Hancock Products, Inc.

Fat and Happy

Bill Phillips, CFO, and chief administrative officer of HancockProducts, a diversified consumer-durables manufacturer, was in a particularly good mood. He was heading into a breakfast meeting of the corporate executive council (CEC) that would bring nothing but good news. Sally Hamilton and Frank Ormondy from Felding & Company would no doubt already be at the office when he arrived and would have with them the all-important numbers - the statistics that would demonstrate the positive results of the performance management program he'd put in place 18 months ago. Bill had already seen many of the figures in bits and pieces. He'd retained the consultants to establish baselines on the metrics he wanted to watch and had seen various interim reports from them since. But today's meeting would be the impressive summation capping off a year and a half's worth of effort. Merging into the congestion of Route 45, he thought about the upbeat presentation he would spend the rest of the morning preparing for tomorrow's meeting of the corporate executive council (CEC).

It was obvious enough what his introduction should be. He would start at the beginning - or, anyway, his own beginning at Hancock Products 18 months ago. At the time, the company had just come off a couple of awful quarters. While surviving the recession of 2009, Hancockhad recently experienced greatercompetition, especially fromoffshore.

What had quickly become clear was that Hancock was adjusting to the new reality far less rapidly than its biggest competitors.

Keith Randall, CEO of Hancock, was known for being an inspiring leader who focused on innovation. Even outside the industry, he had a name as a marketing visionary. But over the course of the five years, he had allowed his organization to become a little lax.

Take corporatebudgeting. Bill stillsmiled when herecalled his first day ofinterviews with Hancock's executives.It immediately becameobvious that theplace had no budget integrity whatsoever. One unit head had said outright, "Look, none of us fights very hardat budget time, becauseafter three orfour months, nobodylooks at the budgetanyway." Barely concealinghis shock, Billasked how thatcould be; whatdid they look at, then? The answer was that they operated according to one simple rule: "If it's a good idea, we say yes to it. If it's a bad idea, we say no."

"And what happens," Billhad pressed, "whenyou run outof money halfwaythrough the year?" The fellow rubbed his chin and took a moment to think before answering. "I guess we've always run out of good ideas before we've run out of money." Unbelievable!

"Fat and happy" was how Bill characterized Hancock in a conversation with the headhunter who had recruited him. Of course, he wouldn't use those words in the CEC meeting.That would soundtoo disparaging. In fact,he'd quickly fallenin love with Hancock and the opportunities it presented. Here was a company that had the potential for greatness but that was held back by a lack of discipline. It was like a racehorse that had thepotential to bea Secretariat butlacked a structuredtraining regimen. Or a Ferrari engine that needed the touch of an expert mechanic to get it back in trim. In other words, the onlything Hancock wasmissing was whatsomeone like BillPhillips could bring to the table. The allure was irresistible; this was the assignment that would define his career. And now, a year and a half later, he was ready to declare a turnaround.

Lean and Forward-Looking

Sure enough, as Bill steeredtoward the entranceto the parkinggarage, he sawSally and Frank in a visitor parking space, pulling their bulky file bags out of the trunk of Sally's sedan.He caught upto them atthe security checkpointin the lobby andtook a heavy satchel from Sally's hand.

Moments later, they were at a conference table, each of them poring over a copy of the consultants' spiral-bound report. "This is great." Bill said. "I can hand this out just as it is.

But what I wantto do whileyou're here isto really nail downwhat the highlightsare. I have the floor for 40 minutes, but I guessI'd better leave ten forquestions. There's no way I can plow through all of this."

"If I were you," Sally advised, "I would lead offwith the best numbers. I mean, none of them arebad. You hitpractically every target. Butsome of these,where you even exceeded the stretch goal..."

Bill glanced at theline Sally was underscoring with her fingernail. Itwas an impressive achievement: areduction in laborcosts. Bill's strategywas to startwith a reductionof labor costs and then move to install a new performance management program.

Specifically,phase 1 (0to six months)would be aheadcount reduction followedby Phase 2(6 to 18months) with theinstallation of thenew performance managementprogram. Keith Randallgrudgingly agreed. Heknew that toughdecisions had to be made and he had full confidence that Bill could pull them off. From Bill's perspective, he had Keith'sposition in mindfor the nextstep in hiscareer as Keithhad been givingsome signals he was thinking of retiring.

