Ray Marano

Friday, 30 August 2002 10:25

Beer bashed

 

CoRem, the Council on Realizing Excellence in Management, puts on programs about once a month to help business owners understand the theory behind business practices and processes.

One of CoRem's recent offerings was the Beer Game, an exercise that simulates the distribution chain from manufacturer to retailer. The game is played by the retailer drawing cards that represent cases ordered by customers in successive rounds, then forwarding the order up the line to the distributor, who places an order with the wholesaler, who in turn places an order with the brewery.

The brewer then decides how much beer to produce and fills orders to be shipped through the system and ultimately back to the retailer. Each team in turn moves a like number of cases to the next distribution level. A one-week lag is built into the process, and none of the teams knows what the orders are until they receive them, so none can anticipate what the immediate demand might be.

The score for each team is determined by assessing a cost for each case that is either backordered or held in inventory in each round of the game, so holding a lot of inventory or backorders can get expensive.

What seemed like a pretty simple process got a whole lot more confusing once the game got underway. I was on the retail team, arguably the easiest to manage, but still no snap.

It wasn't long before things got out of whack at almost every level. Teams reacting to an anticipated shortage in inventory placed big orders that failed to meet its needs one week only to get snowed under with product later in the game.

The exercise demonstrated not only how critical it is to have good data to manage the process, but how emotion will drive the process in the absence of hard information. The CoREM guys pressed us to make fast decisions, and even though our team adopted a conservative approach to replenishing inventory, our judgments were based on little more than gut feeling.

What did I learn besides the fact that I wasn't cut out for the beer business? Having a thorough knowledge of your own company isn't enough.

And knowing as much as you can about your customer's customer and your supplier's supplier isn't a luxury, it's a necessity. How to reach: CoREM, www.CoRem.org

Wednesday, 31 July 2002 11:46

Streamlined selling

For F.B. Leopold Co., time wasn't always on its side.

The Zelienople-based company develops and installs municipal water and wastewater treatment systems on six continents. With 160 employees, it has completed installations in 6,000 cities worldwide.

The projects F.B. Leopold pursues typically entail long selling cycles -- they can go on for several years in cases that involve multiple presentations and communications with contractors, engineers and municipalities. There's a lot on the line with such projects, which can be valued as high as $15 million, so quick turnaround on sales quotes and the ability to locate crucial account data is critical.

F.B. Leopold faced a challenge in managing the massive amounts of information generated from an initial inquiry through to a contract award. It had no integrated system for storing and disseminating information related to the sales cycle. Some key data was in a database that its four regional managers could access and pass along to 33 field representatives, but much of it resided in paper documents at the headquarters.

"We were having trouble with our field people accessing the information," says Mike Wild, sales administration manager for F.B. Leopold.

To further complicate matters, not everyone had that the same information at any given time.

F.B. Leopold found a solution in a customer relationship management system installed by Computer Resources, a Pittsburgh information technology consultant. Computer Resources recommended Microsoft Great Plains Siebel software to help F.B. Leopold track customer contacts online. The package works well for businesses like F.B. Leopold, where sales cycles are not immediate, says Tom Falloon, president of Computer Resources.

The system allows regional managers to quickly access account details and history. The information is synchronized, enabling all personnel to work with the same set of data.

The package brings a competitive advantage, according to Wild. With faster access to more information at a single source, his team can stay closer to the customer throughout the sales cycle. He says the system creates a more accurate picture of where a prospect is in the decision-making process, allowing F.B. Leopold to know project details, what information has been provided to a client and when to schedule presentations or contact prospective customers. That wasn't always the case.

Says Wild: "We were pretty much reacting to the industry rather than being proactive." How to reach: Computer Resources, www.computer-res.com; F.B. Leopold Co.,www.FBLeopold.com

Wednesday, 31 July 2002 11:40

Playing it straight

Bob Dryburgh, president of Straightline, takes pains to point out that the company is not a dot-com.

It's easy to see why he'd want to dispel that perception. Right or wrong, calling your company a dot-com start-up these days is about the same as calling it a flop.

Yet, e-commerce upstart Straightline occupies an edgy office space in the Strip District, where it's already knocked down walls to expand in its first year of existence. The dress code is everyday casual. And except for the most confidential meetings, virtually any employee can listen in when the managers convene.

Launched last October by U.S. Steel Corp. with fewer than two dozen employees and operations in a few states, Straightline now operates in 23 states and has nearly 3,000 registered users. It also has a mandate to break even by mid-2003 and ultimately become a nationwide, multibillion-dollar business.

Sure sounds like an aspiring dot-com, doesn't it?

Roy Dorrance, vice chairman and chief operating officer of U.S. Steel and the senior executive who took the lead on the Straightline venture, explains why it's not.

"This really isn't a dot-com," says Dorrance. "This is using information technology in a traditional business to get efficiency out of it."

And that might be the critical difference. Other large companies, like WalMart, for instance, have achieved good results by taking technology and applying it to a business model they understand in a comprehensive way. U.S. Steel went to school on the failures of the early dot-coms to create an opportunity to make its own e-commerce venture a success.

There is plenty of opportunity to squeeze waste out of the distribution end of the steel business. That's where Straightline steps in. The company uses information technology in Web-enabled applications to manage the entire steel distribution process -- from mill to customer -- more efficiently, reducing costs and, it expects, increasing profits for itself.

To appreciate what Straightline is attempting to do, it's critical to understand how the steel distribution system works. For large steel customers, sheet or coil steel is delivered in large quantities direct from a mill and cut and treated for use.

But for most users, it's not cost-effective or practical to buy steel directly from the mill. For them, the steel must be processed and cut before it arrives at the plant. Coil steel is sold through steel service centers, facilities that cook, slice and dice the mill-fresh steel into a configuration that the end-user can stamp or shape into its final product.

Then there's the transport of the steel from mill to service center to end-user. U.S. Steel sees lots of inefficiency in the process and overcapacity in the service center business -- an area where it recognized a potentially lucrative opportunity.

"It's a business that I think is ripe for the application of technology to bring more efficiency to the system," says Dorrance.

