An Inside Look At Where RIM Went So Wrong

The Waterloo, Ontario, company and name behind the BlackBerry brand had just unveiled alliances with tech trailblazers Microsoft and Intel. Its BlackBerry "email devices" had won numerous accolades, including a spot on PCWorld's annual 100 Best Products list. Its subscriber base had hit the 4 million mark, and co-CEOs Jim Balsillie and Mike Lazaridis had made Time Magazine's list of the 100 Most Influential People of the year as "The BlackBerry Guys."

Writing for Time Magazine, George Stephanopoulos, who profiled Balsillie and Lazaridis for the 2005 write-up, detailed RIM's longtime reign in the handheld communication market, the BlackBerry's rise to becoming a "pop-culture phenomenon" and the coining of BlackBerry as a verb.

[Related: 8 Factors That Led To RIM's Fall ]

Stephanopoulous went on to reveal his own addiction to the BlackBerry -- a trend that ushered the phrase "CrackBerry" into the popular lexicon. At home, in the office, and even at the gym, RIM's popular device could be found glued to his hand, Stephanopoulos admitted. A rule had to be put in place prohibiting him from checking his BlackBerry under the dinner table, and he once took some heat for sneaking it into his daughter's preschool orientation.

How many at the time recognized themselves in Stephanopoulos' description of his own behavior?

"Lazaridis and Balsillie have made a fortune with their business and cultural breakthrough," he concluded. "That makes the BlackBerry a case study for MBAs -- and maybe philosophers too."

Two weeks before Stephanopoulos' profile appeared in April 2005, RIM crossed the $1 billion sales mark for the first time, reporting then-record annual revenue of $1.35 billion -- more than double the $594.6 million it had reported in 2004 -- along with a profit of $206 million, up from $52 million in fiscal 2005. Balsillie referred to it as a "landmark year" for the company.

CNN Money also had reported that month a 25 percent surge in RIM stock and told potential investors it was "ripe to buy."

RIM's success continued for years. Even as recently as 2010, mobile market researcher ComScore reported that "The BlackBerry Guys" held 43 percent of the U.S. mobile OS market share -- and competitors weren't even close. Apple's iOS, which ran on the Cupertino, Calif.-based company's increasingly sought-after iPhone, was next in line (but still at a safe distance) with 25 percent. Microsoft claimed third place with an even less threatening 15 percent. And Google's Android was still in its infancy, accounting for a meager 7 percent.

But by the end of 2011, RIM's fortunes had changed dramatically for the worse, bringing to a close one of the worst years in the company's 28-year history. It was a year plagued by a lackluster tablet launch, a major service outage and product delays. Perhaps most embarrassing was an open letter from a member of the senior management team to the company's co-CEOs -- written a few days after RIM revealed plans to lay off 2,000 employees, more than 10 percent of its workforce -- that began with the ominous words "I have lost confidence."

Wall Street demonstrated a similar lack of faith. After the company that December reported a drop in third-quarter fiscal 2011 profit to $265 million -- which was down 19 percent from the $911 million reported a year earlier -- CNN Money reported that RIM shares were down 77 percent year-to-date and were being traded at their lowest level since January 2004.

It seemed the BlackBerry, a former pop-culture phenomenon, was becoming irrelevant.

Analysts have attributed RIM's fall to a number of things. Increased competition from Apple and Google is one of them. By the second quarter of 2012, Android had propelled itself to the top by capturing 64 percent of the worldwide smartphone market, according to Gartner. Apple's iOS claimed the runner-up spot with 19 percent of the market. But RIM, on the other hand, took a nosedive and closed the quarter with just more than 5 percent of the market, down from 18 percent two years prior.

NEXT: Where Did RIM Go Wrong? So where did RIM go so wrong?

In addition to playing in a particularly competitive market, a general lack of innovation and an app ecosystem that's just too small top the list of RIM missteps. But RIM investors and former employees, who have watched the company's massive shift in the marketplace from the inside out, have pointed to a rigid governance model, blatant disregard for the potential impact of the iPhone and downright stubbornness as the underlying reasons for RIM's demise.

THE EARLY DAYS

Canadian newspaper The Globe and Mail described Lazaridis in a 2002 profile as "Canada's biggest brain in a business suit." A longtime lover of science and engineering (he was the type of kid always tinkering with electronics in his parents' Waterloo basement), Lazaridis went to the University of Waterloo to pursue a degree in electrical engineering. He dropped out just one month shy of graduation to accept a $600,000 contract with General Motors.

