Margaret Boros knows the human resources field isnt universally admired in this age of high-concept management. In fact, she points out, her discipline is engulfed in its own wrenching internal debate about its place in the corporate pecking order. Theres this big discussion going on in HR: Does the internal HR function add value or not? Theyre so paranoid about it; its almost like theyre trying to convince themselves, she says.
But that applies more to what she calls the old HR, a kind of grim, in-house corporate scold, robotically issuing lists of dos and donts divorced from the peculiar operating demands of that business.
If you expect HR to take [all the] responsibility for people, then I think youve lost something. You just cant palm it off on someone else, like HR is supposed to be the conscience of the company, she says. New age HR should instead empower owners and managers with the tools and the insights they need to take full account of people issues themselves. To be truly successful, the HR function doesnt come from the HR department, it comes from the management. Its a management style.
With that in mind, Boros recently left much-admired Manco Inc., as director of partner resources, equivalent of HR director, to launch her Rocky River-based consulting practice, People Matters. We hated to lose Margaret, says Mancos Jack Kahl, but we knew that she needed to follow her lifelong dream to become an entrepreneur.
A veteran of National City Bank, where she dealt with executive compensation, and of Akron-based tire maker Bridgestone/Firestone, where she tried to persuade unionized rubber workers to see the company as their partner, Boros is quick to point out that neither she nor her discipline have all the answers.
People want quick fixes, she says. They think theres an answer, or theres one solution thats going to fit everybody. But I dont have the secrets to success. Its not like Manco had this big secret. I mean, Jack Kahl is their secret. If you can become that charismatic, youll become a successful company, she says, breaking into laughter.
But the flip side for most charismatic leadersand heres where she can helpcarries the seeds of a systemic management problem for their companies: Entrepreneurs generally tend not to understand how most people arent like them. They think that were all alike. But what entrepreneurs cant forget is that most people arent like them. Most people are followers, and we need to know what to follow. You know how Christ called us sheep? Its truewe are sheep. Thats not bad, we just have to understand who we are. And thats why [employees] need some structure, and why they need to know how theyre doing.
Some companies, she knows, institute good policies simply to shield themselves from exposure to lawsuits. Thats one mentality. But how about if you say, I want to put in good practices because it will actually make a difference in my business? Rather than expensively suffering through high employee turnover, she asks, Why not be an employer of choice?
If management can come to appreciate contradiction and paradox in its approach to dealing with employees, it might be able to arrive at a more visionary way of constructing the work environment. I think its possible, she says. But maybe Im still in my delusionary stage. Then again, on the evidence of one early client, she may be on to something.
She was very responsive to my wanting to reflect our culture, says Tom Marshall, owner of Andrews Moving & Storage, a $35-million company in Brecksville which retained Boros to help advise on adding a modicum of structure to its employee policies. Id love to be like some of these companies that throw the book away, he says, citing Southwest Airlines and its radically unorthodox chairman Herb Kelleher. You can create a culture like that, but youve still got to let [employees] know what harassment is, he says. The balance he tried to strike in the employees manual was to keep it light, and have the fine print buried in the closet if we need it. In the end, he says, she helped us understand us better.
Perhaps its that role of corporate shrink thats the most fitting metaphor for the kind of enlightened employee relations she espouses. A senior VP of Wal-Mart once told me that what he has found is that a company is a lot like a person, and that you dont understand a person until you can understand its past. So to really help a company transform itself or move forward, is to help them understand their past.
Three issues every company should address
Despite Margaret Boross insistence that one size does not fit all when it comes to instituting enlightened HR policies, she says there are at least three issues which just about any company should comprehensively address.
The first is coming to an understanding of what the company expects of its employees. I think thats absolutely critical. Somehow, you have to come to some common agreement about what your expectations are and communicate that to each person.
Next comes compensation. "That'll drive people crazy. If you don't have a good compensation system in place that really reflects the values of your company," she says, you're in trouble. "You really have to make a decision as a company: how you want to pay, and why do you pay what you do, and what's the reason for paying it? Do you want to pay the market, could you care less about market, do you want to pay more?"
Finally, there's the crucial issue of giving performance feedback to employees. "Having that communication with your employees, to tell people how they're doing, is pretty critical," she says. "Sometimes, small or entrepreneurial companies are so busy moving so fast that they just assume that everybody's on the same page, and everyone's not on the same page."
Problems with employees typically don't stem from bad intentions, she says. "I really believe that everyone wants to do a good job. Everyone wants to enjoy their job, wants to feel like they're contributing. So give them the structure that allows them to do that."
For Tom Roberts, it looked like the deal of a lifetime.
A former jazz musician who still peppers his conversation with "cats" to refer to people, Roberts was building a modest reputation for developing and hosting Web sites for a quirky range of clients under the banner of Cleveland-based CM&D. But his larger vision was to position himself amid that crowded field in a less-well-occupied niche, as a Web-based publisher of data-rich material.
Eventually, the biggest opportunity of all arose: In conjunction with a couple of universities, he converted static Ohio public assistance and administrative procedure manuals to electronic formats to be placed on the Web and periodically updated. That would simplify the process by which, say, case workers could distribute food stamps. County governments would each pay him $1,000 a year for the service.
The project was going swimmingly, until Roberts got a call from a Cuyahoga County prosecutor.
To cover his bases, one local official checked with the prosecutor's office before purchasing the service. No doubt influenced by the common notion that all Net information yearns to be free-offered at no cost to users-the law man turned thumbs down in an informal advisory opinion. Things quickly unraveled from there. State officials couldn't bar the use or the sale of Roberts's perfectly legal data, even though some didn't think it passed the smell test. But by warning county officials that they wouldn't be reimbursed for such purchases, they effected a similar outcome.
For Roberts, what had looked to be about $300,000 a year in business quickly evaporated. He lost $50,000 in out-of-pocket development costs, but the toll for opportunity costs was far higher. His tiny staff had spent parts of a year doing the analysis and planning for the massive optical scanning and formatting job and parts of another putting it together. The entire organization was focused almost exclusively on the project for half a year. "It almost put us out of business," he says. "We're still digging out from under that."
Tom Roberts's experience is a cautionary tale for anyone whose business model is substantially built on capitalizing on the World Wide Web and its unstable legal underpinnings. In his case, he ran up against the widespread notion that information is free and thus should have zero cost for preparation or other packaging. "The thing that people have got to understand about the Internet is that information itself may be in the public domain, it may be free," says Roberts. "But providing it is not." Tell that to the newbie prosecutor, who really didn't have any case law upon which to rely.
If tough luck stories such as this aren't enough to give you pause as you chart your company's climb aboard the Web-whether for Web retailing or supply-chain integration or improved customer service or some other purpose-there's plenty more at the complex intersection of cyberspace and the law which should cause you to slow down and do your homework before you leap.
If you're doing direct mail through unsolicited e-mail, for example, there's a price on your head. The Federal Trade Commission has declared war by pursuing a few chronic offenders in court and the consumer movement is trying to stretch the ban on unsolicited faxes to cover unsolicited e-mail. Then there's a host of troubling international issues, growing more complicated by the day. Only weeks ago, the European Union implemented a raft of privacy rules which threaten to complicate sales on the Web, even for companies domiciled elsewhere. Finally, there's an issue which seems to cause mass confusion even among the technically literate: Does domain name equal trademark and vice versa?
Perhaps most troubling is that through simple oversight, you might be one of thousands of companies in this early stage of e-commerce that have effectively given away much of its intellectual property by failing to protect it against being repurposed by a Web designer. So that $15,000 you dropped on putting yourself up could well be turned against you a year later, when that same developer takes much of what they've learned about your industry or even your specific application to develop a competitor's site.
But don't panic. Instead, relax as we take you through these issues one by one and explain how to stay one step ahead of the embryonic law governing cyberspace.
