Harman International Industries’ cost containment efforts were heard loud and clear by employees via a campaign emphasizing global accountability.
The author Malcolm Gladwell has an opinion about the nature of culture in an organization. “Cultural legacies are powerful forces,” he writes. “They have deep roots and long lives. They persist, generation after generation, virtually intact, even as the economic and social and demographic conditions that spawned them have vanished.”
Corporations are no strangers to cultural artifacts, and my employer, Harman International Industries Inc., is no exception. When I arrived early in 2008 as part of Harman’s new management team, it didn’t take long to identify some of the cultural legacies that helped create Harman but were now holding it back: The company was entrepreneurial and regional, and employees were fiercely loyal to their brands. We saw the chance to seize a world stage by gaining efficiencies for our operations and new customers for our products. Achieving sustainable change would mean expanding the business mind-set of each employee and encouraging each to take a dynamic approach to goal setting and accountability as “one Harman.”
Since then, Harman employees have been working toward those ends, with the result that the corporation has dramatically restructured worldwide—right in the face of the economic downturn— and stabilized 2009 net sales at $2.9 billion. Here’s how we went about it.
Reinventing the Future
From early days as a pioneer of component audio, loudspeakers and electronics, Harman and its 16 brands— including Infinity, Harman Kardon, JBL, Lexicon and Mark Levinson— earned the respect of audio enthusiasts around the world. Harman has grown into a corporation operating on three continents in a dozen countries, with three business units that address the consumer, automotive and professional audio markets and with products that range from headphones to amplifiers to in-dash audio and navigation systems.
Yet Harman had grown rapidly through acquisitions in the 1980s and 1990s, and each acquired company was allowed to keep its brand, identity and business practices. While employees generally liked the autonomy and freedom, by the mid-2000s this approach began to strain the broader organization. Shrinking margins, rising overhead, and a scattered approach to product development and engineering were compromising the ability to execute projects and stay on top of converging worlds in computing, entertainment and information. Without a global vision, leaders of Harman’s business units could find themselves struggling to compete.
In 2007, a new chief executive officer was recruited to reinvent Harman. Dinesh Paliwal, a veteran of corporate turnarounds, immediately saw opportunities to eliminate silos and gain synergies and efficiencies through integration, cost containment and global sourcing. I joined Harman shortly thereafter as chief human resources officer, coming from 18 years with the global brewery conglomerate Anheuser-Busch InBev, with headquarters in Belgium.
Paliwal stressed his conviction in two areas: achieving best-in-class innovation and research and development, and a bestin- class cost structure. With these elements in place, he says, Harman will gain competitive advantage and the foundations for profitable growth.
As members of the executive committee began examining the organization’s needs, we knew it would be necessary to shift employees’ cultural mind-sets. We needed to facilitate employee participation in a corporate context and build appreciation for what it means to be “costconscious.” In July 2008, we launched the Step Change program. Having founded a similar program for his former employer, ABB Ltd. of Switzerland, Paliwal knew that we would have to engage employees. I was named executive sponsor, and I teamed up with David Karch, our operational excellence expert, who served as executive program director.
Lunchroom to Boardroom
The program target was simple—permanently eliminate $400 million in costs from our then-$4 billion operation by June 2011. The deeper challenge, of course, was stimulating communication and cooperation across business units, geographies and functional groups. The human resource function, therefore, became central to Step Change, and we set out to link cost consciousness, performance mind-set, global awareness and individual accountability.
People often ask me about the significance of the Step Change name. I liken it to a journey: The destination can only be arrived at by taking methodical steps. While some steps originated with corporate managers, the bulk were identified by employees in a bottom-up approach.
From my past experience, I knew that some of the best cost-reduction ideas come from employees who see opportunities to reduce waste and improve efficiency. Step Change has provided employees at every level with the methods to bring these ideas to the forefront and has empowered workers to implement these ideas. It allows for best practices developed in the business units to be shared.
The project was kicked off with an intense, nine-week examination of every part of the business. Through interviews with business leaders and project managers, a breakdown of cost-saving targets across the organization was established. Following this, workshops were held within groups to brainstorm measures, identify quick wins and ensure their validity.
The results of these sessions were remarkable. Employees at all levels contributed hundreds of ideas—large and small— leading to a baseline set of actions toward our $400 million goal. While some employees were wary of executives’ intentions— in particular, those concerning job cuts—most were eager to contribute. After all, executives had never before solicited broad contributions on best practices.
