In January, ID sat down with Patrick O'Keefe, CEO of Atlanta-based Industrial Distribution Group. It had been just over a year since O'Keefe took the helm of one of the industry's largest publicly traded companies. IDG went public in 1997, the result of a roll-up of nine independently owned distribution companies. Following a successful launch — and a slew of acquisitions — IDG's stock price plummeted and has remained low, leaving industry-watchers wondering about the company's focus and plans for the future.

We talked to O'Keefe about IDG's recent decision to abandon using the names of its operating companies at the local level, instead being known universally as IDG, and the implications of that decision. The name change took effect last month. We also touched on management changes, the recent shift in the company's information technology strategy, Wall Street issues and O'Keefe's perspective on his first year as IDG's CEO. What follows are excerpts from our conversation.

ID:In August 1998, we quoted IDG's former CEO Doug Smith as saying: "Our objective is that the name stays on the door and the management stays in place at the subsidiary level." What changes precipitated IDG's decision to abandon using the local market names of long-established subsidiaries like Buford Brothers and J.J. Stangel?

O'Keefe: The change was primarily customer driven. We have been emphasizing and growing our flexible procurement solutions — the integrated supply area of our business. In many cases we take a coordinated approach to those accounts where we are serving multiple sites — and we have an advantage [because] we have multiple distribution locations that can serve all of the customer's individual sites ... Quite honestly, the customer doesn't even recognize you as [having] a coordinated approach unless you come in with a common name.

So really, the whole decision to move to one name was customer-driven based on the emphasis that we're putting on large, multi-site customers.

ID:How does the perception of IDG differ from your supplier partners to your customers and the general industry? How are you working to change how the company is perceived?

O'Keefe: Originally, we had a perception problem because of the way we came together. We came together in what is often referred to as a "poof" IPO, where several independent companies merge and simultaneously go public on the same day. Our name, Industrial Distribution Group, also didn't help us because, with the word "group" in the name, initially we had a problem communicating to customers and suppliers that we were now one organization, with a coordinated approach.

If you look over the last year, we've done a lot to communicate with our supplier base, we've done a lot in terms of communicating with our customers, and we've done a lot in terms of coordinating our own activities, so that image has slowly, but surely, been erased. I think today, if you were to go out and talk to our key suppliers, or talk to any of our key customers, they would tell you we are a ... very highly coordinated organization. We started out as a shotgun marriage and now we have learned how to live together in a mutually beneficial relationship.

ID:Is the shift in focus from subsidiary names to IDG an indication that the roll-up method hasn't worked?

O'Keefe: Those are two different [issues]. Basically, the name change is predicated upon the market needs ... the market focus and what's happening in the marketplace. It really has nothing to do with how we came together.

ID:You embarked upon a comprehensive evaluation of IDG's management team upon your arrival last year. What changes resulted from that process?

O'Keefe: If you look at the changes we've made, they're primarily placing people with appropriate skills in key positions. The way I view the management of the organization is that there were a number of people that were great managers and had appropriate skill sets for managing a $10 million, independent distribution organization. [When] we combined our organizations together, and asked an individual to manage a $40 or $50 million regional business, the [required] skill sets ... are different. So the changes we've made reflect the need for different skill sets to manage the larger scope of the organization.

While we've made several changes over the course of the last year, each of them primarily relate to trying to size the management skill set to the size of the operation as its been reconfigured.

ID:Have the changes been primarily in personnel or have you re-aligned some of the business units?

O'Keefe: We have recognized that ... you cannot support the infrastructure required to operate smaller hubs. So, we've taken some of the smaller hubs and integrated those into larger hub organizations. For example, we took our Detroit organization and blended it into our Cincinnati [business unit] so now we're serving the Michigan-Ohio marketplace through one organization. We took our Western New York operation and blended it in with our Pennsylvania business unit so we're servicing Pennsylvania and New York with one administrative structure.

In many cases, the managers [that were] in place are still in place, they are simply reporting through a different structure.

ID:How would you describe IDG's relationship with, or attitude toward, Wall Street these days? How does being public affect operating decisions and goal-setting at the company?

O'Keefe: Let me just describe Wall Street's attitude, in general, towards roll-ups. When IDG came together, the market was clearly in a stage where it loved and fully embraced the roll-up concept. I call this stage "irrational exuberance." Then, reality came along and everyone realized that the work involved in achieving the synergies and integration savings and all of the other benefits that were associated with integrating the companies was a lot more difficult than originally estimated. The potential benefits and the time-frame in which those benefits could be achieved were overestimated. So now I'd consider us to be in a phase of "benevolent neglect" as far as Wall Street is concerned. ... And I think that is true of the majority of roll-ups.

My feeling is [that] the market has a tendency to correct itself and I think what you'll see in a couple of years is that the valuations on not only us but other industrial distribution companies — and many of our suppliers, interestingly enough — will come back to a more fair valuation. I think today the valuations are on the low side, I think at the time we went public they were probably on the high side, [and] they will balance themselves out over time.

As for the second part of the question, our approach is very simple. We've tried to make the right decisions for the business ... We've made decisions over the course of the last 12 months [that], if we were only making decisions for the short term, we probably wouldn't have [made] ... We made a lot of tough decisions over the course of the last year and our financial results reflect those. This tells you that we're in this thing for the long haul. I don't think being public has a material impact on the way we make decisions.

ID:When and under what conditions do you expect IDG to begin acquiring companies again?

O'Keefe: About a year ago we deliberately slowed down the process of making acquisitions, primarily because we needed to focus our time and resources on the integration process. I think over the course of the last year we've put in place a number of the basic disciplines [and] the policies and procedures that you need in order to run a large-scale distribution business.

