Family ties Featured

7:00pm EDT February 28, 2007

In the typical roll-up of businesses under one corporate flag, the challenge is integrating all of the entities into a cohesive, streamlined unit that works well together.

For Jim Bouchard, chairman and CEO of Esmark Inc., it’s been the opposite. It is Bouchard’s intent to make sure that each of the company’s operating units retains its entrepreneurial spirit and not be swallowed up by a top-heavy corporate structure. “As we scaled it up, we targeted profitable, independent, multigenerational family companies,” says Bouchard. “The biggest challenge is keeping that entrepreneurial aspect in the company and the independence. As you get larger, you like to pull all that together and centralize the power from the individual entities. Then, you get into a more corporate structure, and it gets bureaucratic and slow. “So I guess now becoming one of the largest steel companies in the United States but keeping that entrepreneurial aspect or relationship in the company, that sense of family in the company, has been my mission to accomplish because I don’t want to become slow and methodical.”

Bouchard, a former U.S. Steel Corp. executive who whipped several steel companies in Slovakia into shape for the Pittsburgh-based steel-making giant before launching Esmark, has combined 11 steel-related businesses into his company since he and his brother, Craig, the company’s president, launched it in 2003. Revenue of the private company reached $700 million in 2005.

Bouchard says that it hasn’t always been easy to resist the temptation to herd all of the companies under one uniform corporate structure.

“Right around the fourth or fifth acquisition, when you start to get large, you’re profitable, you’re starting to generate some large profits,” says Bouchard. “At that point in time, you can kind of pat yourself on the back and pull those controls in house, or you can continue to trust your presidents and the people who are running the divisions to provide the vision of where you’re going, the guidance, some critical operating practices, the longer-term objectives on inventory, cash management and so forth, and let them manage within those.”

Bouchard says standardizing functions such as production, inventory and the size and types of orders you will accept is a formula for losing customers and revenue base. As the company gets larger, there is a temptation to standardize, but it won’t work in a business that needs to be geared to serve each customer’s needs.

Bouchard says if Esmark tried to standardize elements such as production, inventory and the size of orders that it accepts, it would lose customers because it would not be able to serve their wide variety of needs. Moreover, not doing so keeps Esmark nimble in a marketplace where demand and pricing can be extremely volatile. “I need to keep that in place because it keeps us very quick on our feet, very entrepreneurial, and we can make decisions very rapidly,” says Bouchard.

Bouchard keeps any tendency to tighten control from the top in check by encouraging unit presidents to bring it to his attention when they feel like the corporate grip over their operations is tightening.

“I try to tell them to let me know when they feel we’re corporatizing or we’re creating this corporate entity, and if they get that sense to pick up the phone and call me,” says Bouchard. “That gives me a wake-up call to reinstate what the company’s all about, that entrepreneurial way we want the company to be. So I have a check-and-balance system to let me know when they feel that we’re moving away from that focus.”

Making the right picks
To make his strategy work, Bouchard looks for companies that meet several key measures. For one, they need to demonstrate profitability over a five-year period. He also looks for a strong CFO and a competent plant manager. “It’s better if they’re well-run and well-managed,” Bouchard says. “It’s very difficult to go in and clean house and sweep in and insert people in a family-run organization.”

To build the acquired company’s revenue, Esmark secures its top salespeople and bolsters its sales force with reps that know the regional market.

“When we go to acquire a company, we lock down all of the critical salespeople with multiyear contracts,” says Bouchard. “Then, after the acquisition, we go out to hire a couple of salespeople at each location that have long-term relationships with their customers. Those people have good relationships and a regional focus and a product focus that is complementary to the entity they’re joining.

“At the end of the day, each one of our entities becomes stronger. When you do that, you’re buying a place in Ohio, you try to find good Ohio sales reps that have good, long-term relationships.” Esmark’s corporate structure, essentially six senior executives, makes it easier to acquire the kinds of companies it’s looking for, essentially profitable, privately owned businesses that won’t get scared away with the threat that Esmark will jettison them as soon as it takes over.

