Leadership and thePsychology of Turnarounds

by Rosabeth Moss Kanter

58

Decline causes managers

to dislike and avoid one

another, hide information,

and deny responsibility.

I N RECENT YEARS, I have been inside nearly two dozentumaroimd situations, in various stages of progress,in which new leaders were bringing distressed organi-

zations back from the brink of failure and setting them ona healthier course. In every case, I saw-and agreed with-the need for smart financial and strategic decision mak-ing. But along the way, I also noted another importantaspect of this leadership task, a related line of effort thatseemed to go largely unnoticed and unstudied by ob-servers but that was Just as vital to improving the com-pany's fortunes and just as hard to do well. Each of theseexecutives restored their people's confidence in them-selves and in one another-a necessary antecedent torestoring investor or public confidence. They inspired andempowered their organizations to take new actions thatcould renew profitability. In short, each had to lead a psy-chological turnaround.

Consider the situations that confronted new CEOs inthree companies:

Gillette: Its performance was strong through the mid-1990s, but hy the beginning of 2001, this global consumer-products company had experienced several years of flatsales, declining operating margins, and loss of market

share. Its Mach3 shaving system was a blockbuster prod-uct, but the company was suffering the effects of its ownreliance on trade loading-the practice of offering dis-cotmts to retail customers at the end of a quarter in orderto move products and achieve sales targets, thus sacrific-ing margins and jeopardizing the next quariier's sales.Meanwhile, because the executives in different productgroups and locations rarely sat in the same meetings, ini-tiatives in their various areas were not coordinated. SKUs(stockkeeping units, or product variations) proliferated asgroups made decisions without informing other depart-ments, leading to waste and duplication. Respect amongpeers declined.

BBC: in 1999, the British Broadcasting Corporationwas a seriously demoralized organization. Its funding wassecure through 2006 because of a government-collectedlicensing fee, but it had lost audience share, experienceddeclining ratings, and was being outpaced by commercialcompetitors. Skepticism and cynicism reigned in the com-pany. Many people felt under attack, externally and inter-nally. Program developers felt they were at the mercy ofbroadcast commissioners and that they were being treatedunfairly, having to endure a long bureaucratic process

That*s what makes

turnarounds so hard -

and leaders who reverse

the cycle so impressive.

JUNE 2003 59

Leadership and the Psychology of Turnarounds

reinforce one another in such a way that

that ended in their show proposals being rejected morethan half the time. The radio division felt it didn't get thesame respect as the TV unit. The sports division had tofight for airtime. Employees regularly went to the pressto air grievances, reinforcing the BBC's culture of blame.

Invensys: A global conglomerate that was created largelythrough acquisitions, Invensys in 2001 had more than50,000 people working in industrial and energy services -and was close to defaulting on its financial obligations.Some managers felt the company was also bankrupt interms of ideas. There was insufficient communicationacross the company, includ-ing few common meetingsof the top group, competi-tion among divisions that Organizationalwere largely isolated fromone another, and an in- patho log ies arise andward focus among manag-ers. Perpetual restructur-ing had created a culture offear and had reduced em-ployee initiative. When the new CEO asked executivesindividually to name the three people in the companyfor whom they had the greatest respect, most couldbarely name one.

It may be true, to paraphrase Tolstoy, that every un-happy organization is unhappy in its own way, but oncewe set aside the details, the fundamental dynamics ofdecline-and recovery from i t - in these three companiestum out to be remarkably similar. Indeed, across a widevariety of situations, in banking, consumer products, re-tail, industrial products, software, education, and mediain North America and Europe, I've found the same pat-tern. Organizational pathologies-secrecy, blame, isola-tion, avoidance, passivity, and feelings of helplessness-arise during a difficult time for the company and reinforceone another in such a way that the company enters a kindof death spiral. Reversing that downward trend requiresdeliberate efforts by the CEO to address each of thepathologies. : :•< • • V:

Here's how this spiraling effect worked at a companyI'll call Industrial Era Corporation, or lEC.