Here's an example of how an order might be processed by Straightline: A registered customer orders a coil of steel online. Straightline's software then verifies that the order falls within the customer's pre-determined credit line.

The order is processed using optimization software that takes into account the inventory of steel at service centers where Straightline inventory resides and that it meets the customer's specifications. It also looks at whether the center has the capacity to fill the order and how the steel can be cut to allow minimum scrap.

Aggregation software interfaces with a third-party logistics provider to determine how the order will be shipped to minimize cost and to arrive in time for the customer's needs.

One of Straightline's customers, a Marconi plant in Greenville, Miss., fabricates steel cabinets for use in the telecommunications and cable TV industry. Before purchasing from Straightline, the plant bought steel coil and had it shipped to a nearby service center to be cut to size for final fabrication, then shipped back to Marconi.

Now, Straightline selects the appropriate steel from its inventory in a steel service center, cuts it and ships it ready for use to the Marconi plant.

Marconi is on a contract purchasing arrangement in which Straightline analyzes the plant's needs and automatically coordinates the delivery of steel to maintain adequate inventory.

The upside for Marconi?

"It helps Marconi maintain a very low inventory," says Brenda Hughes, steel planner at the Marconi plant.

And it frees Hughes from the telephone and paperwork required to arrange a single steel purchase, a process she says could otherwise take half a day. She says she can now spend that time investigating more cost-effective purchasing opportunities.

In 2000, U.S. Steel began to look at opportunities to develop its existing business and to create new ones, and hired a consultant to do an analysis of the company and come up with some business development strategies. One commitment that resulted was to re-establish U.S. Steel as a global business, a position it lost during the decline of the domestic steel industry that began in the 1970s.

Another decision, which spawned Straightline, was to leverage U.S. Steel's considerable information technology assets to bring efficiency to the process of selling to large customers and to apply that experience to sell to smaller users. The company's IT strengths, the consultant concluded, were world class and a firm foundation on which to build new business.

"We maintained that strength in an open, purposeful way because we realized that it was something that was important to us," says Dorrance.

The focus in the past, however, had been on bringing technology to bear to improve service to very large customers. Meanwhile, most of the inefficiency and overcapacity in the supply chain laid in the underused capacity at the service center level.

With its strengths in distribution and information technology, U.S. Steel's top brass decided to create an e-commerce solution that would link producers, processors and transportation providers in one system and maximize the capabilities of each, all without bricks and mortar and other capital investments.

"The idea was to use that capacity that existed but not to own it and not invest in it ourselves," says Dryburgh.

In early 2001, when the dot-com boom was turning into a bust for a lot of ventures, Dorrance and about a dozen other U.S. Steel employees from a variety of disciplines took up quiet residence in U.S. Steel's Pittsburgh Service Center, a nondescript white building on the South Side, to work out a plan for Straightline.

The company had already taken a peek at the e-commerce side of the steel distribution business with a small investment in e-STEEL, an e-commerce company that provides an online exchange for steel. And it took a hard look at similar ventures that had failed and tried to determine why they couldn't do what U.S. Steel was proposing.

Dorrance says the ventures were mostly exchange models that simply offered a market for steel products but not much else. Most had failed to do any market research to find out what customers wanted.

To avoid those mistakes, U.S. Steel conducted focus groups to find out what customers were looking for in an online purchasing environment. It found that customers liked the ability to buy online, but wanted to be able to pick up the phone if they had a question or wanted to place an order with a company representative.

And they expected the party arranging the exchange to have accountability if there was a problem with an order.

Straightline borrowed some technology infrastructure, like its I-track system that manages the sale of steel to large users, from U.S. Steel.

"That's a key engine that basically we lifted out of the system we're using at U.S. Steel and dropped it into Straightline," Dorrance says.

Straightline adopted a similar but upgraded version of an order management system U.S. Steel had been using and added tools to handle optimization and order aggregation. It established a network of field sales representatives and a customer service organization to handle customers that wanted to place orders by phone.

"We've taken those systems and we've added a whole bunch of other bells and whistles," says Dryburgh.

In the end, an online venture's success is tied substantially to the willingness of customers to use it, and Dryburgh says he's pleased with the results thus far. He says about two-thirds of the orders placed by "spot" buyers, those who don't have a contractual purchase agreement with Straightline, are completed online, and nearly two-thirds of those buyers are repeat customers.

An entrepreneurial bent

The company decided that if Straightline were to succeed, it would have to be structured from the outset to encourage a corporate culture markedly different from the type that prevails in a large public company. While about 15 percent of its workers are former U.S. Steel employees, the company has made a conscious effort to recruit from outside the company, benefiting from the dot-com slide by picking up technology workers cast off by failed tech ventures.

Dorrance says it was important to set up a company outside the U.S. Steel organization -- both in work environment and location -- with the independence that would encourage the entrepreneurial attitude new ventures require.

Straightline has independence even when it comes to where it purchases its steel products. There's no requirement to buy from U.S. Steel mills; rather, there is an imperative to make purchases from whatever sources make the most sense from a business perspective.

Says Dryburgh: "Straightline was not created as a way to get U.S. Steel product into the marketplace."

"It really works," says Dorrance. "You really need to get the dynamic of people working together and really feeling that they're part of something exciting, something new." How to reach: Straightline, www.straightline.com; U.S. Steel, www.ussteel.com; Marconi, www.marconi.com

Monday, 22 July 2002 10:10

My three sons

My three sons

By Ray Marano

Although they are still quite young, Christine Jack Toretti has already given a lot of thought to how her sons will succeed her in running S. W. Jack Drilling Co.

Even though they are just 12, 10 and 7, she says she finds herself analyzing where they would fit best in the business. All are demonstrating interest and an acumen for it, she says. One is a visionary, one appears to have a knack for dealing with people, and the third has a preference for operations.

She realizes, though, that she may have to deal with some sibling rivalries when it comes to deciding who will have the most say in the company.

"I think I was incredibly lucky that I didn't have any brothers or sisters to battle with," says Toretti. "The one thing I would hope to do is to have one of them in charge and compensate the others for not being in that decision-making role."