“You don’t apply a lot of corporate overhead back to the entities,” says Bouchard. “It’s lean, so when you’re running or acquiring a company, they know you’re not going to send a whole group in to run the company because you don’t have people available to do that. They have a pretty good comfort level that we’re going to leave them alone, provide a little financial help and provide a little purchasing support, but basically they’ll continue to run as is and be profitable and very entrepreneurial. When you have a lean infrastructure, they’ve got a comfort zone that tells them that’s not going to happen.

“They’re not going to have someone come in and say if they don’t get the job done, they’re going to throw them out on their ear. If they’re not getting the job done, we try to coach them, lead them, and be more of a supporter and a coach. They know we have to trust them to run their companies.”

Bouchard emphasizes the entrepreneurial spirit in the business units, even to the point where they may, at times, find themselves competing with each other. Going after the same customers isn’t taboo; instead, it ensures that the customer is always the focus.

“We instill 100 percent competition between our entities,” says Bouchard. “It creates some friction sometimes when they cross-compete, but keeping the competitive spirit flowing between divisions is mostly a positive thing. We encourage them to compete with each other. You always want to be fighting for the customer, for what’s best for the customer.”

Bouchard encourages a free and open exchange among the heads of the various units.

“I try to keep the communications conduit open between the presidents so they’re working as a team for the greater good of the organization, focused on their own entity but still sharing what they do with each other,” Bouchard says. “All of them get on a conference call every Monday and talk about what’s going on in their operations, so everybody gets an idea of what the market’s doing in Ohio, what it’s doing in Missouri or Illinois.”

The presidents meet as a group every quarter, and Bouchard meets with them as a group at least every six months.

“We talk about best practices, we talk about suppliers who are selling in their areas, how we can put together volume discounts,” says Bouchard.

Where consolidation makes sense
While on the operations front, all of Esmark’s companies work independently, Bouchard has opted to combine some of the corporate functions to control costs and maximize efficiency. To smooth its human resources function across its 11 diverse operating units, Esmark has one corporate human resources person and outsources the day-to-day nuts and bolts of its HR activities to an outside contractor. “What we’ve found in those companies, each would have a couple of people working in HR, and then as we scaled this up, we discovered that as a company, we would have to have a very large HR department,” says Bouchard. “Instead of that, we outsourced all of our HR functions to Synergy in Chicago. They handle all of the payroll, they handle all of the employees’ 401(k) programs, all health care, all of those functions. Inside of Esmark, we have 800 employees but only one HR person.”

Outsourcing human resources provides the best of both worlds, allowing individual units to operate independently while offering the purchasing power and economies of scale enjoyed by larger organizations. Instead of 11 human resources departments administering the function at 11 locations, a single entity handles it. The result has been better control of costs and more bang for the buck.

Bouchard says Esmark can offer better benefits across the board than it would have been able to provide at the individual companies. It has held health care premium increases below 5 percent a year over the last three years because its 800 employees are in a group of 7,000 under its third-party provider. That means it can offer Fortune 500 benefits without carrying a big HR department and applying a lot of overhead back to the operating entities. “When you scale up, it becomes very expensive,” says Bouchard. “So we knew as we scaled, we knew that Synergy was going to be our HR, payroll and health care provider. That’s proved very successful for us, so anyone that’s scaling up a company needs to look at their foundation and then, as they scale it, decide whether your partners are capable of scaling it with you.”

To maximize its buying power in an industry where there are a limited number of producers, Esmark centralized its purchasing function.

“In the consolidation of the steel business, there are only a few major producers,” Bouchard says. “Instead of those producers talking to 11 of our companies, they talk to two or three people that are centralized, so that way, we have a centralized communication with our suppliers, to our customer base, where we’re going, what markets we’re targeting, what products are good for them, good for our company, so we keep that focused and centralized to a couple of people who are our communication conduit versus 11 people trying to communicate what our strategy is.” In his role as CEO, Bouchard views himself less as boss and more as leader, someone who can learn as much from the organization as he can impart to it. And, he encourages his team to endorse the same method.

“I try to be a coach, student and leader,” says Bouchard. “I think if other CEOs took that approach versus the all-powerful role, they would be a little more engaged with their management and their work force. I try to instill in my managers not to be the boss.

“It’s easier said than done, but they’re there to be the coach and the leader.”

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