To some direct marketers, the dawn of e-mail seemed almost too good to be true. Far cheaper than "snail" mail, less invasive than commercial blast faxes (which, in any case, are now closely regulated after a consumer outcry), e-mail solicitation held out the promise of almost no-cost advertising.
Sure enough, it was too good to be true: Consumer groups are making a concerted push in Congress to expand the scope of a 1990 law which regulated unsolicited faxes and telephone cold calls to include e-mail. While that law, the Telephone Consumer Privacy Act, never mentioned e-mail, the broader intent was to bar marketers from shifting their costs to receivers. Thus, consumer groups say, it should apply to newer methods. In May, the U.S. Senate loudly signaled that that argument is gaining ground: It unanimously approved a measure that would allow $15,000 fines for spammers who hide their identities. The Federal Trade Commission also piled on earlier this year, filing its first enforcement action against a high-profile spammer, and warning 1,000 others they might be running afoul of antifraud laws. Giant Internet service provider AOL even got in on the action, suing a spammer who targeted its customers. Message? The world is watching, and very closely.
With that in mind, perhaps the best way to proceed is to adopt the direct-marketing industries' rules of self-governance (crafted with an eye toward staving off tougher government regulation).
Among its online marketing guidelines, the Direct Marketing Association suggests that online solicitations "should be identified in a way that allows recipients to readily recognize them as solicitations" and allows consumers sharing personal information online an easy method for opting out of the disclosure of such data to others.
Where solicitations are posted to common use areas such as bulletin boards, chat rooms and news groups, they should be in conformance with the rules of that forum (which are likely to be unaccommodating if not downright hostile to commercial messages). The DMA urges even more stringent rules for marketing messages directed "primarily" at children, including encouraging kids to get their parents' permission before furnishing any information or making a purchase.
Trademark vs. domain name
This is a topic that seems to confuse even otherwise knowledgeable Web folk. If you remember nothing else from this article, remember this: Domain name does not necessarily equal trademark in cyberspace. A domain name can, of course, also be a trademark or service mark if it's used in concert with the sale of products or services on the Web. The enforcement of disputes is where things get sticky. "One doesn't have too much sympathy if someone takes out the name Coke.com to sell it to Coke," says Peter Junger, a law professor at Case Western Reserve University's College of Law and an amateur writer of software code. "But if they're Pittsburgh Coke & Steel Company ... it can be a mess."
The rules are changing now that Network Solutions Inc. recently lost its exclusive franchise to register Net domain names. Several other organizations are competing for the right to fill that void, which will only add to the legal uncertainty over their ability to play regulator or even mediator in domain/trademark disputes. "I really don't know that anyone can say what will happen at this point," says David Post, co-director of the Cyberspace Law Institute and a law professor at Temple University Law School in Philadelphia. But one thing is certain: "They'll want to take a hands-off policy with respect to trademark policy, and stay clear of th at dilemma."
International rules and regs
If you're doing international retailing on the Web, chances are extremely good that you're breaking a number of laws. Germany bans all two-for-one offers, for instance. In heavily wired Sweden, a new law essentially bans all publication of information about individuals on the Net. That's the bad news. The good news? It may not matter much in a practical sense.
Professor Peter Swire, who teaches the law of cyberspace at The Ohio State University Law School, has written widely on e-commerce across national borders. He uses the metaphor of elephants and mice when it comes to enforcement of Web law breakers.
On the Web, he has written, elephants-or large organizations-"are powerful and have thick skin, but are impossible to hide. They are undoubtedly subject to a [foreign] country's jurisdiction." Smaller organizations-mice-are nimble and mobile, and thus difficult for enforcers to catch. "In such instances, legal enforcement, to be successful, will focus on someone other than the mice themselves"-that is, service providers or financial intermediaries. Medium-sized businesses domiciled outside their country, he says in an interview, fall somewhere between.
"Usually, some authority in Berlin is not going to go after a U.S. company which caters to two Germans ... so if you violate some technical advertising rules in Europe, practically speaking, you'll probably be okay." But if you have operations based there, or send your sales force there, it could be different, he notes. Other legal experts assess the risks differently. "Having no employees there doesn't necessarily protect you," maintains Jim Troxell, an attorney with Squire, Sanders & Dempsey who specializes in information technology issues. "German interests can sue in the U.S."
If all else fails, says Swire, there's one generally applicable rule of thumb. "If you follow good, standard, U.S. business practices, you're unlikely to get hurt by sales internationally."
Protecting intellectual property and trade secrets
Specialists in e-commerce say this may be the single biggest blind spot for most companies.
As Troxell puts it: "So many businesses are taking their trade secrets and contracts, calling a Web contractor who creates an application," but failing to contractually protect their ideas that went into making that product valuable in the first place. Those key competitive advantages needn't be limited to obvious items: He points to the case of catalogue merchant L.L. Bean, whose genius for sublime customer service is embedded in its method of quickly and automatically dispatching e-mail to anyone who inquires at its Web site.
He uses another example from the legal services field: a firm, or an individual lawyer, takes everything they know about estate planning and pours it into a good Web package that can prepare someone's plan for just $300. "Here's where the problem comes - I fall out of the relationship with my Web developer and find somebody else. Can I replicate that, or by telling him [the first Web developer] how to imbed my ideas in the software, can he then go to another company, say my law firm competitor down the street, and offer it again?" The answer - probably yes, if you haven't thought to include that item in a contract.
With e-commerce, says former NFL linebacker Jim Kovach - a Stanford Law graduate who once worked on intellectual property issues at a Bay Area law firm, and who is now a top executive at the high-profile Cleveland start-up NetGenics - "the goal is to share, without losing the rights to the information. And with the supply chain, e-commerce is demanding that people who never talked before now talk."
The solution, says Kovach, is a high degree of planning and analysis about what the real family jewels of a company are before you launch into e-commerce. "How do you protect a trade secret while doing e-commerce? You have to basically partition what is and is not a trade secret-those things that no one else has [which] make you a better company-beforehand." Then build a moat around those trade secrets with contracts, copyrights, trademarks or whatever other means appropriate.
None of these speed bumps ought to dissuade anyone from dipping their toes into the e-commerce waters. On the contrary, any company which resists at least some involvement, however fledgling, may be signing its own time-delayed death warrant.
With information technology now accounting for about 42 percent of total corporate capital spending, it has begun to vault ahead of bricks-and-mortar issues for many, perhaps most, companies. And for at least the next two years, state, federal and even world governments have essentially granted a tax amnesty (in the U.S. through the Internet Tax Freedom Act and in Ohio through a "safe harbor" provision), pledging not to tax e-commerce until a comprehensive method for doing so can be worked out.
Which constitutes a giant tax incentive to get started, because no one is predicting that taxing authorities will keep their mitts off this ever-growing source of income. As attorney Jim Troxell pithily puts it: "They're just waiting until they can figure out how to skin the cat efficiently."
In the end, though, there's good news for modest-sized organizations climbing aboard the Web. If you're not a large, high-profile company and you're not running an egregious cyberscheme to defraud investors or customers, chances are pretty good you'll be okay for now simply by following generally accepted business practices. "The biggest protection for small businesses," says Professor Peter Swire, "is that enforcers usually are going to go after the biggest players first."
- Think globally.
- Spam carefully.
- Use and protect your own trademarks. Tread lightly with others'.
- Respect intellectual property laws.
- When contracting for services, read agreements carefully and construct them to protect your investment.
- Treat the Internet as you would any other communication. If it's not appropriate for a memo or office conversation, it doesn't belong on the Web.
The worlds largest package carrier no longer wants your cash. Beginning in September, United Parcel Service quietly stopped accepting cash payments for its parcel deliveries, a policy which rival FedEx already had in place. While the company says it notified clients, anecdotal evidence suggests notification was spotty, at best.
Some observers say the change isnt that big a deal, since few companies pay U.P.S. in cash anymore. It could be an inconvenience for a small company that doesnt have a relationship with U.P.S., says Jeff McFadden, air freight manager for Middleburg Heights freight forwarder Kuehne & Nagel, but I cant imagine U.P.S. not accepting a company check, and forcing somebody to go get a certified check.
