Bringing A Flatliner Back To Life
After 10 years of no growth in its annual revenues, Delaware Micrographics, Inc. adds computer-formatted data and document output to its offerings, and grows its revenues 50% in one year.
Business Solutions, February 1998
To Bill Swezey, Sr. though, who had cofounded DMI along with 10 other investors in 1977, the stagnant revenues were no laughing matter. "Not only were our revenues stagnant, but we were about to lose a $10,000-a-month customer," says Swezey, Sr. "We were on the verge of laying off employees and shutting down some of our equipment. At the rate we were going, I figured we'd last in business another two years, tops. I was afraid 18 years of effort were about to go down the tubes."
A Good, But Outdated Technology
DMI was founded to offer businesses a way to print data reports, such as greenbar financial reports, on a medium other than paper. "In 1977, microfiche was the best medium. (Microfiche is a 4- x 6-inch sheet of film that holds several hundred miniaturized document pages.) By being able to print reports straight to microfiche, businesses are spared the expense of printing out and storing reams of paper reports," says Swezey, Sr. DMI eventually expanded to offer microfilm services. Microfilm (a continuous film strip that holds several thousand miniaturized document pages) is used for the filming printed paper documents.
"In the early 90s personal computers (PCs) were becoming more popular. So, I began looking at processes to convert data and paper to electronic formats, that could be stored and retrieved, and viewed with PCs," says Swezey, Sr. "In 1993, I began proposing to my partners that we add this technology to our business."
Swezey, however, met with opposition. "I had worked in data processing most of my life, both at an area bank and at a water company. So, I was comfortable working with computers. My partners, though, came from nontechnical backgrounds like accounting and management. Every time I proposed that we purchase equipment, such as document scanners and compact disk recorders, capable of converting data and documents to electronic formats, I was outvoted."
Push Comes To Shove
Things finally came to a head in 1995 when the aforementioned $10,000-a-month customer announced it was switching to one of DMI's competitors. "If we could have offered that customer more updated services, we would have had a chance at keeping the account," says Swezey, Sr. "At that point I decided I didn't want to be part of a company that was going to go out of business just because it wouldn't adopt new technology. It didn't make sense to me. I couldn't just sit there and watch employees that had been with the company for more than 10 years lose their jobs. I hated to see their families suffer."
Swezey decided he would either sell his stock in DMI, or attempt to buy the company and run it the way he felt it had to be run to be successful. In November of 1995, Swezey, his wife Carol, and son Bill, Jr., purchased DMI for $425,000 dollars. After another year of $1 million revenues in 1996, DMI showed its first growth in over a decade with revenues of approximately $1.5 million in 1997. Now, additional technological upgrades and services have Swezey, Jr. predicting $2.5 million in revenues for 1998. "One of our biggest concerns, currently, is managing the growth we are anticipating," says Swezey, Sr. "We are in the midst of expanding our office from 2,500 square feet to 5,000 square feet, but we haven't expanded the size of our staff yet. We have automated some processes that allow us to work more efficiently, but we are also asking our employees to do more work."
"None of them have quit, though. I think it's because they feel they are part of something very different than they were before. We've promised that they will share in any success the company has and they are seeing a lot of good things happening. They are hearing the phone ringing off the hook, they are seeing new customers being brought in and shown around. All that is very exciting, especially compared to what they were used to before, when we hadn't grown for 10 years."
Securing An SBA Loan
DMI's employees came very close to missing out on all this excitement, though, when Swezey, Sr.'s partners balked at his family's original offer for DMI. Before making their bid, the Swezeys had secured a federally funded Small Business Association (SBA) loan for $385,000, at a floating rate of 2% over the prime rate. "We went to our local bank and they steered us into the SBA program," says Swezey, Jr. "Applying for the loan required that we send our personal histories, our business plan, and our financial reports for the past two years, to the SBA."
Swezey, Sr. says the loan the Swezeys applied for was for $425,000, based on his assessment of DMI's assets. "Looking at our equipment, most of which hadn't been updated in over 10 years, and our shrinking customer base, I thought that was a generous assessment," says Swezey, Sr.
Swezey, Sr., said it took about a week and a half for the loan to be approved. "I was kind of hoping that it wouldn't be approved," he admits. "While I was waiting for it to come through, I was reminded of the old adage, 'Be careful what you wish for because it might come true.'"
Beating The Clock
Come true it did. The Swezeys were awarded a loan for the assessed value of the business, minus 10% for the stock which Swezey, Sr., already owned. Armed with the loan approval, Swezey issued his partners an ultimatum. "I offered them $425,000, or, I told them they could pay me for my stock and I would get out," says Swezey. "One of the shareholders countered that he felt the business was worth about $800,000. I told him, fine then pay me $80,000 for my stock. He said it didn't work that way."
