Turnaround at Waste Management: The Secrets of Their Success

Waste Management was in the dumpster.

In early 1998, the largest trash hauler in the United States announced that it had overstated its 1992 to 1996 earnings by $1.4 billion. That boo-boo forced the company to subtract $1.1 billion from its ledgers and restate its earnings back to 1991.

After announcing its error, Waste Management was bought by USA Waste for $26.6 billion in equity and debt, and moved from Oak Brook, Ill., to Houston. Long-suffering Waste Management shareholders were promised that the new, bigger corporate entity would save $800 million through economies of scale, and the new company proceeded to chase those economies by acquiring garbage operations, throughout 1999 at a rate of one a day. The total eventually reached more than 1,500. But in July 1999, Waste Management delivered the first of several earnings disappointments, falling short of revenue projections by $250 million for the second quarter. Upon issuing the earnings warning, the stock plummeted 37 percent on July 7, 1999. Waste eventually lost more than $20 billion in shareholder value, represented by the difference between its May 3, 1999, stock price of $58 (just after its acquisition by USA Waste) and its $14 low on Dec. 20, 1999.

Then the Securities and Exchange Commission (SEC) launched an inquiry into the circumstances that allowed 13 insiders to dump more than a million shares of Waste Management stock two months before the July 7 price drop. A truckload of shareholder lawsuits followed, which Waste Management eventually settled for $220 million.

In August 1999, the company’s fifth CEO in three years, John Drury, was diagnosed with brain cancer and stepped down. The board then ousted President and COO Rod Proto. Turnaround expert Robert Miller, former SEC Chairman Robert Hills and shareholder activist Ralph V. Whitworth, all on Waste’s board, took the wheel and did just what Yellow Corp. and America West Airlines — both companies that had teetered on the edge of the abyss — had done before.

They called A. Maurice “Maury” Myers.

Whitworth wanted a CEO with solid turnaround experience, an understanding of asset-rich companies and a knowledge of IT systems. That was Myers. Whitworth had watched him bring Kansas City, Kan.-based Yellow Corp. — which had lost $61 million between 1993 and 1996 — back into the black and in just three years turn the 76-year-old trucking company into a high-tech leader.

A little negotiating, an $850,000 salary and a bonus that would amount to more than $1 million by the end of 2000 brought Myers aboard in November 1999.

“I don’t show up until things can’t get any worse,” the soft-spoken 61-year-old says with a chuckle.

And he doesn’t show up without Tom Smith. Before accepting the garbage gig, Myers called Smith, then president of Yellow Technologies, the subsidiary that provides IT support across Yellow Corp.

“He said, ’I’m leaving, and I’d like you to go with me,’” Smith recalls. “And I said, ’Fine. Where are we going?’”

Myers explained the situation at Waste Management. “At that point, I decided I’d better call my wife and tell her to think about moving,” adds the white-haired, 62-year-old Smith, who had just sold his home and was on the verge of closing on another. He was thinking about golfing and traveling. Instead, he rerouted the moving trucks to Houston and arrived there two weeks after Myers in November 1999.

Team Turnaround

The Myers-Smith partnership is “probably one of the marriages between a CEO and a CIO that works best in America today,” says John Ogrizovich, Waste Management’s vice president of IT services, who has known Smith since the two worked together at United Telecom, now Sprint, a quarter of a century ago. “Maury knows where they need to go, and Tom is able to steer in that direction.”

Myers and Smith met when Myers joined the bankrupt Tempe, Ariz.-based America West Airlines as president and COO in 1994. Smith had been at the helm of the airline’s IT department since 1989. “The company was in a state of chaos, and the only department that was functioning well and whose leader was respected was IT,” Myers recalls. “I thought, Jeez, this guy must know what he’s doing.”

Myers would eventually leave America West Airlines but not before seeing the airline that lost $222 million in 1991, when it declared bankruptcy, announce a record profit of $53.8 million in 1995. Myers was so impressed with Smith that when Myers left in 1996 to work his turnaround magic at Yellow Corp., he hired Smith as president of Yellow Technologies. The trucking company, which lost a total of $38 million in 1994 and 1995, recorded profits of $52.7 million in 1997 after about a year of the Myers-Smith magic. Today, the company is seeing its best results in 76 years ($69.3 million in profits in 2000). According to current Yellow Corp. Chairman, President and CEO Bill Zollars, that’s largely due to strategy and systems put in place by Myers and Smith.

They attribute their success less to hocus-pocus than to repetition. “It’s funny. The same issues crop up everywhere we go,” Myers says. Specifically at America West Airlines, Yellow and Waste Management, the duo found companies with a lack of reliable information with which to set goals and measure progress. This led to Myers’ first rule of turnaround management: “If you can’t measure it, you can’t manage it.”

