The Condensed July-August 2015 Issue

SARAH GREEN: Welcome to the “HBR IdeaCast” from Harvard Business Review. I’m Sarah Green. I am back again with Amy Bernstein talking about the July/August 2015 issue. Amy, thank you so much for coming in today.

AMY BERNSTEIN: Always a pleasure.

SARAH GREEN: So the spotlight this month is HR, and we have a couple really interesting articles actually. And one of them I wanted to ask about in particular is by Ram Charan, Dominic Barton, and Dennis Carey. Tell me a little bit about this piece.

AMY BERNSTEIN: Right. Well, that is an all-star lineup of authors, right? So it’s Ram Charan, who has written for us and many others before about the role of the chief HR officer; Dominic Barton, the global managing director of McKinsey; and then Dennis Carey, who’s the vice chairman of Korn/Ferry. These are three authors who know whereof they speak.

Every CEO under the sun says that people are our most valuable asset. Yet, research shows that most CEOs undervalue their HR function. No wonder, then, that managing human capital is the top challenge for companies. They say so in research study after research study. And it’s really becoming urgent now that the supply of professionals with rare skills and potential is so tight, right?

So the deal with this, say the authors, CEOs have to redefine and elevate the chief HR officer role. As Ram and plenty of others have argued in the past, the CHRO really needs to delegate the administrative and compliance functions of HR. That’s managing benefits and all of that stuff, And instead needs to focus on strategic contributions.

So Ram and Dom and Dennis point to three specific areas of focus. The CHRO needs to be able to predict the outcomes of strategically deploying human resources. And they need to diagnose people-related problems that are hurting the company’s performance. And they need to be able to prescribe actions on the people side that will create value.

In turn, the CHRO needs to be assessed by the actions that deliver revenue margin, brand recognition, and market share. This is a huge departure from practice. And it’s pretty revolutionary.

But the real point here is that the CHRO should deliver the kind of strategic value that you expect them from the CFO. And more to the point, say the authors, the CEO has to partner with the CHRO and the CFO to steer the company, which all makes perfect sense when you consider that for most organizations, capital isn’t the scarce resource anymore. It’s talent.

SARAH GREEN: That is interesting, Amy. And I know one of the other articles in the package is from Peter Cappelli. And we actually were just recording a podcast last week that is going to air a little bit after this one. And he was mentioning that HR really has come under fire, but especially in the United States. This isn’t necessarily a global phenomenon.

And it really surprised me to learn that in some other places around the world, HR is still seen as the best way to get into the CEO role. And it’s not here in America. So I thought this was a really interesting spotlight that really looked at a function that has come under a lot of fire and has sort of fallen from grace in some ways. And it sort of points the way forward.

AMY BERNSTEIN: And yet, the role has seen a kind of elevation of stature at the same time. I mean, think of Mary Barra over at GM. She ran HR. And you’d see this more and more, where the road to the C-suite goes through HR. Clearly understanding the challenges of talent is critical to any company’s success and any leader’s success.

SARAH GREEN: OK, now, I want to move on to something completely different. The big idea in this issue, which is about another hot topic at the moment– health care costs, managing them, negotiating them. I feel like we often hear about stories like this in the news. And this is actually a wonderful success story of how Intel actually got this under control.

AMY BERNSTEIN: We’ve spilled gallons of ink on the topic of health care costs and how you control them. But I haven’t seen a very good story yet about how a company led the charge and really revolutionized health care provision in a market. But this is what this story is.

Like every other company, Intel was facing soaring health care costs. A few years ago, it projected that its health care costs would top $1 billion–

SARAH GREEN: Wow.

AMY BERNSTEIN: –by 2012, $1 billion. It tried any number of approaches that will be familiar to our listeners and readers. It tried consumer-driven health care with the high deductible, low premium plan. It tried on-site clinics. It tried any number of employee wellness programs. And none of them really did much to make a dent.

By 2009, Intel realized that these problems couldn’t solve its soaring costs because they didn’t address the root problem. And that’s the steadily rising cost of care, right? So for all you do to mitigate the behavior of employees, you’re still not solving the big problem, which is the rising cost of care.

So Intel decided to try something entirely new. It kind of looked into itself and realize its great expertise was in quality improvement and supplier management. And it used those skills to drive transformation in its local health care market.

It focused on managing the quality and cost of its health care suppliers with the same rigor that it brought to managing its equipment supplier. So think about that. It sort of drew on its own strengths.

To do that, it put together a collaborative effort in Portland, Oregon, one if its home bases, that included two health care systems, a plan administrator, and a major government employer. So far, the Portland collaborative has reduced treatment costs of certain medical conditions by as much as 40%, which is extraordinary. It’s improved patient satisfaction, and it’s eliminated over 10,000 hours worth of waste in the system’s business processes.

SARAH GREEN: That’s amazing.

