Bayer - Case Lean Growth

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How I Did It…

by Gregory S. Babe

The CEO of Bayer Corp.On Creating a Lean Growth Machine

THE IDEA

t a September 2007 meeting of the executive committee of Bayer MaterialScience, a division of the chemical and health care giant Bayer AG, the directors were expecting me to pre-sent a detailed plan for signifi cantly reduc-ing overhead costs at the North American headquarters of BMS, outside Pittsburgh. Instead I asked for $70 million in additional resources.

The last time I’d discussed the fate of the North American business with the global leadership was in early 2007, when the newly appointed CEO of BMS global asked me to participate in an executive commit-tee meeting at our Baytown, Texas, facility. I had been CEO of BMS North America since mid-2004. But I hadn’t played a signifi cant

Gregory S. Babe is the president and CEO of Bayer Corporation and Bayer MaterialScience LLC and the senior Bayer representative for North America.

When Greg Babe, the CEO of Bayer MaterialScience North America, was blindsided by a global executive committee proposal that his headquarters be shut down, he turned the blow into an opportunity to completely reshape his company.

July–August 2011 Harvard Business Review 41

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1217 JulAug11 Babe.indd 411217 JulAug11 Babe.indd 41 6/7/11 12:30:15 PM6/7/11 12:30:15 PM

role in global governance, because Bayer’s strategic direction had always been set by leaders based in Germany. Still relatively new to my position, I assumed we’d be dis-cussing what made the operation in North America—a region that generates roughly 25% of the company’s global revenues— unique, what challenges we faced, where we were considering investments, and how I planned to lead the regional business into the future. My top leadership team had pre-pared several presentations showing the added value of our region.

But at that Texas meeting the executive committee caught me by surprise with a dramatic proposal: that the Pittsburgh head-quarters be dismantled and the company’s three business units divide HQ’s functional and R&D resources and relocate them to sites across the region and around the globe. The regional structure was bloated, the committee thought, and thus impeded Bayer’s overall effi ciency and growth.

Since taking the CEO job, I had been talk-ing with my top leadership team about how to streamline operations, but that meeting required me to think quickly. “If you are intent on closing Pittsburgh,” I said, “so be it. But if you are really interested in making Bayer MaterialScience more competitive in North America, I think we can do that.”

I asked for time to develop some propos-als for tackling the bloated overhead. Look-ing at a problem from a regional rather than a global point of view was unusual under Bayer’s governance structure, but the com-mittee agreed to give me a shot. The stakes couldn’t have been higher: Not only the fu-ture of my position but the credibility of the entire regional operation was in question.

Short-Term Pain, No Long-Term GainShutting down the North American head-quarters sounded extreme to me, but I knew the executive committee had identified some very real problems with our business. Our performance tends to ride the waves of the chemical and polymers industry, which match those of the global economy. Our products are used in the automobile and construction industries, which are particu-larly vulnerable to global downturns.

Although BMS North America had per-formed relatively well during my fi rst few years as CEO, with steady growth in 2005 and a modest flattening in 2006, I knew we’d suff ered during the lags that are typi-cal in the chemical business. And for years the division had been allowed to navigate those rough patches with what I’ll call knee-jerk cost cutting. The costs it did cut weren’t well thought through, so the underlying business processes remained unchanged. Typically, overhead would be hastily cut by 10% and a round of layoffs would be made—quick fixes to improve the bottom line. But whenever our indus-try started to rebound, those costs would quietly creep back in. It was a cycle our employees had come to expect. Voluntary turnover was extremely low—probably too low. Our employees waited out the cycles, and the pattern never changed: short-term pain with no long-term gain.

When I returned to Pennsylvania after the Baytown meeting, I quickly put to-gether a war room team. It had to be small, because we were on a very short timetable, and it had to work in secret so as not to sound internal alarm bells. The team had

to have the right mix of skills and an ability to think outside the box. I selected just four key people: a special-projects executive with a good external view from previous experience as a consultant, a top control-ler, someone with a strong marketing back-ground, and someone with organizational-change experience. I asked them to make it their full-time mission to pull together a picture of our costs that was clear enough to enable a truly transformative cost-cutting plan.

The team constructed what we called a cost cube: expense data that could be orga-nized and segmented along many diff erent dimensions. We knew that we needed to fundamentally change how we did busi-ness and signifi cantly reduce SG&A (selling, general, and administrative) costs, and we made those our priorities. But a month into the analysis, we had our “aha” moment. The cost structure should be determined by how we chose to grow our business, not by an arbitrary cost-reduction target. All good business leaders know this, but it is often lost in the myopic search for savings. That’s especially true if restructuring is done un-der duress.

From that moment on, we made profi t-able growth our goal. All our strategies and actions were planned through a growth lens rather than a tactical cost-reduction lens. The shift in approach was profound; it aff ected systems and employee-training investments, the outsourcing of func-tions and services, and the structuring of contracts.