That money, along with a loan from his parents, was used to build RIM, which Lazaridis officially founded in 1984. Eight years later, he met Jim Balsillie, a Harvard MBA with the potential to perfectly round out RIM's management team: Lazaridis would provide the technical insight and engineering know-how to fuel the BlackBerry's development, while Balsillie (a man that The Globe and Mail would later describe as "known widely for his drive, his temper, his passion,") would handle the financial side of things.

Following through with this model, Lazaridis appointed Balsillie as his co-CEO and chairman of the board in 1997, when the company went public. Lazaridis would serve as the other co-CEO, and as president.

The Globe and Mail went on to describe RIM's "unusual corporate structure," centered on the closeness of Lazaridis and Balsillie. The two CEOs once shared an office. They developed a secret "code" of shoulder shrugs and twitches to communicate with each other discreetly during meetings. They even joked that the BlackBerry was invented solely as a means to chat with one another after business hours, without their wives finding out.

And so it went. Lazaridis and Balsillie, a seemingly perfect fit, were at the helm of RIM for what would turn out to be an almost 20-year span before a new CEO or chairman stepped in.

AN 'UNUSUAL' CORPORATE STRUCTURE

The Globe and Mail wasn't alone in viewing RIM's corporate structure -- and especially the tight-knit relationship between Lazaridis and Balsillie in their roles as co-CEOs -- as unusual.

Bill Crittendon, professor of International Business and Strategy at Northeastern University, referred to RIM's governance structure as "founder centrality," a management model in which all decision-making is confined to the hands of a company's original founders.

"We have two very powerful founders and they created a centrality around themselves, where everything in the organization revolved around these two individuals," Crittendon told CRN. "Because they were both co-chairs and co-CEOs, everything was falling through them."

The model creates ambiguity and opens the door for tasks and responsibilities to fall through the cracks, Crittendon said.

"In general, the idea of having co-chairs and co-CEOs is not considered good governance at all," he concluded.

CRN contacted RIM multiple times for comment, but the company did not provide one as of press time. Attempts to contact Balsillie through The Center For International Governance Innovation, the governance think tank he founded and chairs, were unsuccessful.

The founder centrality model did have fans, at least within RIM.

NEXT: The Downside To Founder Centrality Greg Turner*, a former RIM employee who worked on the mobile development team for two years, thought the co-CEO structure actually made sense, at least from a high level, given the different skill sets of Lazaridis and Balsillie.

"Fundamentally, I don't have a problem with the co-CEO structure because it allowed Mike [Lazaridis] to create these beautiful devices, and it allowed Jim [Balsillie] to go off to do the money things he had to do," Turner told CRN.

That said, Turner notes that Lazaridis and Balsillie were so different in personality and temperament that the co-chief structure didn't work for them, instead leading to a divide throughout the organization rather than a balanced feeling of yin and yang.

When you boiled it down, the two were so different that it seemed shocking they even got along at all. Apart from being a steadfast engineer, Lazaridis, who Turner described as a "you're-going-to-have-to-pry-RIM-from-my-cold-dead-fingers kind of guy," was abrupt, strong-minded and knew how to get what he wanted.

Balsillie, on the other hand, seemed flamboyant and long-winded. "He would kind of just ramble on for an hour and a half and not say anything," Turner said. "They have such different personalities, I honestly can't even imagine them working together."

Other former employees said the structure created dysfunction and bureaucracy within the company.

Former RIM employee Janet Rogers* joined RIM's technical sales team in the early 2000s. Back then, she said, the company was still fairly small and full of "pioneering-type people who were willing to take a risk and were really passionate about it."

But as the company grew, the stark differences between Lazaridis and Balsillie became palpable throughout the organization.

"Having two leaders instead of one, that created a very dysfunctional environment. There were always the technical people pitted against the salespeople," Rogers said. "That happens in a lot of these corporations ... but [at RIM] there wasn't a final decision-maker. And I would always say that that's a bad way to run a company."

People both inside and outside RIM would comment on the company having "Chinese walls," serving as barriers between the various segments, she said.