Why the change? As with so much else in life, it was driven by security concerns. They just dont want their drivers carrying cash, says McFadden, a board member of the Cleveland Air Freight Association.
It was all there in the business plan presented to the federal bankruptcy court - visions of back-to-back years of 50 percent revenue growth and 35 percent margins. The numbers would be squeezed from a dowdy bankrupt company with an aging work force and 80-year-old equipment barely held together by continuously improvised mechanical Band-Aids applied by a Croatian immigrant who had lovingly overseen plant operations for 35 years. And it was a model of brevity, if not hyperbole, all these shimmering financial images poured into a five-page plan for the turnaround of Vital Products Inc.
As a testament to a son's aching ambition to live up to the standards of his prominent surname, one might have interpreted it as a glittering epic poem.
But as a plausible road map for a bankrupt company that had been on the decline for decades, it was less satisfying. A skeptic might have boiled the plan down even further: We propose to take a company founded in 1909 by one of those ornery tinkerers who built Cleveland's economy - we'll take this company which first made its name by manufacturing the oil guns stashed aboard Henry Ford's Model T, and which now makes cheap metal consumer caulking guns that are easy targets for foreign competitors - and remake it into a modern enterprise with ambitions to "revolutionize" a $100-million industry.
And it would all be accomplished by a group of investors put together by 38-year-old Tom Roulston III, a relative novice as a dealmaker, but the oldest son of a certifiable legend, Tom Roulston II. Heck, maybe the old man, revered for his shrewdness and patient tough-mindedness in all things financial, will even take a piece of the deal, the son once thought aloud.
In retrospect, the due diligence was a little sketchy. It proceeded from an important first impression, the cataloguing of the younger Tom Roulston's basement sundries. "I did an inventory of my house: I found four caulking guns," Roulston said, echoing the tactics of iconic money manager Peter Lynch, who famously discerned clues to good investments by studying the most innocuous indicators of consumer popularity.
For the first round of this rescue package, he assembled 14 investors - including several in their 30s - who would pump about $500,000 into the company. Eventually, a second round of money would fund a reinventing of the product, to produce it from molded plastic instead of stamped metal and concentrate on higher-priced guns designed for tradesmen rather than on cheap, disposable guns that stack up in do-it-yourselfers' basements - and which were vulnerable to the flood of cheap Asian imports.
For Tom III, the upside looked generous, the potential pitfalls relatively few. "He's doing it with other people's money. If it flies, he makes a couple million dollars. If it doesn't, he just lost other people's money," said one potential investor who passed on the deal.
"We want to revolutionize this industry, which is an old, tired business," Roulston grandly explained in March 1998, while sitting amid the faded Gilded Age splendor of Cleveland's University Club - owned at the time by that caster of long shadows, his father, still an old-school drillmaster in the investment business.
Try as one might, it was hard to miss the parallels between father and son. Tom II had brashly opened his own investment shop in downtown Cleveland in 1963, on the occasion of his 30th birthday. His namesake opened his own investment company 34 years later under starkly different circumstances, bitterly leaving the family business three years ago, having been passed over by his older brother, Scott, who ascended to the presidency of Roulston & Co. in 1991.
The patriarch was as successful as he was forbidding. "He's a tough-minded, honest son of a bitch," says Al Weatherhead, founding donor of the business school that bears his name. He recalls occasionally duck hunting with the elder Roulston a quarter century ago, though not getting to know him well. Former COSE Executive Director John Polk, who calls Tom Roulston II a "self-made genius," likens him to people such as Progressive Corp.'s Peter Lewis - socially prominent, hypersuccessful business owners who never really got their full measure of recognition from Cleveland's business establishment. "He really is kind of a Larry Robinson type: an insider/outsider. Kind of on everybody's list, but never quite seen as a captain of industry."
For years, Roulston ran one of the tightest organizations in Cleveland, a boutique investment firm whose specialty from the start was focusing top-flight research on companies in the Midwest and selling that intelligence to such blue chip clients as Fidelity Investments.
The founder's driving energy was nearly mythical. He made dozens of trips to London, where he built a following with institutions that invested with him. Even on day trips to New York aboard the company plane (which was sold off a decade ago), aides often wouldn't have time to go to the rest room, so packed was the schedule.
Back in Cleveland, the pace was just as grueling. "They had early morning meetings and you got docked for being so many minutes late," recalls a Cleveland attorney who knew the founder well. "And everybody had to speak and they'd get 30 or 40 seconds. He was a bully, but it worked."
To some, this manic energy had its roots in childhood wounds. Roulston grew up in Brooklyn, N.Y., the son of a wealthy grocer who for a time owned as many as 500 stores. But when he was 14, his father died suddenly and the family's fortune was all but wiped out. "I think that angered him," says one retired Cleveland CEO who dealt with Roulston.
Among the patriarch's lasting legacies is the turnaround of Cleveland's Midtown Corridor from a streetwalker-infested eyesore to a modestly booming business district. When the area's history is written, Tom Roulston will be recalled, along with Premier Industrial's Mort Mandel, as one of the two most important figures in its resuscitation. In 1979, he moved Roulston & Co. to East 40th Street, surprising the investment community. "They said they were going to be the forerunner in moving out from 9th Street. Everybody was on 9th Street then," recalls Al Adams, managing partner of Deloitte & Touche's middle market practice.
A year later, Roulston purchased the University Club, one of two remaining 19th century gems of old Euclid Avenue. He invested in its rehab and aggressively sold memberships. "He just grabbed everybody he knew and [figuratively] put a gun to their heads," says friend and fellow Midtown business owner Dan Sussen. "It was easier to join than to give him the reasons you're not going to." His son, Tom, then in college - and the children of other company employees - pitched in, selling 700 memberships in one summer. The Club quickly became the spiritual, if not geographic hub, of Midtown, a place where five meetings might be going on at once.
Roulston recently sold the club, but as if to signal the next stage in Midtown's development, Roulston & Co. unveiled plans for a new $7.5-million headquarters, to be named Midtown Corporate Center. It is in line for a $3 million low interest loan from the Empowerment Zone, which would be the largest such loan to date by the federally funded, locally administered urban renewal program.
But Roulston's proudest achievement, say those who know him, was how his investment firm survived when so many others had either gone out of business or been swallowed up by larger entities. It almost didn't happen, though. Knowledgeable sources say that just a year or two ago, the sale of Roulston & Co. to Fifth Third Bank was all but finalized until the family stepped back from the altar at the last minute. The founder "didn't want to work for a bank," says one person who knows the situation. (Scott Roulston neither confirms nor denies the near sale, saying, "I get approached all the time. It's very flattering that banks and other institutions are interested.")
Despite his ramrod internal operating style, Roulston is said to have had a particularly d eft touch with clients. Calfee, Halter & Griswold Senior Attorney Chuck Emrick recalls once referring a client to Roulston for investment management. "He calls the guy three days before the end of the year, from [Vail] or wherever, and goes over his portfolio for three hours. The guy was really impressed."
By most accounts, Scott Roulston has let the corporate hair down considerably. No longer do Roulston & Co. employees have to address each other as Mr. or keep their suit jackets on in their own offices.
After a difficult retrenchment from investment research that saw the dismissal of about a dozen research analysts in '96 and the closing of the trading room, the troubled company refocused its efforts on investment management and corporate finance, where margins are higher. But the company continued in its traditional segment, finding solid companies in the eight-state Midwest region. While that was tough in the Rust Belt's most trying decade, the '80s, by the early '90s, the region's manufacturing turnaround had proven the strategy prescient. Roulston & Co. launched the Roulston Midwest Growth Fund and, by '95, just as the larger stock market was taking off for an unprecedented four-year run, it was the second-best-performing regional fund in the country, according to one survey.
