Unlike so many companies whose lights dimmed during the dark days following the dotcom crash, Graybar Electric, the $5 billion St. Louis-based distributor of electric and networking products, remained resilient and profitable, even after business from its two largest telecommunications customers switched off. This organizational resilience stems from a commitment to rigorous financial, risk, and project management -- qualities that also define Beatty D'Alessandro's ascent to the CFO seat. Steve Player talks to D'Alessandro about his role in fortifying Graybar's business agility and how he and the rest of the workforce "connect the dots" between the company's success and personal success.
Steve Player: When we first met, the Internet was really taking off and Graybar Electric was poised to exploit that wave. This changed, of course, and your response to that change was highly unique. Please start off by giving our readers an understanding of Graybar …
Beatty D'Alessandro: We're a Fortune 500 company that specializes in supply chain management services as a leading North American distributor of high-quality components, equipment, and materials for the electrical and telecommunications industries. We have about 8,000 employees working through more than 250 distribution centers throughout the U.S., Canada, Mexico, and Puerto Rico.
We're one of North America's largest employee-owned companies, with 6,000 shareholders consisting of current employees and retirees. Due to our large number of shareholders, we are considered a public company by the SEC and must file financial statements and comply with other SEC requirements. As a non-exchange-traded company, we are classified as a non-accelerated filer, which allowed us extra time to meet the requirements of Sarbanes-Oxley's Section 404. We've been SOX Section 302 compliant since that was required in 2003.
Graybar was established in 1926. Our customer base consists of electrical contractors, data system installation contractors, commercial establishments, industrial facilities, and governmental, medical, and educational institutions. Graybar has appeared on Fortune's "Most Admired Companies" list for each of the past six years, and we were named the #1 Most Admired Company in Fortune's diversified-industry category last year
SP: The way your company remained profitable after the Internet bubble burst is also admirable. How were you affected by the downturn?
D'Alessandro: Leading into the downturn, we had enjoyed high growth rates of nearly 20 percent during a three-year period in the late 1990s. We had also completed a string of acquisitions, in which I played a major role (at the time, serving as director ofstrategic planning). We were participating in the boom in two different ways: at the enterprise level, where law offices and hospitals, among other businesses, were putting in data networks to become IP-based, and with service providers, such as Qwest, and companies like Lucent Technologies [Alcatel-Lucent, as of last year].
Those two companies accounted for nearly $1 billion of business for us at a time when we were doing more than $5 billion in annual revenue. When the bubble burst in 2000-2001, both customers began canceling their orders. We essentially saw $1 billion worth of sales evaporate in a two-year period.
The damage was almost entirely isolated to those accounts at first. But then a ripple effect began impacting everybody in the business as the downturn dragged on. Not only did our pipeline stop growing, but also in some cases customers canceled orders that were yet to be shipped.
SP: How did Graybar weather those challenges?
D'Alessandro: We moved quickly to right-size the business. As a result, we did not have a single unprofitable year during this tumultuous period. We remained profitable even while we lost $1 billion in revenue in that two-year time frame. Part of that success reflects the inherent resiliency of distribution: We don't have tremendous fixed costs, like an airline or an auto manufacturer does, for example. When those types of companies lose 20 percent of their business, they can go broke if don't quickly sell idle assets.
We were able to dial back our inventories and receivables, and we reduced headcount to get to a point where we were doing a little better than breaking even.
SP: Yet, your company also remained committed to pursuing strategic initiatives that helped restore that lost revenue -- and then some -- in a few short years. Before we delve into those projects, tell us about your background and career trajectory. At the time of the downturn, you headed up strategy and business development. How did you get to that position in the organization?
D'Alessandro: In 1983, I was hired right out of collage as a management trainee at Graybar's Florida division headquarters in Tampa. Nine months later, I moved to Fort Myers as the branch financial manager for our southwest Florida branches, where I was responsible for financial and credit management. While in that position, I attended graduate school to earn my MBA. As a young new employee, one of the most important benefits that Graybar offered me was tuition reimbursement. It's funny -- I'd go to school at night, come in the next day, and apply what I'd learned in the classroom. There was really a connection between what I was learning and what I was doing. A few years later, I transferred back to Tampa to a larger, more complex assignment in finance and finished my MBA there.
About 10 years into my career, I left the field and was transferred to Graybar's corporate office in St. Louis as treasury manager. I managed our banking relationships, corporate cash, and the investment side of our retirement assets, including our defined benefit plan and our profit-sharing plan.
At Graybar, you generally need to do a divisional management level job to be considered for a senior-level job. So, two years later, I took the equivalent of a divisional controller position at our St. Louis division. While in that role, our board of directors asked me to participate as the internal lead in a McKinsey consulting project to implement long-term and strategic planning for the company. I assigned my day-to-day responsibilities to my number-two person and then spent the next six months heading up the four-person internal project team that worked alongside the McKinsey consultants.
SP: What did that effort produce?
