Technology

New RIM CEO Thorsten Heins's stay-the-course plan

Critics say Thorsten Heins is a company man without vision. But there's only one issue that really matters: can he save RIM?

RIM CEO Thorsten Heins (Photo: JP Moczulski)

Many people first met Thorsten Heins on YouTube, a decidedly low-rent debut for the new CEO of Research In Motion. “I’m absolutely excited,” Heins says in the video with no discernible signs of excitement. “This is so fantastic and phenomenal to become CEO.” The seven-minute clip went online shortly after the Jan. 22 announcement that Mike Lazaridis and Jim Balsillie were abdicating their roles as co-CEOs to make way for Heins.

Subsequent media appearances carried a touch of awkwardness, too. In an interview with CNBC, Heins was a pale, unsmiling figure whose valiant attempts to answer the anchors’ questions were interrupted by audio difficulties and someone coughing and sneezing off-camera.

More worrying than his uninspiring delivery was the content of his message. In those first few days, he insisted he would not make “seismic” or “drastic” changes at the struggling company. That was clearly not what the market wanted to hear. RIM’s share price fell 12% over the two days following his appointment. In short, it was not the most elegant of leadership changes. But neither was it out of line with the company’s recent history of bungled and poorly received moves. The rough transition is now largely irrelevant; what matters is whether Heins can end the bumbling and save RIM from irrelevancy. He needs to bring order to a dysfunctional organization, rejuvenate the BlackBerry and stop the company’s dramatic market share decline in the U.S. before its troubles go global. And he has to act fast, before aggrieved investors start agitating to push him out, too.

Though his public profile has been virtually non-existent, Heins has a long history in the telecom industry. He spent 23 years at German industrial conglomerate Siemens AG before leaving for RIM. In the few short weeks since becoming CEO, he has identified what he thinks are the major issues facing the company. One is perception, a problem largely confined to the U.S. RIM simply hasn’t done a good enough job of telling consumers why they should get a BlackBerry. The other is RIM’s seeming inability to release products on time with the features people have come to expect from smartphones and tablets. Despite his initial statements rejecting major changes, he is well aware that RIM faces challenges. “Probably we need to define what seismic or drastic is,” he said in an interview with Canadian Business. All he meant in those first public statements was that he would not put the company up for sale. “I just wanted to put an end to this.” Instead, he intends to fight. Heins is by all accounts a talented and competent executive, but he has never pulled off a turnaround of this magnitude before. In fact, he was one of the last employees at Siemens to run its troubled mobile phone division before it had to be sold. Nor does he have extensive consumer experience, a demographic he has made a priority. Heins is very likely the right guy to accomplish what his predecessors and the RIM board want: staying the course, only with fewer missteps. The problem is, that might not be enough. After all, neither marketing nor better execution will make much of a difference if people don’t want what you’re selling.

Thorsten Heins is not a visionary like Lazaridis, nor does he have the swagger of Balsillie. At this point in the company’s history, those deficiencies are not a problem. Lazaridis will continue to provide the company with his insight as chair of the board’s new innovation committee. Balsillie’s bombastic style rubbed a lot of people the wrong way in recent years. Heins, in contrast, is pragmatic and detail-oriented, and not prone to outbursts. “He’s very even-keeled, and people might misread that,” says Andy Mattes, who worked with Heins at Siemens. “That doesn’t mean that he isn’t very determined.” And he’s focused. Heins enjoys various outdoor activities, especially riding his motorcycle, but, beyond that, Mattes says, “Germans don’t have a lot outside of work.”

The boyish 54-year-old, a native of Gifhorn, Germany, earned a degree in physics from the University of Hannover before joining Siemens in 1984 in its research lab for communications technologies. He gradually took on more important roles that demanded more from him than just technical knowledge. In the 1990s, Siemens sent him from Munich to Boca Raton, Fla., to build out the company’s wireless infrastructure business. Fred Fromm, his boss at the time and head of the Siemens communications unit in North America, recalls the lanky Heins (he’s roughly six feet, six inches) differed from the German executives Siemens normally sent to the U.S. He was a lot younger and possessed a strong business sense in addition to technical know-how. Despite outward appearances—the placid demeanour, the penchant for facts, data and analysis—Heins didn’t fit the stereotype of the dry German executive, says Fromm, an American. “We often had conversations here in the States about our German colleagues and their inability to think outside of the box,” he says, adding Heins took part in the criticism of his countrymen.

New wireless carriers were proliferating in the U.S. at the time, and there were two competing standards for wireless technology, known as GSM and CDMA. Siemens was a provider of GSM technology, and according to Fromm, the company got a late start in the U.S. Heins sold numerous carriers on the benefits of GSM, and also convinced his bosses back in Germany to shell out the funds to really grow the business. “In those days, that was many times the harder job than the customer,” Fromm says of securing funding from Siemens. GSM never did become the dominant technology in the U.S., but Heins established a foothold for Siemens, and his performance propelled him higher at the company when he returned to Germany in 2000.