The Dynamics of Decline:A View from InsidelEC was once a rapidly growing industry darling. But aseries of lackluster products and expenses too high fora shrinking post-tech-crash market had set it on a down-ward path. Meanwhile, its largest rival went from strengthto strength in the same unforgiving market. It was almostas if they were now two different species. The rival coulddo no wrong; IEC could do no right. One analyst declaredthat IEC was worth more dead than alive. Institutionalcustomers called to ask whether the company would be

able to meet service commitments to its products. Eachgroup that questioned IEC's viability caused other groupsto lose confidence.

IEC tried to bounce back by launching two innovativeproducts. But neither moved the company off the deathwatch, because everything IEC did was now viewed as ev-idence of weakness. The organization was under a nega-tive halo. Psychologists define the halo effect as the aurathat surrounds a successful person or organization. In-deed, when IEC was on the rise, its founders were lionizedas brilliant strategists, and the praise heaped on IEC made

its products more desirable and reinforced a growthspiral. The halo effect had hidden any weaknessesback then. Now it was hiding lEC's strengths.

When IEC posted a string of consecutive quartersof decline, the company'sleaders thought they couldpush their way back intothe black by exhorting

the company enters People to reduce their ex-penses further and launch

a kind of death spiral. new products faster. Com-mands started flowing fromthe top. But the tighter con-trols were greeted with cyn-

icism. Some people began to do the minimum, showingup at work just long enough to earn their end-of-yearbonus. Managers distanced themselves from companydecisions. They would tell outside consultants that theyweren't involved, that they disagreed with the decisions,or that someone else in another division or departmentwas responsible.

As problems mounted, so did the likelihood of secrecyand isolation among managers. People tended to eitherblame or avoid one another. Since bad news is never aswelcome as good news, and there was more bad newsthan good, IEC managers kept communications with thestaff and one another to the bare minimum. It wasn't thatthey were consciously hiding problems; they simply foundreasons to cancel or postpone meetings, offen citing in-creased work pressures.

The CEO told managers to focus on improving theirown performance, and he put their bonuses at risk. Asgroup heads emphasized meeting current targets, thecompany virtually eliminated cross-functional or cross-division projects. Groups knew less about what was goingon in other parts of the organization and stopped caring -or cared too much, imagining how others might be plot-ting to cut them out of their share of a shrinking budget.

Rosabeth Moss Kanter is the Ernest L Arbuckle Professor ofBusiness Administration at Harvard Business School inBoston, specializing in strategy, innovation, and leadershipfor change. She is a frequent contributor to HBR and v^as theeditor from 1989 to 1992.

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Leadership and the Psychology of Turnarounds

Various business efforts were duplicated; each group feltit was easier to perform tasks itself rather than coordinateits actions with others.

Increasingly, people's time and energy were spent onself-protection instead of joint problem solving. The in-visible walls between territories grew. Most senior execu-tives at IEC sat within a few feet of one another in officeswith glass walls, yet many professed ignorance of theother imits' plans to solve IEC's problems. The CEO andCFO tended to control the information that circulated.Though reporting requirements increased during IEC'stroubled period, communication outside of formal meet-ings decreased.

It became rare for all the senior execu-tives to sit down in one room together. Ex-ecutives found reasons not to attend meet-ings because those few meetings thatremained had degenerated into diatribesby the CEO, followed by uninformative re-ports. No one wanted to raise questionsbecause that tended to produce angry ex-changes, as department heads accusedother department heads of putting obsta-cles in their paths. The game became oneof blaming others before they could blameyou. For example, the head of IEC's cus-tomer service group wrote memos outlin-ing the problems other divisions werecausing that his department had to fix.Since the good performers in the orga-nization did not want to be taintedby the failure of the poor performers.

The Troubled Company's

Cycle of DeclineCorporate decline generally does not stem

from a single factor; it results from an accumu-

lation of decisions, actions, and commitments

that become entangled in self-perpetuating

workplace dynamics. Secrecy, blame, isolation,

avoidance, lack of respect, and feelings of help-

lessness create a culture that makes an already

bad situation worse. Once a company is caught

in this spiral, it is hard to simply stop and

reverse direction. The system has momentum,

and change seems impossible. But there are

interventions managers can use to shift the

momentum in the company's favor.

those in units with strong sales became openly scornful oftheir peers in other units.