As for his own investment approach, Scott seems to have inherited his father's cautious conservatism. As he told a San Diego newspaper in 1994, "We may miss out on the next Apple Computer or the next Microsoft or the next Japanese small-cap opportunity. It's not going to be flashy. We're not big risk takers. That's not our style - we're value investors."
But he readily concedes that so long as his father the chairman keeps coming into the office - no, as long as he's alive - he's still really in charge, despite the fact he's surrendered daily control and the title of president. Until then, Scott notes with a self-effacing grin, he'll merely be the S.O.B. - son of the boss.
Talking with a writer in various locations around Cleveland for the better part of a year, young Tom Roulston seemed a starkly different sort. He was supremely at ease in every environment, be it social or business. Wherever he went, he invariably knew half the people, confidently nodding or shaking hands. While politically conservative, his manner was less buttoned-down than his father's (though the elder Roulston once showed up at his son's annual bash dressed as Yassir Arafat).
His mind moves quickly, scouting possible deals, even if they are a little offbeat. Roulston owned a piece of the Lumberjacks hockey team, and as he had a pre-game cocktail in a small sports bar near the Gund Arena one evening, he considered aloud buying the place, spiffing it up and making it a financial success.
But in unguarded moments, with cell phone close at hand and his darting eyes missing little, that upbeat nature is tinged with darker brooding about being the odd man out. His father's reputation was secure, his brother was heir apparent of the family company, and his sister, Heather Roulston Ettinger, was making a name for herself as an advocate of women investors and baby boomer philanthropy (while holding down a key management spot at Roulston as a working mom). Where did that leave Tom Roulston III?
Tom would vent a little about his luck, musing aloud about perhaps one day writing a book about his family. Through a fluke of timing, his brother, Scott, was born while the family briefly lived in Alaska. "That's why he got into Dartmouth," from which his sister also graduated, Tom maintains. "I got the same grades [in high school] and did better in sports. But I can't compete with that," - "that" being an apparent Ivy League fixation on exotic birthplaces. Instead, he ended up at St. Lawrence College in Upstate New York.
Roulston's smoldering filial resentment has an even deeper source, though. As he made the rounds of Cleveland's tightknit investment community, it didn't take long for Tom to surmise that his brother had bad-mouthed him at gatherings of the Young Presidents Organization - a place where dirty laundry is supposed to be hermetically sealed against seepage to outsiders. Tom guessed that stories told by his younger brother had put him in a bad light and partially soiled his reputation as they got around. (Scott, sworn to secrecy by YPO, declines comment). It seemed to provide the last bit of high-octane incentive, if he needed any, to make his mark outside the family business.
He put out his own shingle in 1997, intending to fill a gap. He loved good stock pickers, pure research grunts who could find solid companies in the dark. As he saw it, his role - operating from a sleek office in the jet-black Renaissance Building on Euclid Avenue, where he commanded a prime view of Jacobs Field - would be marketing. He would steer well-heeled investors to these investment gurus; he would rep for the best of them. He would also, and this was important, be alert for good private-placement deals for himself and his clients.
At first, he considered calling his three-employee company Roulston Investments. Eventually, apparently after family members signaled their displeasure, he settled on Thomas Roulston III Investment Partners. But the entry in the Cleveland telephone directory was less distinct. The line for Roulston Investment Partners ran just above that for Roulston & Co.; a line below that was the residential listing for Thomas Roulston III. Visually, at least, his start-up had his family's more venerable firm surrounded.
If he was counting on the turnaround of Vital to provide personal vindication, though, he had cause to be concerned. As '98 progressed, developments at the company were increasingly mocking his self-assured business bravado.
Within months of his group's purchase of the company, the daily operating realities were starkly at odds with the glowing language of the business plan. The investors had essentially bought the shell of a company, whose name they changed from Vital Products to Vital Applications. "When we first took over, the company was basically nonfunctional," says Vital's president John Sherwood, 30-something with a background in sales and marketing and the only member of Roulston's investment group who had a role in operations. "It had trouble filling orders."
The musty plant in a nondescript Maple Heights industrial park, populated with presses dating from the 1920s, first had to be cleaned of mountainous piles of garbage lying in heaps everywhere. The equipment was similarly challenged: When the new owners took over, just 30 of the 300 ceramic heating elements in the paint-drying oven were in working order. "So not only did they have to paint everything five times, but they had to run it through the oven several times ... and then it had to sit for a couple days to dry off," he said.
The preceding winter, the heat hadn't been on in the plant many days. And still, most employees continued to come to work. Their leader was Stipi Vranic, a 59-year-old Croatian immigrant with mildly broken English, a shock of silvery hair and an unschooled genius for all things mechanical.
The only salaried employee on the shop floor, for years he had jerry-rigged his way around the fact that the company had no money for new equipment. "He's really the guy who held the company together," says Sherwood. "When machines didn't work, he'd kind of rig things." He was also the institutional memory, said Roulston. "You'll say, 'We're missing this part to a gun and where the heck do we get these things?' Vranic would quietly disappear and all of a sudden would come back and say, 'I found this in the back - this is the part we used to use and these are the people that used to make it for us.'"
Vranic himself found his contributions unremarkable. Despite not getting paid for five or six weeks while the company was in bankruptcy, he kept coming in, continuing to rally the troops in his laconic fashion. He had an artist's love for his tools and dismissed the previous owner's plans to computerize operations as so much foolis hness. "My welder's 60, 70 years old. They no make machines like that no more," he said. "Computer's good, but not everything."
He was charmed by Tom Roulston's personal touch. Asked about the new lead owner, he smiled brightly. "Oh, yeah - he give me hockey tickets. I told them I'll work 10 more years. I'll teach them [how to run the company]."
For the first time, his efforts were being supplemented by a new layer of expertise. The new plant manager, Tom Koons - a can-do veteran of TRW who had been caught up in downsizing after the defense contractor's helicopter engine business plunged at the twilight of the Cold War - was methodically rearranging the materials flow.
By late winter of '98, all these developments had left Sherwood upbeat. The company was now doing about $50,000 a month in sales, or more than double the rate it had when the new owners had taken control. Even though the new investments in people had pushed the break-even point significantly higher, he was expecting Vital to eke out a modest profit for calendar '98.
But the company was laboring to hold on to key accounts, especially giant Wal-Mart, which had once been the second biggest customer, after Sherwin-Williams.
Where Vital had once supplied all 24 of the giant retailer's distribution centers, it now did business with just five. Sherwood made at least four trips to Arkansas to try to lure that business back, but his wasn't a position of strength. "We went down and asked them for help, quite frankly," he says. The former owner, Bill Laufer, calls Wal-Mart executives "decent people who try to support American businesses." But after his chronic equipment problems caused a major interruption in shipments to the retailer in '96 (which pushed the company into bankruptcy), he recalls, "they tried to do what they could, but they've got their own competitive pressures."
On the factory floor, meanwhile, Koons had his doubts that the Wal-Mart account was even worth holding onto. "It creates volume, which creates opportunity. But they sap the life outta you, cause they're low-end and you can't make any money on it," he said.
By the spring of '98, the partners - or at least some of them - were beginning to understand how bad the long-term situation was. Vital was stuck in a labor-intensive commodity business, with no end in sight.
Roulston had always understood that the company's product would have to be completely re-engineered. "As long as we make a metal gun, if we stay at the $1.99 price point, the Chinese are going to eat our lunch. So we've got to figure out how to get away from that price point and that means we have to change the gun."
The only way to make Vital a growth company with the kind of margins investors expected was to concentrate on the professional market, in which premier caulking guns, some pneumatically powered, went for hundreds of dollars. That would require a second injection of capital. But the first-round investors were apparently losing hope they could hold on long enough to allow that to happen.
"There were two big surprises," said one investor, 30-ish pricing consultant Dave Bauders. Even if volume were increased significantly, Vital still couldn't make money; and the apparently simple operation slurped cash. "Our conclusion was it required too much capital to reach that turning point to justify it," he said in mid-'98. "Fundamentally, my decision was that this company did not have the internal capability to be a leader in product innovation, and that while that was theoretically possible, it was unlikely. ... My view of it was like buying an option and I wasn't ready to buy any more of those options."
