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Turnaround ace: Inside the Hunter Harrison era at CP Railway Add to ...

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Hunter Harrison will not wait

The hard-driving CEO is ahead of schedule with his turnaround of
Canadian Pacific. But can you have too much of a good thing?

Driving through the rusty underbelly of southeast Calgary, past the scrapyards, used car lots and grain mills, you come upon a windswept field of train tracks and semi-abandoned buildings—a century-old industrial site gone to seed. Along the edge of the property, rising from the dirty snow of a long, hard winter, sits a low-slung white-and-grey building with “Canadian Pacific” emblazoned across it in bright red.

If it looks like a factory, that’s what it was—a railcar shop. But now it’s been stripped to its steel skeleton, and retrofitted with a second storey of executive offices, fields of cubicles, a NASA-style operations centre and hallways full of oil paintings of severe men with names like William Van Horne and Donald Smith.

In this remote brownfield of tracks and ties, a new head office of the company that built post-Confederation Canada has taken shape. Standing guard, near the entrance to the rail yard, is a bronze statue of 19th-century tycoon Lord Mount Stephen, but the building itself is a monument to the new lord of the line—a modern-day rail wizard named Hunter Harrison. As CP’s hedge-fund-anointed saviour, he has moved more than 1,000 people—some very reluctantly—to the Ogden Yard, where he is asking them to build a new CP amid the wreckage of a company that had lost its way.

The early results are impressive. It’s been only two years since the bitter proxy fight led by U.S. hedge-fund mogul Bill Ackman that overhauled the CP board and swept aside former CEO Fred Green. But Harrison has already engineered a remarkable turnaround, and he insists there is more to come. The veteran railman, who will be 70 in November, has undertaken a whirlwind agenda of efficiency moves, job cuts and a top-to-bottom culture shock that is still sending tremors through the company. It has made investors delirious, but left critics questioning whether this single-minded focus on operating profits is jeopardizing the railway’s long-term health.

Audio

(Darryl Dyck/The Canadian Press)

Hunter Harrison on treating CP like a wayward teenager.

The new head office is testimony to the Harrison effect. When he arrived in mid-2012 to save benighted CP, he came upon this downsized rail yard and was appalled by the spectacle of underused facilities, especially when juxtaposed with pricey leased offices on Calgary’s downtown 9th Avenue. There is a refrain you hear in CP: Hunter hates downtown offices, he hates wasted assets, and he likes employees to see and touch what they do. Which is, at the core, running a railway.

In the new Canadian Pacific Railway, what Hunter likes, Hunter gets—whether a new $40-million head-office complex or over $40 million in extra compensation to offset lost pension from another of his reclamation projects, Canadian National Railway.

The Harrison team takes care to respect CP’s 133-year history but not its recent record as the worst-performing of the continent’s major railways. “People told me all the history, that Western Canada wouldn’t be here but for the CP. But the CP is not the CP is not the CP,” asserts Harrison in his Tennessee drawl. “There was a great period for CP and there were some horrible ones.”

He has left one of those horrible eras in the dust, having roared out of retirement vowing to trim CP’s operating ratio, the much-watched index of profitability that measures operating costs as a percentage of revenue. His initial goal was to hit 65% by 2015, rivalling CN’s stellar results, and down from CP’s woeful 80% levels before he took over. He is way ahead of that schedule. In the fourth quarter of 2013, the “OR” plunged to 65.9%, a company record. For the full year of 2013, the operating ratio was 69.9%.

Propelled by such numbers—and Harrison’s mystique as a railway operator—the stock has been a runaway train, allowing Ackman to sell a third of his holdings last fall for three times the buying price.

Harrison had CP leave its pricey downtown digs behind; Tommy Browning and Caitlin Courteau confer in the lobby of the new HQ, fashioned from an old railcar stop. (Dermot Cleary for Report on Business magazine)

Rarely has a widely held company been so tightly in the grip of a single compelling personality, backed by grateful investors and a board of directors totally in his thrall—and surrounded by management acolytes, many of whom have followed him back and forth across the continent, from south to north and east to west, fixing railroads and spreading a gospel of transformation.

Brian Stevens, national rail director for the union Unifor—which represents parts of the workforce at both railways—says Harrison has already done far more at CP than he did in making over CN. “From a labour relations perspective, in terms of changing the culture, he has gone further, harder, more aggressive in issuing disciplines and terminating employees.” According to Stevens, “The board has given him the power—he did not have that power at CN.”

But Harrison has also found himself on the defensive in a rail industry marred by controversy. Rail companies have made big gains in hauling crude oil as an alternative to pipelines, but the industry has suffered a rash of oil-car accidents, including the Lac-Mégantic explosion that left 47 people dead. Then, this past winter, grain shipments, so vital to Western Canada, were hopelessly snarled, leading to proposed regulatory changes allowing more choice for shippers—and, perforce, the threat of added competition from U.S. railways—as well as Ottawa giving itself the power to levy fines if the railways do not move certain thresholds of volumes.

