Todd Shryock

Monday, 22 November 2004 10:18

Helping small business

Serve, advocate and lead.

Those are the simple goals COSE has for serving small businesses in Northeast Ohio, but it takes strong leadership to band more than 16,000 businesses into a cohesive group.

Steve Millard, executive director of COSE, has faced that challenge since assuming his role in 1999.

Millard also took a leading role in consolidating several business organizations into the Greater Cleveland Partnership, where he serves as COO in addition to his role with COSE.

Millard focuses on creating a results-oriented culture. Under his leadership, COSE has accomplished the following.

* Membership grew from 15,800 to 16,400, with retention rates topping 90 percent.

* The number of discounted products available to members grew to include office supplies, mortgages, banking and credit card services and electricity.

* COSE held down health insurance rates despite skyrocketing costs nationwide and instituted wellness and disease-management programs.

* It launched a Business Plan Challenge to emphasize the importance of good business plans and gave financial rewards to the winners.

* The organization increased its advocacy efforts on the national scene to voice support for SBA loan programs.

* COSE partnered with 10 other entrepreneur and business support organizations to create, a conduit between the entrepreneurial community and service providers.

Millard has created a culture at COSE that values results and those who achieve them. This earned COSE the highest honor by the National Association for Membership Development as the best chamber in the nation in 2002.

As COSE's volunteer leadership continues its work on behalf of their fellow entrepreneurs, Millard will continue his support to forward the cause of small business in Northeast Ohio. How to reach: COSE, (216) 621-3300

Monday, 22 November 2004 09:42

Generational commitment

The Ratner family's years of giving have set the tone for what the Forest City Charitable Foundation has become -- an organization that invests in human capital and effects positive change in the communities Forest City serves.

The foundation accomplishes this through $2 million in annual contributions, concentrated in the Cleveland area, and through hundreds of employee volunteers who serve on boards, run in races, participate in book sales and give countless numbers of hours to local health and human service agencies.

As Albert Ratner, co-chairman of the board of directors for Forest City Enterprises often says, "You can accomplish so much more together than anyone could alone."

Forest City associates prove that true each day, whether working at a Cleveland school, raising money for the Susan G. Komen Breast Cancer Foundation or volunteering at local service agencies across the United States during the company's first national volunteer day, in which 400 associates in Cleveland and 1,000 nationwide participated.

Forest City's associates often initiate their own fund-raising efforts for events such as Race for the Cure and other walks benefiting the American Diabetes Association, the American Heart Association, the Muscular Dystrophy Association and others. Forest City responds with matching contributions.

"We believe by building communities physically with the projects we do and, most importantly, by building the human capacity in the communities in which we operate, that we make every place better and we improve the quality of life," says Chuck Ratner, the company's CEO.

One example of Forest City's commitment to the community is its participation in the Business/School Partnership Program.

For the past 17 years, Forest City Enterprises has given the bulk of its time and financial contributions to the betterment of Thomas Jefferson Middle School on West 46th Street in Cleveland. As part of the program, Forest City employees have helped thousands of school students receive a better education on Cleveland's near-West side.

The company has completed general improvements at the school, such as painting and carpeting. It also holds fund-raisers, such as an annual book sale, it sponsors a week during which employees read to students, offers a monthly shadowing program in which a student spends half a day with a Forest City employee, helps finance graduation ceremonies and awards grants to teachers to implement new programs.

A paid Forest City employee works at the school to coordinate the company's volunteer efforts.

Last year alone, the company donated more than $50,000 for various programs at the school.

How to reach: Forest City Enterprises, (216) 621-6060

Thursday, 21 October 2004 07:30

Hidden savings

Putting your expenses in the right category can have a big effect on your cash flow.

When you buy or build a facility, it's important to make sure your assets are properly segregated into the right classifications for tax purposes. While you will get your depreciation eventually even if you don't do this, doing so properly can give you more of the cash you need now to run your business.

"In its simplest form, if you get $10, would you rather have $10 today or $1 per year over the next 10 years?" says Tony Constantine, tax manager with Cohen & Co.

Accountants call this cost segregation. For nonresidential property, assets depreciate over a 39-year period. But there are numerous items that can be depreciated on a faster schedule, freeing up more money from taxes.

"When you look at a project, it is made up of structural stuff that can be depreciated over 39 years," says Constantine. "But when you break down the components of a building, there are land improvements, sidewalks, curbs and parking lots that can be written off over 15 years. Carpeting can be written off over seven years. When you look closer at project costs, there are significant savings by writing certain assets off quicker."

Not everyone is taking advantage of the tax savings available in those early years.

"Either they are not aware of it or they just don't think about the fact that they can write some of this stuff off quicker," says Constantine. "Sometimes they just don't understand it, and sometimes it gets lost in the rush to get something done. Taxes are at the back of their mind."

In the past few years, taxpayer-friendly legislation has led to more interest in cost segregation because there are even larger potential savings than were available in the past.

