Execution part 2: The Execution Difference

Every great leader has had an instinct for execution. He has said, in effect, “Unless I can make this plan happen, it’s not going to matter.” But the selection, training, and development of leaders doesn’t focus on this reality.

Judging from our observations, a high proportion of those who actually rise to the top of a business organization have made their mark their personal “brand” as high-level thinkers. They are the kind of people who get caught up in the intellectual excitement of each new big idea that comes out and adopt it with enthusiasm.

They are articulate conceptualizers, very good at grasping strategies and explaining them. This, they know, is what it takes to get ahead. They aren’t interested in the

“how” of getting things done; that’s for somebody else

to think about.

Judging a person’s intelligence is easy for people who hire and promote others; it’s harder to research a person’s track record and gauge their know-how about getting things done, particularly when the performance is the result of many people working together. But the intelligent, articulate conceptualizers don’t necessarily understand how to execute. Many don’t realize what needs to be done to convert a vision into specific tasks, because high-level thinking is too broad. They don’t follow through and get things done; the details bore them. They don’t crystallize thought or anticipate roadblocks. They don’t know how to pick people for their organizations who can execute. Their lack of engagement deprives them of the sound judgment about people that comes only through practice.

THE TROUBLE WITH JOE

Joe, the CEO whose downfall we described in part 1, is a typical leader who didn’t know how to execute. Let’s take a closer look at his story, along with those of two prominent CEOs whose companies failed to execute the leaders’ grand visions.

You’ll recall that Joe couldn’t understand why his people hadn’t delivered the anticipated results. He’d brought in a top consulting firm to design a new strategy. He made several acquisitions and had a great relationship with Wall Street. Based on his deal-making skills and acquisitions, the company’s price/earnings ratio shot up in less than two years. Joe’s strength lay in marketing and customer contacts, but he also had a good, close relationship with his CFO. Joe set stretch goals, and the CFO handed the numbers down to the operating people. No micromanager, Joe left the details of implementation to his direct reports, including the executive vice president for the North American business unit and his director of production. But Joe stayed on top of the quarterly numbers.

If they came up short, he was on the phone immediately with the people in charge, telling them in the strongest terms possible that they needed to shape up. The quarterly reviews were less than civil.

By the standards of conventional management analysis, Joe did all the right things. By the standards of execution, he did almost nothing right. The gap between goals and outcome reflected a chasm between Joe’s ambitions and

the realities of the organization. In fact, the goals he set had been unrealistic from day one.

A major problem was that the company’s plant could not build enough of the product because its managers were 12 months behind schedule in implementing a process improvement plan that was 12 months behind schedule.

Joe didn’t know that. Though he chewed his executives out when they didn’t make their numbers, he never asked why they didn’t make them. An execution-savvy leader would have asked that right away. Then he would have focused on the cause after all, you don’t fix a problem just by looking at its outcome. Was the installation of the process on schedule? he would have asked. Did the executive vice president and his director of operations know the reasons, and what are they doing about it?

Like many CEOs, Joe believed it was the production director’s job to ask such questions, and the executive vice president’s job to make sure they were asked. But (again, like many CEOs) Joe hadn’t picked the right people for

the right jobs. Neither man was much on execution. The executive vice president was a ticket puncher who moved almost every three years from one job to another. The production director was a highly intelligent finance guy who came from a consulting firm and was regarded as a “hi-po”—a high-potential candidate to succeed the CEO in five years. But he didn’t understand operations at all and was acerbic. The plant managers reporting to him didn’t respect him.

If the leaders had had an open dialogue with the manufacturing people, they might have learned about the manufacturing obstacle, but that wasn’t in their makeup.

They just handed the numbers down. Furthermore, while stretch goals can be useful in forcing people to break old rules and do things better, they’re worse than useless if they’re totally unrealistic, or if the people who have to

meet them aren’t given the chance to debate them beforehand and take ownership of them.

How would Joe have behaved differently if he had had the know-how of execution? First, he would have involved all the people responsible for the strategic plan’s outcome including the key production people in shaping the plan. They would have set goals based on the organization’s capability for delivering results. Organizational capability includes having the right people in the right jobs. If the executive vice president didn’t know how to get things done, Joe would long ago have coached him on what he needed to do and helped him learn how to execute.

