In an era when shippers and railroaders have clashed repeatedly over competitive and service quality issues, one railroader stands out as having an ear for shipper concerns and for managing a railroad that provides both reliable service and a respectable return to shareholders. In large part because of that attentiveness, the National Industrial Transportation League (NITL) has selected Paul M. Tellier, Canadian National Railway's president and chief executive officer, as this year's recipient of the McCullough Logistics Executive of the Year Award.

The annual award, sponsored by the league and Logistics Management & Distribution Report, recognizes one person who demonstrates a record of outstanding achievement, devotion, and leadership to the transportation industry. The award was established in memory of John T. McCullough, former chief editor of Distribution magazine, one of the predecessors of Logistics Management.

Shippers have nothing but praise for Tellier's customer focus and communication skills. "He has taken that railroad and turned it into a real customer-friendly, customer-oriented organization," says Van Hayes, this year's NITL chairman and manager of transportation support services for Vulcan Materials. "He has been an accessible, forward-thinking railroad man." He commends Tellier for discussing with shippers his railroad's plans to merge with Burlington Northern Santa Fe (abandoned when the Surface Transportation Board postponed all mergers for 15 months while it rewrote its merger rules) and during its recently completed acquisition of Wisconsin Central.

Curt Werfel, chairman of the league's rail transportation committee and manager of customer service and logistics for Eka Chemicals, echoes those observations. "To me, he was the obvious choice," he says. "The transportation executive of the year should be the person who has done the most to improve the transportation industry. Paul Tellier is without a doubt the guy this year. He's in the forefront of making the railroad customer friendly. Look at the agreement he negotiated with the league regarding Wisconsin Central. He stood by his word. ... Everything he's done so far he has done with a customer focus and he's done it well."

Adds NITL President Ed Emmett: "There's no question that there's tension between the railroad industry and rail shippers. But Paul Tellier has always given the impression—and has actually lived out the promise—that the best thing the railroad industry can do is to make its customers happy. We're not always going to agree on everything, but he has really stepped forward and said first, that he shouldn't be fighting with his customers and second, that he should make the railroad profitable. He's doing both well."

Doing both well represents a challenging task these days. The railroad Tellier oversees has become one of the largest in North America with an enormous geographic reach, stretching from the Atlantic to the Pacific across Canada and, as a result of its acquisition of Illinois Central in 1998, from Canada to the Gulf Coast through the central United States. At the end of last year, CN had 15,532 route miles in the United States and Canada and employed 21,300 people. It added about 2,800 route miles to its network this year with the acquisition of Wisconsin Central. That acquisition was completed last month, following final Surface Transportation Board approval in September.

In 2000, CN had revenue of C$5.4 billion (about US$3.5 billion). Slightly more than half of that came from U.S. domestic and cross-border traffic, 24 percent from Canadian domestic traffic, and 24 percent from international traffic. CN's 2000operating ratio of 69.6 percent was the best among large railroads.

Tellier spoke with Logistics Management's Chief Editor Peter Bradley from his office in Montreal.

You spent a good part of your career in government before joining CN. Did that experience help you in the process of transforming CN from a government corporation to an investor-owned company?

Yes. First of all, as any senior business executive is aware, government can have a tremendous impact on the bottom line. Knowing how government works is extremely important. I spent 20 years in the government and in the policy-making process. Second, it's totally different. [In government,] the pace is too slow. It's a very complex environment with many stakeholders. Any time you want to make changes, there's always somebody saying, "Paul, you've got to slow down." When I came here, I decided that wasn't going to happen again. I think the capacity of a large organization to adapt is unlimited. Some people disagree, but the faster you implement change, the better off you are. When I came here, I was determined to go as fast as I could. I will have been here eight years soon and there's one thing I would do differently if I had it to do over again: I would proceed twice as fast as I did. There's not a single executive here who was here eight years ago, and I should have done that twice as fast as I did. I want to be fair to people and give them a second chance, but we were wasting time.

My government experience was very important and not just on this side of the border. When I walk into Congress, I understand what [lawmakers] have to do. I understand how complex [Surface Transportation Board Chair] Linda Morgan's job is. I can relate to that here.

How has privatization changed CN? How difficult was the transition?

Very difficult. It was a question of changing the culture. It was an old company in an old sector, with entrenched habits and mindsets. It was very difficult, very difficult. It is a work in progress, and it's far from over. How did we change? First, the business plan means something now. It is not just a piece of paper; it is an action plan. Two, you need a sense of urgency. I spent a lot of time on the shop floor this summer. [I explained that] our investors owe us nothing. They don't have to park their money in Canadian National. So you need a sense of urgency. Third is customer focus. You have to keep in mind that your salary and mine are paid by the customers. For instance, next week, I'm holding a meeting of executives. Two called to say they wouldn't be able to attend because they were meeting with customers. I said, "Fine, that's where you should be."

One NITL member cited CN's customer focus as a reason for your selection as executive of the year. At the same time, CN has become a much more efficient railroad. What does it take to have both more efficient operations and good customer service?

There are no simple answers. I would say discipline, discipline. It's my philosophy that we have a game plan and we're going to stick to it. People are on board or they're out. We don't vary the business plan or the service plan. We measure on a daily basis. This company has implemented a lot of discipline. Hunter Harrison [CN's executive vice president and chief operating officer] has had a great effect—he's the best railway man in North America. [Harrison joined CN from the Illinois Central Railroad, where he was president and CEO at the time it was acquired by CN.] I think it's discipline whether it's asset utilization, sticking to the schedule, making sure we get paid for our services, or making sure we stop erosion of the yield in our rates. When we make a decision, we have the discipline to stick to it. This is cascading down the entire organization.