"The government took something that was worthwhile before and made it even more worthwhile," says Constantine.

Not everyone will be able to benefit from cost segregating assets, but the less time you've spent in your building, the more likely you can find some tax savings.

"If you are considering buying a building, you should be looking at this," says Constantine. "If you are building a building, you should be looking at this. If you bought a building in the past few years, you should consider it. If you are a few years down the road since you bought the building, say about 10 years, then it may not make a lot of sense to do it.

"The further out you go, the less the benefit would be. If you bought or constructed a building in the last five years, then you should definitely look into it."

Doing a cost segregation study is the first step. This is much easier -- and therefore cheaper -- to do during construction because the costs can more easily be broken out. If the study is on an existing building, an engineer may have to evaluate what can be reclassified and determine its value in today's dollars. A study might cost anywhere from $3,500 to $30,000, but on many projects, the tax savings can offset those costs.

As an example of what a study might reveal, electrical and plumbing are usually considered part of a structure and have to be depreciated over 39 years, but if they are supporting a specific piece of equipment, they may be able to be reclassified and depreciated over a shorter time span.

"Medical offices are typically a good candidate for that reason," says Constantine. "They have a lot of dedicated electrical and plumbing for their equipment. In a manufacturing setting, there might be equipment with special cooling or electrical systems. Even a reinforced concrete floor to support a machine can be included."

How to reach: Cohen & Co.,

Thursday, 21 October 2004 07:26

Payout or potential?

Stocks are an important but challenging portion of your portfolio. With thousands of companies to choose from, how do you sort out the winners from the losers?

There are essentially two main categories of stocks: those that pay dividends and those that have a high share price growth potential. Dividends provide you with a steady but usually slow way of earning money from your initial investment. Growth stocks usually don't pay a dividend but have the potential to have an exponential increase in share price, earning a greater return on your investment in exchange for a higher risk factor.

"Growth stocks are typically more technology driven or smaller start-up companies," says Patrick Hanratty, managing director of Capital Advisors Ltd. "A dividend-paying company has products that are more defined."

There are pros and cons to being in each class of stock.

"On the growth side, one of the pros is the stock has high potential for appreciation," says Hanratty. If you pick a winner, your return can be very high.

"One of the cons of the growth side is there are thousands of companies to choose from. There are so many growth and mid-cap companies it is hard to pick a winner. There is also usually substantial risk. At all points in time, there needs to be a relationship between risk and reward. A stock might have the potential for being a homerun, but you also have the potential of losing all your money."

Any offer that pitches the potential gains but denies any potential loss is most likely a scam. Big rewards always have big risks.

"Growth stocks can be the most risky piece of your portfolio," says Hanratty. "You have the greatest number of options, and you've got a good chance of losing a lot of money. There's not much chance of making it with a growth stock, but if you do, you'll make it big.

"Everyone wants to own the next Microsoft. It's all about homerun companies, but those aren't core pieces of your portfolio. Those are the fringes."

Dividend stocks are pretty straightforward. Most of them have long-established track records with strong brand names, and they are much less volatile than growth stocks. The dividends help hedge against a market downturn, but because the companies are established, much of the growth has already been achieved.

"Dividend-paying companies can't have gotten to that point unless they've been around, made money, paid down their debt and aren't so R&D driven," says Hanratty. "Dividend companies are the staples of America. The con is they have a more limited upside."

So what you invest in depends on your risk tolerance and cash flow needs.

"You end up with an average of anywhere from 25 percent to 75 percent of your portfolio in equities," says Hanratty. "If you are only at 25 percent, then liquidity and capital preservation is important or you have no risk tolerance. If you are at 25 percent, then 90 percent of your equities should be dividend-paying or producing income. You probably don't have the tolerance or time to do anything else.

"If you take it to the other side, with 75 percent in equities, you probably have a longer time horizon. You can go through several market cycles before you'll have the need for money. You can be more growth-driven. I like diversification, so maybe you would have 50 percent in growth stocks and 50 percent in dividends of the overall 75 percent in stocks." How to reach: Capital Advisors Ltd., (216) 621-0733

Monday, 27 September 2004 10:27

Training regimen

Competition in the manufacturing sector is fierce, with challenges for business coming from across the globe. But Brad Ohlemacher, executive vice president and owner of Elyria Manufacturing, has found that making a commitment to work force development gives his company an advantage both in the marketplace and in some unexpected ways as well.

"We have a wide variety of training we do," says Ohlemacher. "It crosses a broad cross-section of the different disciplines we have here."

Shop workers at the precision machine products company are trained in the latest technical and quality assurance principles. Office employees are trained in how to make the most of their office software, and executives attend strategic planning training.

"It's our belief that the only way we can survive as a company is that we have to invest in technology so we have the latest equipment, and invest in people to continually improve so that we're always getting better," says Ohlemacher. "We have a continuous-learning philosophy. We believe in continuous education and learning to help us become a better company.

"For us, it's about investing in capital equipment so we have the latest technology, and investing in people so we have the latest thinking."

