Greater Madison’s most prolific hirers have begun to regain some of the traction they lost since the dawn of “The Great Recession” two years ago, but conservative business practices remain following a period of downsizing and efficiency gains.
To get a glimpse of how some of the IB Top 100* have survived the recession, and to discuss their concerns about the near and distant future, IB spoke to five chief executives that are among the Class of 2010. We contacted representatives in the accounting, business equipment, medical device, health insurance, and indoor water park industries. Each has survived the recession in its own way, and much of the groundwork for that was established before the downturn began.
Tim Christen
Baker Tilly Virchow Krause
Prior to the recession, Baker Tilly Virchow Krause, the Madison-based accounting and advisory firm, was known simply as Virchow Krause and grew primarily by acquisition. An independent member of the U.K.-based Baker Tilly International, the firm changed names and adopted the Baker Tilly brand in June 2009 — not to withstand the recession, Christen said, but as a natural response to its clients’ globalization.
Christen said the firm would have resisted the economic downturn without adopting the Baker Tilly name and brand. While it has reduced its Wisconsin workforce by about 5%, it has been able to add people earlier in this year’s tax season and focus on the creation of value-added ideas to serve clients, including a greater emphasis on chasing sources of capital such as refundable tax credits. “We’ve been affected by the recession like everyone else,” he acknowledged. “The financial results of our firm very closely follow the financial fortunes of our clients.”
The American economy finds itself in a situation where two consecutive quarters of GDP growth, including an impressive 5.9% in the fourth quarter of 2009, has not yet translated into robust job creation. For the majority of Baker Tilly Virchow Krause clients, Christen said business continues to be difficult, even with an increased sense of optimism. He expects conservative business management to continue for a while, especially in a state like Wisconsin, which has among the highest percentage of existing jobs in the recession-sensitive manufacturing sector.
“Since financial results have been weaker than businesses would like, I believe they are understandably hesitant to add permanent new jobs until they are certain that the demand, those green shoots of demand, are sustainable,” Christen said. “I definitely think there is some level of concern about the possibility of a double-dip recession, and business owners, by and large, want to make sure that we’re on the upswing before adding permanent jobs.”
He added, “That probably results in productivity increases as businesses work very hard to do more with less.”
If a recession has a silver lining, it’s that smart businesses use the time to sharpen the efficiency of their operations and pay more attention to detail. That will pay dividends when the economy starts to churn in job-creating fashion, and Christen expects that to start in the second half of 2010. “I don’t think there is any question that the companies that do survive — which will be most of them — will come out the other end stronger and more competitive on a global basis, which is increasingly important, than when they went in,” he said.
John Flesch
Gordon Flesch Company
Perhaps the best gauge of business confidence is the commercial progress of a firm that sells copiers, printers, and the multi-function devices that provide the machinery every company needs. The Madison-based Gordon Flesch Co. does business in six states, but it has clients that are national in scope. According to Flesch, business is down this year, requiring workforce cutbacks from its peak of 700 to below 600, but it is not out in any way, shape, or form.
“We’ve been finding that in Dane County, there is a little more of a positive attitude,” he said. “We still feel there are pockets in the country where buyers are hesitant to pull the trigger, to make a purchase at this point in time. It’s better by far than it was a year ago, but it’s not where it was four years ago.”
The downturn has forced Gordon Flesch to take a hard look at its business, and make cuts that probably should have been made a long time ago, Flesch said. It forced the company to intensify the evaluation of it operation, the systems it has in place, how it approaches its service model, and perhaps most importantly, who its customers should be. At one point in the company’s 54-year history, every order was considered a good order, but now there are customer profiles that no longer fit the Gordon Flesch business model due to the inevitable change that occurs over time.
“We’re a business-to-business company,” Flesch noted. “At some point in time, you have to ask yourself which businesses you want as customers, or what customer profile you’re looking for, and then you can build your company around serving that customer or that customer profile.”
