(Internet Editor's Note: Read Don Claus's interview in its entirety as part of a special online-only feature. Online-only excerpts are featured in blue)
In the first of a series of exclusive interviews with leading pest control industry executives, Don Claus, director of FMC Corporation’s Specialty Products Business, describes some of the major changes occurring at the longtime chemical supplier as it repositions itself for the coming century.
Although a relative newcomer to the pest control industry, Don Claus is no stranger to FMC Corporation, where he has worked 13 years in a variety of sales and marketing capacities. After graduating from Bucknell University in Lewisburg, Pa., with a degree in civil engineering, Claus began his career at Conrail and Lukens Steel before joining FMC in 1986 in the company’s Automotive Service Equipment Division.
After FMC sold the operation to Snap-On Tools Corporation in 1996, Claus returned to FMC several years later, working for the company’s specialty business under the direction of Jim Collins, a longtime mentor who recently took on new responsibilities within the Agricultural Products Group, including worldwide insecticide strategy and Latin America crop operations. In the wake of Collins’ promotion, Claus has been named director of FMC’s U.S. Specialty Products Business, as well as the Software Solutions Business Unit. PCT recently sat down with Claus, a father of three, to talk about the company’s past and its future.
Dan Moreland: Consolidation at the manufacturer level is a growing concern among many in the pest control industry. As a chemical company executive, what factors are driving that trend and what does it mean for pest management professionals?
Don Claus: There are several factors driving the trend towards consolidation. Currently, there are a number of companies that are spinning off their agricultural chemical businesses in order to focus on the most profitable side of their business — pharmaceuticals. The reason for that is Wall Street is constantly demanding higher earnings. If a company is under that kind of pressure to get their share value up, then one of the best ways to do that is to focus on their pharmaceutical business to drive earnings.
Other companies are merging or making acquisitions to overcome the financial challenges they’re facing in a very competitive marketplace, such as the high cost of research and development, which has increased dramatically in the past 10 years. To remain competitive, some companies believe that size is important so every time there’s a major merger it puts additional pressure on the remaining companies to grow in order to compete effectively.
A couple of other factors that are driving the competitive environment are the impacts of technology, specifically e-commerce, that is putting pressure on the market, and the growth of "generic" insecticides that are forcing profit margins down.
I think liability issues are also driving the trend towards consolidation. For instance, pharmaceutical companies that have agricultural businesses currently offering genetically modified products that are not gaining acceptance in the U.S. may be splitting their organization to protect their pharmaceutical business from the potential liabilities relating to GMO products. If you’re a sound pharmaceutical business with good margins you’re going to look for ways to protect the profitable side of your business.
DM: That’s an issue that wouldn’t have been on the radar screens of most chemical company executives a few years ago. It’s an illustration of how quickly market conditions can change, isn’t it?
DC: That’s correct. In fact, it wasn’t that long ago that the strategy of some companies was to be vertically integrated in life sciences.
But now — because of the lack of market acceptance of GMO products on the part of the consumer — some companies are no longer developing genetically modified products or they’re spinning off those businesses. That wasn’t the case just a few years ago when GMO products were considered the wave of the future.
DM: How long do you expect this trend towards consolidation to continue and what will be its ultimate impact on the pest control industry?
DC: I think ultimately what’s going to drive these changes are the effects of e-commerce and the effects of technology. And it’s going to ultimately affect the chemical industry just like those two factors would affect any business. If I had to guess, I think you would see the most dramatic changes over the next 12 to 24 months.
DM: If you were a betting man, how many major players do you anticipate at the manufacturer level in the next three to five years?
DC: Four to five in the United States, six to seven worldwide.
DM: Given your prediction, what is FMC doing to protect its market position to ensure that it’s one of those major players in the coming decade?
