Speaker 1:
From the library of the New York Stock Exchange, at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House. Our podcast from Intercontinental Exchange on markets, leadership, and vision in global business. The dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism, right here, right now at the NYSE and at ICE's 12 exchanges and seven clearing houses around the world. Now, here's your host, Josh king, Head of Communications at Intercontinental Exchange.
Josh King:
Welcome to the ICE house. Think back to your first cell phone, it was big, heavy indestructible, a week long battery charge, and most likely a Nokia. The name Nokia was synonymous with mobile phones, and 10 years ago appeared firmly atop the emerging smartphone space with 40% of the global market using what was universally believed to be the most advanced technology in the world. Then it all changed. Competition sprang up. You see, technology is like that. Sometimes the next breakthrough comes and the giant on the block can't react fast enough. By 2012, when it appointed our guest today, Risto Siilasmaa, as its chairman, Nokia was at 4% of its all time high market cap.
Josh King:
Under his direction though, Nokia did the unthinkable and sold the mobile phone manufacturing division to Microsoft and began to transform itself into a new company. Today, Nokia has over a hundred thousand employees that are poised to take the company into the future. How a philosophy of paranoid optimism and a dash of entrepreneurial spirit saved Nokia, right after this.
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Josh King:
Let me try and say my guest today's name in the appropriate Finnish, Risto Siilasmaa, am I right, Risto?
Risto Siilasmaa:
That's perfect.
Josh King:
You say it so that our listeners will hear it correctly throughout the rest of the show.
Risto Siilasmaa:
Risto Siilasmaa.
Josh King:
That's Risto, he's chairman of Nokia and its interim CEO in 2013 and 2014. He oversaw the dramatic turnaround of Nokia from a struggling handhold device company to one of the leading providers of wireless communication infrastructure. Risto's career in technology began as a teenager when he set out to create the greatest Commodore 64 game in history, and then founded F-Secure, a Finnish cybersecurity company that he was CEO of for 18 years. He's also the author of Transforming Nokia, The Power of Paranoid Optimism to Lead Through Colossal Change, which is available now. He's at the New York Stock Exchange today on the book's press tour and to ring our closing bell this afternoon. Welcome to the Exchange, Sir.
Risto Siilasmaa:
Thank you.
Josh King:
Were you successful in creating a better adventure game than Zork? We all want to know.
Risto Siilasmaa:
Well, I was well on my way to doing that, but then I just ran out of capacity in the Commodore 64. Zork was the best text based dungeons and dragons game of those days before graphics became a big thing. I was working on understanding natural language. I wanted the game to be a place where you could write almost anything, and the game environment would change accordingly. So, it really understands the language, it understands the physical environment. That was my dream. That's where I got pretty far, but then I had used all the capacity of the computer and there was no space left for the story.
Josh King:
How did the kids that you grew up with get aware of the burgeoning personal computer space? You knew that somehow you needed to stuff advertisements to get enough money to buy one of these things.
Risto Siilasmaa:
So, this was in the early '80s, and there weren't that many PCs around. The Apple II was out, the VIC-20 was out. Commodore 64 was a brand new thing and our school, for some reason, had gotten a faulty version of a mini computer, which had 3.84 kilobytes of memory. I learned to start programming with that one computer at school, and that's how I got into it.
Josh King:
As I mentioned in the introduction, Risto, you got your start in business with F-Secure. The description in the book sounds like a typical Silicon Valley story. Two college kids start a tech company and then open an office featuring all the perks, including a BMW for use of the employee of the week. But we're in Finland, what was the startup culture like in a country thawing from the cold war?
Risto Siilasmaa:
Well, there was actually no startup culture in Finland back in those days. We didn't have a single VC in the country, so we were quite backwards. But I started the company to fulfill my dream that I had with the adventure game to do some work that would be used around the world. It was food for my imagination that a Japanese person would be doing something that I started. That was just a meaningful dream for me. Then, I wrote the book or co-authored a book on security and, of course, learned everything while writing that book. It's a great way to learn and to reflect.
Risto Siilasmaa:
Then, I started consulting large companies on their data security, and then I bumped into computer viruses, which were a completely new thing back then. We figured out that actually we needed to build tools for companies to protect them against this new enemy. That's how things got started.
Josh King:
So, you mentioned that there wasn't a single VC in all of Helsinki, not let alone the whole country of Finland. Where did the capital arrive for you to begin F-Secure, or was it basically organic, just see what you can bring in the door?