Through it all, CP has maintained it is still the safest railway in North America, with the lowest frequency of train accidents. And Harrison is irate over Ottawa’s new shipping proposals, which he says amount to a politically motivated act that unfairly targets railways that were caught in a perfect storm of record grain crops and a punishing winter.

It is clear Harrison does not shy away from a fight, whether taking on governments or dealing with recalcitrant employees. “When you go to a new location, in a railroad or whatever, you’ve got to find the meanest son of a bitch and whip his ass—you get a lot of attention,” he says. If you’re in a rail yard, he says, where a big bully has always got his way, “you take care of the big bully and a lot of things come together.”

Of course, Harrison comes from a long tradition of tough, polarizing rail chiefs. “They don’t make cute and cuddly railway presidents. Hunter is a hard man,” says Bill Brehl, a 34-year CP employee and president of the Teamsters division that represents the workers who build and maintain the CP tracks.

But Harrison is also a sophisticated leader, who comes with a well-thumbed playbook of efficiency and change management, earned by turning around a venerable but dying Illinois Central and helping revive a newly privatized Canadian National. Over 11 years, he was CN’s chief operating officer and then chief executive officer, all the time spreading his gospel of precision railroading—the novel concept that trains should run often, quickly and on time, in order to serve customers.

Backed by human resources policies that inspire and intimidate, Harrison took CN from the bottom rung to top spot among the continent’s seven Class 1 railways. But CP is CN on speed. He was given just four years to turn around this entrenched loser, and embed a new culture, before handing the shop over to his hand-picked successor, Keith Creel, 45, another hard-nosed rail fanatic from south of the Mason-Dixon line.

And the job at CP is twice as big as at CN. When he arrived at CN in 1998, then-CEO Paul Tellier had privatized the bloated Crown corporation, and taken out dozens of senior officers and thousands of employees. He had established the model of a continental transportation giant by buying Illinois Central and got Hunter Harrison as part of the bargain. At CP, Harrison has to cut and build at once, all within a compressed time period, and he has moved with a speed that both impresses and distresses critics.

He started right at the top, moving out most of the core of Green’s senior team in his first 90 days, and airlifting in managers who shared his impatience with bureaucracy and process—what Harrison calls the “mud” in an organization. “CP is the first place where I had to change a lot of senior people,” he says. “It was a horrible culture and they were heavy in fat.” He adds that “I didn’t get Fred [Green]—someone else got Fred—and I had to make changes for the others under him. They just saw the world differently.”

He pulled in old loyalists, such as Mark Wallace, who performs the same chief-of-staff duties as he did at CN, and Creel, the former CN chief operating officer and a Harrison protégé all the way back to Illinois Central. Creel came at a price: CP had to agree to keep its hands off 64 of the other top management people at CN. But Harrison has worked around this, picking up people beyond the untouchable 64 or reeling in converts from other companies.

CP is thus sprinkled with CN alums—from Jason Ross, who had gone to a steel company after his CN stint and now runs CP’s operations centre, to Tommy Browning, an Alabaman plucked out of CN in Chicago and now entrusted with pushing merchandise and energy sales, a rising business but with sliver-thin margins that Harrison is determined to widen. Conveniently, Peter Edwards, one of Harrison’s key human resources people at CN, was already at CP, and has resumed his role as chief proselytizer of the leader’s people principles.

It creates a fascinating dynamic. The two transcontinental railways compete on only about 25% of their networks, but the rivalry is intense, as can only happen when two groups share so much history and so many people have crossed the tracks. Inside CP, there is a lot of talk of “the other guys” or “the eastern railway,” with its Montreal base. And Harrison was not entirely happy about how he was put out to pasture when CN didn’t renew his CEO contract in 2009.

Dermot Cleary for Report on Business magazine

At CP, Harrison has again applied his brand of precision railroading, aiming at a leaner company with longer trains and fewer train starts, faster velocity, and better service at lower cost—all of which, he says, are proceeding as planned. He has also taken his scalpel to the place, cutting a net 4,800 jobs (from a roster of 19,500 when he took over), shedding 400 older locomotives and 11,000 cars, dropping some terminals, and initiating a whack of disciplinary actions against a workforce that, he argues, had got slack about safety and working rules. The company says only 200 people have been “separated,” with most of the job losses coming by attrition, and 1,000 new people have actually been hired. But union officials say many employees—management and rank-and-file alike—have quit, tired and frustrated with the arbitrariness of decision-making and the barrage of disciplines. The result has been a loss of critical know-how that cannot easily be replaced.

