Glass Firm Picks Up Pieces : Owens-Illinois Shifts Focus Toward Services

Right after the turn of the century, inventor Michael Owens had two better ideas. One made him rich and famous. The other made people beat a path to his door--and never leave. Together, his revolutionary bottle making machine and his belief that great benefits and secure jobs produce a loyal, stable work force built Owens-Illinois into the world’s largest glass bottle maker and one of America’s most paternalistic companies. Here in the glass capital of the world, OI was the place people aspired to work.

But time and events shattered the Owens formula. After a radical restructuring, Owens-Illinois now pins its hopes on financial services and health care--not glass. And the three vacant floors inside OI’s contemporary headquarters building, a gleaming glass and steel tower that graces Toledo’s newly renovated waterfront, serve as a reminder that job security at one of America’s oldest companies has become as fragile as the glass that made OI famous.

The restructuring, allows Donald E. McHugh, OI’s human resources director, touched off “a tremendous wrenching of our culture” and brought Toledo’s long-benevolent and, until this decade, largest employer “under attack.”

The transformation of Owens-Illinois points up the far-reaching consequences of corporate restructuring. Even when it works its desired magic, aggressive streamlining opens wounds that can take years to salve. People lose their jobs. Those who remain are traumatized. Traditions die. Cultures are overthrown. Entire communities are scarred.

Thanks to the restructuring begun almost six years ago, Owens-Illinois is now a much more productive, flexible and profitable competitor, the dominant force in glass containers and a darling of Wall Street. But a 76-year-long tradition of paternalism died in the process, as did the spirit of cooperation and benevolence that OI long enjoyed with its work force. Despite management’s assertions that the company’s survival would have been in jeopardy had the transformation not occurred, many employees say they feel victimized, overworked and insecure.

So, while it adjusts to running its business differently, OI is also devoting a large amount of attention to repairing the damage. In exchange for the job security that employees feel they have lost, OI is striving to make its work force more informed, jobs more challenging, rewards more directly linked to performance and pay, and benefits more flexible and better suited to a changing work force.

“In the 1960s, OI learned how to manage operations. In the 1970s, our focus was on financial management. In the 1980s, our focus has got to be people management,” says Timothy L. Williams, director of human resource planning at OI.

Meetings Initiated

Former employees and outsiders who follow OI closely are particularly laudatory of a regular series of employee-management meetings, called Dialogue, initiated by Chief Executive Robert J. Lanigan to update employees on the transition’s progress and encourage a frank exchange of ideas. Lanigan’s more open and forthcoming approach, say these observers, has improved the company’s public relations and quelled what had become a vicious rumor mill inside OI.

It was in 1980, recalls OI Vice President R. Bruce Foster, that the maker of such household goods as pop and beer bottles, Colgate toothpaste pumps and Liquid Tide containers came to the “sober realization” that its balance sheet and stock price had deteriorated so badly that debt raters and corporate raiders were on its trail.

Radical restructuring, OI decided, was the only solution to reverse spiraling costs and a decades-long record of mediocre earnings. Otherwise, says Foster, “we would have been taken out of the game by somebody else and at greater pain” than ultimately occurred.

In went the wrecking crews. In its mainstay business of glass, OI closed eight inefficient factories, jettisoned businesses where it wasn’t the market leader and consolidated production into newly modernized, state-of-the-art factories--all to bring spending back in line with its market share in a declining industry.

More Manageable Units

Next, OI turned inward. Its operations were decentralized into more manageable entrepreneurial units that gave managers more authority and responsibility for the bottom line. Layers of bureaucracy were rooted out. Debt was cut to the bone.

Then the real transformation began. Recognizing that it couldn’t achieve its goal of 14% to 16% return on equity--even with the world’s most efficient glass and plastics operations--the old-line packaging company went contemporary. Through half a dozen acquisitions, it joined the high-growth businesses of financial services and health care.

“We recognized that there is only so much (glass container) business out there where we could participate profitably,” Foster says. “We would rather have stayed a packaging company, but we didn’t have that choice to make.”

Some $600 million later, the diversification is starting to pay off. OI now owns the nation’s sixth-largest chain of nursing homes, is becoming a major player in mortgage banking and has won over skeptical investors and analysts with big profitability gains.

Profits nearly doubled last year and return on equity has risen steadily--to 9.9% last year from its 1982 low of 2.8%. Barring a major recession, most industry analysts now predict that OI will reach its 14% goal by the end of the decade.

Accordingly, the company’s stock is enjoying similar gains. Its stock price has doubled since 1982, when it turned away corporate raider Carl Icahn with a $5.5-million greenmail payment, and the higher price has made it a less attractive takeover target.

