Moments of Truth tells the story of the fantastic turnaround of Scandinavian Airlines under the leadership of CEO Jan Carlzon. Carlzon took the helm of SAS following a two-year period during which the company, once a world leader, suffered $30 million in losses. Within two years, under Carlzon’s leadership, SAS was voted “Airline of the Year” by Air Transport World. How he did it is the focus of Moments of Truth.
The “moment of truth” occurs in those 15-second encounters between a customer and the employee on the front line. In the airline industry, the moment of truth is when a passenger first checks in for a flight. The role of middle managers under the old system was purely administrative. Under a “customer-centered” organization, middle managers become leaders and facilitators to the frontline people who actually serve the customer. Carlzon’s method was to get rid of the horizontal barriers to communication and allow for more direct responsibility of the people who interact with customers daily.
TURNING IT AROUND
Carlzon begins Moments of Truth with an anecdote that vividly illustrates how important those few seconds are to a business that is customer-driven. One day American businessman Rudy Peterson left the Grand Hotel in Stockholm to accompany a colleague on a Scandinavian Airlines (SAS) flight to Copenhagen for the day. When he arrived at the airport he realized he had left his ticket in his hotel room. He knew that without a ticket he could not board the plane. But he was surprised to hear the ticket agent say to him she would issue a temporary ticket and send someone to retrieve the original ticket from the hotel room.
“I’ll take care of everything,” she said. A dispatched limousine brought the ticket back even before Rudy’s plane took off for Copenhagen. The protocol for a traditionally organized company would have required the ticket agent to consult with her supervisor before doing anything. That delay probably would have resulted in Rudy’s missing his engagement.
The incident exemplifies the turnaround in corporate attitude that resulted from Carlzon’s ideas. SAS was reoriented to become a customer-driven company, one that recognizes that its only true assets are satisfied customers–not airplanes, offices, or administrative procedures. The customer wants to be treated as an individual and not simply another number. The typical customer spends about 15 seconds with an SAS frontline employee. With approximately 10 million passengers a year, SAS is “created” 50 million times a year–that is 50 million “moments of truth.” Those moments are what ultimately determine the success or failure of the company.
Instead of relying on rules and instructions from distant corporate offices, responsibility must rest on those who represent the company during those 15 seconds, in Rudy Peterson’s case, the SAS ticket agent. Carlzon admits that such a change turns the traditional corporation upside down. The way most companies are structured resembles a layered pyramid with a pointed top, several intermediate levels, and a base connected with the market. At the top live the chief executive and a number of highly qualified, well-educated vice presidents.
The purpose of the top layer is to control operations by making all the decisions for the company. Under this system, the middle managers, spend their time converting top management’s decisions into rules, directions, and policies. Instead of making decisions within a sphere of responsibility, middle managers only relay decisions made at the top to the ground troops. It is these “foot soldiers,” both blue and white-collar workers, who have daily contact with customers.
FLATTEN THE PYRAMID
The traditional system worked fine in the past, before globalization opened up competition. In today’s business climate, the focus is not on productivity or the tools of technology. In customer-driven companies, the old structure does not work. What does work is a new structure resembling a flattened pyramid, with the employees on the bottom responsible for representing the face of the company to the public. Instead of the frontline employees obeying orders from the levels above their own, they are given the responsibility of dealing directly with the customer.
Carlzon began experimenting with new ways to change corporate structure from investor-centered to customer-centered when he was 32-years-old and was made president of Vingresor, a subsidiary of SAS. Vingresor assembles vacation and package tours. He had been selected president after six years working in various capacities. He had authority over 1,400 employees, yet felt his qualifications were no better than anyone else’s.
His first learning experience came when he began acting the way he thought a boss would act: issuing orders. After awhile he found it difficult to live up to what he assumed were the company’s expectations: that he was able to do everything. Carlzon realized he was making important decisions with very little knowledge, experience, or information. His employees noticed also, and it took a friend of Carlzon’s to tell him he was not expected to know everything and make all decisions. He realized what he needed was to create the right atmosphere for others to do their jobs better. He began to understand the difference between a traditional corporate executive, who issues instruction after instruction from the top, and a new corporate leader, who sets the tone and keeps the big picture in mind.
The early 1970s were troubled times for airlines. The oil crisis of 1973–74 escalated travel prices, leading to fewer charter trip bookings and loss of profits for Vingresor. As president, Carlzon’s job was to make the company profitable again. Traditionally, a production-oriented company in that situation would cut back on service. Often that decision would start a negative spiral by bringing in less revenue, which would engender more cuts, and so forth. Instead, Carlzon and his team tried to squeeze costs by weeding out those trips in which the company lost money. In addition, they restructured the entire organization to improve flexibility and to prepare for more customers should the market bounce back after the oil crisis. It worked. Carlzon’s first year as president resulted in the largest profit in Vingresor’s history.
After four years at the helm of Vingresor, Carlzon somewhat hesitantly took over the reins of another SAS affiliate, Linjeflyg, a domestic air carrier. The company catered to the business traveler, typically someone who flew out of Stockholm and back again the same day. Linjeflyg was losing money and desperately needed a strategy to turn it around. It was challenging, especially for the youngest airline president in the world at 36 years of age.