Everyone, including the global leader-ship, was expecting us to come back with cost-cutting proposals. But this wasn’t

Babe’s Tenure as CEO of Bayer MaterialScience NA

2004Babe appointed CEO of BMS North America

2008Chemical industry suff ers a severe downturn worldwide; eight consecutive quarters of declining BMS sales begin

2010BMS turns the corner fi nancially; double-digit quarterly growth in 2010 and early 2011 2005

Record-breaking year for BMS

2007April: BMS leadership wants to shut North American headquarters; Babe asks for time to propose another solution September: Babe pre-sents his rescue plan to the leadership

BMS NA SALES IN $BILLIONS

3.5

3.0

2.5

$2.71

$3.46

$3.26

$3.10

$2.13

$2.67

$3.30

HOW I DID IT

42 Harvard Business Review July–August 2011


a cost-cutting exercise—it was a growth initiative. Instead of simply lopping off some of our overhead, we would redesign every thing about our businesses to build in fl exibility—not only to profi tably survive a downturn but, more important, to scale for future growth.

Red Sky in the Morning…I knew I needed to enlist the entire com-pany in this project. The war room team had gotten us to a point of clarity about what we needed to do. How to go about it would require much broader thinking. In mid-May I gathered all the BMS vice presi-dents in the region for what I called my

“sailors take warning” communication, re-ferring to the old adage that a red sky in the morning often indicates bad weather on the horizon. It was unusual for me to con-vene all of them at once. I didn’t tell them why they were being assembled, but they knew the meeting was mandatory. The anxiety in the cafeteria—the only room big enough to hold all of us—was palpable.

I explained that we’d begun a cost-cutting initiative but had quickly realized that we needed a complete competitive overhaul. I said that although we were in a great situation businesswise, and the global economy appeared to be in fine shape, there were clues that not all was as rosy as it seemed; we faced unfavorable chemical import-export trends, natural gas price increases, and customer inventory shifts, among other issues. With a sense of what was coming, I said, we really should fi x our roof while the sun was shining and not wait until the rain poured down.

We had very specifi c goals at that point: We wanted a strategy that would keep us growing at 1% to 2% above GDP in all our areas, but we also wanted to save 25% on our SG&A expenses. I said I needed the sup-port of everyone in the room.

I was asking the vice presidents to un-derstand and buy into the transformation that would be required in every aspect of our business. They had to begin thinking about how their specific areas could be changed to support the transformation—

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knowing that their own jobs might not survive the process. Of course there was pushback: “These kinds of changes are not sustainable.” “There’s no way you can make such dramatic changes and still be successful going forward.” “The business is running so well, you know we’ll drop the ball on this sooner or later.” Many of their concerns were legitimate, but none trumped the fact that this was a make-or-break moment for the company. All our measures of success would be altered. In the past, for example, we had focused on the number of patents fi led per day. Now we would focus on the number of products in the pipeline that had clear commercial applications.

Three weeks later I rolled the same mes-sage out to all our employees, again saying that I needed their support but could not promise they’d still be with the company in a year and a half. Then we began to fi ne-tune our growth proposal. Dozens of employees moved to the program manage-ment offi ce and began the serious work of redesigning how we did business. Other than the actual production of finished goods, no process was left untouched.

The Big MeetingAfter months of planning and a full-scale dry run of my presentation with my top team, I fl ew to Germany for that September 2007 meeting. I had to convince the board that this was more than a typical cost cut-ting—this was truly a transformation aimed at growth. Yes, we would need to spend money, which seemed contradictory. But that money would help us grow the busi-ness while we signifi cantly reduced costs in many areas. The $70 million I was asking

for would cover onetime expenses related to layoff s, the development of key systems that we’d be using to outsource or auto-mate particular functions, and training to retool our sales and marketing staff . It was as big a meeting as I’ve ever had.

My presentation was long by board standards—not a 20-minute PowerPoint. There was lots of discussion, lots of chal-lenging, lots of in-depth questioning about the key concepts of our proposal, many of which ran counter to how the business was managed globally. For example, outsourc-ing transportation, traditionally deemed a core competency, would allow customers to give 12 rather than 72 hours’ notice for shipping. In essence, I promised that with a short-term investment of money I could turn BMS North America into a sustain-ably more profi table growth engine for the company.

That bold proposal paid off. I left the meeting with the $70 million and an en-dorsement for my plan. I was excited, but also scared to death, because delivering on it was by no means going to be easy. It would require laying off hundreds of em-ployees and retraining more than 1,000 others, outsourcing many operations, roll-ing out new IT systems, and modifying our product offerings, all within 18 months—not much time for a project of that scale.

