Keynote Speech by Clark S. Colvin delivered to the Western Building Materials Association, on their 100th university, on November 7, 2003.

I’d like to begin by thanking the Western Building Materials Association, especially Chairman, Rand Thomas, a former client and friend, for inviting me to speak at its 100th anniversary conference. I know from my experience with non-profit associations that it is a rare tribute, to any organization to not only survive for 100 years, but also to thrive. In fact it was in this city, 20 years ago as a college student at the University of Washington, that I founded the Washington State Public Lands Association. It did indeed thrive, largely as a lobbying organization, for several years, but as I distanced myself from the day-to-day operations, it began to decline. Indeed, from the association’s apex with 10,000 members in 1985 to zero members in 1987 happened just because I moved out of state. This is a management lesson that surely the Western Building Materials Association has learned over the years, and I’m sure all of the previous owners and CEOs of the companies you represent have learned: train a very hands-on and take charge successor. More importantly, the popularity of this association and its conferences, as can be seen here today, demonstrates the contribution of its current Executive Director, Casey Voorhees. Thank you Western Building Materials Association for being so supportive to all us here today. I would like to share with you a discussion I had in one of my first business meetings after forming CSC back in 1992. In many ways, it frames the subject I would like to talk about today. I was in the process of discussing the concept of corporate restructuring to several of my new associates, all of which were at least 10 years my senior, and already had many years of experience working with some of the largest accounting and consulting firms in the country. After about an hour of discussion, the most senior of my new associates looked to me and said, “Clark, with all due respect, and understanding that your restructuring program is no doubt what businesses need, it will be impossible to sell the idea to business owners. You are talking about completely changing the way a company operates, and business owners are not going disrupt their company despite the benefits of your program. In fact, to make matters worst, the owners and CEOs, probably will not even see the advantages.”

After thinking about his statement for a few seconds, my curiosity overcame my shock and I asked him to tell me how he thought CSC should market itself, as well as what services should CSC provide clients. “It is very simple,” he said, “provide a low cost analysis of the company, find something wrong and then try to sell how we can fix the problem. Then after we are working for our client, find something else wrong, and sell the fact we can fix it too, and so on. This is how management consulting works.”

Oh! If it was only that simple. I would love to be in that business. Unfortunately, in my experience, which was less than all my new associates, such a simple straightforward approach to consulting does not benefit the client, in fact it could more harm than good. Needless to say, I stood my ground, and restated that CSC was going to be a restructuring firm, and if we were going to provide consulting services it was going to be in the context of my restructuring program. Within a year only one of my associates was still with the Firm, though I did learn, that the old guy in one respect was right; it is difficult, though not impossible to sell restructuring services. In fact, 11 years later it is still not easy.

Today, I’d like to talk about how my A through Z restructuring program, which I did invent, has evolved over the past decade, particularly in my decision in 1995 to focus CSC’s restructuring efforts to the Lumber and Building Materials Industry. Before 1995, CSC would conduct a restructuring for any company of any industry. From a marine electronics manufacture located about an hour and half north of Seattle, to a shipyard located an hour south of Seattle, to a demolition company located in Toronto, Canada, to a worldwide plastics manufacture with its headquarters in Norway. In fact, what I had envisioned as a regional firm had gone quickly international. I found myself north of border more than in the U.S. I’ll always remember calling home from a hotel room in Mississauga, Canada, only to here my wife breaking baby bottles. Being gone for a few weeks at a time was not going over very well with my wife of barely 2 years. Since we were married in Oxford, England, and because my first job after being married was teaching college classes at American University in Washington D.C., she probably thought I was going to be a full time professor; home every night. Indeed, she had to make some adjustments.

In the early days, there was still a lot of misunderstanding as to what restructuring was all about. However, one thing was clear, the program indeed saved and turnaround troubled companies. And, I was able to sell the program, beating out the now defunct Arthur Andersen over the restructuring of a large regional air conditioning supplier, and KPMG over the restructuring of a lumber dealer. In fact, even though I had not yet focused on the Lumber and Building Materials Industry, I did have the opportunity to restructure several dealers before making the decision to concentrate on the industry in 1995.

