Business

Back on the rails

Years of cutting have produced a leaner and meaner CN

PAUL KAIHLA January 13 1997
Business

Back on the rails

Years of cutting have produced a leaner and meaner CN

PAUL KAIHLA January 13 1997

Back on the rails

Business

Years of cutting have produced a leaner and meaner CN

PAUL KAIHLA

The guy was working full time on GM’s property and he was driving a Ford,” Paul Tellier sputters, his native French bending vowels as he delivers the punch line to his anecdote. “What the hell was going on?”

Five years later, the memory still irks Tellier, a lawyer and rare intellectual among Canada’s corporate ruling class who, until 1992, was the country’s top civil servant. The incident in question took place a few weeks after Tellier became chief executive officer of Canadian National Railways and, to him, it symbolizes everything that was wrong with the notoriously bloated Crown corporation. Tellier was on a glad-handing tour, schmoozing clients such as the head of General Motors, CN’s largest customer. After a meeting at GM’s Canadian headquarters in Oshawa, Ont., a CN employee who worked on the site arranging rail shipments of newly assembled vehicles picked Tellier up at the front door—in a Ford.

“When I got back to my office,” Tellier recalls, “I asked, TVTiat is going on? Our guy is working at GM and he’s driving around in a God-damned Ford.’ ” He lowers his voice for dramatic effect. “A very senior vice-president answered, ‘What’s wrong with that?’ Ten weeks later, he was gone.”

By that time, five other top executives had also been removed. In fact, after more than four years with Tellier at the helm of Canada’s largest railway, a lot of things are gone. Fourteen thousand of the 36,000 employees who were on the payroll in 1992 are gone. Half a billion dollars worth of real estate and non-railway assets, including the CN Tower, are gone—sold off in an effort to strip operations down to the core business of locomotives and boxcars. And more than a quarter of CN’s 32,000 km of track has been sold or abandoned because, Tellier says, “there were too many miles of rail chasing too few tons of freight.” The slashing and selling are part of Tellier’s grand strategy to transform an organization that was widely viewed as “a basket case,” to use the CEO’s own words, into “a profit-driven, customer-oriented company.”

The harsh medicine seems to be working, because the red ink is gone, too. In 1992, the year Tellier took over, CN lost a staggering $840 million on revenues of $3.9 billion. For 1996, it is expected to turn a profit of $455 million on revenues of about $4.2 billion. In-

vestors, not surprisingly, are delighted. In 1995, the federal government privatized CN, raising $2.2 billion. The shares, mainly held by Americans, have almost doubled in value to $52. “When I got here, the organization was in very bad shape,” says Tellier. “There was no preoccupation with the bottom line— ‘If we make money, so much the better, if we don’t, so what?’ If you ask me to sum up what I do in one sentence, my job is to change CN’s culture.”

To many observers, Tellier seemed an odd choice for that mission. After working in government for a quarter of a century, he was more accustomed to spending money than making it. Opposition politicians branded his appointment as a patronage reward from his boss, then-Prime Minister Brian Mulroney. Pat Nowlan, a Conservative MP from Nova Scotia who was chairman of the Commons transportation committee before he broke with his party to sit as an independent, was one of the most outspoken critics. “The presidency of CN is just too important to be the plaything of the prime minister, let alone the pasture for semiretired public servants,” Nowlan told reporters in 1992.

Tellier now says that such criticisms were fair game. “For someone to say, What the hell is this guy doing there? He doesn’t know anything about railroads,’ that was a very valid question,” he concedes. “I had to earn my credibility.”

It was not the first time Tellier had stretched himself career-wise. His résumé reads like a chapter out of a Canadian counterpart to The Best and the Brightest, a book about the men John F. Kennedy brought to Washington to run his government. After earning a law degree at the University of Ottawa and studying literature at Oxford, Tellier taught law briefly at the University of Montreal. In 1967, he moved to Ottawa and held a succession of senior posts, interrupted by a two-year stint in Quebec City as a mandarin under the late premier Robert Bourassa. In the nation’s capital, Tellier worked closely with three men who have shaped Canadian politics over the past three decades: Pierre Trudeau, Jean Chrétien and Mulroney.