Before I even got to my flight home, I called my top team members to let them know that it was a go. My fi rst task was to select leaders to oversee the four key areas of our transformation: growth, business support, supply chain, and culture. In-stead of turning to established executives, I picked four people from our high-potential program who, I believed, could think cre-

atively about change without worrying about upsetting the status quo. It would be a very high-profi le, high-stress assignment for each of them, and a once-in-a-lifetime career opportunity as well.

The four chose a total of 100 others to work with them on the project, all of whom were then dedicated full-time to our trans-formation. I met with the leaders every Thursday, with a diff erent key decision on the agenda each week. The clock was tick-ing, so we didn’t have the luxury of long, drawn-out decision making. My goal was to create a sense of urgency, following the management thinker John Kotter’s eight steps for leading change.

“Simplify, Standardize, Automate”Over the next 18 months we weathered signifi cant staff layoff s and redesigned vir-tually every one of our business processes following the mantra “Simplify, standard-ize, automate.” For example, we stream-lined and eliminated defects in our order-to-cash process to create “no touch” orders. Today we receive more than 70% of our or-ders electronically, and more than 50% of them aren’t touched. This is better than ef-fi cient—it’s eff ective. To achieve it, our sup-ply chains have to be fl awless. And when we do touch orders, there are typically good reasons from the customer side. (We did not automate customer intimacy out of the equation!) We developed a variable transportation cost model through careful negotiations with two key vendors—which was crucial to controlling costs amid the ebbs and fl ows of our business. We killed several much-loved projects because it became clear that they had limited com-mercial potential; instead we opted for a rigorous stage-gate development process (our term for it was “ruthless decision mak-ing”) that would require clear evidence of solid commercial potential before projects could go forward. Virtually everything, with the exception of how frontline work-ers did their jobs on the factory fl oor, was changed in one fashion or another in that year and a half—our planning processes,

We reduced SG&A costs by 25% and head count by nearly 30%. And we actually overdelivered on our promise: We spent only $60M of the $70M allotted for growth.

44 Harvard Business Review July–August 2011

HOW I DID IT


is where they acquired the skills that led to those positions, and I hope they return to the company someday—but I wish we could have worked harder to find internal opportunities for them. We are working now to improve talent management in the transformed BMS, so I hope it’s a short-term problem.

Overall, the transformation went better than I had dared to hope. Looking back, I tip my hat to BMS CEO Patrick Thomas, who was willing to take a risk on us.

In early 2009 I flew back to Germany to tell the board that we had delivered on everything I’d promised: We had re-designed most of our business processes and system-enabled them. We’d made our warehousing, transportation, and interna-tional freight needs and costs variable by means of outsourcing. We’d reduced our total SG&A costs by 25% ($100 million) and our head count by nearly 30%. We’d devel-oped new skills in the organization. Most important, we had enabled future growth in a highly efficient and highly effective or-ganizational model.

In fact, we’d overdelivered: We spent only $60 million of the $70 million we were allotted.

From closure conversations since then with the BMS leadership in Germany, I know that we’re seen to have done a good job with our transformation. It was diffi-cult, personally, saying good-bye to dozens of long-term employees who left the orga-nization. But navigating the complexities of the highly matrixed global organization while driving a fast-paced program with dozens of decisions each week was an ex-hilarating challenge.

Even more valuable, I think, is that many of our reinvented processes and the tools we developed, which were so foreign at the time to our whole business, have become commonplace at BMS around the world. No-touch orders are widespread, for example. “Simplify, standardize, auto-mate” is a phrase everyone uses now. That speaks volumes about that thumbs-up mo-ment in 2007.

HBR Reprint R1107A

how we drove our supply chain, the part-ners with whom we dealt, how we made sales forecasts, how we managed our sales leads and pipeline, and so on. But perhaps most important, we developed change-management skills within the organization. We didn’t rely on outside consultants to recommend the changes to us. We had to own these processes, and to redesign them in a way we knew could work.

As I look back on those months of rap-idly refashioning our entire company, I am proudest of the employees who worked in good faith toward our goals without know-ing whether they’d have jobs in the end. And despite that stress, we had no opera-tional injuries. Our people demonstrated an enormous capacity to deliver in the face of uncertainty. By the time the global downturn had begun to pound the chemi-cal industry worldwide, our efforts were so far advanced that our business was poised to rebound quickly. By March 2009 we had completed all the restructuring.

Though nearly everything ran accord-ing to plan, I wish I could have done one thing better. I had intended to use those 18 months to improve our talent manage-ment—to stretch and grow key employees, preparing them for future leadership roles, and to provide some of our top performers with new, permanent roles. But in our ef-forts to stay on target, that plan fell by the wayside. Of the four high potentials I had picked to lead our efforts, two left the com-pany for terrific opportunities elsewhere. I consider it a signal of success that BMS

This wasn’t a cost-cutting exercise— it was a growth initiative. We would redesign everything to build in flexibility.

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Bayer - Case Lean Growth