The hardest work in the early days was still selling the program. The restructuring work was easy, even the toughest turnarounds, just a “walk in the park.” I remembering visiting Brown Graves Lumber in Akron, Ohio, trying to explain to the Board of Directors what restructuring was all about….how the assignment would proceed, how it would benefit all the stockholders, how it would turnaround one of their sister companies, and make better the ones that were doing fine. From the perspective of a family owned company that had been in business for over 100 years, had several locations in a couple of states, with over 100 million in annual sales, they probably thought I sounded like I was from another planet with my straight talk regarding increased cash flow and profits, budgets, pay for performance, dealing with unions, troubled locations, truss plants, etc. In fact, they had a good management team already in place, and I said nothing that was new or revolutionary; it was just old fashioned business common sense. I flew back to Oregon thinking that they would probably try to conduct the changes I thought were necessary by themselves. They were from the Rust Belt!

I week or so later I got a call on my cell phone from the CEO, just as I was walking out of the doctors office learning that my wife was pregnant with our second child, a boy. I got the assignment and I got a boy. That was a very special day. Interestingly, it was not my presentation that sold the massive restructuring program; it was the conversations with my previous clients. As it is still today, my former clients are my sales force. Frankly, in any professional service profession, you are no better than what your clients say about you—period. And, as a quick word to the wise, never hire an outside service, as well as employees, without completely checking their references. If a firm or a person, claims they cannot give out reference names and phone numbers, because of client confidentiality; run as fast as you can from this charlatan. Sadly, in the management consulting industry many firms operate like this. This is probably the biggest reason, that I distance myself from management consulting in general, and introduce myself as a corporate restructuring specialist.

It was my work with Brown Graves Lumber and Gulf Stream Lumber out of Florida that finally pushed me over the edge, as to focus on the industry. In essence, I learned that my restructuring program was perfectly suited for this industry. As all of you know, the Lumber and Building Materials Industry is highly fragmented and competitive, suffering often times in price fluctuations because of the commodities market. Further, the competition and your customers seem to always force your gross margins down lower than what you would normally prefer, and, if that’s not enough, your cash flow is many times lower than prudent because of excessive or even obsolete inventory. And, of course, there are the accounts receivable problems—yes, your customers are sometimes not the most reliable; at least that is what banks think. Troubling as these issues are, even for profitable dealers, the industry, as I came to understand is also highly management intensive. While some may claim all industries are, the simple fact is that this industry is more so because your stick is not much different than the stick down the road. On top of that, most dealers, probably most of you in the audience have multiple profit centers serving the same product groupings. Then the issue pops up that the industry suffers from a management accounting point of view. In essence, financial programs, whether provided from software manufacturers, or custom made, fail to track the necessary information in terms of the multiple profits centers by product groupings. Now factor in that you don’t have the necessary information for managing manufacturing and assembly operations, as well as installation programs, specially in the area of costs of goods sold; and what you got is managing by the “seat of the pants.” Yes, the rumor is true, I have probably closed down more truss operations run by lumber companies than anyone in the U.S.

Without getting to blunt, what I concluded after restructuring several dealers across the country, is that here is this huge industry of billions of dollars of annual revenues that generally speaking is “flying blind.” I saw an opportunity to be an industry player. Plus, to be really good at corporate restructuring, it is better to focus on an industry; in other words, specialization separates one from all competition. Stated another way, I know more about a client company before I even arrive the first day, than a generalist would know after weeks working with a company, or maybe even ever. For example, for many of you in the audience, no matter how sophisticated your pricing, your retail margins are still not much higher than your contractor margins, and your special orders margins are lower than your stock margins for the same product. You have a profit center, that nobody pursues yet it generates 30% plus margins, and may represent 5% of your total sales—it is called Industrial and Governmental. And, all of you have obsolete inventory, some of you may have over 1 million dollars worth. And guess what, it is in mainly store and hardware items. And, if you are like most Pro Dealers, your percent of sales of these items will represent less than 25% of your total sales. Finally, if you don’t have an up-front charge for special orders, you will most likely have a “bone-yard” of doors, windows, and other items that your customer decided not to pay for. Indeed, I could on and on, but the point is that in my profession, specialization in an industry sets you apart—period.