AMY BERNSTEIN: It is amazing. It is a great, great story. And one of the things I really love about this story is that it’s written by Patricia McDonald, who’s Intel’s VP of human resources who has deep experience with TPS, the Toyota Production System.

SARAH GREEN: Aha.

AMY BERNSTEIN: Think lean. And she’s also the director of the Intel Talent Organization, by the way. Robert Mecklenburg, a doctor who’s the medical director of the Center for Health Care Solutions at Virginia Mason Medical Center, so one of the systems involved. And then a third party, Lindsay Martin, who’s the executive director of innovation and an advisor at the Institute for Healthcare Improvement.

This article originally didn’t have Lindsay as one of the authors, but we brought Lindsay in to validate that all of the assertions were in fact true. This is an amazing story.

SARAH GREEN: Well, and one of, I think, my favorite parts about it is what you were saying about how they just took what they were already good at in terms of managing their suppliers and vetting their suppliers, and then applied that to this other area where I think sometimes with health care, we’re sort of tempted to throw up our hands and sort of say, oh, we need a policy prescription or oh, this is too big and complicated for us to figure out. But they did it.

AMY BERNSTEIN: Right. Intel was not going to be passive anymore. And I think there’s a lesson in that for a lot of our readers who run companies. And anyone who runs a company is dealing with these soaring costs.

SARAH GREEN: OK, now, I wanted to ask you next about “How We Did It,” which is the article we have in every issue where a CEO talks about how he and his team pulled off a nifty trick. This one is from Tommy Hilfiger’s chairman on going private.

And actually, it’s interesting because this is something I am hearing more and more and seeing more and more in the business press– not talked about as a huge trend, but just one of those things where oh, another company’s going private. That’s interesting. So I was glad to see that we had a piece on how they decided to do that and how it worked out.

AMY BERNSTEIN: Yeah, and I think the reason you’re sort of picking up different instances of it is that in order to make a really dramatic change in a company, you have to be willing to forgo short-term revenues in a lot of cases. And the public markets don’t allow that. They really frown on it.

So when the author, Fred Gehring, first became involved with Tommy Hilfiger in the mid ’90s, he was a partner in the company that actually had the license to sell Hilfiger products in Europe. The brand at the time was white hot. We all remember Tommy Hilfiger. It was a paragon of kind of preppy classicism, right? Sales more than doubled between ’97 and 2000.

But there was a cost to all that hyper growth. The brand moved away from its preppy roots. The product’s got super cheesy. I mean, you remember the baggy shorts and the mega logos on the striped shirts and all that stuff. And they were selling at a steep discount. And they were starting to feel as if they were being manufactured for discount, and sales plummeted,

Meanwhile, over in the European division– remember, it was a licensee– Gehring was taking a completely different path. He was not going to sell the lower quality goods. And in fact, he worked against what was going on the US by creating a Tommy Hilfiger design center and its own supply chain, which is pretty radical.

Sales were increasing 50% a year over there when they were plummeting here in the US. So Gehring proposed a strategy for turning the entire company around and setting it on the course he’d followed in Europe. His plan called for shrinking the business so the he could return it to its roots and then grow it again.

The board countered that he should find a buyer, and so he did for exactly the reasons we just described. So the winning bidder was Apax Partners, which is a European PE firm, said go ahead to Gehring and let him do this dramatic restructuring and scale back the US business in the short-term. That is a huge vote of confidence for him.

He was able, in that short term, to lay the groundwork for the brand’s turnaround. And in less than four years, he’s seen tremendous results. 18 months after taking the company private, he was preparing to take it public again. Then the recession hit. In the end, he ended up selling it in 2010 to PVH, company that owns Calvin Klein and Van Heusen. And now they’re just doing fine.

SARAH GREEN: So interesting there that there was a little hat tip to the supply chain. That has come up in a couple of our different articles we’ve talked about. And so that’s kind of a nice segue to the next article I wanted to ask you about, which is all about negotiating with powerful suppliers. And this is one of those kind of bread and butter articles that I feel like really gets to the heart of what so many businesses struggle with. And so I’ll just leave it there, and you can take it away.

AMY BERNSTEIN: Yep, it’s our meat and potatoes supply chains. So in many industries, the balance of power has shifted from buyers to suppliers. You see it in the railway industry. This is a classic example. In 1900 in North America, there were 35 suppliers of cast rail wheels. Railroad builders, therefore, had plenty of choice.

A century later, only two suppliers remained. And today, there’s just one, which means that if you were a railroad builder in 2015, you’ve no choice but to accept the supplier’s price.

You see this happening across industries to a greater and lesser extent. Companies that find themselves in a weak negotiating position need to tackle the problem strategically, say the authors. They should consider the following actions and implement the least risky one that’s feasible for their organization.

The least risky and the easiest is bringing new value to the supplier. So a company can bring new value to a supplier in any number of ways. For example, it can serve as a gateway to new markets or reduce the supplier’s risks in some way. But you have to be attuned to your supplier in ways that you might not have been before.

