Place To Be, The

Michael Fickes

In spring 2002, Michael Cordesman, chief operating officer with Republic Services Inc., Ft. Lauderdale, Fla., ran a recruiting ad to fill several openings at local divisions. Cordesman realized that the recession was likely to produce numerous resumes. Nevertheless, he was stunned by the response.

"We received 950 resumes in about three weeks, mostly from people with jobs in the industry," Cordesman says. "That's a good barometer of the atmosphere in the company. People in the industry recognize that Republic is doing interesting and creative work, and that this is the place to be."

If you think the waste industry has matured into a handful of consolidated giants with layers of corporate bureaucracy, take a closer look at Republic Services Inc.

Wayne Huizenga, Republic's chairman, helped build the original Waste Management Inc. into a Wall Street darling with a roll-up consolidation strategy that lasted from 1970 through the 1980s. In those years, Waste Management was one of the places to be.

Huizenga left the waste industry in 1984 and got into other businesses, such as Blockbuster Video, which he sold to Viacom in the early 1990s.

But Huizenga has since returned to his solid waste roots. As current chairman of the $2.26 billion Republic Services, he has supercharged the organization with his management philosophy. "We call it being in the box," he says. "We set parameters and give people the authority to take chances, make mistakes and make something happen."

This approach has attracted a number of top people to Republic. In December 1998, Jim O'Connor resigned as area president of Waste Management of Florida Inc. and joined Republic as president and chief operating officer. "The atmosphere at Republic was good," O'Connor says. "I knew a lot of people that had joined the company from Waste Management and BFI [Browning-Ferris Industries]. These people still had a high degree of enthusiasm about the business and were excited about Republic. This was the attraction for me."

According to Huizenga, O'Connor possesses the dual talents Republic needs to move forward. He went through the Waste Management roll-up during the 1980s and understands the acquisition business. He also has worked extensively in operations and knows how to integrate acquisitions, squeeze-out costs and chase internal growth.

O'Connor's assignment is to manage Republic's strategic shift from growth through consolidation to growth through operations and targeted, strategic acquisitions.

Building the Platform

Prior to O'Connor's arrival, Republic Services had focused on rapid growth through consolidation, as it has throughout most of the company's eight-year history.

Whit Hudson, Huizenga's brother-in-law and former Waste Management associate, planted the seeds of the new effort. Between 1984 and 1994, Hudson rolled-up the largest privately held waste company in Florida: Hudson Management Corp.

In 1994, Hudson asked Huizenga to join him in taking another crack at a national waste industry acquisition. Believing the time was right, Huizenga invested approximately $40 million in the effort, while attracting $80 million from other investors.

With cash in hand, Hudson found six strong Sunbelt firms and carried out what Republic executives have dubbed "the six-pack acquisition" between 1995 and 1996.

"These were good, long-standing companies in the industry," Huizenga says. "I give the credit to Whit Hudson for finding them and putting together those acquisitions."

The six-pack companies included Hudson Management and Southland Environmental Services in Florida; United Waste Service Inc. in Georgia; J.C. Duncan Co. in Texas; GDS in North Carolina; and Fennel Container Corp. in South Carolina.

These companies formed the core of Republic Services and reflected the company's strategic business plan of developing assets in the Sunbelt. Specifically, Republic targets this region because it is growing at twice the average rate of the overall U.S. population. Presumably, such rapidly growing trade areas will form a platform capable of internal growth while other acquisition opportunities dwindle.

In fact, Sunbelt acquisitions have enabled Republic to grow from $100 million in 1995 to $1.1 billion in 1997. In July 1998, Republic went public. Six months later, O'Connor arrived. And with additional acquisitions and the early performance of a newly conceived internal growth engine, Republic's revenues have nearly doubled, reaching $2.26 billion in 2001.

Today, Republic's operations include 145 collection companies in 22 states, plus 90 transfer stations, 54 solid waste landfills and 28 recycling facilities.

The company's internal growth rate in 2001 ranged from just under 5 percent in the first two quarters to about 2.5 percent in the last two quarters, when the recession slowed business.

According to O'Connor, Republic will continue to grow externally, but the company is beginning to shift its focus from consolidation to internal growth.

"When you are looking to gain market share through acquisitions, you tend to adopt the attitude that you will go back and fully integrate the companies at a later date," he says. "Now it's time to go back and focus on maximizing the benefits from the purchased assets."