For the labor cost reduction, Bill came up with the idea of identifying the bottom quartile ofperformers throughout the company,offering them fairlygenerous buyout packages, andthen replacing somewith new "moremotivated" employees. Butwhen that hadn't attracted enoughtakers, he'd gonethe surer route.He imposed anacross-the-board headcountreduction of 10%on all theunits. In thatround, the affectedpeople were given no financial assistance beyond the normal severance.

"It made abig difference," henodded. "But itwasn't exactly theworld's most popular move." Bill felt that at times leadership has its costs. Bill was well aware that a certain segment of the Hancock workforce currently referred to him as "Fire 'em."

Bill pointed to another number on the spreadsheet. "Now, that one tells a happier story: lower costsas a resultof higher productivityfrom the new performancemanagement program. Nevertheless,people seemed totake the terminationof several hundred longtime employees very hard. Bill had predicted such a reaction, but he knew he had no choice: Thelowest producers had to goand the 10percent across theboard seemed fair. The process went as follows:

The pink slips had gone out on a Friday morning before lunch. That was the way he had doneit in previouspositions. The approach seemedimmensely logical: Itgave people time toclean out theirdesks and saytheir goodbyes beforethe end ofthe day. It also gave the survivors a weekend to cool off before returning to work. Bill wasn't coldhearted about theprocess, but havinglived through anumber of downsizingsin his career,he believed there was really no "kinder, gentler" way. Bill believed he had gone beyond fair.

Still, the reactionhad been severe.Not so muchfrom the firedpeople; most ofthem went quietly. Butthe survivors wereangry, and eventhe new staffBill had broughtin with him wereupset. Many thought heshould have heldmeetings before thelayoffs to warn people they were coming. But he had rejected that idea. His view was that when a company is in financial trouble and a new CFO is brought in to save it, everyone knows that layoffs are next. Why make matters worse by rubbing their noses in it?

But Bill wasnervous. The wounds openedby the layoffs were not healing after several weeks into Phase1. In anewspaper article, thereporter had speculatedthat a recent resignation by Hancock's new head of human resources - Rachel Meyer was connected tothe downsizing initiative.The company wasa morass of bad feelings, the article suggested, although Meyer had said "no comment" when asked directly about morale at the company. Bill decided to get out into the organization soon, both to reassure people that there wouldbe no morelayoffs and toexplain the onesthat had beennecessary.

Specifically, Bill decided to hold a series of "Meet the CFO" meetings at various locations in the company, inwhich Bill wouldtalk straight with the employees.He would promise no more layoffs, apologize for the ways those in the past had been handled, and set the tone forthe company's future."We need toclear the air,"Bill said. "People shouldbe celebrating around here, not complaining!"

The first meet-the-CFO gathering was called for two days later in one of the company's largerdistribution centers, inSt. Paul, Minnesota.All 300 employeeswere invited to attendthe session, whichwas held inthe conference roomof a hotelin downtown St.

Paul, near the facility. As he surveyed the crowd before going on stage, it looked to Bill asif all 300employees were there.He couldn't helpbut notice thatthe room was remarkably quiet. There was tension in the air.

Bill summoned up his confidence. He cleared his throat and began speaking. "Hancock is a company tobe proud ofagain," he said,thanks to you. In the last several weeks, there have been many changes in the wayHancock does business. What we asked of you wasn't easy -- far from it--but you rose to the challenge and made success happen."

Bill hadexpected applause atthat line, butthere wasn't any.He moved onto the hard part: the layoffs. "I'll be honest with you," he began, "I probably should have handled the downsizing differently --". Here, he was cut off by applause, raucous and prolonged. He waited until it died down, and continued. "Layoffs are never easy. I'm not even sure there is a `right' way to do them. But I take full responsibility for doing them in a way that felt wrong to a lot of you."

Again, the roombroke into loudapplause. But Billcould tell theapplause wasn't a positive release of energy: people looked angry. He decided to cut his losses and move right intothe question andanswer period. Hedidn't recognize thefirst person to approachthe microphone --a middle-aged manin a plaidflannel shirt. Billfigured he was someone from the stockroom.

"Hancock may be making a lot of money now, Mr. Phillips," he said pointedly, "but it's not a familyanymore. It doesn'tfeel right. Youand your folksare always hidingin your c-suite on the eighteenth floor. You don't care anything about the people who are earning your big salaries for you."

Again, cheers.

The man continued, "You just fired people like Mae Collier without any warning. Just up and fired her. That woman gave her whole life to Hancock. She was like a mother to a lot of us. You treated her like a hired hand. That's not right. You broke the heart our St. Paul group that day." Bill had no idea who Mae Collier was, and the truth probably showed on his face. She had worked on the packaging line, probably, and most likely one who had slow output. But beyond that...