Managers with opportunities were leaving. Not all thedepartures were mourned; some senior managers had notmet expectations. But now IEC was constantly recruitingto fill holes at the top, and critical tasks were left undonebecause executives were on double duty-for example,the CIO was now supervising the operations group. All ofthis reinforced the dynamics of IEC's decline. Employeeshad so little interest in socializing with one another out-side of work that the CEO had to order his direct reportsto show up at a company social event.

Secrecuand <^

L

JUNE 2003 61

Leadership and the Psychology of Turnarounds

dynamics at work,

To cope with the decline, lEC got caught in the trade-loading trap, common in troubled companies. Toward theend of each quarter, IEC offered promotional deals to itsdistributors to move inventory. This was a tantalizinglysimple short-run solution to declining sales but tendedto make the situation worse. The price cuts reduced thefunds available for marketing, which increased IEC'sreliance on the promotional deals. And customers knewthey could wait until quarter's end to get even better deals.IEC's managers felt they had no choice but to continueto discount. Acting from a weak bargaining position re-inforced IEC's ever-weal<ening position.

That assumption of weakness reflects a phenomenonpsychologists call learned helplessness, a term coined bythe University of Pemisyl-vania's Martin Seligman.Many people at IEC beganto feel there was little they Despite the commoncould do to make a differ-ence in the company's for- psychologicaltunes. They became pas-sive. The CEO complainedthat he had to come upwith all the good ideas; themore he complained, the worse people felt about theirovm ideas, since presumably theirs weren't the goodones. Managers set low goals to guarantee they wouldachieve them. One group at IEC tested a new methodfor selling products that had doubled sales, but othermanagers wrote much lower numbers into their plansin case the new method wouldn't work for them. Thinkof this as the opposite of the arrogance of success-it'sthe timidity of mediocrity. Individual choices, each logi-cal to the person making it, added up to a system thatcaused people to feel powerless. And the downward cyclecontinued.

Reversing the CycleIEC's story demonstrates how problem fuels problem inan ailing organization's culture. (See the exhibit "TheTroubled Company's Cycle of Decline.") The dynamicboils down to this: After an initial blow to the company'sfortunes, people begin pointing fingers and deriding col-leagues in other parts of the business. The resulting ten-sions curtail collaboration and degenerate quickly intoturf protection. Increasing levels of isolation throughoutthe company then engender secrecy. Once they are nolonger acting in concert, people find themselves less ableto effect change, and eventually many come to believethey are helpless. Passivity sets in. Einally, the ultimatepathology of troubled companies takes hold: collectivedenial. As in the fabled village where the emperor showedoff his new clothes, people unwittingly collude. Ratherthan volunteer an opinion that no one else seems to

share, people engage in collective pretense to ignore whatthey individually know. It's a phenomenon known to psy-chologists as pluralistic ignorance.

How wonderful, then, when a company is able to pullout of that downward spiral-as IEC did after a new CEOtook the helm. How did he pull it off? In the end, the onlyway a CEO can reverse a corporate decline is to changethe momentum and empower people anew, replacingsecrecy and denial with dialogue, blame and scorn withrespect, avoidance and turf protection with collaboration,and passivity and helplessness with initiative. Let's lookat each of these interventions in tum.

Promoting Dialogue. Companies compound their fi-nancial and strategic woes when they keep information

secret from their employees and the public. As nu-merous recent scandals have made clear, the cover-upis often worse than the mistake. And problem solvingis impossible if people do not have all the facts. So the

first task of turnaroundleaders is to open chan-

leading a corporate "^'^ "^ communication-

turnaround isn't a

one-size-fits-all process.

starting at the top.On Jim Kilts's first day

as CEO of Gillette in Eeb-ruary 2001, he held a fullmeeting of the operatingcommittee. He presenteda detailed set of slides out-

lining his style and leadership philosophy. He expectedfact-hased management, open communication, simplic-ity, and collaboration from Gillette's line managers andemployees. Featured prominently on the list titled "MyStyle" was the statement, "If something bothers you,I want open dialogue." Kilts then outlined the results ofhis month-long external review of the company prior tojoining, a detailed analysis of Gillette's strengths andweaknesses. He was also planning to present this infor-mation to the board several days later. Kilts immediatelyestabhshed multiple communication channels-weeklystaff meetings, weekly business overviews from all execu-tives worldwide, quarterly two-day off-site meetings forsenior executives, a chairman's page on Gillette's intra-net where anyone in the company could post questionsand receive answers from Kilts himself, the distributionof videotaped dialogues with Kilts for managers in theinternational locations he couldn't visit personally, andemployee roundtables.