While at the three companies, Myers and Smith developed their Tao of the Turnaround, and it’s based on what they believe to be a fundamental business truth and the corollary to Myers’ first rule: “He who has the best information always wins.”

It’s easy to see why they complement each other so well. Myers is a strategist with a deeply rooted respect for technology. Smith is a technologist with a deep understanding of business strategy. Here’s how they are applying their protocols to what is the duo’s biggest turnaround challenge to date.

The Tao of the Turnaround

Get out of the office. In every turnaround situation, Myers spends his first two to three weeks in the field. “When I arrived here in Houston, Maury introduced me and then took off,” Smith says. “He did the same thing at Yellow.”

During November and December 1999, Myers traveled coast to coast doing the hard work of what Smith calls “hugging garbage- men,” often getting up at 2:30 a.m. to meet drivers before they started their day’s routes. Smith did the same — visiting operating locations, landfills and transfer facilities — upon Myers’ return.

The tours give employees the chance to meet — and be impressed by — the new guys in charge.

But the trips were more than PR missions. Going onsite with your employees is the best way to understand a new business. As Smith says, the extent of his environmental services knowledge when he got to Waste Management Airlines was limited to the fact that “I had a garbageman.”

Smith explains, “The last place you’re going to learn about how a business works is at corporate headquarters. Nothing beats working with a teamster on the dock. They’ll say, ’You’re from corporate. Let me tell you what my problems are.’”

Both Myers and Smith recall hearing a telling story from one of the company’s regional controllers. “She had a fairly simple accounting application she had to run, but she would have to start the process before she went home for the night so it would be done when she came in the next day,” Myers says. So Myers and Smith knew the company’s 400 AS/400s would have to be replaced with speedier machines. They also could see that Waste was in dire need of an ERP system to handle financial information.

Myers believes that these fact-finding missions are critical. In fact, even after nearly two years on the job, he still spends about half of his time on the road.

Stop the bleeding. In September 1999, a third quarter that will live in infamy for “old Waste” as it is called (the company would miss its original earnings projection by $160 million), the chief accounting officer was desperately trying to close the books when the network went down. “He said, ’Can you help me?’” recalls Mike Clarke, now the vice president of systems development, then the senior director of the accounting service center, who had worked on the finance side of the company for 12 years. “I said, ’I think if we can get in [to the server room], we can reboot the machine.’ But the door was locked. He says to me, ’Kick it down!’” The door held, but Clarke found a cleaning lady who let him in. Then he had to call offsite support personnel to get the passwords. Then he was able to reboot the machine.

Not a system one would want to preserve. But as much as Smith wanted to load Waste Management’s legacy systems onto one of their newly painted green and yellow trucks and send them to the nearest landfill, he knew he wouldn’t be able to do that for some time. “System stabilization is important to enable the organization to operate effectively while plans are put in place for the future systems,” explains Smith. “Without it, we would have found ourselves continuously fighting fires and not addressing the long-term system needs of the business.” The same was true at Yellow and at America West Airlines, where new systems were put entirely on hold during the company’s Chapter 11 years. Waste Management will continue running on its legacy financial system until year’s end, but it took a lot of time and money to stabilize them.

Getting rid of the legacy systems lickety-split was impractical, and probably impossible, but getting them to work better was doable. And the man for that job was Vice President of IT Ogrizovich.

Ogrizovich had heard that Myers was coming to Waste Management and knew his old colleague from United Telecom wouldn’t be far behind. He gave Smith a call and asked if he needed help. He did. So Ogrizovich left his job as vice president and general manager in the Houston office of The Harbour Group, an IT consultancy, to become Waste’s new vice president of IT services in January 2000. His immediate task was to build an IT infrastructure, including the $3 million, 12,000-square-foot corporate data center at the Houston headquarters. “Things were so bad that we didn’t even say we were going to go from chaos to stability,” Ogrizovich says. “We said we wanted to go from chaos to unreliability.”

Ogrizovich exceeded those expectations. He built the data center and bought new equipment. Now, thanks to three enterprise-class AS/400 servers (which have more processing power than the 400 old individual units combined) into which all local operating units are now networked, some of the legacy financial applications that once took eight hours now run in three minutes. The center also contains 20 Unix servers, 170 Windows NT servers and 6 terabytes of drive space. And one no longer needs to kick down the door to get in; all one needs is an access badge.

