Trails Less Travelled: Innovation Lessons from former CEO and Chairman of Pitney Bowes, Michael Critelli Part 1

I look for a corporate legal department position considered a much less prestigious and lucrative career path in nineteen seventy nine when i joined Pitney Bowes in stanford connecticut, in fact one partner at my law firm told me that the pay would certainly top out at about fifty grand a year. As for Pitney Bowes the feedback i got from my law firm colleagues was that it was in a dying communications medium.

Mail although mail volumes have declined in recent years because of the significant reduction in consumer credit related volume as well as the long slow decline because of the gradual substitution of electronic communications mail volumes are still far higher than they were in nineteen seventy nine in seventy nine i had another offer from another corporation which would have paid me more. But i like to Pitney Bowes values in fact when i ask the person who hired me david o'hearn.

Why he was in the company he said these are generally nice people who try to do the right thing. At Pitney Bowes, I did not expect to move up in the legal ranks but one colleague ahead of me left the company and another passed away both were friends and mentors.

Fortunately george harvey the company's chairman and ceo and the outgoing general counsel ed harris both of whom were very supportive of me, felt strongly that the general counsel should come from inside the company they gave me a chance to do the job in nineteen ninety another moment of truth happened in my life when george harvey offered me the chief human resources position as an additional responsibility almost everyone who's advice i sought including a few highly

successful ceos told me not to take on the role because it was like driving stressfully down along dead end street in nineteen ninety three i left the stressful but relatively safe set of corporate staff functions behind forever to take over the responsibility for Pitney Bowes financial services. To my surprise only 13 months later after changing a lot in a short period of time i was named vice chairman i was told i would become ceo when mr harvey retired.

I commend the Pitney Bowes board and mr harvey for taking a chance on me based on the track record i was nowhere near the most qualified but they selected me based on my potential. On may thirteen ninety ninety six i became ceo and in nineteen ninety seven became chairman as well.

i stayed as ceo until may fourteen thousand and seven exactly eleven years and one day after i became ceo, it is a challenging time to be a ceo the internet nine eleven the recession and the decline in single piece first class mail all happened during my tenure.

We also made other fundamental changes such as the closure and sale of original main manufacturing plants and headquarters in stanford connecticut in fact the tower that carried the neon sign that stood for over forty six years was demolished in two thousand and eight a lengthy but short version of his biography there a man who is a polymath a humble leader, and a man who has traveled many roads less traveled former chairman and ceo of Pitney Bowes Michael Critelli welcome to the show

Before I took over as CEO, my predecessor George Harvey, recognized that we needed to think about long-term, future of mail. So we retained the Institute for the Future, which Ian led at the time in 1993. And we looked at a variety of scenarios and alternative strategic paths and what we came to realize was that it was most important, not just to have a credible strategy.

That we believed we could execute on, but one in which our the customers, investors and communities and employees believed we were achievable by Pitney Bowes. One of the things we ended up doing as a result of that work, which spanned about eight years was that we brought in a new chief marketing officer. And we said, in effect, mail may be what we are the dominant figure in. But it's perceived as declining. Messaging, which we could do is perceived to be growing.

We don't have the brand permission to do that. So we came up with a very clever work around called Mailstream solutions. So I took a page out of the playbook when IBM used e business, and we said, the Mailstream is something that Pitney Bowes can play in, can be believed to be a leader in. And that if you looked at the total market from end to end, it's about a 200 to 250 billion dollar market in which our market share is about 3%.

And if we move into adjacent spaces from where we were, we would have credibility. So we did about 80 acquisitions of very sizes and little by little, we got redefined as Going from a mailing company to a mail stream solutions company. I think what was different about how we did it as we didn't do one big, all encompassing move, but I use the analogy of a game of dominoes where one side has a tile that matches what's already on the board. So matches to what you already have.