Carlzon began his new job by holding a company-wide meeting in an airline hangar, where he climbed a ladder and made a speech in which he admitted he knew little about Linjeflyg and he “couldn’t save the airline alone.” He urged the employees to “assume responsibility yourselves, share your ideas and experiences so we have more to work with.” His audience never expected him to ask for help.
Carlzon writes that the experience proved to him that nobody was asking him to stand up there and tell everyone what to do. The employees were “delighted” to hear their boss ask them to participate actively in the company’s future.
The future did not look bright. The airline had lost $3 million the year before, carried a passenger load of 50 percent, and actually put its planes in the air 4.8 hours a day when the international average was 7 hours. There was no company-wide strategy.
As a typical product-oriented company, 95 percent of its passengers were business people whose companies were resigned to paying the set fares. Carlzon’s first priority was to increase the number of flights, and the only way to do that was to increase the number of passengers. Linjeflyg already had the business market sewn up; the goal was to induce those business passengers to fly more often by offering more flights to more places. The overall business strategy Carlzon’s team came up with had four major points designed to convert Linjeflyg from a production-oriented company into a customer-driven company:
- Use fixed resources better; i.e., aircraft in the air more hours per day.
- Establish Linjeflyg as the world’s best airline in terms of passenger service.
- Spread responsibility among more people in the organization.
- Streamline administrative resources toward a more profit-oriented approach.
Accomplishing the changeover required a new organizational structure in the shape of a heart, with one half of the heart generating revenue and the other half incurring expenses. This would allow the market to direct the marketing department as to what the company should produce. Then the marketing department would direct the operations department.
The old way was to have engineers determine aircraft availability without taking into account the needs of the passengers. When Carlzon presented the new structure to an organization-wide meeting, the response was supportive and the employees were eager for change. The new Linjeflyg became the “New Domestic Airline,” offering “All Sweden at Half Price.” Sure enough, the number of passengers skyrocketed and the variety of passengers became much more diverse. No longer was the customer base exclusively business people but young people, retired couples, and entire families who took advantage of extremely low fares for mid-day flights. Of all the steps taken to revitalize Linjeflyg, the most effective was the slashing of fares. Off-peak rates were drastically cut.
That first summer, Linjeflyg began going after the young travelers. They initiated a campaign where you could fly standby to any of Linjeflyg’s destinations for 100 kroner. The sale was tagged “the Hundred Note fare” and became a favorite with young backpackers who had been using trains or busses to get to their destinations.
The airline made another change when it began to charge for the breakfast that used to be free, costing the company about $400,000. A full breakfast cost two dollars, coffee and a bun one dollar. Results were quick to show themselves–in the first year while fares dropped an average of 11 percent, revenues rose from $84 million to about $105 million, and the number of passengers increased 44 percent.
Such a success story would have been impossible under the traditionally organized company. Instead, Carlzon enlisted his employees to take responsibility for their own jobs and it worked. He learned to rely more on the frontline people who deal directly with the public and less on issuing edicts. In other words, Carlzon went from being a manager to a leader.
FROM MANAGER TO LEADER
After two years turning around Linjeflyg, in 1980 Carlzon took over as chief operating officer of SAS, a company that struggled with the market forces that left many airlines facing stagnant growth. When Carlzon took his new job, SAS was in the midst of its second year facing a $20 million loss.
Carlzon formed a management team with the goal of steering SAS to a new course, to make the company profitable despite the stagnant market. The strategy was to make SAS the “best airline in the world for the frequent business traveler,” since the business people were the only stable part of the airline market.
Traditional thinking dictated that, because of the condition of SAS and the market in general, the strategy should be to cut expenses across the board. Carlzon and his team decided to look at expenses in light of what could help attract business travelers. This included investing an additional $45 million and increasing operating expenses to $14 million a year to fund 147 different projects. These projects included launching a comprehensive punctuality campaign, improving the Copenhagen hub, and providing service courses for staff.
Carlzon launched the new plan in autumn of 1981, shortly after being elevated to the position of CEO. One successful change was the creation of a “EuroClass” that provided more and better service for full-fare coach passengers, mainly business people. EuroClass passengers were able to check in quickly and easily compared to regular coach passengers. The actions taken by the team resulted in a transformation that catapulted SAS into the spotlight. Air Transport World named SAS “Airline of the Year” for 1983, after it showed an $80 million increase in revenue and a profit.
LEADER, YES; MANAGER, NO
In an interview conducted by a Swedish newspaper, Carlzon reiterated his philosophy, saying that he believed responsibility should be delegated within a company so that individual decisions are made at the point of responsibility. Such a change involves creating a business strategy and communicating that strategy to the board of directors, unions, and all employees. This requires the skills of a leader, not a manager.
