Hartford’s Outsourced CEO – Part II

Last week’s blog discussing Hartford’s decision to hire insurance novice and unemployed banker Liam McGee as CEO generated a good deal of interest and honest comment. Most of the reaction was favorable, but a number of individuals raised the point that I may have been a bit too critical of the Hartford board. Their point was that sometimes it benefits a troubled company to go outside its culture – even its industry – to gain a fresh perspective and approach to solving a company’s problems.

As one individual commented, “My contention is that the blinders that the (insurance) industry is known for may be Bob MacDonald on Poor Leadershipat the root cause of the problems at the Hartford. Therefore outside help may be required to fix the problems.”

While I agree with the basic thesis of this comment, there is definitely a risk in hiring an outsider as CEO of an existing organization and the risk is compounded if that individual comes from an altogether different industry.

If a once-thriving company has become stagnant, it may be best to bring in an outside force to reignite growth. If a once-vibrant entrepreneurial culture has lost its way and slipped into the abyss of bureaucracy then a fresh perspective on culture building could restore its passion.

Bringing an outside person into a troubled company – especially one with no industry experience – seems to be an all-or-nothing gamble. History tells us such bravados are binary: they are either a stroke of genius or an unmitigated disaster.

To have any chance of success, the action must be a proactive decision on the part of the board. Going outside for a CEO must never be an act of desperation, but rather a specific strategic decision that what’s needed for the company is a complete change of direction and attitude. Unfortunately for Hartford, the decision to hire someone from outside the company – and one with no industry experience – was a clear act of desperation.

When Outsourcing Leadership Works and When it Doesn’t

The two most prominent examples of troubled companies going outside the company and their industry to hire a CEO are IBM and Apple Computer. From the perspective of hindsight there are very clear reasons why one of these decisions saved the company and why the other one almost destroyed the company.

Back in 1993 the iconic Big Blue was the largest computer company in the world, but it had grown stagnant and was on the precipice of collapse. Sales, profits and company morale were all plunging. Recognizing that IBM had a corporate culture more inbred than the families of European royalty, the IBM board of directors made the conscious decision to – for the first time in company history – search outside IBM for a new CEO. The board hired Louis Gerstner. As the CEO of RJR Nabisco and president of American Express, Mr. Gerstner had experience as a CEO, but had no history with IBM and no experience in technology. In leading IBM, these “deficiencies” turned out to be Mr. Gerstner’s greatest strengths.

It didn’t matter that Gerstner had no knowledge or expertise in technology, because the problems at IBM did not evolve from poor products, but how those products were positioned and marketed. In fact, IBM had great products, but the inbred culture of IBM did not allow the company to play to its strengths. The IBM culture of only talking to itself had caused the company to fall into the trap of selling only the products and services it wanted to sell, rather than the products and services the customer wanted to buy.

Unbridled by the inward looking and inbred culture that had come to pervade all of IBM, Mr. Gerstner was free to institute reforms, restructure management, refocus the culture from bureaucratic to entrepreneurial and carve out new strategies for marketing.

The rest is history. In nine years as CEO, IBM remade its culture and adopted new strategies that became the model for the industry. In the year Gerstner was hired, IBM had revenues of $62.7 billion, but it reported a loss of $8.1 billion. In Gerstner’s final year as CEO, IBM had revenues of $85.9 billion and profits of $7.7 billion.

In simple terms, because IBM’s problems involved culture and not products; it was a perfect situation to bring in an outside CEO, even if he had no experience in the computer industry.

The story at Apple Computer, however, paints a sadly different picture.  In 1983 William Scully was hired as CEO of Apple Computer. Scully had previously been a successful president of Pepsico, but his knowledge of computers was limited to turning them on and off. Mr. Scully was brought into Apple to bring organization and management structure that its entrepreneurial founder Steve Jobs was unable to provide as the company grew.

Apple was struggling, not because it had grown stagnant, but because it had actually grown too quickly for its management structure. This situation had hampered Apple’s ability to continue development of leading-edge products and this allowed competitors to close the gap with Apple.

Unlike IBM, Apple had a strong and vibrant culture. Scully was hired by Apple in the belief that his past successful management experience with Pepsico would enable him to bring structure, reliability and stability to the company. Unfortunately, it was a bad fit. Scully’s lack if experience with computers and technology severely hindered his ability to build a stronger company. While Scully was able to significantly increase revenues for Apple, they came at the expense of virtually destroying the Apple corporate culture and product development expertise. This ultimately caused margins to erode, sales to decline and stock values to shrink. So dire was the outlook that many observers feared the very survival of Apple was at stake. Ultimately, Scully was forced out and replaced by Steve Jobs and the rest is history.

Hartford has a Little Bit of IBM and Apple in it

Hartford’s problems have less to do with culture (although it is highly bureaucratic) and more with the fact that the very core of the company’s products, checks and balances, and operations have been severely damaged by poor management decisions. Hartford’s problems did not arise because its CEO and other executives had blinders on; but rather because they were blinded by the allure (and Wall Street pressure) of fast growth, risk-taking leverage tactics and short-term rewards. All of which are an anathema to the proper management of an insurance company. The failed leaders of Hartford clearly lost their way in maintaining appropriate risk management at the core of the company and its products.

Given Hartford’s current state of crisis, it might be that going outside the company for a new CEO would be logical; so long as that person has extensive, successful experience in the insurance industry. (Of course, part of the problem for the Hartford board was that no one with appropriate experience in the industry would take the job!)

Since the problems at Hartford go to its very heart as an insurance company, it is a disaster waiting to happen if its leader has no experience in the insurance industry. An outsider – with no understanding as to how an insurance company should be managed – is not capable of understanding the nuances of what went wrong at Hartford and no idea how to fix it. This lack of experience in the insurance industry also means that the individual would have no basis to separate the “wheat from the chaff” in the advice he may receive from those still at the company. (Or those management consultants he will surely bring in to help run the company!)

And the Moral of the Story …

If a company and its culture have become stagnant or bureaucratic, then the fresh wind of new leadership can be helpful. However, if the company has gone bad at the very core of its business and products, then an outsider who does not understand the rudiments and nuances of the industry can end up doing more damage than good.

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