The Henne family could be a model for a 1950s-style television series. In an age in which broken and blended families can appear to be the norm, the Hennes are an intact nuclear unit. They are in a business that literally surrounds them in glitter and luxury and exposes them to customers who are often marking the milestones of their lives. Jack Henne displays a serene, serious demeanor and genuine, well-honed wisdom, and while he often worked long, hard hours no different from any other entrepreneur, he managed to spend significant time with his family.
His wife, Nancy, pleasant and supportive, is a strikingly fitting complement to her husband, one who brings a calming effect to the business, says one of the children. She didnt go to work in the family business until recentlywhen she was encouraged to do so, and long after her children were raised.
They profess a strong religious faith that they say guides their decisions and actions and has played no small part in their familys success in keeping the business together. Their three children are well educated, gracious and poised, with distinctive personalities and demeanors. Meeting the Hennes could easily lull you into believing that their conflicts and difficulties are as amusing and easily resolved as any found on a half-hour TV sitcom.
But this is real life, you need to remind yourself, and real life means genuine conundrums, complex legacies and powerful emotions that can drive wedges between members of the most neatly joined families. Entrepreneurs, by nature, must have can-do, optimistic attitudes. Henne Jewelers, a single-store operation in a business in which chains are squeezing out small operators, would not have survived three generations of family ownership had Jack Henne not been confident that the store his grandfather founded would make it.
Mixing business and family is a challenge in the best of circumstances, and the Henne family, despite its cohesiveness, could easily have fractured irreparably in the process of keeping the family business together. For Jack Henne, that would have been unacceptable.
For the Henne children, the responsibility of preserving a 110-year-old business weighs heavily.
Would we be the ones to blow it up? Jacks son, John, asks.
By all appearances, even in the real world of tough decisions, the Hennes seem to be on the road to a successful transition to the fourth generation. That evolution, however, has not come without hard, sometimes painful, work and extensive outside counsel from those specializing in delicate family business succession issues. The process, it turns out, never ends.
The Henne history
Henne Jewelers was founded by Rudolph Joseph Henne, a jeweler and optician, in 1887 in East Liberty. The business thrived as railroaders brought in their watches for regulation and repair and Henne became a jeweler of choice to members of Pittsburghs richest families, including the Hillmans, the Heinzes and the Babcocks.
Rudolphs son, Rudolph Gerald, inherited the store in 1934 and kept it going through the Great Depression and World War II. Jack started with the business in 1950 and took over when his father retired in 1975. In 1978, Jack moved the business from the Center Avenue storefront, where it had operated for 91 years, to its Walnut Street location in the stylish Shadyside retail district.
The high value that Jack Henne places on family harmony comes into sharp focus when viewed through the lens of the heritage of three generations of Hennes running a single store. In a business in which customers come in and tell of grandparents who purchased their engagement and wedding rings from Hennes, tradition is not taken lightly.
But the value of the business isnt merely sentimental. Henne Jewelers has a reputation for high-end jewelry designs. The store employs two goldsmiths on its staff of 13, who craft one-of-a-kind pieces while a TV monitor displays live images of them working at their benches. The store buys estate jewelry, and an appraiser is available to determine the value of jewelry for estate and insurance purposes.
A fourth generation business?
Jack Henne began thinking about how he would resolve the succession of the family business a half a dozen years ago, knowing he would have to sell it or hand it over to his children. He had seen too many friends and business associates fumble when it came to succession planning and pay dearly for it.
About three years ago, Jack told his son, John, that if he intended to take over the business, it would have to be soon, while Jack still felt inclined to hang around long enough to help with the transition. That had begun to happen when the plan hit a potentially family-splitting bump in the road. Jack and Nancys oldest daughter, Anne Henne Rockwell, a consultant with Andersen Consulting at the time, decided that she, too, wanted to come into the family business.
Jack balked, recoiling because he feared his two oldest children would clash. I thought it would be impossible, says Jack.
I think our main concern was whether we could work together, says Meg Gibson, the Hennes youngest daughter.
Anne was firm in her resolve to be a partner in the next generation, but early on, even she had some doubts. I was starting to believe that we really couldnt do this, she says.
All in the family
John and Anne are, by their own admission, strong-willed, each with definite ideas about how to run the business. Both, by virtue of their backgrounds, have the credibility for their ideas to be taken seriously. Jack, too, had his own ideas about how the business should proceed.
Jack decided that, if John and Anne sharing the business was going to work, they needed advice. He interviewed consultants, even investigated out-of-state advisers recommended by friends and associates.
An initial meeting with Jim Kwaiser, president of Bethel Park based C.H.A.L.L.E.N.G.E.S. Inc., less than impressed Jack.
I thought he talked too much, he says.
But Kwaisers philosophy and view that family comes first meshed with Jacks and Nancys own ideas of where their priorities were.
In a family business, says Kwaiser, you have to blend together the family and the business. You cant separate them.
Jim had a good understanding that the family comes first, says Anne, and thats the way we all felt.
Kwaiser recommended something the family hadnt even considered at that point: He urged Nancy Henne to become involved in the business, something she had never done, and Meg Gibson was encouraged to enter the business, too. Kwaisers reasoning was that all family members should understand the business and that they could best accomplish it by being involved directly.
Division of labor
Perhaps one of the most challenging succession tasks was determining who should be in charge of what facets of the business. Kwaiser got the process rolling by having group and individual meetings with the family. He administered psychological tests to all of them to determine how they could best work together and who might be best equipped to administer various tasks in running the business.
By the time Meg came into the business, Kwaiser had helped all of the family members identify where they would best fit into the organization.
It was very comfortable, says Meg. Everything was all in place.
Kwaiser suggested that each of the Henne children take responsibility for distinct areas, rather than all trying to oversee every aspect. Anne had her heart set on taking on the duties of sales manager, for instance, but Kwaiser suggested John Henne might be better equipped to handle the job.
For a couple of days, it was upsetting to me, says Anne, but theres something bigger than that, and that is that I want to be in this business. Each and every job has to be filled and has to be done by the person best-suited to do that job. Rather than two or three of us trying to accomplish the same thing and walking on top of each other, were working in different areas to accomplish the same goal.
