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Nokia’s $200m secret shows the rot goes way, way back

There have been plenty of attempts to pinpoint where Nokia (s nok), the struggling Finnish mobile company, really started to go wrong. Some think it was when the iPhone (s aapl) launched and left it in the dust; some would suggest it was when the board, panicking, hired Microsoft man Stephen Elop. Plenty of people think that it’s all the result of a culture that has spent several years failing to turn great ideas into great products.

But could the rot go back even further than anyone recognizes?

That’s the argument put forward by Finnish newspaper Helsingen Sanomat (the Helsinki Dispatch), which is running an expose today that paints a damning picture of how life inside the company has been tainted for an entire generation, costing the company hundreds of millions of dollars.

The paper, known as HS, has documents that show how the company has been paying through the nose to stop senior talent leaving as far back as 14 years ago — paying way over the odds to retain their top staff at the same time as the company was, apparently, reaching the peak of its powers.

Their story centers on a rebellion staged in 1997 by Nokia product developer Jyrki Hallikainen. Hallikainen convinced 44 other engineers from the business to join him at a new manufacturing outfit, which was to be set up under the auspices of Dutch electronics giant Philips. The team resigned en masse, sending shockwaves throughout Nokia’s senior management. They were taken by surprise by the move, and desperate to stop the collapse happening — particularly since it would rip the heart out of their main research and development team.

The report details how Nokia’s mobile phone boss Pekka Ala-Pietilä (later the company’s president and now the CEO of Blyk), asked Hallikainen and his rebels what it would take to keep them on board. Their price, the documents reveal, was $200 million — the equivalent of around $4.5 million dollars for each of the engineers who were, effectively, holding the company to ransom.

Most of the rebels returned to their jobs at Nokia and Hallikainen continued on his own with the new company, Microcell — which was sold to Flextronics for $80 million five years later.

The Hallikainen story might seem like ancient history, but it’s a sobering tale that I think provides a startling insight into what’s really been happening inside Nokia all these years. From the outside we’ve watched the rise of Nokia as a global force, the leading power in an explosive industry worth untold billions. Yet the truth seems to be that all the way along, the company has been riven with problems, internal politics, scheming and panics. Maybe we’ve been too charitable all along?

And the story has other ramifications too. Hallikainen’s rebellion is also one of the major reasons that Nokia became increasingly paranoid over time. The company suspected that employees were leaking information to Microcell, and executives wanted to monitor staff emails and data to root out any potential moles. But under data protection laws at the time, it was illegal to do this — so, the business tried a different approach. After controversially lobbying the government and even threatening to quit Finland altogether, it helped push through a widely-disliked corporate snooping law known as “Lex Nokia” that would allow it to spy on employees. Perhaps if senior figures had spent less time occupied with what was going on inside Nokia’s own little world, they might have been able to predict what was happening elsewhere.

And, beyond Nokia itself, there’s a lesson here about other things — innovation, success, staff retention. When you’re on the up, keeping your top employees seems simple: give them exciting things to do and compensate them well. But it can backfire. We’re all aware that making payments to prevent staff leaving is common in many technology companies — right now, for example, Google is known to be spending heavily to stop its engineering talent from leaking away to rivals like Facebook.

But does it ever really work? Nokia spent $200 million on protecting its R&D talent, yet the net result is that it’s been outpaced by newcomers anyway. If you can’t incentivize workers without resorting to bundles of cash, then what’s to say you won’t face a corporate Waterloo in five, 10 or 15 years?

26 Responses to “Nokia’s $200m secret shows the rot goes way, way back”

  1. Ariane

    Actually Nokia’s current predicament is almost normal in any industry. In light of the current strategy, Nokia (or its shareholders) have panicked and over reacted to the whole issue, the media/bloggers have happily ridden the wave.

    In my view the simple explanation is that a technological discontinuity was introduced by Apple when the first iPhone was launched. Particularly this came in the form of the sleek UI and user experience.

    Once a discontinuity of that magnitude happens, the determinants of success get redefined.

    Apple’s success is what you reap by taking the risk of being an early mover.
    -They are ahead in the learning curve
    -Securing of R&D patents (latest move) etc.

    Now that the dominant design has been established, the best you can do is to compete (by extrapolating) on this already set trajectory; improving the UI and user experience as you silently seek “future disruptions”.

    Unfortunately the agility to execute and stay abreast with the current trajectory is where Nokia missed it and opened the gap for Android and other players. Some internal housekeeping would be in order.

