A business that depends on the whims of Washington better hope the government doesn't change its mind too often
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.
"It was a euphoric time," recalls Rocco, "when many companies concluded that, what they had to sell, the client had to buy. . . . The government was a major forcing factor." The oil embargo of 1973 interrupted the euphoria briefly -- there were layoffs, mergers, and bankruptcies -- but by 1975 the industry was back on track, with revenues increasing about 8% a year.
Like many companies of the time, TRC had distinct strengths and weaknesses. It boasted an impressive core of experts -- an important fact, since the renown of its top people is a consulting firm's most persuasive selling point. It also had the necessary capital by virtue of the stock swap. But it suffered from an academic, ivory-tower atmosphere, and was short on management ability.
To make matters worse, TRC was soon orphaned. The firm's parent company, VAST, had been testing sonobuoys (submarine-detecting buoys) for the U.S. Navy for more than 10 years. The program represented nearly 90% of the company's roughly $10 million in annual revenues. When the contract came up for bid in 1974, VAST lost. Overnight, the company ceased to exist. "That," says Rocco, "left TRC in the position of having to fish or cut bait." TRC made a tender offer to Pratt-Read, and, in a $2-million-plus deal that involved selling off VAST's assets, became a stand-alone public company, TRC Companies Inc.
As TRC scrambled for business, government work was getting harder and harder to avoid. For one thing, the line between working for government and working for industry was beginning to blur. In this world, Washington was the source of the whole market, setting standards for industry and imposing timetables for compliance. Then, too, the competition was fierce, and despite VAST's experience, the government seemed like a good customer. "The government contract, which is generally large and may run for two years, looks like a security blanket," says Duffee.
By 1979, TRC's golden ratio was little more than a rusty memory: State and federal governments accounted for 75% of the firm's business. TRC had major contracts with the EPA. It assumed responsibility, along with NUS Corp. of Gaithersburg, Md., for setting up national air and water pollution monitoring and registry systems. On the industrial side, it began a major air-quality monitoring program for New York State Electric & Gas Corp.
Ironically, it was this commercial contract that led indirectly to the firm's first major crisis, precipitating its 1980 losses. The E&G contract required TRC to hire additional people and spend a hefty sum on capital equipment. TRC justified the expenditures by lining up similar work with General Public Utilities Corp. of New Jersey. Then, in March of 1979, came the accident at the Three Mile Island nuclear power plant. GPUC, the plant's owner, decided that it had more pressing matters to pursue.
Vincent Rocco arrived on the scene three months later. What he found was a company with an uncertain future. "The real challenge in coming [to TRC]," he said later "was to create a sense of confidence, a belief that we could survive."
Rocco, with his map of the Western Front and an Apollo II plaque autographed by Neil Armstrong, was an easygoing, avuncular man. He had spent the previous five years selling the services of a consulting firm, called Environmental Research and Technology Inc., to midwestern utilities, mining companies, and rubber manufacturers. His arrival at TRC represented a major shift in the firm's philosophy: The board of directors had decided that TRC should get out of direct government work and explore opportunities in the private sector.
"My mandate," says Rocco, "was to turn the company around by bringing in commercial business and by broadening the client base." Although it had grown significantly -- from the $600,000 in public-utility contracts deeded to it by Travelers in 1969 to annual revenues of $6.5 million 10 years later -- TRC retained its ivory-tower atmosphere and remained somewhat provincial, generally working close to home. "It was a comfortable little company," Rocco explains, that had grown increasingly introspective with each bruise imposed by the market. "Many of the staff no longer knew what was going on outside the building."
Rocco's first job was to solve some of TRC's organizational problems, many of them issues that crop up regularly when a company does most of its work for the government. "When I arrived," he recalls, "we were heavily overstaffed, and our costs were astronomical." Despite the toll on morale, Rocco made the necessary cuts, eventually paring the work force from 170 down to 140. Reminding the firm of its origins in the commercial marketplace, he also cultivated its aggressiveness: One analyst, noting the change, referred to "TRC's new killer instinct."
The firm had been loosely structured on a matrix system, with professionals from different departments coming together on specific projects. "We had 32 groups of people, each of them doing things they liked to do," Rocco remembers. He reassembled the staff, mounting 14 "business elements" that pooled expertise into what amounted to product lines: air pollution control technology, energy and environmental planning, waste-water services, and so on. He also imposed cost-of-sales and cost-accounting procedures that had been either nonexistent or neglected during TRC's do-business-with-the-government period. "We weren't accounting for costs the way we should have been," says Rocco. "In fact, in some cases, we were underbilling the government."
Rocco's biggest problems, though, stemmed from the nature of his new firm's marketplace. Like many industries that depend on the government, environmental consulting expands and contracts as issues heat up and cool off. "The market is very cyclic," observes Rocco, "and it's a constant challenge to gear oneself to ride with it, or to try to dampen the cycle." Each issue, moreover, has a given life span: It is studied, solutions are engineered, and eventually government standards are met. Firms in the business thus face an inevitable sequence of new challenges. "When you're on the low side, you barely survive," continues Rocco. "Then there's the trauma of coming back and the future shock involved in contemplating your next fall."
In trying to ride out the cycles, TRC was partly a victim of its own impeccable but obdurate reputation. Viewed as a high-class consultant to government, the firm was considered virtually preeminent in the field of air pollution. And that image persisted even as TRC lost some of its white-haired experts in the area and made a major effort in waste water and hazardous wastes. Even now, when an observer like David Bartlett of the investment firm of Ladenburg, Thalmann & Co. describes TRC, he speaks of "a class company . . . best known for its work in air pollution."