Many manufacturers say they can't spare the time away from the manufacturing process to train employees, that schedules would be disrupted and productivity would suffer.

Ohlemacher doesn't agree.

"When you are investing in improving somebody, you would be amazed at how those issues just fall away," says Ohlemacher. "Employees help make it up. The employee understands that it is an investment in them, and they work extra hard and other employees help cover for them."

Investing in employees makes them feel important, and a stronger sense of loyalty is developed.

"If you are making an investment into somebody, there is some feeling of appreciation," says Ohlemacher. "It gives people a reason to keep working here beyond just money. It's a different way to show you care as a company. We don't do it for that reason; we do it because we have to. It's what keeps us a growing company."

Another objection to work force training is that you might spend a lot of money on an employee's training, only to have that person leave for another firm.

"How bad would it be to have someone leave, as opposed to have someone remain there that doesn't want to learn?" says Ohlemacher. "That argument doesn't make any sense to me. Why you would want someone there that is subsisting rather than someone you are investing in and making them grow to help you grow seems illogical. Sometimes employees leave, sure, but that's part of life."

Not only does training help retain employees and make Elyria Manufacturing more competitive, it also is a good recruiting tool.

"There's no way to measure it, but it is a better sell to a potential employee," says Ohlemacher. "From the employee's point of view, would you rather work for a company that doesn't do training or one that does?"

Elyria Manufacturing's HR manager is responsible for scheduling all training sessions. Training ideas come from executives, managers and even course offering fliers from Lorain County Community College, where the company does most of its training.

Training sessions that need to be attended by everyone are broken up into smaller sessions spread across several days. The location of the training varies by the equipment needed for the course. If it can be done onsite, it is; if not, employees are sent to an offsite location that has the needed equipment.

"We want employees at every level to learn," says Ohlemacher. "We are willing to invest the money, time and effort to develop them. They will define whether we succeed or fail. The point is, you need to train. It's a matter of growth and survival.

"A company gets more than they pay for when they train. It's very difficult to measure, and it's one of the greatest challenges. If you put $1,000 into a machine, you can measure what the return is, but if you put $1,000 into an employee, how can you measure that return? You can't. You have to make that leap of faith."

How to reach: Elyria Manufacturing, (440) 365-4171 or

Monday, 27 September 2004 10:24

Strength in numbers

Health care costs are rising at an alarming rate.

As a business, there's only so much you can do to keep costs in check. One way is to become part of a larger group that will help you to get a better rate.

There are several ways to go about this, including joining a local chamber of commerce or an industry trade association. It's a matter of balancing the benefits offered with the price you pay.

"There is a tremendous advantage to being part of a larger group," says Tom Sudow, executive director of the Beachwood Chamber and chair of the Northern Ohio Area Chambers of Commerce, an alliance of chambers that was formed to give members access to lower-priced benefits. The group now represents 115 chambers and about 35,000 businesses.

"There are a couple of different plans to choose from, and members get the NOACC discount. It's the same discount for every business. Depending on which insurance plan you choose, it's roughly 3.5 to 4 percent savings, whether you come in with two people or 50."

Businesses interested in the benefits can either use their existing broker or the chamber will recommend one. The plan is chosen, a price determined and the discount is applied.

"Health care costs are rising for all businesses," says Sudow. "We try to work as a cooperative of 115 chambers to contain health care costs."

COSE, the small business division of The Greater Cleveland Partnership, also focuses a great deal of its efforts on keeping health care costs lower for members as part of its overall focus of providing the resources businesses need to grow.

"What we run is a group purchasing program," says Steve Millard, executive director of COSE. "We are administering the whole program. With COSE, you get the benefits of being in a group purchasing program."

As a qualified health alliance, members pay no premium tax. COSE administers insurance to 220,000 people from 13,000 companies in Greater Cleveland.

Similar group programs are also usually available from industry associations and trade groups. But no matter which group you decided to go with, make sure you compare what you are getting for your money and join for the right reasons.

"Don't join a chamber just so you can get the benefits," says Sudow. "The benefits for us in NOACC are just the frosting on the cake. Use the membership to build your business. You should be able to get enough business out of your membership to move forward."

Millard says insurance is just one reason to join COSE.

"You do get insurance when you are part of the program, but you get all the benefits of membership," says Millard. "When you buy a package, you are getting not only insurance that is competitive but all the other services you need to be a successful business."

Here are some key questions to ask when comparing group health plans.

* How many people are enrolled in the program (not just how many people are eligible)?

* How many companies are in the program?

* Is each business looked at individually or pooled with other member companies when determining a rate?

* Who handles the administration of the plan, and what will the paperwork burden of the business be?

* What programs, such as a wellness programs, are available to help you contain health care costs?

* How many different plans are offered, and what is the coverage of the physician and hospital networks?

* What is the total cost of the program, including administration, taxes and premium fees?

