Wed, 15 Jan 2014
Morningstar's 2013 CEO of the Year discusses his successful turnaround strategies and playbook for running a high-velocity railroad.
Heather Brilliant: I'm here today with Hunter Harrison, CEO of Canadian Pacific, our 2013 CEO of the Year. Hunter, thanks for joining me today.
Hunter Harrison: It's great to be here.
Brilliant: We have given you this award for numerous reasons, and I'd like to talk a little bit about that. First of all, you have turned around several railroads in your career, most recently Canadian National. I'd like to hear a little bit about what you did there that you are bringing to Canadian Pacific and how you instill a culture of improvement. Canadian National still seems to be a very strong performing railroad even after you left to come to Canadian Pacific.
Harrison: It is, and they've done very well. I've said publicly and many times when I was leading up to retirement that Canadian National, if that company slipped after I left, I hadn't done my job. … One of the challenges I was given at CP by the new board and the Pershing folks was to build some sustainability. So, you want to build an operating plan, a team that can withstand changes in the market and various pressures and learn to deal with those issues. That's part of a CEO's job, I think, is to build that real sustainability.
Brilliant: Getting into the details around the business itself, you identify "train velocity" as something that's a very important component of a successful railroad. Why is that so important? And what do you do, or what changes have you brought to the railroads that you have run?
Harrison: I think that if you look at the industry's record, in recent years there's been real slippage in train speeds, velocity, which a lot of people don't understand.
Brilliant: Why has that happened?
Harrison: There are many reasons for it. I don't want to use it as excuse, but part of the reason is regulatory issues. Part of the reason is that some people don't appreciate velocity or haven't agreed with me in that regard.
You know at one time we ran trains based on volume. So, when we get the train full, we left, but we didn't go until it was full. But it can't be like going out to [Chicago's] Midway [Airport] and asking, "When is this plane going to Memphis?" [and the answer is,] "When we get it full."
So a lot of us had some influence that said, that's not the way to run a railroad. It starts off with customer service. If you don't know when you're going to run the train, how does the customer know when he's going to get his goods and control his inventory, safety stock, and those things.
I really think in the future, looking out, velocity is going to be so much more important. Velocity adds, number one, capacity. Effectively, without building more infrastructure, you can add capacity just with raw speed and velocity. So, that's going to be important, because we're going to get in this country, not too far in the future, real gridlocks in some of the areas of rail. There are not going to be more railroads built; it's just not in the cards. So there are certainly going to be some challenges there.
Number two, if you have good velocity, speed, your assets turn quicker. If your assets turn quicker, you lower your costs with your assets. If you turn faster like that, then the customers have better service. So, if you have better service, add capacity at a very low cost, can turn your assets and at the same time lower your labor cost, you've got a good fit there. That's why going forward I think velocity is going to be the key to success in this industry.
Brilliant: How was the work that you've done at Canadian Pacific been different from the prior two railroads? How does this situation differ and how has your approached differed?
Harrison: I think if you're a very successful leader that you adjust your approach to what's required where you're going. You evaluate the team, you look at the markets, you see where the company is.
The companies were in three different spots. Illinois Central was on the verge of bankruptcy; people were desperate. There was a sense of urgency, and so you didn't have to really inspire people. They wanted to be led to become successful.
Then we go to CN, and you have a totally different situation. You've got a former Crown Corp that was a huge railroad. It was a big major player in the Canadian economy, and it had already started a turnaround. It was IPO'd in '95. Paul Tellier, who was my leader when I arrived, was the CEO at the time, and he and a gentlemen named Michael Sabia had done a great deal of pre-work and building the foundation to turn the company around. So, that mission had already been started, and so you come in, and you're starting at a different pace, at a different level, with a different sense of urgency.
CP was a totally different story. It wasn't a Crown Corp. There was not maybe the desperation and urgency there should have been, and we had to make a lot of change--much more change than was required at Illinois Central or Canadian National, and that presented another level of challenges.
Brilliant: How do you approach a challenge like that? If there is no sense of urgency, if people don't see the need to improve margins or to operate more efficiently, how do you inspire them or get them to really buy into that?