The bureaucratic feeling continued, and employee morale began to suffer. "A lot of times you would get penalized if you would be the person to speak up and say what was really true," Rogers told CRN. "And eventually you learned not to do that if you valued your job."

NEXT: 'The Height Of Lunacy''THE HEIGHT OF LUNACY'

In March 2007, the issue of the company's management structure came to a head when Balsillie resigned as chairman after he, Lazaridis and other members of the senior management team were implicated in a stock option backdating scandal that had come to light the previous fall.

"Consistent with current best practices in corporate governance, the roles of Chairman and CEO are being separated," RIM said in a statement disclosing the resignation. In addition, Balsillie agreed to step down as a director of the company as part of a February 2009 settlement agreement with Canadian regulators.

Garfield Emerson, a Toronto-based lawyer and corporate director who publishes GovernanceCanada.com, noted that these changes, especially Balsillie's resignation from his role as chairman, made way for some fresh strategic thinking.

"The fact was that there was no countervailing, challenging discussion about anything because it was dominated by these two guys ... Lazaridis would give a report on technology, developments and that kind of thing, but the board agenda was controlled by Balsillie and he controlled the dialogue and the debate," Emerson said.

But RIM's changes were short-lived. Balsillie, who still retained his title as co-CEO during the board shuffles, was re-appointed director three years later. By the end of 2010, RIM also re-appointed Balsillie as chairman -- a role that had remained vacant since he stepped down from it in 2007. Lazaridis also was appointed co-chairman.

The company said the new structure was seen as an "appropriate and effective leadership structure."

Voicing concerns about RIM's revisited management structure was Toronto-based RIM investor NEI Investments. NEI issued a proposal for a vote at RIM's July 2011 annual general meeting on whether the roles of co-CEO and co-chair should be separated and an independent chairman be appointed, explained Bob Walker, vice president, Ethical Funds and ESG Services, at NEI.

"The proposal was prompted by the board's decision to recombine the positions of chair and CEO," Walker told CRN. "Our efforts to engage the company in a dialogue on this topic ... were rebuffed, so we filed."

But two weeks before the vote would have taken place, RIM placated NEI by committing itself to establishing a review committee to study the governance model and determine "the business necessity" of Lazaridis and Balsillie holding both titles. RIM said in a statement announcing the internal review that the joint titles assisted the two CEOs in "their selling and other responsibilities with certain large customers in overseas markets." The board's preparation of that report would later prove to have tremendous repercussions for Lazaridis, Balsillie and RIM as a whole.

For Vic Albioni, CEO of Jaguar Financials, another RIM investor located in Toronto, RIM's implication in June 2011 that Lazaridis and Balsillie needed to maintain both roles to keep a leg up in the industry was what finally prompted him to step forward and voice concerns of his own. He told CRN he felt the characterization demonstrated the extreme influence the two men had over the board's line of thinking.

"To me, this was the height of lunacy," he said. "It showed the extent to which the board would buy into their rationale."

On Sept. 6, 2011, Jaguar Financials went public with its concerns. In a press release, the company called upon the directors of RIM to spark a period of "transformational change." According to Jaguar Financials, a "lack of innovation" seen in the BlackBerry brand, coupled with steep competition in the mobile market, were making RIM less and less relevant in the market. And with a co-CEO and co-chair board structure in place, finding room for any outside thinking that potentially could turn things around was nearly impossible.

"Messrs. Balsillie and Lazaridis are first-class entrepreneurs, but the current management arrangement with the board impedes the board's effectiveness, in turn impacting RIM's strategy, operations and performance," Albioni said in the statement.

There were other indicators, apart from an apparent tight grip on the board, that the Balsillie-Lazaridis duo may not be ideal for RIM. Albioni pointed to "poor execution" and BlackBerry product delays as further evidence of a transformation being needed within RIM.

NEXT: 'The iPhone's Crap''THE IPHONE'S CRAP'

Just a few months after Balsillie abdicated the chairman's seat in 2007, RIM found itself facing a new competitor in the smartphone space with a strangely buttonless screen: the Apple iPhone.

Unaware of the booming success that awaited its newest rival, Lazaridis and Balsillie weren't alarmed. In fact, according to former RIM employee Turner, they weren't even impressed.

"When the iPhone came out, I started pressuring my management like, 'Guys, we have to respond to this, we have to respond to this,' " he told CRN. "And the answer I got back was: 'The iPhone's crap, and we'll be OK.' "

Charles Grace*, a former RIM employee who worked in the telco relations department, noticed a similar response.