Anne, they agreed, would handle advertising and personnel, a natural since she had worked in Andersen Consultings human resource department. Meg, in the business for about a year and a half, is learning inventory control and sales. Nancy Henne works in the store, and the children say she has contributed significantly to its growth.
Nancy says that working as a team has had another benefit: Now that theyre working together, theyve gotten closer, she says of her children.
Where families fail
Kwaisers experience indicates family businesses are like snowflakes.
Of the hundreds of family businesses weve dealt with, weve never found two that are the same, he says.
Yet common characteristics trouble many family businesses. Most problems center around a failure to communicate, says Kwaiser. Often, family members havent committed to interact with each other as equals. They have failed to address what Kwaiser terms the unspeakables, issues everyone knows about, which may have their roots in earlier experiences and which have caused hostility or barriers between family members.
Its really important to get to know each other as adults, he says.
The need for a plan
Ann Dugan, executive director of the Family Enterprise Center at the University of Pittsburgh, says that, while succession and estate planning are critical to the survival of a small business, too many families put them off. While it can be a 15- or 20-year process, business owners sometimes wait until a crisis erupts to plan.
The worst time to do it is when its situational, says Dugan.
Or they will buy life insurance in the belief that it, alone, will take care of the succession issues.
Dugan recommends family businesses form advisory boards to help them through the planning and decision-making processes. In any case, says Dugan, its never too lateor too soonto begin planning.
An ongoing process
The Henne family keeps the business going by following a schedule of regular meetings to discuss issues that affect it. Each week, all five have an after-hours meeting. Every two months, they hold a meeting off-site; every six months they hold a one-day conference at which long-term issues are discussed.
They have developed a plan that includes a buy-sell agreement and life insurance to fund it, and plans that cover a variety of scenarios, including death, marriage and children.
As a result, the Hennes say they have resolved much of the anxiety they had over the future of the business. That peace of mind allows the family to concentrate on growing the business, a requirement if the company is to support multiple members of the current and future generations.
Says John Henne: If theres a lot of uncertainty, its difficult to focus on where youre going.
How to reach:
5521 Walnut St., Pittsburgh, PA 15232-2325
Phone: (412) 833-8070
Ann Dugan, executive director
Family Enterprise Center, University of Pittsburgh
Practically anyone can walk in the door and open an account at the friendly looking Enterprise Bank, a new financial institution housed in a former brick post office building on a calm stretch of Mount Royal Boulevard.
But Enterprise Banks most coveted customer is the closely held business, a customer with distinctive banking needs that often demand close, trusting relationships with a banker and fast access to capital.
Unfortunately for closely held businesses, those relationships have been harder to come by in recent years. As large banks have taken over many community-based institutions, some business people who once had a close face-to-face relationship with their banker have found that those ties have been eroded. Smaller institutions that had close connections to their communities, where bank presidents could get an answer quickly for a loan applicant, have been supplanted by large, centralized operations with approvals sometimes coming from offices in other cities.
Small-bank presidents who stuck around have turned out to be local branch managers who dont have much say in loan approvals. The founders of Enterprise Bank see an opportunity to capture that segment of the market and create a profitable book of business for themselves and their investors not to mention a relationship-building opportunity for local business owners.
Ive believed for a long time that business owners dont bank with the bank, they bank with the banker, says Donald Whitehead, president and co-founder of Enterprise Bank. When you develop a relationship with a banker, you dont want to be told, Well, I cant help you with that RV loan, I cant help you with your childs education [loan], I cant do that home equity loan. Youll have to call so-and-so over in consumer lending.
Quickly, local business people catch on, adds Whitehead, a 14-year veteran of PNC Bank and one of the founders of Pennsylvania Capital Bank, another bank start-up. Soon, they realize that theyre dealing with someone with little authority, he says
The bureaucratic mire that often trips up loan approvals for closely held businesses is cleared significantly by Enterprise Banks current five relationship managers, skilled and experienced bankers who provide personalized service to the banks customers. By creating a single point of contact for its business customers in the form of its relationship managers, Enterprise Bank believes it will be able to cultivate lucrative long-term relationships with closely held businesses.
The relationship managers spend much of their time outside the bank, meeting with their customers and cultivating new business, most of which comes from referrals. Three-quarters of the loan agreements are closed at the customers place of business.
Enterprise Bank joins the ranks of hundreds of new banks growing out of the bank consolidation efforts of the past few years. American Banker reports that 290 banks were chartered in 1998, an increase of 27 percent over the previous year and almost three times the number chartered five years ago. That trend is expected to continue as big bank mergers squeeze out bank executives, who, in turn, seek out opportunities to use their experience in new ventures.
But before you think you might want to jump into the banking business, keep in mind that its an expensive up-front proposition. Whitehead and his 10 fellow investors first had to come up with $500,000 to finance the start-up and regulatory costs. Thats before they sold a single share of their stock to the public. And, had they not cleared the regulatory hurdles, the venture would have failed before it even started.
Enterprise Bank opened its doors last October, and to date, its doing better than projected. Its first quarter report reflected assets of $13.9 million, $1.5 million over its projected goal. The bank is on track to become profitable in 12 to 14 months, its original target, and in about a third of the time it takes the typical new bank to climb out of the red, Whitehead says.
Enterprise Bank has structured itself for success by maximizing opportunities for its officers, investors and relationship managers. Some of the features of that plan are:
- Build in incentives. Relationship managers are virtually business owners themselves. There is no ceiling on their incomes, but they each have to cover virtually all of their expenses, including their support staff, and even share in loan losses. As a result, they are motivated to seek out the most credit-worthy prospects and sell other bank products to their customers besides loans. Weve made entrepreneurs out of them, Whitehead says. The founders have had a powerful incentive to maximize shareholder value, as they each hold warrants to purchase bank stock in the future at its original price.
- Cater to all of the banking needs of the target market. Enterprise Bank is offering a full array of services to its customers, including checking accounts, consumer loans, major credit and bank debit cards. However, its offering those mainly to the owners of closely held companies and their employees.
- Emphasize service and fast turnaround. Whitehead says owners of closely held businesses have special needs when it comes to banking that large banks often are not equipped to fill, even though business owners are hungry for it.