An agreement was reached to put DMI on the market, but no bids were made. "These events covered several months, and by the end of September our window for accepting the SBA loan was beginning to close. The SBA's year ends on Oct. 31, and if we did not accept the loan by that date we would have to reapply for it, to be covered by the SBA's 1996 budget. And there was no guarantee it would be approved again," says Swezey, Sr.
Swezey finally threatened to take his partners to court. "My position was that my partners were needlessly running DMI into the ground and, therefore, hurting my investment," he explains.
Before filing suit, however, Swezey consulted one more time with a couple of DMI's major shareholders, who between them held over 50% of DMI's stock. "I told them that I wanted out one way or the other. I couldn't sit by and watch DMI die on the vine, when there was a chance for it to be fruitful."
Swezey's plea worked. In a vote taken at a meeting to which Swezey, Sr. was not invited, the major stockholders were able to shut out the opposition to the sale. "The vote was held in the last week of October. It took us until Nov. 3 to finish the paperwork to close the deal. Luckily, the representative at our bank had a good relationship with the SBA manager for our region. The SBA representative was able to extend our deadline," says Swezey, Sr.
Celebration Tempered By Learning Process
Once the deal was made, there was little time to celebrate for the Swezey's. "None of us had any experience with converting documents to electronic format," says Swezey, Sr. "I was aware of the technology through reading trade magazines. I also had experience in data processing, but I had never worked with document scanners and CDs."
Bill Swezey, Jr. had worked with CDs prior to becoming a partner with DMI, but as a software developer for a company that sold CD-based programs. "I had burned a few CDs for demos, but I had never done anything like taking a whole file cabinet full of paper and storing it on a CD. I had to learn that type of application from the ground up. "
Deciding On New Vendors Is Time-Consuming Process
"The hardest part of adding new technology to our business, at first, was just deciding which products to use," says Swezey, Jr. "In addition to converting our customers' data and paper to electronic formats, part of our business plan was to act as a value added reseller (VAR). As a VAR, we planned to sell systems for electronic conversion and retrieval of documents and data. Components of these systems include document scanners, CD-recorders, CD-jukeboxes to store libraries of CDs, and software to run the systems."
"Scanning and CD-writing in-house would give us the opportunity to become familiar with the systems we were selling. Also, if you are burning CDs for customers, it's a natural to sell them retrieval systems."
Swezey, Jr. says DMI was looking for vendors that offered robust components that would stand up to the demands of service bureau applications. "But, DMI is a small company ( 24 employees)," he adds. "We can't afford to sell products to our customers that are difficult to install and require a lot of support."
Swezey, Jr. began contacting vendors and asking them a laundry list of questions about their products. "One of the questions I asked them was, 'Do you offer Internet links to your resellers' sites?' This is important because we can't afford to do a lot of advertising. With a link to our site, it is simple for a user from our area looking at one of our vendor's products on the Web, to get in touch with us."
"Other questions I'd ask had to do with support, training, availability of demos, etc. If vendors gave me the wrong answers, I'd cross them off the list. By the time I finished questioning well over three dozen vendors, I still ended up trying out about two dozen different products. Once I chose a product, I also had to be trained on it. To resell products from Kofax Image Products (Irvine, CA), for instance, I had to fly to California for a week of training."
Taking A Technical Approach To Sales
Most of Swezey, Jr.'s vendor queries were done over the Internet. "Using the Internet, I could leave and retrieve messages at 2 a.m.," he says. "Most of my day was busy helping to run DMI's operations, including making sales calls."
When the Swezeys purchased DMI, they did not retain the services of DMI's previous salesperson. "We hadn't had any growth for 10 years," explains Swezey, Sr.
Swezey, Jr., who had no previous sales experience, inherited the job. "I have a technical background, not a sales background. My college degree is in electrical engineering and I've worked as a software developer. But I've been able to use these skills to my advantage. When an end user has technical questions about our products, I can answer them. I've demoed most of them. A lot of my customers will tell me, 'I had a salesman in here last week trying to sell me the same products. He couldn't answer the questions I'm asking you.'"
Swezey says most of DMI's sales leads come from vendors, from Internet queries, or from queries by existing customers. "I'm usually not selling our prospects a need for a solution. They have made the first step, and are looking for a storage and retrieval solution for their data and documents. Since we offer both microfiche and electronic format systems, it doesn't matter to me what kind of solution they want. I usually explain the products and then work with the end users to figure out what type of system best suits their needs."
Dividing Work Among The Family
With Swezey, Jr. doing most of the sales calls and new product selection, Swezey, Sr. concentrates on management of the daily operations at DMI. "I provide computer support at the service bureau," says Swezey, Sr., who had never worked full-time at DMI prior to acquiring it. "I also manage the accounts payable department, and am involved with all the dollars and cents decisions."
