by Real Business - Thursday, 30th August 2007

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MEET Gary Webster. He's managing director and founder of Smith's Environmental Products, based in Essex. Smith's is a world-class company - it won the Queen's Award for Exports in 1996. It has over 45 per cent market share in the UK. Smith's manufactures and sells a physical product - hydronic and electric fan-assisted heaters. It makes most of the components in-house, assembles the heaters and sells them on to builders' merchants in the UK and overseas, mainly the US.
Now meet David Graham. He's managing director and co-founder of Buying Team, based in London. It has just attracted £15m of funding from a top-notch venture capitalist to develop its new internet business and expand its consultancy arm. Buying Team is an entirely service-based business. Ring Buying Team, and it'll send a consultant round to your business. He or she will look at your invoices for your non-core supplies - office stationery, energy etc - and then get you a better deal. Either that, or you can go to its new web site and it'll find you a better deal online. (It's also got a similar web site for consumers.)
Webster set up Smith's in 1991 in a spare room. He now employs 60 people. In the next six months, Webster expects to be employing 65 to 70 permanent staff. It has grown by 20 per cent a year in the last couple of years. Turnover last year was £4m and profits were around £250,000. Webster reckons he'll more than double that this year. He's proud of his success and has a yellowing copy of his first ever order invoice framed and hanging up in his reception area.
Graham set up Buying Team (then the Cost Reduction Partnership) in 1993 in a one-room office in Shoreditch. He now employs 49 people; in the next six months, Graham expects to employ 100. The consultancy arm's turnover last year was around £1.5m. It grew by 47 per cent in 1999 and expects a staggering growth rate of 70 per cent this year. And that doesn't include his burgeoning internet business. Buyingteam.com has yet to make a profit, but it is still early days; its "online market place for business buying" is very much an idea du jour. Graham is also proud of his success. He has the piece of paper on which he scribbled his almost incomprehensible business plan displayed on a bookshelf in his office.
Smith's and Buying Team are both solid, successful, growing companies. They both make a profit - and have done from the first couple of years in business. But today they are classed as quite different beasts. Most people would say Webster's manufacturing company was pure, unadulterated old economy. Unkind folk might suggest it was little outdated. They'd call Graham's service and internet business a prime example of the new economy. Aha, they'd say, now here's something to get really excited about.
It's certainly true that they're different.
Ask Webster what's key to managing his business well and he'll say cash flow. "It's the lifeblood of the company," he says. "If I see a hole coming, I can ring the bank manager and warn him. You can't ignore financial management. It's more important than making profits. You can run an unprofitable business if you've got cash, but you can't run a profitable business if you haven't got any money coming in."
Graham, on the other hand, "can't bear worrying about money… I spend very little time monitoring and managing cash flow. I set up the consultancy on the basis that we'd never be short of money. We've pretty much always had the cash for 12 months of overheads in the business - we need that because we don't get fees upfront, we get a percentage of any savings made at the end of a year. I never wanted to be in a business where I'd be short of cash. I always wanted the financial freedom to do what we wanted to do with the business when we wanted."
Webster has funded his company's growth mainly through reinvesting his company's profits. No surprise there. He's had a couple of loans from the DTI, but he's paid these off. In the future, he intends to carry on reinvesting most of his profits - around 75 per cent - and will look for cash from banks. He may try the DTI again. Unlike Graham, he's not keen on searching out business angels or venture capital. "I've seen an instance where people I know got funding from a VC to finance an MBO," he says. "The company grew as quickly as predicted, and then when the VCs wanted out, the directors couldn't afford to buy their share. So the original company bought it back."
Graham, on the other hand, has just received £15m from Internet Capital Group, a major private equity player with a network of more than 60 business-to-business e-commerce partner companies. "It was an amazing feeling to have £15m sitting in the bank," he says. "It means that we can really look forward and develop the internet business."
The two men work in completely different worlds.
Webster and his company are dogged by external factors that are beyond his control. He's swimming against the tide. His company is dubbed as "old economy." And he hates it. He can't see anything "old" about what he does. He can't understand why investors want to throw ludicrous sums of money at "new" economy companies, many of which he feels have no real substance and have yet to make any profit.
And he's being strangled by red tape. He's particularly angry about a new piece of legislation that will shift the burden of disposal from consumers to manufacturers. It will double his costs. It is, he says, "manufacturing in reverse" - he'll have to dismantle his units at the end of their lifespan as well as having put them together in the first place.
Then there are safety standards. You can barely see his technical director's office walls for the certificates. And don't forget the safety standards on the factory floor. When Webster bought a piece of machinery from France recently, he had to fit different, special light bulbs because the original ones weren't UK standard-compliant. Oh, and then there's the small matter of being forced to install a lift in his factory because part of it is situated on a mezzanine and can't be accessed by wheelchair. That costs at least £10,000. Webster would, he says, be happy to employ disabled workers. But at the moment he doesn't.
All this costs Smith's money. And it's money that other, overseas manufacturing companies don't always have to pay. Webster believes that, despite the fact that much of this expensive legislation hails from the EU, many continental countries aren't as stringent in applying it.
The high pound is a problem for Webster, too. Indeed, it's the main barrier to his company's growth. Around 45 per cent of his business comes from overseas, but there's very little incentive for him to go into new markets because he'd have to sell three times as many units as he would in the UK to get any return. He's swimming very hard to get nowhere fast.
Webster: "I really enjoy what I do, but it just seems to be getting harder. All I'm asking for as a manufacturer is a level playing field. If we've got one, then we can have one hell of a game of football. But if it's sloping towards my goal all the time and it's muddy down my end - and it is - I'm never going to get to the bloody centre line, am I? I'm seeing the pitch tilt. It's happening all the time. The proliferation of red tape is shocking. It's driving our country into a position where we're no longer manufacturers. I'm fearful for the way things are going."