Risto Siilasmaa:
Yeah. We bootstrapped the company. So, basically we did everything. Nothing was too far from our core for us to do if it brought in some money that we could use to pay the developer's salaries, where we were actually developing the product. Then, as the product started selling, we could stop all this other stuff, writing articles, coding, customize software for companies, training people. We were the biggest Mac training company in Finland for a while. We did everything to make the money to create these products.
Josh King:
So, let's skip way ahead now. We were just talking about the 1980s and 1990s in Helsinki. It is now 2008. You've joined the board of Nokia at a time when this sound owned the smartphone market. The iPhone, which is the first major competitor to enter the high end smartphone space had been introduced a year earlier, but you found a Nokia board that didn't seem to understand the threat. What did they miss?
Risto Siilasmaa:
Well, that's the interesting thing. In 2006, a group of top people in middle management of Nokia had been given a task to identify the 10 next things that the company will miss. The number one thing that they came up with was an iPod with a radio, meaning a mobile phone built on an iPod platform, which is basically what an iPhone became. So, the company was aware that this is a risk, but the prevailing wisdom in the company was that a touch phone would be a niche market. There would be a very small group of people who really wanted to use a touch phone, and Nokia had dabbled in touch devices for a few years already.
Risto Siilasmaa:
So, they had some market research data on that. In the end, they felt that you need to provide a full portfolio of different types of devices with qwerty keyboards, with numeric keyboards, with keyboards that hide under the screen and you'd slide the display up to reveal the keyboard. Just like Blackberry, they had a captive audience of people who wanted to do email with the foreign factor that they had, but it didn't appeal to everybody. So, the idea back then that in five years time everybody would be using a touch device, it was just an alien idea.
Josh King:
What were the circumstances of you being brought into Nokia in '08, and did you feel like you saw what was happening as well?
Risto Siilasmaa:
No, I was not any smarter than anybody else. I was a new member on the board. I have never been in that kind of a position in a company as large and as global as Nokia. I was like a little kid in a candy store or a little kid from a small countryside town coming to the biggest metropolis. I was just, with my eyes wide open, watching what's happening and trying to not reveal that I was completely at loss.
Josh King:
So, you were there and in 2009 you were a member of the board, Nokia released the iPhone killer that was cheaper, more advanced, and from the company already holding market share. Was it too late to turn the tide or was there another reason for its failure?
Risto Siilasmaa:
Well, we never thought that it would be an iPhone killer. The press gave it that name. We targeted the device for a completely different user group. It was mid tier device as opposed to the iPhone being a high end device. But the reason why it didn't work out was the operating system, the Symbian operating system which was deeply flawed. Just making it work on a touch device didn't remove those deep flaws that had been built or allowed to build into the platform over years through what is called development debt. You just don't keep the architecture and the code up to date, modern. You have to actually rewrite it every few years, and that had not been done. So, it was a complete spaghetti.
Josh King:
So, Android is introduced in late 2008 and began to rapidly get adopted by hardware producers. So, was it just this development spaghetti of Symbian that allowed it to surpass it, or was there something extra special in Android that allowed it to burgeon?
Risto Siilasmaa:
Well, Android was free and available to all manufacturers, so that was a radical new you approach. Google obviously monetized through ads. So, it was not just that we had problems with Symbian, it was also that Android was a radical new approach.
Josh King:
So, as you are on the board, you get more comfortable in your position there. You begin to challenge the status quo, but you also find yourself running into what you dubbed as the toxicity of success, which sounds similarly as oxymoronic as paranoid optimism. How is success slowly poisoning Nokia?
Risto Siilasmaa:
Well, this has happened to multiple large companies, the kings of an era, that when things change are very slow to react. I think I witnessed some of that as well. So, when you are truly successful, you start believing that if you just keep on doing the same things, you'll continue to be successful. You almost feel as if you have earned that success in advance and you start focusing on secondary things or things of secondary importance such as share price, such as analyst reports, such as what the press is writing.
Risto Siilasmaa:
For the press and the analyst, those are not of secondary importance, but for a company, the things of first importance are customers, the competitiveness of the core technology that we base our business on, our own employees. If we focus on those and make sure that we are looking far enough into the future and doing the right things to remain competitive and preferably build some unique core competence or sustainable competitive advantage that we control, instead of starting to focus on those things of secondary importance, then now things just follow their natural course.
Josh King:
So, sidebar though, here we are now in 2018 and the importance or at least distraction of the media and analyst reports are as prevalent as ever. Your CEO needs to report earnings every 90 days. You still will get news stories that whether you like it or not labels your most recent introduction as an iPhone killer. So, you can't stop the onslaught of the external forces who need to hear from your company. How do you almost insulate yourself from that noise?