Many executives mistakenly believe they must know–or pretend to know–everything. Carlzon is an airline executive who does not know how to fly a plane or how to fix one. What a business leader needs to succeed is a broad understanding of how different elements fit together. He must understand the relationship between individuals and groups both inside and outside the company. This requires a “helicopter sense” of being able to rise above the particular and see the broader lay of the land. Today’s leader must manage not only finances, production, and technology, but human resources also. A good leader must define clear goals and strategies, then communicate them to his employees and train them to take responsibility for attaining those goals.
Many executives begin by devising goals and strategies, then later examining the general business climate and the customer’s needs. This is backward, writes Carlzon. How can a leader know what his or her goals should be if there is no clear picture of the environment in which they are working nor of what the customers want?
THE CUSTOMER COMES FIRST
The first step in turning a company around is to orient it to the customer’s needs. But finding out what customers want is not always easy. At Vingresor, the subsidiary company that books tours, Carlzon realized that the growing population of senior citizens was a good target. So he and his team sat down and made up a list of things to do to cater to the needs of older customers. But when they went directly to their customers for feedback, they found that all the thinking from the pyramid’s top down missed the target. Seniors did not want special food and special accommodations. They did not want to be ghettoized.
Carlzon writes that when he took over SAS he had to question exactly what business it was in. Was it in the airline business or the service business, with the goal of transporting people safely and efficiently? It is common for airlines to buy new aircraft as a way of remaining competitive. At about the same time Carlzon came to SAS in 1981, the airline had just received four new Airbuses at a cost of $120 million and had ordered eight more. The new aircraft were to replace the DC-9s. The new planes had been purchased on the basis of forecasts of an increasing passenger load. But the oil crisis had undermined the forecasts so that the only way the new Airbuses could be used economically was to provide poor service to the same business travelers the company was trying to attract as the “best airline for business travelers.”
Carlzon learned that customers wanted SAS to continue non-stop service from Scandinavia to Europe, a service not possible with the larger Airbuses, which would result in less frequent flights that would have to go through Copenhagen hub. It was yet another classic example of decisions made from the top down instead of from the customer’s point of view. The Airbuses were mothballed and a new generation of DC-9s was ordered.
For Carlzon, the Airbus incident illustrated a gap between a customer-driven and a production-oriented approach. In a production-oriented company, decisions are motivated by product and technology considerations. A customer-driven company begins with the market and lets it guide every decision, every investment, and every change.
FLATTENING THE PYRAMID
By flattening the traditional pyramid structure of a company, more responsibility is given to the team of employees on the ground interacting with the customers. These teams are the people who take on problems as they arise.
Under the hierarchical structure, if a passenger on an SAS flight pre-ordered a special vegetarian meal and wanted to know if the meal was on the plane she would not be able to get an answer from the ticket counter, the gate attendant or the stewardess. Under the traditional company structure, everyone has their jobs but no one has the authority or autonomy to step out of the routine and take care of the customer. In this case, three “moments of truth” would occur without a productive result.
With a less hierarchical structure a team of SAS employees would be in charge of the flight from start to finish. When the customer requested information on her vegetarian meal a team member would have the authority and access to the information to find out whether or not the meal was on board.
For example, one day when snow delayed an SAS flight. The purser decided on her own to compensate the passengers with free cups of coffee and biscuits, circumventing regulations that prohibited giving extra food than was allotted to that flight.
Flattening the organizational pyramid will improve any company that deals with the public, not just those in the airline industry. Taking such a step requires leaders to take risks. With all the changes Carlzon’s team made at SAS there were still no guarantees of success, but he cites three keys to successful leadership: intuition, courage, and conviction.
In the traditional hierarchy company leaders are skilled at finance, economics, or some other technical expertise, able to find 10 solutions to any problem, but lacking in the ability to proceed with a decision. They are good at analysis but overlook the big picture. To succeed in executing a new idea requires a leap of faith. Carlzon cites the lowering of prices at Linjeflyg as a big risk that paid off because it was a substantial cut not just a token public relations ploy.
Another risk faced by SAS occurred when it launched EuroClass in the face of strong opposition from other European airlines. One of those airlines was Air France, which the previous year had launched its Classe Affaires, also geared to the business traveler. Unlike the EuroClass, the French offer required the payment of a surcharge over the regular coach-class fare. Air France complained that EuroClass was competing unfairly by not charging extra for its business class. What erupted was no less than a trade war with France dropping out of the various civil aviation agreements linking the various national air carriers in Europe. Things escalated until, in 1981, SAS settled with Air France after respective foreign ministers met to work out their differences.
Carlzon makes no claim to having discovered a unique way of doing business by restructuring and reorganizing SAS. There is nothing new about keeping an eye on the overall business climate and aligning the company’s goals, strategy, and organizational structure with it. But empowering employees with real responsibility and authority requires a horizontal organizational model and a true redefinition of work roles. As an example, Carlzon uses the story of two stonecutters chipping square blocks out of granite. When asked what they were doing, the first stonecutter grumbled, “I’m cutting this damned stone into a block.” The other stonecutter said, “I’m on this team that’s building a cathedral.”
A worker who can envision the whole cathedral and has been given responsibility for his or her portion of it will be more productive. A good leader is one who designs the cathedral and then shares the vision that inspires others to build it.