One of Kilts's more controversial moves, but one thatincreased disclosure among colleagues at Gillette andpushed communications forward, was to expose the per-formance data regarding his top team. The CEO intrc>duced quarterly report cards for his senior managers, andafter the first ones were completed, he posted the resultsfor the whole top team to see (anonymously at first) sothat everyone knew where they stood in relation to their

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Leadership and the Psychology of Turnarounds

peers. Those scorecards were followed by senior manag-ers' open presentations of their priorities for the nextquarter. Secrecy and denial were relegated to the trashbin; there was no way to hide information.

The nature of conversations at Gillette shifted fromindividual reports to group dialogue. Previously, manag-ers told me, they would go to meetings, say their piece,and go away. With Kilts at the helm, managers said theirpiece - and stayed to answer questions. "He does not at-tempt to wrap himself or the company in any sort of mys-tical qualities," an executive observed. Anything was openfor questioning.

Almost identical shifts in quantity and quality of com-munication occurred in the other companies I observed.At the BBC, new CEO Greg Dyke restructured to removea layer of the organization that had stood between topmanagement and those responsible for audiences andproducts (the broadcasters and show producers). He putprogram people on the executive committee and gavethem a voice in decisions. Meetings became more fre-quent and much more informal. Dyke favored open anddirect communication through personal e-mails to indi-vidual employees as well as broadcasts to the whole of the

BBC. The BBC's finance director noted,"He writes the mes-sages himself, to everyone, from the heart, telling thetruth, telling people what he wants them to do, and com-municating instantaneously." Dyke also sought less for-mality among senior managers so they could spend moretime talking about strategic issues. Dyke reduced the di-visions' formal reporting requirements to the executivecommittee. BBC News had previously submitted statusupdates in six three-inch binders; Dyke condensed therequirements so that the reports fit on ten pages. Staffersoften remarked about the CEO's personal warmth. An ex-ecutive said, "Greg cares about people-he touches themon the shoulder and arm-a sharp contrast from the be-havior of most standoffish Brits. He establishes a connec-tion and makes time for as many people as possible."

CEO Rick Haythomthwaite and his team made dia-logue a hallmark of the new Invensys. Town-hall-typemeetings were convened in the largest of the company's400 sites worldwide. Haythomthwaite picked up thephone to call people who raised an interesting point ora note of dissent on the company's "Ask Rick" help line.And he still continues to be personally involved in thedraffing of responses to employee questions. Dialogue

means that everyone deservesa response. "If you do drop theball, people know about it veryquickly," Haythomthwaite said."And even though it creates anincredible amount of pressure,you've got to be thinking everyday. Is there someone I cut short?Is there something that someonesaid in a meeting that I haven'tfollowed up? Those things justundermine the effort."

In a company where there wasa perceived distance between theleadership and the workforce,Haythomthwaite made a point

of standing before his employees with no podiumbetween him and them. At one town hall meeting,he spoke about company issues in front of what feltlike a factory floor of humanity. When it was time forquestions, the first person asked him why the com-pany had trimmed the health plan. "It was one ofthose moments where you could see everything washanging on my answer," Haythomthwaite recalled."I hadn't even been responsible for the decision, so Icould have said that it wasn't me, that it was the pre-vious guys." Instead, Haythomthwaite acknowledgedthat the decision wasn't his-but that he was account-able for the fallout. He presented the facts about thecosts of the health plan. Given those facts, the crowdcould see that cutting from the health plan was theonly sensible course of action. "The only way I could

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Leadership and the Psychology of Turnarounds

give you a different answer is by fundamentally shiftingthe U.S. health care system "he told the group, and at thatpoint the audience was back on his side. "People justhadn't been treated to the facts in the past. That's just soconsciously condescending. If you're all in the same game,then you share those facts."

