Now that he has won a monumental legal victory in an on-going court case to keep the Allen-Bradley line, Hartford Electric Supply Co.'s Bill DePasquale wants a bigger piece of New England's industrial automation market.
It's a pain that any electrical distributor can feel: getting the news that your biggest manufacturer doesn't want to do business anymore with your company. When your company has had a product line for more than 50 years, has been counted among the manufacturer's 25 largest distributors, and the line accounts for more than half your annual sales, this news hits hard, and you feel a mixture of hurt, anger--and terror.
That's the situation that faced Bill DePasquale, president of Hartford Electric Supply Co. (HESCO), West Hartford, Conn., two years ago when Rockwell Automation's Allen-Bradley unit notified him of its plans to terminate HESCO as a distributor. The reason for the move, according to Allen-Bradley's notice of termination, was poor market share and sales performance, a lack of commitment to and participation in Allen-Bradley promotions, inadequate training and the lack of a stable, knowledgeable and experienced management team.
DePasquale took the matter to court. The trial judge found in his favor and blocked Allen-Bradley's termination of HESCO in a landmark court battle that earned DePasquale national recognition in the electrical world as the man who took on Allen-Bradley in court--and won.
The Superior Court for the Judicial District of Hartford/New Britain found that A-B terminated HESCO without good cause, according to Connecticut's tough franchising laws--the Connecticut Franchise Act (CFA) and the Connecticut Unfair Trade Practices Act (CUTPA). A-B plans to challenge the decision in a higher court. A public-affairs representative for Allen-Bradley declined to comment on the case because of the company's policy of not discussing ongoing litigation.
While DePasquale's efforts in this ongoing lawsuit earned him words of encouragement and pats on the back at NAED conventions from some of the industry's largest electrical distributors, he isn't on a crusade for distributor rights and says he's just trying to survive. "Some large electrical distributors told me at the NAED Annual, 'You are doing a helluva lot for distribution. It needs to be done.' I said, 'I am only doing it because I had no alternative. I had two guns pointed to my head.' I don't want anyone to think that this is a crusade."
Losing the Allen-Bradley line would have been a crushing and perhaps even fatal blow for this 58-employee, two-location distributorship, which for 58 years has focused on the OEM (original equipment manufacturing) and industrial/MRO business associated with Connecticut's defense industry. HESCO's long and once-amiable relationship with Allen-Bradley was shaped in large part by the Milwaukee, Wis.-based company's position of prominence in the electrical industry and widespread popularity of its products among specifying engineers, facility maintenance personnel, OEMs and electrical contractors.
The Allen-Bradley line is typically the jewel of distributors' product packages. While its parent company, Rockwell Automation, has gradually de-emphasized the familiar Allen-Bradley logo in size and prominence in favor of its own corporate colors, the company's distributors still proudly display the familiar "A-B meatball," as it's affectionately called, on their buildings, business cards and literature.
The automation world in which HESCO and other Allen-Bradley distributors live is changing fast because of changes brought on by the open architecture concept of system design. This allows components of different vendors to communicate with each other and does not restrict distributors' customers to buy any one manufacturer's proprietary control system. Despite this trend, many of HESCO's customers still consider Allen-Bradley's line of motor starters, programmable logic controllers (PLCs), machine-vision systems and bar-coding equipment a premiere package in the market.
Allen-Bradley's selective distribution network, which uses HESCO and an estimated 120-plus other distributors to sell these products, is also the envy of its competitors, and the distribution policies that it uses to support and control this network have been emulated to a lesser degree by manufacturers of many different types of electrical products. The relationships the company has with these distributorships are unique in the industry because it maintains what's still probably the most select distribution policy in the business. Allen-Bradley has sold its electrical products through electrical distributors since its legendary president F.F. Loock selected Les Watson to build the company's distribution network in 1948.
For all of these reasons, losing the Allen-Bradley line could have been a death blow to HESCO. The company was already struggling to find new customers to replace the many industrials that had either closed up shop during the early-1990s recession that decimated southern New England's industrial base, or moved their factories to less-expensive Sunbelt locations. Indeed, DePasquale had to make some painful decisions in the early 1990s when he closed several of HESCO's locations and laid off some employees to keep the company competitive (See "HESCO's Revolution," EW-February 1992, p. 23).
