Organizational Transformation: A Case Study

Charles I. Homan

Michael Baker Corporation

The Michael Baker Corporation provides a case study of a private sector organization in transition. About one-third of our business is with federal agencies. I personally work often with the Federal Emergency Management Agency (FEMA). In the past few years, FEMA, like my company, has undergone great change. I have been able to draw on many of the strategies that Director James Lee Witt employed at FEMA.

The Michael Baker Corporation—a highly diversified engineering, construction, and operations and maintenance firm—was very successful until the 1990s. In the mid-1980s, we began to change the core of our business. Around 1993, we reached a crisis. But we have begun to succeed in turning the company around.

The company was founded in 1940 near Pittsburgh. In 1995, we had revenues of $355 million. The company's 3,200 employees hold 42 percent of the stock of the publicly traded firm. Nearly 85 percent of the eligible employees hold stock, giving the company good access to capital and the employees a liquid form of participation (upon retirement). This is not always the case in employee stock ownership plans. Baker's offices are mainly on the East and Gulf coasts, with a few offices overseas.

The Roots of Crisis

Figure 1 traces some of the roots of the recent crisis. In 1983, the company was restructured. Michael Baker, Jr., the founder, had died in 1977, and the company had not prepared new leadership at that time. By



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--> Organizational Transformation: A Case Study Charles I. Homan Michael Baker Corporation The Michael Baker Corporation provides a case study of a private sector organization in transition. About one-third of our business is with federal agencies. I personally work often with the Federal Emergency Management Agency (FEMA). In the past few years, FEMA, like my company, has undergone great change. I have been able to draw on many of the strategies that Director James Lee Witt employed at FEMA. The Michael Baker Corporation—a highly diversified engineering, construction, and operations and maintenance firm—was very successful until the 1990s. In the mid-1980s, we began to change the core of our business. Around 1993, we reached a crisis. But we have begun to succeed in turning the company around. The company was founded in 1940 near Pittsburgh. In 1995, we had revenues of $355 million. The company's 3,200 employees hold 42 percent of the stock of the publicly traded firm. Nearly 85 percent of the eligible employees hold stock, giving the company good access to capital and the employees a liquid form of participation (upon retirement). This is not always the case in employee stock ownership plans. Baker's offices are mainly on the East and Gulf coasts, with a few offices overseas. The Roots of Crisis Figure 1 traces some of the roots of the recent crisis. In 1983, the company was restructured. Michael Baker, Jr., the founder, had died in 1977, and the company had not prepared new leadership at that time. By

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--> Figure 1. Revenue and market value of the Michael Baker Corporation 1983 to present.

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--> the early 1980s the company was in trouble, intensified by the recession in the Pittsburgh area. The employee stock ownership plan was formed at that time, to give employees the incentives of ownership. Baker began to perform well, concentrating on its core engineering business. In 1987, the company made its first acquisition. The object was to diversify the company, moving into operations and maintenance, and ultimately construction. We saw the coming trends of outsourcing, privatization, and design-build, and we wanted to position the company to take advantage of them. Baker acquired three companies that operate and maintain facilities: one that operates public facilities, and two that operate private facilities in oil and gas. Then, in 1991, we acquired the Mellon-Stuart Construction Company in Pittsburgh. Revenue began to grow rapidly, peaking at about $430 million in 1994. We proceeded to lose $20 million in 1993, and another $10 million the next year, by failing to understand, integrate, and control the acquired companies. The company's market value, which had grown significantly along with revenues and profits, dropped, too. However, we did complete those projects we were committed to. Deep financial losses damaged our credibility with all of our constituencies except, perhaps, our clients, with whom we maintained our standards of service and commitment. The financial community was frustrated with Baker, as were employees and other shareholders. We experienced significant litigation. We had taken over a construction company that had a culture of litigation and adversarial relations with clients. Many construction companies share that attitude. The Baker Company had not only litigation to resolve, but a corporate culture to change. Baker's long-standing credit facility was withdrawn by the bank in the fourth quarter of 1994, at a time when the company had $15 million borrowed on that facility. Baker was in a difficult situation. The company also faced growing competition, especially in the individual areas of engineering, construction, and operations. Organizational Transformation We needed to change the company dramatically and very immediately, and we needed to do it so that we could be profitable in 1995. The company began to transform itself to meet these challenges. With all