Risto Siilasmaa:
Well, you don't need to insulate yourself, but you need to frequently remind people what is really important. You need to build that into the culture so that you avoid the toxicity of success. But the fact is that, for example, myself, I don't follow our share price. I trust that if there's a significant enough move, somebody will tell me. Sometimes I'm like 10 days without having anybody tell me what is happening in the share price. That's just because I think it's my role to think further ahead.
Josh King:
It seems like you found an ally in September 2010 when Steven Elop came on as the company's new CEO. What was operation Sea Eagle and what did it reveal about the prospects of changing the focus of Nokia from hardware, where it was all the industry growth, to the rapidly crowding field of software platforms and ecosystems?
Risto Siilasmaa:
Well, Nokia had been intensifying its efforts on software for years already. That didn't change so much. But what had happened earlier was that from already the '90s, when these not so smart mobile phones came to the market, the portion of software code on them was pretty small. So, it was easily customizable for each device because there was so little code. But then when we came to the smartphones, the amount of code in those devices grew and grew and grew, but Nokia continued with the old model of customizing the software for each device. If we had 40 devices a year, that meant that our source code tree forked 40 times.
Risto Siilasmaa:
Much of the work was spent on those branches, which didn't lead anywhere. They were dead ends. All eccentric companies, such as Apple and Google or Linux and Mac OS, they were just focused on keeping the trunk healthy, putting the maximum effort on creating competitiveness in the trunk rather than the branches. That was the big thing for Nokia. We kept the old model for way too long. When Steven Elop came to the CEO role, he started a project to find out what's happening in the company, what are the assets? That project was called Sea Eagle. To the great shock for all of us, we found out that Symbian was in such a sorry state that it was pretty much not salvageable anymore.
Risto Siilasmaa:
But even a bigger shock was that the OS that we have placed all our future hopes on called MeeGo was also a no-go. This was such a shock that I still remember the moment when we were told. This was almost like the end of the company, but the big question, of course, in hindsight is how can these things be a surprise? The core projects that the whole company's future depends on are suddenly revealed to be hollow. That should never happen. This is one of the things that I'm reflecting in my book, how do we find out earlier, how do we build a culture that will naturally bring these bad news to the top much, much earlier? How do we prevent these things from happening in the first place?
Josh King:
In the end, Risto, Nokia chose to double down on its hardware and instead made a strategic partnership with Microsoft. This is Microsoft CEO, Steve Ballmer, three days after that famous partnership was announced.
Steve Ballmer:
The fact that Nokia has a primary focus on Windows phone hardware and services really means we can work with them in a different kind of a way to aggressively drive innovation on the Windows phone platform. Nokia shares our focus on growing the overall Windows phone ecosystem, their global expertise and focus on all price points and market segments will benefit Windows phones broadly, and Nokia's Windows phones specifically. Nokia's location and mapping services will improve our joint experience.
Josh King:
So, Ballmer, formerly the President and then CEO of Microsoft, now known, of course, as the owner of the Los Angeles Clippers. But the partnership with Microsoft didn't pay off right away and led to numerous changes. You were even thinking of stepping down from the board at some point, but instead you got a call from Nokia's Vice Chairwoman asking you to replace Jorma Ollila as the chairman. What were your reactions at that moment?
Risto Siilasmaa:
Well, I realized that the company was heading downwards and there's an existential risk. So, I had my eyes open to the possibility that maybe my face would be linked to the demise of Nokia forever. This was a big thing in Finland, not necessarily such a big thing worldwide, but in my home country it was a huge thing. So, a huge risk. But then, who would I myself ask to take the chairman's role if I would myself decline and saying that I don't dare do that? You do that. It just didn't fit with the image that I had of myself. So, I felt I didn't have an option anymore.
Risto Siilasmaa:
I had been fairly critical of certain things in the company, and then I was given a choice to have some influence on those. If I would reject that, then why would I have complained in the first place then?
Josh King:
What was the conversations like outside of Nokia, people that you trust? You're being asked to take the chair role of the storied Finnish company that you don't know yet whether or not it can be saved. But you also think that if you don't step up, how can you ask someone else to? But how are you bouncing that idea off of people you really trust? Or, is that all an internal conversation?
Risto Siilasmaa:
Well, of course, I discussed that with my wife. I didn't talk about it that much with others, because it's really not a thing that should be too much influenced by how others will perceive you if you do A or B, because it shouldn't be about perception. It should be about what is meaningful and what is right. The fact is that I was very optimistic. I think I'm always optimistic. I think many entrepreneurs are almost stupidly optimistic that they will always find a way through all problems. Things will always work out.