They want personal service and appreciate the value of it, which is another way of saying they are willing to pay a fair price for it, says Whitehead. If a customer is expecting a large receivable from a credit-worthy client to come in on Friday, but needs cash to cover the companys payroll on Friday, he needs his banker to act fast. In most cases, says Whitehead, a two- or three-day turnaround on a loan request is not unusual.
In the end, however, the fundamentals of banking havent changed much, and Whitehead says Enterprise Banks ability to be successful is closely tied to its ability to attract deposits and make profitable loans. Making loans is easy, very easy, says Whitehead. To get paid without trouble is much, much more difficult.
How to reach:: Enterprise Bank at (412) 487-6048 or on the Internet at www.enterprisebankpgh.com.
In any business, getting results ultimately is what really counts.
That may be at least one of the reasons Tim Johnson was selected Minority Advocate for Pennsylvania and the SBAs mid-Atlantic region, as well as for the SBAs Pittsburgh district.
There are a lot of well-intentioned people who fall short, says Vic Tatum of Kensington Capital, a venture for which Johnson helped put together a financing package for its launch last year. Hes one of the people who really delivers.
Johnson heads National Citys community development lending department, where he often has to work with precision and diligence to get public entities such as the Community Development Loan Fund and the Urban Redevelopment Authority of Pittsburgh to coordinate their efforts with the borrower and National City to put together loan packages for growing businesses and new ventures.
Making those efforts successful with a minority enterprise, says Johnson, is ultimately no different than with any venture.
You have to go into them in a way where the transaction will be beneficial to both parties, says Johnson.
Johnson points to National Citys efforts to help convenience store entrepreneur Gene Thomas put together financing to expand his Quik-It store chain as an example of the kind of projects that can be accomplished when public and private entities work together.
Johnson is not afraid to take on a tough project and work with it patiently if it shows promise.
Hes willing to invest the time, Tatum says. You really need someone who is willing to sit down and hear your story.
Entrepreneurs considering relocation or placing new operations in the region will find a wealth of data in Pittsburgh Particulars: Southwestern Pennsylvania Business Facts and Resources.
Penns Southwest Association, the group that has compiled the publication, calls it the regions most comprehensive source of information on prime areas of commerce, how to establish a business in the region and what incentives exist for those interested in relocating and expanding here.
The 140-page publication contains more than 90 tables and maps, profiles 10 Southwestern Pennsylvania counties and contains detailed labor profiles, labor force training opportunities and a comparative analysis of wage rates in the Pittsburgh MSA.
Single copies of the book are available for $24.95. Ten may be purchased for $150 by calling Suzanne Foscoe at (412) 392-4555, ext. 1031. It can be viewed online in its entirety at www.pennsouthwest.org.
It wasnt easy for Megan OGorden to break the news to her boss. She was planning to marry in a few months, which meant she would be moving to Chicago with her husband and, she regretted, resigning her position at Fitting Kohlbrener.
OGordens plan wasnt easy for Andrea Fitting, one of two name partners in the firm, to accept.
We were just cooking along, doing fine, says Fitting, describing the marketing communication firms progress before she got word OGorden would be leaving.
Fitting and partner Mike Kohlbrener knew it wouldnt be easy to replace OGorden, a key member of the team for two years as a communications specialist with the eight-employee firm. Fitting Kohlbreners strength, much of it residing in highly skilled employees like OGorden, has helped it land and retain clients from Boston to Arizona.
In fact, for the past three years or so, the agency has been attempting to build its business with such clients rather than limiting its reach to local companies in the high-tech, health care and professional services fields.
OGorden worked with a number of high-tech and health care clients, and the knowledge she had gained would be hard to replace, Fitting reasoned. The company would have to launch a recruitment campaign and expect a period of adjustment for the new employee as well as the clients and the other team members they would work with. And there was always the risk that the person hired might not fit the bill.
OGorden faced considerable upheaval, too. She would soon be a newlywed, moving to a strange city and seeking out a new employer. The changes promised no minor level of stress and adjustment.
Loathing the loss of a good employee and recognizing an opportunity to gain a foothold in a major market that is home to myriad trade associations the agency does business with, Fitting mulled over offering OGorden the opportunity to telecommute. OGorden, eager to stay with a job she felt comfortable in, jumped at the offer.
Andrea has been a mentor for me, and we have a fantastic working relationship, says OGorden. I believe in the philosophy that the agency follows.
Fitting Kohlbrener isnt alone. Telecommuting is fast becoming the rule rather than the exception, according to a study by FIND/SVP, a New York-based research and consulting firm. The study indicates there is a strong upward trend toward telecommuting nationally, with 11 million working at home a number that is growing about 15 percent a year.
Growth of e-mail, voice mail and the Internet, combined with a renewed emphasis on work results rather than workplace appearances, have encouraged managers to recognize that employees working part-time down the road are no more distant than employees working down the hall, says Thomas Miller, vice president of FIND/SVP. What matters most is whether or not the job is getting done.
What do we tell the clients?
The issue that most concerned Fitting was whether clients would balk at the arrangement. While some were skeptical at the outset, all decided to give it a try.
What it will come down to is results, says Gene Nacey, president and CEO of Tele-Tracking Technology, one Fitting Kohlbrener client OGorden works with. Nacey says he didnt bat an eye when he found that OGorden would be working from Chicago.
Fitting Kohlbrener outfitted her with a computer, fax, modem and Internet connection, and by the time she arrived in Chicago in March, she was on the job.
So far, so good
OGorden says shes more productive because shes able to avoid interruptions and structure her time to suit her schedule.
She did, however, have to spend a few sessions with the agencys system administrator to learn how to use the computer and its peripherals.
I think its worked out, says OGorden of the transition from in-house employee to long-distance telecommuter. I think its been pretty seamless.
Most of the wrinkles have been technological, and primarily arising out of problems with Fitting Kohlbreners Internet service provider. Theyve had to adjust to transmitting PDF files by e-mail.
Thats been a challenge, says Fitting, adding that the company needed to purchase new software for the task.