If he still wasn’t making progress, the only option left would have been to replace him (as the new CEO who took over did). Second, Joe would also have asked his people about the hows of execution: how, specifically, were they going to achieve their projected demand on a timely basis, their inventory turns, and cost and quality goals? Anybody who didn’t have the answers would have to get them before the plan was launched.

Third, Joe would have set milestones for the progress of the plan, with strict accountability for the people in charge. If they were installing a new process to improve yields, for example, Joe would have made an agreement with them that the project would be X percent completed by Y date, and that Z percent of the people would be trained in the process. If the managers couldn’t meet the

milestones, they would have told him, and he would have helped them take corrective actions. Fourth, Joe would have set contingency plans to deal with the unexpected a shift in the market, say, or a component shortage, or some other change in the external environment.

Joe was very bright but he didn’t know how to execute. The people who hired him saw nothing in his record to indicate he’d fail because they did not use execution as a selection criterion. His reputation for deal making and for making savvy acquisitions had earned him the job.

When the board fired him, it brought in a management team that knew how to execute. The new CEO came from manufacturing. He and his team reviewed and discussed the hows with plant managers, set milestones, and followed through with discipline and consistency to review them.

THE EXECUTION GAP AT XEROX

The people at Xerox who hired Richard C. Thoman saw no reason why he’d fail either. Thoman was one of the most thoughtful people to head a major American company in recent years, and a highly respected strategist. When Xerox hired him as COO in 1997, he was one of Louis V. Gerstner’s protégés at IBM, where he’d been CFO. Thoman was brought in to bring change. While COO, he launched numerous cost-cutting initiatives, including layoffs and cuts in bonuses, travel, and perks.

He also laid the groundwork for a new strategy. After the board elevated him to CEO in April 1999, he set out to transform Xerox from a products and services company into a solutions provider, combining software, hardware, and services to help customers integrate their paper documents and electronic information flows, organizing partnerships with companies such as Microsoft and Compaq to build the systems.

It was a stirring vision for a company that badly needed one. At the 1999 annual meeting, Thoman told stockholders the company was “poised on the threshold of another period of great success,” and predicted that earnings for the year would grow in the mid to high teens.

Investors shared the optimism, bidding the stock price up to record highs.

But the vision was disconnected from reality. Execution had been a problem for decades, and Thoman bit off more than Xerox could chew. For example, in an early step in the company’s efforts to refocus itself, he launched two mission critical initiatives, both of which were gut-wrenching. One aimed to consolidate the company’s ninety-some administration centers, which handle accounting, billing, and customer service scheduling and calls, into four. The second would reorganize Xerox’s roughly 30,000-person sales force, shifting about half from a geographical focus to an industry focus.

Both moves were necessary and important. The administrative consolidation would cut costs and improve efficiency, and the sales reorganization would pave the way for the intense focus on providing customers with solutions, not just hardware the core of the new strategy. But by the end of the year, Xerox was in chaos.

In the administrative transition, invoices languished, orders got lost, and service calls went unanswered. Sales representatives had to spend much of their time straightening out the mess, just as they were trying to adapt to a new organization and new way of selling. They also had to build new relationships with customers, since so many had been reassigned to new ones which, not incidentally, alienated many customers who had been loyal

for years.

Morale dropped. Cash flow from operations went negative, and investors began to worry about Xerox’s financial viability. The stock price plunged from the sixtyfour dollar range to seven dollars. The company was forced to sell some of its business to meet cash needs. In May 2000, Thoman was summoned to Chairman Paul Allaire’s office and told he was out of the job. What went wrong? While launching two such enormous initiatives at the same time was an execution error—either one alone would have placed a strain on the organization—the problems ran deeper. Thoman’s critics argued that he was too aloof to connect with the people who had to execute the changes. But Xerox’s clubby culture did not take kindly to an outsider, and as Thoman has pointed out, he did not have the authority to appoint his own leadership team. Especially when a business is making major changes, the right people have to be in the critical jobs, and the core processes must be strong enough to ensure that resistance is dissolved and plans get executed. Both of these building blocks were missing.