Engendering Respect. Open dialogue exposes factsand tells the truth, but a successful corporate turnarounddepends on relationships as well as information. It is verytempting for a new regime to exact revenge and punishthose responsible for past mistakes. But that would onlyguarantee that organizational pathologies-the com-pany's blame culture - would continue. Turnaround lead-ers must move people toward respect; when colleaguesrespect one another's abilities, they are more likely tocollaborate in shaping a better future. There is a parallelin the work of a great world leader. To tum around hiscountry. Nelson Mandela, the first democratically electedpresident of South Africa, established a Truth and Rec-onciliation Commission. Reconciliation helps peoplemove beyond assigning blame for problems; it helps themregain respect for one another while becoming more per-sonally accountable.

Haythomthwaite was conscious of walking a fine linebetween truth and reconciliation. He observed,"You've got to speak to where the organizationstands. And you've got to do it in a way that doesn'tmake people wrong but, at the same time, doesn'tleave them in denial." He wanted to avoid punish-ing anyone for past mistakes, and he wanted tohuild mutual respect among colleagues. "You'vegot to create some space to make a mistalce or two,"he said. "We are but a collection of human beings."By making no changes in the senior-managementranks in his first months, except for one divisionhead, Haythomthwaite signaled that there wasquality to be found in the people already in thecompany. By involving about loo peoplein strategy-formulation teams, he pro-vided opportunities for them to demon-strate their talent. Haythomthwaite toldthem explicitly that he trusted them, thathe believed there was talent in the com-pany. At a three-day reporting session after their45-day intensive effort to plot a new direction forInvensys, he said, "the mood was extraordinary.People we didn't know existed were offering high-quality presentations of strategic thinking. Theoverall level of respect for one another in theroom rose." To set standards for a variety of pro-cesses, Invensys's new leaders looked inside theorganization for best-in-class practices - among53,000 people there were surely examples of bestpractice - as another way to raise organizationalesteem and confidence.

Similarly, Jim Kilts's initial actions at Gillette helpedpeople look at the facts without becoming defensiveabout them. Kilts's message from day one was that he hadno preconceived notions about people and no plans tomake sweeping changes in the management ranks. "Wehave a very good cadre of people who want to do theright thing,"he said. One of his priorities was to eliminatethe finger-pointing that had gone on in the past. Frequentmeetings among managers who never had much of an op-portunity to sit together before made this possible. If anexecutive said he did not reach a certain target becausesomeone else didn't do his part. Kilts would tum to thatperson to ask what happened and to remind everyone ofthe overarching objectives and priorities linking theareas. A participant recalled that the first quarterly off-siteunder Kilts was tension ridden, with outbursts of angeras people played out the blame culture of the past. Butover time, the meetings became more effective and teamoriented. "I don't want competition among functions orthe senior staff. Anything that even hints at it is counter-productive. I hate anyone saying 'Jim said' or 'Jim wants'or 'the board said' or 'the board wants' as the reason fordoing or not doing something. Things are done, or not,based on rigorous assessments and considered delibera-

y

M'OST OF THE EXEMPLARY TURNAROUND LEADERS I've

seen-including the CEOs of Gillette, the BBC, and

Invensys-were new to their organizations as well as to their

jobs. Does this mean that only a new broom can sweep clean?

Perhapsso.After ail, ifthe old CEO had wrong ideas in the

past, why should people believe he or she has the right idea

now? Even when an executive who presided over a period of

decline admits mistakes and embraces new ways, it's nearly

impossible for that person to stir up the organizational energy

needed for a turnaround. As former

U.S. vice president Al Gore observed

when he decided not to run for

president in 2004, his candidacy

undoubtedly would have been

dogged by debate over why he lost the race in 2000, at a time

when his party needed to focus relentlessly on moving forward.

But new CEOs have the edge in more positive ways, as well.

