The StoneWood Interviews
The Transition Master
July 16, 2009
Saddled with a ten-year worldwide non-compete, in 2004 Robert Glegg acquired a small $2.5mm per year parts manufacturing business which he renamed 2Source Manufacturing Inc. Despite massive currency fluctuations and a global recession, Mississauga, Ontario based 2Source has become one of the fastest growing aerospace manufacturing companies in Canada with revenues of $20mm per year and a clear path to annual revenues of $100mm in the next few years.
StoneWood Group’s Allen Ballach spoke with Robert Glegg about his successful transition from water systems industry leader to aerospace parts innovator.
Would you please start by telling us where it all began? I understand you grew up and were educated in Montreal where you trained as engineer. Can you speak a little about your early career?
That’s correct. After graduating from engineering school I joined Pratt and Whitney in Montreal. It was a less than auspicious start. I was hired as a heat transfer engineer and joined a large number of engineers all working in one huge room. I could immediately see my future and it just was not for me so after a very short period I asked if there was something else I might be able to do.
Believe it or not they offered me a role as a bird ingestion engineer. My job was essentially to fire frozen chickens into Pratt and Whitney jet engines to analyze the effects of the impact. It is a very serious issue for aircraft but frankly I could not see myself firing chickens the rest of my career.
What did you do?
I left after all of three months. I had started a part-time MBA program and decided I would devote more time to completing it sooner. I also had a small business importing fuel additives which generated some cash and helped me get through the MBA. Upon completion of my studies and having gotten my fill of pure engineering, I joined a water treatment company in a sales role. I was soon promoted to sales manager after obtaining some large orders.
When did you first decide to go at it alone and become an entrepreneur?
Actually it was not that long afterwards. I spent about one year in the water business before setting out on my own. I saw some market needs in the water treatment sector that I felt I could address as an entrepreneur.
I started Glegg Water Conditioning with $10,000 which is not exactly a healthy bankroll to start a designer and integrator of large industrial purification systems so I had to become creative. I found a small manufacturing company in Burlington, Ontario that had moved into a new facility with excess capacity.
We struck a deal with the owner where I would rent an inexpensive office and have access to all of their people, as I required their skills, for $25 per hour. We also agreed that they would benefit from any work I would subsequently secure. It was a great way to get started and everyone won.
How did the business evolve?
We built it step by step, brick by brick. We designed and integrated large water treatment systems for industrial boiler and utility applications. We grew from one to two to fifteen employees all within this other company. Within 4-5 years we were doing $4mm per year and we had to either evolve our relationship with our landlord/sponsors or move out. We actually tried to buy the firm, which itself had only 30 people, but could not come to terms so we moved the company to Guelph.
For the first number of years we engineered and manufactured our systems in accordance with customer specifications. It was not until 1992 that we started to develop our own proprietary technology, an electro de-ionization process. Water Purification resin beds were typically regenerated using chemicals which brought with them byproducts and costs of their own. In conjunction with a Japanese partner we developed a way to regenerate these beds using electricity which had tremendous advantages in the marketplace – we were then able to offer chemical-free systems. To be honest it was not easy as there were patent, joint venture and competitive issues to be dealt with but in the end we had hugely differentiating technology of our own which really helped propel us even further.
We also became leaders in the semiconductor industry. Semiconductor yields are highly sensitive to water purity and as that sector’s growth exploded so did we. In fact by 1988 we had become the sole source supplier to Intel worldwide. Our relationship with Intel became so important to both firms that they agreed to put one of their executives on our Board of Directors.
Why did you sell your water business when you did?
We had been building Glegg Water Conditioning for 21 years by that time, and while I was not looking to sell, I was not closed to the possibility.
Secondly, General Electric had been knocking on our door for a while. Their turbine division was a big supplier to power utilities. They wanted our chemical-free water treatment technology as an add-on suite of capabilities to that marketplace. Our very successful semiconductor business was actually only of sideline interest to them.
