By Charles Darwent. Saturday, 01 October 1994

UK: KALAMAZOO PAPERS THE CRACKS.

UK: KALAMAZOO PAPERS THE CRACKS. - The office paper maker's early attempt to tackle the problem of the paperless office led to disaster. Now saved from the brink, it is almost unrecognisable - only the name remains the same.

The office paper maker's early attempt to tackle the problem of the paperless office led to disaster. Now saved from the brink, it is almost unrecognisable - only the name remains the same.

Lest you entertain lingering doubts about the commercial power of branding, consider the cautionary tale of Kalamazoo. Referred to by the more tactful sort of business journal as 'memorably named', the Midlands-based stationery firm found itself, in 1979, cheerily churning out what its present chief executive, Mike Langmore, refers to as the same 'products with funny round corners' - accounting system documents, pay slips and other printed ephemera - as had kept it chugging profitably along since the firm's creation in 1896. (Then, the Birmingham printers were known by the rather less sonorous familial title of Morland and Impey. Kalamazoo - a record-keeping system pioneered in the Michigan city of the same name - was only adopted as the group patronymic in 1942).

Unfortunately for Kalamazoo, a technological serpent - the personal computer - was about to enter this unruffled corporate Eden. Noting that the advent of the paperless office might well have unfortunate ramifications for a company whose business was the manufacture of office paper, Kalamazoo's then family-dominated board of directors scratched its collective head and came up with a solution irreproachable in its logic. If the future for accounting systems lay with computer hardware, then Kalamazoo would manufacture hardware of its own.

As if this were not sufficiently bullish a departure, Kalamazoo's board next considered the experience of one International Business Machines. The corporation in question was American, of course, but Kalamazoo's computeristes generously allowed that IBM might be something of a potential competitor nonetheless. In any case, the Birmingham board concluded that that company's early success in hardware manufacture was a passing fad, and set about commissioning a British-made machine of its own that was to be resolutely IBM non-compatible. One hardly needs an MBA to guess at the conclusion of this remarkable tale: peals of ill-bred laughter from corporate systems buyers; warehouses full of unsold Kalamazoos; the Sinclair C5 Award for Innovation; an invitation to appear before Her Majesty's bankruptcy commissioners. But no. 'In fact,' says Mike Farley, now head of Kalamazoo's motor trade division, with an air of distant amazement, 'the project did quite well at first. Why? Well, I think it was because we had been around for so long and our name was so memorable that we had got ourselves a tranche of unswervingly loyal customers. As long as we didn't do anything too obviously silly, they would buy whatever we made.'

Whatever the other commercial morals of the case, one - that even the most seductive of brand names will not fool all of the people all of the time - is amply borne out by Langmore's description of what happened next. 'When I arrived (from steering Unipart's computer operations) in 1987 to run Kalamazoo's computer group,' he recalls, 'I found myself heading up a small computer business that was making a £2.5 million annual loss - and that was on a turnover of under £8 million. The group's borrowings had peaked at £15 million and the bank had put a lien on all our machinery: every bit of plant had a little yellow sticker on it, which certainly gives you something to think about. I was presented with the simple task of turning it all around and making it profitable.'

And that, in surprisingly short order, is what Langmore has done, not just for the computer group but for the company as a whole. Last June, Kalamazoo turned in pre-tax profits of £6.3 million on a £60.9 million turnover for the year 1993/94, figures that were up from £0.9 million and £56.5 million respectively on the year before. Earnings per share meanwhile soared to 10.2p (from 0.6p), while the company's net cash balances rose from £1.1 million to an extremely handy £7.9 million over the same period. Not surprisingly, these stellar statistics have also led to a radical alteration in the attitude of institutional money to Langmore's one-time corporate turkey. No yellow lien stickers at Kalamazoo's Northfield HQ now: Henderson Crosthwaite Institutional Brokers' investor report on the firm, headed, Strong Recovery - Ambitious Management - BUY, sums up the sea change in Kalamazoo's fortunes nicely. 'We believe that the level of management ambition should not be underestimated,' continue the analysts, breathlessly. 'It has a medium-term target of building a group with a revenue of £200 million p.a. and profits of £20 million p.a., compared with current sales of £60m and profits of £5m+'. These City effusings draw an enigmatic smile - if not precisely a denial - from Kalamazoo's corporate mastermind.

That Langmore's Kalamazoo should be the same that only seven years ago was, he says, 'right on the edge of liquidation' seems scarcely believable. And you would be right not to believe it: for the remarkable alteration in the firm's bottom line reflects the fact that Kalamazoo is - name apart - by no means the same firm that Langmore first found himself running. By way of illustration, consider that the company's violently unprofitable computer sector accounted for only some 25% of its turnover in 1987, the remainder still coming from the pay slips, chequebooks and 'products with funny round corners' that had kept Kalamazoo profitable for nearly a century. In 1993/94, contrariwise, only an estimated 25% of the company's total came from Kalamazoo Business Systems (KBS). The remaining 75% was accounted for by another new division: Kalamazoo Computer Solutions and Support (KCSS). This last is not to be confused with that bizarre foray into computer hardware undertaken in Kalamazoo's pre-Langmore incarnation, however.

Langmore's answer to the question of how he turned Kalamazoo's fortunes around is a disarming three words long: 'downsizing and concentrating'. This is, as might be expected, not quite the whole story. In fact, the company has elected, as before, to tackle the computer-induced problem of the paperless office head on. The difference is that it has done so, rather more temperately, through the provision not of hardware, but of software. In essence, this move stemmed from a timely recognition that Kalamazoo's most marketable core competence lay not so much in its skill as a printer as in its ability to mastermind business systems: whether the medium through which these were expressed was the manila envelope or the silicon chip was, in a sense, neither here nor there.