Initially, the roll-up strategy was two to four acquisitions per quarter. We now recognize the difficulty of integrating these organizations into a larger coordinated entity, and are no longer operating at a roll-up pace. Rather, we are operating on a sequential acquisition strategy where we may start making acquisitions, but if so, we will make them on a much more sequential basis. [Once we have] acquired a business, and gotten the integration pretty well under hand, then we would consider making another acquisition.

So, we don't see ourselves going back to two or three acquisitions per quarter, but we do see ourselves being active again in the acquisition market.

ID:IDG recently abandoned implementation of the JD Edwards enterprise resource planning system. What was the original scope of that project and why didn't it work? What system will take its place?

O'Keefe: Originally our systems requirements were predicated on a roll-up strategy where we were going to be a $2 billion to $3 billion organization at this point in time. We needed a system that would support that size enterprise. When we reevaluated our strategy and moved from a roll-up strategy to a sequential acquisition strategy, the need for that kind of a system was no longer there.

The scope was a large footprint. In essence, we were going to replace all the existing systems with ... what I call a monolithic ERP system. The evaluation that I made ... is that you need to balance a couple of things. [One was] whether the benefits of that new system justified the cost — and our answer was no. The second was, we needed to look at the fit, the form and the function of it and ask yourself, under a revised strategy, was that the best selection? And the answer was no. That's why we made the decision to go ahead and abandon that project and effectively take the financial losses that we recorded in the fourth quarter.

Looking at the strategy we're currently employing, we have some, what I call, "best of breed systems" on a regional basis.

For example, we have the NxTrend system in the Southeast, we have the Prophet 21 system in most of the Northeast and Mid-Atlantic area. We have the Prelude system in the majority of the central part of the country.

So, what we have decided is to look at the idea of expanding those systems and putting all the business units, for example, in the Northeast on one platform ... that will effectively give us the best solution at the lowest possible cost. And it fits with our strategy because in most cases, the synergies that you get from operating on one system come from the ability to share inventory and the ability to share back-office operations. Well, the most logical place to get those synergies is, first and foremost, on a regional basis.

So, what we're doing is re-organizing on a regional platform and we will probably achieve 95 percent of the benefits at a fraction of the cost of a monolithic ERP solution.

ID:Do you plan to eventually put the regional systems together on one IT platform?

O'Keefe: We're going to primarily focus on three operating systems. But we're also tying those three operating systems together so that they can communicate and share information. In essence, [we are] depending on three regional operating systems, which are then tied together so that they can communicate across the entire enterprise.

We're working on two things. One is converting those locations that aren't on one of our best of breed systems today. And then, two, building the communication structure so that they can communicate across systems.

ID:What lessons can IDG share with the industry about undertaking such a large project?

O'Keefe: Let me just talk about roll-ups in general ... If you think about it, you're taking on a number of large-scale projects simultaneously. You're combining organizations that were previously independent and you're putting in place an infrastructure, disciplines, and a control structure overnight. The lesson I think we've learned here is that when you're taking on a roll-up there's a lot to be done and you need to select your priorities carefully. The first priority is to deal with the cultural issues, because you're bringing together some vastly different cultures that have to be melded together in a positive way.

Looking back, I think that we probably took on too many projects simultaneously, given the scope of trying to pull together an organization for the first time. Just too much too soon.

ID:What, if anything, does the experience mean for the roll-up model as a whole?

O'Keefe: I personally think that the roll-up model is a viable model. I think that we did go through a period where we were too aggressive. We were trying to do too much too soon. I think the concept is still valid, [but] I think you need to do it in a much more disciplined time-frame. I think there is a lesson here: It's that roll-ups can work, but you need to make sure that as you're going along that you are in fact achieving the synergistic effect that you set out to achieve.

ID:What are IDG's long-range goals and what are the critical steps needed to be taken to achieve them?

O'Keefe: We're focused, primarily, on four areas. One is integrated supply/FPS [Flexible Procurement Solutions]. I think we have ... the ability to be a stand-out organization with regard to fulfilling the needs of the market when it comes to integrated supply. We acquired a number of units that have been doing integrated supply for upwards of 10 years. They've done very well ... What we're doing is taking that expertise and sharing it with the other units that were slower to pursue integrated supply.

The second thing we've focused on is strengthening our relationship with our suppliers. We have a program we call Strategic Growth Suppliers. And that program is designed to help us to partner ... more closely with our suppliers. We view one of the keys to success in integrated supply as working very closely with the suppliers and bringing our suppliers' expertise to bear on behalf of the end user.

The third one is, and this is necessary in any roll-up ... We're still putting together ... the basic operating policies, procedures and disciplines necessary to run a large-scale distribution business. It's a lot different to run a small-scale operation than it is to run a large-scale operation. The organization has to go through the process of, one, understanding the differences and, two, becoming accustomed to the controls, etc., that need to be in place in order to effectively operate a large-scale business.

The last thing is one that probably every business needs to do, and we're no different, which is we've got to focus on where we're going to get the future managers for this business. Succession planning is important to our continued growth.

ID: What have been the greatest challenges for you in your first year with IDG?

O'Keefe: The biggest challenge has been trying to get a group of managers who are essentially great leaders with an entrepreneurial spirit to transition from being independent entrepreneurs to being entrepreneurial in a larger scale business ... The one thing, I think, that's been a challenge for the organization and a challenge for me is making this change happen quickly.

... I think the organization has gone through an interesting year. It was a year where we recognized that the strategy needed to be adjusted, [and] we adjusted it. We put in place many of the operating disciplines we needed. We're a lot stronger organization than we were a year ago. We have developed an improved ability to service our customers. We are confident that we can make additional acquisitions and do it in a constructive way. I feel very positive about our future.