Bill Sr.'s wife, Carol Swezey, is the president and CEO of DMI. She recently received her master's degree and works part-time in the medical industry. She has input during family meetings on the weekends where the direction of the business is decided. Carol is also overseeing DMI's expansion, and has gained a reputation as DMI's "social director," according to Swezey, Sr. "She wants DMI to be a family company and the employees to feel like they are part of that family," he says. "She's organized activities like group trips to Atlantic City and Christmas parties for everyone."
Turning An Unexpected Expense Into A Competitive Advantage
DMI's first return on its investment in new technology came in April of 1996. PPG Industries, Inc., which was already using DMI's micrographics services, added CD services from DMI. PPG, headquartered in Pittsburgh, PA, is a global producer of coatings, fiber glass, glass and chemicals with annual sales exceeding $7 billion. "PPG was recording most of its reports straight to microfiche, without printing them out. One set of reports, however, in addition to be microfiched, was also being printed on paper for distribution. After it was printed, it took 16 hours to prepare this report for distribution because different parts of it went to different personnel."
Swezey, Jr. proposed a system for distributing the reports on CD. "Using CDs, the whole report can be distributed on disk. Software can be programmed to automatically take an end user to the part of the report that end user requires," says Swezey, Jr. "The preparation time this system saved PPG made it an easy sell."
At about the same time, though, DMI was hit with an unexpected expense. The company that serviced DMI's micrographics equipment was filing for bankruptcy and increased its service rates by 15%.
"Our capital was already stretched thin," says Swezey, Sr. "We began looking at taking out another loan. We also started looking at switching service providers. We discovered the cost would be the same to switch service providers and install a major upgrade to our computer system, as it would be to remain with our old service provider."
Based on these numbers, the Swezeys applied and received another SBA loan (at the same rate) for $80,000. "We bought 14 new PCs and networked them. Some of them we hooked to the front ends of our microfiche machines. This sped up our micrographics processing, and also enabled us to output data to both CDs and microfiche at the same time."
Faster micrographics processing is one reason DMI has been able to sustain 50% growth without hiring new employees. "Most of our employees had probably never heard of Windows before our upgrade. Now, a lot of them are working on a Windows system all day long. It's been a lot for them to absorb," says Swezey, Sr. "We've encouraged them to stick with it by increasing the benefits the company offers. Since buying the company, we've added a retirement plan, long and short term disability benefits and company-paid life insurance. We also have available video tapes for employees who want to learn additional computer skills, and are adding a customer demo/employee training room as part of our expansion."
Sources Of Revenue Growth
Swezey, Jr. says that about 80% of DMI's growth has come from new customers. The other 20% is from micrographics customers who have upgraded their services to include conversion of data and documents to electronic media.
- New customers: Swezey, Jr. has used an Internet marketing campaign to attract new customers. "Five percent of DMI's revenues in 96 were generated through Internet queries," he says. "This includes both micrographics and electronic media services."
Swezey, Jr. spends about 10 hours per week updating DMI's Internet site (www.delmicro.com). "I try to answer any technical questions users might have about the services and products that DMI offers," says Swezey, Jr. "I also make sure we are listed on all the major search engines using key words like microfilm, microfiche, imaging, CD-ROM, laser print and OCR."
"Thanks to the Internet, we've gained customers in 12 states outside of the Mid-Atlantic region, which is what we consider our local market. Those states include FL, TX, CA, MA, and WA. Eventually I see us with applications in all 50 states," says Swezey, Jr.
DMI's new products and services have also allowed it to win contracts that it formerly would not have even been able to bid on. An example is a recent installation at the State of Delaware's Natural Resources Site Investigation and Restoration Branch. The installation will make electronic copies of paper documents on hazardous waste sites available through personal computers.
- Customers who have upgraded their services: In addition to PPG, Swezey, Jr. cites the example of a former client company who originally came back to DMI for micrographics services. That client company is now negotiating with DMI for a larger contract, involving electronic media services. "This client left us a few years ago, when it was bought by another
company that had its own micrographics division," relates Swezey, Jr. "Recently, a representative from this former client company called us and wanted to contract DMI for six months worth of micrographics work. Its parent company had converted its micrographics equipment to scanning-to-optical-computer-disk equipment. Our former customer, however, was not ready to receive information in optical disk format."
"As we were talking, I explained some of our new services to the representative, including our ability to store our customers' data on an Internet-accessible server. He was surprised by the direction our business had taken. He then explained to me that his company did a 2-million page report every month which had to be distributed to 100 regional offices. He thought our Internet services might be the perfect way to distribute it."
DMI's renewed growth has not come without a price. "We've put in hundreds of hours over the average 40-hour workweek, putting our new technology in place. We did a lot of things ourselves that we probably should have hired other people to do. As a small, family-run business though, we were trying to keep costs down everywhere we could," says Swezey, Sr. "The transition has been twice as much work as I envisioned."
The revenues, however, have been five times as much. "I was hoping for 10 percent growth in 1997. We were so successful, that 10% growth is what I am going to be hoping for again in 1998," jokes Swezey, Sr.