Sunday, 21 July 2002 20:00

Know thy market

Soft-drink bottlers and fast-food restaurants have long known the value of currying the favor of young customers, who often turn out to be loyal to their brands well into adulthood. St. Barnabas Health System seems to be taking a page out of that marketing book.

St. Barnabas, known best for its extensive housing and health services aimed at the elderly, is trying to attract some "youngsters."

It looks like a smart move, since the health system is playing to its strengths while reaching out to a slightly different and more affluent segment of the growing elderly population.

To bring the younger retiree population into its system, St. Barnabas is building the Woodlands at St. Barnabas, a complex of single-story homes on a 42-acre site on its Valencia Woods Nursing Center campus. The system broke ground last month on the first four-unit structure, expected to be completed by September. Seven additional buildings are in the plan, which will mean a total of 32 homes in the development.

St. Barnabas says the attraction will be the low-maintenance requirements, housekeeping services and accessibility to the restaurant and social activities at The Village at St. Barnabas, its 252-unit community for people over the age of 65.

St. Barnabas also will have an opportunity to cultivate a group of retirees who, as they age, will likely need additional services and may find comfort in assimilating into other parts of its health system, such as The Village at St. Barnabas.

Monday, 22 July 2002 10:09

The few, the proud

Venture capital firms based in Pittsburgh invested more than $7.4 million in 16 Pennsylvania companies in 1997, an amount dwarfed by the $17 million invested the previous year.

"Obviously, it's not the trend you want," says Tom Canfield, president and CEO of the Enterprise Corp. of Pittsburgh, a non-profit entrepreneurial assistance organization that is expected to become part of the state-funded Ben Franklin Technology Center of Western Pennsylvania next year.

The venture capital-investment figure is but one snippet of information contained in The Enterprise Corp.'s report, "A Survey of Venture Capital in Pittsburgh 1998," but it's notably not a trend that Canfield expects to continue into this year.

Canfield says that, already in 1998, a few major deals have closed, foretelling a much bigger year in 1998. And, he adds, the quality of some of the presenters of late indicate that at least some local entrepreneurs are getting better at making their case to the venture capital community.

Canfield cites as examples former executives of Automated Healthcare and Fore Systems, two highly successful companies launched in Pittsburgh, who have been able to raise significant blocks of capital for new ventures.

And while venture capitalists locally are looking for deals with strong potential for big returns, they aren't necessarily interested only in mature, sure-thing investments.

"My perception is that there is much more interest in the private investment community in investing in early-stage companies," says Canfield.

Indeed, start-ups accounted for $3.2 million in venture capital investment last year, according to the survey. And, as in previous years, more than $6.6 million of the $7.4 million invested went to new portfolio companies.

Moreover, investments by small funds, such as the Western Pennsylvania Adventure Capital Fund, which was launched in 1997, and the Enterprise Corp.'s Private Investor Group, have attracted larger investments from other funds.

The report notes that, as in prior years, companies in southwestern Pennsylvania in the software and medical products industries received the most investments.

By contrast, industrial-product companies in southwestern Pennsylvania that received capital from Pittsburgh-based venture capital firms employed 818 people, the most of any category, yet only three firms received venture capital investment. Twenty-one companies in computer software and medical products and services received investments.

Says Canfield: "The venture capital industry as a whole is looking for extraordinary products and services, high value-added products," which means most of the investment is going to go into medical and other innovative high-tech businesses that have rapid growth potential.

Of course, the kind of manufacturing typically found in southwestern Pennsylvania doesn't fit in that category.

"We don't make much that goes inside a computer," says Canfield.

Entrepreneurs who want a reasonable shot at landing venture capital should do two things, he says: have a well-prepared business plan and at least one well-satisfied customer.

"They need a solid business plan, they need to be able to effectively communicate it to investors-and we see a lot who can't do that-and a clear acceptance by key customers who can offer powerful testimonials," says Canfield.



Who's who in Pittsburgh venture capital

Following are the 15 venture capital funds and fund managers either based in Pittsburgh or with regional offices here at the end of 1997. They also are listed in "A Survey of Venture Capital in Pittsburgh 1998."


1. Adams Capital Management-(412) 749-9454

2. ALCOA/Advent Venture Capital Fund-(412) 553-2982

3. Birchmere Investments Inc.-(412) 803-8000

4. C&L Ventures-(412) 341-1144

5. CEO Venture Fund-(412) 687-3451

6. Keystone Minority Capital Fund L.P.-(412) 338-2230

7. Mellon Ventures Inc.-(412) 236-3595

8. Pennsylvania Growth Fund-(412) 361-0500

9. Pittsburgh Seed Fund-(412) 687-4411

10. PNC Equity Management Corp.-(412) 762-8892

11. Point Venture Partners-(412) 261-1966

12. Robinson Venture Partners-(412) 661-1200

13. Stonebridge Partners-(724) 223-0707

14. Wesmar Partners-(412) 392-2350

15. Western Pennsylvania Adventure Capital Fund-(412) 687-0977

Monday, 22 July 2002 10:09

In Brief

Pittsburgh may lag in some areas economically, but there's one thing the region can brag about: It's safe.

While the Bureau of Labor Statistics reported that the 1996 rate of lost-time accidents was 4.5 per 100 full-time workers, local building contracts maintained a low 1.5 accidents per 100 workers-a 300 percent improvement over the national average.

As a result, the Master Builders Association of Western Pennsylvania Inc. was honored recently for its safe job sites by the Associated General Contractors of America, coming in third nationally in the standings.

"We've enjoyed a long history of cooperation between the building trades, MBA contractors and the Occupational Safety and Health Administration," says Bob McCall, safety director of the MBA. "We all have the same goal-saving lives and preserving the quality of life for our employees."

And winning the occasional award.


On the offensive

A player from the Chicago Bears comes to Pittsburgh without the rest of the football team. Must not be too bright, right?

Wrong. Jim Flanigan is in fact a very intelligent young man. Flanigan, a Notre Dame MIS grad as well as a defensive tackle for the Bears, rushed into Pittsburgh in May to give awards to two reading educators at the Weil Technology Institute, an elementary school in Pittsburgh's Hill District that has been reorganized and refurbished with an emphasis on technology tools and literacy improvement.

