On December 4, E. Hunter Harrison, President and CEO of Canadian Pacific (CP) made an appearance before a New York City gathering of investment analysts to reflect on his first 160 days in office, and to present CP’s vision for the future. He noted that the critical components of CP’s plans are centered around cost reduction and service improvements.
Other critical elements of the plan include having an experienced management team and competent workforce in place, with people properly matched to the requirements of their jobs, and ensuring that asset utilization is maximized and risk management receives the attention it deserves.
The immediate challenge following Harrison’s arrival focused on corporate leadership, following an ugly proxy fight. Harrison found an organization that was top heavy with too much focus on bureaucracy and procedures, and too little focus on driving the business where it needed to go. Seven Vice-Presidents left, and Harrison developed plans for major reductions in the workforce. Harrison found an organization that relied heavily on outsourced talent, with one critical department, Information Technology, staffed mostly by contractors, rather than employees.
CP’s Board has approved plans to trim the organization’s total head count from 19,500 (including all temporary workers, contractors, consultants, and others on the payroll) to about 15,000 by the end of Harrison’s first four years. Harrison pointed out that CP’s natural attrition rate is in the order of 8 to 9 per cent annually, so that the vast majority of payroll reductions would be implemented through the failure to replace retirees and people leaving the company voluntarily. Henceforth, the company will reduce its reliance on contract workers and will also do away with its previous philosophy of engaging and releasing seasonal workers, aiming for a stable workforce throughout the year. Harrison announced that CP recently concluded five-year collective agreements with three labour unions.
Harrison announced that the company will be abandoning its “glass tower” Head Office in Calgary in favour of a new Head Office adjoining an industrial yard about ten kilometres from its present location. The new headquarters will save CP about $18 million per year, and will “connect” employees more directly with the nature of the company’s activities, railroading, than a downtown location could.
Harrison reported that the company’s first major marketing initiative, reducing intermodal transit times to Chicago and Toronto by one day, has been very successful. It achieved an excellent on-time record, and was well received by customers. In addition, the move allowed for significant cost reductions.
An important element of taking costs out of the system has been the re-evaluation of everything the company does, principally in technical operations, but also in administrative and corporate processes. The efficiencies that resulting changes are yielding are reflected in improved service deliveries, reduced costs and redundant assets.
Among the first operational improvements and cost reduction initiatives were the closing of four hump yards, and the construction of eight siding extensions to reduce train starts.
Commenting on CP’s decision to invite expressions of interest for a major part of the Delaware, Minnesota & Eastern Railroad (DM&E)’s network, Harrison stated that CP already participates in the carrying of increasing volumes of Powder River Basin coal to Prince Rupert, and that, no matter whether CP disposes of the lines it has put up for sale or not, the company will benefit from growing volumes of coal exports from this region.
Harrison commented that, despite major expenditures on information technology, the company is behind rival CN in this important area, but vowed to catch up.
Harrison took pains to emphasize that the accomplishment of the Board’s objective to lower CP’s operating ratio to about 65 per cent in about four years would be the result of taking unnecessary expenses out of operations, and driving business opportunities, and was not dependent on extra-ordinary deals with its labour unions. He stated that the management team is “pretty well in place”, although he would welcome the addition of “superstars”. Furthermore, he noted that the company intends to engage a Chief Operating Officer in 2013 who would naturally be groomed to occupy Harrison’s position when his contract with CP comes to an end.
The following morning, presentations were made by the company’s senior executives, consisting of Scott MacDonald (Senior VP Operations, System), Guido De Cicco (Senior VP Canadian Operations), Doug McFarlane (Senior VP U.S. Operations), Peter Edwards (VP Human Resources and Industrial Relations), Jane O’Hagan (Executive VP and Chief Marketing Officer), and Brian Grassby (Senior VP and Chief Financial Officer).
These executives reiterated the plans announced by Harrison and provided more details. Collectively, they emphasized that the change in decision-making which was previously centered in Head Office, was having a dramatic and positive impact. With the new mantra of “Centralized planning with decentralized execution”, execution of plans is now delegated to operational levels, the speed of decision-making has been increased, bureaucracy has been reduced, and new levels of decision-making and accountability have created higher levels of “ownership” and involvement. Operational changes have allowed the company to increase average train velocity, reduce dwell times, and reduce maintenance costs, which in turn have allowed the company to make considerable reductions in rolling stock and yards, while improving service to customers.
The company’s 1991 acquisition of the Delaware and Hudson Railway (D&H) and its 2008 acquisition of the Dakota, Minnesota and Eastern Railroad (DM&E) were described as “not successful ventures to date”. CP has invited expressions of interest for third parties to acquire the Western portions of the DM&E, but has not yet decided on D&H’s future. With transportation of energy products expected to become a more important part of CP’s business, it appears that the senior management is eyeing a new energy-related focus for this carrier.
On the topic of cost reductions related to labour, Peter Edwards reported that in addition to eliminating non value-added work, the company is also doing its best to remove non-critical work. CP is also focusing its culture on railroading, with coaching and training on railroad management provided to middle management personnel. In addition, 700 to 800 managers will be trained to become qualified conductors and engineers, instilling a greater awareness of what it means to run trains, and also providing backup capability in the event of a possible future strike. While the company recently signed five year contracts with intermodal workers and clerks, signal maintenance workers and CP’s police force, negotiations are currently underway with the Teamsters Union (MWED – track maintenance workers), whereas mediation/ arbitration procedures are currently in progress with the Teamsters (RTE and RCTC – train/engine crews and rail traffic controllers). Almost 5,000 Teamster-represented workers struck CP in May of this year.
Jane O’Hagan reiterated the company’s stated revenue growth objectives of 4-7 per cent annually during the next few years, based on the expected growth of trade with Asia, recovery of the North American economy, and continued expected rapid growth opportunities in the transportation of crude oil and oil-related materials and supplies. Along with Harrison, O’Hagan championed the idea of focusing on sustainable, profitable opportunities to avoid unjustifiable capital expenditures to support new services, and to avoid new fixed and variable costs. However, she pointed out that currently marginal opportunities have the potential to become more solid as operating costs come down.
Brian Grassby summed up what had been said before, which was that CP’s plans to drive productivity and cost savings will support sustainable revenue growth without requiring extraordinary capital expenditures to implement. The increasing free cash flow that is generated strengthens the balance sheet, resulting in growing investor returns, and provides the company with options to enhance shareholder value. Cash flows before dividends which were negative in 2010 and 2011, and are expected to be only marginally positive in 2012, are expected to jump to $900 to $1,400 million by 2016. Capital expenditures, as a per cent of revenues, are expected to decline from 21 per cent currently to 14 to 16 per cent by 2016.
It is evident that a lot has been accomplished at CP within a relatively short time period. Harrison’s arrival has re-energized the organization, turning a lethargic behemoth into an entrepreneurial entity. The company has been turned upside down, with everything, no matter how minor, being questioned and reviewed. Undoubtedly, CP’s transformation is being eyed carefully by its rival, CN, which will likely initiate its own review of what it does, and why it does these things, in an effort to remain ahead of a competitor that clearly has its sights set on matching, or surpassing its performance.