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Taking the Measure of Agilent

January 4, 2007
Related Topics: Human Resources Management Systems (HRMS/HRIS), Featured Article
A few years ago, Agilent Technologies was the measurement company that wasn’t measuring up.

    A maker of testing tools for a variety of industries, it posted billion-dollar losses for two consecutive years, including red ink to the tune of nearly $2.1 billion for the year ended October 2003. Corporate strategy was diffuse and employee development unfocused.

    In response, Agilent launched a makeover in 2005 with a new CEO and a strategy targeting several business areas. A key piece of the plan has been attention to the skills and potential of the firm’s top 100 leaders, including a recent high-stakes assessment by an outside consulting firm, which compared the capabilities and promise of Agilent execs with those of industry peers.

    Partly as a result of the external review, a third of Agilent’s high-level executives have left their posts in the past two years. New CEO Bill Sullivan makes no apologies for roiling the leadership ranks.

    At a Conference Board seminar in May 2006, he portrayed his mission as injecting a new sense of urgency and accountability into a culture that Agilent inherited originally from venerable Silicon Valley computing giant Hewlett-Packard. That culture had been collegial and upstanding, but at times slow and overly forgiving.

    "The people who don’t deliver have to be replaced," he says.

    It’s not surprising that a firm devoted to measurement products should use an outside yardstick to evaluate its executives, a practice on the rise these days. Still, Agilent has won praise for the way it tackled leadership assessment and development.

    Sullivan and Agilent’s chief learning officer, Teresa Roche, stand out for being at once hard-nosed and kindhearted with their executives, says Louis Carter, president of research firm the Best Practice Institute.

    "Their emphasis on results, measurement and consistent cultural change is really second to none," he says.

    But Agilent hasn’t earned an "A" yet. Wall Street analysts worry that the company faces meager revenue growth. Agilent also confronts the challenge of extending leadership training to several hundred lower-level managers spread across 40 countries.

    Sullivan isn’t satisfied with the progress so far. Despite higher profits, he told the conference audience in San Diego that signs of success include revenues that outpace the market, superior shareholder return and industry-best leadership, as judged by employees. "The verdict is still out," Sullivan said. "Will Agilent really become the premier measurement company in the world?"

Shift in strategy
   Agilent’s roots date to the founding of Hewlett-Packard in 1939. The first product from Bill Hewlett and Dave Packard was an instrument used to test sound equipment. In 1999, HP spun off some of its business as a new company, Agilent. It initially encompassed test and measurement equipment, semiconductor components, chemical analysis and medical products. Despite raising $2.1 billion in its initial public offering in 1999, the company soon hit tough times. It lost more than $1 billion in the year ended October 2002, and the bleeding doubled the following year.

    As a result, the company shifted from the catch-all strategy of being a "diversified technology company" and decided to concentrate on two areas. The first and largest chunk of Agilent’s business is electronic measurement, which includes products it says test 70 percent of the world’s cell phones. The second is "bio-analytical" measurement, which includes products for genetic research and environmental testing.

    In 2005, Agilent sold its semiconductor products group, and last year it spun off a division that makes test systems for the semiconductor industry. These actions, and more than 15,000 layoffs in the past several years, have halved the company. Revenue for the year ended October 31, 2006 was 5 billion, compared with $10.8 billion in 2000. Agilent’s headcount has dropped from 47,000 in 2000 to some 18,500 today.

    But the company returned to profitability in 2004, and some key financial indicators have been ticking upward. Operating profit has doubled year-over-year for the past three quarters, and return on invested capital--a measure of value created for shareholders--has nearly tripled since early 2005.

    Even so, the company isn’t wowing investors. Agilent stock is trading around $35 a share, roughly the same price as at the beginning of 2006. A recent report from Banc of America Securities retained a "neutral" rating on Agilent shares and forecast that company revenue will grow in the "low single digits in 2007." Banc of America analyst Mark Fitzgerald said a key for Agilent is to expand its bio-analytical business.

    "To build a more exciting growth story, we think the bio-analytical segment needs to increase as a percent of the mix," Fitzgerald wrote in the report. "Acquisitions will likely be the source of growth for this segment."

"You’ve got to have a number"
   Sullivan, obviously, is at the heart of whether Agilent will win over investors, customers and employees. A veteran of HP and Agilent for 30 years, he took the company’s reins in March 2005.

    Despite his insider status, Sullivan has proved willing to shake things up, starting with the decision to sell the semiconductor products group he once ran.

    Given the importance of leadership development, Roche also plays a key role in Agilent’s turnaround quest. Roche worked closely with Sullivan in the early 1980s at HP, left that company in the late 1980s and joined Agilent in 2002. Sullivan persuaded Roche to join Agilent, but she wasn’t impressed with what she found. Leadership development was scattershot, with the only formal program focusing on first-line managers, Roche says.

    Under Sullivan’s direction, the company put a new emphasis on top executives, including the general managers responsible for financial results in various units. The company’s executives, Sullivan told the conference audience, have to be able to set strategy, build up the organization’s capability and deliver results. What’s more, he said, goals have to be measurable. "If you can’t put a number next to something, it’s a waste of time," he says. "You’ve got to have a number or it gets too soft."

    Agilent set out to evaluate its senior leaders with an internal appraisal of general managers by their superiors based on business results, leadership capabilities and potential. The company’s leaders also are regularly assessed through a quarterly leadership audit survey taken by employees, which analyzes engagement at the company and confidence in managers.