They are better able to disentangle system dynamics because

they were not caught up in them. For example, one of the most

important steps ofa psychological turnaround is putting a

name to problems that have long gone unexpressed. At Gillette,

for example, senior executives claimed to a person that they

had known for years what the problems were: trade loading;

long gaps between new product releases and a proliferation

A New Brooms

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Leadership and the Psychology of Turnarounds

tions," Kilts said. That also meant that people could startrelying on each other to be accountable.

It is hard to play politics if everything is discussedopenly. The BBC's Greg Dyke changed the tone and styleof the executive committee meetings dramatically. An ex-ecutive explained, "In the past, managers would lobby thedirector general privately, so you would go into a meetingand not know where you stood. With Greg, if you haveany issue, it needs to be put on the table. Meetings aremore chatty, less formal, more sociable. We have awaydays. We do fun team-building events. We see each othersocially." Dyke also expected managers to respect one an-other's ideas. To drive this home, he created yellow cards,resembling those used by referees to signal a penalty insoccer matches, labeled "Cut the Crap: Make It Happen."He used the cards himself, holding them up when heheard ideas getting trampled. BBC leaders started learn-ing not to second-guess people but rather to extend trust.

At a leadership conference of several hundred people,a junior manager confessed in her small discussion groupthat she was out of pocket a few thousand pounds fora project because of BBC rules concerning qualified ven-dors and the timing of reimbursements. She was encour-aged to speak up in the large group. After she described

of minor upgrades on existing products; and the inappropriateapplication of the company's strategy for blades and razors toother categories, especially the Duracell biittery business. Asa Gillette group director for Europe proclaimed, "I'm absolutelycertain there's not one person in the whole company who forone momentthoughtthatwe should do anything other thanget out of trade loading." Yet it took a new CEO to give voiceto the problem and change the habit. Similarly, at Invensys,new CEO Rick Haythornthwaite reported, "Everyone knew theproblems, but the structure inhibited them from doing any-thing about it. People could only take shots across the silos.Some people knew the issues technically and couid preventobviously bad decisions, but they lacked the power to act out-side their own fields of concentration. They knew change wasneeded, but they were not sure how to make it happen."

New CEOs may also have more credibility in representingand respecting customers. In his earliestdays atCillette,JimKilts visited a major retailer with a sales executive. Greg Dyketraveled to several BBC studios outside London and immedi-ately endorsed a plan to move them to visible locations in thecenters oftheir cities, where they could connect with audiencesmore directly. And Haythornthwaite spoke passionately aboutwhat he learned from customer interviews. All three under-stood the powerful, unifying effect of focusing on customers.

her situation, her boss offered to write her a check for thesum she awaited. But he was superseded hy the BBC's fi-nance director, who not only wrote the check but changedthe rule on the spot.

Sparking Collaboration. Turnaround leaders knowthat problem solving requires collaboration across depart-ments and divisions - and not just because innovationsoften come from these joint projects. Changing the com-pany's dynamics requires collective commitments to newcourses of action lest local decisions, taken in isolation,undermine that change. New strategies are possible whennew kinds of conversations are held about combiningorganizational assets in new ways. Thus, Greg Dyke's firstmajor initiative, announced within two months of hisarrival, was called "One BBC: Making It Happen,"to high-light that he was seeking more collaboration throughoutthe organization. Executive commiftee meetings wereincreasingly devoted to themes that cut across divisions,and members discovered areas in which they could com-bine forces to tackle new business opportunities.

Gillette's complex organizational matrix meant thatmany operations issues arose at the intersection ofgroups-for instance, product managers required re-sources and support from the IT depariment or needed to

coordinate their launches with help from salesrepresentatives in the field. Jim Kilts encouraged

i the formation of operating committees in eachbusiness unit or regional group, and then furtherencouraged the creation of cross-matrix operatingcommittees that included representatives from allthe functions and areas on which the businessunit depended. The view across the organizationrevealed business opportunities that would havebeen hard for any one unit to see by itself For ex-ample, Gillette's Oral-B business unit, centered inthe United States, produced a quality line of tooth-brushes, and its Braun division, headquartered inGermany, had developed world-class portable-appliance technologies. But, unlike its competi-tors, Gillette did not make a battery-poweredtoothbrush-until new relationships were formedacross the ocean.