Finally, the market itself was trending to a new model of building, owning and operating systems. This was an altogether different, much more capital intensive game from the build and sell world that we built the company around.
Anyway, taken together it just seemed like the right thing to do.
After you sold Glegg Water Conditioning, Inc. why did you decide to continue working and what prompted you to go into the aerospace business?
I stayed on at GE as a consultant for some 9 months through the transition and then took some time off. I was still young and after a while I started looking around for another business to buy or start. You have to keep in mind however that I had a ten year worldwide non-compete with GE, so the industry I spent 21 years learning was not one that I could even contemplate re-entering.
I looked at a lot of different types of businesses. I guess I like manufacturing, I understand it and enjoy the operational challenges. I found a small company called Trilete that machined metal parts. They had two core markets, under sea fiber-optic cables for which they manufactured high precision bushings and various custom machined parts for aircraft. Unfortunately for them, the dot com bust devastated their fiber optic business and 9/11 severely hurt their aircraft business. The owners decided to sell the business and I bought it in 2004.
Did the company’s resuscitation and growth progress as planned?
I would not say that at all.
When I bought the company, I had a vision of providing customers with two sources of manufacturing, one here and one somewhere in Asia. Thus the name 2Source. But it never worked out that way.
Though we bought a business with only $2.5mm in revenues per year, it was a company with fantastic people and the capacity to do a lot more. We just needed to figure out the path to that growth. We actually spent the first 18 months trying to determine our strategy going forward. We knew bushings, having made them for telecom applications and we knew aircraft, having machined components for that market. The answer proved to be putting those two together.
We did a lot of research and found that there was an opportunity providing bushings for aircraft landing gear. We liked the market, including the fact that there were opportunities not only with the global OEMs but also in repair and overhaul. So after some due diligence that was where we headed.
But how did you differentiate yourself in what had to be a fairly mature marketplace?
The landing gear on a large aircraft houses hundreds of bushings of all sizes. The industry practice had been to supply quantities of individual bushings which the customers would deploy as needed. But this demanded a fair degree of logistical effort, inventory management etc. at the customer end. It was just the way things were always done.
One day we were presenting to a large potential customer about securing their work. We asked them what we could do to differentiate ourselves. We introduced the possibility of developing fully integrated kits of bushings assembled specifically for a section of the landing gear. Each kit would have exactly the right configuration and number of bushings for that section. The client indicated that at least four firms had tried to deliver to this model in the past, but none had succeeded. This was our big opportunity.
The manufacturing challenges in taking a platform approach are not insignificant. To start, you have to develop flexible and lean manufacturing systems. You have to have people who can deliver at an altogether higher level of expectations. You also have to implode the whole bill of materials and develop significantly greater sophistication across the whole organization.
We are blessed to have great people at 2Source and they leapt at the challenge. We have made major strides in our manufacturing mindset and capabilities and sales have grown dramatically ever since. From $2.5mm in annual sales just a few years ago, last year revenues grew to over $19mm.
Most significantly, 2Source has developed patent-pending technology that makes custom-dimensioned bushings available to landing gear overhaul customers at essentially the same price as mass-produced bushings. We expect that this innovation will have a revolutionary impact on our industry and we are extremely excited about the benefits we will provide to our customers going forward which we believe will drive significant growth.
You noted the tremendous contribution of your team to your company’s success. Is there one other thing that stands out as having been pivotal?
Yes, though in a way it is related. I had absolutely no experience in the aerospace/defense industry when I bought this company. It is a complex industry with a rich history, as well as a culture and cadence of its own. It is also, like other businesses, steeped with relationships and I had very few. I realized quickly that for 2Source to be successful, I needed senior help of a caliber and seniority that I was unlikely to hire to work for me.
