When Alexander Cutler took the helm of Eaton Corp. in 2000, he saw a company in transition.
The company, while successful and respected in its industries, was still mired in a lot of mature, slow-growth vehicle-related manufacturing markets, limiting its returns.
Compared to its peers, Eaton was doing great, but Cutler saw that as part of the problem. Sure, it was beating its peers, but maybe the wrong measuring stick was being used. He wanted excellence as defined by some of the best companies in the world.
“I think we were a little too focused on our traditional sources of comparison,” says Cutler. “If you look at some really terrific companies with years of performance, then the contrast becomes more striking, and that was enough to create the energy for change.
“My own criticism of many benchmarking activities is they do a good job of benchmarking, but it’s the wrong companies that are benchmarked. If, after spending time benchmarking, everyone comes back and says, ‘Yeah, they’re just like us,’ then they probably didn’t find the right people to benchmark. The best people are always doing something better than you somewhere.”
The situation was obvious. If Eaton wanted to grow at a faster rate, something had to change. Supplying mature vehicle markets was limiting the company’s potential, so Cutler got to work changing that.
“We sold about 45 percent of what was the traditional Eaton Corp.,” says Cutler.
Replacing it was a new emphasis on electrical and fluid power systems, established in large part through acquisitions.
“We’ve been moving ourselves out of areas that we feel are either slower growth or lower margin and moving into areas that have better potential for us,” he says. “There’s been a very large change in the mission and product matrix of the company.”
The transformation of Eaton began in the late ’90s, when Cutler was president, but more needed to be done.
Cutler was going to change the way the $11.1 billion company and its 60,000 employees operated. Best practices would be identified and rolled out across the company so local managers could focus on growing business rather than on back-office systems.
“Eaton has, for all practical purposes, been largely run as a holding company over the years,” says Cutler. “The businesses were run relatively independent from one another. There were a limited number of things that were common across the company, and so we made a change to say we are going to run it as an integrated operating company. That was a very dramatic cultural change in the company.”
Laying out the plan
Cutler’s first step in the transformation was to create a set of goals that everyone could work toward together.
“I don’t think it works for one person to sit on a hill and carve goals on tablets and send them to the masses,” says Cutler. “I’ve never been convinced that approach to leadership works. We’ve always tried to involve a pretty broad group of people. We’re not only trying to build responsibility, but accountability that comes from ownership.
“People that help develop goals get a much stronger sense of ownership from them.”
In 2000, the company announced its goals. Its end markets grow about 4 percent per year, and the expectations for Eaton would be 10 percent growth: 4 percent from market growth, 2 percent from organic growth and 4 percent from acquisitions.
Those were aggressive goals, but the big surprise was that the announcement was made not just internally but externally, as well.
“It was the first time in our history we ever announced any financial goal externally,” says Cutler. “The reason we did it was as an additional indication to our own team that we were absolutely fixed on achieving these new goals. We were basing our external credibility on our ability to get it done internally. The big message internally was that these goals weren’t going to disappear a year from now.”
The biggest message of all may have been that Eaton was changing. Its primary markets were changing, the way the company operated was changing and the culture would be changing, too.
“The first thing anyone has to do in an organization that is going through change is to help convince everyone that it is the right thing to do,” says Cutler.
His new benchmark was based on the performance of the top 16 diversified industrial companies. Goals were set accordingly, and people realized pretty quickly that they needed to change.
“We set the goal of being in the top half of the 16,” says Cutler. “When we started, we were pretty much near the bottom of the 16. There were some big cultural issues in the company that we said we were going to start programs to address. Everyone was not going to get to do things their own way.”
Cutler says clear goals are the key to getting buy-in on change. The bigger company goals were broken down into smaller pieces so that everyone in the organization knew what he or she had to do to personally contribute to the company’s growth.
“When change is looked at as growth, then you have change happening on the right basis,” he says. “When people look at change as a threat or something that brings bad things, then you have a basic cultural problem. People will have logical questions about why the new thing is better for them than the old thing. We spent a lot of time on communications.
“Some people that were more comfortable in our old style of management went elsewhere, while with others, it just took them longer to think, ‘Wait a minute, there’s something here.’”
The message was clear: Change was going to happen. Either people would see it as an avenue to growth or they needed to pursue other opportunities.
“It was relatively easy for people to see we weren’t going to get to those goals doing it the way we’ve been doing it,” he says. “Some people just say, ‘Work harder.’ That’s just not the answer. In most enterprises, and it’s very true here, people have always worked very hard. We have to work differently.