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--> of the bad news, we did have a few advantages. First, the market was changing rapidly. If we could create an entrepreneurial organization that was creative and innovative, we could take advantage of that market change. Baker also had a very strong core engineering business, operating rather independently of the other businesses. It had a strong internal infrastructure (including project management, finance, and technology) and an excellent, seasoned management team. It had done many things right, such as implementing a total quality management practice in 1991, which touched every major process in the company. The board of directors made a national search for a chief executive officer and was leaning toward an outsider, because they recognized that we needed significant change. But, with my understanding of the company, and working with key people from the engineering part of the company, I was able to put together a restructuring plan to present to the board. I knew that I had to take a great deal of risk. When Baker competes for projects, if we think we have a good position we tend to be cautious. But if not, we take some risks. I felt I was in that position. The board accepted the plan. The approach, briefly, was threefold: Build on strengths. Our central strength was the core engineering business, which now had the design-build-operate capability of which the marketplace was demanding more. Another strength was our established reputation; we had served our clients well throughout this time. Market trends were positive for the company; as I noted, the market has been full of change, which has been helpful. Remove barriers. One serious barrier was the managers of the acquired companies, who did not share the values of Baker's engineering culture. Fix weaknesses. Weaknesses existed mainly in reporting systems, human resources, and technology—all those infrastructure systems that make an organization healthy. In October 1994, we announced the reorganization plan to all employees. We presented the guiding vision: ''An integrated, high-performance engineering, construction, operations, and technical services company, servicing focused, global markets.'' We announced that Baker,

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--> to be a high-performance company, must earn customer loyalty and repeat business; must be the employer of choice; must consistently achieve 15 to 20 percent return on equity; and must be recognized for its community service. Another subject of that announcement was the company's values, those that should drive Baker employees' behavior: Value our employees Have unquestionable integrity Meet our commitments Emphasize leadership (which implies empowerment of employees) Be performance-driven Build teamwork Be a technology leader Communicate openly and honestly. To give employees a better definition of Baker's business philosophy, we developed two graphics. Figure 2 graphs shareholder value against time, as a way of contrasting Baker's new approach with its old one. One line indicates conventional "hero leadership" and conventional strategic planning, which tries to predict the future, and then takes action (such as an acquisition) to be positioned for that future. The marketplace is changing so rapidly that this approach no longer works. The Baker Company is following the business philosophy built instead on "empowered culture strategic management" and progressive small successes. Figure 3 illustrates the second element of Baker's business philosophy, which we call our "quality service chain," and which has the end goals of increasing revenue and profitability. The way we will achieve them is through customer loyalty, gained through continuous customer satisfaction with the quality of service, and so on, back to the basics: taking good care of Baker people. Some companies say, "Our clients are number 1." Baker's people are number 1, because we believe that if we do a good job of taking care of Baker people, they will do a good job of serving our clients.

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--> Figure 2. Baker's old vs new business philosophy.

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--> Figure 3. Baker's operating strategy and service delivery system.

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--> The other first priorities were to reorganize the corporation's structure and staff the leadership team. The new structure is a rather conventional one, but has the virtue of simplicity and clarity. One important change is to have the major business units report directly to the office of the chief executive officer, which removes a layer of general management. In addition, the earlier organization, in the three areas of engineering, construction, and operations and maintenance, has been integrated and reformed around the five major markets that we serve—environmental, civil, buildings, energy, and transportation. For example, we provide design-build services for transportation and for buildings. We have operations and maintenance under our energy business unit and under certain other business units. We also added information technology as a separate staff function, because leadership at the top in information technology is critical today. Among our other first priorities, we had to assess the situation, which we did within about two months, to avoid carrying any more baggage than necessary into 1995. Conjointly, we reorganized. We took a further $10 million loss in the fourth quarter of 1994, because we knew we had a lot of litigation. Our litigation problems were resolved finally in great part by working with the clients to find win/win solutions. Even the most "difficult" clients responded favorably to this direct approach. We made our organizational changes quickly as well, because doing so is better for morale; partly for this reason, we also kept our people very well informed of what we were doing and what we were attempting to do. Secondary priorities included arranging a new credit facility and tight controls on cash flow; putting the new leadership team in place; building internal infrastructure, such as reporting systems and technology; building a marketing culture through training; and establishing a distinctive technological competence—in our case, geographical information systems, which are increasingly vital to facility management, and in which Baker has unique expertise. With regard to the success of our new organization: we have become profitable; we have increased backlog; our employee turnover rate has been reduced dramatically; and our client satisfaction index ratings have gone up. Those are some of the measures we have used to assess our progress. Together, they suggest that our reorganization has been extraordinarily successful.

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--> Vision 2000 The last thing Baker did in 1995 was to tell our people where we wanted to go, defining a longer term vision around which managers could plan. We established visions for the year 2000 for both operations and staff functions. The vision for operations set goals for the year 2000 in revenue (doubling the size of the company), for earnings per share ($1.25 per share), for business scope, and for geographic coverage (with international revenue growing more rapidly than domestic revenue). For staff functions, the vision statement sets additional concrete expectations. In 2000, for example, the measurements taken in employee surveys are expected to be above corresponding values for comparable companies. Conclusion Excellent performance requires leadership. Baker's leadership has been shown in its vision, values, business philosophy, strategic management (as opposed to conventional strategic planning), and motivating and rewarding employees in their achievement of incremental successes. Finally, any organization today that is operating in Baker's marketplace must practice some form of total quality management, that is, a formal process that provides for continuous improvement of the organization, so that it remains competitive and provides good service to its clients. The total quality management process can also make innovation and significant change possible.