* Besides health insurance, what other member benefits are offered, and will you use them enough to justify the cost of membership? How to reach:,

Tuesday, 31 August 2004 06:31

True colors

Sherwin-Williams has been creating innovative concepts for 138 years, so it's no surprise that innovation is ingrained in the company's culture.

"We view innovation as being more cultural than structural or policy driven," says Christopher Connor, chairman and CEO of Sherwin-Williams. "It is an important part of our heritage, beginning with Henry Sherwin's invention of the pigment grinding mill in 1876 that made possible the first premixed paint, to the invention of water-based paint in 1941, the first paint roller in 1941, the first latex paint in 1950, and the list goes on.

"Over the years, Sherwin-Williams has amassed more than 500 patents, but innovation goes far beyond product development. While we have a responsibility to our customers to continually advance coatings technology, we also have a responsibility to our shareholders to continually advance the productivity and effectiveness of our company. As such, we expect innovation in every discipline of the company."

To keep fresh ideas coming, teams of employees compete to win recognition in an annual contest.

"Each year, we sift through dozens and dozens of nominations to recognize four teams of employees within our company for their outstanding performance in the areas of technical achievement, marketing achievement, cost reduction and quality," says Connor. "The names and photos of the four winning teams are posted in a permanent display in the Center of Excellence (a company museum), by no coincidence on the Spirit of Discovery wall. These four awards are among the highest honors one can receive in our company.

"Although there is not an 'innovation award' per se, being selected for one of these honors has everything to do with innovation. In my 23 years with the company, I cannot recall a team winning in any category by doing the status quo better. Given the intense competition each year, everyone knows that marginal improvement won't cut it. You win by quantum leap improvements, and that requires leapfrogging existing methods and technologies.

"The fact that we receive so many applications for these awards each year underscores the point that innovation is part of our company culture. Everyone understands that innovation is an integral part of their job. Continuously improving how you do your work becomes as important as the work itself."

Connor says there is more to innovation than coming up with a unique idea. How the idea can be applied and what value it brings is the true measure of success.

"There is a difference between innovation and successful innovation," says Connor. "Doing something unique is innovation. Doing something that brings unique value to your customers and shareholders is successful innovation."

Connor lists Krylon Fusion for Plastic aerosol paint and the Twist & Pour paint container as two examples of successful innovation.

"In both cases, we began with well-recognized challenges -- traditional spray paint doesn't adhere to plastic and traditional paint cans are not user-friendly - and we developed straightforward solutions: A spray paint that forms a molecular bond to plastic and a plastic paint can with a screw-top and integrated pour spout," says Connor. "The benefits of these innovations were obvious to end-users, and sales took off. Twist & Pour is now available in four of our best-selling paint lines, and Krylon Fusion soared over our first year sales plan.

"An important lesson here is that the market is the ultimate judge of successful innovation. The genesis of most successful innovation isn't in a lab or an office, it is with the customer in a store or on a job site."

Every spring, paint companies hold events for painting contractors called pro-shows to unveil new products and write orders for the start of the painting season.

"Last year, I was talking with a contractor at one of these events, and he told me that he attends many competitors' pro-shows each year, but makes it a point to never miss ours," says Connor. "I asked him why, and he said, 'Because this is where I find out what's new in the industry.'

"We think it's significant that in an industry that many view as a commodity, professional customers come to us to find out what's new and exciting, to learn about new leading-edge products and services that will make them more productive and their business more successful." How to reach:

Wednesday, 21 July 2004 11:17

Office pulse

A slow economy can make for a stagnant office market as businesses close, pull out of Northeast Ohio or limit their real estate spending.

But one company's loss is another's gain. With vacancy rates hovering around 20 percent for the past two years, some businesses have found opportunities to upgrade to a better address, negotiate cheaper renewal rates or get better concessions from landlords.

"The downtown market and Rockside Road are in stagnant positions," says Todd Gabriel, senior vice president of Grubb & Ellis, a commercial real estate advisory firm. "We don't see any true signs that the vacancy rates in those markets are going down quite yet."

The Rockside Road area has an office vacancy rate of 24 percent, while downtown Cleveland has a total vacancy rate of 22 percent. But that number is somewhat deceptive, Gabriel says.

"The downtown Class A market, which is buildings like Key Tower, BP and North Point Tower -- now the 5/3 Center, that market is still relatively healthy at about 14 percent," says Gabriel. "The market that is really stagnating is the Class B market --East Ohio Gas Building, the Diamond Building and the Tower at Erieview. What we have seen downtown is that as big blocks of office space open up and vacancy rates climb higher, the Class A spaces lower their rates to compete with Class B.

"A lot of companies are making the jump from B to A because the differences in rent are not as significant as they were five to 10 years ago. That's why we have a glut of Class B space. People are able to justify the jump in price to get a much higher quality space."

Class C space has vacancy rates in the 28 percent to 29 percent range and has suffered as much as Class B buildings from space jumpers.