Slightly less risky is companies can change how they buy. They can consolidate their purchase orders. They can re-think purchase bundles. Or they can decrease purchase volume.

Or they can create a new supplier. So now, we’re ratcheting up the risk. There are two ways to do this. They can either bring in a supplier from in an adjacent market, or they can vertically integrate to become their own supplier.

And then there’s the riskiest option of all, which is just to play hardball.

SARAH GREEN: Yeah.

AMY BERNSTEIN: Yep, your last resort, you can cancel the current order, or you can threaten litigation, or you can threaten future business. I mean, you do this advisably. This is not something you go to first.

But whatever option your firm chooses, you need to clearly understand the problem. You need to work it across functions, and you need to think analytically and creatively.

SARAH GREEN: So if this article focuses on narrowing down on a particular problem to solve a pain point, the next article I want to ask you about takes the opposite tack. It’s really all about expanding out, and instead of narrowing down, getting a really, really broad view to help you to see some new opportunities. And that’s an interesting one to me.

So let’s talk a little bit about break your industry’s bottlenecks. Because this is one that talks about some really interesting companies, the kind of companies where you think, oh, I wish I had thought of that. And then I could be retired on a beach somewhere. Why didn’t I have that cool industry changing idea? So let’s talk a little bit about that.

AMY BERNSTEIN: Yeah, so like the last one this, this is one of those articles I’d put in a category called How to Break the Rules Without Losing Your Shirt. To understand this notion of industry bottlenecks, think about Ryanair. Every airline seemed to assume that high price landing fees were just a cost of doing business in the industry. Ryanair said, no. It turned Europe’s unused World War II landing strips into low-cost airports.

SARAH GREEN: See, that’s the idea I wish I had had.

AMY BERNSTEIN: Yeah, no kidding. So think about Airtel. To be a cell phone service provider, you need to invest in the towers and networks and billing systems and so forth– very high cost stuff, right? Well, Airtel in India said no in at least just about every part of that ecosystem, and was able to lower its costs so dramatically that it could actually supply a not wealthy customer base with the service it needs.

So how do you figure out what rules to break? The answer is, according to the authors, that you focus on the big structural problems endemic to the industry. Don’t just look at your own company’s challenges. So think industry-wide.

And there are, of course, four ways you can do this, four common approaches. You can look at the bottlenecks around the outdated purchase or user experience. So think about what Bonobos did. It came up with Guideshop to address the frustration of having to visit the pant shop over here, and the shirt shop over here, and the tie shop over there. Guideshop offers a new service, which is a personalized appointment for fittings followed by online ordering assistants. Makes it super easy, right?

You can look for a superfluous major expense category. So think about Redbox. By eliminating payroll and location expenses of operating brick and mortar retail stores, Redbox with the automated vending kiosks– you see them in supermarkets and so forth– transformed the video rental business.

The high financial risks for customers– look for those and either reduce them or eliminate them. Hyundai during the recession found that its customers were really hesitant to shell out $20,000. $30,000, $40,000 for a new car because their finances were uncertain. So Hyundai said to its buyers that they could return the car if they lost their job.

SARAH GREEN: What I love about that story too is that it’s like almost no one actually had to use that contingency. It’s like it was this great thing they offered. And I actually remember wondering at the time, how many cars are they going to back? And then later, we find out actually not that many. And it actually did spur a lot of new car sales.

AMY BERNSTEIN: Well, this is why we measure consumer confidence, right? And then there’s this last one, which is the nasty ethical or environmental side effects of a product or service. And of course, Patagonia is the right example for this. It looked at the environmental damage and negative health impacts related to its supplier’s farming practices and sought to eliminate them. So it works only with suppliers of organic cotton.

The article lays out the strategies used by real companies for busting bottlenecks. And what it finds is that companies that follow these strategies boost demand levels and can eliminate entire cost categories.

SARAH GREEN: Well, it is another great article in a very rich issue. This being our July/August issue, we do have a little extra meat and potatoes in there since it’s a double issue. So definitely take this one to the beach and plan to spend a couple months with it. So–

AMY BERNSTEIN: On the beach.

SARAH GREEN: On the beach, why not? Makes it also double as a convenience sunshade. And I just wanted to mention we had a late breaking add to this one too, which was an interview with Sony Pictures CEO about the hack. So that is a late addition, and it’s going to be really interesting.

AMY BERNSTEIN: It’s super interesting, and he’s really candid about the kind of turmoil that the hack presented to the company and how he pulled the team back together and actually mitigated a lot of the damage.

SARAH GREEN: Well, Amy, thanks again for coming in today.

AMY BERNSTEIN: My pleasure.

SARAH GREEN: That was Amy Bernstein, editor of Harvard Business Review. For more, visit hbr.org.