What to do
The experience of Fitting Kohlbrener and its first telecommuting employee reveals some points that should be considered by any employer thinking about a telecommuting arrangement:
- Be up front about the arrangement with your clients. Initially, OGorden reveals, some of the agencys clients had reservations, but the agency was able to allay those concerns. The trust the agency had built into its relationship with clients likely would have suffered if they discovered only after the fact that OGorden was working outside of Pittsburgh.
In fact, the arrangement likely will raise few concerns among your clients. Many, like Nacey, who gets about 50 e-mail messages a day, will feel comfortable with and may even prefer handling their correspondence via telecommunications. Nacey says that rather than having to deal with frequent telephone interruptions, he now can send a concise e-mail message when its convenient and save time.
- Communicate often. OGorden says she tends to err on the side of communicating more rather than less. She participates in regular teleconferencing calls with the Fitting Kohlbrener staff, and the agency is considering a schedule of periodic visits by OGorden to Pittsburgh.
- Arrange for technical support. While OGorden says anyone with basic computer and telecommunications literacy should be able to handle most issues that come up, it helps if an employee at a remote location has access to a systems administrator or help desk in case technological glitches arise.
- Its not for everyone. OGorden says that, while the solitary nature of working at home doesnt make her feel isolated, she can understand that some employees might find it distressing to be alone for extended periods without face-to-face interaction with clients or co-workers.
- Carefully evaluate costs. Fitting estimates that supporting OGordens employment in Chicago costs about 20 percent more than it would had she maintained her office in Pittsburgh. However, productivity gains, she says, might very well offset the additional costs. And Fitting Kohlbrener has avoided the cost of hiring a replacement, who would face a time-consuming learning curve.
Moreover, OGorden has access to resources and potential leads for the agency in Chicago that would otherwise go untapped. But as Fitting is quick to note, business development is not central to the plan.
We didnt send her to Chicago to drum up new business, Fitting says.
With the technological capabilities available and the opportunity to hold onto an employee who might otherwise leave the company, given the right circumstances, having a telecommuting employee might be a viable option for an employer.
While Fitting says its too early to make a final judgment of the arrangements success, the experience to date, she says, has been positive. Says Fitting: Weve had our bumps, but so far, so good.
The offices of Sladekutter on the North Shore and Labwerks in the Strip District are separated by little more than the Allegheny River. Both are high-technology firms in a similar business, relatively young and led by ambitious, energetic entrepreneurs.
Neither needs the distraction of litigation. But a battle over an employee noncompete agreement between a Labwerks employee and Sladekutter, his former employer, ultimately dragged both into court.
In the end, Sladekutter and Labwerks reached an out-of-court settlement, but not before wasting lots of valuable time, energy and hard cash in an ugly, five-month fight full of allegations and counterallegations over an issue that could have been avoided on both sides if they had approached a noncompete agreement the right way from the beginning.
This recent case illustrates both the importance of making a careful evaluation of employee noncompete agreements long before they are implemented, and the hassle that can ensue when they are poorly executed.
Parties from neither side of the dispute could be reached for comment. But according to court documents, Daniel Dehner worked full time at Sladekutter as a multimedia developer from November 1997 until September 1998. A month after joining the Internet Web design and communications company, Dehner was asked to sign a noncompete agreement, but was offered no additional compensation at the time, in accordance with Pennsylvania law.
From September to November 1998, Dehner worked part time for Sladekutter, continuing as a consultant while working for Labwerks, considered a competitor of Sladekutters. In fact, he often used Labwerks computers to access Sladekutters system to complete unfinished projects for Sladekutter, documents state.
The dispute arose while Dehner was working as a part-time consultant for Sladekutter. At one point, he apparently informed Sladekutter that he was working for other individuals and companies. After he accepted a full-time position with Labwerks, Dehner reportedly stopped accessing Sladekutters computers.
In November 1998, court documents say, Sladekutter gained access to Labwerks computer system using a combination of Dehners name and fragments of his Social Security number and took Dehners e-mail and names of Labwerks customers. Sladekutter then allegedly contacted two of Labwerks customers and demanded that they stop doing business with Labwerks or risk responsibility for interfering with Sladekutters business. Sladekutter then took legal action to enforce the noncompete agreement which Dehner had signed while employed there.
Labwerks and Dehner fought back vehemently by seeking a restraining order in federal court to prevent Sladekutter from accessing or attempting to access any computer operated by Dehner or Labwerks. In her summary, the judge ruled that the noncompete agreement which Dehner had signed while he was employed by Sladekutter could not be upheld, since it was signed after he had negotiated terms of employment, a month after he had started working for the company.
The court also found that Sladekutter had violated federal wiretap laws. The judge ordered Sladekutter to return to Labwerks any and all computer files and other things obtained from accessing the plaintiffs computer systems. Finally, the court ordered Sladekutter to contact Labwerks clients whom it had previously contacted and inform them that Sladekutter was subject to an injunction restraining its actions in that regard.
Both parties are prevented by terms of their agreement from discussing the terms of the final settlement; however, the lawyers who represented the parties agreed to talk in general terms about the issue of noncompete covenants and how you can avoid the excruciating pain of a situation which proves costly, and, in the end, becomes a no-win situation for all involved. Consider the following:
In a business environment in which a growing numbers of employees with specialized knowledge and intellectual property constitute an essential component of a companys competitive arsenal, companies increasingly are requiring employees to sign noncompete agreements. How they do it, though, is what makes the difference.
Where to start
At least talk to a lawyer before going down the road to creating noncompete agreements, says Peter Santos, a lawyer with Dickie McCamey & Chilcote who represented Labwerks.
Essentially, noncompetes must pass certain tests to be valid. First, they must offer a consideration, says Jerry Richey, the lawyer with Buchanan Ingersoll who represented Sladekutter. In legal terms, a consideration is something of value offered in exchange for the employee agreeing to the noncompete. Making a noncompete agreement a condition of employment can be an adequate consideration as long as the condition is enacted at the time the employee joins the company and not some time later.
In the case of an existing employee, however, as Dehner was when he signed a noncompete with Sladekutter, something of value, such as a promotion, a boost in compensation or an expansion of benefits must accompany a noncompete to make it enforceable.
The terms of the noncompete must be reasonable in terms of time and geography. For instance, a business may have a legitimate need to limit an employees ability to work for another company within its trading area. But as Richey explains, the concept of reasonableness is flexible. A company whose legitimate business interests are global may well limit an employees ability to work for a competitor anywhere.