Harrison’s team negotiated five-year agreements in 2012 with four of its bargaining units, but relations are strained in other places. Doug Finnson, a Teamsters vice-president who represents so-called running trades such as conductors and engineers, says the number of arbitrated discipline and dismissal cases has skyrocketed in his area of the company. He paints a picture of an American style of labour relations that values confrontation over conversation, and a workforce facing a bewildering turnover of managers, with ever-shifting interpretation of the rules.

For its part, the railway agrees discipline actions are up, as managers strive to enforce rules that were being ignored in some areas. “We have some radical concepts, where we want you to come to work the whole eight hours,” says Peter Edwards, the HR vice-president. “Some operations people were leaving after four hours—both union and management. We asked them to stay the whole day.” While the running trades experience the highest discipline rates, across the system the number of such actions is “not even double,” Edwards insists.

Whatever the numbers, the spate of actions has revived the image of a “culture of fear and discipline,” a description coined six years ago in a federal review of rail safety while CN was under Harrison’s leadership. But he doesn’t shrink from that “fear” word. If people are afraid, that’s fine—they are finally feeling pressure on the job after years of indifferent execution of the rules. Behind it all is a message: When employees behave in a certain way, bad or good, there are going to be consequences.

If a culture of fear exists, Harrison says, it is a matter of “here’s your job to do, do it, and if you don’t, you are not going to get to stay”

If a culture of fear exists, Harrison says, it is a matter of “here’s your job to do, do it, and if you don’t, you are not going to get to stay. That looks to me a pretty simple contract.” He adds that “you can call it fear or accountability, responsibility, whatever, but it is just basic. The hard part is that someone created a culture of permissiveness, which means somebody else has to come in and make a change.”

Harrison believes that to accept change, people have to find a WIFM—a what’s-in-it-for-me payback. It can be the prospect of job security, higher compensation, or just a good feeling about working at CP. Keith Creel insists the speed of change stems from unleashing the pent-up frustration at being considered second-class. “I had anticipated a hard grind from the very beginning similar to what we experienced at CN, but the same level of resistance was not there.”

Every change story relies on a strong narrative, and it helps that Hunter Harrison has one of the best. This son of a Memphis cop grew up with a passing acquaintance with Elvis Presley, started out as a 19-year-old car maintenance worker for the St. Louis-San Francisco Railway and became the consummate operator and turnaround ace. “I know this business. I happen to be, with a little humility, pretty good at it,” he says.

His years in the trenches fashioned a leadership style that is highly personal, with no hesitance to micromanage. While the old CP had a reputation for hierarchy and decision by committee, Harrison personally roams the company, dispensing teaching moments like a crusty professor or, in the next breath, baring his teeth with the menace of a junkyard dog.

“Hunter is a big personality,” says Creel, an Alabama-born former U.S. Army officer, who claims to match his boss’s passion for railroading but admits his personality doesn’t quite fill up a room the same way.

At times, it seems like the standard operating rationale among CP managers is “Hunter likes...” or “Hunter doesn’t like...” Hunter doesn’t like trackmobiles, the little buggies for moving tools and people along the rails, so they have been shut down. Hunter doesn’t like customer service centres—companies with big service departments are companies with service problems—so he downsizes the department. If Hunter said he didn’t like BLT sandwiches, the Last Spike Bistro at head office would no doubt ban bacon, lettuce and tomatoes. But the cuts are based on hard reality. Building a new head office for $40 million sounds like vanity, but CP would have had to pony up $20 million a year for a downtown Calgary lease.

At every turn, Harrison preaches the gospel of his five core principles—give good service, operate safely, optimize assets, control costs and develop people. Any CEO would salute these priorities, but CP’s boss uses them as a hammer to pound change into his organization. In previous posts, he has published small books on the principles. At CP, he has instituted whiteboard sessions where managers blue-sky ideas. He has revived his Hunter Camps, first introduced at CN as three-day retreats that bring together people at all levels, including the occasional union leader, to learn the principles straight from Harrison’s mouth. The camps give Harrison a forum to communicate directly, thus cutting through the mud.

And because CP is, at its heart, an operating railway, Harrison has begun to insist that general managers, superintendents and other senior people know the operating and safety rules of the railway. They take the standard rules test, and pass with a minimum grade of 90% on a closed-book basis. Creel has taken the test, but did he get the 90%? “I would be very disappointed in 90%,” he says.

But beyond the management ideas, Harrison relies on emotion as a learning experience. He believes the biggest change comes through significant emotional events, which can be positive or negative, and, if necessary, he is willing to bring them on. All of which makes a company run by Harrison an unsettling place to work.