    Agilent also turned to consulting firm Egon Zehnder International for an outside perspective. Egon Zehnder, which specializes in assessing and recruiting business leaders, evaluated Agilent general managers and compared them with industry peers. The rating involved a review of the executive’s professional and academic background, a structured interview and confidential discussions with superiors, peers and employees.

    Not surprisingly, Agilent found it had some better-than-average executives, many average leaders and a few that lagged behind their external peers. Still, Roche says, the scores proved useful.

    "The information helped the company make decisions about how to structure the organization and who were the leaders to help the company going forward," she says. As a result, Roche says, about one-third of the top 100 executives are no longer in their positions. Most were reassigned, and some left the company.

    Guidance for the restructuring wasn’t the only payoff from Egon Zehnder’s services, Roche says. For one, the message went out that "the bar has been raised," she says. In addition, she says, the external evaluation helped executives think about key leadership questions, such as how grooming lower-level managers can have a big impact on their business results.

    Bob Burns, vice president and general manager of Agilent’s nanotechnology measurements division, was evaluated by Egon Zehnder in August. The review was similar to other 360-degree feedback assessments he had experienced. But the heightened emphasis that came with using an outside firm caused him to "take it even more seriously than I might have in the past," says Burns, whose division makes products used to help etch semiconductor chips as well as devices for manipulating atoms.

    To Burns, the most valuable part of the evaluation was the way it helped him focus on the essential skills for running different businesses.

    "It caused me to think more deeply about this aspect in my direct reports," he says. An emerging business requires risk-taking and vision, while expertise in operations is vital for a stable, mature business, he says. Burns has both sorts of businesses in his division, which employs about 250 people and generates annual revenue of more than $100 million.

    In the wake of the appraisal, Burns elevated a controller with strong strategic thinking skills out of the already mature business related to semiconductor lithography and gave him responsibility for the growing business in precision optical products.

Big investment
   Agilent put serious money into the outside appraisals, Sullivan told the conference audience. "It is not cheap to do an external assessment," he said. Agilent wouldn’t specify how much it spent on Egon Zehnder’s services. But another prominent assessment provider, Personnel Decisions International, says clients can expect to pay about 2 percent of an executive’s annual salary for an appraisal—or $3,000 for an exec who is paid $150,000 a year. At PDI, assessments can include interviews, personality testing and business simulations.

    These sorts of external evaluations of corporate leaders are becoming more common. PDI says its revenue for executive assessments has been growing 20 percent to 30 percent annually in recent years. Jim Walker, a leadership development consultant, says comparing senior managers against other business leaders outside the firm can serve as a wake-up call. But, he says, a more useful approach is identifying the specific skills needed by executives at a firm, and helping leaders hone them.

    "I’d put more money on development and less on measurement," he says.

    In terms of time and money, Agilent has invested more in development than appraisal, Roche says. In particular, the company’s turnaround plan under Sullivan has featured two major training efforts for executives. The first was a general manager "boot camp"—in Sullivan’s words--lasting three and a half days. Through this program, roughly 100 people learned about Agilent’s expectations for leaders, talked about the role of Asia in Agilent’s business, and came up with a profit improvement plan based in their actual business.

    The second development program, dubbed the strategic leadership forum, brought teams of leaders together to talk about closing specific performance gaps or going after new opportunities. A total of 156 people attended two sessions earlier this year. Burns said this process, facilitated by consultants from IBM, led him to form a new group to create a companywide nanotechnology strategy. Inspired by this experience, Burns also is focused on being a leader in mergers and acquisitions, a major component of his unit’s strategy.

Battle isn’t over
   Whether through acquisitions or organic growth, Agilent still faces the test of ramping up revenue. And despite its new concentration on measurement matters, Agilent confronts a wide range of competitors, from electronic equipment tester Tektronix to life-science specialist Applied Biosystems.

    On the leadership development front, Agilent aims to bring its "boot camp" program to lower-level managers. By the end of 2006, the company planned to complete sessions for some 320 senior managers who rank just below the top 100 or so executives. And in December, Agilent started a program for roughly 750 middle managers worldwide. Overall, Roche says, leadership programs must embed training in real job experience.

    "They are a part of work, not ‘apart’ from work," she says.

    Despite its challenges, Agilent is on the right track to succeed, says Carter, whose Best Practice Institute focuses on leadership development and organizational change. He picked Roche to be on his board of senior executives, along with leaders from companies including the Gap, Best Buy and Johnson & Johnson. The institute also recently selected Sullivan as one of the top 25 CEOs. Agilent provides BPI with an undisclosed membership fee for service, but Carter says his high regard for the company has nothing to do with that financial contribution.

    Roche says Agilent is restoring the best aspects of HP’s legendary culture. Sometimes dubbed "The HP Way," it is understood to be a climate of integrity, innovation, accountability and respect for the individual. Those values are alive at Agilent today, Roche says. "I feel like I’m back at what caused me to choose HP in the first place," she says.

    HP itself has been accused of losing the HP Way in recent years, most spectacularly in its spying on people during a botched probe of leaks to the press. HP chief executive Mark Hurd is seen as trying to recover the company’s culture.

    Agilent may have a jump on its parent company, Burns says. Dave Packard was famous for holding people accountable, even as he gave them freedom in how they met their objectives, Burns says. Bill Sullivan is working to establish the same environment, he says, by preparing leaders and then getting out of their way.

    It comes down to a philosophy of trusting in people and expecting them to achieve great things. "If that’s what you believe," Burns says, "the quality of those leaders is everything."

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