The time period covered by the noncompete can vary as well, depending on the nature of the business. When intellectual property is involved, the temporal and geographic elements might legitimately be extended.
A noncompete must protect a legitimate interest. If an employee has knowledge of his employers proprietary secrets that are essential for the companys business, a noncompete may be in order. In an instance in which a company may have relative ease in recovering its interests (for example, a sales territory where another sales representative could reasonably establish relationships with customers in a year or two), the time restrictions may be more limited.
A level of understanding
Richey suggests that employees make sure they understand what they are being asked to agree to, and if they are uncertain, to check with a lawyer. Employees should evaluate noncompetes in terms of whether they can live with the terms. Richey says employees might ask themselves the following question: If this is enforced, can I live with it?
The owners of Sladekutter and Labwerks both know the unfortunate truth that results when you cant.
Bob Williams and Dave Ogborne headed to Ireland last year with their hats in their hands after their airliner interior restoration business fumbled on its first project for Ireland-based Shannon Aerospace. But the pair returned to Pittsburgh like a couple of tycoons sporting pricey new Stetsons.
We got them back in time but we didnt do a very good job, says Williams of the panels that the company refurbished for the interiors of a group of airliners. Fearing that their reputation in the business could be blunted by a less-than-stellar performance, they figured a face-to-face meeting might help smooth things over.
We went to apologize and see what we could do to regain their confidence and get more business from them, says Williams, president of Air Excellence, an Oakdale firm that is in the esoteric business of refurbishing the interior panels of airliners.
While they were in Ireland, the partners dropped in on the economic development office. That meeting led not just to potential new business, but also to Air Excellence establishing an interior refurbishment facility in Shannon.
We went in to talk with them and they fell all over themselves, Williams says. The company got a years free rent, $4,500 for each job the company created there, access to a well-educated work force and a handful of other perks to establish operations there. The facility opened in December, and the company expects it to do about $1 million in sales this year.
That was a strike of good fortune, and Ogborne and Williams talk a lot about how luck has played a part in their success. In fact, there have been some happy coincidences that have played in their favor, like a spate of airline mergers in recent years that spurred carriers to revamp interiors of acquired aircraft to reflect a uniform corporate look.
But there is little doubt that the experience of Air Excellences partners has played an even bigger role in its success. The companys reputation for quality, established quickly within the industry, led to an assignment to cover interior panels for the new International Space Station. At $100,000 and as a subcontractor to another subcontractor, it was a tiny but prestigious project.
At first meeting, the partners appear an unlikely pair. Williams, shorter and gray-haired, with glasses and a voice in the upper registers, has an accounting background. Contrast him with the towering Williams, a kind of Marlboro man with a gift of gab delivered in a thick baritone. Nonetheless, they have formed a smoothly working partnership at Air Excellence, where revenue has gone from a few thousand dollars in its first year to more than $4 million in 1998.
After long careers in the airline supply business, Williams and Ogborne, the companys vice president, started Air Excellence in 1995. Both had been squeezed out of AID International, a Coraopolis manufacturer of airliner interior panels.
Ogborne now finds himself persuading customers that repairing is better than replacing.
I sold against recovery for years, he quips.
On the surface, recovery should be a fairly easy sell. New panels cost the airlines thousands each, while having one refurbished costs hundreds.
But Ogborne and Williams first thought they would get into manufacturing the panels, since that was their background. But a noncompete clause tied Williams up for a year, and meanwhile, Ogborne had scored equipment to do recovery.
Airlines formerly handled panel repair and refurbishment themselves when the aircraft were in for a major periodic overhaul. Both Williams and Ogborne knew that the airlines had little love for doing it, and that using highly paid maintenance employees for the work was expensive and inefficient.
Air Excellence operates a recovery facility in Oakdale, where its approximately 50 workers refurbish interior airplane panels in a simple but thoughtfully arranged shop. Customers remove panels and ship them to Air Excellence in large wooden crates. When they arrive, the parts are stripped of their old coverings, checked for damage and repaired, then fitted with a new vinyl covering.
The work is extremely labor intensive, with workers using simple hand tools to remove old laminates from the sheet metal panels. The facility houses little in the way of automated equipment, save for a rig that applies the laminate and a few other small machines. Wooden molds are used to hold panels in a press that applies the laminates. Workers trim and do the final fitting by hand.
Williams provided the start-up capital by selling his shares of stock back to his former employer, then putting the proceeds up as collateral for bank loans.
Commercial airliners undergo major regularly scheduled maintenance every few years. In some cases, the work requires that the interior components be removed to gain access to certain mechanical systems and to perform checks and services. Its during those inspections that the airlines either replace or decide to redo the panels.
U.S. airlines operate approximately 1,700 airplanes and the European fleet is made up of roughly 1,500 aircraft. A study by the Air Transport Research International Forum estimates that growth in airline travel will increase in 1999 by 4.3 percent in Europe and 2.3 percent in the United States.
European airlines tend to be smaller than those in the U.S., and many have their maintenance done at the facility in Shannon. With the global fleet expected to increase significantly in upcoming years, more aircraft will require major maintenance each year.
In an industry in which relatively few players compete, Air Excellence relies heavily on referrals and repeat business from airlines. As Ogborne points out, airline purchasing agents look for outside vendors that can handle large parts of their business seamlessly, from scheduling pickup to delivering the service to their doors. With recovery a fraction of the cost of purchasing new panels, Ogborne figures an economic slowdown will make Air Excellence even more attractive to companies seeking to conserve cash.
Sales to date
Air Excellence posted sales of only $23,000 in its first year. Contracts with large customers such as Delta and US Airways have allowed revenue to grow quickly since the companys first project, refurbishing 60 panels for a single aircraft owned by a Venezuelan airline. Last year, it logged $4.3 million in revenue, and is projecting it will reach the $6 million mark in 1999.
Sales and Marketing Strategy
Ogborne handles the sales at Air Excellence, and has tapped long-time customers and relationships he has developed over the years to secure business. Much of the work comes by referral, often from suppliers and vendors, and the company has a backlog of work that reaches several years into the future.
