$12 Billion Start-Up, A

Just more than one year ago, Waste Management Inc. (WM) was clearly at one of the lowest points in its history. The company was suffering from the aftershock of a sizable merger that left a wake of problems. The problems included inadequate information systems. An ailing balance sheet. Gaping holes in the executive team. A tangle of legal issues. Plummeting stock prices. Sinking employee morale. And, not surprisingly, declining levels of customer service.

Don't take our word for this. The paragraph above is plucked from the introduction to Waste Management's 2000 annual report.

This year's annual report, however, may adopt a different tone. Two years ago, a new chairman, CEO and president, A. Maurice Myers, charged his new executive team to help rebuild the company's infrastructure with the pursuit of four initiatives.

Those initiatives redefine the company's approaches to information technology, market strategy, customer service and procurement. According to Myers, the successful implementation of them will create still another new Waste Management, one capable of internal growth.

“This will be a transition from a roll-up or consolidation business model to a model based on operational excellence,” he says. “These initiatives are our way of finally integrating all of the 1,400 acquisitions we've made over the years into a single operation.”

Leaving the Past Behind

In its 30-year history, Waste Management has consistently fought its way to a position of great promise, only to flounder and eventually disappoint. What will happen this time?

Myers aims to leave that history behind. Today, just like any start-up company, the future of Waste Management is a blank slate. Unlike any other start-up, however, Waste Management has $12 billion in annual revenues to use as chalk.

The scope of the job ahead is enormous. The company must build an infrastructure that will make 1,400 operating units and 57,000 employees work effectively as a single company serving 27 million municipal, residential, commercial and industrial customers.

Can Myers' four initiatives accomplish this goal?

“Ninety percent of strategy is implementation,” Myers says. “If people don't buy into these ideas and implement them, they won't work. So the key to accomplishing our goals is really one thing: culture change.”

A Cultural Revolution

In the first quarter of 2000, Waste Management suffered a financial embarrassment that illustrated its weaknesses in financial information processing. To close the books on that quarter, the company had to hire nearly 1,100 accountants to sort through records from the field's 1,400 offices. Those records resided on a stunning 400 different computer systems.

“This was an eye-opener for us,” says Tom Smith, senior vice president and chief information officer, charged by Myers to build a new, integrated information management system for the company. “We didn't have the most basic financial information necessary to run the business, let alone the information we needed to run a business that would feature a model of operational excellence.”

Smith took emergency action. First, he figured out how to close the books each month. Second, he implemented a company-wide billing system — billing had fallen dreadfully behind. Third, he began looking for a financial system capable of handling Waste Management's sprawling operations. “In other words, we had to bail water from the boat and at the same time, think about buying a new boat,” Smith says.

Smith also had to worry about the cultural preferences across 1,400 Waste Management offices.

“We put together a large team drawn from field offices across the country,” Myers says. “This team spent weeks in Houston evaluating the IT [information technology] alternatives we had.”

The team selected PeopleSoft as the primary IT supplier and laid plans to implement the general ledger, accounts payable, fixed asset, payroll, human resource, and other systems.

Between June and Dec. 2000, Smith piloted the system in 30 operating districts located in the country's mountain region, in Colorado and surrounding states. Operations in this region appeared characteristic of the company as a whole in that they included hauling, transfer, landfilling and recycling.

The pilot ended successfully in Dec. 2000. By the end of 2001, all of Waste Management's operating units in the United States, Canada and Puerto Rico had converted to the new system.

Meanwhile, the emergency billing system has fetched material benefits on the revenue side. “A year ago, our day sales outstanding (the average time it takes to collect a bill) were in the high 60-day range,” Smith says. “Today, that figure has fallen into the mid-40s.”

In any company, accounts receivable represent a sum that could generate income if it weren't outstanding. Smith calculates that reducing Waste Management's overall outstanding day sales by one day saves the company $30 million. Smith's emergency billing solution reduced outstanding day sales by more than 20 days, when multiplied suggests a savings in the neighborhood of $600 million.

Still, this billing system is only a stopgap measure designed to handle the emergency encountered in 2000. Currently, Smith is planning a pilot for a new PeopleSoft billing system that will get underway in mid-2002. The new system will be integrated into Waste Management's other PeopleSoft products, including a single customer database, now under development. In combination, the new billing system and database will enable customer service representatives to discuss bills with customers and provide access to complete information about individual accounts.

Also in the works is a new fleet management system for the company's 30,000 vehicles, a new route optimization and scheduling system, a procurement system, marketing systems, and customer service systems. The team's Information Technology Initiative helps to support the work of the company's other three initiatives in marketing, service, and procurement.

“Our job is to enable those capabilities,” Smith says.