Risto Siilasmaa:
Through my career as an entrepreneur, from the Finland in the shadow of the Soviet Union, to Finland becoming a hip country in the world because of Nokia's success. Then, my own company becoming publicly listed and growing to be a global cyber security force, I had faced so many challenges and at times I had thought that this is the end, but we always survived. So, I have grown to believe that there's always a way forward. So, I was quite optimistic, even if I probably shouldn't have been.
Josh King:
The Wall Street Journals Simon Constable and Drew Dowell did not share your optimism at that time. I want to hear a clip of them.
Speaker 6:
We got the new Chairman Risto Siilasmaa saying, "It's no secret Nokia is going through a very difficult period."
Speaker 7:
Not a secret. True.
Speaker 6:
Not a secret.
Speaker 7:
Very public struggle.
Speaker 6:
Definitely not a secret. The secret is, is how they're going to get their mojo back.
Speaker 7:
I'm not sure anyone knows the answer to that, including them. They've signed this deal with Microsoft where they're going to use Microsoft software and roll out new phones and the first ones are out, but they're not getting massive take up and they have two problems. We all know that they're not competing very well with Apple and Android in the smartphone market, but now they're facing this problem of having their large market share eroded from underneath them in the developing world by manufacturers like Huawei and ZTE that are making cheaper ...
Josh King:
So, Risto, later in the clip they quote you as saying, you would bring entrepreneurial leadership to the company. What were the first steps you took after being chairman?
Risto Siilasmaa:
Well, there were many symbolic changes with which I tried to communicate, that there's a more open approach to things. For example, I dismantled the office of the chairman and I took a desk in the open office. We gave up the limos that were rented for each board member individually to chauffer them from the meeting to the hotel and so forth and we all drove in the same bus. All sorts of these small things. We gave up the gavel in the meetings. We gave up the name plates. We gave up arranged seating and we gave up the dress code, and we created golden rules for the board behavior. We had a discussion on how do we set up an environment where we are more likely to solve the problems that the company faces?
Risto Siilasmaa:
Not diving into those problems and trying to solve them with the management, but thinking about how to create the right environment. We came up with seven golden rules. The first one of which was assume the best of intentions from others, so building trust. When there's trust, we dare to say what we think. We dare to look at the bad news straight into the eyes. The final one of those golden rules was that any meeting where we don't laugh out loud is a dismal failure. I always make it my goal to have the board laugh out loud during the first 10 minutes of the board meeting.
Josh King:
What I pray tell are your tricks of making a board of Finnish directors laughing out loud?
Risto Siilasmaa:
Well, actually it's very international, we have more North Americans than Europeans on the board. But if nothing else, my desperate attempt to make them laugh will make them laugh.
Josh King:
You tell a story in your book of the elevator in the Nokia headquarters, what did a broken screen tell you about the culture and how did you set out to correct it?
Risto Siilasmaa:
Well, in the old Nokia, the R&D people knew about the problems we had, which the top management didn't know about. So, somehow the bad news didn't travel up. People were trained not to tell. They were afraid to tell perhaps, for various reasons the management didn't know what was broken. While the people down below they knew and they saw that the top management was not doing anything about some of those issues, the message was that it's okay for things to be broken. Well, I believe that many people felt that that was the message because they didn't know that the top management didn't know.
Risto Siilasmaa:
They, of course, assumed that they know, but they're just not doing anything. After that, I have always been allergic to visible signs of things not being okay, visible broken things, because I'm afraid that they communicate that same message, that it's okay for our things to be broken. So, when I saw this new display screen that had been just installed next to the elevators, which gave the weather and the company news showing a blue screen, a Windows blue screen-
Josh King:
We've all seen those in different places.
Risto Siilasmaa:
We have. Yes. The next day, the same blue screen was there.
Josh King:
No one cares.
Risto Siilasmaa:
Yeah, no one cares. So, I had to contact the IT department and ask them, "When are you going to fix this? At least turn it off." They said that it will be fixed today. You might think that this is something a chairman should never spend time on. It's micromanagement, it's whatever. But for me, this was part of the culture. We all have to have a sense of ownership for the small details because the small details communicate loudly.
Josh King:
So, just as Nokia was seeing some success with its Lumia smartphone line, Microsoft introduced the surface and announced a binary break in its Windows operating system. How did these two events affect any chance of Nokia turning around its handheld business?
Risto Siilasmaa:
Well, of course, it's always impossible to say how things would have turned out if something had gone differently, it's speculation. We could speculate what would have happened if Nokia had adopted Android in 2009. We might be in a worst place today than we are. That might have been the outcome. Same here, if the binary break and all that didn't happen, maybe we would be in the worst place somehow. So, it's needless to speculate too much. But the fact is that in many businesses, momentum is your best friend because when you get momentum it becomes easier to increase that momentum.