The airline industry is a relatively small one, with a small circle of contacts that makes most of the decisions when it comes to replacing or repairing aircraft interiors. Williams and Ogborne keep their eyes and ears open for new business.
Because its so small, everyone knows exactly whos doing what, says Williams.
Because of the size of the projects its logged, Air Excellence has enough work to keep it busy for years. Projects for US Air and Delta comprise a big chunk of the companys work.
Now, its keeping ourselves from becoming complacent, says Williams.
Ogborne says the company will have to pay close attention to ensure that it maintains the quality standards that have helped Air Excellence capture the work while moving the projects in and out the door on time.
Says Ogborne: Once you say qualitys not an issue, it becomes one.
Youre making more sales than ever, but your bookkeeper says your company is in a cash crunch. How can it be?
The problem may be simply in your cash flow management, say the experts.
Jeffrey Moreland, vice president and treasurer of Jaymore Electrical Products & Systems Inc., says too many business owners look at sales growth and profitability and fail to pay attention to cash flow.
While profitability is one measure of your companys performance, its not going to keep you afloat. On a day-to-day basis, its cash or the lack of it that will make or break your business.
No wonder business owners get caught in cash flow limbo. The mathematics of cash flow can be tricky.
Consider this example: You get a few new customers that bring you an additional $200,000 in business each month. Sounds like a blessing, but it could turn into a heartache. Your payables average 15 days, while your receivables are averaging 30 days. Somewhere along the line, youre going to need an infusion of another $100,000 into your cash flow to handle the extra business.
Why? Because youre going to have to cover the 15 days of lag time between when your bills come due and when your customers pay you.
Moreland says there are a number of factors that can contribute to cash flow problems, but the principal causes are:
- Poor profitability It may take a while to show up, but poor profitability will eventually erode your cash flow. Either youre paying too much for goods or not charging enough for your product or service. New businesses are particularly vulnerable, since the tendency is to try to undersell the competition to get the business.
- Rapid growth Aggressive growth likewise can eat up your cash. New business often requires additional inventory, more in receivables and additional capital investments.
- Poor management Basing investment decisions on profitability, adding unnecessary expenses and faulty business systems can lead to cash flow problems.
- External forces An increase in the cost of goods or services to you, shrinking markets and the introduction of new competitors can put a noticeable dent in your cash flow.
When facing a cash flow crisis, Moreland suggests, communicate with your vendors and be upfront. Let them know that youre going to be late with payments.
You cant hide, says Moreland. Theyll just stop shipping or go C.O.D. He suggests selling off useless assets, taking the ax to your budget and prioritizing who you are going to pay. Under no circumstances should you draw out of tax accounts, says Moreland.
Other ways to ease cash flow woes, he says:
- Consider leasing equipment instead of purchasing it. Upfront costs are usually less, leasing companies usually have more liberal credit standards than banks and there may be tax advantages.
- Use bank financing for asset acquisitions, such as real estate or equipment, but not to finance inventory costs for a ramp-up in business.
- Try to negotiate better terms with vendors.
- Ask for a deposit from customers on orders or offer a discount for early payment.
Marcia Schwab, a senior management consultant with the University of Pittsburghs Small Business Development Center, suggests that business owners do a monthly and yearly cash flow forecast to determine where cash needs will fluctuate and start early to plan for the changes. Early planning to secure financing through times when cash is likely to be scarce is sound management.
Says Schwab: Going into a bank at the last minute is perceived as mismanagement.
Ray Marano (firstname.lastname@example.org) is associate editor at SBN.
Its no news that technology companies are finding it difficult to find and keep highly skilled workers. And employers that pay at the lower end of the wage scale are having headaches attracting workers and holding them.
But companies that lie somewhere between those requiring high-knowledge employees and those hiring unskilled and high school student workers are finding themselves scrambling for reliable, skilled workers, too.
The lack of quality workers is a real problem in the construction industry, where the average worker is 49 years of age, says Jerry Fox, vice president of Patio Enclosures Inc., a manufacturer and installer of patio and porch enclosures, solariums, custom blinds and shades, and casual furniture.
When the company began to feel the worker pinch a few years ago, it launched a comprehensive program to attract and retain workers with extensive training and assurances of future growth within the company.
Still, the company doesnt expect the pressure to ease up any time soon.
I think its going to be a long-term issue, says Tony Schipani, general manager of the Pittsburgh operation. There are a lot of other things out there that they can do. You dont get a big pool of people to choose from.
A booming economy that created a surge in demand for its products has meant a growing need for employees at Patio Enclosures. A shrinking labor pool and other options for employment have made it more difficult to find workers willing to stay in the construction industry.
Patio Enclosures has seen its sales more than double since 1992, but finding workers has been a problem. By last year, there was a shortfall companywide of 78 employees. The company, which has annual sales of $65 million, estimates that a shortage of workers last year cost it $5.5 million in lost sales.
In just two years, it has closed the gap substantially, and the recruitment and retention program appears to be succeeding. Turnover has dropped, and to date this year, the company is short only 32 installation employees, fewer than half the number last year. Heres how Patio Enclosures is easing its labor crunch.
Goals and rewards
Schipani says theres no magic to his companys approach. The keys are to make sure applicants realize that there is a future with the company, that there are opportunities to progress in terms of pay and responsibility, and that there is a structured training program designed to help them meet their goals.
To make sure employees have the greatest chance of success, all go through a structured training program that requires them to reach certain benchmarks and rewards them with additional responsibility and pay raises.
Most begin as probationary apprentices (although the company does hire higher-skilled workers at advanced levels) with the potential to reach lead carpenter level. For employees to progress to the next level (apprentice 1), they must be involved in 20 installations. Through additional experience, they advance to installer, lead installer, carpenter, measure/breakout person and lead carpenter, with testing and evaluation at every level. Construction employees have opportunities to move into sales or management positions.
Get the word out
But while you might have a stellar program for training and promoting your work force, Schipani says, you wont have much success unless you can recruit qualified applicants. Part of the problem Patio Enclosures found was that prospective employees werent aware of how rewarding jobs in construction can be.
Entry-level rates at Patio Enclosures range from $9 to $16 an hour, and employees who work for a year or more become part owners through its employee stock ownership plan. And while construction work is often seasonal, the company offers an opportunity to work on residential projects in other cities, on commercial jobs or at trade or home show booths.
