Shyamal Majumdar: ABB's matrix of integration

HUMAN FACTOR

How the power and automation giant re-engineered itself to make a dramatic turnaround.

In 2000, ABB, the $20-billion power and automation giant, was on top of the world, with profits growing at a healthy clip and order books swelling like never before. Within three years, the company's future was in doubt, with losses mounting to $690 million in 2001 and $780 million in 2002, the company also faced a huge debt.

How did this happen? Listen to Dinesh Paliwal, member of the worldwide group executive committee and the number two man in the company: "Those were the most traumatic years in the life of ABB. We lost focus and tried to reinvent ourselves. Basically we forgot that ABB is a power and automation company."

Those were the years when ABB got into financial services, building airports and Internet software business. The market perception was high because it believed what ABB said. But when there was a huge gap between the perception and ABB's low execution in these areas, "the market punished us, the banking community did not like what they saw and started to pull the rug, resulting in ABB facing huge cash flow problems," Paliwal says.

The fragmentation of businesses had driven internal costs to outrageously high levels. ABB went into a fix largely because of the management's obsession with speed, which made them forget that every big decisions should be taken only after adequate due diligence. The situation called for drastic steps and a well-crafted turnaround plan. This is precisely what a brand new executive committee did after spending 24 gruelling hours at a meeting outside of Zurich.

At the heart of this turnaround plan, Paliwal says, was the company's decision to stick to its core business "" power and automation only. Everything else was non-core even if they generated wonderful profits. The company sold businesses worth $6 billion.

The second part of the plan was to improve the culture of execution and the management opted for a big organisational restructuring. ABB operates in 140 countries and each has its own country manager. The challenge was to see that the country managers did not suffer from an ivory tower syndrome and were disconnected from its headquarters in Zurich. The question was how would the five executive committee members communicate the strategy and monitor the execution levels of these 140 country managers?

The answer was simple enough. ABB reorganised the 140 countries into eight regions under eight regional managers, who would have profit and loss responsibilities for each country under their regions. Paliwal, who was the mastermind behind this matrix of integration, says "Creating some regular interaction points between the global and local guys has ensured that they don't go into two different directions," he says. Ravi Uppal, head of ABB India, for instance, is now the regional manager of South Asia and reports to Paliwal on the profit and loss and business strategy from India to New Zealand.

Another interesting thing ABB has done is to bring all chief technology officers (CTOs) of the company reporting directly to Paliwal. CTOs are usually left alone in engineering companies since they look at the R&D side and think that they know the best what the market needs. The company realised this was not necessarily always true. With paradigm shifts happening every third, fifth or seventh year, engineering companies need to really connect the R&D labs to the markets early on. Instead of the CTOs working on products in isolation, the new arrangement ensured that the CTOs and the production departments were well connected and ABB knew what its leading customers wanted early on. These customers are invited to ABB labs regularly to monitor the progress that is being made. "ABB has proved that knowledge sharing can be quite productive and profitable," Paliwal says.

Another important part of ABB's turnaround plan was elevating HR to centrestage. ABB had to change its culture in a way that would drive co-operation, dialogue and trust. Building a communication channel for providing key information to employees was essential to that change. This required a demonstration effect and one of the first things the management did was to sell the company jets and bullet-proof limousines and closed the executive committee dining room. This sent a strong message to employees that the new leadership was serious about setting a new course.

Result: the company's much-publicised Step Change programme, started in October 2002, resulted in reducing the cost base by at least $800 million in just under two years. The lessons were important for the new management because the market will not pay for a company's inefficiencies. "We have become much more humble in the sense that we watch every dollar that we spend," Paliwal says. Going by the huge profits that ABB is now making worldwide, the market will agree to that.