Efforts are beginning to bear fruit, he adds. For example, a controller in one of Waste Management's operating units used to run an accounting procedure that took her computer 8 hours to complete. It took so long that she would start the process before going home in the evening and pickup the results the following morning. Today, the controller connects her office computer to a computer in Houston that does the same job in three minutes, giving her access to the information she needs a full day earlier than before.

Deep Dives

In the waste management business, most companies fish for business, tossing lines into the murky waters of a particular market baited with good prices. Myers' market strategy initiative has replaced fishing with “deep dives.” Using a 10- to 15-person team drawn from Waste Management haulers, landfills, transfer stations and recyclers within a particular market, the company makes a deep dive by studying its local market in extraordinary detail.

The goal is to remove guesswork from business practices by examining every aspect of the business: pricing, competitor's strategies, flow optimization, acquisition and divestiture opportunities, customer profitability, and more.

“Our deep dive procedures take our teams to every landfill, recycling plant and transfer station in a market area to count trucks,” says Chuck Wilcox, senior vice president of market planning and development, and the honcho for WM's market strategy initiative. “This gives us a snapshot of market shares of various companies, the sizes of routes, the density of competitors, hours of operation, and a lot more.”

Following 8- to 10-weeks of market study, the team begins to look for operational opportunities, called “looking at the market from 30,000 feet,” according to Wilcox.

From such a vantage point, deep dive teams have discovered some counter-intuitive principles. In one district, for example, a hauling manager had been maximizing his unit's earnings by splitting his use of landfills. In the northern area of his district, he sent his trucks to a Waste Management landfill. But trucks in the south ended up closer to a competitor's landfill. An evaluation of transportation costs showed it to be less expensive to use the competitor's landfill. However, the deep dive data revealed that while sending the southern trucks north reduced the unit's margins by 3 percent, it would raise overall profit margins in the market-area by 5 percent.

“This kind of discovery is leading us to consider alternative incentive plans,” Wilcox says. “Incentives based on maximizing earnings in markets instead of districts can fix this kind of problem.”

The deep dives also have revealed a host of such profit opportunities, Wilcox says. An example involves the relationship between revenues and costs. “They don't necessarily relate,” Wilcox says. “The cost structure in a district with pricing flexibility, or the ability to raise prices, often is higher than the cost structure in districts where managers have to fight to raise prices. The manager with pricing pressure has been driven to lower the costs of operations, while the manager with pricing flexibility hasn't.”

In other words, cost is cost and revenue is revenue. Costs should go low and revenues should go high, without making allowances on the cost side for good revenue performance and vice versa.

To date, Waste Management has developed deep dives, formally referred to as market business strategies, in 73 of the metropolitan statistical areas (MSAs) served by the company. These areas represent 63 percent of the company's revenues. The company has been completing deep dive research in about 20 MSAs per quarter for about a year.

“By the end of 2002, we will have completed deep dive reviews in 157 markets totaling 88 percent of our total revenues,” Wilcox says. Each review produces an action plan built around operational and earnings goals drawn from the detailed research.

“We track the dollar impact of this effort on a monthly and quarterly basis,” Wilcox says. “Once a month, we update total earnings based on deep dive research done four quarters ago compared to one quarter ago.”

Wilcox declines to discuss any of these numbers, but says they are compelling.

A Service Machine

Paul Marshall fills a new position at Waste Management — vice president of customer service. As the first to hold this new position, Marshall puts his goal in simple terms: Find out what is most important to customers and design processes, procedures and measurements to ensure that customers get what they want — the first time they ask.

“Our work centers around five service areas, called the Service Machine, that satisfy — or dissatisfy — customers,” Marshall says, describing each of these areas as follows:

  • Customer setup follows a customer's initial experience with the company from the first call through the first billing cycle. This involves getting everything exactly right during the customer's first encounters with Waste Management.

  • Route-based pickups look at the way the company services each customer on commercial routes. Did the pickup occur on schedule?

  • The commercial roll-off service area strives to create flexibility in making pickups and decreasing response times. If a customer calls today, how can a roll-off be delivered within a few hours?

  • Recovery focuses on fixing missteps before they become problems. If a driver didn't make a pickup, why? How can it be made now? The goal is to call the customer and arrange for pickup before the customer calls to complain.

  • Customer handling is a service that assigns people to problems called in by customers. The first goal is to solve a problem during the first call. Service representatives are trained not to pass customers on. If the problem can't be solved immediately, representatives must take some action and call the customer back within a certain time.

  • These new customer service priorities affect virtually everything WM does in connection with picking up a customer's trash from the beginning of the business relationship. “There is one best way to do things in each of our offices,” Marshall says. “We're going to find it and practice it to give our customers more consistent and repeatable service.”

