Answers from outside: two CEOs share consultant experience.

• Author: Bowen, Andy

Two years ago, operations at two Denver companies, Regal Plastics, a distribution and fabrication firm with 110 employees, and E3 Consulting LLC, a five-year-old, 20-employee energy-sector adviser, looked pretty stable in the face of Colorado's harsh economic downturn. Yet the firms' CEOs, Al Stoltz at Regal and Don Hurd at E3, unbeknownst to each other, shared something in common: too many sleepless nights.

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"It was tough on some days to come in here and focus," recalls Hurd, who founded E3 Consulting in 1999 along with two partners, James Short and Paul Plath. The three energy-sector consultants were refugees from much larger firms, and they had launched E3 because they believed they could provide better client service to customers and at the same time be happier and more successful on their own.

"We had created a company, but none of us had ever run one before," says Hurd. "My experience was not sufficient for me to understand how to run a firm, nor was the experience of the folks who were working here when we started this company. The reasons you start a business are far different than how you look at the business after you have had five or six years of experience."

In spite of E3's growth over those years, and in no small measure because of it, the three founding partners had reached a point in 2003 when they were sometimes at odds over business, organizational, financial, compensation and operational decisions.

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Staff morale was being affected. Overall, long-term direction and business focus had become uncertain.

At Regal Plastics, company growth had become stagnant for a number of reasons, including price undercutting by its competition. Stoltz concluded the company also was suffering from a host of seemingly intractable internal problems. Receivables and inventory were excessively high, and the company's debt load was costing it nearly $500,000 in interest annually. In addition, there were leadership, accountability and general management challenges at some of Regal's 11 locations (four in northern Mexico). Competition was becoming more brutal with each passing month.

One of the most important and difficult decisions a CEO can make is to admit he or she needs help, rein in that ego, and ask someone outside the company to come in and begin to ask the tough questions that lead to the right answers. Stoltz and Hurd each turned to Valant & Co., a turn-around consultant (for which Larry Valant, the co-writer of this article, is president and CEO). It takes courage to make that decision, but courage, after all, is one of the chief character traits valued in CEOs.

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BIG PROBLEMS

Stoltz said Regal had been experiencing a long decline of residual income--a key indicator Valant uses to predict long-term business success or impending failure. Residual income is a cost-of-capital measure of a company's economic growth. It looks like this:

Net profit after taxes

- (minus)

cost of capital

= residual income

When RI is growing, a company's value is growing, and when it is negative, the company's value is declining. Regal Plastics experienced declining RI for four years.

E3 Consulting was in a completely different financial situation.

Since its founding, E3 Consulting had grown at a rate of 35 percent annually to achieve revenues topping $5 million...