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A former Tyco finance executive finds wide latitude to use his cost-cutting and other business-process skills.
David McCann, CFO.com | US
August 12, 2009
Colleagues and friends told Jeff Richard he was crazy to give up his career as a finance executive at big public companies to take a job with a small private firm. But Richard, though mindful of the potential scar that such a move could leave on his résumé, could not resist the appeal of a meaty turnaround situation and a likely future ascension to CEO.
That was three years ago, and things are going according to plan. Richard is both CFO and chief operating officer at Pavestone Company, a Dallas-based provider of stones for patios, retaining walls, lawn edges, and other uses, both residential and commercial. While the recession has driven revenue down about 20% from a high of $360 million in 2007, profits have continued to flourish, he says, though he declines to quantify the bottom line.
That result was achieved in large part by squeezing waste out of Pavestone, a company that previously had no strategic plan or even a formal budget, according to Richard. He credits his ability to direct the transformation to his 20 years of experience at large companies. That's one reason why finance executives shouldn't too-hastily dismiss similar opportunities to move down in size but up in authority. "Big-public-company experience works well in smaller companies," Richard tells CFO.com.
Much of that experience, after he started out as an internal auditor for Pennzoil and Cooper Industries, came at Tyco International, where Richard landed a role as finance vice president for an Asia/Pacific division. He stayed at Tyco for 13 years in various jobs, including divisional and segment CFO, where he says he was far removed from the schemes that resulted in long prison sentences for one-time Tyco CEO Dennis Kozlowski and CFO Mark Schwartz. Following briefer stays with Jacuzzi Brands and Electronic Data Systems, he encountered the opportunity at Pavestone.
Richard was told that he would be in line to be Pavestone's CEO when the company's owner, who's now nearing 60, became ready to step back. Just as attractive was the idea of spending most of his time running the company and making a difference — formulating and executing a strategic plan, visiting plants and customers, and working on product development and acquisitions.
By contrast, at the public companies, Richard says, three-quarters of his time was spent on "being Sarbanes-Oxley compliant, answering analysts' questions, and fighting with auditors — things that didn't necessarily bring a lot of value to the company. What I really wanted to do was see the fruits of my labor."
Indeed, in his due diligence before accepting the job, Richard got the clear idea that drawing from his experiences would make Pavestone more valuable. Large public companies like the ones he worked for have more and often better talent from which to learn, he notes. They also have money to spend on implementing efficiency-enhancement programs such as Six Sigma and Lean Manufacturing. And they tend to have more robust business analytics and stronger internal controls.
All of those things contributed to the changes at Pavestone. The ideas Richard brought to the table, he says, "were just the ones I'd been running with for many years."
Getting under Control
To be sure, some of those ideas were fairly straightforward, though in some cases they produced seismic changes in the Pavestone culture. For example, Richard instituted controls over capital expenditures where there had been none. "The first meeting I had with the management team, one of our transportation guys came up to the CEO and said, 'I want to buy 15 trucks for $2 million, what do you think?' And the CEO says, 'Sounds good, go ahead.' I was floored."
Now, he says, an expenditure request must come along with an analysis of how there will be an adequate payback on the investment within 18 months. But he has adjusted the control for the small-company environment. "We don't have 16 approvals to buy a piece of machinery," he says. "We want to be able to make a decision in hours rather than weeks."
It's not only big capital expenditures that undergo the microscope treatment. Any discretionary payable has to go across Richard's desk.
For example, the company had a history of treating customers to sporting events and trips. Now, if there is a request for 10 tickets to a football game, Richard asks for a list of the customers and what business they are expected to provide. "What I found is that many times there would be seven Pavestone guys and three customers going," he says. "That's a non-starter."
While sporting events don't in themselves have a huge impact on the company's profit performance, they are emblematic of the kinds of savings identified from a Six Sigma-like approach to analyzing the business. The company has lopped $1 million per year off its former tab for attending trade shows, simply by analyzing the leads that derived from each show. "Most of them didn't produce many leads at all," Richard says. "We don't go to those anymore." And for the shows Pavestone still attends, it is buying smaller booths.
Controls also were put in place over equipment leases. Heavy equipment is a big-ticket item for the company, because it moves a lot of raw materials. "We might lease a big front-end loader for $250,000," notes Richard. "I would catch things like an operating guy out in the field leasing a new loader through a finance company for a 15% interest rate." Now an analysis must be done that shows the lease would be a better investment than, say, keeping the old loader for another year.
Purchasing activities were put through the wringer as well. For instance, the company, which had been buying three months worth of safety supplies at a time, has saved $10,000 per month by working with vendors to deliver the items closer to the time they're needed. That means less drain on working capital.
Working capital improvement was also one of the main benefits of a drastic change in the accounting process. At the time Richard came to Pavestone, the books were being closed an average of 23 days after the end of a month. By mapping out the entire process through a Six Sigma approach and cutting out wasted effort, Pavestone managers have reduced that time-frame to seven days. "Having the results earlier means we can make decisions faster and understand the run rate so we can adjust inventory levels and minimize working capital," he says.
But the biggest impact on working capital came from implementing a material-requirement-planning system like ones commonly used at bigger manufacturing companies. By using the system, executives can more easily project what the company will sell in the next 12 months and what materials it will need, and when, to enable that. Before Richard's arrival, 18 general managers around the country determined what inventory levels to carry. "They could order as much as they wanted and just load up the yard with inventory, which is the age-old way to make sure you don't short-ship a customer," he says.
The first year the MRP system was in place, money tied up in inventory fell from a peak of $100 million to about $75 million. That has made a big difference in banks' leverage tests for the company, according to Richard.
The Big Picture
More recent changes are driving even bigger bottom-line improvements for 2009. One was a 20% reduction in the company's workforce to 1,300 employees, mostly implemented in 2008.
The positions won't have to be added back when the business improves, Richard notes. Most of the cuts were of fat; for instance, the fact that forklift drivers only drove forklifts, and inventory managers only managed inventory, created inefficiencies. Cross-training such employees has been a big component of a $12 million decrease in SG&A expense for this year.
Another large chunk of savings, as much as $8 million, is coming from something not much in Pavestone's control: the drop in the prices of oil and diesel fuel over the past year. Because its materials are very dense and heavy, the company routinely maxes out truck weights, making transportation the most expensive component of its business.
All of the savings are helping drive forward the strategic plan Richard pushed into being, which largely involves making acquisitions and expanding product lines. Overall, Richards appreciates the heavy exposure he's gotten at the smaller company to areas — like treasury and tax, in addition to M&A work — that Tyco had huge, separate departments to handle. "You talk about on-the-ground, on-the-job experience. Now I have that," he says. "It's definitely good for the career."