In the early Trudeau years, Tellier grew his hair longer and rode a 750 cc Honda in motorcycle leathers (his current bike is a muscular 1000 cc BMW). Trudeau’s first public act after the election of a separatist government in Quebec in 1976 was to put Tellier in charge of the office that planned the federalist campaign for the upcoming referendum. In 1982, as deputy to then-Energy Minister Jean Chrétien, he helped implement the National Energy Program, which enraged westerners by giving Ottawa 25 per cent of all new oil and gas finds. Later, under Mulroney, Tellier helped to dismantle the program.

It was Tellier’s image as a Trudeaucrat that made him suspect among right-wing Tories. A few months after taking office in 1984, Mulroney’s advisers wrote a memo identifying five posts the government needed to commandeer in order to control the bureaucracy: at the top of the list was the clerk of the privy council. The aides wanted Mulroney to give the job to David Johnston, then principal of McGill University. When he chose Tellier instead, many in the prime minister’s entourage concluded that he had sold out to the Ottawa establishment. “Mulroney wimped out,” a former staffer says now. “He wanted to be liked by the system. That was important to him.”

Looking back, Tellier says that both Trudeau and Mulroney were “enjoyable people to work with.” He praises Trudeau’s “sense of excellence” and Mulroney’s “people skills,” adding that the Tory politician is “a very, very considerate person.”

Tellier insists that his transition to the private sector was an easy one. “I never saw myself as a permanent public servant,” he says. He now lives in Montreal, home to CN’s head office, and draws more than twice the $165,000 annually he received as a public servant. Tellier’s neighbors in the wealthy enclave of Westmount include Canada’s former ambassador to the United Nations and sometime tennis partner, Yves Fortier.

While Tellier boasts that no other “large company in Canada has changed more than Canadian National has in the last four years,” the transformation has largely been achieved by cutting expenses rather than drumming up new business. By far the largest portion of the savings, $350 million, resulted from the 14,000 layoffs. “I didn’t do that because we were going after labor,” Tellier says, sensitive to the growing backlash against corporate job killers. “It was simply the biggest ticket item.” He rejects any comparison to AÍ Dunlap, the outspoken U.S. corporate downsizer who prides himself on mass firings. “I do realize that we are disrupting human lives,” Tellier continues. “But I tell our employees that the best security is to work for a company that is profitable. I feel very strongly that what I did was not to abolish 14,000jobs—it was much more to protect the 22,000 jobs that remain.”

One way Tellier cut jobs was by attacking CN’s notorious featherbedding. When Tellier arrived at the company, CN was handing out paycheques to about 2,000 employees who no longer reported for work because their jobs had been abolished. Union contracts guaranteed that any worker with eight years of service could remain on the payroll until age 65 even if his or her position disappeared. On top of that, the company could not transfer employees against their will. Those restrictions meant that CN was hiring new workers off the street in Edmonton while creating make-work projects for redundant employees in Moncton who refused to move. Under a new contract that came into effect after a 1995 strike, employees saw their income protection reduced to 90 per cent of their salary for six years. Workers who refuse a position in another city only receive 65 per cent of their pay for two years.

The new contract also requires train conductors and engineers to work longer shifts. Before 1995, a two-man crew travelled only an average of 208 km each workday. That meant a train carrying petrochemicals from Sarnia, Ont., to the port of Halifax had at least six crew changes along the way. Now, by making crews work up to 12-hour shifts, the number of changes has been cut in half.