Risto Siilasmaa:
With the binary break, which meant that all the software that you have so far will have to be rebuilt for the future devices and vice versa. All the software that will be developed for the new devices will not work in the old devices. It means that for anybody who's interested in buying a Windows phone device, they should wait for the next generation, because if they buy today, no new software will be written for these devices. Microsoft announced the binary break, and at the same time, they announce that they next OS is delayed.
Risto Siilasmaa:
So, this was a double whammy and we didn't know that they would be announcing it at that time. If they had told us, we would have told them that this is a bad idea. Of course, they didn't mean anything bad with it. It just happened and it stopped our momentum.
Josh King:
The paranoid optimism that you bring into situations leads you to walk into them with plans based on all of your perceived outcomes of any business decisions. So, at that point, when Steve Ballmer asked to meet with you in 2013, you came armed with plans A, B, and C, and a multitude of sub-contingency plans for each course of action depending on how this meeting goes. This kicked off an intense series of negotiations that you capture over several chapters of transforming Nokia. Can you give us a summary of what happened over those series of negotiations with Ballmer?
Risto Siilasmaa:
Well, actually, it was a really positive experience. I truly respect Steve Ballmer. He was honest, logical, calm. He was a good negotiation partner. I would gladly work with him again.
Josh King:
After the break, Risto will take us through the transformation of Nokia from the brink of bankruptcy to today. That's right after this.
Speaker 8:
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Josh King:
Welcome back. Before the break, we were talking to Risto Siilasmaa, chairman of Nokia about his new book, Transforming Nokia, The Power of Paranoid Optimism To Lead Through Colossal Change. We left off with the decision that you described as selling a piece of Finland's heart, Risto. But in the end you felt that Nokia got the deal it needed and personally informed the president and prime minister of the impending deal to sell Nokia's handheld business to Microsoft. Overall, the deal was seen in a positive light, but there was some blow back at that time. Let's have a quick listen.
Speaker 9:
Nokia's outgoing boss Steven Elop's set to receive almost 19 million Euros in compensation for his contract ending early. The Finnish phone maker is being bought by Microsoft where Elop used to work and he's going back to Microsoft where some are speculating he might even take over from chief executive Steve Ballmer, who's about to step down. The payment to Elop is a year and a half of his salary plus cash from management incentives and share schemes. Microsoft will pick up about 70% of the cost of that. There's anger in Finland over the huge payoff. The country's economy minister told a newspaper there it's difficult to understand the merits of this bonus.
Josh King:
Uncomfortable conversations with the government, Risto?
Risto Siilasmaa:
Actually, not at all. The government was just reflecting what the population was thinking and what the media was saying. So, not the government, but obviously the shock of selling our hearts was big for everybody. It was painful for everybody, and it's hard for people outside Finland to understand, but Nokia's rise to world fame really gave us a significant boost to our national self-confidence. Nokia was a key part for my confidence in starting to promote my company as a Finnish company. Rather than as I used to do earlier, I tried to fool people to think that we are a Silicon Valley based company by putting our Silicon Valley office address first in the list of offices we have around the world.
Risto Siilasmaa:
Not saying that it's the headquarters, but not saying that it's not our headquarters either. Nokia changed that for me. So, that shock was truly a painful, painful thing to digest for everybody. Then, Steven Elop was picked as the scapegoat for this, and then he's being rewarded based on his contract. The reward was so high because the stock market reaction for our deal was so good. There's obviously the speculations that Windows phone would kill Nokia, had brought our market cap down, and that doubt being removed and us getting a good deal increased our share price significantly.
Risto Siilasmaa:
That increased the value of the share based compensation Steven Elop had been getting. As he was going out, his contract stipulated that his share based incentives would have to be paid out at the much higher share price. So, that led to large amount, and this was just difficult to digest for everybody.
Josh King:
It wasn't the first managerial contract that needed to be honored and it won't be the last.
Risto Siilasmaa:
Yeah, and the way I tried to explain it is that our word is our bond, and Nokia needs to be trusted. So, if we sign a contract, we'll upheld the contract, uphold that contract even if it's not appealing at that time.
Josh King:
In the meantime, Nokia had to continue to operate as it is with you being named the interim CEO, how were you able to lead during this period of uncertainty?