If Webster's "old" economy company is thriving despite the UK's business environment, Graham's "new" economy company is going from strength to strength on the back of it. He's swimming with the tide. He knows it. He's happy to be "new economy." He's loving "being a success in the new world." He says: "I'm now part of the greatest revolution business has seen in centuries. And growth in companies such as ours is actually being helped by the government - tax breaks to encourage share ownership, and the Chancellor's last Budget. There's a sense that the government is behind us and encouraging us much of the way."
For a short while, Graham was in manufacturing. He bought out UK shoe manufacturing company Rayne in the late eighties. He loved doing that, too. But he's all too aware of the problems of manufacturing. Graham: "When I was at Rayne, I remember being shown round the factory. There was a guy sitting making the shoes. He poured nails into his mouth and fed them to his hands with his lips. I asked the guy showing me round, 'What happens if he swallows one of those nails?' He just said: your factory shuts down. That's when I knew I had to get out. I couldn't handle the thought that my business was dependent on nail-eaters."
What problems does he face now?
The big one is other companies' inertia. Graham just can't understand it. Buying Team's proposition to other businesses is simple: outsource your non-core purchasing to us and we'll save you money. We don't charge you. Nothing. We just take a cut of any saving you make. His people have in-depth knowledge of the suppliers and can get aggregate discounts. His consultancy arm has advised the likes of Asda and Sotheby's. Buying Team has a number of deals in the pipeline. But many other companies still seem reluctant to change suppliers.
Any other issues? Well, internet take-up and speed. The internet is too slow for many people to use it for all their purchasing. It's also clunky and unreliable. Some of the software suffers from glitches. This affects Graham's business. His company's rapid growth depends on it. And it's out of his control. But other companies - IT companies - are spending millions on putting these external factors to rights. It's not costing Graham's company a penny. We'll all have constant, fast - and perhaps free - internet access before we know it. And if all the predictions of internet take-up rates and of e-commerce growth are even vaguely correct, Graham's company stands nicely positioned to make a mint.
Gary Webster, however, is no Luddite. Smith's has had a web site for five years - far longer than many others can claim (Graham's only had one since late-1997). He can't sell directly through it yet because of contractual agreements he has with trade bodies. But it's unlikely to be long before he can. He's not saying, but there will have to come a time when this kind of contractual agreement will be a nonsense. When builders and consumers get up to speed on the net, they'll demand that Webster sells directly over the internet, rather than going through builders' merchants or DIY retailers.
Webster is taking advantage of other, supposedly "new economy", trends. Advances such as e-mail have stimulated the rise of "remote working." While most of Webster's staff are based in his Essex headquarters - the factory floor workers, for example, have to be - others can work elsewhere. He's got a marketing manager based in Hull. His sales director works from his base in Oxfordshire. And his after-sales person works down the road in Billericay. Even his finance director, who's semi-retired, works mainly from home. "Why should they have to come to me?" says Webster. "If they did, I'd probably have to pay relocation costs, I'd have to find office space and probably pay them more because we're in the south-east. We can work well with the technology we have. I can e-mail them with anything from updates on suppliers to new designs - all for the price of a local call." Webster insists that his nine sales agents in the UK are on e-mail. He's also got six people working over in the Boston office on US sales and marketing.
Ironically, Graham's staff are pretty much all located in London, occupying prime, pricey, office space. Sure, he's got sales people throughout the UK. But his in-house programmers, internet staff and consultants are all office-based. So who's more new economy now?
In many ways, the new/old economy distinctions are irrelevant.When it comes down to the nitty-gritty of running a business, Webster and Graham face the same issues. People and office space, for example.
Like many growing companies, Smith's has expanded its premises piecemeal. It started in one small unit on an estate. It has since taken over a whole row of units, one by one. It's less than ideal. Plus, Webster is anticipating fast growth and he's already outgrowing the space he's in now. He's currently trying to find premises with double the floorspace.
Again, because of rapid growth, Buying Team has just had to arrange temporary office space a few doors down from its main office. That's less than ideal, too. In a few months' time, the company will be moving into completely new offices in a different part of town. It'll be the sixth time it has moved.
And then there are people issues. Graham's company faces the classic "knowledge economy" challenge. Buying Team's success is based on his and his peoples' knowledge. It's their knowledge of and relationship with their suppliers that has made the business so successful. The business depends on them. Graham, like many of his consultancy staff, trained as an accountant. He knows how to trim costs in his own and other businesses. He knows his suppliers. His programmers know how to ensure that the technology makes his business work, too.
But isn't Webster's company equally about knowledge? Webster started out as a welder in what is now his main competitor, Myson. He worked his way up the company to become managing director of the division that produced fan-assisted heaters. He's been in the same business for 37 years. He knows it inside out. He knows which suppliers are reliable and he knows his customers. Around 70 per cent of his staff came from Myson. They know the business, too. It's this knowledge, this accumulated experience, that enables the company to prosper.
Graham: "It's Gary's knowledge of who makes the best cooling or heating component that makes him produce a good quality unit. That's what we've got, too. We have to know our supplier very well to ensure our success and customer satisfaction. That's what you're buying in Gary and in me. You're buying people who know how it all works. It's experience."
So there you have it. Two very different companies that are facing many of the same issues. They're also two very successful companies led by two very determined and talented people. The main distinction between the two is that Webster is swimming against the tide; Graham is swimming with it. Walk around Webster's company and you'll meet some incredibly enthusiastic people. They really believe in what they do. But you can tell they're a little bit tired, a little weary of spending so much of their energy on keeping the business up to date with all the latest rules and regulations. Visit Graham's company and again, you'll meet some incredibly enthusiastic people. But they're not tired. All their energies are spent on growing the company. Maybe it's because they don't have to worry about nail-eaters.