Les Dakens saw it all unfold before as Harrison’s senior vice-president, people, at Canadian National. In selling change, the critical point of contact was the front lines, Dakens says, where people like mechanics and conductors could be coached. To find the right agents of change, CN had to replace 20% to 30% of its first-line supervisors. That often meant moving some supervisors back into the ranks—or out of the company—and elevating people who had got religion.

At CP, Edwards says, that transition is happening right now as the company moves towards the CN turnover figure. His message is: “Don’t mourn it; the job has changed and it is not for everybody, and it does not mean they are not good people.”

The criticism of the Harrison system is not limited to some quarters of the workforce. A number of customers are dismayed by how the intense focus on operating ratio is driving strategy at both CN and CP. Even before the grain-shipping crisis, Wade Sobkowich, executive director of the Western Grain Elevator Association, felt the cost-cutting push resulted in poorer service and, more broadly, a transfer of wealth to CP’s investors from shippers.

The grain crisis underlined this issue. The move to leaner companies—with reduced workforces and rolling stock—had left no insulation against shocks to the system, says Sobkowich. He likens it to a power company that fails to maintain the capacity to deal with surges in demand.

CN and CP are both guilty, he says—but then again, they have something in common. “When CN went through this process, Hunter Harrison was CEO. Now CP is going through this process, and Hunter Harrison is the CEO.” Sobkowich respects Harrison for what he has accomplished, but he welcomes Ottawa’s new regulation of an industry where both CN and CP are monopolies on their own networks.

CP says it would be imprudent to invest heavily in capacity to meet rare moments of record crops and record winter weather.

In any case, cost control is not the entire solution; in the drive to reduce the operating ratio, the company is also focusing on higher revenue. That puts the pressure on Jane O’Hagan, the senior vice-president in charge of marketing and sales, to get revenue up by the targeted 6% to 7% this year.

“I am a survivor,” O’Hagan says, explaining she is one of three senior executives left over from the Fred Green days—the others are chief legal officer Paul Guthrie and Peter Edwards. Looking back, O’Hagan describes a senior team that wanted to change, but got bogged down in the mud. She had taken time off from the company some years ago, and came back because she loved the industry—but she was becoming frustrated with constant failure.

That all changed at 8 in the morning of July 4, 2012, when Hunter Harrison arrived for his first meeting. While some colleagues were nervous, O’Hagan was excited. “I just knew that, No. 1, we had been trying so hard and we were not getting results and something had to change. I just wanted to be a part of it.” In front of the leadership group, Harrison asked her how she would feel about cutting deeply into intermodal cycle times.

For O’Hagan, this was a signal that her new boss was committed to change by building up a service that had great potential but where CP was lagging. The intermodal service shifts containers among trains, trucks and ships; it relies on speed to make the economics work. CP has been able to take a day out of the old five-day cycles for Vancouver-Chicago and Vancouver-Toronto traffic, and it has focused on domestic intermodal service as a growth area.

Another goal was to get salespeople out of the office and selling, which means, for the first time, they are being rewarded by commissions, as well as salary. It has motivated people like Caitlin Courteau, 26, who thrives as a regional account manager for energy and merchandise. Whereas sales used to be a transaction business conducted from a desk, she is out on the road meeting customers 80% of the time.

The road is where you will often find the CEO, as well—he is out of the head office at least half the time. But if the CEO is at his Florida home, he is present in Calgary and elsewhere in spirit—and through phone calls to executives.

The problem with this intensely personal leadership is this: What happens when the leader rides off into the sunset? If Harrison’s legacy is just short-term cost-cutting, it will be a failure. The Teamsters’ Bill Brehl says a low operating ratio is good for investors, and may even be good for the country. But it has to be achieved safely and with a satisfactory quality of life for workers or it won’t be sustainable. “A railway is measured not in quarters, but in centuries,” Brehl says.

His Teamsters colleague Doug Finnson predicts that Harrison, in the short time he has left in the job, will continue to “cut and cut and cut.” And what will be left for Creel? There will be a hostile workforce, Finnson warns, and a management team that lacks experience and independent thought.

Indeed, the results are mixed for companies that shift from a cult of personality to more conventional leadership. It took a long time for Jeff Immelt to implant his style at General Electric after replacing Jack Welch. Apple CEO Tim Cook is grappling with the identity of the company in the post-Steve Jobs era. CN may provide the best model. CEO Claude Mongeau has maintained the essence of Harrison’s precision railroading but, as one union leader says, has taken some of the heat off the workforce.

In two years, CP’s destiny will be in the hands of Keith Creel, who portrays himself as no less consumed by railroading than his mentor, but “not quite as loud or as intense,” although he adds: “I’m not far off.” With him, CP gets “a little more level approach,” he says. By 2016, after four years of riding Hunter Harrison’s exhausting leadership, CP’s managers and workers may be ready for something a bit more level.

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