Four years later, he was put in charge of the company’s mobile handset unit, which was in poor shape. Its phones had fallen behind the competition, and Siemens couldn’t get its products to market fast enough. Its global market share was dwindling. To make matters worse, Nokia, one of its biggest competitors, instituted a price war. Heins resisted an all-out war but did lower prices on some models, and that didn’t help the unit’s razor-thin profit margins. The division attempted to rejuvenate its portfolio with a new line of phones called the 65 series, but a defect caused some devices to emit a screeching noise at high volumes when shut down. Siemens introduced a software upgrade to fix the problem. “We remain convinced of the success of our products,” Heins said in September 2004. He was promoted to the executive board at Siemens Communications the following month, which oversaw the handset unit, among others. The mobile-phone division posted a €152-million loss that year.

Investors called for Siemens to sell the troubled division, and rumours swirled that the company was searching for a buyer. Siemens conceded that all options were on the table, but insisted a sale was a last resort. Publicly, the company was still trying to reverse its fortunes through cost-cutting, new phones and a new operating system­. In June 2005, Siemens offloaded the division to Taiwanese manufacturer BenQ. Siemens recognized a loss of €546-million on the sale. A year later, BenQ put the division into bankruptcy.

The similarities between Siemens’s mobile collapse and RIM are unnerving, but there are a few very important differences. RIM is still a profitable company, earning nearly US$20-billion in revenue in its last fiscal year. Siemens only got into the handset business as an extension of its other manufacturing activities; RIM became a success because of its expertise in wireless communication. Perhaps most important, RIM isn’t just a handset manufacturer. It builds the underlying software and operates its own network, providing it with an additional revenue stream. RIM’s structure as an integrated hardware, software and services company appealed to Heins in 2007 when he was approached by a recruiting agency to jump ship to Waterloo, and that’s why he’s rejecting calls to break up the company today. “We truly believe we are differentiated,” he says, “because I’ve seen the other side of the fence, and it isn’t greener.”

He started out as RIM’s senior vice-president of hardware engineering, and quickly distinguished himself. “What we learned over the four years of working with him was that he was a star,” Lazaridis says. Heins played an important role in the company’s international expansion, and helped establish RIM’s design centres (two in the U.S., and one in Germany), which the company uses to tailor its products to different markets. He was also integral in establishing network certification processes to allow the BlackBerry to be quickly approved by carriers around the world, an unexciting but crucial function in a company that operates in as many countries as does RIM. Heins eventually became chief operating officer for product and sales last August. He had suspected he was on a succession path, an assumption Lazaridis says was correct. “Anyone in the company would probably have come to the conclusion that he was being groomed,” he says.

The exact sequence of events in the succession plan is oddly unclear, however. “I’ve been doing this for 27 years. Jim’s been doing it for 20 years. We recognized that Thorsten was the right guy, and this was the right time,” Lazaridis says. He and Balsillie took the recommendation to the board of directors, which did its own due diligence on Heins. When the board unanimously approved Heins, the two co-CEOs asked for the opportunity to tell Heins personally. Both Lazaridis and Heins sidestepped the question of where and when this meeting took place, though Heins says he thinks it occurred in early December. Asked for Heins’s reaction, Lazaridis says, “Well, I think there was a big smile across his face. I mean, this is the opportunity of a lifetime.” Lazaridis says the succession plan was not enacted in response to shareholder pressure for change, citing instead the company’s rapid growth, financial health, and the fact that it has nearly completed a major operating system transition. “This was the perfect time,” he says. With the former co-CEOs still on the company’s board, it’s hard not to wonder just how much leeway Heins has to do as he sees fit. Lazaridis rejects this: “He’s clearly in charge.”

It was, nevertheless, a somewhat unusual leadership change. The appointment of Heins was immediate. There was no transition phase, which is typical with large corporations to allow employees, customers, investors and the media to get to know the new leader. Analysts questioned whether Heins, an insider present through most of the company’s troubles, could take the necessary steps to fix it. Mattes, his former Siemens colleague, has a different view. “Due to the fact that he’s so analytical,” Mattes says, “if he had concluded that this is a no-win scenario, he wouldn’t have taken the job.”

The challenges facing Heins are huge. RIM’s market share has shrunk to just 16% in the U.S., according to research firm comScore, whereas it used to be the only smartphone around just a few years ago. Its stranglehold on corporate customers is weakening (U.S. energy giant Halliburton, for example, is moving all of its employees to iPhones), and consumers are flocking to rival devices. But one sign that Heins might be up to the task is that he is not in denial of the fact that RIM has problems, a condition that afflicted his predecessors.