And the other side is something that expands. And that's the way we thought about it. I use the dominoes analogy on many conversations that you have to little by little expand beyond where you are so that people believe you can succeed in it.

It's a brilliant read, particularly from the benefit of hindsight now and how things panned out and a lot of what you were thinking back then including the work you were doing with institute for the future, but on the screen for those people who are watching us there's a great diagram that mike has as the lead image in that article and you start this.

Article by saying company investors board members senior executive leaders and the media routinely ignore an inside based best captured in general and president dwight eisenhower's quote in preparing for battle i have always found that plans are useless.

Planning is essential and you go on to say here competition and business markets like wars of many unanticipated twists and turn a single fixed strategic plan has to be frequently change to adapt to external conditions i thought that was brilliant Mike because.

If you think about the strategic process and you weren't like this, I can see from a lot of reading about you that you were constantly adapting and tweaking the strategy, but most companies bring in outside consultants, come up with a strategy based on best practice, et cetera, and then the whole organization gets behind that strategy, almost like getting behind a big catapult and then stay there until the execution of that strategy.

Even if the market conditions change and this was something that you were acutely aware of back when you were writing these articles and when you're in Pitney Bowes.

Various points in time was whether we were going to get into the preprocessing or what's called pre sorting of mail. Postal service outsources a lot of its work, but they do it in a very quiet, deliberately opaque way so that they don't arouse the ire of congressmen and the media. So they basically say, similar to, you're getting a self service discount at a petrol station or gas station. If you do work that we would otherwise have to do, we'll give you a discount.

And we looked at this in the 1970s when the first discounts were announced. And again, in the 1990s and , I remember going to the head of the mailing business. In about 2000, and I said, shouldn't we be in the pre sort business? And he said we've looked at this multiple times. And frankly it's a low margin business that is hyper competitive and not really consistent with how we like to do business.

I spoke to someone, actually the co chair of the mailing industry task force, the deputy postmaster general at the time, John Nolan. And he said, you should look at a company called the PSI group and recognize that our regulations and our pricing pre sort discounts have changed, which they did in the late 1990s. And all of a sudden this unattractive business properly framed and structured could be very attractive.

And in fact what we learned is by bringing in An in house economist and hiring an outside economist, we could widen the discounts and we could make this into a business where scale worked and we ended up by the time I retired pre processing about 15 billion pieces of mail and having 20 percent operating margins.

And this came out of the fact that we didn't just one snapshot, I continually looked at where the regulations were going and similarly I looked at the direct mail print shop market, which was considered unattractive for a long time, but the the advent and advances in High speed digital printing made it possible for smaller firms to outsource their mail to these print to mail shops.

And it was a market we would then have to be in, as opposed to the large high volume transaction mail where you get your credit cards processed at places like JP Morgan Chase or Citigroup or Capital One, all of which were customers of ours. But we knew that the growth was going to come from direct mail marketing. And some of it was going to come from low to middle volume direct mail solicitations.

And I learned this from getting an envelope from a not for profit organization that had a Pitney Bowes postage meter in its mail room, but was using a competitive postage meter because it had outsourced the invitation to an event and all of a sudden the light bulb went on and I said, , there's something going on here. And , we went out to that print shop and learned that Xerox's new digital printer had made it economical for a 1000 piece mailing to be done digitally.

At a small print shop and the competition had the stronghold in that kind of market, but within a few years, thanks to organic investments and acquisitions, we became the market leader. So I learned that you had to do a lot of visits to our field operations to our customers reading about marketplace changes even things beyond our industry. All of that was something we had to continually do. And that's why this diagram is so applicable. It's not a, it's not a one time decision.

It's a continuous adaptation to things that we learn and some of which we caused to make happen in the market.

But, the problem you say is that most leaders will copy cat other leaders because they don't want to be the ones that stand out and look to be swimming against the tide.