Now, I would like to share with you what I believe CSC has contributed to the Lumber and Building Materials Industry, and how these contributions have unlocked enduring value in our clients for over a decade.

The first enduring value of restructuring is that it institutionalizes that management as well as all employees act and feel like owners. Running a business as an owner inevitably unlocks value. But unlike ESOPs or fathom shares of stock, that are suppose in theory to make employees act as owners, CSC early on invented an approach to making management and employees act and feel like owners without the real owners having to sell stock. In fact, I have witnessed first hand that ESOPs, the actual selling of shares to key managers, as well as the creation of fathom shares of stock, does not in the slightest sense unlock value among these new owners. Further, it does not motivate these new owners to generate additional profits, increase cash flow, or strive to grow the revenues of the business. Instead, it makes the new owners feel comfortable, secure, resulting ironically in less productivity. Why? Because, they are now motivated to retire from the company at some future date knowing they will be able to cash in their shares to fund their retirement. In essence, you have created the exact opposite motivational driver than the one you intended to create; and to make matters worst, you must now pay these new owners to go away when their time comes. It is like a big pension fund now haunting the company.

Instead, CSC believes in companywide incentives distributed quarterly. These are incentives calculated on the respective bottom line of each profit and cost center. All unproductive assets are also taken into consideration, so the incentives that are paid out are as close to cash as possible. Even for outside sales personnel, their commission is paid upon the profits they brought to the bottom line. I have seen too many times, a contractor sales executive selling a few million dollars a year at such a low gross margin, that actually this person was losing the company money. To ensure that incentives do not cause the company to dig to deep into its pockets to make the quarterly pay outs, I always put a threshold upon what percentage of the total company’s bottom line must be reached. The value created from this approach is enormous. Now, all employees are striving to increase gross margins, reduce unnecessary expenses, as well find ways to grow the company’s revenues. Take for example, the night shift load builder, who always in the past equated more money by getting a raise or by increasing overtime hours. Both of these pay increases motivates the load builder to actually wish upon the company additional expenses without necessarily a corresponding increase in productivity, not to mention profits. CSC instead pays yard operation workers in lock step to the sales personnel. More sales, more margin, more pay to the yard workers. I have seen to many “us vs. them” mentalities between sales and operations. To counter this mental dogma that plagues the industry, I put them all on the same team. Realtors say; “location, location, location. You must say; “service, service, service.”

The second enduring value is our mantra of functional organizational charts that mirror a newly created financial and management accounting system. Indeed, the foundation of a CSC restructuring, these two principles working together creates tremendous value. First of all, what is a functional structured company look like? Well if you have three locations with three general managers running each location, you are not functionally structured. In a CSC restructuring, I would eliminate the general manager position all together. A typical restructured lumber company top management team usually consists of the following posts: CEO, CFO, VP Contractor Sales, VP Retail Sales, VP Industrial/Governmental Sales, VP Purchasing and Inventory Control, VP Distribution and Yard Operations, and if there are manufacturing operations going on, such as a truss plant, I include a VP Manufacturing Operations. In the future I envision the need for a CIO and perhaps even a VP Human Resources, to compliment the team. Each one of these functional positions has corporate-wide oversight of their respective areas, with second tier managers conducting supervisory support at the specific locations. In other words, each one of these top managers can be held totally accountable for their responsibility center, whether it is a profit or cost center. The CEO does not have search very far for why things happened right or wrong. The beautiful thing here is all top managers are focused in their day-to-day job duties. This in itself unleashes human talent to achieve greater results. All decisions at the top management team level are made with a clear intent to create more sales, more gross margin, more net profit, more cash, and thus more value.