Risto Siilasmaa:
Well, it was a tough time emotionally for various reasons. We were still managing the handset business. If we had been managing it for ourselves, obviously, we would've been cutting all expenses, but we were also managing it for Microsoft. We had 25,000 people who'd be moving to Microsoft and they were always thinking, "Okay, if I now make this decision, how will that be seen by Microsoft, who will be my new employer? But I'm doing this decision as a Nokia employee, so I have to take the Nokia interest to my heart." These were just difficult soul searching moments for many.
Risto Siilasmaa:
Many of the people who would not be moving to Microsoft were afraid that they would be laid out, because we wouldn't need their services anymore. So, how could we motivate them to work until the final day? We didn't know when that final day would be because it was dependent on getting the regulatory approvals from countries all around the world, which were constantly being delayed. There was the risk that maybe we wouldn't get approval from some of the key countries, which would mean that we would have to take the handset business back and it could still kill us.
Risto Siilasmaa:
So, we had to plan for all sorts of possible futures at the same time while trying to keep people informed in a situation where we didn't know ourself. Some of that what we knew we couldn't tell. So, it was a weird time.
Josh King:
So, you've got A, B, C, D, and probably E, F, G, and H working simultaneously. What is Nokia Siemens Networks and how did it end up into the middle of the Microsoft deal?
Risto Siilasmaa:
When the third generation of mobile networks, the 3G, was being built, it was a huge investment and 4G would be even bigger. At that time, both Nokia and Siemens had their networks business and they were both too small. They were subscale to make all those investments. So, the company has decided that this is such a challenging business area, that it will be better off by combining the network's units, and Nokia Siemens Networks was created as an independent company, co-owned by Nokia and Siemens. It had its own board and its own culture and its own brand and so forth and so forth, a independent business.
Risto Siilasmaa:
In the June of 2013, where we were in the thick of negotiations with Microsoft and Microsoft board had just turned down the deal that I had shaken hands on with Steve Ballmer, we also were in discussions with Siemens about what shall we do with NSN. Siemens had announced publicly that they will get rid of that investment, so they were under a lot of pressure to follow through with their announcement. We saw an opportunity to buy their share of NSN at a fairly affordable price, and the company was doing much better. So, just turning out to be a real asset, but we didn't have money. So, we, in the end, decided to go through with the deal.
Risto Siilasmaa:
We got very expensive short term loans from Siemens and JP Morgan. But then, I had a call with Steve Ballmer, where I asked him to bankroll us with 2 billion Euros, market priced, so a good deal for them. They have lots of trapped cash overseas. We needed the money, and we had been in negotiations for six months preventing us from accessing the financial markets. So, it was their responsibility to support us, or at least I tried to paint it this way. In the end they agreed and they loaned us 1.5 billion with market prices.
Risto Siilasmaa:
That was an unconditional loan, so it was not dependent on whether we would end up doing a deal with them on the handsets or not. So, this was a interesting month or month and a half, where we had negotiations on multiple major deals that would combine to transform the company.
Josh King:
So, the Microsoft deal closes and you find yourself in charge of, we could call it the new Nokia, but it is now a manufacturing company for centuries without a manufacturing arm. This was what you call it in the book a recipe for reinvention. What were the ingredients that you were working on putting into this recipe and what did the board decide to do?
Risto Siilasmaa:
It's true that it was a being between two places, but actually being nowhere, a purgatory of some sorts, where we had a mapping business, which was an independent digital mapping business called Here, with their own brand and their own offices. Then, we had NSN, which was a financial holding. We owned it completely, but it was completely independent. We only had some hundreds of employees that were in the mothership, so we basically didn't have a business. We had to decide what shall we do. There was the risk of having to take the handset business back, which we were still operating at that time, but it was on its way out to Microsoft.
Risto Siilasmaa:
So, this was a wonderful opportunity to reinvent a 150-year old company. One rarely gets that opportunity, but there were lots of limitations as well into what we could do. We decided that we'll do five things. First of all, we'll come up with a vision for the new company. We'll come up with the strategy to execute on that vision. We'll design an organizational structure that would best be able to implement the strategy. Then, we would put people into the organization and appoint the CEO. Then, finally, we would decide what kind of a balance sheet structure we would need to execute on all of this. So, these were five clear steps that we had to fulfill.
Risto Siilasmaa:
I was interim CEO and chairman working on these five things full time, and had a good colleague taking care of much of the daily operations and communicating with the street and so forth. This took eight months for us, and we created a vision of the programmable world and became a player that builds the infrastructure for the programmable world.
Josh King:
So, after two years, Risto, of having the interim CEO title you handed the job to Rajeev Suri, who was the CEO of NSN. He, I guess, you would say in the book was unknowingly on a year-long job interview as the two of you worked through the reorganization of the new Nokia. Why was he the right person to bring together these different cultures of NSN, Here Mapping, and advanced technologies?