That our health care costs had doubled over the previous five years, and maybe with the innovations that the benefits department was coming up with through the third party benefits consultants, because we have, obviously, in the United States, a large self insured employer market, we might be able to reduce the 12 percent increase to 10 percent per year, which would mean that our costs would double in seven years instead of six years, which is not sustainable.

And I got an audio tape of a speech by a researcher at Dartmouth. And the gist of the essence of the speech was there was no relationship between what communities spent on health care and their health outcomes and for individual kinds of medical problems. There was, in many instances, a 5 to 1 spread between the highest spend community and the lowest spend community. But sometimes the low spend community did better.

And so I then said to my team, and I ended up having to replace the benefits team completely. What are the low spending communities doing and how do we create a self insured health plan that learns from what low spend high performance communities are doing? But the people who had been in benefits and the benefits consultants.

It was too easy to just say everybody's doing this practice or that practice and nobody was looking at out of the box solutions, including a more expansive understanding of the value of investing and keeping healthy people healthy and all the benefits of doing that they were looking at it just in terms of health care cost reduction. But when you add it in Reduced absenteeism, reduced disability, reduced workers compensation costs, improved productivity.

The investment in health became compelling and it became compelling, not just in reducing healthcare costs or healthcare related costs but really a culture in which people performed better and made fewer mistakes on the job, stayed longer at work. There were just so many benefits to me focusing on that. And, but the signal was that one audio tape, which if I hadn't gotten, I wouldn't have known it existed.

Nobody was feeding that to me and telling me, this is something you need to pay attention to. But I picked up on it. And I believe a lot in the use of the bell curve and looking at outlier data. At both the top and the bottom of the bell curve and seeing how revealing it is. And I do that, not just on business stuff, but issues like how people look at climate change, for example. Or how they look at many other issues. You got to look at the anomalies as well as the center of the bell curve.

And you listen to that data and actually made a huge change to the business because most of your team had said there's no money in this. It was the revolving credit business and you were like, this Lisa's pipes up and says, no, I disagree. And you listened to her. That's huge credit to you, but also it shows that Lisa had psychological safety to be able to pipe open say this and then be listened to

Why would they take 1 percent interest when their treasury department can earn 3 percent on overnight money? And her answer, which was, I give her credit for arguing back, was they want control. They want to know that when they have to send bills out at the end of a calendar month. Or whenever their billing cycle is that the money's going to be in the postage meter and they don't have to wait for a treasury department infusion of cash into their machines.

And so there's a penalty that they're willing to pay in order to have control of their funds and their operations. And that's a profound insight. People mid to lower levels in organizations. Have a different set of drivers than the top of the organization. And you have to remember that's by the way, what I learned you in the introduction, you referred to the fact that the clients determine what's valuable.

I found out that the guy who did make partner instead of me was attuned to the fact that the clients were not as focused on the economic value of the work I was doing as they were on removing the aggravation factor of small legal problems that family members got them into. And I realised that people are motivated, there are a whole bunch of emotional support and people's concern about their careers. They really matter.

And back in 1994, when we had a One of the most profound comments that I take with me to this day was in answer to a question, George Harvey asked the most senior sales leader who kicked off the breakfast. He said, what's the secret of success for you in sales? And he said, the secret of success is I turned 30, 000 a year, mailroom managers into 100, 000 a year VPs of administration. And he realized that a lot of success.

When you're calling on business customers is not the economic value or the the big ticket value. It's are you, do you have the customers back? And let me just tell another story along those lines up. And this is an adaptation story as well after the 2000 presidential election, which, of course, was well publicized as a disaster in terms of Florida's management of the voting.

Particularly in Palm Beach County, Florida we said to our team, look at where we can play with the funds that are, have been made available under the 2002 Help America Vote Act. And so we developed an end to end vote by mail system called ReliaVote, and we launched it actually in Arizona, and then in California, and then in Florida. And we happen to be in Palm Beach County in 2006, and the city messed up and not mailing out the ballots to about 700 people.

