still going to the accounts and making calls.
Q: They wanted to hear from the CEO.
A: It's not a one-person thing -- (Nortel chief technology officer) Greg Mumford travels a huge amount of time. By the way, we bring CEOs to the Ottawa labs all the time. Our view is, we bring CEOs here and bring them to the labs and we actually show them what our capabilities are. Part of it is to explain to them it's not about a new technology widget, it's about an application that could change the way they run their business. If I'm a good salesman, they should be intrigued enough to come. Usually they never come, right? So I'm 10 for 10 now.
Q: Care to tell us which CEOs you've enticed here?
A: No. (laughs)
Q: Will Ottawa continue to be the R&D core?
A: Today, more than one out of every three employees work on the R&D side of the house and 20 per cent of them work here in Ottawa. This is clearly the core of Nortel.
Q: Your global headcount is still 36,000?
A: The last number we gave out was 35,500.
Q: And roughly 6,000 are based in Ottawa? That's 17 per cent -- about the same as during the past few years. You talked about doubling your head count in R&D in China. There's other offshore stuff.
A: We're a global company -- we get, what, about five per cent of our revenue out of Canada. To do well, we need to build on our base in Asia. When I look at the use of video, the creativity that's coming out of Asia now is mind-goggling. They're more advanced at it. Each country, each area, comes at things from a different perspective so they add value in different ways. If you're a global company, you need to tap that.
We need to have a global network of our core capability and we need to have the diversity. I need to put people in China, in India and other places. I need to get close to my customers. I need to have a global reach and partner closely with customers where they are. That's my model.
Q: There are two different aspects to this. One is putting your own people on the ground in China, in India. But a lot of North American companies are also outsourcing parts of their R&D as well. What's your strategy on this front in both these countries?
A: We got into an environment at Nortel where we tried to do everything. If we didn't have a technology our customers wanted, we went out and bought it for them. We became so broad that we became average at everything.
We need now to focus on partnering with world-class players. There are a lot of other players from outside the telecom industry that we need to work with. Computing and telecom are coming together big time. So we will partner there. There are companies that do things very well in the software world; some of them are in India, others are in North America. We need to work with them. Maybe we'll start with an OEM deal (original equipment manufacturing arrangement under which a partner includes Nortel gear as part of its product or vice versa) and then either build our own capability or amalgamate.
Q: Will you also be contracting out more R&D to companies such as India-based TCS, Wipro and Infosys?
A: Do we need those companies today? Yes. Have we used them for a very long time? Yes.
Q: I'm asking about the future strategy.
A: Nortel is a significant player in the optical space in India. We sell a lot of our call center technology in India. However, our wireless business there isn't very big. Nor is our wireline networking business. We are working really hard to expand our presence. As we start becoming successful that's when we'll ask ourselves whether we'll use more Wipro programmers, for example, or whether we should hire our own staff in India or maybe hire people back in North America. Maybe I'll want to build my own very significant development lab in India. I'll adapt and adjust to circumstances.
Q: Are you comfortable with this job yet?
A: I'm a big believer in continuous learning. You learn from your mistakes. I go and do things and say 'Oh, I didn't do that very well' and people tell me I shouldn't say that. Why? If I think I do everything perfectly, something's wrong. And, by the way, if you guys think you're doing everything right, something's wrong.
Q: Demonstrably untrue as well.
A: A lot of the things I did really well, I don't even remember them. So you grow and learn through things you fail at. To be successful, you need to take risks, you need to make choices and you make mistakes. I'm an honest person. I really believe you should talk straight and be honest with people. Am I more confident as CEO? Absolutely. And I'm proud of the job the company has done in which I had a role to play.
Q: It's less fun being CEO than it used to be.
A: A few years ago, business, society, we lost our way. CEOs were made out to be bigger than the company. You go back 20 years, most people didn't know who the CEO of a company was. During the tech boom, we got carried away. If you want to talk about the pressures in my job, I'm OK with that. But, you know, it's not about what I do personally, it's not about the things I own, because all of a sudden it becomes about me -- and I think that's wrong. As soon as it's about Frank, it's a belief I have, not as CEO today, but when I watched them make movie stars of CEOs, I think that's wrong.
Q: Nortel dealt extensively with Worldcom and Qwest -- companies that had financial accounting irregularities. Did Nortel's senior executives not have a sense of what was going?
A: I have no idea. You're asking even though Worldcom was a big customer of mine and Enron was a little one, did we sense that and so on? The answer is no. But I wouldn't expect to sense that of any of them.
Q: Why didn't you buy Innovance (an Ottawa-based optical systems startup that recently laid off nearly all its staff)?
A: How would you feel if you were an engineer and every time a new technology came out, your company paid a lot of money to buy that technology?
When it comes to building very robust products that scale (can serve huge numbers of customers), Nortel has unbelievable talent. When we bought a lot of startups (in the late 1990s and 2000), our R&D group was given the job of making the technology scalable. It wasn't the greatest morale booster. Our engineers could have built the stuff, too. So, rather than paying huge amounts to buy technology and then fix it, why don't we just save a lot of money and ask our engineers to do what they're capable of. This doesn't mean I'll never consider an acquisition. But if we understand our markets, we should be anticipating where they are going to be in two years time -- and develop the products that will be needed. That's the way we used to do it. We're the ones that figured out digital switching, we were first to market with OC-192 (high-speed optical technology). We were doing that stuff before the customers really knew they needed that stuff.
Q: In fact they told you they didn't need it.
A: That's right. Well, customers will tell you what they're trying to do. It's up to us to interpret, go back to our labs and say 'If you want to do that, you need this'.
Q: Are your labs ahead of the curve now?
A: We asked ourselves a year-and-a-half ago what the world will need in 2004. It's coming out of our labs. Look at our new optical multiservices edge platform (which is meant to create simpler optical networks) and our wireless LAN (more efficient high-speed wireless networks). These products are world class. You should see some of the stuff we haven't publicly. So, guess what? We won't be looking to buy a lot more companies when our guys are ahead of the curve. I say that as a direction. You never say never.
Q: Is the HDX (a key optical switch) still alive and well?
A: The HDX is a heck of a product. The issue is that it's a very large product. In going up against competitors such as Ciena and Lucent, we decided we needed a smaller version. So we developed one. There's a couple of features we lack that some of our competitors have but we will address that in the next little while. The HDX is alive and well.
Q: Were you under a lot of pressure from the financial community to cut R&D faster and deeper?
A: We were asked why aren't you being more aggressive on R&D to get profits sooner. When we began restructuring the company, we decided to focus on what's going to be really important two, three, four years out -- and that's where we put our attention. We could have had higher revenues by chasing some business with smaller customers but it would have taken our focus away from doing the right things. I now have the highest (gross) profit margins in the industry. A lot of that is our innovation. My margins are 50 per cent. Who else has a margin close to 50 per cent in the carrier infrastructure business?
Q: You're still making cuts, for example, in the optical business.
A: I'm finished with corporate downsizing. I'm tired of that word. I tell my managers 'go out there and win and come back with good business opportunities I can invest in and I'll do it.' I'm moving to an organization model that says if you win, you should feel very comfortable. If you run a business that's not doing very well, it isn't fair to the rest of us to say 'just keep losing money'. The optical market is much slower than anyone thought. So what do we do? If they start to win and they grow the business and need more investment, they've got it. If they're not winning, you need to take corrective action. Remember these are people who said they would deliver the goods.
Exclusive Interview with Frank Dunn.
© The Ottawa Citizen 2004
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