"In some cases, the buildings are functionally obsolete," says Gabriel. "In some cases, tenants from Class C have jumped to an A or B space. The price can be justified for moving to a new building. Just like if someone offers a Cadillac for $1,000 more than a Chevy, most people would prefer the Caddy. People in the office market are doing the same thing."

Gabriel says new construction downtown is a long way off. With the current vacancy rates, a new building isn't cost-justified.

"The rents they're getting right now wouldn't support it," he says.

New construction in the suburbs isn't booming, but there is some activity. The south market has the Heritage Corporate Center, with Family Heritage Life Insurance occupying about half of the 60,000 square feet available. On the west side, Crocker Park will have up to 250,000 square feet when complete, while the east side market has a new 75,000-plus square-foot development that is already 50 percent leased.

Even with the construction, there are areas like Rockside that have plenty of options available.

"I did a survey for someone that needed 10,000 square feet on Rockside Road, and they had 16 choices," says Gabriel. "In that market, it is almost like which building you can't have instead of which you can. Five years ago, they would have had five choices, maybe."

Landlord concessions are still very much a factor in the market.

"The typical concessions you receive are free rent and above-standard tenant improvement allowances," says Gabriel. "If you wanted to move, you can get a competitive rate, free rent for a set period, and the landlord will spend a significant amount to build out the space." How to reach: Grubb & Ellis, (216) 861-3040 or

Homegrown in Akron

The Akron office market can be completely different than its bigger neighbor to the north, even where the two rub shoulders.

"Suburban Akron is almost a separate market," says Todd Gabriel, senior vice president of Grubb & Ellis. "I won't say it's bulletproof, but it doesn't have nearly the peaks or valleys that just going 20 minutes north to the Rockside Road area would have. In areas like Fairlawn and Copley, vacancy rates are at about 12 percent."

New construction is limited and big blocks of space do not sit on the market for very long.

Gabriel says that for the most part, Akron office space is occupied by companies that are growing from their Akron base, as opposed to new companies moving to the area.

"It's the people that are already there that are growing," which is certainly a good sign for the Northeast Ohio economy, says Gabriel.

Similar trends are flowing into Cleveland's eastern market.

"One thing worth noting is that the eastern market of Cleveland has a vacancy rate of 17 percent, and that's been coming down," says Gabriel. "Most of the companies in the eastern markets are local companies. It's a positive sign that if the space is getting absorbed, local businesses are growing."

Wednesday, 21 July 2004 11:04

Future challenges

Employers in Northeast Ohio continue to face the same challenges they did last year -- namely recruiting and retaining qualified employees -- which was listed as the No. 1 challenge facing local businesses today.

Besides the challenges, there were also some bright spots in the survey. Business may be a bit slow right now, but survey respondents indicated the local economy may be changing for the better.

"The most prominent stat to me was the fact that only 13 percent anticipate layoffs in 2004," says Marty Mordarski, manager, workplace research, for the Employers Resource Council, which conducted the survey. "It's been as high as 30 percent in years past. I think it is a great sign that employers are being a little bit more optimistic. The average projections for base pay are up a little bit from past years, and the percentage of temporary workers is down. That may be an indication they are hiring more full-time employees."

The average percentage of employees who have been promoted over the past two years is 8.1 percent, its highest level since 2001.

"I think it is a sign that business is growing," says Mordarski. "Maybe in the past, they had hiring freezes where people didn't move to new positions. Now there may be other opportunities to move folks that have been there to new opportunities. As a result, they could potentially hire new folks to replace those positions."

Survey results show that 88 percent of the companies surveyed offer some sort of financial assistance to employees to upgrade their knowledge through training programs or degree programs. Of those that offer it, a little more than 8 percent of their HR budget is dedicated to the program.

"Businesses are making sure their work force is prepared for new opportunities," says Mordarski. "It's a retention tool. As the economy continues to grow like it seems it is, they want to be able to hang onto their best workers. These programs help do that."

Half of employers are using online job boards to find candidates, but only 32 percent have an online career center on their own Web site.

"They are missing a great opportunity to promote their organization and their brand," says Mordarski. "It's another wasted opportunity."

Employers should also use their online career centers to promote living and working in the region.

"Considering how much we hear about brain drain, why aren't employers doing more to promote the region if it is one of the biggest concerns that folks have?" says Mordarski. "It's easy to do. Showcase why someone would want to work at your organization, but also tell them it's because you're in a great region."

Companies may be challenged with finding qualified recruits, but they are not being careless about who they hire. Survey results show that 78 percent use pre-employment drug screening, up from 52 percent in 2001, and 97 percent perform reference checks, up from 89 percent in 2001.

"There is a much greater focus on making sure the right people are coming in to do the job and become part of the organization," says Mordarski.

And while recruiting and retention is the biggest challenge faced by local businesses, less than 2 percent indicated that HR was the most important position in the company.