So I decided to assemble a world-class board of directors. I have always been a big believer in high quality boards. As I mentioned earlier we had an executive from Intel on our Glegg Water Conditioning board who helped us a great deal. So, at 2Source, we set out to put together a world-class board of directors with in-depth industry and business experience who could help us navigate our growth along with the relationships needed to achieve them. It has worked out exceptionally well. With your firm’s help, we assembled an amazing group of people who have contributed immensely to our success to date. I cannot emphasize enough how grateful I am to have them as part of our team.
What advice would you offer executives contemplating switching industries?
There were two distinct categories of parameters requiring leadership and management from me as I switched from one industry to another.
One category contained all those variables which pertain to the effective growth and operation of any business. These include having a first class strategic plan, managing marketing and sales, laying out and following detailed financial forecasts, operating the business appropriately day-to-day to meet typical metrics for execution (quality, delivery, cost, etc.), and dealing with human resources to name a few examples.
The second category involved items which were specific to the new company and its industry. I had to identify and develop the value proposition that drove the business – both immediately after the acquisition and in the future – i.e. why do the customers need us – now and in the future? It was important to learn the details about the products and/or services offered, the marketplace and its customers, the suppliers, and, most importantly, the details about who is on your team and who you can trust – lots of time needed to be spent reading and listening. A new CEO has to show a great deal of interest to the stakeholders, particularly if there are serious issues at the time of the change of control as there were in my case. It was critical for me to quickly evaluate our team, particularly our senior team, make certain that we had the right people driving us forward, with as much motivation as possible to excel. I never took anything for granted – I wanted to know the details – and if I did not understand something I did not let go until I did. It is very refreshing to change one’s industry – a wonderful and exciting opportunity to learn new things and apply old ways to new opportunities.
What advice would you offer others in building successful organizations such as Glegg or 2Source?
I can think of a few things. First, I have come to believe that to be a successful company; you must have a strategy that includes a unique value proposition for whoever is buying. I am not saying that is easy, but in my mind it is essential. It took us 18 months to determine our initial strategy – ie. landing gear bushings at 2Source. But today everyone, and I mean everyone, in our company knows that our uniqueness lies in reducing lead time for our landing gear customers and providing world-class platform-based, innovative bushing solutions. We continually strive to refine that strategy.
I would also add that whatever your value proposition or mission statement is, you must be able to articulate it in one sentence. At Glegg we had it down to four words, ‘chemical-free standard systems’. Though that may not mean much to a lay person, to our customers it meant a lot and it ran to the heart of what we did.
I have only led two companies, but I strongly believe that both of their successes can be traced back to finding that unique value proposition.
Anything else you care to add?
Yes, I would also say that while a unique value proposition is critical, it is no more important than execution. A company whose value proposition is average but which executes well will generally outperform the company with a great value proposition and poor execution. What is optimal is to have a great value proposition and great execution.
At 2Source, it was one thing to promise platform solutions to our clients and it was another thing altogether to deliver to that. And execution is a game of continuous improvement, of attention to detail, of persistence. From people to costing to processes to quality, you have to execute, you have to measure and you have to improve each and every day. The devil is always in the details.
Third, I have learned that you have to be honest every single moment of every single day.
I am reminded of that in these trying times as companies and people deal with down markets and uncertainty. I have learned a lot about customers in terms of the manner in which they have dealt with us in these times. I have always believed that honesty is a currency which yields interest. Life is a long time and good things come to good people. Integrity has to be a constant. You have to be a fair trader, you have to live up to commitments, and you have to be honorable without exception.
And it cannot be overstated that you have to treat people right. Companies are collections of human beings. The success of 2Source is the result of good people coming together, working towards a common goal, contributing effort and ideas to create something quite extraordinary. Businesses have to ensure that their employees are aligned to what is important. For example, we offer profit sharing at 2Source, where everyone can take part in our success. We are transparent with out numbers, our metrics, our goals and we involve everyone in our efforts to improve. People need to feel they are part of something, and companies realize far greater value from their teams when they are all working together in pursuit of common goals.