Rather than continually reorganize, which ishighly disruptive, especially for a troubled com-pany, turnaround leaders simply augment the or-ganization chart with fiexihle, often temporary,groups that open relationships in multiple direc-tions. Invensys's Rick Haythornthwaite refers tothis as structuring the organization to get theright discussions."The only thing I really do is leadconversations," he says. "Any group is a networkof conversations. 1 continuously thrust people intosituations that force them to challenge the currentconversation they're holding, to get beyond thatdiscussion to one that's more productive."

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Leadership and the Psychology of Turnarounds

Invensys's leadership team acted on this theory byadding new groups and roles, slicing through the organi-zation chart vertically, diagonally, and horizontally. In hisfirst months at the company, Haythomthwaite formednine strategy teams comprising people from across the di-visions, with each team focused on one of nine customersegments. When the company laimched this initiative, itinvolved the top 300 people in rank at the organizationand 100 additional participants called "ambassadors forchange," ensuring that people below the managerial rankswould be part of the strategy conversation. Haythom-thwaite also recruited experts to lead in four areas cut-ting across the business-supply chain (procurement),customer development, service delivery, and project man-agement. They had only small teams and no P&L respon-sibility. Their charter was to set standards within theirareas and to work with others to bring about necessaryimprovements.

Inspiring Initiative. Once turnaround CEOs establishthe structures that allow people to collaborate, they needto empower their employees to initiate the actions thatwill improve the company's financial or strategic posi-tion. One incident at the BBC revealed that learned help-lessness is a disease that even top executives can sufferand that initiative is not automatic even in those assumedto have power. Jane Root, controller of BBC2, remem-bered a pivotal executive committee meeting about aseemingly trivial matter: "Greg wanted to put up someposters on the wall and was told by someone on the ex-ecutive committee that 'They won't allow that.' Greg said,'Wait a moment-who won't allow it? We are them.' Wehad to break out of this infantihzing past. It took Greg toshow us that we were in charge, that we could changethings if we liked."

The push on the part of the executive committee tosupport new ideas and to collaborate on cross-divisionprojects created some striking innovations at the BBC:a new time slot for the nightly TV news that boosted view-ership; a successful Scottish soap opera produced locallyrather than in London {the source of most programs inthe past); and interactive features on the BBC Web sitethrough the combined efforts ofthe news, sports, drama,and children's programming divisions. In another earlywin, a new trainee using funds intended for a trainingvideo created a ten-minute pilot for what hecame TheOffice, a hit comedy series about life in a dead-end, white-collar job.

The next step was to move idea generation from theBBC's executive committee and senior leaders to every-one in the company, ensuring a flow of ideas from thebottom up as well as from the top down. At his annualstate-of-the-organization broadcast to the whole BBCin February 2002, Greg Dyke annoitnced the then-still-unformed "One BBC" effort-but by now, the executivecommittee was sufficiently confident that it could an-

nounce a major initiative even if the details hadn't beenworked out. That was a major departure from the com-mittee's passive bureaucratic past. By July 2002, 5,000people were involved in "One BBC: Making It Happen"brainstorming sessions; by November, 10,000 ofthe BBC's24,000 employees bad participated. More than 2,000ideas were submitted through the initiative's Web site,and 700 had been implemented, including a BBC-widediscount on digital set-top boxes and an important newemployee orientation program. E)yke personally reviewedmany of the proposals, and division managers added theirown support for grassroots innovations. BBC Wales cre-ated a fund of £100,000 to pay for projects suggested bythe staff, who then voted for the top seven ideas; morethan 900 people, 70% ofthe division, voted.

At Invensys, the leadership team conveyed the messagethat employees were now expected to show initiative."The days of autocracy are over. You have it do it your-self," Haythomthwaite told his people. The nine strategyteams were a first step. Arming them with customer in-formation, a framework, expert resources, deadline pres-sure (45 days), and a process, he left them to develop theideas themselves. A strategy rollout conference with thetop 70 executives reflected their increasing confidenceand initiative. At one point, the Industrial Components &Systems group walked out ofthe meeting, booked its ownconference room, wrote a script for divestitures, and re-tumed with a sense of pride because it had taken control.