Identify your biggest problem and fix it pronto. When Myers and Smith began to make changes at Waste Management, “it was anything but by the book,” Smith says. Forget about building a business case, determining ROI or even getting a blessing from the board in order to fix an urgent problem. In a turnaround situation, certain things must be done yesterday. At Waste Management, the company was notorious for needing an army of 1,100 auditors just to close its books. From overstated earnings to revenue shortfalls, unreliable financial information was the hallmark of the old Waste. And much of the bookkeeping at the individual business units was done manually. “If one district wanted to charge another district for something, rather than using a financial application to do it, they’d have to call them up and say, ’I’m putting this on my book, you record the offset on your book,’” recalls Waste veteran Clarke. “It was horrendous.”

So in April 2000, Smith decided that rolling out the PeopleSoft financial system enterprisewide, which he had also done at Yellow in the early stages of its turnaround, was imperative.

“When we made the decision to go with new financial software, there was no cost justification. We just knew we had to have them,” Smith explains. He and Clarke decided to install a pilot program at the company’s Colorado Springs operation by December 2000.

“We were in such paralysis as a company that no one had ever wanted to make a decision. So we just decided we were going to do this and guessed at a date for the pilot,” Clarke says.

“I didn’t know if we could do it,” Smith adds. “But if you don’t have a target, you’ll never get there.”

Smith and Clarke beat their deadline and came in slightly under their $70 million budget with the PeopleSoft pilot, which includes general ledger, asset management and accounts payable functionality. By May, 200 of the company’s Midwest area districts were running the new financial systems, and Smith expects to speed up the rollout and finish all 1,500 conversions by the end of 2001. At that point, they will be able to look at expenses, such as maintenance, on a companywide basis in order to manage them (“If you can’t measure it, you can’t manage it”) and set budgets more effectively.

Not to mention close the books.

Conduct customer surveys. If there’s anything as important to Myers and Smith as having the best information (“He who has the best information always wins”), it’s satisfying customers. “Everything we do, we build around customer needs and desires. They make the business go, and it gives the company a nice focus,” Myers says. At Waste Management, there was a 12 percent churn rate among commercial customers, costing the company millions of dollars.

So Myers did what he always does — conduct customer surveys.

At Waste Management, it was a Herculean task; the company has 25 million residential customers and 2 million corporate clients. In June 2000, Myers hired McKinsey & Co. to do a targeted survey. It revealed that the number-one customer concern was not timely pickups or prices. It was billing.

“They wanted us to post their payments properly and stop calling them for payments they’d already made,” Myers says. Thus, a new billing system became a top priority.

Myers also found that poor service — missed pickups or failure to resolve a customer complaint — was what most often motivated customers to switch garbage companies. That inspired Myers and Smith to create the “service machine” initiative — an attempt to create a consistent approach to customer service throughout the company, focusing on new customer setups, on-time service and customer handling.

Figure out where the profits are. When America West Airlines was working to emerge from bankruptcy during the early 1990s, the company had to reduce fleet size and routes. In order to help executives do so smartly, Smith built software to find out which routes and times were making money and which were losing money so that airline executives could figure out which routes to keep and which to shuck. In 1998, when Smith joined Myers at Yellow, Smith quickly built a system in Cobol called Prism that could look at the trucking company’s profitability from all levels.

“We had a lot of data but not a lot of information,” explains current Yellow CEO Zollars, who was president of Yellow Freight, a Yellow Corp. subsidiary, during the Myers-Smith reign. “Tom developed a system that allows us to determine the profitability of each shipment, then the profitability of each customer, then each industry and so on.” Though the technology platform has been different at each business Myers has run, the principle has remained the same.

“So guess what Maury says when I walk in the door here?” Smith asks rhetorically. “’Tom,’ he says, ’we need to be thinking about a profitability system.’”

In July 2000, Smith and Vice President of E-Business Griff Macy created a temporary intranet-based profitability program to track operational metrics so that business units could begin to determine which customers they were losing money on, and either adjust prices or even walk away from the unprofitable business. In the next year, Smith will roll out the PeopleSoft enterprise performance module to provide even more granular profitability information.

Talk the talk. Once the IT systems were stabilized at Waste Management, Myers held one of his famous leadership conferences, a kind of corporate pep rally for company managers. In April 2000, Waste Management’s leaders gathered 1,700 strong at the Mandalay Bay Resort and Casino in Las Vegas to hear what Myers, Smith and their senior management team had done and what they were planning to do. The high point of the conference was when Myers, wearing a tear-away garbage- man’s uniform over his button-down shirt and trousers, rode into the huge conference room in a Waste Management truck. He received a standing ovation.

“I mean these are down and dirty garbage- men. And you start to hear this rumble: ’It’s Maury. It’s Maury.’ And all of a sudden they’re all on their feet, standing on their seats and clapping,” Clarke says. “I’ve been here 16 years, and I’ve never seen that before.”

Managers attended workshops on the company’s key initiatives and tried out new IT tools at 25 booths — everything from the PeopleSoft ERP system to route tracking and maintenance software. At Waste Management, employees had always had management, but it had been a long time since they’d seen leadership.