OUT OF TOUCH AT LUCENT

Hopes were high when Lucent Technologies named Richard McGinn a CEO in 1996. A strong marketer, McGinn was personable and adept at explaining the company’s bright prospects to the investment community. He promised investors dazzling growth in revenues and earnings. Given the climate of the times and seen from an altitude of 50,000 feet, the promises looked credible to the board and to investors. The combination of Western Electric and Bell Labs spun out of AT&T, Lucent would in 1997 concentrate on the booming telecommunications equipment market, from consumer telephones to network switching and transmission gear. With Bell Labs, it had an R&D resource that nobody else could match.

But McGinn had difficulty getting things done inside the company. “We got ahead of our capacity to execute,” said Henry Schacht, who came back from retirement to replace McGinn after he was fired in October 2000. The collapse of the telecommunications bubble eventually took down almost every player, but Lucent’s decline began even before that. The company fell sooner, harder,

and farther than its competitors.

In a technological marketplace moving at Internet speed, McGinn did not change the slow-moving and bureaucratic Western Electric culture. Lucent’s structure was cumbersome, and its financial control system was woefully inadequate. For example, executives couldn’t get information about profit by customer, product line, or channel, so they had no way of making good decisions about where to allocate resources. McGinn’s people asked him in vain to fix this situation. He failed to confront nonperforming executives or replace them with people able to act as decisively as their counterparts at competitors such as Cisco and Nortel.

As a result, Lucent consistently fell short of technical milestones for new product development, and it missed the best emerging market opportunities. The company spent an enormous amount to install SAP, enterprise software that connects all parts of the company through a standard software platform, but the money was largely wasted because the company didn’t change work

processes to take advantage of it.

Lucent did meet its financial targets during the first two years, surfing on its customers’ unprecedented wave of capital investment. But these early revenue gains came largely from Lucent’s old voice-network switch business a business with unsustainable growth prospects. Even before the wave broke, the company was struggling to deliver on McGinn’s commitments.

A leader with a more comprehensive understanding of the organization would not have set such unrealistic goals. The hottest demand was for products Lucent didn’t have, including the routers that guide Internet traffic

and optical equipment with high capacity and bandwidth. Bell Labs was working on both of these products, but was painfully slow to develop and introduce them. The missed opportunities in routers and optical gear are

widely perceived as strategic errors. In fact, they show how execution and strategy are intertwined. In 1998 Lucent talked with Juniper Networks about acquiring it but then decided to develop routers in-house. But one part of execution is knowing your own capability. Lucent didn’t have the capability to get its products to market fast enough. At the very least, good execution would have kept growth projections from getting so far out of hand when the company didn’t have a presence in one of the hottest growth markets.

Similarly, the strategic error in optical gear originated with poor execution in this case, the failure to understand changes in the external environment. As early as 1997, Lucent engineers were pleading with senior management to let them develop fiber optic products. But the leadership was used to listening its biggest customers AT&T, its former parent, and the Baby Bells and those

customers had no interest in optical gear. This is a classic case of the so-called innovator’s dilemma companies with the greatest strength in a mature technology tend to be least successful in mastering new ones. But the innovator’s dilemma itself has an execution solution that isn’ t generally recognized. If you’re really executing, and you have the resources, you are listening to tomorrow’s customers as well as today’s and planning for their needs.

Nortel was hearing the same arguments from its big customers, but it saw the emerging needs and organized itself to supply them.

Second, in the mad rush to grow revenues, Lucent set out in too many directions at once. It added myriad unprofitable product lines and acquired businesses it couldn’t integrate or even run, especially in the many cases where leaders of the acquired companies left because they couldn’t abide the bureaucratic culture.

Costs ran wild. The three dozen acquisitions, along with a roughly 50 percent increase in the workforce to some 160,000, led to redundancies, excess costs, and lowered visibility.

The endgame began well before the telecommunications market imploded. Under pressure to meet unrealistic growth projections, people left to their own devices did anything they could. Salespeople extended extraordinary amounts of financing, credit, and discounts to customers.

They promised to take equipment that customers couldn’t later sell. Some recorded products as being sold as soon as they were shipped to distributors. The result was a ravaged balance sheet. In 1999, for example, while revenues grew 20 percent, accounts receivable rose twice as fast, to over $10 billion. The company also amassed a huge amount of debt, largely from financing its acquisition binge, that put it near bankruptcy. It forced Lucent to sell businesses at fire-sale prices. The situation became so serious that the company flirted with losing its independence through its relationship with the French company Alcatel.