DC: We’re doing a couple of things. Number 1, we’re moving forward quickly to drive our strategy of becoming the industry’s "solutions provider." As part of that strategy, one and a half years ago we made an acquisition of a software company to begin offering pest management software as a value-added service to our customers, but that’s just the beginning of our solutions provider strategy. It was the first step in transitioning FMC, the chemical manufacturer, to FMC, the solutions provider.
Number 2, our agricultural products business has entered into a joint venture with a firm called DevGen, a cutting-edge company located in Belgium (see related story on page 56). They’ve developed genomics technology that will allow us to streamline the research and development process dramatically, allowing FMC to bring products to market much more rapidly. Genomics enables us to identify those locations where insects are adversely affected by a particular active ingredient.
Concurrently, this screening and testing process can profile the impact of these active ingredients on humans, so you can screen for safer product profiles, thereby reducing your overall development costs. You can test thousands of candidates in a fraction of the time it used to take. It will also allow us to look at new modes of action that will be beneficial when registering new products with EPA. It’s a very exciting technology.
DM: Given all of the changes that occurring at FMC, what do you consider the greatest challenge facing the company?
DC: The greatest challenge facing FMC during this period of transition is effective communication. Our messages to our various target audiences must be clear and concise so that the specific benefits to everyone, both internally and externally, can be quickly understood. The expected rewards from the restructuring are significant and will have a positive impact on our employees, our business partners, our customers and Wall Street.
DM: When did this joint venture take place?
DC: A year and a half ago, but it’s already beginning to bear fruit.
DM: In what way?
DC: We have already done extensive testing and have identified some promising active ingredients. The testing and development process has already proven to be more efficient and rewarding.
DM: When will this restructuring be completed?
DC: In February FMC announced that a registration statement had been filed with the Securities and Exchange Commission in order to move forward with an IPO to create FMC Technology Inc. The IPO was implemented in mid-May and the final split is planned to occur at the end of 2001, so by then we should be two separate companies.
DM: When you purchased the software company in 1999 as part of your company’s long-term solutions provider strategy, it raised a lot of eyebrows in the industry. How do you sell such a novel concept to management?
DC: You make sure that you have all the facts and you communicate your strategy as clearly and persuasively as possible to top management. We described the market dynamics that were taking place in the pest management industry — the consolidation at the manufacturer and PCO levels, the growing margin pressure, the trends in the industry that create business challenges for pest management professionals — and we wrapped those trends around a strategic plan that would grow our business in the long run. For pest management professionals to survive in the future they’ve got to become more efficient and more productive, so more dollars drop to the bottom line. One way to do that is to offer business management software that addresses some of those challenges, which fits hand in glove with our solutions provider strategy. As a result, the acquisition was approved quickly.
As a subset of that, e-commerce and the Internet have become a part of everybody’s life. We know there’s going to be an increase in the number of transactions on the Internet, but manufacturers like us who are committed to our distributors and current methods of distribution have to figure out how e-commerce fits into the total picture. How do you leverage the Internet as a sales and marketing tool while protecting your distributor relationships? We believe you can ascend that learning curve more quickly by owning your own software company.
DM: Given the inherent risks, why would FMC choose to reengineer itself so dramatically? Wouldn’t it be easier to stick with the status quo?
DC: At first glance that would appear to be true, but it is actually more of a risk to stick with the status quo. In order to differentiate ourselves from the competition we felt it was essential we do something more dramatic. To be a long-term survivor we cannot simply supply chemical after chemical after chemical to the pest management industry. We have to be able to provide solutions to the PCO. Right now, the margins are being squeezed in every market segment, whether it’s at the manufacturer level, the distributor level or the PCO level. In order for our company to be successful we need to continue to develop solutions that will help the pest management professional stay in business. Our software initiative was the initial step in that process, but it was only the first step, others will be forthcoming.
DM: One of the reasons some were surprised by FMC’s entry into the software business were the problems reportedly being experienced in the marketplace by the company you purchased. Did you know going into that relationship that there were problems with the software and, if so, why did you proceed?