Following CN's proposed merger with BNSF, the U.S. Surface Transportation Board postponed all merger considerations and rewrote the rules governing mergers. From a railroader's perspective, what is an appropriate direction for rail regulation in both the United States and Canada?

In the United States, I think it's about right at this point. Linda Morgan and her colleagues have done a good job. You can always argue this provision or that provision, but it's about right. Would I have any difficulty in coming forward with a proposal? The answer is no. On this side of the border, we have to keep moving in the right direction. I keep saying to the ministers, the state of railroading in Canada has never been better. Service has never been better. Rates are down 35 percent, we're finally providing competitive service, and the taxpayers no longer provide subsidies. We have to review [transportation regulations] every five years. They're now in the review process. We're urging them to continue to move toward deregulation rather than the other way around.

You often speak about the regulatory and tax disadvantages that Canada's railroads have when compared with the trucking industry. How does that situation differ from that in the United States—where railroads and motor carriers are often at odds as well—and what do you think is the solution?

We have been arguing for a level playing field. Our tax treatment should be similar to that for the roads. This issue is very much North American in scope. There should be a level playing field for railroads in Canada and railroads in the United States and, two, a level playing field between ourselves and trucks. We devote about 14 percent of our revenue to taxes, and truckers' tax rates are about 30 percent below that. We're not asking for special treatment; we're saying that we're a North American company. More than 50 percent of our revenue comes from within the United States or from freight moving across the border. Give me a level playing field.

You express particular concern about the Canada Transportation Act review panel's recommendations as a reversal of policy. What, specifically, are your concerns?

First, anybody who takes the time to read the whole report will find that it says what we said: The system isn't broken, so don't fix it. Fine-tuning should be good enough. But the recommendations do not express what I just said. My concern is that some bureau will take the recommendations out of context and introduce amendments that go completely against what the panel is recommending. More specifically, I think that unless there is excessive use of market power so that a shipper is truly discriminated against, market forces should determine services and what people pay for them. Any remedy should be a product of whether any commercial harm has occurred or is occurring. If this test were removed, it would open the floodgates to further regulation.

CN has successfully implemented scheduled service, something that has eluded other railroads. What did it take to make that happen?

In addition to discipline, we had to convey across the organization that sound asset utilization, reducing cost, and improving service were not incompatible. One example: For a great many years, when we would get new customers or a new contract, we would buy new equipment to serve that customer. Now, we're looking more toward improving asset utilization and our car cycle rate. The conventional wisdom for a long time was that to improve service, you had to spend more. This is not true. We are buying cars—we've invested millions of dollars—but with the preoccupation of turning these assets. This is a capital-intensive business. If you're not getting the best use you can from the assets, you will never earn your cost of capital.

We are very proud that we are one of the few railroads that earns its cost of capital. We have the strongest free cash flow after the dividend of any railroad. Why? Our preoccupation with asset utilization. Before we put in additional siding, additional tracks, or expand a yard, we have to be convinced that our assets are no longer sufficient. Does this give rise to debate internally? You better believe it. We just cannot throw additional equipment at every business. We use all the capacity we have before expanding.

The CN/Illinois Central integration went more smoothly than some others in the industry did. What does it take to put two large operations together without disrupting service?

First, it's people. I like to say the best decision I made was to convince Hunter Harrison to come work with us. He knew us inside out, and right from the outset, he could basically transmit some of the IC's best practices to CN. When we got the green light [to integrate operations] 16 months later, we knew each other very well. Look at any merger or acquisition. Those that are successful are ones in which people can work well together. We're from very different backgrounds, but it's a perfect marriage. We've set the example for the rest of the organization.

CN has been a leader in developing North American services, rather than focusing entirely on domestic services. Why has your company chosen to do so, and how do you think the trend toward multinational service will affect the entire rail industry?

It's very simple. We are a network industry. We are in the North American business. The question is not to benchmark with CP Rail. We want to be the best in the business, so we took a North American orientation from the outset. Why is this? Too often people say you can be a big frog in a small pond but not a big frog in a big pond. I disagree. If you succeed in a small pond, there's no reason you can't succeed in a big pond. We're trying to make the border disappear, because economically, it's irrelevant.

You've been outspoken about your concerns regarding U.S. customs procedures. What will it take to improve cross-border efficiency while ensuring compliance with customs regulations? Do you expect to see improvements?

Yes. I sat down with Gov. [George E.] Pataki [of New York] and the premier of Ontario [Mike Harris] to discuss this subject. The border is quite fluid. Everybody in Washington and in the neighboring states is keen to make the two countries as borderless as possible. Yet we cannot ignore what happened [on Sept. 11]. It is premature to assess that.

When you talk about taking CN to the next level, what does that mean?

In short, it means doing everything we do better than everybody else does. Our tax planners have to be better than everybody else's. On bill collections, we have to reduce the number of days we have to wait to get paid. There's a lot of working capital in this. In the area of information systems, we have to be better than everybody else is. It's not only the quality of people moving boxcars; it's a question of promoting a sense of excellence in everything we do. As I say to employees, "All of you have a contribution to make. If you don't, you shouldn't be on the payroll. I use a lot of sports analogies. Pick any sport: The New York Yankees—everything they do on the field, they do better than everyone else. The Chicago Bulls for many years were better than everybody else. The Detroit Redwings, for a few years, did better than everybody else. We have to move to that category. CN/IC is moving in that direction. But we're not there yet.