Turning the tables
We asked Webster and Graham how they'd run each other's company. Here's what they said.

Webster on Buying Team: "I'm rather envious of David in a way because he could have his offices anywhere. Yet he's based in central London and paying £25 a square foot for his premises. I'm paying £5 a square foot and that's high because we've taken over different units on the same estate, each with their own services. When we move, we'll be paying much less than that. He's also having to pay top dollar salaries in London. That's a tremendous overhead."

Graham: "We're located in London mainly because of history. We set up the business here and we've built it here. So we've now got an issue where we're employing over 40 people and they live in and around London. This business is all about knowledge. Where would I locate to without losing all my staff and all the knowledge they have? It's a real issue."

Graham on Smith's: "Manufacturing in the UK isn't easy any more. Red tape pushes up production costs and the strong pound makes our products much harder to export. And then the internet makes it far easier for people to source finished products from abroad. The cost of manufacturing in the UK is incredibly high. It makes sense then, to source components from cheaper places such as Poland or China rather than making them yourself or trying to get them from the UK. We're simply not a manufacturing country in the UK any more."

Webster: "I source 30 per cent of my supplies on the internet. That helps me keep costs down. Where I can source from the UK, I will and I work with my suppliers. I strongly believe I ought to be supporting British industry. I can see the threat of imports. I just have to make sure that we're equal to that threat."

in brief

Name: Gary Webster
Age: 53
Occupation: Managing director, Smith's Environmental Products, South Woodham Ferrers, Essex.
Career to date: Started out as a welder at Myson in the early sixties and gradually worked way up the ranks to foreman, works manager and then to managing director of the fan-assisted heating division. Set up short-lived disc jockey business for private parties. Made redundant after Blue Circle bought Myson in 1990. Set up Smith's in 1991 in his spare room and made his first prototype himself. Now employs 60 people and has big ambitions for a new, innovatively styled range of heaters.
Likes: His Aston Martin.
Dislikes: Government interference.

Name: David Graham
Age: 49
Occupation: Managing director, Buying Team, London.
Career to date: Qualified as chartered accountant with Grant Thornton, moved to BDO Stoy Hayward. Left after two years to set up property company, District and Urban Group. Bored with property, he bought a soft drinks manufacturer and then shoe manufacturer Rayne. Sold Rayne after personal difficulties and had to concentrate on District and Urban again after the late eighties property crash. Set up Cost Reduction Partnership in 1993 (now Buying Team) with Matthew Eatough. Now employs 49 people and has big ambitions for his new internet business.
Likes: His wife's holiday home in Scotland.
Dislikes: Cars and lawyers.

Vicky Meek is deputy editor of Real Business.

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