D'Alessandro: We came up with a strategic road map -- a long-term plan that identified high-potential markets of opportunity as well as a priority list for action to exploit those markets we had identified. A month after I returned to my divisional controller position, I was notified that Graybar's CEO and board of directors had approved our plan and the creation of a strategic planning and acquisitions group. I was asked to form and lead this group as director of strategic planning and business development.
SP: Were you charged with implementing the strategic plan?
D'Alessandro: Partly. The CEO's question to me was, "If I have only one dollar to invest in the marketplace, whether it's a customer set or a geography, where should I put that dollar?" So we did the research to try to figure that out. After the basic research and prioritization was completed, we went out and bought five companies between 1998 and 2000. A number of other projects we worked on were handed off to other corporate and field executives for delivery.
We chased 50 companies and then negotiated with approximately 15 of them and were able to close on five deals. In our first year, we completed only one acquisition because, in part, we were not known as buyers in the marketplace. Then, as we gained some traction, people started calling us with deals. Our pipeline quickly filled up with opportunities to consider. Just as our reputation and expertise were reaching critical mass, the tech wreck of 2000 and the terrorist attacks of 2001 derailed the global economy as well as our business. During the same period, our CEO retired due to poor health. Very quickly, our new CEO wisely shifted our focus from acquisitions and expansion to controlling costs. This change really saved the day. Investment bankers kept calling, though, asking about our interest in an acquisition, and I'd have to say, "We're not doing deals at the moment due to market conditions." After a while, they stopped calling.
SP: Where did that leave you personally?
D'Alessandro: It left me wondering where my next gig was going to be. However, the CEO had other work for the strategy group to do. As the Internet bubble burst, he asked us to study the role and direction of technology in large-scale distribution. He wanted to know three things: How can technology be used to lower cost and improve efficiency in distribution? What are distribution companies already doing with technology to lower cost and improve efficiency? And, finally, which technology providers are investing in or are experts in distribution solutions?
With help from Deloitte Consulting, we evaluated how technology impacts distribution. After five months of work, we pitched our findings and a full-blown ERP project to the board. We had found that technology was a critical contributing factor to the success of high-transaction-count companies in many other industries, specifically financial services. We found that distribution was behind the curve in the adoption of these technology solutions. We felt that being in the lead in deploying these tools could give us a significant advantage over our competitors. Our research indicated that technology could be used to lower the cost of each transaction by automating the back-end posting, tracking, and recording steps. In addition, well-designed systems could improve order entry accuracy, leading to fewer billing claims and faster payments. Finally, we found that data-rich, fully integrated forecasting systems could significantly improve customer satisfaction by having the right products in the right places at the right times, while lowering the total overall investment in inventory.
The board brought us back in the next day and said that they thought that the project, which included significant process improvements and implementing a single-instance ERP, was a way to improve our strategic posture and a means to create competitive advantage for Graybar. Shortly thereafter, our CEO asked me to lead the project. I was appointed the vice president of IT strategy in June 2001.
SP: You have finance training and an MBA. How did you assimilate into your IT organization?
D'Alessandro: Carefully and quickly. My past experience in doing acquisitions was very helpful. Part of the acquisitions integration work I did included moving newly acquired companies onto our back-end systems. Those were mini-projects that taught me about data conversion, training, and change management. Converting inventory files, pricing files, supplier files, and payroll files from one system format to another were a part of what I oversaw when we bought companies. Training the workforce and dealing with the fallout of major shifts in process and procedure were also elements of acquisitions I had responsibility for. While postmerger integration served as solid preparation for a large technology project, those mini-projects were much smaller than this $100 million enterprise-wide technology project we embarked on in 2001.
SP: What did you do right off the bat?
D'Alessandro: I focused on getting the best people possible and the best plan possible, developing a reasonable budget, and securing funding for the project. Our CEO backed me on getting the best people, internally and externally (which included Deloitte and SAP). Our top software expert and our top infrastructure manager joined the project. And the very best business guy we had in IT came over full-time. With a highly impressive core group, we were able to go out and draw very talented people to the team.
One of our most difficult challenges was building a whole new system with most of our IT resources dedicated to this effort, while keeping the old system fully functional and available to support the current business. We left a small group of our very best people to manage all of the legacy systems; they did an outstanding job of keeping things going for over two years with very little help from the rest of the team. We dipped into the business and into IT to bring almost all of the other development and business process people to the project. We also brought in additional field experts in inventory, HR, payroll, accounting, order entry, and "pick-pack-and-ship," who served full-time on the project team.
At the peak of the work, we had nearly 300 people working on the project, including 60 non-IT people from the business.
SP: Before you get into the planning and execution, how did you fund the project?
D'Alessandro: We used debt, long-term and short-term. Our CFO included me in the bank presentation we made to secure the project's financing. I presented what we were doing, how we planned to do it, and the benefits we expected to derive from the project. We interacted with our lenders openly and regularly to keep the financial community satisfied. And the banks stayed with us throughout the entire process. We got all the money that we needed.