    For the past 18 months, Marshall has been working to instill the cultural values that will make this new approach to customer service work. There is proof that the work is beginning to pay-off.

    “At several of our sites, the volume of calls we receive from customers with problems or complaints has declined by more than 50 percent,” Marshall says. “In some areas, we've reduced complaint calls by 70 percent.”

    Price Tag Reductions

    Waste Management purchases approximately $4 billion in goods and services every year. This includes everything such as trucks, consultants and notepads. Cutting that $4 billion price tag will send profits directly to the bottom line, and Myers wants to cut procurement costs by 5 percent to 10 percent. Not only that, he wants to reduce procurement costs in a way that improves customer service.

    “Look at Southwest Airlines,” Myers says. “The company buys standard equipment, all Boeing 737s. Aside from the efficiency and availability of the craft and its parts, the company saved substantially on training, parts inventory and even timing for turnaround at the gate. So procurement actually can have a customer service impact.”

    To that end, Brad Holcomb, vice president of procurement, received his assignment for WM. “When I arrived about a year ago, none of the $4 billion that we were spending was leveraged,” he says. “We were spending that money with tens of thousands of suppliers.”

    That's changed.

    In many purchasing areas, Holcomb has reduced the numbers of suppliers from many to a handful. He has slashed truck chassis and truck body suppliers from 21 to six. He also has reduced truck configurations from 65 to 15. Six companies used to sell tires to Waste Management, now there are two. And the number of truck parts suppliers has been cut from more than 200 to six.

    Even for office supplies — instead of using virtually every supply company in the country — Holcomb has named Staples the company's sole supplier.

    In each case, Holcomb has leveraged the Waste Management budget to take advantage of volume purchasing power. In other words, suppliers must sharpen their pencils and offer better prices.

    The savings can be substantial. In some areas of procurement (Holcomb won't say which), suppliers have cut their prices by 35 percent to 40 percent. “In other areas, we're lucky to get 2 percent to 3 percent,” he says. “On balance, though, we're achieving our 5 percent to 10 percent goal.”

    Revenues for Growth

    With the initiatives in place, Waste Management may be headed down a sunnier path. But “There is one obvious area missing from the initiatives [Waste Management] has been implementing: revenue generation,” Myers says.

    “All our work so far has involved building infrastructure,” he explains. “There has been no point to spending money to improve revenue generation when our services are really no better than average or when our organizational structure is not operating at top efficiency.” After two years of rebuilding the company's infrastructure, however, Myers believes the company is ready to move ahead.

    In 2002, Myers plans to add a fifth initiative in the area of revenue generation. Currently, Waste Management's senior executives are looking at the company's marketing programs and sales organizations for angles that will kick-start revenue generation. The company is going about this in the same way as it handled the first four initiatives — by asking field people what they need.

    Myers is confident that this will help the prospects of his huge start-up. “This business will soon be generating $1 billion per year in free cash flow,” he says. “Free cash flow is what's left after you have paid all your bills, bought all your capital equipment and paid your taxes. Our goal is to put $1 billion in free cash flow to work for our shareholders, and we're close to being in that position.”

    What kinds of work might $1 billion do?

    Increase dividends, pay down debt, buy back stock, invest in the business, and make acquisitions, Myers says. “Our management team will be looking at all of these choices,” he explains. “Our focus is to spend that money in a way that will enhance shareholder value and the price of our stock.”

    Finally, after two years of acting like a $12 billion start-up, Waste Management is starting to behave like a competitive behemoth.

    Michael Fickes is Waste Age's business editor.

    Waste Management At-A-Glance

    No. & Types of Trucks: 30,000 collection vehicles with Mack Truck or Freightliner chassis and Wittke, McNeilus, G&H Manufacturing and Dempster bodies.

    Types of Containers: Steel Refuse Containers — front-end load and rear-end load, 1-yard through 10-yard by Wastequip Corp.; Steel Roll-Off Containers — 15-, 20-, 30- and 40-yard containers by McClain Industries Inc.; Compactors — Marathon Equipment Co.; and Plastic Roll-Out Carts — 35-, 64- and 96-gallon carts by Cascade Engineering.

    No. & Types of Customers: 25 million residential, 2 million commercial

    No. of Employees: 57,000

    Services & Service Area: Collection, disposal and recycling services throughout North America, including Canada, and Puerto Rico. 16 WTE facilities.

    Most Interesting: Waste Management is committed to innovative programs. The company operates 70 landfill gas-to-energy projects in North America. The liquified natural gas program includes 120 LNG-fueled trucks. And the company manages bioreactor landfills, electronic scrap recovery, glass and plastics recycling, pulp and paper trading and bioremediation.