During the tech boom, neither industry people nor investors imagined that business could possibly drop so sharply. A leader skilled in execution would have probed his organization to get a realistic assessment of its market risks. According to published accounts, McGinn did not do so. And during his last year in office, he clearly was completely out of touch. Several times he had to revise financial estimates downward. To the very weekend when the board fired him, he insisted Lucent was dealing with its problems.

In a postmortem, the Wall Street Journal reported:

People familiar with the company say several executives told Mr. McGinn as long as a year ago that the company needed to drastically cut its financial projections because its newest products weren’t ready yet and sales of older ones were going to decline. “He absolutely rejected” the advice, says one person familiar with the discussion. “He said the market is growing and there’s absolutely no reason why we can’t grow. He was in total denial.” Indeed, in a recent interview, Mr. McGinn said that during Lucent’s spectacular rise to stardom in the years after its spinoff from AT&T, he never gave much thought to how or whether the company might fall from grace.

EXECUTING AT EDS

Now let’s look at a formerly troubled company whose new CEO brought the discipline of execution. EDS had a lot in common with Xerox when Dick Brown took the helm in January 1999. EDS created its field, computer services outsourcing, and had been successful for decades. Then the information technology market changed, and EDS didn’t.

Competitors like IBM grabbed the growth. Revenues were flat, earnings declining, and the stock price sinking. Like Thoman, Brown came from another industry in his case, telecommunications. He’d previously turned around Cable & Wireless, the British telecommunications giant. At EDS, he faced a deeply embedded culture in need of fundamental change, one that was indecisive and lacking accountability, along with an organizational structure that no longer fit the needs of the marketplace. Two more parallels: not long after arriving, Brown set goals for revenue and earnings growth so ambitious that most people in the company thought them impossible to meet. And he

subjected the company to a massive reorganization.

There the similarities end. Brown is deeply executionoriented,

and there was never any doubt who was in charge. While he points out that the transformation of EDS is still a work in progress, he successfully changed the fundamentals of the company in two years. He infused it with an energy and focus it hadn’t experienced since its early days, and he met his profit and growth goals.

Brown’s vision was that EDS could grow strongly and profitably by meeting the fast-growing new needs for information technology services. These services range from digitization within companies to virtual retailing and electronic

integration, where companies work with suppliers, clients, and other service providers as if they were one integrated business. Keeping abreast of the changes was a big challenge for even the best corporate IT department and a

serious problem for companies with limited resources.

Brown saw that EDS had the core competencies to serve these markets. These resources ranged from expertise in providing the most routine operational services at low cost to strategic consulting at the highest levels through its

consulting firm, A.T. Kearney, acquired in 1995. Its people’s breadth and depth of technical expertise and experience in solving clients’ problems was a vast reserve of intellectual capital. One good thing about the EDS culture was a powerful can-do spirit. What one executive called “a belief we could do things for clients that seemed impossible” was the legacy of founder Ross Perot. But EDS was trapped in its old structure and culture. Its forty-odd strategic business units (SBUs) were organized along industry lines, such as communications, consumer goods, and state health care. They divided the company into a confederation of fiefdoms, each with its own leaders, agenda, staffs, and sometimes policies. These fiefdoms rarely worked together, and the new marketplace opportunities were falling between the stools. How would Brown apply the company’s intellectual capital to the new environment? EDS would need a new organizational structure, but first Brown had to change the culture to one of accountability and collaboration.

Brown jumped out onto the playing field. First, he got to know the company intimately, traveling around the globe for three months, meeting people at all levels formally and informally to talk and listen. In weekly e-mails that he sent to the whole organization, he not only told employees what he was thinking but also asked them to respond and make suggestions.

His candid and down-to-earth messages weren’t simply communications they were a tool for changing attitudes. They made the company’s goals, issues, and new leadership style clear to the employees everywhere. And they put pressure from below on managers to explain priorities and open up their own dialogues.