"Is Mae coming back?" the man at the microphone interrupted Bill's thoughts. Bill hadn't expected this.He knew hewould have tohandle tough questionsabout how he had managed the downsizing.But to bequestioned about anindividual employee likethis Mae Collier -- that was not something he had prepared for. He stalled for a moment, but he knew therewas no pointtrying to placatethe crowd withsome sort offudged half-truth. When he spoke, his answer was simple. "No," he said, "Mae Collier is not coming back. None of the employeeswho were let go are coming back. Hancock is a different company now, and we need to let go of the past and focus on the future, and our future is very bright."

Another member ofthe audience pushedher way tothe microphone. "Peopleare hurting, Mr. Phillips," shealmost shouted. "Youcan't talk aboutthe future withus until you make up for the past."

"That's what I'm trying to do right now," he shot back, exasperated. "What do you think I'm standing up here for?"

No one answered directly, but the crowd was rumbling unhappily. Bill was about to speak again when the distribution manager, Rob Lawson appeared at his shoulder and pulled him back from the podium. "Don't dig yourself in any deeper," he whispered. "Wrap it up. Say you're sorry and let's get out of here."

Bill turned backto the crowd,ready to closethe meeting withan appeal: giveme chance, he wantedto say. But,looking out, hecould see peoplewere already filing towardthe door. Noone would listento him anyway.He shut offhis microphone and followed Rob to a back exit of the hotel.

Leading the Way with the New Performance Management System

Toward the endof Phase 1,Bill thought thata lot ofthe earlier employeecommotion began tosettle down. ForPhase 2, Billfelt strongly thatmethods needed tobe developed to improve performance and lead the company to get back on track. One area that neededimprovement was Hancock'scall center where phone representatives took orders and handledquestions and complaints fromboth trade and retail customers.Bill envisioned a transformation of the call center. One year into the change the consultant's reportindicated a dramaticuptick in productivity:The number ofcalls each servicerep was handling perday had goneup 50%. Ayear earlier, repswere spending upto six minutesper call, whereasnow the averagewas less thanfour minutes. "lguess you decided togo for thatnew automated switchingsystem?" Frank asked."No!" Bill answered. "That's the beauty of it. We got that improvement without any capital investment. You knowwhat we did?We just announcedthe new targetsand let everyone know we were going to monitor them. Bill got the idea from a video he saw at a local Chamber of Commerce meeting. The video, Jim Roth, was about a Dell call center manager who put the names of employees and their performance on a computer screen for all to see.

Bill's instinct was to put the names of the lowest performers on a great big 'wall of shame'.Realizing that callingit a wallof shame was alittle tacky, hecame up with "Red Sticker Board". He thought: "Never underestimate the power of peer pressure!"

Sally,meanwhile, was already circling anotherbanner achievement: an increasein on-time shipments."You should talkabout this, giventhat it's somethingthat wasn't even being watched before you came."

It was true. As much as Hancock liked to emphasize customer service in its values and mission statement, no reliable metric had been in place to track it. And getting a metric in place hadn'tbeen as straightforward as it mightseem - peoplehaggled about what constituted "ontime" and evenwhat constituted "shipped." Finally,Bill had put hisfoot down and insistedon the mostobjective of measures.On time meantwhen the goods were promised to ship. And nothing was counted as shipped till it left company property. Period. "And once again," Bill announced, "not a dollar of capital expenditure. I simply let people know that,from now on,if they madecommitments and didn'tkeep them, we'd have their number."

"Seems tohave done thetrick," Sally observed."The percentage ofgoods shipped by promise date has gone up steadily for the last six months. It's now at 92%.

Scanning the report,Bill noticed anotherhuge percentage gain,but he couldn'trecall what the acronym stood for. "What's this? Looks like a good one: a 50% cost reduction?"

Sally studied theitem. "Oh, that.It's pretty smallchange, actually. Rememberwe separated out the commissions on sales to employees?" It came back to Bill immediately. Hancock hada policy that allowedcurrent, retired, andlaid-off employees to buy products at a substantial discount. But the salespeople who served them earned commissions based on the fullretail value, notthe actual pricepaid. So, ineffect, employee purchases were jacking up the commission expenses.

Bill had createda new policyin which thecommission reflected theactual purchase price. On its own, the change didn't amount to a lot, but it reminded Bill of a larger point he wanted tomake in hispresentation: the importanceof straightforward rules- and rewards -in driving superiorperformance. "I know youguys don't haveimpact data for me, but I'm definitely going to talk about the changes to commission structure and sales incentives. There's no question they must be making a difference."