“If people aren’t comfortable with the style of how things are run, then it’s probably not the right place for them to continue their career. It’s not that our way is better or worse, it’s just the style that we have chosen. Some people come to work and don’t understand what their organizational model is. Our organizational model is built on certain systems, and that’s not something that’s put up for a vote every day. It’s our means of differentiation.”
Cutler realized that change also had to happen at the highest level of the company. It’s hard to move a company into new markets based on a talent base that was designed for another purpose.
“The other issue we recognized was if we were going to transform the business, we were going to need to do it off of a base of very strong people and also bring some new talent into the company,” he says. “Many of my direct reports are people that we recruited from outside the company, bringing in experience in running a diversified industrial company.
“Most of my direct reports have come from the outside because we really wanted to accelerate the change of the company.
Creating a growth environment
Changing out a handful of key senior leaders is one thing, but you can’t replace 60,000 employees. They had been given goals, but they needed to have an environment in which to achieve them.
Setting a goal is just the first step. Setting the parameters on how those goals will be achieved is the second step, and it starts with the company’s value statement.
Cutler was trying to transform Eaton at a time when the Enron scandal was dominating headlines. Employees had to be clear on what was acceptable behavior and had to understand that they could trust the leadership of the company.
“It’s one thing to read a value statement, but it’s another to live it and respect it and apply it day-to-day,” says Cutler. “You have to allow people to work their way through difficult situations. It’s how they become better critical thinkers.”
Eaton regularly presents its managers with hypothetical ethical dilemmas. They are expected to work through the problem with their employees to come to the proper decision.
“That’s how you get people to understand the difference between right and wrong and kind of in-between and where you draw the line,” he says.
It’s all part of creating an environment where people are comfortable and want to work.
“We believe when you have that combination, people will do their best work,” says Cutler. “If their personal beliefs are being compromised, they won’t do their best work, and they’ll probably go someplace else.”
When you have thousands of employees spread across the globe, it’s important that they all have an idea of what is acceptable and what is expected.
“I would never say we have just one culture at Eaton,” says Cutler. “We have one set of cultural expectations, but every leader at every site around the world will have some small emphasis that’s different. We know what we want in terms of expectations of how people find their work environment, and that’s something we continue to work toward.”
To keep tabs on all its locations and to identify areas for improvement, Eaton conducts an annual survey of every employee.
“It really enables us to understand every problem by type and by department, how the leaders are doing helping people and what’s on the minds of employees,” says Cutler. “It has real teeth in terms of how leaders and managers are evaluated, whether they are likely to be promoted or keep their job.
“It’s an opportunity to hear from employees without their boss there so we can hear what is on their mind. You’ve got to drive that kind of open environment so people are comfortable talking about it. All methods of communication are methods that say we value what employees think and we want there to be multiple channels to communicate. If they find themselves in a situation that, for whatever reason, they are uncomfortable expressing their honest intent, they can still express it without any fear of reprisal. We think that puts the value of the employees very high, and that’s what we want.”
The survey is also used as a continuous improvement tool. Each department’s top three problems are assigned to a team of employees who have to figure out how to solve them. It allows employees to take ownership and also shows that what they say on the survey matters.
“The most frustrating environment to be in is to take X amount of your personal time and fill out a survey and really pour your heart into it, and then nothing happens,” says Cutler. “The next time the survey comes out, you’re probably going to figure that you don’t need to do it.”
Eaton’s commitment to acting on the survey has resulted in a 96 percent participation rate around the globe. World class is considered 80 percent.
“It’s a reflection of the employees knowing that what they say counts,” says Cutler.
And it is a major part of creating the environment necessary for success.
“Employee engagement, in my mind, is a measure of employee confidence in their leadership,” he says. “Even while we are making all the changes, it’s been very understandable for people to say with all this change going on, they’re uncomfortable with it.”
Communication is what helps employees work through change.
“We’ve always had a commitment to communication with employees,” says Cutler. “We want it two-way, not one-way. That way we can address situations that are addressable.
“If you’ve got engaged employees in any enterprise, then their shoulder is into the wheel, they enjoy what they are doing, they are learning, they are being given the resources they need and they have career opportunities. That’s the kind of environment we think exceptional results come from.”
On the move
With a clear set of goals and an environment where employees could excel, Cutler focused on the two avenues of growth: organic and acquisitions, neither of which is a guaranteed path to success.