"It's kind of an eye-opener," says Mordarski. "They are responsible for putting the recruiting and retention programs in place. Companies are not recognizing the resources they have in the HR department." How to reach: ERC,

Local workplace trends and stats

* The average minimum hourly rate has steadily increased since 2001, to $9.67 per hour.

* The average projected pay increase is 3.1 percent, its highest level since 2002.

* Only 13 percent of employers anticipate layoffs in 2004, compared to 23 percent last year.

* 30 percent of employers use some sort of psychological assessment during the selection phase.

* Controlling health care costs has moved up to rank as the second biggest challenge facing Northeast Ohio businesses, behind only recruiting and retaining qualified workers.

* 55 percent of employers offer flexible spending accounts.

* 12 percent offer health savings plans.

* 97 percent have a 401(k) or 403(b) plan for employees.

* 74 percent of companies pay cash bonuses to management, while 58 percent pay them to nonmanagement.

* Companies spend an average of 25.4 percent of their recruiting budget on classified ads, while 21.8 percent is spent on online advertisements.

* 58 percent of companies said that everyone at their company knows their mission statement.

* 16 percent of companies said they do not have a strategic plan.

Wednesday, 21 July 2004 10:47

People power

David Hein walks through the archaic factory on Superior Avenue on Cleveland's near east side in his suit and tie, waving to every employee and greeting him or her by name. The employees take a moment away from the rolling presses or foil stamping machines to smile and wave back.

Hein, chairman and CEO of The Chilcote Co., a 98-year-old manufacturer of photo mounts, folios and albums, understands the importance of the employees and the specialized knowledge each of them brings to work. The machinery is a mixture of old and new -- some pieces appear to have been in use when the building was constructed at the turn of the century, while others have so many lights and buttons on them they could be part of a NASA space launch. The building itself is also a mix, a cobbled together collection of brick and block structures that is reminiscent of many American manufacturing facilities.

Hein points out a scar on the floor in the middle of the warehouse.

"This is where the exterior wall was the last time you were here seven years ago," he says to this reporter.

The building now extends far beyond that line, with racks of boxes stretching high in the air on narrow rows of shelves. As the company grew -- from 190 employees and $23 million in sales in 1997 to 475 employees in four states and in excess of $50 million in sales today -- the building grew with it. The business was almost exclusively photography-related seven years ago, but diversification has changed that.

"In 1997, 95 percent of our revenue was photo-related," says Hein. "Today, it's probably 60 to 70 percent."

The diversification came from a string of acquisitions the company has made to help secure its supplies, keep its dominant position in the marketplace and acquire the specialized machines and the people that run them. Hein knows that consolidation is happening in every industry, and to ignore it would be folly.

The Chilcote Co. has not been idle. Between 1986 and 2001, Chilcote made five acquisitions -- Forest City Bookbindery, D. Davis Kenny Co., Winthrop-Atkins Co., Wooden Nickel Albums and Lakeview Products -- and Hein says they are looking for other opportunities.

Managing growth is challenging, but Hein has found that by focusing on the people issues first, acquisitions go a lot more smoothly.

HR building blocks

People make the business, and people policies determine the viability of a potential acquisition.

"We'll observe the owners and employees to see if there is a chemistry," says Hein of potential acquisitions. "If they are really flamboyant people that fly in the face of our conservative style, there would be a clash. We'll meet them at tradeshows or on the golf course. In a short time, we'll know whether we can get along. We try to get over the cultural hump at least on the executive level."

This is important, because one of the keys to Chilcote's success with acquisitions is to keep the leadership in place after the transaction is complete. It keeps the business running smoothly and helps alleviate employee apprehension.

"We try to minimize the intrusion for our acquisitions to make the process as seamless as possible," says Hein. "We don't want the people that work at the company we acquire to think that their job is going to be at risk. We've been able to do that by making sure the person we bought the company from is still in charge."

When a company is purchased, the person in charge makes the announcement and explains the sale and that he or she will still be running the company. Then Chilcote executives talk about The Chilcote Co. and its culture and financial stability. After that, it's a matter of aligning certain aspects of the business.

"The first thing we go after are the HR issues to make sure they are in close proximity," says Hein. "We could never buy a company that was giving two-month vacations. We go in and make sure the handbooks are similar and that the vacations and holidays are the same.

"We don't want to be working in Cleveland on Washington's birthday if they are not working in Middleboro, Mass., but that's what they do up there. So what we did was establish a program of a floating holiday. We didn't want to take the benefit away from them, so we had to add more here in Cleveland. It's good for the employees, but bad for the company, but at least now we have people working on the same page."

Overtime, safety and other policies are lined up as best as possible. If a company has a policy that isn't in line with what Chilcote does, it is negotiated.

"We've never been in a position where we've had to take anything away," says Hein. "Maybe if a company had a super generous bonus program, if we felt it was not cost-effective to have that, then we would sit down and say, in order to maintain this benefit, we are going to have to increase profitability by 6 percent. How are you going to do that?