Neither, apparently, was anyone else. While the partnership talked to "over 100 people" about injecting additional capital in the second round, according to Roulston, there were no takers.
By August, the die was cast: Vital's doors would be shut that month, the company liquidated.
Some long-time vendors who had already taken a hit on the '96 bankruptcy - secured creditors got only eight cents on the dollar from the Roulston ownership group - were stunned. "They were a very congenial group and they worked very hard to turn it around," said Don Anzells, whose Euclid Steel supplied Vital with steel rods and a little bit of fresh credit. (After putting the previous owner on C.O.D., Euclid Steel put the Roulston-owned company back on account).
"It looked like they knew what they were doing, because operationally they had improved. ... Apparently, they just took on too much debt from before and apparently ran out of time and money, which was a shock to us."
Tom Roulston III's first big deal had failed, and in less than a year. Asked in December if he had seen Roulston after the deal soured, Tom Koons didn't try to mask his bitterness: "Naw - he's probably out huntin' duck."
He may not have gone hunting, but Roulston did go into a subtle form of hiding about that time. Once a fixture on the local investment deal circuit - a man who threw lavish parties for baby boomers each year at his home, at which he would whisk to dinner aboard rented limos those who stuck around long enough - he was less in evidence around town. No longer would he regularly quiz people over lunch at a monthly venture capital gathering, probing for possible deals while studiously ignoring his brother, Scott, just across the room.
Tom labored to put the best face on the Vital deal, which in the end failed partly because he was suffering through a messy divorce which badly diverted his attention. "My money management firm is taking off full-bore," he said in the fall, and he intended to put his full attention into that rather than more complicated private-placement deals. "I don't have time for the due diligence and negotiating the deal. So I'm just referring those kinds of things to others."
By September, weeds were sprouting from between the cracks in the cement of Vital's parking lot and a large sign on the front lawn referred interested parties to a real estate agent. Little was visible through the window in the locked front door but some dangling utility wires and a ratty, turquoise seat once positioned for the benefit of visitors. John Sherwood had helped find everyone a new position.
But he was doing something else, too. He was helping administer this latest Vital bankruptcy proceeding - a Chapter 7 filing - and the court-appointed trustee, Saul Eisen, was giving him wide latitude to try to wring some value out of the assets for creditors. "He pretty much let me administer it myself. So I went out and looked for a buyer," Sherwood recalled. He knew of Wayne Jones, a near-recluse who nevertheless was becoming a minor legend in Cleveland's manufacturing community, and thought he might be interested in buying the company. In fact, Jones, or his representatives, had looked at the company before.
Jones, who declined to be interviewed, has been an investor in manufacturing companies in this region for a quarter century. In the mid-'70s, he left the accounting firm of Touche Ross to help run Cuyahoga Management, a company which bought and operated small companies. Soon after, he began Brittany Corp., a vessel for buying solid manufacturing companies with no succession plan (he has since sold it to investor Charles Bolton). In each of the companies he acquired, Jones installed a framed plaque. It read, This company is forever.
"Of course, think of his strategy: This was what the seller wants to hear," says Forrest Hayes, former head of the Cleveland office of Arthur Andersen, who now runs Brittany and has known Jones for many years.
At this stage of his career, Jones didn't need to do much tire-kicking at Vital. "He just asks you a couple of questions, sizes you up real quick," says Tom Koons. "Then I negotiated the particulars with Brian," his son. "They're all straight shooters, feet on the ground," adds Koons, who recalls a startling moment shortly after the October sale to Jones, which confirmed for him what kind of people the new owners were.
Even though the Vital operations were due to move to the Dayton area in a few months to join its existing operation there, Jones came in on weekends to paint the employee bathroom himself. "Wayne was in here in his grubbies. ... One [employee] said, who's the old guy? I told him, 'That's the owner, and he's a millionaire a couple times over.'"
Jones bought the company through his Springfield, Ohio-based EMBEE Corp., a century-old maker of paint scrapers and other items for the painting industry to which he would now graft the operations of the former Vital. Through a handful of platform companies, the Chagrin Falls investor now quietly owns 17 manufacturing companies, say those who know him best. His son, Brian, has similarly been well-schooled in reticence with the media (he does, however, admit to spending lots of time driving around Ohio, looking at solid companies with aging owners and no real succession plan).
Why the modesty? Says Brian, politely declining SBN's request to interview his father: "We want to be like Northwestern Mutual - the quiet company."
In the end, the epilogue wrote itself. A reclusive, plodding hare of manufacturing had succeeded where younger, brasher types with a less-modest vision could not.
A seasoned operator's stealth and patience had won out over a budding financier's bravado, a cautious eye for bargains bested a boomer's search for personal redemption.
The Cleveland area would lose yet another tiny shred of its manufacturing heritage to another city. But a piece of that history might live on in a product, or an industry segment, or perhaps a way of doing things on the plant floor. This company wouldn't be forever.
As for the Roulston clan, it had begun to heal. Last fall, for the first time since the younger Tom left the family company, the Roulston men got together for a trip. Tom II, his two sons and his son-in-law, spent a week in Europe together. "We'll probably never be as close as we once were," says the younger Tom. But neither would they be feuding.
With employers hungrily clamoring after what seems to be a rapidly vanishing segment of the job market, solid entry level employees, a new facilitator to the labor market has sprung up to address the need.
The Employment Alliance, newly located in the West 25th Street neighborhood of Cleveland, is a collaborative job-placement initiative among the West Side Community Mental Health Center, the Epilepsy Foundation of Northeast Ohio, Hill House and Spectrum of Supportive Services. The alliance will serve as the employment liaison for the four social service agencies and expects to place as many as 500 clients each year.
In addition to those directed to it by its constituent organizations, employment-seeking clients will come through referrals from county mental health case workers and the Ohio Bureau of Vocational Rehabilitation. In most cases, companies that hire these clients will be eligible for federal tax credits under the Work Opportunity Tax Credit program. Other government programs provide resources for capital expansion in exchange for hiring disabled workers.
Our mission is rehabilitation, so we look to develop jobs in the clients area of interest, says The Employment Alliances director, Betsey Kamm. If a client has an interest or a work history in dog grooming, thats where the initial focus of the job search will be. But about 70 percent of the clients are expected to land in entry level employment, where they will be competing with the pool of former welfare recipients about 20,000 in Cuyahoga County alone who are now being moved to the job market in the wake of federal welfare reform legislation. At the same time, however, the alliance will be dovetailing on the social service infrastructure that has grown up around the Welfare to Work movement.
Many of the Employment Alliances clients lack their own cars, and thus, the focus will be on identifying employers located along routes served by public transit. But as so-called reverse commute (transporting people on public transit from inner-city areas to suburbs with active job markets) opportunities increase, job possibilities are expected to expand.
For further information, contact Carol Howlett, the alliances employer liaison, at (216) 875-0460.
For two years, Dan McBride looked for his little niche in the business world.
A couple of years ago, we brought you the tale of Dan, then 36. A freshly minted MBA with a background in sales and marketing in the manufacturing arena, McBride had a modest inheritance from his late father, a longtime Cleveland-area entrepreneur. He was determined to find a good little company to purchase and operate at the right price.
McBride had an office downtown, a lawyer and an accountant to provide advice and point him to business brokers, and off he went, kicking the tires at dozens of companies.
Still, it almost didnt happen. After looking over more than 100 companies, from those too sick to consider to those he couldnt afford and unsuccessfully trying to buy about a half-dozen McBride was beginning to waver. Finally, in recent months, he found just the right thing: a 10-year-old company in Aurora, Martin Morrissey Inc., that makes stretch film products used in industrial packing.