"Right," Sally nodded. "A classic case of 'keep it simple,' isn't it?" She turned to Frank to explain. "The old way they calculated commissions was by using this really complicated formula that factored in, I can't remember, at least five different things."

"Including sales, Ihope?" Frank smirked. "I'm still not sure!" Bill answered. "No, seriously, sales were the most important single variable, but they also mixed in all kinds of targets around mentoring, prospecting new clients, even keeping the account informationcurrent. It wasall way too subjective, andsalespeople were getting very mixed signals.I just clarifiedthe message sothey don't haveto wonder whatthey're getting paid for.Same with thesales contests. It'ssimple now: Ifyou sell themost product in a given quarter, you win."

With Sally and Frank nodding enthusiastically, Bill again looked down at the report. Row after row of numbers attested to Hancock's improved performance. It wouldn't be easy to choose the rest of the highlights, but what a problem to have! He invited the consultants to weigh in again and leaned back to bask in the superlatives. And his smile grew wider.

Cause for Concern

The next morning, a well-rested Bill Phillips strode into the building, flashed his I D badge atCharlie, the guard,and joined thethrong in thelobby. In thecrowd waiting forthe elevator, he recognized two young women from Hancock, lattes in hand and headphones around their necks. One was grimacing melodramatically as she turned to her friend. "I'm so dreading getting to my desk," she said. "Right when I was leaving last night, an e-mail showed up from the buyer at Sullivan. I just know it's going to be some big, hairy problem to sortout. I couldn'tbring myself toopen it, withthe day I'dhad. But I'm going to be sweating it todaytrying to respondby five o'clock.I can't rackup any morelate responses, or my bonus is seriously history."

Her friend hadslung her backpackonto the floorand was rooting through it,barely listening. But she glanced up to set her friend straight in the most casual way.

"No, see, allthey check is whetheryou responded to ane-mail within 24hours of openingit. So that's the key. Just don't open it. You know, till you've got time to deal with it." Then a bell tone announced the arrival of the elevator, and they were gone.

More Cause for Concern

An hour later, Keith Randall was calling to order the quarterly meeting of the corporate executive council. First, he said, the group would hear the results of the annual employee survey, courtesyof the newhuman resources VPLew Hart. Nextwould come a demonstration by the chief marketing officer of a practice the CEO hoped to incorporate into allfuture meetings. Itwas a "quickmarket intelligence," or QMI,scan, engaging a few of Hancock's valued customers in a prearranged - but not predigested - conference call, tocollect raw dataon customer serviceconcerns and ideas. Andfinally Keith concluded, "Bill'sgoing to giveus some verygood news aboutcost reductions and operating, all due to the changes he's designed and implemented this past year."

Bill nodded toacknowledge the compliment.He heard littleof the next tenminutes' proceedings,thinking instead abouthow he shouldphrase certain pointsfor maximum effect. LewHart had losthim in thefirst moments ofhis presentation onthe "people survey" by beginning with an overview of "purpose, methodology, and historical trends."

Deadly.

It was the phrase "mindlessly counting patents" that finally turned Bill's attention back to his colleague.Lew, it seemed,was now into the"findings" section ofhis remarks. Bill piecedtogether that hewas reporting onan unprecedented levelof negativity in the responses from Hancock's R&D department and was quoting the complaints people had scribbled on theirsurveys. "Another oneput it thisway," Lew said."We're now highly focused onwho's getting themost patents, who'sgetting the mostcopyrights, who's submitting the most grant proposals, etc. But are we more creative? It's not that simple."

"Youknow,'' Hancock's chief counselnoted, "I have thought lately thatwe're filing for a lot of patents for products that will never be commercially viable."

"But the thingthat's really gotthese guys frustratedseems to betheir 'Innovation X' project," Lewcontinued. "They're allsaying it's thebest thing sincesliced bread, a generational leap on the product line, but they're getting no uptake."

Eyes in theroom turned tothe products divisionpresident, who promptlythrew up hishands. "What can I say, gang? We never expected that breakthrough to happenin this fiscal year. It's not in the budget to bring it to market."