Brown increased the quality and flow of information in other ways, too. For example, sales figures, which had formerly been compiled quarterly, were now reported daily, and for the first time the top 150 or so senior leaders were given the company’s vital information, from profit margins to earnings per share.

Starting at the highest levels, Brown created new ways to drive accountability and collaboration. In the monthly “performance call,” for example, he, his COO, and his CFO began hosting Monday-morning conference calls of the company’s roughly top 150 leaders. These calls are essentially an ongoing operating review, in which the company’s performance for the previous month and the year to date is compared with the commitments people have made. The calls provide early warning of problems and instill a sense of urgency. People who fall short have to explain why, and what they are going to do about it.

In the early days, when Brown was building the new culture of execution, the calls also served to reinforce the new standards of accountability. “The point I tried to make is that when you sign up for what used to be a budget item, you are committing for your team and each other,” he says. “The rest are depending on you. It added a layer of weight and responsibility that was missing before.”

The calls have brought a new reality to discussions of EDS operations. The talk is straightforward, even blunt, designed to elicit truth and coach people in the behavior Brown expects of his managers. “Intense candor,” Brown calls it, “a balance of optimism and motivation with realism.

We bring out the positive and the negative.” The calls can be uncomfortable for those in the negative column. In front of their peers, executives have to explain why and what they’re doing to get back on track. “If your results are negative enough,” adds Brown, “we’ll talk after class.” Such talks involve a series of questions and suggestions about what actions the executive plans to take to get back to performing on plan.

But neither the calls nor the “after class” discussions are scold sessions. As one senior executive (who has been with EDS since the beginning) says, “It’s done in a positive and constructive way, not to embarrass. But just by the fact that it happens, human nature says you want to be one of the ones doing well.”

The talk isn’t always about numbers. At one of the first meetings, Brown recalls, “one of the executives made the statement that he was worried about growing anxiety and unrest in his organization, worried about rapid and dramatic change. His people were asking, ‘Are we moving too fast, are we on the threshold of being reckless? Maybe we should slow down, take it easy, reflect a bit.’ ” Brown turned the issue around not incidentally, creating a forceful coaching lesson. “I jumped all over that.

‘This is a test of leadership,’ I said. ‘I would like anybody on this call who is really worried about where we are going and worried about the fact that we will probably fail, tell me so right now. Don’t be afraid to say you are.

If you think we’re making a big mistake and heading for the reef, speak up now.’ “No one did. So I said, ‘If you’re not worried, where’s the worry coming from? I’m not worried, and you’re not worried. Here’s where it is: some of you say one thing, and your body language says another. You show me an organization that’s wringing its hands, listening to rumors, anxious about the future, and I will show you leadership that behaves the same way. People imitate their leaders. If your organization is worried, you’ve got a

problem, because you said you’re not.’ “And I put it right back on that. ‘Here’s your test of leadership; now calm your organization, give them information;

strike right at the heart of their worries. I can’t believe that their worry is fact-based. I believe their worry is ignorance-based. And if that’s the case, it’s your

fault.’ ”

Brown organized a series of two-day meetings for the top 150 executives, exposing them for the first time to the to the details of the company’s plans, critical issues, and finances. “I want you to see the business from my level,”

he told them at the first one. “It engages you in what we’re doing. It will focus you on the most critical issues we face.” The meetings also gave diverse people practice in working together, not only at the meetings but throughout the year. “Know each other so when we collaborate and work together, we’ve got a face with a memo or an e-mail or a name,” he said. “We’re on the same team, and we can only get there working together.”

People selection got intense attention. Brown removed scores of underperforming executives. Under new leadership, the HR department (renamed Leadership and Change Management) developed a compensation system

that linked rewards to performance, along with a Web based set of evaluation tools to help line executives sharpen their assessments of their people. Also added were extensive training courses for leaders at all levels, targeted to specific organizational needs. Leaders who couldn’t handle all the changes either got coaching or were removed.

Brown himself ordered an analysis of the sales staff’s performance and found, among other things, that 20 percent of the salespeople had sold nothing at all for the previous six months. He said to his sales executives, “What are you going to do about these people and about their supervisors?” The 20 percent were replaced.

