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?