John Roese’s Blog CTO, Nortel

Location: Ottawa, Canada

One of the most significant challenges of being in the public eye and communicating to the press is the fact that headlines often fail to capture the true essence of the details, and often even the details are taken out of a broader context. That reality can certainly create significant confusion when complex topics are discussed. As a good example of this, yesterday I gave a talk at a Technology Executive Breakfast in Ottawa to discuss the progress we’ve been making against the transformation of R&D at Nortel. In this blog post, I would like to share some of that content. As you digest the details, though, I ask you to consider the headline “Nortel to rethink R&D work plans, executive says” and ask if it is an accurate reflection of the overall message.

Well over a year ago now, we began a significant R&D transformation effort within Nortel, where we began to look at R&D from a “total Nortel” perspective (versus from the perspectives of individual R&D groups within each of our lines of business). There were multiple reasons why we began this transformation. Among them … the fact that we were spending over 50% of our R&D budget on late-lifecycle products; our R&D spend as a percentage of revenue was much too high; we had very little re-use of technology going on across the businesses; we lacked common processes; and the employee satisfaction scores of our R&D teams were getting worse. Most of this was the natural result of the collapse of the telecom bubble and the dramatic changes in Nortel as a result. What became increasingly clear, though, is that if we did not stabilize and strengthen our R&D organization, then we could not reasonably expect to execute on our business strategy to lead in the era of hyperconnectivity.

In order to transform an R&D function that is both large (about 12,000 people) and distributed (many business units and all geographies), the effort needed to be comprehensive and positioned for the long term. Given that, we embarked on our path. This path included three major pillars. First, we needed to make sure we had a balanced, responsible, and stable R&D operating model; second, we needed to create a framework for world-class operations and process excellence; and third, we needed to recognize, cultivate, and celebrate our world-class people talent. Let me talk about each of these areas in a bit of detail.

Creating a balanced, responsible, and stable R&D operating model

To reach a viable long-term R&D operating model, we needed to do many complex and difficult tasks. First, we needed to get the total R&D spend to the 14-15% of revenue range -- more in line with the industry norm and our target operating model. This involved significant changes in R&D over the past 2 years and, unfortunately, did involve both people reductions and the shift of our global footprint. This is old news and is almost completed based on our decisive actions over the past 18 months. Today, we are operating inside of that target window.

Additionally, we needed to shift resources to new and emerging technologies. We did this through a strategy called “20-60-20”. Rather than spending more than 50% of our R&D budget on late-lifecycle products, we committed to moving resources so that only 20% would be late-lifecycle spend, 60% would be focused on growth and mature product activity, and a full 20% would be directed to emerging and new technologies and markets. Given the fact that we spend more than $1.7 billion a year on R&D, moving to this new alignment clearly meant some significant shifts of workforce to both new formations and new projects and skills. Again, this is old news, as we have already announced and executed on this and today, after less than 18 months, are operating at almost exactly 20-60-20.

As part of this first pillar, we also created an incubation fund, in order to open new addressable markets outside of the existing business units. Today, 3% of R&D is now devoted to “startups” within Nortel.

And, finally, last year we began to look at our R&D footprint in terms of developing a skills-based R&D site strategy. Today, we have a consolidated global, cross-business view of where we have critical masses of expertise. This skills-based site strategy is a more strategic way of doing R&D. It will make it easier to move resources to new jobs and opportunities within sites/skills cluster, and will create less disruption from an operational perspective (e.g., if we ramp down one project at a site, it will be much easier to redeploy those resources to another project that is ramping).

Creating world-class processes and operational excellence

The second pillar of R&D transformation at Nortel has been a focus on creating exceptional operations and processes. Here again, the transformation is complex but mostly complete. We first looked at structure, and in early 2006 we launched an effort to create a common engineering group. This group, consisting of thousands of R&D personnel, was created to provide a common foundation that could be leveraged by the business unit R&D teams. Under this group, we centralized platform work, common components, common management, silicon development, tools and R&D processes that could be leveraged across a range of product teams. This “build once, use many” approach goes directly to creating efficient re-use in the company and allows us to avoid hundreds of millions of duplicate spend in each area. Today, for example, almost all of our Carrier solutions leverage common platforms (work that was begun by Richard Lowe, our president of Carrier Networks and a strong proponent of this model) and as such are being delivered faster and at lower cost and greater scalability than before.