Part of what O'Connor hopes to remedy is pat corporate demands with little relevance to operating divisions. "Every year, in my 25 years in the business, someone would come to me and say that I had to improve productivity by 5 percent," he chuckles. "If you improve productivity by 5 percent every year for years, you soon won't need any trucks to pick up the garbage.

"It's important for managers to articulate and address real problems," he continues. "You can't simply demand that the general manager go faster."

Four of O'Connor's initiatives aim to give divisional level managers the tools to define and address issues in four key areas — sales, productivity, maintenance and finance. In many cases, these initiatives suggest counter-intuitive solutions.

Price Hikes Just One Answer

Take price, for example. O'Connor says he's seen prices increase three times in one year. "That's one way to raise revenue, but not necessarily a good way," he says.

Price hikes can backfire as often as they succeed if policies that raise prices without considering individual accounts eventually drive some customers and revenues away, O'Connor explains.

Consequently, O'Connor's revenue initiative, called account stratification, addresses this potential miscalculation by combining customer retention considerations with price increases. "We analyze the prices at which we have sold into a market for the past six months," he says. "This tells us where we have the least amount of price resistance."

The computer crunches this data, looking for existing customers with similar container size and frequency of service, then spits out a list of customers paying less than the sell-in price. These are the only customers that receive price increases.

"With account stratification, we've seen retention rates improve, and we're having more success in maintaining price increases," O'Connor says.

Another phase of the revenue initiative looks at return-on-investment (ROI) pricing within various markets. "Understanding the return in a specific market is vital to our survival in that market," O'Connor says. "ROI pricing ensures that we achieve a proper return and helps us better understand the marketplace for future acquisitions."

For example, ROI pricing analyses fueled the decision to swap assets with Allied Waste Industries Inc., Scottsdale, Ariz., in 1999. In that transaction, Republic swapped operations in Pittsburgh and Bronx, N.Y., for Allied operations in Winston-Salem, N.C., and Indianapolis.

To date, Republic has established ROI benchmarks for its markets. In the next 18 months, O'Connor will extend the concept to analyzing ROI of individual customers.

Still another phase of the revenue initiative has installed a new customer relationship management system (CRMS) in each of Republic's offices.

Currently, company salespeople contribute to the database with prospective customers. Over the next three years, Republic will collect extensive information about prospects, including contact names, their current service-provider, services being received, prices paid and contract expiration dates.

As the account stratification and ROI studies wind-up, O'Connor expects his salespeople to be even more productive in the search for new business.

Working Smarter, Not Faster

Companies often attempt to increase productivity by hectoring slower drivers to work faster. But what if productivity lapses are beyond the driver's control, O'Connor questions. For example, a driver whose lack of productivity is the result of a customer's security procedure may be required to wait 30 to 40 minutes at every visit. Instead of urging the driver to go faster, management needs to mark the account for an ROI study. Granted, some drivers are slower and, to that end, O'Connor has set up a system to identify the real causes of low productivity.

"We use a system called grid productivity to benchmark the best drivers against other drivers in a location handling similar routes," O'Connor says. "After benchmarking, we talk to drivers that seem unproductive, asking why it takes, say, two hours longer to handle a route with roughly the same mileage, density and numbers of lifts as the benchmark route."

Like other waste service companies, Republic's approach to improving productivity includes optimizing routes with technology from RouteSmart, Columbia, Md.

Early results have been encouraging. According to O'Connor, the company optimized its routes in the Los Angeles market between May 2001 and June 2002, taking the area from 180 routes to 140.

O'Connor resists the temptation to assume that route optimization will produce proportional savings everywhere, noting that Republic is seeing various degrees of success.

A third productivity concept covers disposal optimization, which means finding the least cost alternative for disposal. "In some markets, it costs less to take waste to a competitor," O'Connor says. "Obviously you have to consider the cost of money in this, the distance to the transfer station or landfill. But we won't internalize for the sake of upping our internalization percentage."

Maintenance A Puzzle Piece

At Republic Services, the relationship between maintenance and revenue merits a separate productivity initiative for truck and equipment maintenance. "If you have a truck down for two hours, it affects productivity and revenues," O'Connor says.

Late last year, Republic implemented a two-part maintenance initiative. First, maintenance managers applied a simple checklist to all equipment, including the company's 5,000 trucks. Since then, O'Connor has begun to implement a maintenance software application across the company's 200-plus hauling, transfer, landfill and recycling locations.