Our CFO was very involved with the oversight of the financial side of the project. She had been with another company prior to Graybar that had gone through an SAP conversion and had a wealth of insight about the process. My financial background allowed me to manage the budget in detail. I used weekly finance reports that showed whether we were hitting our milestones and where we were in terms of overall progress. In the end, we completed the project within the time frame that we had originally allotted. We were very focused on not disappointing our lender or shareholders during the project.
SP: What would you attribute that to?
D'Alessandro: We started the project by developing a set of realistic expectations and instituting intensive scope control. At the onset, there were discussions about "Graybarizing" the implementation approach. I assembled the project's leadership and asked how many of them had installed SAP across an enterprise as large as Graybar. No hands went up. That was our starting point: We acknowledged that we had never done anything this big or complex before, individually or as an organization. We were paying SAP and Deloitte for their expert advice, and my plan was to follow their proven plays. I asked SAP and Deloitte to bring us methods and practices that had worked for other large, complex implementations. The project leadership reviewed these and then, in the end, we carefully and diligently followed their advice. I told our Deloitte partner, Neil Gholson, "If this doesn't work, there will be no one to blame but you and SAP." He took this warning very seriously. The advice that we got from our partners was very good and made a big difference for us.
SP: Scope creep and additional bells and whistles almost always rear their heads in a project like this. How did you keep those in check?
D'Alessandro: We said, "The scope is the scope is the scope." We had identified some advanced functionality around forecasting and the planning of inventories, and some pretty interesting capabilities in the way we do pricing. These were the places that we knew -- based on the original scope -- would require more time and money. We slammed the door on any request that would not make us money or make us more competitive as soon as we went live. Our mind-set was, "We can barely afford to do this, so there is no money for anything but the essentials." We always knew that we would come back to improve and enhance the system after we were up and running everywhere. The push was to finish the initial build and deployment before the money or our users' patience ran out.
SP: And you succeeded …
D'Alessandro: Yes. We started planning on January 6, 2001, and our final go-live date was October 11, 2004. We spent a total of 1,375 days designing, building, testing, and deploying. The project team members' dedication and the field employees' hard work were vital to our success. And we made an important commitment to the team members when they joined the project. We told them that their willingness to take a chance in their career was admirable. We told them that if they're successful and if they add value, that they would be highly sought after all over the company. We emphasized that we would protect them as the project ended and they waited to be rolled back into the business. This took about a year for us to accomplish after the project concluded, and we kept them in IT until we could find the right positions for everyone.
During the project there were several people, including some high-profile employees, who burned out and left the company. They were all good at what they did, but they did not respond well to the incredible demands of project work. Several former project team members have parlayed their experience into very high-paying jobs in consulting. We also had a number of people who have moved on to much bigger and better responsibilities at Graybar as a result of their involvement with the team.
SP: What strikes me is that you were a finance person leading what was primarily an IT project. When you took that position, how did you gain the respect of the technology people?
D'Alessandro: First of all, I admitted my limitations. I said, "I am not a technologist and I don't profess to be one. I am responsible for bringing these parts together. Now, you have to help me understand the way that these technologies interact and what the risks are."
I never overstepped my personal capabilities. I knew and they knew that I was not there to render technical judgments. My role was to make sure that all of the right people were part of the evaluation and recommendation process. I wanted to know that the team had identified all of our options, the cost (immediate and long-term) associated with each of them, the interdependencies with other parts of our solution, and, finally, the recommendations of the group.
SP: So you asked not only for an education but also for recommendations …
D'Alessandro: Absolutely. And I never went against what the technologists recommended -- never. Sometimes I would move along the spectrum of choices and suggest that we phase in their solutions over time. However, I never crossed the line and said, "In my technical opinion, that's the wrong solution."
SP: You were the CIO when the project concluded. When did you become CFO?
D'Alessandro: Three days after our final go-live date, our CEO called me to set up a meeting. We sat down after-hours and he told me that our CFO was retiring. Then he asked me to be the next CFO. Something I'm proud of is that I was replaced as CIO by my number-two person on the project, who, like me, also comes from the business side of Graybar. We had been working day-in and day-out together since the project had begun in early 2001. Because of the complexity and risk of the project, I reported to the CEO when I was CIO. Now that the project is over, and because of my background, the CIO now reports to me.
SP: The company's revenue is back to where it was prior to the dotcom crash. The company has greatly streamlined and strengthened its back-office processes thanks to the ERP implementation. Yet, distribution remains a tough industry. As CFO, what are you doing to help the company stay competitive?
D'Alessandro: I am always looking for a better, faster, cheaper model of doing business to avoid being displaced by someone else in the channel. We have to work to be the channel partner of choice for our manufacturers and for our customers. This exerts constant pressure on us to improve our transactional efficiency and our capital efficiency while providing high-quality customer service.
SP: Finally, how do you keep the organization striving?
D'Alessandro: I think that this is part of our employee ownership culture. Our employees have more than just a great deal of pride in Graybar's success. Our employees have connected the dots at Graybar -- they know that the success of the company and their own personal success are tightly bound together.