In its total impact on the company, Brown’s reorganization was far bigger and more complex than the one that brought Xerox to its knees. Brown essentially turned EDS upside down. The SBUs were rolled into a new organization of four lines of business (LOBs) centered on broad market segments. E Solutions would offer a complete range of services for the “extended enterprise,” linked electronically with suppliers and clients, from supply chain networks to Internet security. Business Process Management would provide businesses and governments with administrative and financial processing and client relationship management. Information solutions would sell IT and communications outsourcing, managed storage, and management of desktop systems. And A.T.

Kearney would specialize in high-end consulting, along with executive search services. (EDS has since added a fifth LOB, PLM Solutions, which offers digitized product life cycle management from development to collaboration

with suppliers for manufacturing companies.)

The new structure was more than a way to divide up business according to markets. It was designed so that EDS could fully leverage its intellectual capital for the first time, drawing on people from all parts of the company to provide solutions for clients. Collaboration among the lines of business would enable EDS to bring every client a value proposition based on its full “end-to-end” capability from business strategy consulting to process redesign and  to Web hosting. It wouldn’t work unless the people from the old business units learned not only their new jobs but also new ways of working together. At the same time, they were under orders to raise productivity at a 4 to 6 percent annual rate, making about $1 billion a year available for reinvestment or the bottom line. Moreover, the speed of new product introduction and delivery

could not slacken.

The radical overhaul succeeded because Brown put its design in the hands of the people who would have to make it work. A team of seven executives was assembled from different disciplines and regions to come up with the new model. Meeting regularly with Brown, his COO, and the CFO, they produced the model in ten weeks of seven day- a week effort.

Simply in terms of the demands it made of EDS leaders, the new organization could not have been more different from the old one. In the past, the heads of business units were focused solely on the success of their part of the company. The new model, however, was designed to maximize results for the company as a whole, requiring close collaboration among all of the businesses. For most of the executives, the experience was their first taste of such teamwork. It wasn’t always easy. Here’s what one member had to say about the process:

“We were seven people from different backgrounds with different views and different opinions. Some were more sales-oriented, some more delivery oriented, some internationally focused, some very industry-knowledgeable. And we had to agree up front that the model we produced was one that we

all completely bought into.

“Getting there was really hard. I can tell you we had lots of fights among ourselves. We stormed out of the building and didn’t like each other some days. Compromise is difficult for me. I’m a very strong, opinionated person. There were lots of times when I was really frustrated. And there were days when I would leave our meetings, and I’d get in my car, and I would literally think, ‘We’re destroying this company.’ I’ve got twenty years in the company; it’s family to me, and I love it here. I couldn’t stand to think that we were destroying it.

“It takes some, I guess, emotional and mental processing to make such a radical change, to understand that ‘Hey, what we did before doesn’t always have to be the way we do it in the future, and you just have to be open to it.’ And at the end we became personally close because we had to wrestle through all the points together. So it truly, truly was a good developmental experience.”

While all this was going on, Brown sharpened the company’s focus on the quality of service it delivered to its clients, which had slipped over the years. “Service excellence” became not only a mantra, but also an objective figuring

in the performance rewards of all client-facing executives and LOB presidents. Today 91 percent of EDS clients rate their service either “good” or “excellent.”

The results are evident in EDS’s performance. At the end of 2001, the company had achieved record revenues and solid market share gains, and chalked up eleven consecutive quarters of double-digit growth in operating margins and earnings per share. Its stock price was up some 65 percent from the time Brown took the job. After the executive session of the December 2001 board meeting, each EDS director approached Brown, and one by one told him they hadn’t expected him to succeed in transforming the culture in less than three years, while at the same time delivering the stellar top- and bottom-line performance he’d achieved.

_ _ _

Each of the previous three companies we’ve talked about was once an icon of American business. Xerox, Lucent (as Western Electric and Bell Labs), and EDS created their industries, led them for years, and once were the companies

against which competitors benchmarked themselves.

Today two are struggling to recapture a small fraction of their former glory, while the third has regained its luster and aims to lead its industry once again. The difference?

Execution. The discipline of execution is based on a set of building blocks that every leader must use to design, install, andoperate effectively the three core processes rigorously and consistently. part 3 to 5 distill our observations about

these building blocks: the essential behaviors of the leader, an operational definition of the framework for cultural change, and getting the right people in the right jobs.