  2. Matti

    The last bit is simply wrong information:
    “Nokia spent $200 million on protecting its R&D talent, yet the net result is that it’s been outpaced by newcomers anyway.”

    I’m native in finnish speaker and the linked article in Helsingin Snaomat does not state that. The plan of the rebel workforce was to demand 200 million. It failed and most workers returned to Nokia. Nokia did not pay the money.

    Also, this happened at the Oulu network unit in 1999, currently part of Nokia Siemens Networks. Nothing to do Nokia’s smartphone side of business.

    • Finnish

      This is correct. In no where in the article (or the court papers, Nokia vs Hallikainen, which came public this year) it says that Nokia paid anything. Hallikainen with others tried to blackmail Nokia for $200M, Nokia didn’t pay and got the issue resolved with most of the people staying with Nokia. Hallikainen got sued and Nokia won in court.

  3. I believe your information is inaccurate. Jyrki’s asking price was 200 million (and I’d guess Jyrki told Jorma before Jorma would have time to ask). This was to complete work for AT&T’s 6160 phone that Jyrki, as project manager, though he knew what Nokia would pay for the work.

    In the end the some of the employees were offered the ability to return, but some were black listed.

    How to I know? I was there…

  4. Hamranhansenhansen

    Any company the size of Nokia would of course have problems and internal politics and of course sometimes makes mistakes.

    Nokia’s problem is very, very simple: the mobile phone, their one product, was made obsolete by the mobile computer. End of story.

    So Nokia’s choice now is either to die along with the mobile phone, or start making mobile computers. Their partnership with Microsoft to make mobile computers shows they have chosen not to die. Microsoft needs them because in spite of their computer industry heritage, Microsoft has not yet made a mobile computer. They are now essentially replacing their Windows (CE) Mobile (mobile phone software) with Windows (NT) 8 (mobile computer software.) Windows Phone is a stopgap: the mobile computer user interface on top of the old mobile phone software core, which is still hiding under there.

    Same thing happened to Palm. Their mobile phone business died, then they died, then their brand was applied to a new mobile computer company, which went on to merge with HP, which is not a phone company; it’s a computer company.

    At Google, they were making mobile phone software up until iPhone shipped, and they rebooted the Android project as mobile computer software instead, which is why Android is basically half and half phone software and computer software. For example, the carrier control and Java applets are anachronistic on a mobile computer, but right at home on a mobile phone.

    You can see RIM buying QNX computer software to replace its mobile phone software. You can see them struggling with a developer program and the move into consumer marketing that mobile computers represent.

    So Nokia did not commit suicide. They are not a unique case. All mobile phone companies have had their products made obsolete and now have to become mobile computer companies. It’s very hard to do. Some will not make it.

    The reason Apple is so successful right now is they never made a mobile phone. So they have none of the baggage, none of the transformative struggle to become a computer company, because they already are that. And since they shipped the first true mobile computer, they are way out ahead of everyone else in the new era. Expecting any mobile phone company to be competitive with Apple between 2007-2017 is crazy. Pure unadulterated crazy. Ten years is only 5 product replacement cycles. This transition will take at least that long.

  5. Jacob

    Many of the facts in this are wrong. The Helsingin Sanomat article says that Hallikainen told Ala-Pietilä that it would cost Nokia $200 million to for him to “work with Nokia as well”, which by my reading means that he was leaving no matter what, and they could pay to use his new company’s services if they wanted. There is no indication that they ever paid that money. Also according to the article the “deal” Nokia offered the rebel engineers was they could come back quietly without consequences. The article mentions nothing about pay raises – in fact it indicates that Nokia had the upper hand, basically promising to not take legal action against them. This is corroborated by the fact that the article indicates that Nokia DID take action against Hallikainen, and he was forced to pay “millions of euros” to Nokia.

  6. So, let me get this straight:

    1. An extraordinarily charismatic and evidently brilliant engineer left Nokia and started a company taking 45 rock star engineers with him.

    2. Nokia panics and pays a ransom to bring some of them back, but Charismatic Engineer leaves anyway, still takes intellectual property with him, and doesn’t get sued.

    3. Nokia is hamstringed by local politicians who won’t let the company read emails on their own internal company email system.

    Sounds like Nokia’s problem is easily solved: move to Texas, U.S.A. Why?

    1. Federal and state laws protect intellectual property.
    2. Federal and state laws allow a company to do what ever they want with emails on their own systems.
    3. Stealing intellectual property in the U.S. is not rewarded with millions, it is punished.