"Better buying because of the acquisition might get you 3 percent right there. By putting the hospital benefits together, maybe you get a 1 percent reduction. If you have to go out and get a 5 percent sales increase, how will you do it? That's a mathematical equation and a financial reality.

"If we could not come up with a formula that could make that work, then we probably couldn't do a deal."

Joining a common health care package is one of the few changes required for the new acquisition.

"We try to change as little as possible," says Hein. "But if we can spend $500,000 on health care rather than $600,000 on health care, I think everyone can understand that. We always look to the internal aspects first."

The most difficult part of acquiring another company is dealing with regional cultural differences.

"We have a Northeast culture, a rural Kentucky culture, a Southern culture and we have a Midwest ethic here," says Hein. "It can be frustrating. You have to have a different kind of feel for folks. We've learned that communication is very important. I give high marks to our people who have been involved in the integration process. Most companies do business pretty darn well, in any case, better than we could if we tried to do it ourselves. We give them a set of rules to follow. We still have differences of opinion, but if they do it better than we do it here, they can do it that way.

"There are still some feelings that we are competitors. It's a hard thing to overcome. They always saw us as the enemy. Now that we are in the same family, how do we become friends?"

Differences in operations can cause internal struggles as cultures clash.

"But if something is working well, why change it?" says Hein. "In Massachusetts, they feel they have to be at every trade show, buy everybody dinner and have the latest in brochures and products, and that's very expensive. We had to have an understanding. The previous owner was more liberal financially. We are more ultraconservative. They are not insurmountable differences, you just have to sit down and talk about what steps you have to take to deal with this expense account.

"There have been some casualties along the way. Some people leave. And more often than not, the people that left are probably the ones that should leave anyway."

The Chilcote Co. is owned partially by its employees through an Employee Stock Ownership Plan, with the balance of the company still owned by the Chilcote family. While the employees eventually see the value of being an ESOP, it doesn't make the initial acquisition any easier.

"It has to be hammered home on a continuous basis," says Hein. "That's why we go down there with two or three people and then follow up with levels of communication, not only about the ESOP, but also the soft aspects of employee ownership. It takes a while to get there."

Hein says the company has been very liberal in applying ESOP rules to new acquisitions, giving employees credit in the ESOP for time spent employed with the acquired company.

"The ESOP is the undertow of what we are trying to do. If we can get everyone to think like owners, the whole will be so much better," he says. "Closing windows, turning off lights and writing on the backs of paper -- we are all doing things that a lot of people think are dumb, but that culture, once taught and ingrained, has a huge impact."

The company has paid dividends for more than 35 years, and they have increased or remained the same for eight of the last 10 years. Communication at every level reinforces the value of the ESOP and ultimately helps Chilcote keep its employees.

"The older employees become prophets for employee ownership," says Hein. "They tell the younger employees to not go across the street for a dime more an hour because in a month's time, that company is going to have a layoff. They know their jobs are secure here. It's money in the bank. We understand the company. We share that information so they know where we stand. We share the good information and the bad information.

"Tell me what's going to happen here. That's the kind of place I like to work."

Continuous communication with the acquired companies is vital to the success of the organization as a whole.

"We communicate as much as possible," says Hein. "We invite them here and we go there. We try to get in front of people as much as possible in other locations. We could do it over a conference call, but it is so less personal that way. It's like the sales process: If no one ever bothered to come and see me, I'd feel somewhat slighted.

"We use memos and e-mail to stay in contact while trying to let them act as independently as much as we possibly can. You are not going to get 100 percent right. Of those things to get right, if you get 70 percent, I think you've done a good job."

Communication is the thread that binds the acquisition process together and eventually ties the new company to the parent company, but the integration has no defined end.

"It requires complete diligence," says Hein. "The integration process never does end. Sometimes what people say and what they think are different."

You have to be aware that the leaders of the acquired companies may be looking for more input and guidance than they are asking for. It's important to recognize and address this issue, Hein says, particularly because Chilcote values the human part of the equation.

"As we broaden our scope of acquisitions, we are going to add to our pool of knowledge," says Hein. "Three people in a conversation is going to be better than one person thinking or talking to themselves. When we had our meeting in Massachusetts about research and development, I didn't want the marketing people to just think about what the market needs and how to respond to it. I wanted the engineering people to not just think about what is the next greatest thing we can do faster and better, but why not put all the ideas together? We should all walk a tradeshow and spend six to eight hours together and then sit down over dinner and really share ideas.

"Is there a company that already has the equipment we need? Rather than us going out and creating a new wheel, let's take advantage of what's there. What I'm trying to do is bring more of us together to share knowledge rather than standing in our own intellectual capacity. There is too much knowledge and capacity in this country, and we need to take advantage of that."

Acquiring minds

There are many reasons for making acquisitions: Diversifying revenue, gaining redundancy in capabilities and increasing marketshare are a few. But The Chilcote Co. is in a specialized niche that requires technical machines with skilled operators. It's exactly this type of expertise and machinery that drives the company's acquisition strategy.