Lew Hart silenced the rising voices, reminding the group he had more findings to share. Unfortunately, it didn't get much better. Both current and retired employees were complainingabout being treatedpoorly by salespersonnel when theysought to placeorders or obtaininformation about companyproducts. There wasa lot ofresidual unhappiness about thelayoffs, and not simplybecause those whoremained had more work to do. Some people had noted that, because the reduction was based on headcount,not costs, managershad tended tofire low-level people,crippling the company without saving much money. And because the reduction was across the board, the highestperforming departments hadbeen forced to lay offsome of thecompany's best employees. Others had heard about inequities in the severance deals: "As far as I cantell, we gaveour lowest performersa better packagethan our goodones," he quoted one employee as saying.

And then therewas a chorusof complaints fromthe sales organization."No role models." "Nomentoring:" "No chanceto pick theveterans' brains." "Noknowledge sharing about accounts." Morethan ever, salespeoplewere dissatisfied withtheir territories and clamoring for the more affluent, high-volume districts. "It didn't help that all thesales-contest winners thisyear were fromplaces like Scarsdale,Shaker Heights, and Beverly Hills," a salesperson was quoted as saying. Lew concluded with a promise to lookfurther into the apparent declinein morale todetermine whether itwas an aberration.

The Ugly Truth

But if thegroup thought themood would improvein the meeting'snext segment - the QMI chatwith the folksat longtime customer BrentonBrothers - theysoon found out otherwise. Boomingout of thespeakerphone in themiddle of thetable came the Southern-tinged voices of Billy Brenton and three of his employees representing various parts of his organization.

"What's up with your shipping department?" Billy called out. "My people are telling me it's taking forever to get the stock replenished."

Bill sat upstraight, then leanedtoward the speakerphone. "Excuseme, Mr. Brenton. This is Bill Phillips - I don't believe we've met. But are you saying we are not shipping by our promise date?"

A cough - or was it a guffaw? - came back across the wire."Well, son. Let me tell you about that. First of all, what y'all promise is not always what we are saying we require - and what we believe we deserve. Annie, isn't that right?"

"Yes, Mr. Brenton." said the buyer. "In some cases, I've been told to take a late date or otherwise forgo the purchase. That becomesthe promise date, I guess, butit's not the date I asked for."

"Andsecond," Billy continued,"I can't figureout how youfellas define "shipped" We were told last Tuesday an order had been shipped, and come to find out, the stuff was sitting on a railroad siding across the street from your plant."

"That's animportant order for us," another Brenton voice piped up."I sent an e-mail to try to sort it out, but I haven't heard back about it." Bill winced, recalling the conversation in the lobby that morning. The voice persisted: "I thought that might be the better way to contact your service people these days? They always seem in such an all-fired hurry to get offthe phone whenI call. Sometimesit takes two or threecalls to getsomething squared away."

The call didn't end there - a few more shortcomings were discussed. Then Keith Randall, to his credit, pulled the conversation onto more positive ground by reaffirming the great regardHancock had for Brenton Brothers and themutual value of thatenduring relationship.Promises were madeand hearty thanksextended for the frankfeedback.

Meanwhile, Bill feltthe eyes ofhis colleagues onhim. Finally, thecall ended andthe CEO announced that he, for one, needed a break before the last agenda item.

Dazed and Confused

Bill considered followinghis boss outof the roomand asking himto table thewhole discussion of thenew metrics andincentives. The climatewas suddenly badfor the news he had looked forward to sharing. But he knew that delaying the discussion would be weakand wrong. Afterall, he hadplenty of evidenceto show hewas on theright track. The problems the group had just been hearing about were side effects, but surely they didn't outweigh the cure.

He moved to the side table and poured a glass of ice water, then leaned against the wall to collect his thoughts. Perhaps he should reframe his opening comments in light of the employee and customer feedback. As he considered how he might do so, Keith Randall appeared athis side. "Lookslike we haveour work cutout for us, ehBill?" he said quietly- and charitablyenough. "Some ofthose metrics takinghold, um, alittle too strongly?" Bill started to object but saw the seriousness in his boss's eyes.

He lifted the stack of reports Felding & Company had prepared for him and turned to the conference table. "Well, I guess that's something for the group to talk about."

Questions:

Q1. How should Bill Phillips lead and manage the change at Hancock? Discuss a set of actions that need to be taken to resolve the problems at Hancock. Use examples and insights from readings and class discussion forums as part of your answer.

Q2. Consider in more depth the readings and class discussion forums on leadership: How are insights from various authors and class discussion forums useful for understanding the role of leadership in this situation?

Q3. Suppose this event occurred in another country or geographical area, such as Germany, Japan, India, China (you choose a particular country); would Bill Phillip's CFO career get derailed? Why or why not? What is your definition of derailment?