How to create a big national business
Tuesday, December 11, 2007/
Computer reseller Leading Solutions has gone Australia-wide, and should end up seeing revenue jump from $50 million to $300 million over three years. Chairman Domenic Martino tells AMANDA GOME how he took a state-based enterprise to national big-business
By Amanda Gome
In 2003, Domenic Martino resigned as the high profile head of Deloitte Touche Tohmatsu after becoming embroiled in the collapse of junior telco, NewTel.
But instead of heading off to another corporate job, he became an investor, sinking his money into several companies. Then in 2005, aged 50, he turned entrepreneur, rolling up his sleeves to takeover computer reseller ComputerCorp from founder Hugh Smith.
He has overseen the company as it went from $50 million revenue to almost $150 million in two years. This week a merger with Melbourne-based Leading Solutions was finalised. The combined entity will have 430 staff and is expected to generate revenue of $300 million in its first year. Domenic will continue as chairman.
He tells SmartCompany how he took the small state-based business and turned it into a national organisation. Domenic is happy to answer your questions. Email [email protected]
Amanda Gome: In the late 1980s while you were at Deloitte, there was a huge number of companies springing up to service the computer industry. Why not stay as an adviser?
Domenic Martino: I wanted to be part of the action. I had always been in corporate finance and really wanted to get out and be one of the principals – not an adviser any more.
Was ComputerCorp a client of Deloitte?
Yes. I saw it and liked it. I was looking for a company that had good management and could find opportunities rather than the other way around. When I left Deloitte in 2003, I did a few investments and started working on a succession plan for ComputerCorp.
But you could also see the entrepreneurial opportunity?
Many of the computer companies that started in the late 1980s were run by local entrepreneurs who were state-based, still in control and undercapitalised. They had had a good run, so they were still in control. But the problem was that their clients were changing.
Instead of buying stationary and computers from different states, companies wanted the cost benefits and efficiencies from buying from one supplier.
Clients were looking for a seamless service across Australia. But there were few large national companies in the reseller market.
Consolidation had happened much earlier in the US so it was surprising it had not happened in Australia and the industry was so fragmented.
Was it hard to take over a medium sized business from the founder?
No. Hugh Smith started the business in his early 40s. He was the original entrepreneur who started the business from scratch. But he was in his 60s and had done a great job, and had come to the time of his life when he wanted to do something else, but he wanted the business to continue. We can still ring him today and he will come in and give us advice.
What needed to change?
Hugh had done a great job taking the business from start-up to $50 million revenue and expanding it.
When I joined about half the revenue came from Perth, a quarter from Sydney and the rest from the other states. Huge could see that it needed to go national. But that’s difficult. The state-based operations were replicating what we had in Perth.
They were not talking to each other and while local people were facing local markets, there was no national approach where people pooled resources. So while we might have a great team in Perth to bid, there could be no one in Sydney to work on the job. So the company had major problems.
What was the first step?
To find the right structure and raise equity.
We knew we were going to need capital. Many people in this position use debt from major vendors or banks. Generally debtors are high quality clients.
But we needed equity. We raised $7 million from a backdoor listing to partially buyout Hugh and other partners (Smith ended up with about $8 million). In January this year we raised another $6.5 million via a placement with overseas investors and $4.5 million was a rights issue. I underwrote the fund raisings.
Then in August this year we raised another $5 million through convertible notes for acquisitions. So we raised about $18.5 million. To go to $300 million revenue that’s the sort of equity you need, and you can’t do it from banks because you haven’t got the runs of the board yet. So you have to back yourself.
The next step was to change the management?
Yes. The CEO was a good operator but working on the old basis. We brought in Robin Rindel who was the CFO for DataTec in the UK and South Africa through the 1990s, which did 50 acquisitions in five years. He came to Australia for lifestyle reasons.
He started as a non-executive director and a consultant in 2006. Then last year we made the switch and took total control in June. He has restructured entire management team and hired some very experienced people.
Did you have to make big changes to the culture?
Yes. We outlined our values and our mission and did that with the whole team, not just key executives. The values centred around the clients and delivering what the clients wanted when they wanted.
It sounds simple, but when we arrived often all sorts of things turned up when you ordered them and there were problems with delivery times. We encouraged the whole team to come forward with ideas and suggestions. We were focused not just on financial aspects but changing the whole system.
How about reporting?
We also had to streamline operations. When revenue was $50 million Hugh could make decisions on a feel of what was happening. But once we were $150 million with people across Australia, it is far too difficult to run that way.
We needed information on a real-time basis. We had lots of systems but we needed systems that would produce KPIs and financial information on a daily basis. It is spit out at midnight and hits my email at 1am. That means we can figure out where the industry is going on a weekly basis because things change very quickly. At the end of the month we know the results on a flash basis so we know what the sales pipeline is doing.
What about costs?
We had $28 million of costs a year and managed to strip $6.5 million of costs a year out of the business. Some came from redundancies and natural attrition (100 people left), there were also duplications and inefficiencies. For example we went through the telephone accounts and found 80 lines that were not used. There were also lots of different accounts that we consolidated.
We looked at the way we ordered from vendors. Now we only order from vendors when we have the contract, so our stock levels have gone down 50% which really helped the balance sheet.
Would you have done anything differently?
We would have raised the money privately and floated when we did the acquisition, but it was very difficult to get the capital to do that. Also we should have started the restructure earlier. We spent six month looking at it, but should have moved faster.
Then there are days you wonder if you have cut too many costs out and you don’t know until the profits start to roll in.
Now you have just finalised a merger with Melbourne-based Leading Solutions, which was started in 1990 by entrepreneur Frank Colli as an exclusive HP reseller and grew through acquisition and organic growth to expand into Sydney and Brisbane. What appealed to you about merging with Leading Solutions?
The skills set. Frank is very good at sales, Robin at operations and I have a financial background. We also are strong in Perth and Sydney and they are strong in Melbourne, Sydney and Brisbane.
We also had a large rump of technical people who are well qualified. This is a competitive advantage of sorts because it meant we had the grunt to do the projects.
Leading Solutions is very sales focused. So by marrying the sales team and keeping costs tight, our sales people can lead from the front and we know we can deliver because we have a top engineering team.
Both companies have vendor relationships with HP, IBM, Toshiba, Lenovo and Lexmark.
The merged entity, called Leading Solutions, will be headed by entrepreneur Frank Colli. Why Frank and why take that name?
Leading Solutions is well known in the eastern market and we want a sales lead business.
How are you planning to grow now?
Organically and further acquisitions.
How has the market treated you?
We listed at 25c then drifted down to 14c when we didn’t have a lot of news. But now we are at about 27c.
How does the future look?
We cleared the balance sheet and took a big cost hit last year and got that out of the way. The actual cash loss was $3 million for 2006-07, but we included good will and stock write offs so the loss was $17 million. Revenue is predicted to be $300 million in 2007-08 and from July onwards we have been profitable. Frank’s shares are performance-based and to get the shares he needs to make profit of $15.5 million by 2009.
What’s ahead for your industry?
The next three years there will be a lot more rationalisation. Margins are very tight so you need to sell high volumes and large contracts. So we will see many more acquisitions not just on the IT supplies side but also the services side.
What is the difference between being an adviser and an entrepreneur?
It’s more stressful. When you are an adviser you are more impartial – you sleep at night. But when you are an entrepreneur you are in the gun. Restructures are hard.