“Organic growth starts with an understanding of what the customer needs,” says Cutler. “While it sounds trite, it’s a very difficult thing to do well. I think that’s why you see so many books written about it. Few companies really live inside the bones of their customers.
“It’s not about doing it from inside your company but inside your customer. It allows you to decide whether you are solving the right problems and offering the right products and have the right price points.”
Eaton focuses a lot of resources on studying new technologies and examining new market segments that can provide new opportunities for existing products or ideas for new products. A big part of successful organic growth is listening to customers, something the CEO needs to be involved in at some level.
“I think you have to spend time with customers, the same way you have to spend time with the employees,” says Cutler. “The more senior position you are in the company, the easier it is to get disconnected from relevant sources of information, whether it be ethics situations, supplier feedback or customer feedback. Every time information goes through one person, it is filtered. Every time it goes through two or three people, it is ultrafiltered and is probably not going to be the best information.
“My recommendation is to work your channels of communication all the time.”
Another key factor in driving organic growth is making sure you are sending your best people to areas where they can do well.
“As one area slows down, you need to move resources and move people and money into areas that are much more happening and exciting,” says Cutler. “Some people say that’s subtracting to get organic growth. It’s about not keeping your best people tied up in a valueless, frustrating activity. It’s no fun to work in those environments, so rather get those people on something that is hot and fun.”
A key part of Eaton’s transformation has been through acquisitions. By buying up key companies in certain markets, it has been able to quickly garner marketshare in fragmented industries — a trend that Cutler expects to continue.
The company has made 26 acquisitions since 2000. To integrate companies into the Eaton family as quickly as possible, the company typically sends in some Eaton people to take over some of the management to maximize growth potential.
“Getting that mix is important because there are certain control functions you like to get in place,” says Cutler. “That’s not a criticism of who’s there as it is a matter of getting them on the right systems.
“I was actually with a company that was acquired. I would always vote for sending in people who know how the parent really works. Then they will not lose momentum while they try to figure out how to get appropriations handed down or approvals done or who they need to talk to. Every company has its own way of how it gets things done, and you need to learn that quickly. Otherwise you are on the outside knocking on the window, and you spend a lot of time trying to figure it all out.”
And regardless of whether growth comes through home-grown ingenuity or the acquisition of a promising company, the key to keeping the wheels firmly attached to the wagon is making sure everyone knows their role.
“If you have a larger organization where people are not clear on how you get things done or who is responsible for what, then you have a quagmire,” says Cutler. “The issue of clear alignment and who is responsible for what is very important as a company gets larger.
“In a business situation, when a call comes in from a customer and it’s this situation, who is supposed to hop on this baby? If everyone looks around the table and isn’t sure, you have a roles and responsibilities problem. If you immediately have four people that jump up and say, ‘That’s mine’, then you probably have a roles and responsibility problem. If one person stands up and says, ‘I’ve got it, my team has got it and I know I need to correspond with you guys,’ then you’ve got it working.”
While it sounds basic, it can be a major downfall for growth companies.
“A lot of organizations aren’t clear on those things, and as a result, either things don’t get done or else you have a whole bunch of people bumping in to one another, and that’s frustrating. It seems like a pedantic things to talk about, but it’s part of alignment.
“You see it in a particularly unattractive fashion when companies are growing quickly and the model that worked two years ago doesn’t work today, but people are still trying to do it that way. That’s where leaders and managers have to step up and say, ‘Guys, we’ve spent an hour trying to sort this out, and we’re killing one another.’”
Cutler’s transformation strategy, while still ongoing, has paid off. Five-year compound earning per share growth has been 24 percent, exceeding the 10 percent goal, and annual compound total shareholders’ return has been 18 percent in that same time period.
Cutler has announced 2010 goals for Eaton that are as aggressive as the ones set back in 2000: 10 percent compound revenue growth, 15 percent compound annual growth in EPS and 15 percent return on invested capital.
“There were gasps back in 2000 when we announced the goals and people looked at them and said, ‘How are we going to do that?’” says Cutler. “People have a sense of confidence that we figured out how to get there the last time, we’ll figure out how to do it this time. I think that’s part of any enterprise that is doing well; the bar keeps getting raised. What was good last year maybe isn’t so good this year.
“You have to keep looking for ways to grow profitability and make the enterprise a more exciting place for people to work for. In the final analysis, the difference between a good enterprise and any other enterprise is the talent of the people.”
How to reach: Eaton Corp., www.eaton.com