Teachers Susan Sauer and Rebecca Hamilton received awards from the foundation, and students participated in a book exchange with peers in Detroit and Charleston, W.Va.

Weil was one of six stops nationally on the Great American Book Drive, an effort by the James Flanigan Foundation and the UPS Foundation to raise awareness of child literacy issues and to stimulate interest in reading and learning.

While the audience was almost entirely children, Flanigan's message was clearly one that adults need to hear, too. He pointed out that 40 million American adults lack adequate literacy skills, shutting them out of opportunities for employment as well as personal development.

Talking like a coach might to his players, Flanigan slipped important messages about the value of reading and literacy into his presentation to an auditorium packed with elementary students. Without adequate literacy skills, he explained, finding a meaningful place in the job market would be difficult.

"Just like skills in sports..." Flanigan explained to the youngsters, "reading is a skill that must be practiced every day."


One too many arrows in the back, perhaps?

When our May 1998 cover subject, Gregory Coticchia, told SBN about Mallett Technology's effort to raise money via a direct public offering, he described the process aptly-perhaps too aptly: "We're the pioneers," he said. "We're the ones taking the arrows in the back. Some will be successful, some won't."

Evidently, Coticchia and company took one too many arrows. By early May, company founder Robert Mallett abruptly cancelled the DP, having raised only about $125,000, scrapped his aggressive plans to grow by acquisition, and laid off eight senior employees-including CEO Coticchia and Chief Financial Officer Robert Delach. Both now are serving as consultants in the region as they look for new employment opportunities.

Doug Goodall, president and CEO of Vision Systems and our other May cover subject, meanwhile, reportedly continues to forge ahead with commercialization plans and is ready to raise another round of capital, as planned.

The moral of this story: Don't expose yourself to shooting arrows. And if you do, don't just cut and run. The premature retreat always results in an arrow in the back.


Overheard

"When you're an entrepreneur and someone is waving a bag of money in front of you, it's usually a compelling reason to go into that market."

William Hulley, Adams Capital Management, at a recent M.I.T. Enterprise Forum presentation, commenting on a local entrepreneur's dilemma in determining which of many potential markets he should pursue for his company in the early stages.

Monday, 22 July 2002 10:09

Bound to the basics

A deal that would have sold Pittsburgh Applied Research Corp. to a group of its managers had just collapsed. The lawyer who had tried to put it together, it turned out, was a friend of Dave Eichenlaub, CFO of Gemini Holdings Inc., a firm formed last year to acquire stable companies in a variety of business segments. The lawyer mentioned the failed attempt to his friend, and Eichenlaub, sensing there may be an opportunity for his company to acquire PARC, brought it to the attention of Tom Certo, Gemini Holdings' CEO and the leader of this young, aggressive cadre of entrepreneurs. In the end, Certo and company consummated the acquisition in about 60 days, from first mention to closing. It all began simply by maintaining contact with a business associate.

Undoubtedly, Certo, 34, and his four similarly youthful partners in Gemini Holdings, waste little time when an opportunity presents itself. They move quickly, each applying his particular area of expertise to scrutinize the target, identify its strengths, weaknesses and potential, and integrate the new company into Gemini Holdings.

Despite their youth and assertiveness, however, they seem to hold little regard for the latest theories being promulgated by the prestige business schools or management gurus currently in vogue. Their conversations aren't peppered with highfalutin jargon or the faddish buzz words and slogans that seem to plant themselves so easily in some business owners' vocabularies.

A good deal for both parties isn't a "win-win." It's simply a good deal. They're not looking for basket cases in need of heroic rescues. Instead, they seek out good companies that need a little help to reach their peak. And they rely on the fundamentals of business.


Relying on the basics

You've heard it a million times. When things are faltering, go back to the basics. Practice the fundamentals. During a panic or, at the least, a downturn, most businesses will embrace the basics. There's some comfort in going back to the familiar, to the tried and true, like putting on a pair of comfortable shoes. And it makes good sense. What's more important, for instance, than balancing the checkbook, looking for ways to cut costs, and asking your customers what they think?

But how many companies do it when things are going well?

Gemini Holdings, with operating companies doing in excess of $20 million in annual sales, appears to know the value of the simple stuff: sound operations and financial management, investment in technology or equipment when necessary, and good human relations skills. They're the bedrock principles, Certo and his colleagues assert, that will keep any kind of enterprise on a steady course. And so far, Gemini Holdings has successfully applied the approach to a start-up, a turnaround and more than one mature company.

"When forming Gemini Holdings, the approach we took, unlike many management or holding companies, was that we weren't going to specialize in any particular industry," says Certo.

Instead, Gemini's tack is not to micromanage each enterprise, but rather to apply a set of fundamental management and business skills in overseeing strong management teams with the specific knowledge of their respective industries.

In effect, the five principals use a team approach and function as a very active board of directors for each of the operating companies, staying focused on strategic needs and leaving the day-to-day functions up to the managers.

They've then taken that approach on the road, applying it across the board to their growing-and diverse-portfolio of companies. First, there are Carman Supply & Equipment Co. and Havnaer Supply & Equipment Co., with $15 million in combined sales. Both are distributors of laundry chemicals, supplies, equipment and parts to commercial concerns.

USA OnRamp Network Integration Corp., formed after the sale earlier this year of USA OnRamp, an Internet service provider, is a network consulting and integration company with revenue of more than $2 million. Leasing Capital Corp., formed in 1997, is a third-party equipment leasing company that has annualized revenue of $3.6 million. PARC, a $5 million concern, provides independent testing services, primarily to the petroleum industry.

Certo places Gemini Holdings' business philosophy somewhere between the typical financial stakeholder-those looking to regularly churn their holdings and take short-term profits-and strategic owners, who are seeking acquisitions that will enhance the growth and profitability of their other interests. The time frame for holding onto the companies that Gemini Holdings acquires is something on the order of three to 10 years, says Certo.

"The key is, if they're turning their portfolio over...then what they're doing can work very well," says Bill Rupp, assistant professor of management and director of business accreditation at Robert Morris College.