The purpose of the conferences goes beyond giving employees a new, more positive perspective on the company. Myers finds that they help to ease employees into the new systems and processes he and Smith introduce. “Getting people to change their view of how to do something is often more difficult than implementing the mechanical change,” Myers says. “Communication is the key to getting people’s confidence.”

Myers’ other communication efforts include starting a weekly Waste Management newsletter, WM Monday (in English and Spanish), that updates all employees on changes in the company, including contracts won and lost and their value, quarterly town meetings to go over financial results, and a new intranet that offers copies of all corporate communications along with webcasts of analyst conferences and other meetings. Those efforts go a long way toward keeping all 57,000 employees apprised of the company’s progress. Smith also asks a large number of field employees to help him meet vendors and select new software. And every Friday morning at 10, Myers holds a senior leadership team meeting with area senior vice presidents by phone. Myers has held these management meetings at all three companies he’s worked at with Smith — same agenda: a weekly update on all turnaround initiatives.

“It’s almost a religious thing. You just do it,” Smith says. “It forces everyone to talk to each other.”

Base IT Investments on ROI. Smith’s profitability system at America West Airlines and the new financial systems at Waste Management were no-brainers for the turnaround team. But once you start giving systems-starved employees new applications, their appetite can become insatiable. So when it’s time to move beyond the basic must-haves, Myers and Smith base their decisions on yield. All IT investments must show a 15 percent annual return.

At Waste Management, Smith has limited his IT budget to under 1.5 percent of the operating budget — $113 million in 2000 and $165 million in 2001 — and he expects that investment to plateau right there. Among the IT initiatives that have made the cut is e-procurement.

Waste Management spends $4 billion a year on everything from tape dispensers to trucks, and “everybody bought from whomever they wanted to. If their uncle was running a tire store, they probably bought tires from him,” Smith says. Now a new vice president of procurement is limiting Waste’s vendors, reducing the number of truck body types from 60 to 14 and working with Vice President of E-Business Macy and Clarke to take purchasing online. By July 2001, Waste Management was buying all its office supplies online and had sent out an RFP for a supply chain system that would enable the company to make all its purchases via the Internet. Myers and Smith expect $75 million in savings by year-end and say that they’ll eventually save $400 million a year. Some other IT initiatives that have received the green light include fleet routing and maintenance software, a billing system, enterprise application architecture, a data warehouse and a new HR system.

Among the plans that haven’t gotten the go-ahead — installing global positioning systems in Waste’s 33,000 trucks at $1,000 to $2,000 a pop. “Knowing where our trucks are, how fast they’re going and whether they’re in a McDonald’s lot — there’s some advantage there, but we haven’t come to the conclusion that we should make that investment,” Myers says. “We look at every single technology investment on an ROI basis.”

One Man’s Trash

A year and a half into the Myers-Smith turnaround, board members, executives, employees, Wall Street analysts, previously peeved shareholders and the turnaround team itself are optimistic. Waste Management’s stock, which was teetering around $16 when Myers and Smith came aboard in late 1999, had jumped to $30 by the end of June 2001. And the company, which lost a total of $2.1 billion from 1997 to 1999, posted profits of $124 million in the first quarter of 2001.

“Customer satisfaction is up, the stock price has doubled, and the company has created over $6 billion in shareholder value in the last year,” says Pastora San Juan Caf-ferty, a professor at the University of Chi-cago and a Waste board member since 1994. Bottom-line benefits of the new IT systems should become evident in the second half of 2001, according to analysts. “But long-term productivity potential in terms of profit enhancement and cost-cutting, which is tied to these new systems, will take some time to see,” says Tom Ford, senior analyst at Lehman Brothers in New York City.

“The management team is doing a great job of turning this company around,” says Jaimi Goodfriend, an analyst at First Analysis Securities in Chicago. “They’re taking their time in doing so, but we’d prefer that time be taken for a company this size.”

As for the future of the turnaround team, it appears that Waste Management will be the last stop on the magical turnaround tour.

“I’m an old guy. I’ll be here as long as I’m needed,” says Myers.

“I’m not young anymore,” echoes Smith, who plans to retire in three years to dust off the plan he put on hold when Myers called about Waste: play a little golf, do some traveling. “What we’ve told people here is we’re trying to build a foundation rather than build the ultimate system.” Smith says. But that foundation has already made a difference.

“A year ago I went to this bankers meeting,” says Smith, “and they were all anxious because they knew that the systems were broken and wanted to know what we were doing to fix them. I told them what we were going to do. But it was like sitting on the edge of the bed telling them how great it’s going to be. There’s not much credibility there. This year I went to the same meeting and said here’s what we’ve done, and we blew them away.”