Accordingly, the firm has spent much of the '90s recreating itself as a VAR (value-added resaler) for software systems, purveying these most notably to such bluechip car dealership businesses as Ford and Nissan. To handle this particularly fecund sector, Langmore has created a discrete and vertically-integrated subdivision, Kalamazoo Motor Trade (predictably, KMT), run by Farley and responsible for some £22 million of KCSS's overall £46 million turnover. Thanks to some discreet acquiring over the last three years, KMT now finds itself in the position of having (according, at least, to Farley and Langmore) pretty well unchallenged control over some 43% of the overall UK dealership software market.

Things are also radically changed at Kalamazoo Business Systems (KBS). The market for such previously lucrative round-cornered commodities as double-entry ledgers having been hit hardest by the genesis of the paperless office, Langmore has been trying to find value-added, higher-tech applications for a doggedly low-tech expertise elsewhere. (Indeed, he admits that he was initially disposed to dispose of the firm's printing business altogether. 'I decided to keep it because it generates a large amount of cash,' notes Langmore, blithely. 'It's always a good reason'). That these have largely had nothing to do with business systems - one recent coup has been the selling of access control ID cards to Birmingham City Football Club, for example - is reflected in yet another divisional re-christening, KBS now being more voguishly known as KPS (for Kalamazoo Printed Systems).

In a sense, however, Langmore's real challenge over the past two years has been less one of finding new things to do than of new ways to do them. 'When I joined Kalamazoo,' he recalls, 'it was still a family company, with all that implies. Nothing was ever delegated: decisions were taken at board level.' Langmore's commercial perestroika has also called for corporate glasnost. Kalamazoo's 'change from a print business to a computer business has,' he says, 'put us in a much faster and more dynamic market. Nowadays, we have to expand by innovation: but in a paternalistic company like this, how do you get people to innovate?'

His own answer to this has varied from the proferring of corporate carrots to the brandishing - indeed, the liberal application - of the commercial stick. Among the latter must be included that apparently anodyne word, 'downsizing'. This has by no means been restricted to the hiving off of Kalamazoo's less financially attractive disjecta membra. 'When I arrived,' notes Langmore, 'the group was hopelessly over-manned. We now have roughly half the employees (1300, down from 2600 in 1987), and that's with seven acquisitions along the way. I made a third of the staff redundant six weeks after arriving.'

Production, too, has come under Langmore' s unrelenting gaze. Last summer, recalls Farley, Kalamazoo's chief executive ordered the contents of the group's factories to be emptied into an adjacent car-park. 'Basically,' suggests Langmore, 'we cleared all the crap out - about 80 tons of redundant machinery - and put it all back in a cellular system designed for us by PA. It saved us something like 30% of floor space, and we now have six individual production cells. All very Japanese.'

Organised along discrete business lines and each with its own profit point, these same cells have cut production inventories by two-thirds and sped up delivery by 50%. Moreover, this physical manifestation of the new corporate culture has, apparently, worked wonders in concentrating the minds of the workforce. 'Let's just say, it has introduced a degree of healthy competition,' says Langmore, smiling wolfishly.

Most helpful of all, though, may have been Langmore's recently engineered compact with trustees of the Kalamazoo Trust, a Quaker-inspired document drawn up in 1947 to give the firm's entire workforce a perpetual 51% controlling stake in its equity. 'Up 'til the '60s, the line was always "51% must be retained",' says John Peeney, deputy company secretary and one of four trustees nominated by employees. 'But then up to the '60s we didn't need any money. Now there is a general understanding that the group needs to look outside for funding, even if it means a dilution of the Trust's holding. After all, 49% isn't necessarily death: 49% of a bigger pot may arguably be worth more than 51% of a bankrupt company.' This agreement will also doubtless be helpful in Kalamazoo's rumouredly imminent wooing of the City. Even so, the corporate horizon at Kalamazoo's Northfield HQ is not without the odd cloud. The most potentially stormy of these is over-reliance on a single market. Farley's KMT, no matter how vertiginous its verticality, is nonetheless responsible for 40% of group turnover, and the current rosiness of its divisional bottom line is due in no small part to a recent upturn in the British automotive industry. By contrast, the late '80s dip in car sales was disastrous for Kalamazoo. Being at the whim of so notoriously fickle a market is not a comfortable position in which to be. A 43% share of the UK dealership systems market also makes the prospect of nurturing further significant organic growth a distinctly distant one.

Despite Farley's assertion that he 'would rather be in Kalamazoo's position than anyone else's', he and Langmore are busily looking for partnerships in the relatively under-computerised world of European dealership, primarily in France and Germany. A recent acquisition - of the Dutch motor systems software house CBA - underlines this ambition, as well as some of the problems involved in fulfilling it. ('We were told that the Dutch corporate culture was like ours,' says a rueful Farley. 'It isn't').

Oddly enough, though, Kalamazoo's most pressing problem may now be precisely the commodity that has historically been the ace up its commercial sleeve: its unforgettable name. 'Our role has really been to take Kalamazoo into the 20th century,' notes Langmore. 'The trouble is getting people to see that it's happened. A lot of MDs and City people remember our name from doing their accountancy training. If you ask them, they'll say "Oh, yes: rather a naive little company. Isn't it family owned?" In fact, there is literally no single board member left from the time before I joined, and 80% of senior management have gone. Things have changed here, but how do you convince people? Kalamazoo is a brilliant brand name: but it's also something of a two-edged sword.'

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