Technology has also saved money. One CN innovation is the “belt pack,” a metallic box strapped to an operator standing beside the track who uses toggle switches to move a six-ton train engine. At a demonstration last month at CN’s largest marshalling yard, north of Toronto, an operator used a belt pack to assemble a 102-car train, which included a boxcar of rubber from Buffalo on its way to northern Quebec and two cars of salt from Battle Creek, Mich., destined for Montreal. Before the introduction of the belt pack in 1994, the process required three people instead of the current two. Nationwide, belt packs have replaced 281 locomotive engineers, each of whom cost the company about $75,000 in annual salary and benefits.

BUSINESS_

Some workers are unimpressed. “It’s a crock,” says Cliff Hamilton, a veteran CN train engineer and Ontario chairman of the Brotherhood of Locomotive Engineers. He argues that the belt pack does not manoeuvre an engine as efficiently as a human in the cab. Adds Hamilton: “I think it’s a crime what’s going on. They’re taking money out of the pockets of Canadian workers and putting it in the hands of American shareholders.”

With few jobs left to cut, Tellier is now tackling other expenses. Of the $3.6 billion the company spends each year, 40 per cent goes for supplies and services. Tellier put Bob Gallant, a no-nonsense CN insider who has worked his way up the company ladder over 40 years, in charge of trimming the fat.

During the past three years, Gallant’s team has cut $100 million. Last year, Tellier ordered him to chop another $30 million annually to the year 2000. To tackle his assignment, Gallant adopted a “supply-chain management” approach. His team analyzes the acquisition and flow of materials and services through the company to their final disposition. “We had to change the mind-set of our people,” declares Gallant. “Folks in the purchasing department were traditionally measured by ‘How much are you paying for this item today versus what you paid yesterday?’ If you paid more you were a bum, if you paid less you were a hero. In fact, you’re sometimes far better off to pay more money, particularly if you got a product that lasted longer.”

Gallant found that goods could be made to last longer if employees engaged in a simple practice: challenging the specifications of the products their departments purchased. An example is a wheel axle that, Gallant says, “is really nothing more than a dumb piece of steel.” Two years ago, CN instructed the manufacturer to increase the diameter of all axles by less than one-hundredth of an inch. The reason: CN’s trains wear out 40,000 pairs of wheels a year, and mechanics must shave metal off an axle each time a new set is installed. After three replacements, an axle is too small to grip the wheel and has to be scrapped. Now, the axles can go through an extra cycle in the field—extending their lives by several months. That move alone has saved CN $700,000 a year.

Other measures instituted by Gallant’s team:

• By banning the use of color copying for documents that are meant for internal use, the company’s annual $600,000 bill for photocopying has been slashed by two-thirds.

• Hotel expenditures were reduced by $20 a night in Montreal. In 1995, CN staff logged 8,000 hotel nights in that city in three different establishments. In an exercise he has repeated in other cities, Gallant shifted all of that business to one hotel and tendered it to the lowest bidder.

• The company’s $1 million plus bill for cellular phones has been cut by 30 per cent. Before, employees signed up with either Cantel or Bell Mobility at their own discretion, and picked various brands of phones. Gallant cut a better deal by tendering the business to a single equipment provider, Motorola, and a single service provider, Bell Mobility.

Tellier, Gallant and other CN executives are fond of saying that customers are number 1, and that the goal of all the changes is to improve service. Still, some shippers in the forest products industry who were contacted by Maclean’s said that the railway has run into problems. Vancouver-based Weldwood of Canada Ltd. operates two pulp and nine lumber mills, and pays CN $70 million a year to ship 60 per cent of its cargo. Weldwood’s pulp mill in Hinton, B.C., requires CN to deliver 15 empty railcars each day to handle the plant’s production. Last week, there was none. But Bob Elder, Weldwood’s manager of transportation, blames the weather more than CN and rates Tellier’s management highly. “They’re working very hard at meeting our demands,” declares Elder. “Our opinion is that the company has come a long way.” Tellier clearly wants to take it a lot further.