But success at acquiring and divesting businesses hinges on knowing when to get in and out of them at the right times, Rupp says. He notes that research indicates companies that practice "conglomerate diversification," or acquiring businesses unrelated to each other, often find that the operating companies become less manageable. "As they continue to add to the portfolio...they will spread themselves beyond their ability to control them," he cautions.

Certo started out as an entrepreneur when he became a partner in International Culinary Academy and Computer Tech, two downtown technical and training schools. The business was in a state of paralysis-and in the red-because its owners were at odds and couldn't agree on how to proceed. Decisions were deferred, and by the time Certo and a partner took over in 1991, the business dipped into the red.

By 1997, when Certo decided he wanted out of the education business and sold the company to a national chain of proprietary schools, revenue was $7 million, up from $1.7 million when he took over, and was turning a healthy profit.

Certo launched the successful USA OnRamp, an Internet access company, as a spin off from Computer Tech. He then decided that Gemini Holdings, however, wasn't going to pursue additional start-up opportunities. Instead, he was going to seek out existing companies with good growth potential, generally within a 100-mile radius of Pittsburgh.

Certo surmised from his experience with the proprietary schools that a lot of companies out there were essentially sound but for a variety of reasons, ranging from feuding partners to complacent owners or poor financial management, hadn't been able to reach their potential. That theory led to the formation of Gemini Holdings and the concept of acquiring businesses and acting as a strategic team in guiding them rather than adopting a day-to-day management structure.

"We're kind of industry generalists, and we rely on the management of the companies," Eichenlaub explains.


The team approach

In the early stages of a takeover, the principals generally meet for a long brainstorming session, where they make a master list of things to be accomplished. Then each works independently at the new company, with Dave Gilpatrick, chief operating officer, taking a lead role as kind of an advance man, introducing Gemini Holdings to the managers and working closely with them to resolve issues like personnel and facilities needs and refining the sales function.

"With most companies we come across," Gilpatrick acknowledges, "sales and marketing need a kick."


Support, don't supplant

Gemini Holdings' approach of leaving the day-to-day management of its operating companies to teams of managers means that those teams need to be capable of working independently. So far, since its acquisitions have been of essentially sound companies, Gemini Holdings, for the most part, has not yet had to totally revamp the management teams.

"The most valuable asset we are purchasing is the people who are there," Gilpatrick says.

And the principals expect the managers to provide honest input into how the businesses shou ld be run.

"We foster some disagreement," says Gilpatrick. "We don't want a lot of 'yes men' or 'yes women' in our organization." In fact, Certo and Gilpatrick say, even most of the major decisions are made by the operating companies' managers, albeit with the input of the principals.

They further solidify the commitment of the management team by giving them an equity interest. The top managers at PARC, for instance, who had been seeking an ownership stake when they tried to acquire the company, secured an equity interest in Gemini Holdings.

Companies taken over by Gemini Holdings generally don't have to expect a housecleaning. While the principals make a careful analysis to determine how the management of its companies will be staffed, shake-up is not the general rule. In fact, Gilpatrick points out, only two people were not offered positions in their last two acquisitions.

Very close to the closing date, the principals hold a meeting with all of the company's employees to introduce themselves, announce the management team and explain changes that will take place in benefits and pension plans, for instance. The roles and responsibilities of all parties are covered.

Early in the takeover, the principals spend about a day a week on site with the management team. "We're all kind of going in our own directions," says Gilpatrick, but they meet as a group weekly to review their progress. After the acquisition has been completed, Certo moves away from any day-to-day involvement to focus on identifying and evaluating other acquisition targets.

All of the principals eventually withdraw from the day-to-day to focus on the larger strategic issues. Keeping out of the details of running the business, they say, gives them a perspective that otherwise might be lost.

"It allows us to take a fresh look at the business," says Gilpatrick.


The technology investment

While the companies Gemini Holdings has acquired have been in reasonably good condition, the Gemini principals all realize that investments will be necessary to get the companies running at full tilt.That's where principal Joe Joy comes in.

Joy, executive vice president of information systems, leads the way in assessing what the acquired company's technology needs are. The acquisition of Virginia-based Havnaer Supply & Equipment Co., for instance, was made to help expand the geographic coverage Gemini Holdings held with its earlier purchase of Carman Supply & Equipment Co., which is in the same business. To coordinate their operations and tie the two companies together, Joy directed the installation a wide-area network. At PARC, new network cabling and software were the first improvements to be made.


Creative financing

Eichenlaub says Gemini Holdings has structured all of its deals to date using its equity, bank loans and with the seller holding a subordinated note. Getting the seller to hold paper means, at least for a time, he or she has a stake in the company's success, says Eichenlaub, and the larger the seller's share, the less equity and bank financing required.

But one of the main financial keys, says Eichenlaub, is to not overpay for a company and saddle it with excessive debt. The tendency in a strong economy is for companies to be over-priced. On the other hand, the ease of securing credit in such conditions makes it easier to overpay for an acquisition. For a company on the acquisition track, a combination of too much debt and an economic slowdown can pose a problem.

"If you pay too much for a company and you have a lot of debt and you hit a recession, that's a recipe for disaster," says Eichenlaub.

And having the company but not being able to invest in it because you've overpaid for it won't work, either. "Once we are able to make an acquisition, we need to grow the business," says Eichenlaub.

So careful valuation must be made of each target. While the intent is to increase revenue, to ensure that the company will be able to support the deal, Certo explains, projections are made with the assumption that there will be no increase in sales.


An ear to the ground.

Just as the PARC acquisition came out of a personal contact and not through a business broker or some other formal channel, all of Gemini Holdings' takeovers have come out of referrals. Each of the principals belongs to at least one organization that allows them to get Gemini Holdings' story on the street and attract potential deals.

Certo spends the lion's share of his time meeting with potential sellers and others who might be interested in the Gemini Holdings story. Gilpatrick rubs elbows at the Downtown Rotary Club, and Eichenlaub, Joy and Joseph Weis, executive vice president and general counsel, stay visible through organizations associated with their respective professions.