We also recently created a centralized R&D operations role under the leadership of Tony Pirih, who reports to me and oversees R&D operations – on a consolidated basis – across the company (with all other R&D leaders reporting into him on a dotted line). This consolidated management chain allows R&D to collectively act as one (one of the Nortel core principles that Mike Z articulates), to make rapid decisions and to develop cross-business unit processes to, again, drive efficiency and scale.

We have also made the decision to adopt the CMMI process and operations approach to institutionalize continuous improvement in R&D. CMMI is generally seen as the gold standard for process, and the results of a disciplined process and operational structure are well understood. We have now completed much of our baseline, have begun the efforts, and are starting to see the results. CMMI is a long-term commitment to process efficiency and quality, and unlike other initiatives in this list, is much more evolutionary than revolutionary.

Finally, we have added (or, in some cases, re-established) a set of new (and missing) functions to the company. For example, we have reconstituted a core industrial design group (Nortel historically was well-respected as a leader in this space with its Design Interpretive group, which was eliminated during the bubble burst) and have created centralized Design to Value and Design Cost Reduction groups to drive cost reductions and margin improvement.

A Renewed Focus on Our People

The third, and in my opinion the most important area of R&D transformation, has been a renewed focus on our people. You can measure your people in many ways, but to me the two that matter most are their skills and their satisfaction. On the R&D skills side, Nortel is rich in talent. In fact, one of the main reasons I joined Nortel was because of the technical strength of the R&D teams. On the satisfaction side, two years ago Nortel was suffering from a continued decline in R&D ESAT. Much could be attributed to the state of the industry and the negative events of the past 5 years, but the additional factor was that a true focus on cultivating talent in R&D had been minimized for quite some time.

In order to address this area we again launched a series of initiatives to transform the people side of Nortel. In the last year, for example, we have launched a new “Nortel Fellows” program, which recognizes our best technical experts. We also held our first annual technical conference last summer, bringing together 300 of our top technical people to collaborate and invent the future. And, last fall, we held a number of formal recognition events for our patent creators. This IPR recognition was driven by Mike Z’s understanding of the importance of IPR to Nortel’s future and his passion about recognizing and thanking our technical teams for the extra time and effort they take to invent and capture those inventions - essential to a healthy R&D environment. This year, we have launched a Distinguished Member of Technical Staff recognition program (the level below a Fellow) and are revamping our technical ladder (career path) to ensure that top technical talent cannot only work at Nortel but can progress their career here. Finally, we have dramatically accelerated our new graduate hiring with about 1000 new grads entering Nortel last year.

The result of many of these people efforts (as well as the other initiatives I mentioned above – such as directing more of our R&D dollars to the front end) is starting to pay dividends. For the first time in quite some time, we are seeing a statistically significant rise in R&D ESAT and we continue to be able to attract world-class talent globally.

The amount of work and the complexity involved in R&D transformation is obviously significant. What may not be obvious is that this has been going on for some time and by any reasonable measure has resulted in a huge positive change in our R&D posture. And this is what you would and should expect from us, whether you’re a customer, partner, employee and/or a shareholder. Our ability to operate R&D more effectively and at lower cost, to contribute to the improved operating margin of the company, and to create a stronger technical position for the company should resonate with all. We are not done with this process but the approach is structured and we believe world-class.

As a final note, let me go back to the headline comment at the start of the blog... “Nortel to rethink R&D work plans, executive says”. This would have been a great headline in the summer of 2006. Today, it is a bit out of context and while the observation that we clearly did re-think R&D a few years ago is true, we are now well into executing on that comprehensive R&D transformation and are indeed making solid, measurable, progress.