The first phase of the maintenance initiative reduced maintenance costs between the fourth quarter of 2001 and the first quarter of 2002 by a half percent of the revenue recorded in the quarter. A half percent of $500 million represents an extra $2.5 million to the bottom line.

Connecting the Pieces

In a kind of happy coincidence, about 40 percent of Republic Service's acquisitions used a billing and operating system from Soft-Pak, San Diego. Republic purchased the exclusive rights to a version of the system and increased staff to support the product in-house, develop system enhancements and train employees.

While other waste management companies generally have moved toward high-end enterprise resource planning (ERP) systems, O'Connor has opted for a different approach, hoping to gain equal benefits at lower costs.

"ERP packages can cost up to $200 million," O'Connor says. "We spent $1.9 million and added 10 people to support the system."

Balancing Growth

O'Connor estimates that the acquisition pipeline for Republic contains about $100 million worth of business in numerous small companies. From now on, however, O'Connor plans to balance acquisitions with a healthy dose of internal growth possibilities.

"The cheapest way to grow our business is internally," O'Connor says. "We can develop $1 of new revenue with $1 of capital. If I acquire a company, I acquire $1 of revenue at a cost of $2 in capital. So our preferred investment will be growing the company internally.

"But we're always looking for acquisitions that meet or exceed our financial metrics, which include an ROI of 8.5 percent to 9 percent," he continues. "Acquisition prospects must also be located in high growth markets."

Republic Services has plenty of cash for acquisitions. In 2002, O'Connor says the company will generate approximately $200 million in free cash, money available to fuel internal growth as well as acquisitions.

The question Republic Services must wrestle with is how to use that cash today. "We still don't have a good economy," O'Connor says. "So internal growth will remain low for a time. Attractive acquisitions don't appear plentiful, either, although we'll probably close $25 to $30 million in acquisitions this year.

"Right now, the best place for our money is our stock," he adds. "We've been buying stock and will continue to do so for the time being."

Meanwhile, Republic's four operating initiatives have begun to add 1 percent to 2 percent to operating income. When the economy finally rights itself, O'Connor believes he will have cash plus an operating platform and the right systems in place that will allow Republic Services to better serve customers and maximize returns. If he's right, Wayne Huizenga's new waste company really will be the place to be, and Michael Cordesman will have even more resumes to sift through.

Michael Fickes is Waste Age's business editor.

REPUBLIC AT-A-GLANCE

Operations: 150 hauling companies, 54 landfills, 89 transfer stations, 26 recycling divisions.

Services and Service Area: Solid waste collection, transfer and disposal in 22 states.

No. & Types of Trucks: Approximately 5,000 trucks. Trucks are manufactured by Mack, Volvo, Peterbilt, International, and Autocar. Bodies are manufactured by Heil, McNeilus and Galbreath. Heavy iron dealers include Caterpillar, Volvo Construction and Deere. Engines and transmissions are provided by Allison and Cummins.

Containers: All types, manufactured by Wastequip, Marathon and Schaefer.

No. of Employees: 12,700

Most Interesting: Company chairman is H. Wayne Huizenga. Bill Gates is a large shareholder, approximately 10 percent.

WAYNE'S WORLD

Waste Age recently sat down with Wayne Huizenga to get his thoughts on the industry. Here's what he said.

Bill Wolpin (BW): Why did you return to waste?

Wayne Huizenga (WH): The waste industry has always been good. In the '70s and '80s, there were consolidations that eventually cooled-off. In the mid-'90s, there was an opportunity for a second consolidation wave. That's when Republic was born.

BW: How does waste compare to other businesses?

WH: It's more difficult to operate, but it's predictable. It is more recession-resistant, and margins are good. Other businesses are more cyclical.

BW: What's your reaction to your celebrity status in the industry?

WH: (Laughs) I didn't know I was.

BW: You may not be Tom Cruise, but people are aware of your accomplishments. What are you most proud of?

WH: Giving people a chance to excel and not micromanaging them. I'm most proud of the successes our people have achieved as they accomplished their goals. They feel good because they've had the authority and opportunity to make something happen.

BW: What's your biggest professional mistake?

WH: Usually when I make a mistake, it's [because of] not listening to my people.

BW: What is the character of your company?

WH: I want our people to focus on the integrity, character and honesty of the company … we have a great place to work and the esprit de corps is that the company is exciting to them.

BW: Is this your key to success?

WH: I'm not the brightest guy in the world, but I'm smart enough to know that I need talented people.