Harrison: Some of it is about pressure. You've got to evaluate your team and your people individually--not as a group--and see what they need. My first agenda everywhere I go is to let people know what's expected, and if you want to play on this team, here are the rules. Here's what we're going to do, here is how we're going to do it, here's why we're going to do it, and hopefully you can be supportive of that. But if you can't, you're going to be traded, let go, and that to some degree creates its own sense of urgency.
I think what people see, though, is once you can convince them that there is some real opportunity, … and I think CP had maybe kind of lost its way. There was not a real sense of direction. There had been maybe even too much change. But as we went through the change, and all of a sudden, things started turning around … People don't like to be identified as the worst: the worst operating ratio in North America, the worst railroaders. And you appeal to their sense of pride, and all of a sudden they're moving up the ladder, making a little money, enthusiasm, and that all starts to come together, and that's when it's real fun to sit back and watch the esprit de corps, the chemistry develop among the team.
Brilliant: You've been in the railroading industry for really your entire life. What are some of the changes you have seen in the industry over that time period? And what are you most proud of having achieved within the industry?
Harrison: Probably the most significant change from a non-technological standpoint has been with labor. We certainly went through, early in my career, the term "feather-bedding"--where we had six people on train crews, where today we have two. So, there's been a huge shift in change in labor agreements, collective-bargaining agreements, and a change in work rules, which came a great deal with deregulation, which came about in 1980 with the Staggers Act, which effectively deregulated railroads. So, from that side, I'd say, probably the labor.
From a personal standpoint, I think I would have to say that maybe I'd like to think I had a little something to do with the industry changing and turning around, going a different direction. … The first half of my career was in a regulated environment. I saw the frustration of what we went through in that regulatory [environment]. I thought a lot of things that we did strategically, tactically, made no sense. I got to a point where I had an opportunity to do something about it. Sometimes you never can reach a level where you can really influence an organization. But if you get to the top, you don't have that excuse anymore. So, I tried to take my learning from the bottom to the top and apply it. And maybe more than anything, that agent of change is the leadership. And look, I'm supposed to have been the author of schedule precision in railroading, and I can write up an operating plan. But to lead and inspire people to make changes in culture--and that's an overused term--but it truly is something special.
Brilliant: Absolutely. And I commend you for the impact that I'd certainly give you a big piece of credit for.
Brilliant: So, along the lines of your leadership style, speaking of that, we talked a little bit previously about how you have taken it on yourself to communicate your vision to as many employees as possible directly, and not necessarily require some kind of management trickle-down or something along those lines. How would you characterize your leadership style? What would you say to other CEOs out there who might be looking to inspire a change?
Harrison: Well, maybe you ought to ask somebody else, but I think hopefully my leadership style is not consistent, because your challenges aren't consistent. I think you have to really look at what's before you, evaluate what the needs are. If you're going in, and you've got a very competent and experienced staff, you do one thing. If you've got a total change in leadership and a weak group, … I think this is all about people.
So, when we first started the so-called Hunter Camps back in Canadian National, it was a desire to try to get to every employee we could in the company and explain to them what we were doing and why we were trying to do it. And rather than look at every year change and have a new mission statement on the wall, I've been a CEO now for 20 years effectively--with a little break, a little respite there for couple of years--and the strategy hadn't changed. It's the same thing as it was 20 years ago. It's pretty simple agenda.
When people start understanding what you are trying to do, and why you are trying to do it, that the organization is trying to do the right thing, they really open up the opportunity to be inspired. Hopefully, if you do a good job, they become disciples, and this thing really creates some power and some sustainability of its own.
I can remember going up in my career and the first 10 years I was with the company, I had no idea what we did. I knew it was a railroad, but I didn't know where it went or what it did. You'd pick up the company magazine, and you'd read about who won the bowling league, but never anything about the strategy of the company, what the company was trying to do, the markets we were trying to serve. So, I just think that if you can make people part of the organization, proud of the organization, that there is a strength there that sometimes we don't call upon or use as a resource.
Brilliant: That's fantastic. Hunter, thank you again for coming. Congratulations on being our 2013 CEO of the Year. It was really a pleasure to have you here today.
Harrison: Thanks so much.