When he joined in 2007, he says, the company was still being run like a startup in some respects. Responsibilities were shared among various engineering and developer teams, and the company expanded very rapidly before a proper management structure could be put in place. Fortunately, Heins has a strong background in operations well suited to a complex company like RIM. (Siemens, after all, is obsessed with operational efficiency.) Heins has already made use of his skills, implementing a number of changes since his promotion last summer. Developers and engineers now work on small teams and focus primarily on one project at a time. He’s instituted greater accountability for managers, and introduced metrics for gauging their performance. He’ll also ensure the company continues to innovate by rotating engineers between working on projects and retraining. “Build something, then learn something new, then build something on top of that. That’s actually the creative cycle in engineering,” he says.

Greater discipline could go a long way to curing the organizational dysfunction that resulted in product delays last year, and the botched launch of the PlayBook tablet. Such improvements are crucial. RIM needs to get its new line of BlackBerry devices, which run a version of the much heralded QNX operating system, out as soon as possible. RIM still has not indicated when the BlackBerry 10 series will be released, other than to point to the “latter” part of the year.

RIM cannot afford further delay, as it’s already facing a product drought. Its BlackBerry 7 line launched last year, and the devices have not sold particularly well in the U.S. Heins is forthcoming about how RIM has lost ground in the U.S., too, saying the company didn’t react quickly enough to meet the needs of consumers as competition came to the market. Instead, the company made the decision to expand its offerings to corporations globally rather than focus intensely on the consumer closer to home. Heins contends this was the right decision, but admits the company now has to fight its way back to relevance in the U.S.

Only 20% of existing users in the U.S. have a BlackBerry 7 device. The rest own older versions. How exactly RIM convinces those users to upgrade rather than switch to another platform will, to some extent, be up to whomever Heins hires to be chief marketing officer. Unlike other mobile device companies, RIM hasn’t been overly concerned with marketing until fairly recently. For many years, it simply relied on its carrier partners to handle the bulk of the work. Its last official CMO, Keith Pardy, clashed with Lazaridis and Balsillie and eventually left the company after less than two years. The end result is that the BlackBerry is still perceived as a work device in the U.S. with no clearly defined benefits for consumers. When asked to describe what BlackBerry can sell to average consumer, Heins says it comes down to efficient communication. “To the consumer, it just has to be fluent, fun, easy-to-use,” he says.

Improving marketing and the company’s internal workings are both desperately needed changes, but some are wondering if Heins truly has a grasp of the situation facing RIM. “There isn’t room for four players in this market. There’s barely room for three players,” says Ted Schadler, a vice-president and analyst with Forrester Research. RIM is competing against much bigger companies (namely Apple and Google) that have extensive consumer marketing experience. Microsoft and Nokia, which teamed up last year, are also pushing their smartphones aggressively. “You have three major players with very deep pockets, huge advertising budgets, the ability to command huge attention in retail, in the media and among consumers, and not one of them is RIM,” Schadler says.

Competition at the low-end of the market is particularly fierce, with numerous handset manufacturers pushing cheap smartphones running Google’s Android operating system. Fighting it out in the low-end means that RIM’s margins will shrink, and it will have to sell more and more devices to maintain the same level of profitability; that’s where the Siemens mobile phone division ran into trouble. The upper end is equally challenging, with some analysts contending RIM has essentially ceded it to the iPhone. RIM has thus far tried to distinguish its products with better performance. “It remains unclear if building phones with faster hardware such as dual-core processors is the solution to reclaim the market,” writes BGC Partners analyst Colin Gillis in a recent note. “The company is on a declining trajectory and there is little reason to think this is going to change.”

And while Heins is focused on the U.S. now, the fight is really global. It may only be a matter of time before the trends seen in the U.S. play out in other countries. Heins would be foolish to be lulled into a false sense of security by, say, the 75% subscriber growth RIM saw in Europe, the Middle East and Africa over its last fiscal year. Both the iPhone and Android are gaining ground in Latin America, a traditional RIM stronghold. South Africa, which the company singled out recently as a success story, might not be so solid either.

Last year, the BlackBerry accounted for the majority of smartphone sales in that country, according to World Wide Worx, a technology research firm just outside of Johannesburg. But as contracts come up for renewal, many South Africans may turn to other devices that have since arrived in the country. RIM’s current popularity is largely due to a sweetheart deal with the carriers, who agreed to offer a low-priced plan for unlimited Internet access. Arthur Goldstuck, head of World Wide Worx, says the carriers are no longer content with the deal, having realized they can charge more. “There’s a very good chance in this coming year the networks will try to pull out of that deal, and that will be the end of BlackBerry domination,” he says.

The danger that the BlackBerry could lose its foothold globally puts more pressure on Heins to stop the decline in the U.S. before it spreads. Unfortunately, that’s not likely to happen until he gets BlackBerry 10 out the door, a product that has essentially been in the works for well over a year. The details of those smartphones are still largely a mystery. In that sense, Heins is similar to his predecessors, who repeatedly told everyone to “stay tuned” for what the company has in store. The best he can do in the meantime is slow the bleeding in the U.S. and prove to investors that RIM is no longer a dysfunctional company. Given the scope of the problems facing RIM, that’s the easy part for Heins. But as for the superb new products that will best the competition? We’re still waiting.