In the end, after looking somewhat far afield, McBride landed close to where he began, purchasing a company from a man who once worked for his father and had since become a friend of the family.
There are so many ways to find a business. And I guess I found it the most successful way: by contacting (those) I knew, he says.
At first, he avoided considering Martin-Morrissey out of a concern for mixing friendship and business, and because the company wasnt really for sale at the time.
Eventually, I said, Hey, I just need to ask.
Still, he nearly ran out of time.
I was already beginning to investigate Plan B and look for a job, he confesses. It had been two years and two months. We got it right down to the wire.
His wife was getting antsy. And he wasnt so happy himself about two years of lost earnings slowly eating into his nest egg. He was beginning to rack up serious bills for legal and accounting advice.
I probably spent $30,000 to $40,000 on due diligence at first, he says, before gradually learning to perform much of that work himself, including by using the Internet.
Each time a deal fell apart, he grew increasingly frustrated.
You get so far on a deal, and then it falls apart and youre back at square one. And you have to make sure you werent too eager to do a deal.
One of the negotiations that broke off, was for the very company he eventually purchased. The first time around, he and then-owner Bob Jackson couldnt close the gap on purchase price.
We went to the altar once, and it fell apart, McBride recalls.
Months later, with Jackson nearing 65 and apparently growing eager to make his exit from day-to-day operations, the two sides got back together and struck an agreement. (McBride declines to disclose the purchase price, but he originally told SBN that he was prepared to spend up to $1 million in his own equity and other financing for the right opportunity).
The company, with about a dozen permanent employees, operates on three shifts, four days a week. McBride hopes to use it as a platform on which to add other manufacturing companies.
McBrides attorney recently told him that putting his long search behind him has been good for his clients mental state.
He says I look relaxed, that I dont have that look of angst on my face anymore.
And his wife? Once concerned about the extended income drought, her worries have done an about-face, according to her husband.
Now she gives me a hard time cause Im not home enough.
The ones that got away
Dan McBrides search for an acquisition turned out largely as he might have originally envisioned, but for the longer time frame than hed initially expected. Art Weismans search for a company to buy ended quite differently.
Last fall, the former Big Six accountant whose family operated a closely-held furniture business for years before liquidating it joined Everen Securities Cleveland office, ending his year-long search for a company to purchase and operate.
What did he learn during that year?
I learned that its tough to be a buyer out there. Prices are too high; expectations [of sellers] are too high. Some [companies] I looked at were troubled, and for those that werent, the price was too high.
But he also came away with a deeper self-understanding. He came to appreciate how much he prized the importance of family, and of the balance between work and family. During his search, he met owners who were consumed by their business, he says.
And thats fine, as long as the passion is there; the passion has to be there first. I just didnt have the passion.
But working in the securities industry alongside his cousin, a 35-year veteran of the business whom he considers a mentor of sorts, he insists that his new line of work will merely be an alternate form of entrepreneurism. Recalling the advice of another cousin, sales guru Hal Becker, who counseled caution before taking on the responsibility of meeting a payroll for an entire staff of employees, he says, its certainly cheaper to start your own business than to buy one.
For decades, accountants considered it a professional slight. Attorneys, under the shield of law, could protect most sensitive communications with clients, under the argument that unbuttoned, protected dialogue between the two sides would increase the likelihood of lawful client behavior.
Now that theyve won the privilege as a result of aggressive lobbying by major accounting firms the profession might yet come to regret it.
In some respects, this will make your life easier, Ulmer & Bernes Steven Marcus recently told a room packed with accountants, who came out in droves for a professional session on the topic of the new accountant-client privilege, even though it was scheduled in the heart of tax season. However, it will further complicate your lives and increase your already significant exposure to professional liability claims.
In other words, the new privilege comes with its own double edge, threatening to make it easier for clients to sue their CPAs.
Thats because Congress, as is its wont, left crucial gray areas unanswered and important terms such as tax advice undefined when it extended the privilege to accountants almost as an afterthought to last years IRS Restructuring and Reform Act. While the legislation symbolically brought accountants on the same professional footing as lawyers when it comes to protecting sensitive client communications, the new privilege is technically is not new at all, but merely an extension of the attorney-client privilege which dates from ancient English common law.
In practice, though, the crafting of the bill will leave accountants in a far less privileged position than their counterparts in the bar. As one tax expert, Ulmer & Bernes John Goheen, chair of the firms tax practice, said at the conference, This new privilege is not as broad as the attorney-client privilege. It applies to tax advice, but at least in this bill, that doesnt cover much of the actual work accountants routinely perform for their clients.
Similarly, the new privilege which covers those communications which took place on or after July 22, 1998 extends only to matters before the Internal Revenue Service. But even then, it provides no protection for communications involving tax shelters or criminal cases. And it can be accidentally forfeited in cases where there is disclosure of the communication to a third party. Finally, the privilege is reserved not to accountants at all, but to their clients.
These limitations may be a trap for the unwary, said Goheen. The upshot for clients? Go slow and be wary in releasing sensitive information, as you always should have been in the first place. Theres a good chance your accountant wont be able to keep your secret, even if he or she wants to.
For instance, theres a large gray area in what constitutes tax advice, since Congress didnt define what it meant by the term. Its pretty clear that simple preparation of tax returns, including the process of converting financial statements to tax returns, doesnt count. Until the IRS issues related regulations, as it sometimes does to put some flesh on the bones of new legislation, or a body of case laws emerges from tax and other courts as the issues are litigated, that will be one important question left without light.
The problem, as Lewis Barr put it, is deciding how much of a flavor of legal advice will tax advice have to have to be privileged.
It seems clear that tax advice does include, and thus will be covered by the privilege for, advice that you give to your clients, discussions, letters, especially if its dealing with thoughts, mental impressions, likelihood of success, those types of communications, especially if you memorialize them in memoranda, Goheen maintained.
Theres a thorny issue of what happens if a bit of tax advice is first issued concerning a matter before the IRS, but later ends up in the courts. The House of Representatives didnt deal with that important issue, leaving it to the Senate to hastily address it, Barr points out.
But this kind of last-minute addition was only half thought out, and it raises all kinds of questions, he said.
Despite those as-yet-unanswered questions, the legal community seems to be tentatively edging toward a rough early consensus on how to proceed, if this session was a fair guide. Where the matters under discussion are clearly subject to privileged communications, accountants and their clients are being counseled to get in the habit of memorializing such conversations in memoranda, and stamping associated work papers with terms such as privileged and confidential or the like, as lawyers have always done.
In the end, legal experts are suggesting that the new privilege will almost certainly introduce a new and potentially troublesome tension between an accountants traditional duties to the public and his professional responsibilities to best represent his client.
Theres no good answers to this tension right now, says Goheen. But whats going to have to prevail is the duty to disclose to the creditors and investors, and that this confidentiality privilege may have to fall away.
When the merger of Amoco Oil and British Petroleum (whose BP America unit was headquartered in Cleveland) was announced in the summer of 98, it quickly became apparent that the deal would spell the end of hundreds of jobs suddenly rendered expendable by the giant consolidation.
But an innovative, if little noticed, outplacement feature established by the combined companies has cushioned the blow considerably for employees caught in the crossfire. Its also become something of a bonanza for smaller Cleveland-based companies that have skimmed off some of the employment cream.
The BP Amoco Continuous Job Fair, built on a college job recruiting model, debuted earlier this year on the World Wide Web. It offered hundreds of employees affected by the job cuts access to a database of available job listings, and permitted employers and their agents to scan employee resumes.
The site, launched in January, was originally developed specifically for the 1,200 Cleveland-based employees, who were expected to be affected by the job cuts, explains Marcia Bakst, a Cleveland-based recruiting consultant who manages the site. Initially, it was available only internally through the companys intranet.
But within weeks, as it became apparent that the merger would also lead to downsizing in other areas of the country Chicago, Houston and Tulsa, Okla., as well as Alaska workers there were also permitted to take advantage of the site, which by then had been transferred to the Web, where it remains, at www.bpemployees.com.