DC: Yes, we knew there were some issues. We did a lot of industry research before we made the acquisition — we talked to many people, primarily our distributor partners in the industry, and we got quality feedback from them. As a result, we knew what to expect and we were ready for the challenge. We had a tiger by the tail, but we felt that the software package fit so well into our solutions provider strategy that we couldn’t afford not to move forward. We put a plan in place to address the issues and we moved forward.
DM: Part of the process of moving forward was to put your own team in place at the company, correct? Did that cause any problems?
DC: The biggest challenge was how do you take two vastly different cultures and put them together to create a seamless operation? There was a talented group of software programmers and developers in Phoenix that were not used to the structure of a large corporation. So we transferred some people from our Philadelphia office who put systems and procedures in place that would allow the software development process to go forward without restricting its creativity. Dan Rosenbaum was promoted to business manager, plus we added three other Philadelphia people to the Phoenix staff who have extensive pest management experience. As a result, we integrated FMC’s culture into the software operation, while providing valuable practical insights into the pest management market.
DM: So, you knew you had to turn that situation around quickly. What specifically did you do to address the complaints of current customers, while going after new business?
DC: Basically, the previous management over-promised and under-delivered. So immediately what we started to do was under-promise and over-deliver. The next step was to develop updated versions of the software that eliminated any significant bugs. Once those bugs were eliminated the complaints dropped dramatically. Concurrently, we increased the number of people providing tech support. Prior to our new software products, we were getting a large number of support calls a day. That dropped by 50 percent once those initial steps were taken. In addition, we developed a customer service center to respond to all calls within 24 hours of receiving them. Currently, we are averaging less than 10 percent of the calls we received when we first acquired the business, with 99 percent getting solved the same day and one or two being resolved in 24 to 48 hours. Additionally, we put together an updated training manual that was easier to read and understand, which also helped cut down on a lot of the calls.
DM: Have you tried to go back and rebuild some bridges with those pest control companies that had a negative experience with the previous owners?
DC: Absolutely. We created a new customer-focused support agreement for the new software versions and all customers who were interested received the updated software for free. In addition, we decided to split our software development and marketing functions, so we now have a "center for excellence" for software development in Phoenix and a "center for excellence" in sales and marketing in Philadelphia. We have hired two inside salespeople to work out of our Philadelphia office to help drive our sales efforts. Once we generate the lead, the leads are routed to these two inside salespeople who follow-up with a phone call, or if it’s applicable, we get on an airplane or in a car to close the sale. As a result, the phone calls and complaints have gone down and the sales have gone up.
DM: I understand FMC Corporation as a whole also has undergone a strategic restructuring, recently splitting the chemical and equipment business. What, if anything, does that mean for the pest control industry?
DC: FMC Corporation is about a $4 billion company made up of about 26 different businesses. Approximately $2 billion of the company’s revenues are based in chemicals and $2 billion in equipment. The $2 billion in equipment business is made up of FMC’s Energy Systems and FMC’s Food, Technologies and Transportation. The chemical side is made up of Industrial Chemicals, Specialty Chemicals and Agricultural Products (including PCO).
The split of these two businesses was announced for two major reasons — to increase shareholder value and to give our businesses more focus. We think it’s great news for the shareholders because the stock price is going to rise, and it’s also good for our employees and customers because we’re going to be a more focused, dynamic organization.
We will be a part of a $2 billion chemical company that is going to focus 100 percent of its energy on developing technologies and finding solutions that are important to us as a chemical business. We have started to transition the headquarters of the chemical business from Chicago to Philadelphia and Bill Walter, who will be the CEO for the new chemical business, will be just a few floors away. That’s certainly going to allow for improved communication throughout our organization. We’ll also be able to respond more quickly to changing market conditions and secure more internal resources to be able to execute our products and programs more efficiently.