And it not surprisingly, because of the history of mess ups in getting voting by voting done in Florida. This was a headline story in the Palm Beach newspaper. And in fact, it had nationwide coverage. And the question, and it wasn't our fault. And the question was, how are we going to handle this from a public relations standpoint? And, my business unit had said, it's not our fault. We should tell people it's not our fault.

And I got very wise advice from somebody whose company we bought the year before. And he said, you don't blame either Palm Beach County or say that we're to blame, just say it's not constructive to figure out who's to blame, but we will take responsibility to make sure this gets fixed. And the most important thing about that is not that we solved the problem.

It's that we sent a message to the government officials that we had their back and we gave them the credit when it worked out and we basically took the frontline criticism. And we sold that business that's part of about six years ago. But the company that was spun off, it's called Blue Crest. There's still the vendor to Palm Beach County that rely a vote still there 16 years later. So that worked. And that's one of those insights that you'll learn about business to business.

You're serving emotional needs as well as the business needs that people have.

line employees have the opportunity to ask questions and that's something that we've seen in recent years with some forward thinking organizations but you say you're the great leaders of successful businesses are humble and accessible. People who tell them what they need to hear that's not the case usually there away in the ivory towers away from people and having these filters of information coming their way.

He took a dedicated elevator up to the executive floor. And we had an actor who had been in the Harry Potter series Tom Felton, who played Draco Malfoy, and he told me he had never seen any of the Harry Potter movies. Now, how could you possibly be an acquisitions executive for a studio and not have watched movies that did as well as the Harry Potter franchises? It's mind boggling, but I learned that it's amazing what people will tell you.

And I did one further step that my predecessors did not take. In field office town hall meetings, you have sales, customer service and admin. Salespeople historically dominated those meetings. They're very outgoing, aggressive. They're always in a selling mode and the customer service people they hold back cause they're intimidated. So I would meet in advance with the customer service management.

And I'd say, I want somebody to ask me a very challenging question so that I can respectfully acknowledge it and congratulate him or her for asking it. And I want to give the sense that they have permission to ask challenging questions and that came in very handy in 2004, because we launched a new line of products. And we cut our service staff too deeply thinking that the products were more reliable and that there wouldn't be as many service calls.

And fortunately, the service people laid into me and said, we cut back too fast. And I got very good feedback. I went back to the national customer service vice president. And I said, you gotta build back the staff at least temporarily until the products have the reliability that was forecasted in the business plan. But I wouldn't have heard that if I didn't say to the manager, I want somebody to ask me a challenging question and if it opens the floodgates, so be it, I need to hear that.

And I'm going to quote a little piece here that I'd love you to expand upon. You say, "great leaders delegate to those who can do the job best. However, they always understand that there are key signals and metrics that they have to monitor closely. The art of leadership is to discern what should be monitored by the most senior leader and what can be delegated". So they can get away from it a little bit as well.

And I said, I Karen, who is our group president told me what we learned from losing the Bank of America deal. And he said she's right. Everything she's told you is accurate, but there's another piece to this you need to understand. A year before this contract decision was made, the Bank of America called us in and was probing to see if we were willing to reduce our price and and they would perhaps extend the agreement without going through an RFP.

We were unwilling to reduce our price at the time because we thought we knew better what they needed and they then moved forward to do a request for proposals and we ended up losing a year later, but he said the real seeds of this ultimate failure were sewn a year before the decision was made. And I learned a lesson from that, which is customers typically don't automate, you don't wake up one day and have them say, we're going to go to a request for proposals.

There are usually encounters before that, where you got to pick up the signals and I spent a lot of time when we talked about our major accounts even when I visited some of those accounts in the middle of a contract saying, what do we need to do now that we're not doing, even though we just won a big contract from you last year. And earlier that year, I visited the California Department of Human Resources, which was a big production mail customer.