Then Invensys started the long process of opening upthe idea floodgates. The company created INVEST (iden-tify, nominate, validate, evaluate, start, track), a programto find improvement projects already under way in theorganization, as well as new ones, and give them a disci-plined project-management process to make successmore Iikely."I want our 53,000 people to be able to comeup with ideas that we'll be able to transform into results,"Haythomthwaite said. A thousand INVEST team leaderswere trained over six months by 33 master facilitators,and a Web-based system was developed to track the statusof all the change programs. Haythomthwaite had to re-peat the message several times for people to get on board,but then new opportunities popped up and old ones keptresurfacing-a virtual logjam of interconnected issues,from transfer pricing to incentive schemes. A new teamwas established to take action and to continue the processof empowerment.

The Energy for ChangeDespite the common psycbological dynamics at work inall the turnaround situations I've witnessed, we shouldremember that leading a corporate tumaround isn't aone-size-fits-all process, lt requires that CEOs pay attentionto the specifics of a company's problems and that theleaders bring their own preferred approaches to the task.

HARVARD BUStNESS REV1£W

Leadership and the Psychology of Turnarounds

Rick Haythomthwaite engaged large teams to work ona new strategy for Invensys, while Jim Kilts devised Gil-lette's strategy for each line of business by himself, work-ing with a small group of trusted executives. Greg Dykevirtually eliminated consultants at the BBC to force man-agers to think for themselves, while Kilts retained manyconsultants to bring an external perspective to a com-pany that had become too insular.

Yet, despite differences in strategies and tactics, all turn-around leaders share the overarching task of restoringconfidence through empowerment - replacing denial withdialogue, blame with respect, isolation with collaboration,and helplessness with opportunities for initiative. Eacbleader must manage the tricky task of creating a winner'sattitude in people, even before the victories.

And that means performing a series of balancingacts. Troubled organizations are generally in finan-cial distress, and cutting expenses is a characteristicturnaround move. But how this is done has a bigimpact on whether the turnaround is a temporaryfix or a path to sustainability. To pull a company outof a death spiral, the CEO needs to encourage peo-ple to take initiative and feel that they can makea difference - which is hard to achie\'e when anorganization is in slash-and-bum mode. Effectiveturnaround leaders consider the kinds of cutsthey're making as well as the number, emphasizingreductions in bureaucracy that stifles initiative,thus creating conditions for change. The BBC'sGreg Dyke embarked on a campaign to reduceoverhead over a five-year period, from 24% to 15%of revenues, by removing a level of management;cutting spending on consultants from £20 milliona year to about £500,000 a year; and consolidat-ing support functions and making it clear that suchfunctions served the business units, not the otherway around. The goal was not just a more efficientorganization but one that invested in its products -broadcast channels and programs. Unlike previousrounds of cost cutting, this approach was not de-moralizing; people at the BBC generally consideredit empowering.

Invensys's Rick Haythomthwaite noted the en-thusiasm with which people raised their aspira-tions and their performance. He said he was pleas-antly surprised by "the quality of people that wantto join. The people who don't think you're going tomake it suddenly burst with enthusiasm, and thenyou've connected to something in their soul. It's awonderful moment when you start having uplift-ing conversations. It's a pleasant surprise, the extentto which people are self-motivated." Restoring con-fidence raises aspirations, he told me. "And the gapbetween aspiration and business-as-usual is thesource of energy for change."

JUNE 2003

One conclusion is unmistakable; Turnarounds arewhen leadership matters most. Managers can stem losseswith a few bold strokes, such as slashing budgets or sell-ing off assets. But putting an organization on a positivepath toward future success also requires that leaders en-ergize their workforce, throughout the ranks. The smallwins that newly empowered people create are the firstsigns that a turnaround is on track. And this is the truetest of leadership-whether those being led out of thedefeatism of decline gain the confidence that producesvictories. ^

Reprint R0306C; HBR OnPoint 4023To order, see page 139.

"Just keep thinking about the money we're saving."

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