"I think that there was a disregard for the iPhone because I think that RIM missed the 'consumerization of IT' phenomenon," he said. "When the iPhone came out, BlackBerry was strongly entrenched in enterprise accounts, and they were relying on security and manageability as their core enterprise drivers. I think that there was a disregard for iPhone becoming a contender in the enterprise space."

Some RIM employees weren't shy about their disdain for Apple as a rival.

Sterling Ball, CEO of Ernie Ball, a guitar accessory company in Coachella, Calif., uses Apple products in his company.

"I was at a golf tournament a few years ago and I had my iPhone, and one of the original RIM employees, who was very rich and very successful, said, 'What are you doing with that toy?' And I said, "You shouldn't be making fun of my toy because it's the most legitimate threat to you guys.' And he said, 'Not possible. Our business email system will keep us valid forever.' You can't ever think of your business like that."

NEXT: The iPhone Reality NOT IN 'MOTION'

The public eventually would start to catch wind of RIM's internal struggles. In June 2011, Boy Genius Report received and reprinted a letter that an anonymous RIM executive had sent to Lazaridis and Balsillie. Just like the sources who spoke to CRN, the letter's writer decried a corporate culture epitomized by loss of passion, low employee morale and a fear of speaking up. It also begged for change.

"To avoid this death, perhaps it is time to seriously consider a new, fresh-thinking, experienced CEO," the anonymous letter-writer said. "There is no shame in no longer being a CEO. Mike, you could focus on innovation. Jim, you could focus on our carriers/customers. ... They are our lifeblood."

After Boy Genius Report published the nearly 1,800-word letter, other RIM employees came forward, anonymously expressing identical woes. They also were made public, and their messages again stressed a need for transformation, more consumer-friendly products, and a change in management structure. The company is being "led by poor leaders," one employee warned. It is "no longer 'In Motion.' "

RIM responded to the slew of controversial emails in its company blog. After first speculating that the letters may have been "fake, exaggerated or written with ulterior motivations," the company said that its senior management is "fully aware and addressing both the company's challenges and its opportunities."

The next blow came with RIM's failed attempt to launch a viable competitor to Apple's iPad tablet, the BlackBerry PlayBook. The PlayBook is one of the most cited examples of the company's sometimes-sluggish route to market. PlayBook OS 2.0, a highly anticipated software update that promised to breathe new life into the struggling tablet brand with features such as native email and support for Android apps, originally was slated to launch in fall 2011. But on Oct. 25, 2011, RIM disclosed that the launch of OS 2.0 would be delayed.

Many fans were irate.

"I am a big RIM fan, but I am also a fan of good products," wrote one user in a forum on CrackBerry.com, an online community for BlackBerry users, in response to the delay. "I really believed the PlayBook would be the best tablet on the market, and in some respects it is. But what really bothers me is how RIM can willfully drag their customers along, making them believe that the PlayBook is a great device. They repeatedly broke promise after promise for the PlayBook, claiming false release dates for OSes and such."

The delay only added to RIM's pre-existing PlayBook woes. In December 2011, it disclosed that it was taking a $485 million charge due to weak demand for the tablet. A pre-tax provision was recorded in its third fiscal quarter, and it continued to sit on a "high level" of unsold PlayBook inventory.

THE BOARD COMES AROUND

On Jan. 22, 2012, with the deadline looming for the board to issue committee findings on its examination of its governance model, RIM disclosed that Balisllie and Lazaridis had stepped down from the company. Thorsten Heins, former co-COO, was named as its new president and CEO, while board member Barbara Stymiest was named as independent chair. One week later, the company released the report recommending the separation of the CEO and board chair roles.

Walker said NEI is satisfied with the result.

"At the end we got them to produce a report examining the question of combining the positions, and at the end of the day, the board came around and agreed with us that the roles should be separated, which they have done," Walker said. "To have somebody like Heins, who has been there for a while, but not that long, he knows the company surely. And he knows where the problems are and where the challenges are, hopefully, and he has some idea how to pull the levers."

*Names changed to honor requests for anonymity.

Robert Wright contributed to this story.

For a look at an assessment of Heins' chances of turning RIM around, see tomorrow's edition of CRN Tech News.