The fact that HESCO was one of the early distributors to pledge allegiance to Allen-Bradley and is still devoted to selling the company's products makes the whole legal battle all the more bittersweet for DePasquale. Indeed, when a visitor walks into the lobby of HESCO's headquarters, examples of the close relationship the two companies had are immediately apparent. The message center behind the receptionist's desk was built with Allen-Bradley pilot lights, pushbuttons and other products. A plaque from Allen-Bradley dated Feb. 10, 1997 (over seven months after the manufacturer notified HESCO of its plans for termination) recognizes the distributorship for sales excellence and is hung proudly on the wall next to several dozen other manufacturer awards, HESCO's recent ISO certification and certificates of participation for employees who graduated from Texas A&M University's Quality program and Ohio State University's executive management course.
The depth and breadth of the HESCO-Allen-Bradley relationship and the lawsuit have given DePasquale reason to reflect on the current state of manufacturer-distributor relationships, especially captive distribution and the control a manufacturer can have over a company's succession plan.
DePasquale says that for years the HESCO-Allen-Bradley relationship was mutually beneficial. With Allen-Bradley's thorough marketing programs and its sales support in the field, HESCO became one of the company's top distributors in the U.S. Yet some problems lurked not far from the surface because of how much HESCO depended on the manufacturer. It's a scenario any distributor can relate to, he says.
"You want to do it because it's right and, hopefully, because it's throwing off profits for you," DePasquale says. "But at the same time, you may be taking a dangerous step forward onto thinner ice in the future. The solution is not to cut back the amount of business we do with a manufacturer; it's making them less of a major factor in our overall business.
"In retrospect, our company was too dependent on a single manufacturer for too many years. However, we never realized it because things were fine. They (Allen-Bradley) were fine people with a fine product line. Their business was growing, and our business was growing. But it wasn't managed growth. Managed growth is essential. There should be a ratio between how much business you do with a single manufacturer or single customer and its relationship to the whole." DePasquale says the lawsuit has also made him think about how much control a manufacturer should have over a company's succession plan.
"Manufacturers need to be concerned with the passing of the baton," he says. "There are valid reasons why that's important to them. But when everything is in place and it looks as though there is going to be a smooth transition, a businessman ought to be given the latitude to make those decisions. If that long-term relationship can be sabotaged by someone's personal agenda, the whole system needs to be reevaluated."
While its ongoing lawsuit with Allen-Bradley thrust HESCO into the headlines, some far-reaching, subtler trends may have an equal amount of impact on the company's future as a supplier of automation products and systems in New England.
One is the macroeconomic trend that took root during the region's recession, when many of HESCO's customers downsized their engineering departments. Eliminating these engineering positions meant customers often must outsource a lot of design and specification work, says Casey Pimenta, vice president of sales for HESCO's automation and control. "I have been in engineering companies that had 20 engineers 20 years ago and now have four engineers," says Pimenta, who has worked for HESCO for over 20 years. "The engineer today is almost like a project manager."
While automation specialists, systems integrators and technically-minded electrical distributors have provided engineering services for years, customers now want more from them. They want systems that can take advantage of open-architecture design without being limited to a proprietary product line that distributors or other automation specialists may represent. "Instead of being a captive of any one manufacturer, our salespeople report that customers are increasingly looking for open architecture because of price and functionality," says DePasquale."
He also says brand loyalty is being challenged in the automation market because the customer is quite willing to purchase a system with a variety of manufacturers' products, as long as that system is the best solution. DePasquale says these are two of the key challenges facing Allen-Bradley and other suppliers of automation equipment as they contemplate the roles that distributors will play in the future. Allen-Bradley and other manufacturers often prohibit distributors from stocking competitive products. What remains to be seen is whether or not the market will continue to accommodate and value distributors who rely solely on the sale of hard products as their "value proposition," says DePasquale. This is why he started a new business that operates independently from HESCO and designs automation control systems built with the products that do the job best and most cost-effectively for a customer's particular application, not just the products of any one manufacturer.
Innovative Solutions and Automation, LLC (IS&A), Lowell, Mass., focuses on control applications in process-oriented industries such as pulp and paper, food processing, semiconductor and biotechnology. IS&A is not in direct competition with Allen-Bradley, but actually enhances the sales of Allen-Bradley products due to the synergy associated with the common ownership of both companies, says DePasquale. "In no way do I consider this a contradiction to my loyalty to Allen-Bradley under the terms of the franchise agreement," he says.
Martyn Culverhouse, IS&A's senior operations manager says customers are contracting out more and more of the selling expense to organizations like IS&A that don't fit as nicely in the pigeonholes of the past: distributor, rep, systems integrator.
"Customers are struggling with the best way to service their customers and expand their business, but not break the bank doing it," says Culverhouse, who worked for an automation-equipment manufacturer before joining IS&A about a year ago.