    • Matti


      More like:
      Charismatic engineer tries to do those things, fails, gets sued by Nokia.

      Your misunderstanding is understandable. It’s based on article written on the basis of a terrible Google translation. What a waste of digits.

  7. Arttu

    There’s also the not-so-insignificant fact, as the original article in Helsingin Sanomat clearly explained (in Finnish, though), Nokia did NOT pay the 200 million requested by the “rebel” engineers. They were given pay rises etc. but not nearly on that scale. At least that’s what the piece on HS stated.

  8. I read the story this morning and I was surprised to see it referenced here. Maybe that is because I’m a native Finnish speaker and the author of this article may have used Google Translate to translate to it. Nokia did not pay 200 million, it paid nothing.

  9. Not sure why other commenters are having such problems understanding this very interesting story.

    I dealt with Nokia in 2000, saw their product and marketing organizations as fragmented and chaotic. Everyone had ‘stop’ button. Nobody had the authority to see that a product turned out beautifully.

    Their system worked better than those of their competitors, for a while. But while Nokia came out with the first WAP phone, Sprint required a common phone UI across different hardware manufacturers, and that UI was better than Nokia’s.

    And by the early 2000’s Korean manufacturers were whittling Nokia’s market share away pretty quickly. The writing was on the wall for the Finns.

    All the above said, it was still iPhone that showed Nokia’s terminal (yes, it’s terminal) weakness. After years of having the right general idea (data services are the future of mobile comms) with Ovi, Nokia still couldn’t build the complex, cohesive and elegant system necessary to match the new world.

      • Thanks for your reply.

        “The Hallikainen story might seem like ancient history, but it’s a sobering tale that I think provides a startling insight into what’s really been happening inside Nokia all these years. From the outside we’ve watched the rise of Nokia as a global force, the leading power in an explosive industry worth untold billions. Yet the truth seems to be that all the way along, the company has been riven with problems, internal politics, scheming and panics. ”

        Others have pointed out that all companies have their internal problems, but blackmail by a core development unit stands out as unusually bad (at least for the companies I’ve worked for and read about).

        I should have written in my comment that the problems I observed at Nokia seem consistent with a profound corruption in the way authority and responsibility were assigned within the company, which is consistent with the blackmail story.

  10. So the point is that large, successful, multinational companies sometimes have internal political struggles and staff retention issues? And that one episode of such issues, discovered 14 years later, is predictive of a subsequent period of market share loss and poor investment decisions? After the same company had dominated a growing technology market for over a decade, including a number of years after the issue occurred? There’s a great story out there waiting to be told about the product development group at Nokia. This is not it.

  11. zipzip

    I used to work in the design group. none of this is insight into nokias problems. trust me.

    nokia became what it was because it made easy to use phones. then, without anyone realizing it, their phones were more and more difficult to use. but, the public didn know. then finally, all of their street cred for being easy to use was gone, but to the management that was a surprise. but, too late.

    in a nutshell.

  12. OMG! Nokia paid 200 million in 1997. So actually it wasn’t making huge profits, becoming the biggest telecom company in the world, becoming the biggest camera manufacturer in the world, selling 13 phones each second. No no no, it was rotting! In 1997 we saw the first signs that Nokia would end up in troubles in late 00’s.

    If Chewbacca lives on Endor this article does not make any sense.

    • +1 internets to you.

      This has to be the biggest hatchet jobs I have read in a long time. Most of those “facts” have nothing to do with each other and as commented by others are separated by 10 years or more.

      The world in ’97 was nothing like it is now. Nokia wasn’t a giant, it probably had less than 20,000 employees including the network division. In those day Motorola was on top. Losing a core team of engineers would probably have been fatal.

      In the long run I would say it was worth it. They comprehensively kicked Motorola’s ass within two years to become number one.

  13. Praveen

    Thanks Bobbie, this post looks like a sensational, nothing more. fail to understand the point you are making-if nokia was paying money to employees, and it is a sign of rot; then are you saying that google is also rotting?
    dont agree.

    • Bobbie Johnson

      I think it’s an amazing story, to be honest. And I think it tells us plenty about Nokia.

      As for other companies? I don’t know, but I think it’s more evidence that retentions of this sort aren’t necessarily going to do much for you. And the company I can think of that has been putting most effort into retention is Google. It’s not like the dots join together directly, though. Just worth thinking about.

  14. This is the most ridiculous article I have ever read… On more levels than I could possibly articulate in one comment. Unbelievable.