DM: While there are big changes occurring at FMC Corporation, there are also big changes occurring in the termite market, with a wide range of products and technology now at the pest management professional’s disposal. Clearly, the termite market is the most dynamic market in the industry today. How do you see the market shaking out in the next few years?
DC: We had Dr. Brian Forschler of the University of Georgia at one of our customer meetings a few months ago and one of the things he said really rang true for me. He said pest management professionals must begin looking at termite control as an ongoing process. It’s not a one-time event. Termites have been around for millions of years and they’re going to be around for another million years. We have no evidence that somebody’s going to come along and totally eliminate termites. If we make that assumption, and if we agree that termite control is an ongoing process, then the PCO needs to be focusing his or her efforts on protecting the structure, which means controlling and managing the termites. Today, the most progressive PCOs are choosing to suppress the colony with a liquid application and then minimize the termite pressure with baits. Such a treatment regimen is an ongoing process. We’ve looked at the market that way, since we introduced baits in 1997. We’re the only company that’s offering termite bait, liquids and computer software to monitor termite activity, all wrapped around a guarantee of support, but we are certain that’s a long-term winning strategy.
DM: If the termite control market is any indication, there’s no shortage of new tools on the horizon for PCOs. But many of the industry’s tools are threatened by increasingly onerous government regulations. What do you see happening in the regulatory arena? The organophosphates have been under attack recently; can the pyrethroids be far behind?
DC: I think it’s safe to say that the Food Quality Protection Act is here to stay, so I don’t expect the regulatory climate to change any time soon. As far as the pyrethroids are concerned, the official schedule for the re-registration of these products is fiscal year 2002. The EPA is already indicating, however, that the process might be delayed a year, perhaps until fiscal year 2003. Fortunately, FMC has already gone through a preliminary risk assessment with bifenthrin and cypermethrin and that showed we had more than adequate room in the "risk cup."
That’s not to say, however, that pyrethroids won’t be looked at very closely by the Agency. We feel that moving forward we’ve got to continue to have a good dialogue with EPA because they’re still in the process of refining their protocols for measuring that risk assessment. If we can have an open dialogue and continue to communicate, while staying updated on the refinements of their protocols, we feel we can work through the situation successfully and retain these valuable products for years to come.
DM: Speaking of government regulations, do you think there will be much of a change in the philosophy of the EPA with the change in leadership at the top?
DC: I’d like to think so, but I don’t believe there’s going to be a lot of change. It would be good to see sound science brought back into the regulatory process. When the topic of chemicals and children come up — and it’s already out there — I think it will remain at the top of the public’s consciousness and the country’s political agenda for quite a while. I think it’s something we’re all going to have to deal with for years to come.
DM: That makes the National Pest Management Association’s Legislative Day even more important. Does FMC plan to continue to be the lead sponsor of that event?
DC: Absolutely. I think we need Legislative Day more today than when we started sponsoring it in 1988. FMC is a company that is very committed to the industries in which it participates. Legislative Day is good for FMC. It’s good for NPMA. It’s good for the industry. The regulatory environment is going to get more complex as we move forward. To keep the lines of communication open with our elected officials we need a visible forum to communicate our message. I think there’s no better way to do that than through NPMA’s Legislative Day.
DM: Given the significant regulatory challenges facing PCOs, are you optimistic or pessimistic about the future of the industry?
DC: I am very optimistic about the future of our industry. Change and the challenges it creates are certainly not new to pest management professionals, distributors or manufacturers. The industry is comprised of a hearty group of individuals that are passionate about the business. With the dedication of organizations such as RISE, NPMA, UPF&DA and ASPCRO, there is no doubt in my mind that we have the energy and skills to meet the regulatory challenges with which we are faced.
I personally would like to see these separate organizations that share a common goal come together and share resources — especially in the regulatory arena — creating a greater critical mass to help achieve the goal of providing quality pest management products and services to our customers.
Dan Moreland is publisher of PCT magazine. He can be reached via e-mail at dmoreland@pctonline.com.
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