But that is only half the story.

Since 1977, when retrenchment throughout the glass industry began in earnest, OI has cut its work force in half, ending its decades-long distinction as Toledo’s largest employer and further straining this city’s already hard-hit economy, which is heavily skewed to the auto industry.

Some 17,000 hourly workers and 6,400 salaried employees have quit or lost their jobs in 11 waves of resignations and layoffs, concluding with a $10-million voluntary separation program last winter.

(But typical of its tradition of paternalism, OI gave all salaried employees an option to leave and enticed them to do so with a lucrative package of financial incentives. Several former OI managers have since started their own companies with that separation pay, some in competition with or as consultants to their old employer.)

“We were forced into a cold-hearted realization,” says Foster, “that to preserve the jobs of most, many had to go through a lot of pain and suffering.”

For those who remain, the going has been almost as tough. The work week was lengthened, one-fifth of everyone’s accrued vacation days was withdrawn, salary increases have been rare for five years and bonuses were cut back to only 200 salaried workers from 1,000 before.

With the personnel cutbacks, job descriptions and lines of authority have changed drastically. Most jobs are more demanding but also more challenging. And the climb up the job ladder is faster. Nonetheless, managers “are being asked to adjust to a situation that is very threatening,” says McHugh.

Now OI employees are bracing for one more jolt--an upheaval of the “cradle to grave” benefits philosophy that has been a tradition at OI since the founding of its predecessor company in 1909.

That was the year that inventor Owens put to work his better ideas. Having split from industrialist Henry Ford to automate the glass bottle making business, he and inventor Edward Libbey set up shop with Owens’ revolutionary bottle machine. To lure workers, the inventors offered something equally revolutionary at the time--the promise of secure jobs and great benefits, which they considered key to building a stable, loyal work force.

Guided by that philosophy, Owens-Illinois became the first major U.S. company to offer employees comprehensive benefits and, later, the first to provide group insurance, 25 years before unions began demanding it.

American industry looks to OI as a bellwether in the field of compensation and benefits. And eyes are on Toledo now.

Like others in the throes of drastic restructuring, a newly svelte Owens-Illinois looked in the mirror and saw that its old compensation and benefits plans no longer fit. They were extravagant, inflexible and fashioned for a company that Owens-Illinois no longer resembles.

Flexible Package

To complete its transformation, OI realized that its one-for-all plans likely would have to go the way of OI’s inefficient glass factories and bloated work force.

Knowing that employees are particularly sensitive to any tampering with their pay, the Williams-led task force tackled benefits first. Its recommendations to management favor discarding a rich, traditional benefits plan for a highly flexible package that better accommodates today’s workers but involves more risk and less overall value.

Changes of this nature do not occur overnight, and OI is still months away from finalizing its plans. But under serious consideration is a two-step package combining minimal standardization with considerable flexibility.

First, OI would shrink its benefits base to what Williams calls “the minimum possible level needed to still be socially acceptable.” So, life insurance benefits, now twice an employee’s salary, might be cut to half the salary but no lower than $12,500.

Then, employees would be given a spending account and set loose on a benefits shopping spree. Those wanting more life or health insurance could have it. Those preferring more time off, extra vacation days, reimbursement for child care or smoking clinics, group legal benefits, adoption benefits, cosmetic surgery benefits or even a bigger contribution to a 401k retirement-savings program could choose accordingly. Someone could even opt to take the cash.

After factoring in such things as the nature of the business, what the competition is offering and the relationship each business unit wants to have with its work force, the level of benefits would then be determined by the unit’s financial performance.

So, the better an employee and his business unit perform, the better his benefits.

“We want to get people oriented toward looking at the short-, intermediate- and long-term financial success of their business unit,” says Williams.

The arrangement would have obvious attractions for OI. With overhead expenses at $100,000 per $1 million sales--more than double the industry average when Williams began his review in 1981--OI would have an opportunity to reduce benefits costs.

But the freedom of factoring divisional differences into benefits plans is the biggest attraction. “We didn’t enter this thing under a mandate to control costs,” says Williams. “Rather, we wanted to determine what was appropriate for the industries we are in.”

Initially, the flexible plan would be limited to salaried workers and salaried retirees. But Williams says he envisions a day when flexibility will be built into hourly workers’ benefits plans, too.

Williams’ next mission--reviewing whether employees’ pay should be differentiated by line of business and individual performance--is more delicate. When an employer substitutes a straight salary system with a pay-for-performance setup, “the question,” says Williams, “is how much risk should you subject them to and how much are they willing to stand?”