Survival also has been aided by responding to evolution in the industry. In the years leading up to the recession, Gordon Flesch’s transformation was driven by the digital age. Digitizing information, and being able to massage it and network it and print it — first in black and white, and then in color — gave way to managed print services such as document storage and retrieval, and then to consulting services for client businesses on their internal systems. “There is no question that our sales people have become much more than just sales people selling a business machine,” Flesch said.
Fred Robertson
TomoTherapy
The health care industry has fared better than most during the recession, but as of this writing, organizations were bracing for the impacts of health care insurance reform.
In the case of TomoTherapy, manufacturer of the Hi-Art radiation therapy system for hospitals and cancer centers, one proposal included a 2.5% excise tax on medical devices as part of its financing package. “I view that as negative for our industry and for us, specifically, and a short-sighted funding mechanism,” Robertson said. “It ultimately has the risk of costing jobs.”
The Hi-Art was created in the 1990s by scientists at UW-Madison and was commercialized through TomoTherapy. Despite the rocky road the company has traveled since its May 2007 initial public offering, Robertson has no regrets about going public. Fourth quarter 2009 revenue was $58.0 million, a decrease of 33% from $86.3 million in the fourth quarter of 2008. Yet by year’s end, TomoTherapy had $154.3 million of cash on hand and minimal debt. “I’m glad that we have a strong balance sheet. This would be a very difficult environment to try and raise capital in,” Robertson said.
In its IPO, TomoTherapy raised a net $181 million, but along with a deteriorating economy and stiff competition, it faced a challenge by the California-based Avalon Portfolio, which owned four percent of its stock. Avalon Portfolio, managed by Avalon Capital Group, charged that TomoTherapy’s investments in sales and service infrastructure were a sub-optimal use of shareholder capital. In light of TomoTherapy’s falling stock price, Avalon pushed for the execution of various strategic options, including the outright sale of the company.
One of Avalon’s concerns was that while the Hi-Art sold well in academic and research centers, it was at a disadvantage against competitors like Varian in commercial, single-unit carrier centers because Varian could leverage a broader product line. Avalon and TomoTherapy announced a settlement last April in which Jonathan McCloskey, a portfolio manager for Avalon Capital, joined TomoTherapy’s board of directors. TomoTherapy has since introduced additional products, including the TomoHD treatment system and the TomoMobile relocatable radiotherapy solution, both of which are designed to enhance the Hi-Art platform. The next major initiative is an advanced delivery capability that will improve system throughput. (In radiotherapy, throughput refers to the number of patients who can be treated in a standard treatment day.)
Part of TomoTherapy’s challenge is to educate investors on the length of its sales cycle. At the end of 2009, the company had a revenue backlog of $135.8 million, as the cycle time from prospect to order often can be one year, and another year can pass from the time of purchase order to the conversion to revenue. “The backlog has gone down somewhat, but the quality of the backlog is high,” Robertson stated. “We’ve continued to assure that the orders that are in backlog have a very high probability of converting to revenue in a two-year time frame.”
Robertson believes that TomoTherapy’s targeted radiation approach, where the cancerous tumor is targeted and the radiation dosage impacts less surrounding tissue, plays well in light of heightened concern over radiation dosage and safety.
Jim Riordan
WPS Insurance Corp.
Another local company that keeps close tabs on the health care debate is WPS Insurance, which evaluated the impact of various reform scenarios. “We’ve watched it very closely,” Riordan said. “We’re trying to make sure, based on each possible direction they could go, that we assess whether we could compete in that environment.”
WPS offers insurance coverage in several markets, including individual, family, group insurance, Health Savings Account plans, self-employed health insurance, and various Medicare coverages. Through WPS, more than 30,000 Wisconsin seniors have supplemental insurance that helps them fill the gaps left by Medicare, and more than 29,000 have enrolled in its Medicare Part D (prescription drug) plan.
One of the more controversial features of the health care law is a $500 billion cut in Medicare, and while many wonder if those cuts will ever really take place, they could have considerable impact. In the most recent fiscal year, the WPS Medicare division processed more than 100 million claims, with benefit payments of $8 billion for 4.6 million beneficiaries.