The referrals usually come to them only if there is a reasonably good fit. "We're not turnaround people, and don't profess to be," says Certo. The companies have to be at least near break-even or slightly in the black, in a good industry with growth potential. And getting in early usually means moving in before a broker has had an opportunity to shop the firm around and, in most cases, inflate its asking price and the expectations of the current owner.

"They say they're not doing turnarounds, but I guarantee you the first thing they're doing is getting a hold of the checkbook," says Rupp. Next, he says, they should be making a comprehensive evaluation of management and products, picking out the winners for further development.

Since its formation in 1997, Gemini Holdings has enjoyed the luxury of doing business during a period of relatively easy credit and a growing economy. What happens when the business cycle alters its course and the economy takes the inevitable downturn? Rupp says there should be opportunities in any economic environment, and smart companies are sharp enough to recognize which ones can thrive in current conditions.

"They will never run out of opportunities," Rupp says. The key, he maintains, is to know where a company's strengths are and where it fits into the external conditions.

Certo says he believes that an economic slowdown, while it may pose a challenge to his firm's operating companies, will provide opportunities that a good economy does not offer.

"I think it will actually increase deal flow and give us more realistic pricing on deals," he says.

So for Gemini Holdings, the good times could very well roll for a long time to come.

Monday, 22 July 2002 10:07

Successful successions

Chuck Vater, managing shareholder of law firm Tucker Arensburg, says only a small number of closely held businesses are successfully transferred from one generation to the next. Often, the lack of a comprehensive succession plan—or any plan at all—that takes into account the individual characteristics of a business is the reason for problems.

Every family owned business has its distinctive characteristics of ownership, industry type, size, participation of family members, not to mention personalities of the principals involved. So it would follow that no two succession plans will be exactly alike, either.

And, in fact, all plans differ in their details. But Vater points out that all will share some common characteristics. Those include:

  • The commitment of the owners and management of the business to discuss and implement a succession plan.

  • A team of professionals who will help create and support the plan; a clear understanding of the expectations of each of the professionals; and an agreement on the fees involved.

  • A determination of the manner and timing for the transfer of control from one generation to the next.

  • Identification of the retirement and disability needs of the current owners.

  • Identification of the estate planning desires of the current owners.

  • An honest assessment of the leadership and management skills of both family and non-family members currently active in the business.

  • A proper valuation of the business for tax and transfer purposes.

  • Liquidity of the payment of all succession costs, including income, gift and death taxes, debts of owners and estate/trust administration expenses.

  • Appropriately written documents that will carry out the succession plan.

The announcement in August that EchoStar Communications Corp. would bring its new customer-service center to the former location of U.S. Steel National Tube Works in McKeesport is the kind of proclamation that makes politicians and economic development types swell with pride. After all, it's a tangible symbol of the new economy overtaking the old, a rust-belt relic resurrected, a promise of thousands of new jobs.

Like most such announcements, this one was pushed into the public eye by slickly executed public relations campaigns and grand political muster. Still, Jon Prince barely noticed it. And yet his company, McKeesport Candy Co., a confections wholesaler and retailer, has operated not far from that former industrial site for nearly three-quarters of a century.

The truth is, Prince simply has been too busy running his small company to notice the nearby hoopla. His company now is in the hands of its third generation, and it's clear that Prince, its president, wants it to be around at least that much longer. A confirmed optimist, he expects that to happen, not because he has waited for the economic development colossus to create a favorable business climate here, but rather because of something much simpler: The company has been willing to change with the times.

Prince is not unlike most local entrepreneurs, in that they are, by nature, independent individuals often guided by the singular vision of making their businesses successful, whether they are new software ventures or coffee kiosks in shopping malls. These business builders believe in their products and services, and they are convinced that they can make them into spectacular successes.

And in their sublime self-confidence, they often are sure they can do everything themselves.

But being in business, if anything, is likely to get tougher ahead, and entrepreneurs will find that going it alone won't always be an option. Regulatory, competitive, legal and personnel issues probably won't become any less complex in the future. While large companies have the resources to solve their problems internally or purchase the needed expertise, smaller companies with limited resources are more likely going to be the rule in Pittsburgh's future.

Businesses, therefore, will have to respond to change more quickly, serve their customers more efficiently, and manage their finances and their employees more carefully to remain competitive. And that, according to many entrepreneurs, is why they would welcome new resources-and not just those aimed at high-tech companies-to help them navigate through uncertain waters. That kind of help, they suggest, will, in the end, offer the best hope for a healthy economy.

In the meantime, regional economic development studies, initiatives and organizations have trumpeted a pervasive theme: that high-technology businesses will provide the primary fuel for an explosive growth of business in Western Pennsylvania. The so-called "spike" industries-the innovative businesses, many of them spun out of research done at Carnegie Mellon University or the University of Pittsburgh that can be created here and then commercialized to produce jobs and wealth for the region-are viewed as the soil, fertilizer, rain and sun that will allow the region's economy to grow and flourish into the next century.

But what about the thousands of entrepreneurial ventures outside high technology and the spike industries which, in aggregate, have the potential of providing thousands of jobs across the skills spectrum? What about entrepreneurs who launch businesses in retailing or construction, for instance? Where is the support system for the hair salon owner, the graphic design firm or the food-products company?

And from where is the know-how coming that will help small-business entrepreneurs engage and disengage from the virtual companies with whom they will have to combine to do business in the future? Will the rising tide which high-tech ventures are expected to produce rise enough to lift the rest along with it? Are the economic development groups and the entrepreneurial education complex, as they exist, prepared to assist this seemingly forgotten group of business builders? Are they the business and job creators that they purport to be?

"A lot of these organizations have done pretty well creating jobs for themselves," says Thome Matisz, whose company, Solotec, has developed and is marketing Driv'nPlow, a snow plow for use with cars, passenger vans and sport utility vehicles.

Granted, Matisz is rather outspoken, but the views of other entrepreneurs are, in their own way, just as unsettling. Most see little direct benefit to them from most of the high-profile economic development efforts that pass through the region.

"They don't seem to apply to me," says Peg Stewart, publisher of the Green Tree Times, a community newspaper.