Risto Siilasmaa:
Well, Rajeev has been working for Nokia for decades, so he really knows the Nokia culture, the good Nokia culture. As we were going to focus on the operator market, he knew all the operators and he had turned NSN around, so we were riding a wave of success and he turned out to be the right choice. It's always better to promote somebody you know than go outside and recruit an unknown. Even if you do a careful job of interviewing, you never truly know that person the way you know somebody you have worked with.
Risto Siilasmaa:
So, that's why most companies say that one of the signs of good leadership is that that leader creates bench strength underneath him. That's, by the way, a key metric for us today that we track diligently, both in the board and the management team for every division, for every department.
Josh King:
So, you've got Rajeev in the CEO role, you are now free of that. You begin to explore the next move for the company, which was already revisiting something that came up during the Microsoft deal, a merger of NSN and with Alcatel-Lucent's wireless business. You came armed with plans for all the possible outcomes of approaching Alcatel-Lucent's chairman, but surprisingly found a willing partner. Why was the combination of the company is like two jigsaw pieces?
Risto Siilasmaa:
Well, we had a, what we called ourselves, a one-trick pony in the mobile business. We were a mobile broadband specialist. We didn't have fixed networks. We didn't have routing equipment. We didn't have a large software business. We lacked many of the pieces that an end-to-end network needed to have. Alcatel-Lucent had all those pieces. They were an end-to-end company, but their mobile broadband business was subscale and was bleeding money. It was hemorrhaging money badly, so they couldn't afford that. So, combining the two companies would create a up-to-scale mobile broadband business with the strength of the end-to-end offering, providing the economies of scope and economies of scale. That's why the two pieces fit together so well.
Josh King:
So, in this case, Nokia was the acquiring company, but what did you learn from your experiences with Microsoft that helped you in these negotiations with Alcatel-Lucent? Because the shoe is on the other foot.
Risto Siilasmaa:
Well, we practiced quite a bit how do we negotiate, and what's important in a negotiation. Some of the pragmatic learnings were that small teams are always better than large teams. So, we ended up with a, what we called a four by four. We had the chairman, the CEOs, these chief legal officers, and the chief financial officers. This was a good negotiating team. So, when we went into the first meeting with Alcatel-Lucent and I welcomed the Alcatel-Lucent team to the meeting, and I told them that we have learned some things in the Microsoft process. One of the things was that trust is paramount.
Risto Siilasmaa:
There will be tough moments in these negotiations. There will be negative surprises. We don't know everything, and we can only survive those moments if we trust each other. So, I pledged to them that our key goal in this process will be to negotiate in such a way that regardless of whether we make a deal or not, you will respect us years afterwards. That's how we will conduct, want to conduct ourselves. Of course, I hope that they would copy that and think that way themselves, and that would make it much easier to build trust and share information in an open way. They were very open to these negotiations because they understood their own situation. They understood that they are subscale and there were not many alternative ways for them to solve that problem.
Josh King:
How has the integration gone since then?
Risto Siilasmaa:
The integration is always painful. There's no hiding from that, because basically we often have two organizations and we only need one. So, some people will have to go. One thing that we managed to do really well was to start this integration at the earliest possible date. We started it way before we actually owned Alcatel-Lucent. That again, required a lot of trust. The Alcatel management had to trust us to jointly create a shadow organization or a virtual organization running a company that didn't exist. The company that was the combination of the two entities. We appointed roughly 10,000 managers, leaders to that shadow organization before we actually owned more than 50% of Alcatel-Lucent, and about a year before we owned it fully.
Risto Siilasmaa:
We made those picks purely on merit, so we didn't even track how many Alcatel people we appointed, how many Nokia people we appointed. Afterwards, we counted and we ended appointing 52% of the leaders from Alcatel and 48% from Nokia. Now, I think that process generated quite a lot of trust as well. So, when we said that we are a meritocracy, we really meant that. We're not political. We're not competing who gets more people from their old organization into key roles.
Josh King:
Now that you were at this point with all of these deals and action behind you, what do you think about as the long term prospects and prognosis for Nokia?
Risto Siilasmaa:
Well, first of all, I believe that all leaders have to rethink their role based on the circumstances. We need to do this in a regular fashion. Obviously, when the company's in a crisis, it's all hands on deck and the board will have to take a different role with the management team. When there's no crisis, then again, the board has to step back and the management needs to do their job, with the board supporting them and challenging them. So, for the last few years, it has been a little bit more regular board work. We are a very active board. We are very much involved in figuring out the possible futures, thinking about the alternatives.