From there, it wasnt long before affected BP and Amoco employees in remote postings took advantage of the service. Resumes began arriving from employees based as far away as Belgium. Several even arrived electronically from employees stationed on drilling platforms in the middle of the ocean.
There have to be 2,500-3,000 resumes on there, says Bakst, though many belong to people who have long since found new employment.
The ground rules for taking part in this electronic employment bazaar are fairly straightforward, according to instructions posted on the site. Employees of either petroleum company may post resumes and other personal information and can view employment ads.
Employers or their ad agencies may post job ads and appraise candidates resumes. But head-hunters and employment agencies are barred.
Unfortunately, we cannot accommodate requests from the hundreds of search firms and staffing services who have contacted us ... Only direct-hire companies are eligible for access to this Web site, it explains.
The first batch of downsized employees became available around February, with a larger wave coming on the market in June. At summers end, a large group of employees at the BP Chemical site in Warrensville Heights were phased out, but many of those specialized workers had already lined up new positions.
Bakst says that under ordinary circumstances, she would have expected that large groups of BP alumni might have gone en masse to individual employers in the Cleveland area. Thus far, though, the largest group headed to any one employer appears to have been the four former BPers who landed at the investment firm Roulston & Co.
A year after the merger announcement, at least two significant groups of employees, both still on the job, remain available. In-house computer programmers working on fixing BP-Amocos Y2K issues in the waning days of the year are not expected to become available until some time in the second quarter of next year.
But by all accounts, area employers seem to be reserving their hungriest glances for the more than 200 call-center employees who continue to service BP credit cards from downtowns Midland Building and a satellite office near Hopkins Airport, but who are due to lose their positions this fall when the merged company outsources that function.
So many employers from banks to credit card issuer MBNA to OfficeMax over the months have told me, Call me when those people are free, says Bakst. She estimates at least 30 companies will wage a spirited competition to hire these people as soon as theyre available, probably beginning this month.
As for those hardy souls on the wind-swept drilling rigs dotting the seven seas, theres no word yet on their future employment plans.
As for Bakst, formerly the recruitment advertising director for the suburban Sun Newspaper chain, shes hoping this unusual assignment will provide a springboard to other similar Web-based outplacement efforts as the BP engagement begins to wind down at years end.
Thats my hope, she says. Ive been contacted by a number of Internet job boards ... I cant say this site was unprecedented, but I havent seen anyone else doing outplacement on the Web like this.
How to reach: Employers can register to take part in the virtual job fair simply by logging on to www.bpemployees.com, and following the user-friendly instructions. Marcia Bakst can be reached at (216) 381-7385.
John Ettorre (firstname.lastname@example.org) is a contributing editor at SBN.
David Deeds was a bearded, as-yet-untenured business school prof whod only recently been installed at his new perch at the Weatherhead School of Business when he got an idea for his latest round of entrepreneurial research.
With support from the Center for Regional Economic Initiatives, a think tank based at the school, the sunny-dispositioned San Diego native decided to crunch some numbers from the Securities & Exchange Commission.
The goal: To rank various metropolitan areas in America on their record for producing new public companies for initial public offerings. After all, these are future Fortune 500 companies, and as indicators of a regions economic vitality, there arent many more telling yardsticks than the number of enterprises that can successfully negotiate all the necessary hurdles to going public.
To do an IPO, a company has to be able to sell a venture capitalist. And then sell an underwriter. And then sell an institutional investor, says Deeds. Its an arduous process.
What he found was interesting, though much of it couldnt have been surprising to anyone who follows these things. The Bay Area, encompassing San Francisco, Oakland and San Jose, Calif., topped the list, producing 416 IPOs between 1988 and 1996, or about seven percent of the 5,627 in the country over that period. Next came the Los Angeles and Boston areas again, no big surprise. At the other end, the Grand Rapids, Mich., area captured the bottom rung at No. 31.
But for his newly adopted area, the results were bad, and perhaps a little more surprising. Over the same nine-year period, the Cleveland/Akron metropolitan area produced just 32 IPOs, which collectively raised less than $500 million from the capital markets. Expressed another way, Northeastern Ohio produced barely one-fifth of the 154 new public companies that the similarly sized Minneapolis/St. Paul area managed to give birth to during the same period.
As Deeds told a regional economic conference earlier this year, the ranking puts us in the middle of the pack clearly, not among the high flyers. For the entire period, the Cleveland-Akron area ranked No. 17, just ahead of Pittsburgh, Nashville, Columbus and Cincinnati (in that order), but immediately behind St. Louis, an even older city, and one not generally regarded these days as an entrepreneurial hotbed.
When examined more closely, his research points up more troubling indicators.
One of the big things you dont see here is software its a big hole, he says. Between 1988 and 1996, of the 490 IPOs nationwide in the computer programming and data processing category, this area had only one good for just 25th place out of 31 metro areas.
And that company, Twinsburg-based Smart Games Interactive, turned into a spectacular flop after raising $8.5 million in the mid-90s to produce golf and baseball simulators (the downfall of that company, originally called Sports Sciences Inc., was vividly chronicled by SBN in August 97). At 25th place, he says, these are not the cohorts I want to have Buffalo, Grand Rapids, Louisville and Rochester.
Perhaps more ominous still, this region has steadily lost ground relative to others over the nine-year period. On a per-capita basis, Cleveland/Akrons IPO statistics steadily grew worse from the 1988-90, 1991-93 and 1993-96 periods, while Cincinnatis relative position improved and Columbus stayed the same in the last two periods.
So why did he compile this data?
Id never seen anything like this before, and it seemed like such an obvious thing to do, Deeds says. It seems like such a good leading-edge indicator [of an areas economic standing], or maybe tailing-edge indicator.
After all, he argues, IPOs are an excellent proxy for a regions ability to nurture entrepreneurial activity. There is a correlation, he says, though not necessarily a causal link, between the number of IPOs a region produces and its per-capita income. More generally, its a telling indicator of investor confidence in the regions future, in the direction its economy is collectively headed.
I mean, these are some smart people [Wall Street and other institutional investors] betting on where the economy is going. What its saying is they think we are not where the future of the economy is.
Clevelands poor record for producing new public companies is all the more disappointing, Deeds says, because of its vaunted industrial heritage.
In the 19th century, this was the Silicon Valley, he says. And it wasnt just oil. It was also steel, paints, chemicals. At the turn of the century, I think Cleveland was the richest city per-capita in the country.
But what happened afterward, he wonders aloud over lunch, absently picking at his salad in late August, the first week of classes at CWRU.
Clevelands an interesting town, he says. But it never made the transition from industrial technology to electronics and software. It seems that Cleveland had a base to do it from, but it missed. And I dont know the history enough to know why.
But he seems determined to at least try to solve the puzzle. In a little over a year, hes burrowed into the region in uncommon fashion. One of his best vehicles for doing so will be Cleveland 2000, a nonprofit initiative which is providing Cleveland-area small businesses free Web access and a Web site in exchange for serving as research subjects. Modeled on a program in Seattle, it will offer Deeds a ready-made population to study.
We want to get beyond all the hype about the Internet and find out what small businesses actually get out of the Web, he says. Publicly launched just weeks ago, approximately 250 businesses had signed up as of early October. (See www.cleveland2000.org for details).
His publishing credits, both in academic journals and in more popular media outlets for which he has served as a kind of pundit quote machine for newspapers from Dallas to Salt Lake City and magazines such as Bloomberg Personal Finance are the kind that can give rise to special envy in the ivory tower. (A recent list of his media mentions in a Weatherhead publication was as long as that of three colleagues combined).
Of course, much of that is accounted for by the fact that his is a white-hot specialty at a time when everyone in America seems interested in business, investments and entrepreneurship.
At the source of all the activity is a restless curiosity. Through a half-dozen conversations for this story, its often not entirely clear whos being interviewed.
