About a month after Jim Nixon bought Varel International Inc. in 1998, he stood before his employees and put a slide up saying that in three years, the company would be making a $100 million a year in revenue. His employees thought he was a comedian.
“Several of them actually laughed,” the president and CEO says. “They thought it was hilarious. That was the starting point.”
It was a rough place to begin, but the laughing wasn’t unwarranted. When he bought Varel, he realized that he had to completely overhaul the entire business to the point where people questioned why he bought a company instead of just starting one from scratch.
“I had an inkling when we bought the company in 1998 that there was a lot to do,” Nixon says. “Being forever the optimist, there was a lot more to do than I actually thought.”
The beginning of his problems was that Varel, which manufactures high-performance drill bits, had major quality issues.
“The company had an attitude that quality wasn’t terribly important, and if there was a problem with the product, you would just give them a new one,” he says.
As a result, the business had a really bad reputation in the industry. Additionally, the organization was very local in nature instead of being a global competitor, as it had nearly no international business.
“That was a very significant challenge, but we came in with our eyes open and we knew there was a lot to do, but there’s always more than you expect, and that was true of this also,” he says.
Despite the laughs, he was determined to change the business into a top-notch organization.
To start, Nixon was looking at the company’s numbers and saw a line item called “performance credits” of about $300,000 a month, which was significant for a company doing about $2.5 million a month in revenue.
He inquired as to what performance credits actually were and was astonished to discover that when a distributor’s customer didn’t like the performance he got, Varel was simply giving them a new product to replace it.
“There was no investigation into what was wrong, so you never learned from it,” he says.
He realized that if they wanted to save money, they had to create better products, but without knowing what was wrong with the products, he didn’t know where to start. He began by looking at Varel’s processes. What he found was astonishing. The company claimed to be ISO 9000 certified but what he discovered was the only part of the business that was actually certified was the engineering design group — about five people. So he had about 1,100 people in Mexico manufacturing products with no quality systems in place.
“So our first thing was get a recognized quality system in place at our primary manufacturing facility,” he says.
It took about nine months to get them certified, and by the time that process was finished, the performance credits had dwindled to nearly nothing. The tradeoff, though, was that the scrap in the manufacturing plant was about $250,000 a month now.
“At least then we knew where we had to attack it,” Nixon says.
He started working with the unions in Mexico to change the philosophy of the plant. Workers were operating in an old-fashioned batch-and-queue manufacturing environment where a machinist would machine all the pieces he was given and then move them to the next operation, and so on. He changed it to implement Toyota’s lean model of manufacturing and production, which calls for people to be their own inspectors. Operators began working two or three machines, and they became responsible for the quality that came off of their machines. The only time an inspector was looking at parts now was during the set-up process of getting a machine up and running.
Not only did quality improve, but scrap levels dropped from about 7 percent initially to less than 1 percent. On top of that, the business had been making products primarily for the mining industry, but by improving, they started doing more for the oil and gas field market.
“The most important aspect of that is understanding what your issues are and drilling down deep enough to understand what the true underlying issues of the product actually are,” Nixon says. …“The first stage of any product-based business has got to be really understand the quality issues you have within the product, stabilize them, and from there, move forward with improved technology, with improving designs and improving the product for your customers.”
Get better people
With processes in place that were improving the company, Nixon next needed to ramp up the quality of people he was bringing into the organization.
In the past, Varel had traditionally hired people locally who had some understanding of the industry, but there was no expertise. He decided to change the approach by bringing in experienced veterans from the industry and build the organization out through recommendations from potential customers as to who they thought had the best technologies and who were the best sales people.
“We went from being a somewhat parochial, ‘Let’s hire locally in Dallas,’ to ‘Let’s hire all over the world,’” Nixon says.
But doing that wasn’t exactly easy.
“Initially, our ability to hire the best quality people was somewhat low because that was linked to the old quality image,” he says, “Until we really started building momentum in the company and changing the image and reputation in the industry, it was difficult to hire the very best people.”
He overcame that by targeting what he calls renegades — people who were with major competitors and were unhappy and felt as though they were being held back. He put in place a lucrative pay and incentive system to attract these talented individuals.
As a result, he started hiring people from Australia, Malaysia, Indonesia, the Middle East and all over Europe.
“As we’ve gone through changing the image and improving the quality and expanding our business, it’s become easier and easier to hire some of the best people in the industry to come and join us,” he says.
As he brings them in, he’s kept them there by giving them the ability to achieve results without being micromanaged.
“You put in place the measures for accountability, and then you review those measures on a regular basis,” he says.
He has monthly reports that define how each region and reviews those and asks questions around them, so people understand that they’re responsible for it.
“You can’t say, ‘You’re accountable to this, but you can’t do anything unless I approve it,’” he says. “You have to give them both. The way to do that is push that authority down and let them know that they have that authority and not to second-guess them and not to micromanage them but really to lead them to it. Have regular reviews but other than that, let them run their business.”
By about 2005, the business had grown to approximately $90 million in revenue, and for the first time, the company’s oil and gas business was larger than its mining business. Additionally, Varel was having success with some major companies around the world.
“Through 2005, we had gotten to the stage where we could compete with them, our products were as good as them, and we were making progress in most of the markets we were in, but we still didn’t have a clear identity as to who we were and what the differentiators were,” he says.
The next step then was to focus on differentiating Varel from its major competitors.
“We felt as though we had enough foundation laid that we could actually start to tell the story about who we were and what we can do and start to market ourselves really well,” Nixon says. “We didn’t want to go out and make a big hoo-hah about who we were and what we could do until we had in place all the building blocks for doing it.”