Risto Siilasmaa:
We always have these A, B, C scenarios, but during the hectic years of 2013, '14 we had over a hundred board and board committee meetings in those two years, and that was unreasonable. It was unfair. It was unfair to the management. It was unfair to the board members, many of which had full-time jobs, and our participation rate at those meetings was very close to 100%. So, pretty much everybody participated in every single meeting, even if there were a hundred of them in two years. So, hats off to everybody on the board and hats off to all the management team members, because they worked unreasonably hard.
Risto Siilasmaa:
For the last few years, we have tried to get back to normal, but still constantly trying to rethink what we should do under the current circumstances. It's so easy to get used to just following the status quo, operating the same way as before. We are, today again, thinking how should we behave, operate differently under the current circumstances?
Josh King:
You described Nokia in the post Alcatel-Lucent merger as a company reborn and a foundation for the future, but forever you are the paranoid optimist. You went back to school to learn about machine learning and AI. Is that the next frontier for Nokia and do you share the paranoia of someone like Elon Musk, who's extremely concerned at possibilities for AI?
Risto Siilasmaa:
It is possible that there will be an intelligence explosion that Elon Musk is concerned about, but there's no linear path to that from where we are today. There has to be a non-linear event that will enable that intelligence explosion. There's no way to predict that. Somebody will have to make a disruptive innovation, disruptive invention for that to be possible. It's something that I think we need to be thinking about and it's good to be paranoid about it, but it's not foreseeable. It's not possible to predict that. However, what we can do on the linear path with machine learning is disruptive by itself.
Risto Siilasmaa:
I think we can generate so much higher productivity and we can solve so many issues that we have. Some of them, perhaps, these existential issues that the whole of mankind faces, that we just need to keep on investing in that. From the Nokia point of view, it's for our customer's benefit and it's for our employee's benefit. Augmenting our employees to become better at what they do. Therefore, we created a five-stage program to accelerate Nokia's journey into the world of machine learning.
Josh King:
As we wrap up, Risto, a recent article in the Harvard Business Review that you wrote, you highlighted that not only will AI disrupt everything but everyone who works at Nokia will be required to know the A, B, Cs of AI, as well as the company's code of conduct. You expect them to read the code of conduct. Why do they all have to go back and get their PhDs in AI?
Risto Siilasmaa:
Well, they don't need to get their PhDs in AI. I have compared this to how well do you know how an internal combustion engine works? I think most of us who drive a car, we have some idea of how the engine works, but we are not car mechanics. We can't build a car. We can't even fix a broken car. We won't even dream of trying. This is the level of understanding that we all need from machine learning. Then, there are the car mechanics who are the coders and developers and data scientists, but not everybody needs to be at that level.
Risto Siilasmaa:
But in order to be able to identify a business problem that can be solved using machine learning, we have to understand how machine learning works. In order to be able to ask the right questions, when somebody comes to you with a machine learning based solution, you have to understand how machine learning operates. That's basic business competence nowadays. So, when I meet with audiences of CEOs and chairman, I often ask them how many of you think that over the next five years machine learning will be a core source of competitive differentiation for your company? Then, they all raise their hands. Then, I ask them, how many of you understand how machine learning works?
Risto Siilasmaa:
Then, 1% of them raise their hands. Then, I'm asking, how is this possible? How can you tell me that you believe this is a key technology for your own company's future and you have no idea how the technology works? What are you smoking? Then, I tell them that I was in exactly in the same situation myself. So, I can talk about this in this fashion because I had been guilty as charged myself, but it is possible for us to learn. It's not rocket science, it's simpler than people believe. Oftentimes, leaders are in a, sort of get trapped into having others explain to them how things work. We get a deck of 10 PowerPoint slides and then we learn by heart, some lines.
Risto Siilasmaa:
Then, we repeat those like parrots to different audiences. We sound smart, but we don't actually understand what we are talking about. If it's really important for the company, we must and we can.
Josh King:
From that first game of Zork on the Commodore 64 to AI, Risto Siilasmaa, thank you so much for joining us in the ICE House. It's an incredible journey.
Risto Siilasmaa:
Thank you. It has been fun.
Josh King:
That's our conversation for this week. Our guest was Risto Siilasmaa, Chairman of Nokia and author of Transforming Nokia, The Power of Paranoid Optimism to Lead Through Colossal Change. Available now wherever you get your books. If you liked what you heard, please rate us on iTunes, so other folks know where to find us. If you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at @NYSE. Our show this week was produced by Pete Asch and Ian Wolf, with production assistance from Ken Abel and Steven Portner. I'm Josh King signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
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