To talk with David Deeds, a relative newcomer to Cleveland, is to submit to a thorough debriefing about various entrepreneurs and other community players, or about pieces of local history.
David came here with a wonderful ambition: To learn more about this area and its entrepreneurship, explains Richard Shatten, director of the center for Regional Economic Issues and Ameritech professor at the Weatherhead School of Business. He has a nice mix of interest both in data and policy. In whats happening and what should happen. Hes not merely curious about entrepreneurship; hes anxious to learn enough to say, Now what do you do with it?
Based upon his initial research, Deeds critique of the region is wide-ranging. But stripped to its core, it really boils down to a single critical issue: The regions apparent lack of risk tolerance, its reluctance to use the riches from its past as an industrial powerhouse as a regional investment springboard into the kinds of technologies that will drive the future economy.
Because he was raised and educated on the more technology-friendly West C oast, he discerns the conservative local investment environment in everything. In San Diego, where he grew up, and in Seattle, where he attended graduate school (at first embarked on an MBA, but instead earning a Ph.D. in strategic management at the University of Washington), Everybodys talking about entrepreneurship. The law firms and the accounting firms are set up to support start-ups.
But supportive environments are even more amorphous than that. As he told the aforementioned REI conference earlier this year, when it comes to competing regions, its not just about amenities, its not just about research institutions. I grew up in San Diego, and out there, when you go into the bars, it just smells like entrepreneurial opportunity.
Cleveland, on the other hand, gives off a whiff of trust-fund conservatism, he suggests.
The civic leadership in this town is third-generation sons and daughters of sons and daughters of people who founded companies, and theyre risk averse.
Big companies can try to latch on to the bandwagon by talking all they want about intrapreneurship, he says, but they dont understand how important $50,000 is [to an early-stage company]. Thats pocket change to them, what they pay to move their CEO. Where are this areas angel investors, he asks, those who can pump a half-million dollars into promising new companies, crucial early-stage investments that are generally too small to command much attention from a venture cap?
And why, for Gods sakes, cant the towns major daily newspaper cover entrepreneurs even half as energetically as it does the bigger companies?
A couple of important asterisks to his research should be noted. Deeds, having recently caught some minor errors in his numbers, is still refining his findings. He doesnt think theyll much affect the relative rankings.
The rankings, meanwhile, dont include real estate investment trusts (REITs).
Cleveland has a fair share of those, he says. Perhaps more important, it didnt include all of the roll-ups, a particularly hot trend in this and other manufacturing centers, under which established manufacturers in the same or related industries are purchased by investors and operated under common management for the sake of increasing scale and synergy.
Its a strategy thats been pursued to great success by several private equity buyout groups in this area, which have scooped up venerable but mature companies and fashioned them into larger, healthier entities, often before selling them to turn a steep profit for the limited partners and other investors.
While they clearly rejuvenate older industries, the problem with these rollups, Deeds argues, is that they occur almost by definition in industries with little promise of real growth in the future.
The classic manufacturing sector is going to be viable and continue here. But its not gonna grow, he says. As bellwethers of the economy of the future, he insists that these companies just dont portend as much as new, stand-alone public companies.
And they dont provide the same foundation.
We really want headquarter companies in this area,
says REIs Shatten. The best way to do that is to have IPOs.
In the early 90s, the then-head of technology transfer at CWRUs medical school former NFL linebacker, M.D. and intellectual-property lawyer Jim Kovach put the local communitys collective investment challenge in stark perspective. The test of whether this regional economy would prosper, he liked to say, is whether those who historically built their fortunes in tangible assets such as steel and iron ore will be able to recognize that in the coming century, it will be ideas and other intellectual property that will provide most of the wealth.
Now, at the end of the decade, David Deeds is sounding much the same alarm from a University Circle perch just a few hundred yards away from Kovachs. We gotta get the wealth in this town to invest in the ideas, in the entrepreneurs in this town. Cause most of the capital is not going to come from outside.
At age 38, with formative entrepreneurial experience under his belt and a steadily growing list of publications behind him, Deeds is enjoying his current posting like a carefree joy rider tooling along the Southern California coast in a convertible.
I was raised an irreverent Californian, so I like to stir the pot, he says to the accompaniment of his signature impish grin. With his academic credentials, if his contrarian views about Clevelands economy cause him to fall out of favor at Weatherhead, somebody else will take me, he says matter-of-factly, sounding as though he doesnt for a moment expect that to happen.
Instead, he gives every evidence of settling in for a longish stay. Hes excited about the research project on small businesses and the Internet, and always on the prowl for inspiring new speakers to invite to his classes. Hes hoping to secure the assistance of a graduate assistant to deepen his IPO research (to crunch the numbers for the top 100 metro areas).
Hes energized, too, by the faculty dream team the Weatherhead School is assembling in his specialty. The school, now in the process of hiring two more faculty specialists in entrepreneurship, should one day soon have five tenure-track positions in that area, with the stated intention of becoming the top entrepreneurial academic program in the country.
And I plan to hold them to it, he says.
With all that, whats to complain about?
I get paid to pontificate in front of students and research issues Im interested in. Its a blast, I love it.
John Ettorre (email@example.com) is senior contributing editor at SBN.
Vince Piscitello was at a job site last year when his office called with word of a hefty rebate check, in the mid-five figures, from the Ohio Bureau of Workers Compensation. I said, What? Go to the bank right away! to deposit it and begin earning interest.
His companys good fortune was part of a larger windfall for Ohio employers, who received about $2 billion in rebates in 1998 from the long-suffering agency. This year, however, the money being returned to employers is considerably less: about $630 million in what are being called not rebates but dividends (the proceeds of which the BWC helpfully suggests should be invested in Y2K compliance and additional employee safety programs).
More important, the money being returned this year is distributed not in the form of actual checks, but in credits to quarterly employer billing statements.
For its part, Piscitellos VIP Restoration Inc. has seen proportionately far less money coming back from the BWC this year than last. Its premium dividends in 1999 have been just $2,700, while it enjoyed total rebates of about $60,000 a year ago. And VIP has been told to expect even less next year, he adds.
While he no longer expects such giant windfalls from BWC, Piscitello isnt really complaining. Thats because, as his case suggests, Ohios workers comp system, which former Gov. George Voinovich famously called the silent killer of jobs in Ohio, is, if not fixed, at least vastly improved in recent years.
If employers arent getting such eye-popping rebates, neither will they be paying such enormous premiums into the system as they once did. Premiums dropped an average of 3 percent this year for all employers paying into the system, according to BWC figures. More fundamentally, theres a general sense that, with the market disciplines of managed care added to the system, premium dollars are no longer being wasted by the once-massive state bureaucracy. (Epic BWC computer glitches once routinely sent duplicate checks to thousands of employers).
Longtime Voinovich aide Jim Conrads surprising decision to remain as the BWCs director after his former boss left the governors mansion for the U.S. Senate has helped further stabilize the agencys fortunes.
A look at VIPs experience with workers comp over its 15-year history vividly illustrates the improvements in the state system. A few years ago, when it was grossing just $1.2 million, the company which performs residential and commercial building restorations with unionized laborers who work about nine months out of each year was forced to shell out approximately $80,000 for workers comp coverage.
While its admittedly in a higher-risk industry than many other companies, with premiums formerly at that stratospheric level, I was very concerned about the viability of the company, says Piscitello. But three or four years ago, with the introduction of managed care to the huge state system, VIP was added to a group rating.
Now, the company, which grosses about $3.3 million, (big public building projects downtown have greatly stimulated overall rehab in the area, Piscitello says) pays only about $20,000 for workers comp coverage, or well under one percent of its revenues.
Overall, Piscitello sounds relatively happy with the systems current condition. But he does sometimes dwell on all those dollars he once poured into the system, which at one time billed itself as the largest single insurance pool in the United States.
Id just like some of the money back for all of those years I spent $80,000, he says.
John Ettorre (firstname.lastname@example.org) is a contributing editor at SBN.