Adds Rick Restelli, president of International Apparel and Promotional Products Corp.: "The intentions are there, but I think politics gets in the way."

"Politics" isn't limited to government, either. More than one business owner observes that a lot of duplication of services exists across the various agencies and organizations, which in recent years has been addressed largely by the creation of umbrella organizations.

"I would say our area is overblown with competing agencies that hand out the same story and information," says Matisz.

While the owners of many existing businesses may feel almost forgotten when it comes to economic initiatives, it's not that there haven't been at least pronouncements by the economic development community that existing businesses demonstrate promise for the region.

"Many think of economic development only as attracting new companies or plants from outside the region," said Tim Parks, president and CEO of the Pittsburgh Regional Alliance, when the organization unveiled its economic development framework in December 1996. "Clearly, attraction of new business is important, but the biggest potential for growth is in nurturing the expansion of existing regional businesses, and encouraging the talented people of our region to become entrepreneurs and to start businesses here."

At this point, the PRA continues to work on an action plan for the region, based largely on an extensive study conducted for the organization by McKinsey & Co. However, recent reports indicate that its early action efforts will focus more on marketing Pittsburgh to the rest of the world.

Still, most entrepreneurs aren't particularly critical of local economic development efforts and strategies. Like the rest of the population, their opinions differ widely when it comes to big projects such as stadiums and convention centers.

But what comes across clearly in discussions with a group of people involved in a variety of ventures is the sense that they believe the economic development infrastructure has little impact on their businesses. More likely, they see themselves relying on their own wits and on each other to survive, grow and prosper.


Agile, not fragile

McKeesport Candy Co. is one of a few old but resilient businesses along Fifth Avenue in this once-bustling Mon Valley town. A few signs of resurgence have emerged in McKeesport, but many store fronts still are boarded up or blighted, a result of McKeesport's decline in the wake of the steel industry's abandonment of the region that began in the 1970s.

But McKeesport Candy has survived because it has been willing to change, not because of the promise of regional development, owner Jon Prince asserts.

The company grew and prospered in its early years because virtually every neighborhood at one time had its own store, perhaps two, which McKeesport Candy could service with small orders of candy and tobacco products. But with the advent of supermarkets, discount giants and convenience stores, McKeesport Candy found its customer base of small retailers drying up. Big wholesalers demand slotting fees to stock a company's products, buy in huge quantities direct from the manufacturers, and impose strict delivery schedules on their suppliers. So a few years ago, McKeesport Candy shifted its focus.

While it still retains its wholesale operations, the company dug into the fund-raising end of the candy business a few years ago and opened a retail store in Station Square.

For Prince, the ability to be agile has meant more than any of the economic development efforts that have gone on in McKeesport or elsewhere in the region.

"If you don't [maintain that agility], you'll have a lot of time to think about it because you won't be here," says Prince.


Do-it-yourself

Lucy and John Garrigan, owners of Business Alternatives Inc., are not unlike most entrepreneurs. They have busy schedules and wear lots of hats. For them, generating new business and keeping existing customers happy are their preoccupations. They are so busy taking care of the day-to-day that they hardly have time to look up to see what's going on outside their office-machines business.

The Garrigans say they handle everything internally. "We get a book on the subject," says John Garrigan when asked how he might handle a business issue imposed by some major legislation. The implications of the Family Leave Act on a small business could be profound, for instance, but entrepreneurs like the Garrigans are determined to confront them by themselves.


Self-support systems

If entrepreneurs look to anyone for help, it's usually to their peers more than to economic development or membership organizations.

Take Jay Fairbrother, for example, who owns Direct Advantage Marketing, a marketing firm that conducts telephone fund-raising campaigns for clients such as arts organizations and public broadcasters.

Fairbrother's company needs to be bonded in each state where it does business. So when the insurer that had always issued him his specialized bonds served notice in January that his bonding would be canceled the following month, he faced the possibility of having to shutter his operations.

In his scramble to get bonding, he enlisted the help of a peer group he belongs to, the Young Entrepreneurs Organization. It's a group comprised of business owners who are under 40 and whose companies are doing at least $1 million in annual revenue.

After about a week of contacting brokers, most of whom weren't even familiar with the bonds, Fairbrother queried YEO's international database of members who specialize in particular areas and agree to make themselves available to other YEO members. He got a response the next day. And that same afternoon, he received a letter from a large insurance brokerage that said it would replace his previous bonds and issue a letter of credit to issue future bonds.

Groups like YEO can offer other benefits as well, says Fairbrother. He can get advice, for instance, "without the cost of a $200-an-hour lawyer to explain what I need to do." That's not to say he wouldn't use a lawyer at all, but YEO has helped him cut through some of the details, he says, and home in on the issues he has needed to address.

The camaraderie that Fairbrother feels with the other members of YEO, particularly the other two-dozen members of the local chapter, has proven a potent force for him. In forum sessions held by each chapter, members can discuss in confidence problems that run the gamut from the professional to the personal and, sometimes both.

"That's powerful," says Fairbrother. "I'd take that over all the Ben Franklin handouts I could get."


Show us (some) money

Not that anyone is likely to dole out anything to Fairbrother. Entrepreneurs always seem to have trouble coming up with enough capital to finance their enterprises, and despite the campaigns mounted by banks that say they are actively seeking small businesses to lend money to, financing seems to be an ongoing problem. The perception at least is that businesses in high tech and information technology, for instance, are the ones attracting the capital.

"Of course, there's much more support for businesses that seem more glitzy," says Prince.

"There are a lot of us who feel that since we're not in high tech, we don't have access to that kind of money," says Fairbrother. But he adds that many of the businesses owned by some of his fellow YEO members have the potential to "explode" if they are able to get access to the right level of financing.

Susan Gove, president of the Gove Business Center, a former convent on Mount Washington which she converted to a center designed for small enterprises, attended a program by one of the entrepreneurial support organizations at the Duquesne Club recently. The group, she says, marched out a number of speakers who talked about how easy it is for small businesses to get SBA loans and government grants.

"The other nine strangers at my table were all laughing as hard as I was," says Gove.

And John Garrigan's assessment sums it up for a lot of entrepreneurs.