And the I spent a couple hours with them and I asked that question and the guy who ran the center, his name was Mark Grimm, somebody we eventually hired by the way, because I really liked his thinking. He said, you should send somebody out to live with us for a month and just see how we do things. Because that's the best way for you to learn what things you could be doing that you're not doing. I can't answer that question today.

But if you sent somebody here who was around, not just for a two hour visit like you or a salesman or a service technician, but somebody who's watching us work and interviewing us. And I went back from that trip and I met with the head of advanced concepts. Go to Beadaholique. com for all of your beading supply needs! And he said, I've been thinking about the same thing. Are you receptive to the idea of hiring a couple anthropologists? Cause they're really good at this stuff. So we did.

And that guy left Pitney Bowes some years after I retired, he went to Goodyear, the anthropologists followed him there and we learned so much from watching people and interviewing them. There's things they don't tell you. There was a great book that I read somewhere along the way. I can't remember when, but it was by the not long since retired chief technology officer at Xerox named John Seely Brown. And it was a chapter in his book called tacit knowledge.

Meaning what are things that people do, that are habitual and they don't think to tell you that, they need to be changed. They assume that these are unchangeable. So when you have anthropologists and you're observing people and talking to them, you uncover these unspoken needs that you wouldn't find in a focus group or in a debriefing.

So part of the weak signals are not just things that people tell you, but things that somebody observes that are not talked about because they're believed to be unable to be changed. I'll tell you the one thing that we missed on my watch, but it didn't happen until after I stepped down from the CEO job, for decades, people had predicted that mail volumes were going to decline and there was one week signal. Which I picked up in 2008, but didn't understand its significance.

And that was this consumer credit bubble. And I picked it up by visiting two mailrooms in Boston Northeastern university and Berkeley school of music. And I went to both places on the same day and right at the, right after the end of the school year. So the students had left. So I walked into both mail rooms and there were these big vats. Of mail that had to be either forwarded to them or thrown out under.

I don't know the way mail is processed when people move in Ireland, but we have first class mail gets forwarded. What we call standard marketing mail, like catalogs do not get forwarded. They lower rates, but the post office makes no commitment to forward them. So there were these two big vats, first class and standard mail. And what astounded me about both vats of mail was that here you had college students getting catalogs from very high-end luxury goods marketers, like Gucci.

Handbags Nordstrom's Bergdorf Goodman, a high end vendor. And I was thinking, and I asked somebody there, somebody in the mail room, I said, are these kids that credit worthy? And they said, no, they get a lot of credit cards thrown at them and their parents don't have to don't have to guarantee the debts on the credit cards. And of course. That was part of the consumer credit bubble.

What I didn't know, and nobody else knew because the Postal Service did not capture data like this, it was about one third of about 30 percent of first class mail was basically excess credit card billings and credit card solicitations. So if you knew that bubble had to burst. You knew that there was going to be a big drop off in first class mail volumes when the credit when the credit bubble hit, which it did a few months later, but there weren't a lot of other ways of knowing that in advance.

And if I had it to do over again, I probably would have tried to dig into, there were stories out there about zero down payment mortgages and home equity loans and auto leases where people didn't have to put any money down the size of that credit economy. No one was looking at it and understanding its impact on mail. And I hate to say it, but my successor at Pitney Bowes and the board also didn't understand it because the Postal Service got it wrong.

They kept saying, oh, it's electronic substitution, it's emails. And a few years later, they finally hired Booz Allen to do a study. And Booz Allen pointed out what I've just said. It was a, it was the bursting of the credit card bubble. But they lost a few years before they picked up on the fact that was going on.

You might be waiting cause the supply chains are so disrupted ever since the pandemic but it just shows the complexity of things that something is connected that you might not see and these are often disguised as Mike said, as a weak signal, i thought it might be a nice way to segue then to something that you write about which is when the digital commerce strategy didn't work.

