The Economy

Three CFOs Tell How They Found New Revenue

Private-company finance executives describe how they changed their business models to adapt to turbulent times.
David RosenbaumOctober 31, 2012

MIAMI — When Kathleen Wolf became Atari International’s CFO in 2011, she joined a company focused on building and selling high-end condos, mainly in Florida and Puerto Rico. About 60% of Atari’s construction business was condo development.

As the housing market — and the economy — famously swooned in 2007 (or even earlier), Atari’s management was unsure what to do. The luxury end of the condo market, Atari’s sweet spot, had been especially hard hit. The company knew it was losing money, it knew times were tough, but housing was bound to rebound. It always had. What could Atari do but wait for it to do just that?

Wolf, after examining Atari’s financials, went to the company’s executives and asked for a check for $300,000. “I need it,” she said. And while they had the checkbook out, Wolf suggested they write several more checks for $300,000 to cover the next several days because, she told them, that’s what the company was losing every day in interest on unsold properties and the costs of carrying those unsold units, including insurance, maintenance, and physical-security costs. She didn’t even need to mention what the company owed its contractors, and what it wasn’t getting in new revenue.

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Atari got Wolf’s message. Hunkering down was not a reasonable strategy. It needed new revenue streams, it needed them now, and they were not going to come from its old business any time soon. The company needed to change.

At Tuesday’s CFO Playbook for Private Companies conference, three finance executives — Wolf, Urschel Laboratories CFO Dan Marchetti, and RSW Group controller William Schulz — described how finance led the charge to respond to declining demand and dwindling revenue streams by identifying new and underserved markets. By building on the capabilities these companies already possessed, the executives were able to develop new business lines, enter new markets, expand old ones, and find new revenue.

“The market no longer needed what we provided,” said Wolf. “Continuing to build condos was no longer sustainable. Where was there an unmet need?”

What Atari had was human capital. Wolf knew it had people who had experience working overseas. She looked overseas for demand and found it in the Middle East, especially Qatar, which had been awarded soccer’s 2022 World Cup and was determined to create the housing and infrastructure (including IT) to make it a success. Building in the fractious Middle East, physical security is always a good thing to have. Accordingly, Atari began partnering with a range of companies, offering IT solutions and physical-security operations.

Atari was no longer just a construction company living in a suffering segment. It was a service provider in an emerging market.

Urschel Laboratories builds machines and blades that make things smaller. For most people that means cutting, but Urschel calls it sizing. For 100 years, Urschel, a family-owned business, had focused on the food industry, selling cutting machines (and their parts) and blades.

The recent recession, unlike previous economic downturns, adversely affected the food industry, and Marchetti looked to evolve the company’s strategy at home and abroad. Benchmarking Urschel’s investment in research and development against comparable companies worldwide, Marchetti found that Urschel was spending 2.5% of revenue on R&D; other companies were spending 3.5%. Marchetti increased the company’s spend and, speaking with Urschel salespeople, began looking at new applications for the company’s machines, blades, and expertise.

Urschel brought potential customers to its test kitchens to “show them how to reduce the size of all kinds of stuff,” Marchetti said. Today, the company is developing a pharmaceutical business, helping companies extract insulin from pig and cow intestines. Its equipment is also being used to get aloe out of aloe leaves (for unguents, creams, and cosmetics), as well as producing powders to provide bulk to medicines supplied in capsules.

Urschel is expanding its market reach, building a business reducing the size of waste in fish products in Canada’s fisheries. In Japan, the company is selling machines and blades to reduce the waste in cutting rubber for automobile and truck tires.

Private-equity company RSW Group owns AT&T authorized retailer Communications Connection, a $70 million business that operates more than 100 U.S. retail stores selling AT&T devices. The stores, said controller Schulz, had a trade-in program that offered customers $20 for their old phones, which would then be sold on the Internet or to offshore firms for parts and repurposing.

The program, Schulz said, was not popular; $20 was not a sufficient incentive. About 18 months ago, Schulz changed the program to give customers up to $250 (depending on the device). The program took off and now RSW is trying to sell it as a service to other AT&T stores and even to other brand resellers. The service, said Schulz, is showing promise and “has the potential to be bigger than our retail phone stores.” RSW “saw a need: trade-ins and warranties, services where AT&T’s offerings were not strong. We didn’t bring in consultants. We saw an opportunity,” he said.

The company has realized that it has developed expertise in opening and running stores. The question RSW is asking itself now, according to Schulz, is if it can leverage that knowledge to assist other companies, offering its knowledge as a service. It could even help run pizza shops, Schulz suggested, a far cry from phone stores.

The new opportunities these companies have seen and seized require changes to their finance department.

“We turned some folks in accounting and finance for our condos into property managers,” said Wolf, who said she’s made every effort to retain and retrain finance people whose skills may not align with Atari’s new focus. “It’s more equitable for us to stick with people who have the values — adaptability, a good work ethic, people willing to grow with the company — we value” than to lay them off, she said. “New hires are a huge cost.”

Marchetti is determined to increase his finance department’s sophistication. “We’ve got to get away from making decisions by gut feel.” To that end, he wants to increase finance’s ability to forecast and build more detailed financial models. “The ability to be cost-competitive,” he said, “is more and more critical.”

Schulz also is attempting to create a finance department with advanced forecasting skills. RSW’s owner, Schulz said, “relies on that data to model new opportunities. We’re trying to get away from finance’s traditional role as a provider of historical data.” Indeed, he says, he’s just hired a data analyst.

“You can’t grow by staying the same,” Marchetti said. “You have to change to survive and thrive.”