By Julie Sneider, Senior Associate Editor
“Disruptive innovation” is a phrase sometimes applied to transformation that takes place in the Silicon Valley. But can it be applied to 19th century American icons — such as transcontinental railroads — that remain vital to the nation’s future?
That’s the question the New America Foundation posed March 8 during a virtual panel discussion titled “Disruptive Innovation Where You Least Expect It.” The rail portion featured Union Pacific Railroad Chairman, President and Chief Executive Officer Lance Fritz, who talked about how UP transformed itself under its “Unified Plan,” an operating strategy designed to mold the Class I into a more reliable, efficient and safe railroad.
Panel moderator and New America CEO Anne-Marie Slaughter began the program by asking Fritz to describe the kind of organization he found when he joined UP 20 years ago.
“Even back then, we were talking about how we build America: We connect the communities and the businesses we serve to each other and to the world,” said Fritz, who’s been UP’s president and CEO since February 2015, chairman since October of the same year.
However, Fritz also noticed the railroad was “insular” — it promoted within, initiated “invent here” concepts, wrote its own software and applications.
“A lot of our thinking started inside the railroad and looked outward, and of course that’s not the best way to think of innovation,” he said. “That was the lay of the land. I found a team that was outstanding in their pride and working together, looking for ways to be better but also one that was inwardly focused.”
Iterating a new design
Slaughter asked Fritz to explain how a leader goes about pursuing major change in an organization like a Class I, which employs tens of thousands of people and owns and operates fixed assets. Since you can’t replace the entire workforce or move the rail network, how do you develop a new and innovative operating model?
“For the railroad, the fundamental business question is a gigantic linear program, right?” Fritz said. “For Union Pacific, you’ve got 8 million or 9 million cars that want to go from where they are to where the customer wants them, and you need to do that by optimizing on your resources, making sure you get on a schedule that works for your customers, utilizing the existing footprint to the maximum extent possible.”
At the time, UP was “maximizing” its old model of doing business, offering a lot of discreet products within one big network that was complex to execute and hard for its field leadership to do well repeatedly, he explained.
“As a result, our service product was pretty good: We had a beautiful white-glove service facing the customer, but we weren’t always doing what we said we were going to do for the customer,” Fritz said.
To reposition the company for the future, “we blew up that model and iterated a new design that worked for us,” he said.
Fritz described the core principles for coming up with that new model: Streamline the organization and move the decision-making deeper into the organization where the expertise resided; create and enable a system of accountability; and be transparent about the process.
“Instead of asking two dozen really smart people at our headquarters to build a network model, we asked hundreds of people from the field to come in and design the transportation model,” he said. “By pushing the work there, by having the experts build out their own model and be supported by people who know how to connect all the moving parts, we’ve removed about a third of the work that we were doing, all of our service product numbers have improved and our efficiency has improved dramatically.”
The process was “very painful because most people don’t run toward change,” Fritz said.
Also, the new model for doing business had to be invented while the railroad kept running.
“The railroad never stops. You don’t have the luxury of shutting the doors, figuring it out and firing it back up. You have to land the plane while designing it. And that’s a unique challenge,” Fritz said.
'I harnessed our desire to be the best'
Slaughter then asked Fritz how he created a culture that was/is willing to create, accept and implement change.
“I harnessed our desire to be the best,” he said. “If Abraham Lincoln is the creator of your company, performing at the ‘meh’ level doesn’t get the job done.”
Under the old operating model, UP “had tremendous success from the perspective of our shareholders [and] maybe some of our stakeholders,” he added. “We had improved our operating margin by 2,700 basis points over the course of 13 to 15 years. That’s kind of unheard of in industrial America. But for about three years prior to this very significant transformation, we had reached a plateau. … Candidly, it took me a while to figure out that we were managing by looking backwards at last year’s model instead of really challenging ourselves to think, ‘Hey, if we want to be the best, running the railroad the old way isn’t going to do it.’ We had to open our eyes to what the model would look like and change ourselves.”
Managing well under “last year’s model,” combined with human resistance to change, presents a major impediment to transformation, Fritz acknowledged.
“But I find the ways to overcome that are to make the arguments [for change] so compelling that the difference between the current state of the business and the future state is unacceptable to the majority of your employees,” he said. “And you have to be transparent about every day, that it’s about taking one step at a time. … Then you wake up three years later and realize the world is better, that we can do this.”
Slaughter wrapped up the discussion by asking what advice Fritz would pass on to a successor.
“The guidance to my successor is going to be: Give it time, look at what you’ve got, be really clear-eyed about what’s coming, be inclusive and don’t wait too long,” Fritz said. “Once you have a clear image of what you think we need to be, be relentless. Make sure not a minute goes by that you’re not working on it.”