"They lend money to those who have it," says Garrigan.

David Wilke, an experienced small-business accountant who has just launched his own practice, relates a tale of two of his clients, a husband and wife, who entered a business that was in the same field in which they had been working. After three years, they had doubled their income and still couldn't get a bank line of credit without putting up their home as collateral and taking out a certificate of deposit with the lender.

Yet without the financing, they would be hard-pressed to expand their business. Indeed, growth without adequate access to capital is difficult and fraught with danger, says Wilke. Entrepreneurs who get caught in the squeeze of a cash-flow crunch, he says, can be tempted to try things that will eventually bury their business.

"If you go from $500,000 to $1 million in expenses, you're going to take your payroll taxes to pay your suppliers," Wilke says.

And other funding sources seem to be just as difficult for entrepreneurs to access.

"We know how difficult it is even to get $50,000," says Matisz, who scraped together start-up money from friends, family and personal savings. No Pittsburgh bank would help Matisz finance Solotec, although Southwest Bank of Greensburg bank eventually stepped forward. Now that the product is showing commercial promise, Matisz says, out-of-state banks are dropping off their business cards.

It's not that entrepreneurs are blind to the situation that banks find themselves in, either. Most acknowledge that they find that, once they have established a track record, banks are more willing to work with them.

"Once people have worked with you, that's not a problem, but again, they're responsible for their bank or their company, and their job is to guard it," says Cathy Vonderau, who operates a documentation service.

While getting money is essentially difficult, finding someone who can help you with the process, it turns out, can be just as vexing.

"The SBA was a tough nut to crack," says Restelli, who found banks balking at making such loans. Restelli got the Chrysler Corp. Duquesne University Small Business Development Center to help him put together a financing plan, but he says he only came across the SBDC's services because, as a Duquesne graduate, he receives literature about the university.

Another resource that he found valuable but with little visibility is the Carnegie Library's downtown business library. "I don't know that a lot of people are aware that it exists," Restelli says. "There's got to be a better way to educate people."


Tapping into the system

For Dick Thornton, a retired bank executive, getting money to finance the start-up of his Satellite Office Network hasn't been a problem. The service provides clerical services to businesses and employs handicapped individuals and others who prefer to work from home.

His difficulty has been in gaining marketing expertise. His clients, among them Eat'n Park and Applebee's restaurants, as well as Parkvale Savings, are pleased with the service, says Thornton, and he's confident that dozens, perhaps hundreds, of local companies could use it.

But his efforts to get help from a couple of organizations produced phone-tag matches and promises to send literature-but no results.

"It's very difficult to get these people to respond," says Thornton.

For businesses like Satellite Office Network, simply a more efficient way to find potential customers, along with some focused marketing advice, could make a big difference.

For some entrepreneurs, fighting the "big is better" mentality has been an uphill battle. When Gove tried to launch her business center, designed primarily for one-person operations, she got more than a little resistance.

"When I was in the process of trying to open this building, to open it as an entrepreneurial center, people gave me absolutely no notice, took none of it seriously, and didn't see it as an opportunity for economic development at all," says Gove. "They sort of patted me on the head and said, 'That's nice.'"

Gove eventually managed to open the center, but she and some of her tenants still find it tough to land work with larger companies and government agencies. Despite the fact that ,collectively, they can muster the resources to handle large jobs and have access to professionals who could help them fulfill the contracts, most prospective clients view them as one-person shops.

"The mindset has to change as far as what the powers that be see as credible businesses," Gove advises. "We're serious businesses. We're not huge dollar generators, but there is a huge number of us."

To survive and prosper, the entrepreneurs interviewed by SBN say they would like better ways of identifying other similar-sized companies with which to work strategically.

"There are so many companies, so many small businesses in Pittsburgh ... that are somewhere beneath the surface," offers Lee Ann Munger, president of Graphics & Artworks, a design, marketing and public relations firm. "How do we find the hidden companies?"

She suggests a database of small businesses that would allow them to get in touch with each other. That, she says, coupled with a willingness on the part of large companies and government agencies to work with consortiums of small businesses, could open some additional doors for small entrepreneurs.


A working model

An already-working pilot program at Duquesne University could serve as a model for putting entrepreneurs on the fast track.

Its new Self-Employed Assistance Program gives unemployed individuals who meet a list of specific requirements an intensive course of training that prepares them for entrepreneurship. All the while, participants continue to receive unemployment benefits, enjoying a cushion of security that otherwise would not have been there.

Wilke, who has been involved as an instructor and with the development of SEAP, describes it as a "boot camp" for entrepreneurs. For fledgling entrepreneurs, Wilke characterizes it as "just as good as receiving a $10,000 loan." More than half of the approximately two-dozen individuals who participated in the first phase, held earlier this year, are generating revenue for their enterprises, says Wilke.

The problem with most of the other educational programs available that are designed for start-ups, Wilke contends, is that they are not comprehensive enough. Most, he says, provide general information and serve more as a first cut that weeds out the uncommitted.

More value would be derived, Wilke suggests, if sponsors spent "less money on the one-day seminars and more on longer seminars, and when they graduate, make some money available." For many, he adds, $1,000 of seed money or a few extra points on their credit rating for completing the program would be a boon.

If there were a way to synthesize the views of small-business owners and what they say they need to prosper into a few sentences, it might sound something like this: Financiers need to be more entrepreneurial, more willing to adopt the risk-taking posture that their clients take. There need to be better ways to identify each other as clients, customers, vendors and suppliers. The structure of the organizations in place to assist entrepreneurs needs to eliminate duplication of efforts, slash and streamline bureaucracies and pool resources into a more comprehensive, efficient delivery system.

In the end, the approach that Solotec has taken may wrap up the key to success for any enterprise, whether the entrepreneur goes it alone or is able to get some help along the way.

As Matisz puts it,"We've made it on sheer belief in what we're doing."



We want your feedback

Tell us what you think. We want to know what you think you need - and this region needs - to prosper economically. Fax your comments (with name and phone number) to (412) 321-6058, or e-mail the editor at dbates@sbnnet.com. We'll publish your responses in the next edition.