A business that depends on the whims of Washington better hope the government doesn't change its mind too often
Each morning as Vincent A. Rocco flips through The New York Times or The Hartford Courant, his eyes automatically scan the pages for the latest environmental disaster. Another dioxin find at Times Beach, Mo. The discovery of ethylene dibromide in foodstuffs. As he checks the headlines, Rocco is also on the lookout for a subtler kind of problem, such as another shake-up in the Environmental Protection Agency or a new Senate battle over funding for acid-rain research. The front-page catastrophes may threaten the ecological balance or the public health, but it is the bureaucratic disasters, Rocco knows, that threaten his firm's future.
Rocco is president of TRC Companies Inc., a small (1983 revenues: $7 million) environmental consulting firm in East Hartford, Conn. The reason for his concern about Washington-style disasters isn't hard to fathom: "Environmental consulting," after all, usually means contracting to study or solve whatever the government deems to be an environmental problem. TRC is a firm whose market was virtually created by federal legislation and whose very existence depends on the government's continuing interest.
That, to put it mildly, makes for a volatile business. In May of 1981, for instance a $2-million-a-year contract with the EPA shrank by $1 million over the course of a weekend.
"A lot of us were breathing hard, or hardly breathing, back then," recalls Rocco.
Fortunately, Rocco, 38, a former Air Force captain with degrees in mechanical engineering and business administration from the University of Tennessee, has a profound sense of history. A large faded map, "Order of Battle on Western Front, 11a.m.,Nov. 11, 1918," that once hung in the office of General John J. Pershing now hangs in Rocco's, and he is fond of pointing out how that critical line shifted over the years. The interminable trench warfare of World War I, he observes, shares certain characteristics with environmental consulting.
Environmental consulting, in this respect, is not alone. Other industries do business with the government, fall under its regulations, or compete in markets that it fashions Like TRC, they are familiar with the tense uncertainty and the sudden shifts in fortune, the ground gained and then lost. Defense contractors, public utilities, airlines, television stations -- all rise or fall with the signing of a bill or a change in administrations. Since passage of the Motor Carrier Act of 1980, net profitability in the trucking industry has dropped from an average of 3% to .5%; the number of carriers has doubled; and 100,000 Teamster drivers have lost their jobs. Conversely, changes in recent Internal Revenue Service tax packages have fueled a boom in the equipment-leasing business.
"The problem," says Richard A. Giesser, president of the Small Business Foundation of America, "is that whatever government giveth, government can taketh away." He recalls, for instance, President Nixon's punitive defense-spending cutbacks in Massachusetts after that state voted for George McGovern in 1972.
The history of TRC is, in large part, the story of one company's attempt to master that life-or-death, "government giveth, government taketh" dilemma. The process has involved a mixture of fancy footwork, luck, and repositioning, along with the development of some new areas of expertise and an apparently successful attempt to "productize" its services. Not that the firm's battle for survival is over. Although it was profitable throughout the 1970s, with pretax earnings averaging 60% of sales, TRC lost $209,000 in fiscal 1980 and $317,000 in 1983. By the end of this year it hopes, at best, to return to break-even performance.
But although the story here isn't yet one of victory, it is a pretty good case study of how a business that depends on the government has to dig in to survive.
TRC began life as Travelers Research Center, an enterprise set up by The Travelers Insurance Corp. of Hartford to provide meteorological, industrial hygiene, and other research services related to insurance underwriting. But it soon expanded its purview, doing business both for public utilities and for the federal government. During the 1950s, TRC and United Technologies Corp. combined to design a system known as 433-L, which structures the collection, processing, and distribution of weather data for the entire United States.
When Travelers spun off TRC in 1969, most of its employees returned to the academic world: Many migrated to the Center for Environment and Man at the University of Connecticut. But TRC Service Corp., a subsidiary specializing in environmental issues, proved more entrepreneurial in spirit. Twenty-two of its 25 employees decided to incorporate as TRC, The Research Corporation of New England. Shortly thereafter, in a stock swap, TRC became a subsidiary of VAST Inc., an oceanographic research firm headquartered in Boothbay Harbor, Maine. VAST, in turn was 51% owned by Pratt-Read Corp., of Ivoryton, Conn.
At first, TRC was sensitive to the dangers of doing too much work for the government. "We started with the mandate of serving industry," recalls chief consulting scientist Richard A. Duffee, one of the founders still with TRC. "We wanted to be free of auditing, of government interference . . . and we preferred working with industry; with industry, you generally had the feeling that you were really accomplishing something, whereas with government, there sometimes didn't seem to be clear objectives or any urgency." The firm was equally concerned about "putting all of its eggs in one basket" and the potential for conflict of interest
"If you're working for thg policeman, it makes it difficult to counsel industry," Rocco observed later.
The firm deliberately set a government/industry ratio of 25:75. "No more than 25% of our work would be for the government," explains Duffee. Management's intentions, however, proved no match for a market that was being defined more and more by Washington's environmental initiatives. The Clean Air Act of 1969 was followed by the Clean Water Act of 1972 and the Safe Drinking Water Act of 1974. Then came the Resource Conservation and Recovery Act of 1976 and the Comprehensive Environmental Response, Compensation and Liability (or "Superfund") Act of 1980.
All these laws turned what had been a modest-size industry into a booming business. "There were environmental companies before 1969," says William T. Lorenz, a management consultant and publisher of 1983 Update, Air Pollution Control Industry Outlook, "but not very many and not very big. The business, as a discrete industry, really began with the passage of the Clean Air Act and the creation of the EPA in 1970." The figures bear out Lorenz's assessment. During the 1970s, the number of environmental-consulting firms shot from a few hundred to nearly 8,000, although about half of them were one-or-two-person shops.