To make sure it was reaching a wide range of potential employees, the company distributed pamphlets to its employees, at trade shows, job fairs and trade and vocational schools, explaining jobs available. Information is also posted on the companys Web site.
Consider emotional support
The issue of attracting and retaining productive workers goes much deeper than simply offering adequate compensation, says Charles Popovich, professor of marketing at Robert Morris College and a private business consultant. Popovich says the major social institutions that used to provide individuals with emotional support intact families, churches, schools and others have faltered.
Businesses now are faced with finding ways to fill those needs in some cases, says Popovich, if they want to attract and hold onto their best employees. If the workplace becomes more than simply a way to earn a living, if it provides interpersonal connections and becomes an entity with which employees can bond closely on a social and emotional level, workers are more likely to stay.
If employers provide a clear path for employees to succeed and achieve, workers become convinced that the company does, indeed, have their best interests at heart. And, says Popovich, satisfied employees are a companys best recruiters and boosters.
The training factor
Schipani recommends that employers consider a few basics before putting a recruitment and retention plan in place. First, he says, develop a program thats appropriate to your business.
Before you put in a screw, you have to know how to hold the screwdriver, says Schipani.
You also have to promote the fact that you have a strong training program designed to move employees up the ladder by providing valuable skills training and communicate to prospective applicants that your policy is to promote from within.
Says Fox: The idea is to create a coaching environment where men and women can learn on the job from people with experience.
How to reach: Patio Enclosures, 412 431-7000
Ray Marano (email@example.com) is associate editor of SBN Pittsburgh.
The roots of a successful merger between Dudreck DePaul Ficco & Morgan and Hallmark/Tassone lie in a success and in a failure.
The two agencies had moved into a common office space in Four Gateway Center to see if they were compatible enough to merge. They joined forces to pitch the Allegheny Energy account, an effort that proved successful.
I think that whole deal helped us get over the culture shock, says John DePaul, a Hallmark/Tassone principal and former name partner at DDF&M.
But another pitch with a different outcome is also cited as one of the defining moments in the combining of the agencies.
The two staffs worked together at a feverish pace for three weeks during 1997 in a bid to land a major account. The agencies had shared resources on some of their respective existing accounts and jointly pitched for other business since moving in together the previous year.
But snagging this account, they believed, could solidify their relationship and demonstrate how well they could work together. It would be a coup for the partner agencies that had been shacking up to see if they could make a marriage work.
In the end, the business went to another agency, but the effort hadnt been in vain.
Says Jim Calderone, executive vice president and creative director: I told [Hallmark/Tassone CEO] Bill Binstock we didnt get the business, but now we have one agency.
Working together intensely for three weeks, while failing to land the account, knocked down the last of the barriers between employees who had come from a diverse array of agencies over the previous years.
The DDF&M acquisition has given Hallmark/Tassone a spurt of growth that helps promise to bring the agency to the $90 million mark in capitalized billings in 1999, a gain of $55 million since Binstock took over at Hallmark Advertising in 1995.
Its goal is $100 million by 2000, and $250 million by 2005, and while the clout that a larger agency brings should contribute to that growth, much of it will have to come through acquisitions. Binstock has his eye on Cleveland, Charlotte, N.C., Columbus, Ohio, and Washington, D.C.
Wheres the business?
DDF&M partners John DePaul and Al Dudreck realized years before their merger with Hallmark/Tassone that their industry was changing in ways that meant they would have to grow to remain competitive. The Pittsburgh market has been tough, to say the least, for advertising agencies in recent years.
The exodus or demise of large corporations in the 1980s hit the industry hard, and the remaining big players usually found New York agencies more to their liking.
Agencies concluded that the bulk of new business would have to come from outside the region, but to mount an effort to get those accounts takes a lot of resources. Small agencies began to find it more difficult to compete in an environment that required significant investments in technology to keep up with client demands. Many, like the ones Hallmark/Tassone has acquired, had well-developed specialties but found them difficult to sell to large clients.
DDF&M had some enviable strengths. It had a sizable public relations practice, something that Hallmark/Tassone, which has represented Dads Pet Products and Hoover Co. for years, lacked. DDF&M likewise had built a solid reputation and a strong list of long-time advertising and public relations clients.
It landed Kings Family Restaurants in the early 1980s and continues to handle that account, and it had an even longer relationship with Shop n Save.
Because the agency was mature and had grown steadily, it had a clear, stable structure that could be put to work in making Hallmark/Tassone tighter organizationally. But DePaul and Dudreck realized that their business wasnt going to get any easier. And they had to face issues such as the impact of technology on the industry and the investments required to remain competitive.
At DDF&M, says DePaul, it would have been tough for us to come up with the hardware and software needed to compete for the larger accounts.
Merging businesses is never easy, and when the enterprises involved are heavily dependent on exceptionally creative human capital, its no simple analysis. When acquiring a manufacturing company, both parties bring to the table many more tangible assets.
In an advertising agency, the critical assets are in the human resources, and theres no easy way to predict how they will respond when confronted with having to forge a new set of working relationships.
A milling machine wont walk out and go to work for a competitor, and it wont take customers with it, even if you sell it off. But in a creative enterprise, the people who do the work comprise the bulk of the value, and those people naturally will react to change with at least some resistance.
And lets face it ad agencies brim with creative types and powerful egos. So a merger unquestionably raises turf issues and other uncertainties about where they will fit into the new organization.
There are key people that the combined new entity doesnt want to lose in the upheaval and who could readily be snapped up by a competitor. And there are the principals and long-term employees who identify with the old name.
Principal Tim Tassone recalls the response from one of the principals of an Orlando agency it had acquired when Hallmark/Tassone executed a name change a move which everyone, including the acquired agency, agreed was necessary. The Orlando agency principal didnt show up for the press conference to announce the change, and Tassone believes his reluctance was tied to the realization that his name wasnt going to be out front anymore in a city where he had become quite well known.
Employees dont take a name change any easier.
Probably the toughest thing for the employees was to take the sign off the door, says Dudreck.