How would a Medicare cut affect WPS? “It depends on how they go about it,” Riordan said. In one scenario, lawmakers have talked about reducing the Medicare Advantage program by $500 million, yet that program was purposefully over-funded by Congress to provide certain benefits. “If you take it from those programs, it will cause a lot of chaos in the market for people covered by that,” Riordan explained. “In our case, we don’t have quite as many people in those programs in Wisconsin, in terms of percentage of the population, as they do in a lot of other states like California, Texas, Louisiana, and Florida. In those states, you would see mass chaos because hundreds of thousands and maybe millions are in those programs.”
In addition, the law contains a provision for the uninsured to shop for health insurance in a national exchange, forcing insurers to compete nationally for market share. While approving the Senate bill — which allows states to have their own exchanges — was the focus of recent Congressional action, subsequent fixes were reportedly designed to move toward a national exchange.
In either event, Riordan is dubious of the purported cost-saving benefits of shopping for insurance across state lines because people tend to confuse medical cost and insurance rates. “You can shop all you want to beyond the state’s border, but an insurer in Colorado still has to interface for 92% or 94% of the total cost with the Wisconsin medical system that delivers care,” he noted. “They want to make it sound like buying the insurance somewhere else is going to cost less than it does in Wisconsin.
“When you’re paying for the care in Wisconsin, you’re paying for the care in Wisconsin, whether it’s WPS or an insurer outside the state.”
The recession itself hasn’t forced any adjustments to the WPS business model, but its affects are unmistakable — especially in the group market. When jobs are lost, WPS doesn’t necessarily lose an entire group, but the group may have employed 100 people three years ago, and today it employs 72. “So we’ve lost 28% of that business that we insured,” Riordan said, “even though we did not lose the customers themselves.”
Kim Schaefer
Great Wolf Resorts
For Kim Schaefer, the brand evolution from indoor water park resort to a family entertainment venue, complete with arcades and spas and restaurants, has been a form of recession insurance. “We were a recognized brand when we opened in the Southwest and Pacific Northwest in the past couple of years,” she stated, noting that same-store sales, in terms of the number of leisure guests served, remained level in 2008.
Still, the recession has been landed a few blows. Great Wolf reported a net loss of $58.5 million, or $1.90 per share, in 2009, and last month it announced its intention to offer first mortgage notes in the amount of $225 million, due in 2017. Great Wolf said it plans to use the proceeds to pay outstanding mortgage debt on existing properties in Ohio, Virginia, and Texas.
Yet it also has benefitted from a tough-minded familial resolve. In a struggling economy, the last thing families give up is their time together; hence, the emphasis on “beyond-water” amenities. “They are doing a lot more research and they are being more thoughtful about how they spend their money,” Schaefer noted. “I think that lays in perfectly with staying closer to home for vacations, where you can go and have a good, quality time as a family and have great memories. They don’t have to commit the really big dollars to have a great time.”
The other lynchpin was going public in 2004, which raised $250 million and allowed Great Wolf to quickly grow from five to 12 resorts and shed some debt. Management changes, investor lawsuits, and tumbling share prices ensued. Former chairman Bruce Neviaser, who founded The Great Lakes Companies, Great Wolf’s predecessor, filed for bankruptcy in February, and co-founder Marc Vaccaro resigned from the board in 2006, but the stage was set for growth. “We were able to do that a lot quicker with access to the public markets,” Schaefer said.
A new Great Wolf Lodge in Pittsburgh, Pa. is planned, but the development focus is on maximizing existing properties. “I think what we’re trying to do is be creative with the amenities and the type of product we already have,” Schaefer indicated. “We need to leverage those proprietary brands, and do that without a lot of capital on our side because that’s going to be a restraint for us.”
*The IB Top 100 is a ranked list of Dane County’s largest employers. The list is only available in the April 2010 print edition of In Business magazine. To purchase a copy of the issue, please call (608)204-9655.
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