"I look for manufacturing niches and professionalism," says Hein. "I prefer to be a big fish in a small pond rather than a commodity player. All industries are consolidating, and you have to have something to hang your hat on. I'd rather be in something very unique with high entry barriers. You can't go down and just buy that piece of equipment we have from Germany for less than $500,000. We also will take a standard piece of equipment and apply it to the market in new ways."

Some of the companies Chilcote acquired were in danger of failing or falling into the hands of a competitor.

"Protecting our revenue stream was critical," says Hein. "Who knows whether these companies could come back or become a threat to us."

For example, the acquisition of Forest City Bookbindery was based purely on the need to secure Chilcote's supply line. With a key supplier selling out, Chilcote bought Forest City, which could fill the gap.

"We were going to be out of a product because we didn't have control of the manufacturing process," says Hein. "That acquisition was based on need -- an immediate and significant need -- and there was an opportunity right here in the city of Cleveland. It allowed us to get a product to the marketplace much more quickly. We have control of the quality process because it is right under our nose."

A similar situation drove the purchase of Wooden Nickel Albums of Benton, Ky. The company, the third largest distributor of Chilcote's products, decided to sell to a group that wasn't as interested in promoting Chilcote's products as the previous owners. Hein exercised a provision in the distribution agreement that allowed Chilcote to veto the sale and bought the company himself.

"We told them we would buy their business," says Hein. "We would get into the distribution business, putting us in competition with our own customers, which is a difficult philosophical position to be in."

But it was better than losing a major distributor and suffering the related sales hit.

"It is probably an area of growth for us in the future," says Hein. "We're going to find places for us all over the map. It will be moving to the people who buy our products."

With Lakeview Products, the acquisition offered a chance to pick up additional equipment and experienced operators.

"They had equipment that we did not," says Hein. "We were doing something similar but on different pieces of equipment. They did something a little more sophisticated, so we ended up buying their company. It gave us a bigger presence in the commercial market. It was an opportunity to get some good people and equipment and add to our pool of talent."

Rather than creating an operation from scratch, it sometimes makes more sense to buy an existing operation. The Chilcote Co. had just started to get involved in a particular manufacturing process in the late '80s when the opportunity to purchase D. Davis Kenny Co., which already had mastered the process, came up.

"It would have taken us three to four years to get up to speed because of the learning curve and to get known in the marketplace," Hein says of the process Chilcote acquired with the San Antonio-based firm. "They had already gone through that in the marketplace. There was no point in duplicating the effort."

In each acquisition Hein has made, the new company had a piece of equipment that was not redundant with what Chilcote already had.

"In each case, it offered a different level of service or capability than we had here in Cleveland," says Hein.

The company not only added manufacturing capacity, but expertise, as well.

"It was another set of eyes in the marketplace looking at capabilities and availability. Our guy down there was so knowledgeable about folded edge products, he knew exactly where a specific piece of equipment was. In a matter of weeks, we had a purchase order issued for it. Now that machine is working 20 hours a day, six days a week, and I'm not sure we'll be able to keep up. They possessed knowledge that we did not. It was cheaper to buy it than to learn it."

Redundancy was another reason factor that drove the decision. The company did some of the same things Chilcote did in Cleveland.

"We were under one roof, and if there was a disaster here, we would be out of the market and be exposed to losing it permanently to someone else," says Hein. "I'd seen that happen to some of our competitors, and I felt we needed that redundancy, that insurance policy."

Davis Kenny also had half of its revenue in commercial bookbinding and making products such as menus for major restaurant chains. This offered a related diversification of Chilcote's product lines.

The company gained more diversification with entry into the retail photo greeting card market when it acquired Winthrop-Atkins in Middleboro, Mass., but it was the people who helped drive the final decision.

"It wasn't necessarily what they could do, but their marketing aggressiveness and sales aggressiveness that attracted my attention," Hein says.

The company also made presentation folders, something Hein was looking into manufacturing.

"We leapfrogged by 24 months getting into the market," says Hein. "Whether you pay for it through research and development or through acquisitions, you still pay for it. We went with acquisitions. They have the customers, they know where they live, they have their habits and their telephone numbers. There is a built-in marketing strategy. Our salespeople were selling a lot already. To take on another load and learn another industry would have been a very cumbersome process."

Acquisitions have worked well for The Chilcote Co. It has diversified its product line while staying within its core manufacturing process, created redundant operations in other cities to protect itself against disaster and increased revenue. But the most important acquisition of all is the people.

"We are a company that is not real deep in senior management," says Hein. "When I look at these companies to acquire, it's not to eat them up and fire a lot of people, but to acquire their expertise, their market share, to acquire their executive talent or even the people working on the machines or the people with engineering capabilities or the machine operators. These are the people we need to build the business from the bottom up.

"We don't slash and burn when we buy companies. We are out there to assimilate them into our culture or for us to assimilate into their culture if it is better. So far, that's worked reasonably well for us."

How to reach: The Chilcote Co., (216) 781-6000