Now in order for the CEO to exactly know what is going on within the company, CSC reformats the financial and accounting aspects of the company, so that each profit and cost center has their own financial statement. In other words, each top manager has their own respective profit and loss statement. CSC creates the ability for top managers to have a laser focus of their respective bottom line, as well as each appropriate expense line-item; and for the profit center managers, an additional laser focus on each product line’s dollar sales and percent of sale, and gross margin dollars and gross margin percent. As a result of developing these tools, I get to know my client’s business, if not better, than the management teams. As I say to all my clients, once this is over you will be able to know 100 times more about your company on vacation in Mexico using a laptop, than sitting behind your desk today. Indeed, after we train the top management team in management accounting, the value creation is almost immediate. I personally bring a sense of urgency to the restructuring, and I have learned that any delay in implementing business decisions can be very costly. Therefore, I engage the new management team in the implementation of decisions. On the human side of things, the new organizational and financial structure, often brings new light on knowing who is a good manager and who is not. I believe in moving quickly and decisively in changing management when deemed necessary.

The hard reality is that value creation takes as long as it takes. However, I do believe value creation can be readily seen within the first few weeks of the restructuring. Whether it’s the elimination of slow moving stock, the maximizing of gross margins by every product, expense containment and reduction, as well as aggressively increasing sales, value creation becomes institutionalized within a short period of time. And, the incentive program mentioned earlier carries the value creation to unthinkable levels. For example, the industry sets as a norm or standard that 2 to 3 percent net profit before taxes is average for a company in the industry. The first word that comes to me about this is “bull.” I believe 5% is easy, and 10% very attainable. If that is the case, then the goal should be 12%, or even 15%. And, for the doubtful and the critics in the audience, I say this. Run a standard valuation based upon your current profitability, and then run a valuation using 5% as the bottom line, and run one using 10%. If you can’t do one or don’t want to pay someone to do it, bring me your financials and I’ll have my office conduct a current valuation, and a couple what-ifs for free. Once you see how much you and your company could be worth, I think you would think twice before saying it is impossible to generate such high returns. Now, if the increased values don’t motivate, then I suggest a buyout discussion.

The third enduring value is CSC’s belief that people must be managed, and that good old fashioned job descriptions and evaluations conducted from these job descriptions is about as simple and good as it gets. First let’s talk about human nature. Despite, what the human resource types, and the organizational behaviorists, as well as Tom Peters may think, people in general like hierarchy, they like order, not chaos, and prefer to have a logical and well laid out structure in which they can advance. They also prefer to have some kind of evaluation procedure which they can be measured and thus improve their job performance. People tend toward security, and an organization that provides security is much more preferred than one which does not. Without a proper formal structure, an informal and power oriented structure becomes the norm. I often call these situations “thiefdoms,” petty kingdoms, etc. Think of the early middle ages with feudal lords. Clearly, this is not the way to inspire and motivate the common people. People with “power trips,” grasp everything they can thus preventing talented employees from rising up in the corporation. Thus, a company cannot keep good people, and because a company’s most important asset is people, the company is threatened. Let me repeat myself: the human resources are the most important asset of any corporation. Of course, I also mean good, hardworking, and smart people. Bad, lazy, and stupid people can work somewhere else. Truly managing people is a lot more critical than most managers think. In fact, most managers don’t manage people very much at all. They instead manage tasks, they micromanage, they sit behind their computers too much, and they don’t delegate. Managers often surface when there is a crisis; largely because they didn’t manage in the first place. Bad managers love crises because it makes them look busy. The really terrible managers can’t even handle a crisis. In my profession I’ve seen it all.