The company still stuck with it instead of pivoting and this goes back to that diagram where mike said you're never finished the strategy it's not like there's a destination there's just a vision for the future but you have to be very agile about how you're going to reach that one.

The bigger problem was exiting the external finance business, which we had been in since 1982. And we did take a charge against earnings in 2002 from the crash in the domestic commercial airlines industry, United airlines, and. U. S. Airways both went into bankruptcy and the other four majors at the time threatened to go into bankruptcy. And we took a 213 million dollar charge against earnings. But I had a lot of trouble getting our board to buy.

At the time we had a board meeting and the chairman of the finance committee said. Let me try to understand this. And I wasn't at the finance committee because the only meeting I missed in 11 years, I was in Brussels at a meeting of the international postal corporation. And I thought the finance committee would rubber stamp a recommendation to get out of the external financial services business. They said, let me try to understand this. We're going to lose revenues.

We're going to lose profits. We're going to lose cashflow and we're going to lose absolute return on investment. Why would we get out of this business? And my CFO, who was in agreement with me said it's high risk. But, that didn't persuade them because it didn't. Quantitatively, it didn't, it couldn't make the case. So fortunately I went to and this is by the way, bears on this digital commerce decision. I went to a board member of Eaton corporation who wrote a book. His name is John Miller.

He had been an oil industry executive, one of the smartest people I met along the way outside of Pitney Bowes in terms of, he was a finance guy who became a chief operating officer at Sohio before it was acquired. He actually wrote a book about Their efforts to build the transit trans Alaska pipeline was called if only we knew, and it was about all the unanticipated problems. And he happened to be going east on the Eaton plane with me, and I told him, I said, how would you approach this?

And he said, oh, you have to use a risk adjusted cost of capital analysis on future revenues and profits from the financial services business. Because it's a much higher risk business than postage meters. So I went to the chairman of the finance committee and he said, fine, but don't use JP Morgan Chase because they're the people trying to get you to sell the business, go to another firm.

So we went to Morgan Stanley and they agreed with us that we should discount future revenues and profits by 400 basis points more than the cost of capital we were using in the core business. And at that point, it became a no brainer to get out of the business.

And I think that's a tool that boards and management teams sometimes need to use, but don't use when a business is riskier, either because there's no protective moat around it, or because there's more new competitors, you have to apply a cost of capital to investments in that business that's really much higher and you have to discount the future revenues and profits much more severely than if you're in a pretty safe, recurring revenue business, like postage

meters, and I think that's probably 1 of the things that did not get done here. You'd never stay in a business like that. If you looked at its history and at the market dynamics, you would apply a cost of capital to future revenues and profits. That would change how you thought about the business's future.

So there's this very human, and you talk about this a lot, the very human decision making that goes on, even in an executive suite, even with highly intelligent experts and often times being the expert is actually what undoes people. Or being successful leads to their failures

I hired McKinsey to design the plan that we have now, if I came back to the board of directors and said, we have to take a charge against earnings right now. First of all, I'd be fired. And secondly, the company would look bad to investors. And I thought, if you don't do this, the company is going to go under, which it did. And people get afraid of the consequences of leaving the familiar, even if it's not working.

As opposed to saying what's the best of maybe a less than optimal set of alternatives. And I think that's the way you have to frame these things. Not this is great. And this is not great. They're all these things have risks. And what's the least risky, best course of action in a very imperfect challenging environment.

Then that creates this other kind of dilemma and you mentioned, and this is a teaser for our next episode, which will be that HBR article is that you spent 25 percent of your time because you knew how uncertain the future was for this industry and being able to create that time for yourself, be able to create the time to read and be able to instill that as a culture in your organization, what would you have as advice for the leaders listening?

mike-critleli_1_03-08-2024_091139: And of course, Clayton Christensen and the innovators dilemma pointed out that typically it's going to come from somebody that is not in that industry today. It's going to be somebody completely different with a different business model. So my advice is assume you're going to be disrupted and think about the when and how not the if.