Not so long before Berkshire Hathaway’s purchase of Apple baffled many, Warren Buffet puzzled many with the purchase of a regulated, capital intensive company, his largest ever in history. Considered to be atrocious, many of us wondered what led the G.O.A.T investor to change his style from scouting companies with low reinvestment needs to a high capital-intensive. Berkshire Hathaway’s aficionados will have intuitively known the company’s name by now – Burlington Northern Santa Fe (BNSF), taken 100% private in 2009 at a valuation of $ 44 bn.
“In earlier days, Charlie and I shunned capital-intensive businesses. We are today quite willing to enter businesses that regularly require large capital expenditures. The railroads got down and consolidated and got better control of their labour costs and it turned into a wonderful business. And what did we do? We missed it. We stumbled in very late to the party, right?”
– Warren Buffet at 2013 AGM
Frankly speaking, for an old millennial like me surrounded by compounders and tech stocks, it was difficult to fathom the thought of investing in a railroad. An important “investment principle” I emulate from the superinvestors I admire, is to read and understand the history of the industry as back as possible. Finally, before investing in one of the largest railroad stock company (prefer referring company instead of stock 🙂 ), I tried reading many books apart from every company filings.
To share my learning, this post explores the many facets of change in dynamics for the railroad sector through the lens of an American icon – Hunter Harrison. The post is largely in the form of a book summary of two highly recommended books:
- “Railroader: The Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison” by Howard Green.
- “SwitchPoints: Culture Change on the Fast Track to Business Success” written by two Canadian National (CNI) executives and two consultants.
Harrison, the originator of Precision Scheduled Railroading (PSR), started as a carman oiler at Frisco (later acquired by Burlington Northern) to become the CEO of four largest railroad companies, making billions of dollars for shareholders in the process of teaching the industry how to become profitable. The first book provides great managerial lessons (although controversial) and a gripping account of the inside story of Bill Ackman’s proxy war against Canadian Pacific (CP) to instil Harrison as its CEO. The second book provides an insight into the culture change at CNI, making it the gold standard of railroads. (Tip: Bill Gates is the largest shareholder in CNI ).
Over to the life and managerial lessons from Harrison:
I. Steve Jobs of Railroading
Harrison was a complex human being with an extraordinary career and a different management style. The author has done a great job by discussing all facets of his life, and accomplishments not just in broad brushstrokes, but also in the nuances—a portrait of the man as he truly was. Changing the culture of a railroad company with thousands of employees and a history of labor unionisation is no mean feat. From “Railroading genius” being an oxymoron to an adjective is a testimonial. That is the reason he was the Steve Jobs of railroading: uncompromising, unrelenting, fierce, antagonistic, confrontational, and a winner.
II. Illustrious career – turnaround specialist and pioneer of PSR
Starting as a labourer in a Memphis rail yard when he was nineteen in the early 1960s, Harrison rocketed upward to grab the topmost job of CEO at Illinois Central (IC). He held that position four times over an almost twenty-five-year span, turning around three major railroads: Illinois Central (IC), Canadian National (CNI), and Canadian Pacific (CP). Even after achieving successes as CEO of these firms, he was hell-bent on fixing a fourth railroad, CSX. Only nine months into that last assignment as CEO, he died, but he had already increased the value of the American railroads by billions.
A turnaround specialist, he was the pioneer of PSR, the operating philosophy that would become his calling card worldwide.
III. Feared and respected who read about winning coaches
- Innovator: That he could improve business with so many pieces—thousands of employees, locomotives, railcars, and miles of track—demonstrated that Harrison was a compound of an innovator
- Feared and respected: He invoked “the team” and studied great sports coaches of the modern era. While many CEOs love reading biographies of political leaders, Harrison’s shelves were full of books about winning coaches. Even though he drew lessons from all of them, he favoured the no-nonsense, tough-guy styles of the past—Vince Lombardi of the Green Bay Packers and Bear Bryant of the University of Alabama. Both were feared and respected.
- 80/20 principle: When he wrote the first manual at CNI, the railroad had more than 200,000 Originating and Destination (O&D) points. O&D points make the rails slow. He was quick to realise that 5% of these O&D pairs accounted for more than 80% of CNI’s traffic volume. Any average CEO would think twice before disrupting traffic of that magnitude. Contrarily, Harrison went on to optimize the 80% traffic first (or 5% of O&D) and let the remaining 20% pretty much takes care of itself.
- Saying no to customers: Early on, Harrison developed the ability to use a powerful two-letter word: no. He did not just use it with employees, but with customers, a counterintuitive approach in an industry that had always let the customer dictate railroad schedules.
IV. From an operator to a leader developing people
An important lesson that Harrison learned early in his life was to become a good leader he must spend time in developing people. Being good at operations is not a recipe for being a great leader. He was asked by his boss at IC, as to how much time he spent in developing people. “About 10% of my time,” Harrison said. “You’ve got it all backwards. You should be spending 80% of your time coaching and teaching and 20% on all the other stuff.”
V. Controversial: obsessed with creating shareholders value
The flip side of Harrison was that he was averse towards the corporate protocol. He had little patience for boards. Put simply, he considered them to be a pain, a waste of time and money. He was only obsessed with creating value. Anything that didn’t increase shareholder value he didn’t like.
The book has an interesting anecdote when Harrison was accused by the Board of seeing customers as an inconvenience. He cited a line from Steve Jobs biopic “I guarantee whoever said ‘the customer is always right’ was a customer.”
VI. Great writer – railroading bible
Like the traits we see with Jeff Bezos and other CEO’s who also are prolific writers, Harrison was no different. He wrote various manuals of PSR at CNI which are today considered as railroading bible. He was a perpetual teacher when it came to management principles. His books were even translated to Mandarin but still the Chinese were unable to emulate America’s efficiency in railroads.
VII. An early adopter of data and business intelligence
Importance of data was always utmost for Harrison. It was in the 1980s during his time as a VP in BN that he became intrigued by computers. Harrison was an early adopter of a system called COMPASS (Complete Operating Movement Processing and Service System), an online inventory tracker that told users where all the railcars were and whether they were on time. He was credited for giving importance to MCSM (Major Corridor Service Measurement), a system that tracked traffic patterns from origins to destinations (O&Ds). He was the only one who understood what the data meant. He could look at the data and know exactly what that meant from an operating perspective.
VIII. Origin of PSR – don’t spend a dollar of capital when all it takes is improving processes
MCSM was the first baby step toward Precision Scheduled Railroading, the philosophy for which Harrison would become renowned. For decades, freight trains did not run on schedules. They departed when a customer’s load showed up for shipment. Harrison would eventually change that, providing more predictable service and shorter transit times for which he could charge premium prices, as opposed to the commodity-like pricing that railroads had.
Thanks for reading!
If you liked this post, please stay tuned or subscribe below for my next post which will be a deep-dive of my investment process for the railroad company that I finally invested and railroad 101 (including PSR). Currently waiting for the exclusive period to end after posting at VIC. Always a pleasure to connect with fellow market participants (email or twitter) for collective learning.