Growth through acquisition
For Hallmark/Tassone, growth has been a process of identifying the right partners and going through the necessary steps to make sure that the two entities can work together organizationally once the merger is completed.
Assimilating DDF&M was the largest undertaking of its kind, but by no means the first for Hallmark/Tassone. Binstock and Tassone merged their agencies in 1994, with the objective of building the business not simply by adding accounts, but by acquiring agencies and gaining the muscle to pitch to large clients outside of Pittsburgh.
The ensuing years saw Hallmark/Tassone buying Van Dine Humphrey and Point Communications, as well as a handful of Florida agencies.
DDF&M, meanwhile, had looked at making acquisitions and considered offers from other agencies to be acquired, but the fit was never quite right.
Both Al and I knew that none of that was going to work, says DePaul.
At the front end
Mergers are not easy to pull off, but Binstock says the pain can be minimized if the proper work is done up front.
Too many deals, are done for financial reasons, says Binstock, a move he says is a mistake.
I think were careful about not putting ourselves together with companies for financial reasons, he says. More often than not, acquisitions and mergers are done because there will be economies of scale.
When theres no rhyme or reason organizationally, problems are certain to follow.
Two CEOs sit down and they work out the numbers, Binstock continues, and the numbers make all the sense in the world and they work out positions for themselves at the top ... and they put the two companies together. Guess what? Youve got a lot of problems up and down the organization, the bigger the organization the worse.
And when a company tells employees that the merger is for other than financial reasons but does a house cleaning, it risks fostering mistrust.
When you have a big general meeting and before or right after that 10 people get axed, it doesnt matter what you say in the meeting, says Binstock. Youve done what everyone thought was the reason to do it.
If the companies dont share a similar philosophy, problems can emerge. Tassone recalls a meeting with the owners of an agency from Charlotte, N.C. who was interested in a merger. The agency is a strong creative shop, well respected in its market and would have brought about $25 million in additional billings to the agency, but Binstock and Tassone say they knew it wouldnt work.
An agency that was creative-driven, they realized, would clash with Hallmark/Tassone.
Their point of view of how marketing should be done was 180 degrees away from ours, says Tassone.
DDF&M was, on the other hand, a good fit with Hallmark/Tassone for a number of reasons that went beyond financial. DDF&M offered Hallmark/Tassone an easy entry into public relations.
At the simplest level, there was almost no conflict of clients. Both had solid experience in retail advertising, and both viewed themselves as account-driven, that creative existed to sell something, and the needs of the client drove the creative process.
Teaming with the younger Binstock and Tassone offered Dudreck and DePaul, who found themselves wearing an assortment of hats while running DDF&M, an opportunity to downshift and focus on more narrow areas of the business.
DDF&Ms principals realized that the marriage wouldnt be a happy one if the cultures couldnt mix harmoniously or there werent enough solid strategic reasons to try to pull it off.
If money is the only consideration, chances are pretty good that youre not going to be happy, says DePaul.
Hallmark/Tassone learned some valuable lessons along the acquisition trail. Acquiring companies have to consider what kind of compensation structure the joining firm has. How will differentials in benefits be reconciled, and how will pay scales be structured? The experience of acquiring the smaller shops taught them to look at those kinds of issues going in.
I think it taught us, on a smaller scale, how to go about acquiring agencies, says Binstock.
Technological compatibility is another consideration. DDF&M had a PC-based system, while Hallmark/Tassone operated on a Macintosh platform. On that front, some dissonance remains.
Were still battling that, says Tassone.
DDF&M and Hallmark/Tassone decided that sharing
office space at Four Gateway Center might be a way to bring the organizations together and give the employees a chance to mix and become accustomed to each other. They settled on a three-year term to live together while each pursued its own business as an independent agency, with an occasional joint pitch when appropriate.
Dudreck and DePaul, with the help of Hallmark/Tassone, had worked carefully to assure their two dozen or so employees that a merger would be good for everyone, that they werent going to be hung out to dry. On the first day that DDF&M people moved in, Hallmark/Tassone account people organized a carnival in the offices and hallways to help break the ice.
The agencies worked on their respective accounts, occasionally drawing help from each other. They used the same conference rooms and kitchen, entered and left through the same door. The arrangement was, for the most part, a comfortable one, but problems did arise.
Pitching business together sometimes proved awkward and confusing to potential clients. And there were nagging questions among employees about where they would ultimately fit in as the merger progressed. Even as it became apparent that the two agencies would ultimately become one, people continued to pair off as they had before the partnering. There were lingering doubts about job security.
None of it surprised Tassone.
We just knew that when we moved in together ... we would have a lot of personal issues among employees, says Tassone. Its human nature.
A single flag to rally around
Tassone says he ultimately recommended that the agency operate under a single name that would end the confusion and give everyone the sense of a single organization, not simply two ships in the same harbor. The principals agreed on Hallmark/Tassone. Then they brought in a consultant to review the situation and make recommendations.
She told us we have the typical deep territoriality here, Tassone recalls.
To break down the barriers, Tassone had employees gather to do SWOT analyses; strengths, weaknesses, opportunities and threats.
My goal was to have the people of our agency tell me what the strengths, weaknesses, opportunities and threats were, and then to draw conclusions and do something about it, he says.
The principals then assembled a group of task forces to attack issues and come up with recommendations. Suggestions ranged from how to structure performance appraisals to standardizing management systems to remodeling the kitchen. The Pittsburgh staff continues to meet as a group on a regular basis to keep everyone up to standard.
None of the partners describes the process as a slam-dunk. With two large agencies merging, one made up of several others swept into the fold in a few years, there are bound to be disagreements and uncertainties. Dudreck characterizes it as eight pairs of shoes under one bed, but they all agree that the whole far exceeds the sum of the parts.
Only a few people left when the agencies were merging, and Binstock and Tassone write off the departures as amicable and substantially because some people simply like the pace of a smaller shop, and not because they felt they were sold a bill of goods. Binstock credits a strategy of finding a spot for everyone in the company and making sure everyone got the truth up front.
You have to be clear in communicating, says Binstock. The worst stress is not knowing.
How to reach: Hallmark/Tassone, (412) 471-3308 or at www.hallmarktassone.com
Ray Marano (firstname.lastname@example.org) is associate editor at SBN.