Many of his competitors are huge companies with tens of billions of dollars in revenue, and the way they approach business is to have central engineering and manufacturing capabilities. Seeing this, Nixon saw an opportunity to provide a more agile and flexible company to the marketplace. He set up small manufacturing facilities close to the customer base and built the technology around those to make them stand-alone facilities. While much of the competition is building product and saying, “This is what we offer,” now Varel is saying, “Here’s what we’re capable of, what can we build for you?”
Nixon says that it’s also very difficult to get a first sale from a customer, so they went about building relationships with potential customers so that when an opportunity finally presented itself, they already had an established relationship.
For example, one company needed a drill bit in the middle of the night but couldn’t get a hold of its usual bit provider. The man at that company finally remembered that he had met with a Varel guy and found his business card and called to see if a $600 bit could be delivered to him. The Varel guy made it happen.
“When he gets there, not only is he delivering the bit, but he’s delivering breakfast for the rig crew,” Nixon says. “He now has a customer for life. That foreman spent five hours trying to get a guy on the phone, he calls the Varel guy because he finds his business card, and a guy is up and in his truck delivering a $600 bit. Our major competitors won’t get out of bed for a $600 bit, but that’s what builds the relationship, and that’s what builds the breakthroughs.”
He also works to differentiate Varel by being completely honest with customers, even if it costs them a sale because he doesn’t want to just sell a bit — he wants to sell service and value, as well.
“The first time you say to the customer, ‘We have a bit that can do that, but it’s probably not the best bit for that, why don’t you let me get you one of these from someone else,’ all of a sudden, that guy is going to believe everything you tell them in the future because you’ve just taken a sale away from yourself and given it someone else in order to get him the best product,” he says. “It’s all about building the customer relationship and building the customer’s confidence and your reputation that you won’t let them down.”
By 2006, Nixon’s efforts were paying off and his people’s attitudes had changed. That year, he had a revenue goal of $120 million. Initially, they thought it was too aggressive, but by year’s end, they had hit $140 million, and they were pumped up and believing they could do anything.
“It was a cultural change — the first time we blew away our plan and targets was when the momentum was building,” he says. “It’s very exciting to see people start to have a great deal of pride and enthusiasm about what they’re doing, and that feeds into the customer service model.”
Revenue has continued to climb and Varel did nearly $300 million last year — a far cry from the approximately $30 million in business it had when Nixon first bought it. And everywhere else you look inside the company shows how much Varel has changed. The company previously had three patents, two of which had expired, and now has about 70 patents to its name. Productivity drastically increased; Nixon says that he had about 1,100 people manufacturing about 2,600 units a month when he bought the company, and today, he has about 750 people manufacturing 5,500 units a month. He’s even rolling out lean practices to all the other areas of the company beyond just manufacturing and seeing nice results, as well.
While mining made up most of Varel’s business initially, now it accounts for only about 20 percent of the company’s business, and the oil and gas field represents about 80 percent. And on top of that, its customers are now top-tier organizations from all over the world.
Varel’s competition has also taken note. A third party does an annual survey of the largest players to gauge market share. In the past, there have always been four major companies and then an “all others” category. As Varel has improved, the third-party now has Varel as its own category — creating five majors and “all others” now.
“That tells us we’ve changed significantly,” he says. “The other thing is they’ve come to us three years in a row now and asked us to join their market consortium. Of course we’re saying, ‘Nah.’ We keep saying no, and they keep coming back to us and asking us to join. Clearly they understand that we’ve become a significant part of the market.”
How to reach: Varel International Inc., (800) 827-3526 or www.varelintl.com
THE NIXON FILE
Jim Nixon, President and CEO, Varel International Inc.
Born: I was born in Glasgow, Scotland. I’m the youngest of eight children. I’ve got five older sisters, so effectively I had 6 mothers. I had a very charmed childhood.
Education: Degree in mechanical and production engineering, Stow College of Engineering in Glasgow, Scotland
As a child, what did you want to be when you grew up?
An engineer. My first memories were of getting a lot of grief from my parents for dismantling things around the house, whether it be an electric kettle, or an electric plug. I remember I managed to disassemble a tricycle when I was just over four years old.
What was your first job ever as a child, and what did you learn from it that still applies?
I had a paper round. I delivered papers when I was 11 years old. At 6 a.m., I had to start, so I would pick up papers and sell them at the bus stop for the public transport service and then go to school. Then after school I actually had a delivery round and picked up four or five dozen papers and delivered them to private homes around the area.
That taught me a lot about cash flow. The guy who you bought the papers from was always looking for his money on a Saturday, so if you didn’t collect your money from your customers on a Friday night, you couldn’t pay him. It was a very simple cash-flow model.
What’s the best advice you’ve ever received?
My father ran a butcher shop, and he worked extremely hard to provide for the eight children he had. He told me, ‘Son, your role in life is to find the gold in everyone and polish it up.’ Basically what he was saying was find the good in people and don’t waste your time trying to make them perfect -- just make them as good as they can be at what they’re good at.
What brought you to the U.S.?
I moved to the U.S. with Dresser Industries to run the global operations for one of their divisions. Shortly after I moved, Dresser was acquired by Halliburton. … I moved over here to become president of one of those divisions, and Halliburton doesn’t have division presidents, so that was really the catalyst for me to buy this company -- to take control of my own destiny, having moved my wife and my family over to the United States and then find the opportunity I had moved for had closed on me.