Now, I’m going to discuss something some of you will disagree with—perhaps not. I believe in finding talent in an organization, uncovering rough diamonds, and promoting these individuals to positions higher up the chain of command. I have promoted truck drivers to management positions, a special order clerk to head of Purchasing, a fork lift driver to the inside sales department, a service technician to head of Retail Sales, a sales order taker to head of Interiors, and countless other individuals to higher level positions.
I actually find a great deal of pleasure finding raw talent and giving that person a chance that perhaps they would have never had. Trust me, it is a lot more gratifying than firing the incompetent location general manager, CFO, etc. I believe CSC is revolutionary in its ability to restructure companies, while at the same time making sure that the talent is found in the organization and that only round pegs are put into round holes. One last thing regarding people. Some people are naturals at what they do, in other words it comes easy to them. Others have to work real hard, to accomplish the same thing that a “natural” makes look easy. My point, is when you find a natural make sure they are in their right position. Maybe a sports analogy will help you understand this. Michael Jordan was a great basketball player, but was not a great baseball player.

The forth enduring value of a CSC restructuring is a corollary of the third. Success in creating value today is more than ever a function of the talented people you surround yourself with, and the experience, creativity, hard work, and integrity of these people. Indeed, the before mentioned incentive plans, organizational and financial structures, mean absolutely nothing without talented people. In essence, talent is fundamental. But, simply being bright does not make anyone a talented manager or employee. Yes, indeed there are stories of incompetent Nobel Laureates. Which leads me to suggest that one of the best ways to ensure the success of a modern corporation is through a company-wide training program. In fact, a CSC restructuring mandates that there is depth in the company. In other words, that right below the top management team, there is another one ready to slide into the top position if necessary, and one below that. One of the biggest mistakes owners and top managers make is not training their successor. While there is no substitute for firsthand experience, we should constantly look for opportunities to pass on our decades of experience to a new generation. The Lumber and Building Materials Industry is populated with incredibly talented people, I meet one of them almost every day. That is why I’m optimistic about the industry’s future, as well as CSC’s future within the industry. The more you people come into contact with CSC the more together we will be able to conquer the future, conquer the Home Depots, the Loews, etc.

On this point, on September 11, 2001, I was in Amsterdam, Netherlands learning more about advanced corporate finance, but more specifically talking to European Bankers about the investment opportunities in the U.S. Lumber and Building Materials Industry. I had just got back to my hotel, around 4:00 pm their time when I called Paul Miller, President of Holmes Lumber, who was at that time a client going through a restructuring. He told me to turn on CNN or FOX because something was going on in New York City. We both watched as the second jet flew into the Trade Center. You know you never forget where you were, or, who you were talking to at the time, but I’m sure Paul will never forget; I know I won’t. My point; is that for the past year or so I had been trying to arrange financing to buy lumber companies. Dennis Valassis, President of Gulf Stream Lumber, a former client, and I had been to Wall Street, as well as the Bahamams to speak to investors, but the fact is they did not understand the industry. You guys are just like Home Depot they claimed, and Home Depot will dominate the industry in time. Believe it or not, but the Wall Street analysts do not even get this industry. Dennis and I learned that they are not as bright as they think they are. So where are we today. The market is hot, housing starts are approaching all time highs, and right now lumber companies are growing at amazing rates. Clearly, not the time to buy. But, for the smart CEO, clearly the time to restructure.

The story about the old associate that told me I was going in the wrong direction when I first started CSC is really true. It did made me realize that I need to do a better job of explaining to our prospect clients what CSC can actually do on their behalf, day in and day out. To me it was a call for greater dialogue. Many of you in the audience may not still think that restructuring your company will generate the returns that I have suggested, but I’m still listening to your concerns. Rand and Casey would have not asked me to speak at such an important event, if they were not thinking that CSC can help the members of the Western Building Materials Association in the 21st Century. CSC would not have been successful if we did business as the old associate recommended. I feel I did think outside of the box, and I have many former clients who are a lot more wealthy because I did. I hope these remarks have helped all of you more clearly understand your potential in the great industry that you are apart.

Thank You.