Along with downsizing in the market and the traditional need for automating production processes in these industries, there's a new market driver: government regulations that require documentation and traceability in the manufacture of some products. These regulations have created additional demands for control systems that capture information about production processes. For instance, in the pharmaceutical industry, the Food & Drug Administration (FDA) requires that drugs be date-coded and batch-coded, and the Environmental Protection Agency (EPA) often requires tests on any effluent that a plant pumps into a water system.
Culverhouse says customers want "marquee-named products," but are even more interested in getting a complete solution from one source.
A trend influencing how these systems are designed is the sophistication and comparatively low price of PC-based systems that can be upgraded by software modifications. In the past, modifications and upgrades often meant ripping out a hard-wired control system and starting from scratch, he says.
"Customers want to be able to go to a source and buy a solution, not just discreet products," says Culverhouse. "They want to be able to say, 'Here is my problem. Design this thing for me. Do the programming and deliver a complete system.'"
He and DePasquale believe another key reason there's a market need for a company like IS&A is the high cost of technical sales. Because the cost of employing and training engineering-oriented salespeople is so high, vendors tend to have them focus on accounts with big-dollar sales potential, and they overlook many small- and medium-sized industrials that need automated control systems. It's too expensive for them to cover the entire market with their own in-house sales force, according to DePasquale and Culverhouse, so these companies are looking for cost-effective alternatives--like IS&A. The company functions as a "virtual division" of a customer on a project-by-project basis. A customer can have IS&A design a control system that it produces, and not incur the cost of having these capabilities permanently in house. This strategy offers enormous economic benefits for that customer, says DePasquale.
IS&A's charter is to focus on smaller customers and let automation-equipment manufacturers, system integrators and panel builders go after the big jobs. It's a market niche that design firms can't effectively service because of their bulk, says Culverhouse. "Smaller jobs are our specialty. When you have 200 engineers, they can't exist on the small jobs. We think there's a real niche to build a company on."
The solution that IS&A provides will be built just with Allen-Bradley products only when the customer specifies them, or if those products constitute the most cost-effective solution. This contrasts with how HESCO and other Allen-Bradley distributors operate, because they must sell Allen-Bradley products and systems as the best and only solution, he says.
"Most manufacturers that sell intelligent products would like you to standardize and be the prime mover for that product line and no others, says DePasquale. "We can still accomplish that by setting up these two companies the way we have. IS&A can offer any solution. HESCO can't. HESCO is bound to Allen-Bradley as long as we are partners. That is good and that is right, and we are committed to that distribution strategy.
"Our Allen-Bradley business has increased and will continue to increase dramatically as a result of having this other company on-line, because a lot of the applications or potential applications are and will be in accordance with preexisting specifications requiring Allen-Bradley. When that happens, IS&A will purchase that equipment from authorized distributors and utilize it in the design-to-build process."
DePasquale says that systems integrators and panel builders are important to IS&A, and the company often gives them jobs. "They typically don't have salespeople on the street," he explains. "By leveraging our organization and adding in some additional capability, we are able to do it on a cost-effective basis for the customer."
DePasquale and Culverhouse see the day when IS&A and HESCO will partner with large management consulting firms such as Andersen Consulting, McKinsey & Co. and the Boston Consulting Group to develop information systems for customers. In theory, the consulting firms would design the system from the headquarters offices out to the plant and specify the required production information. IS&A would design the control systems monitoring the plant floor to meet the information needs of the company's executive suite.
"We design systems and control things on the plant floor," explains Culverhouse. "We gather huge amounts of information about the process on the plant floor. Companies want to look at the whole plant floor, eliminate human error and look at the plant's efficiency. That information can be used for decisions regarding just-in-time (JIT), quality and inventory management. That's purely software consulting."
"Andersen Consulting, Boston Consulting and McKinsey & Co. have been working at the top of the corporation down to the plant floor," adds DePasquale. "We feel we're experts on the plant floor. I would like to see Innovative and HESCO working with McKinsey and other consulting groups."
Taking on additional design and engineering responsibilities and entering new geographic markets with a company like IS&A meant DePasquale had to create a new entity that doesn't conform with traditional definitions in the market or within set geographic boundaries, as in the past.
DePasquale says adhering to the status quo and playing by the existing rules wasn't going to ensure that he would remain a factor in the automation market. To grow in the future, DePasquale says he had to break free of the conventional role of the electrical distributor and start up IS&A, which he says may one day "dwarf" HESCO in size. DePasquale believes the lawsuit with Allen-Bradley and the threat of termination actually accelerated IS&A's startup process and gave more credibility to the whole idea. "I want to get a lot of slack in that rope so I can do what needs to be done to grow my businesses," he says. "It's not a comforting factor, but it's a risk that has to be taken."