"They made a mistake by staying in that area as long as they did," says William Lorenz. "The more successful firms recognized, earlier on, that the long-term growth was going to be in the water-resources area. There are tremendous opportunities there."
As Rocco pushed TRC to develop its expertise and credibility in newer disciplines, he also attempted to wean it from its dependence on government. He got a little help, as it turned out, from Washington itself. In the spring of 1981, TRC was one of several companies operating air- and water-pollution data management systems for the EPA. Faced with budget cutbacks, the agency decided to consolidate the parallel programs. "The program manager was down in Washington on a Friday," recalls Rocco, "and on Monday, I think he was a bit reluctant to return to work. . . . He said, 'We've got problems."
One-half of TRC's $2-million contract would disappear within the next 90 days. Rocco got busy on the phone, flew down to Washington, and, during the following week, did a lot of pleading. But the work was gone. And soon thereafter, so was the program manager, who, Rocco feels, had been unwilling "to read the handwriting on the wall."
Within that same 90 days, Rocco and his staff had managed to replace some $800,000 of the lost business, mostly through quick scrounging for contracts in the commercial marketplace. But, says Rocco, "I don't like playing it that close."
Overall, TRC probably couldn't have picked a better time to cut back on its government work. "The Reagan Administration had an immediate impact," says Rocco, who admits somewhat sheepishly that he voted for the President. The industry had hoped that Reagan would streamline the environmental-regulation process. Instead, it got spending cutbacks and chaotic administration, with devastating results. Since the late 1970s, Lorenz points out, the number of firms in the environmental-consulting industry has been cut in half, and aggregate earnings for the 100 largest companies are "close to zero." Observes Rocco: "In essence, what happened was that the plug got pulled."
Although TRC's losses from 1980 to 1982 were "traumatic for the company," as one insider put it, it came through with a performance that was regarded as credible. Revenues dropped from $9 million in 1980 to $7 million last year, but Rocco increased his firm's contracts from 60 to 187. And although his client list held steady at about 100, he points out that "some of them were new faces."
Most important, TRC's government/industry ratio flip-flopped back to the targeted goal of 25:75. To be sure, it was hard to say whether it was the company's or the government's decisions that had most to do with the change: Companies that hadn't elected to change direction were seeing similar if less dramatic shifts. But when the lines of battle shift so dramatically, a company does well to simply stay alive.
In recent years, the prognosis both for TRC and for the environmental-consulting business has improved. The return of EPA administrator William D. Ruckelshaus has brought some order to that agency; Reagan has now targeted about $123 million for acid-rain research; and the recession is finally over. Rocco, continuing to broaden TRC's capabilities, has beefed up its hazardous-waste expertise by adding geotechnologists and geohydrologists to TRC's staff. He has also completed a $750,000 private placement, and is using the proceeds to expand a new nationwide high-tech toxic-measurement business.
Probably his most important innovation, however, has been a mobile package of air-testing equipment known as the Trace Atmospheric Gas Analyzer, or TAGA (see INC., July 1983, page 20). In most cases, notes one observer, selling environmental consulting is like selling a soft drink -- without a bottle. TAGA represents TRC's attempt to package its science in a commercially appealing manner. "We were looking for a technology that was somewhat proprietary," Rocco explains, "and that would make our services seem more tangible."
Rocco first encountered the technology on which TAGA is based while in the Air Force. Stationed at the Arnold Engineering and Development Center in Tullahuma, Tenn., in the late '60s, Rocco used earlier but similar equipment to analyze the components of aircraft-engine and rocket-motor exhausts. Now, mounted in two mobile vans, TAGA is being used to pinpoint pollutants inside office buildings as well as at hazardous-waste disposal sites.
TAGA, says Bartlett of Ladenburg, Thalmann, has given TRC a certain "high-tech" distinction. One of the few firms in the country with the expensive ($1 million) equipment, TRC is working with other consulting firms to market the service more effectively.
The TAGA edge was reflected in a brief jump in TRC's stock price (from $5 to $12 a share), and The Boston Globe subsequently designated TRC the fifth-best-performing New England stock of 1983. But the stock, responding to the broader realities of the marketplace, soon settled back down to the $6 range, where it has since lingered.
No one now doubts TRC's credentials or technology: The unresolved, and perhaps unanswerable, question has to do with its long-term prospects. Bartlett describes it, without hesitation or qualification, as "a super company . . . class people and class technology," but reflects that it would probably do better as the subsidiary of a major engineering firm. "The really big money to be made in the environmental area," he explains, "isn't in finding the dioxin pile, but rather in cleaning it up. . . . If TRC aligned itself with someone like Combustion Engineering Inc., which is in an acquisitions mode, it could transform its expertise into megabucks."
TRC, however, wants to make it on its own. "We're finally beginning to move," says Rocco, his enthusiasm in the face of fire a tribute to his belief in the firm. He notes that TRC has recently obtained several important waste-disposal site assignments, and has recently signed a $1.3-million contract with the EPA to do acid-rain research. But he admits that until the economy picks up more steam, he may have trouble.
His general problem, moreover, has not disappeared. Although TRC is now doing more work for industry than for the government, its market still depends on the programs and regulations issuing from Washington. And a market conceived, executed, and ultimately orchestrated by Uncle Sam is bound to remain, in Rocco's words, a "tough" one.
Tough, as in "Order of Battle on Western Front, 11 a.m., Nov. 11, 1918."