Working with Swiss consultant Roland Berger, each proposal was organized in a cross-functional review to eliminate double counting and to prevent scenarios where savings identified through one action would increase costs in another. Some initiatives were massive and tough—such as optimizing our engineering and manufacturing footprints and integrating acquired businesses. Others tackled overhead costs such as renegotiating service contracts or streamlining policies for travel. Still others addressed operational efficiency such as improvements to supply chain management and aftermarket responsiveness.
Ultimately, 250 individual cost-saving targets, with subtasks to execute the goals, were agreed upon by the project steering committee. Each task was recorded in a proprietary software tool that sets timelines and checkpoints, monitors completion of milestones, and alerts program owners of pending actions. The tool tabulates the actual combined savings as each initiative nears completion. To further drive accountability, regional Step Change managers were named to follow up on actions in their areas and report to senior executives.
The projects focus primarily on organizational simplicity, supply chain excellence, global footprint optimization and operational excellence. Some examples, reflecting our global transformation, include:
- Closing or consolidating manufacturing operations in Germany, South Africa, Sweden, California, Indiana and New Jersey. In 2008, some 1,900 jobs were eliminated in high-cost countries and a further 300 positions temporarily put on hold because of sales slowdowns.
- Opening a factory in China and engineering centers in India and China, and expanding manufacturing in Hungary and Mexico.
- Selling real estate and reducing the number of leased facilities.
- Reducing dependence on contract and temporary workers through better scheduling and workflow tools.
- Implementing a “combined sourcing” strategy to leverage buying power.
- Renegotiating supplier agreements for services such as insurance and travel.
Implementation of the initiatives began in the fall of 2008—on the brink of a worldwide economic crisis. As a major supplier to automakers—about 70 percent of Harman’s revenues are tied to the automotive market—Harman was particularly affected by a downturn in automobile sales. These losses eventually drove a 26 percent reduction in fiscal 2009 net sales. Hence, Step Change took on heightened importance: Employees could see the urgency of cost containment, and the program picked up momentum.
Targeting and Rewarding
We knew that we would have to link Step Change to short- and long-term incentives.
Obviously, we wanted to ensure that our targets remained on track and that we fulfilled our commitments. This was critical to keeping our integrity before stakeholders. But we also wanted to reward the individuals who took on heavy Step Change responsibilities in addition to their day jobs.
Previously, goal setting and performance management varied throughout Harman. Coincident with Step Change, we unified target setting and performance tracking. Goals and targets were established for the corporation and systematically cascaded to employees as individual targets. These were linked to annual incentive compensation, as were Step Change goals.
Beyond the teams and project managers, top managers had their performance targets tied to Step Change goals through special incentives for the top 20 employees who delivered against Step Change.
Whatever their motivation, many employees embraced Step Change and its principles. By June 2009, the program was tracking ahead of its year-to-date target. The trend continues; by March, the company had reached $321 million in permanent cost saving and enhanced productivity.
Address the Hurdles
While it seems prescient now, Step Change was initiated ahead of the economic slowdown. As world economies softened and consumers curbed purchases of cars and electronics, Harman was immediately affected. The need for strong cost management became apparent. Some savings were accelerated to address market realities. In other cases, savings didn’t materialize as planned, but that didn’t mean we were off the hook. Any shortfalls had to be replaced with new initiatives.
At the same time, despite declining revenues from the automotive market, we still needed to meet contracted customer timelines and project deadlines for our automotive customers. That meant keeping certain manufacturing employees and operations intact through the downturn. Executives were also committed to maintaining research and development centers so that Harman could seize opportunities with product innovation when the market rebounded.
Survey the Results
The program is now approximately twothirds complete. From a numbers perspective, we continue to track ahead of our projected targets, and we are proud of our achievements.
We are well on the way to creating a culture of ownership: Employees make decisions as though they were owners instead of hired hands. However, such a culture depends on all employees working as a team to achieve individual results and the company’s goals and objectives.
I started this article talking about cultural legacies. There is no doubt that Step Change has created a legacy in Harman’s culture. Clearly, our employees have adopted cost-conscious mind-sets, a collaborative spirit and sustained accountability. Lines of communication have been opened that would never have existed before.
I would say that Step Change’s lasting cultural artifacts are transparency, an enhanced sense of urgency and employee engagement. Through increased accountability and a global perspective, employees have gained high levels of trust, responsibility, communication and renewed pride. Although it has been a journey of many individual steps, our organization has taken a giant leap toward sustained efficiency and set the foundation for long-term, profitable growth. The author is chief human resources officer of Harman International Industries Inc. in Stamford, Conn.