Moving from a regulated to a deregulated business environment can be an experience akin to “Bill & Ted’s Excellent Adventure,” or, on the downside, the appropriately named sequel, “Bill & Ted’s Bogus Journey.” While some industries (the airlines, among them) and, indeed, a slew of companies have taken the “bogus journey,” few have mastered the “excellent adventure.”
One of the excellent adventurers has been Ameritech, the Chicago-based telecom. Ameritech has been a leader in cost-cutting, and the first of the Baby Bells to be 100 percent off rate-based regulation. With 26.8 employees per 10,000 access lines, Ameritech has been a leader in this efficiency measure for the industry, reports Lehman Brothers.
“The catalyst of Ameritech’s cost effectiveness is the regulatory format it discarded,” says Dillon Read’s William Vogel. “The company has had flat or down capital expenditures for the last three years, and it is no coincidence that it also was moving from rate-based regulation.”
In addition to cutting payroll, the company focused on cash-flow management, which it continues to massage year in and year out. As the industry is capital-intensive, growth has been double digit and competition profound, cash flow is the “lifeblood” of the company.
One measure of Ameritech’s success is its earnings before interest, taxes, depreciation, and amortization. In 1991, EBITDA was $3.9 billion, and it has climbed to $4.4 billion in 1992, $4.7 billion in 1993, $5 billion in 1994, and $5.3 billion last year.
“We had teams working on improving cash-flow management over the last four years since we started the cultural transformation of the company back in 1991 and 1992,” notes Richard Pehlke, Ameritech’s VP and treasurer. “We recognized we could meet some of the demands of our rapidly changing business by adopting more aggressive, innovative ways to improve cash flow, such as cash management.”
As Ameritech’s management prepared for competition, it looked at how it invested capital in the business in infrastructure as well as working capital, receivables, and inventory. Management felt it could do a better job if it identified aggressive targets and then mastered them one by one. For example, the company sought to improve collections, and attacked the problem at the front and back ends of the process. First, the company changed how it checked customer credit by developing an application scoring model so the initial service representative could better determine credit risk. The scoring model also established different risk groups up front so that if a payment problem developed, it could be tracked more quickly.
The company also changed its policies for paying suppliers and vendors. Ameritech better uses its financial strength to negotiate terms and to extend payments to vendors so as to maximize cash flow, while at the same time shortening billing cycles, improving collection efforts, and tightening credit policies.
Further, in the company’s small-business organization, a team worked to improve upfront credit-checking procedures, consolidate collection activities into a single site from multiple locations, and adopt a more disciplined collection practice. This new methodology reduced cycle time in contacting past-due accounts and consolidated collection practices. As a result, Ameritech reduced the amount of money in, and number of, past due accounts.
Since it has implemented tighter cash-flow management policies, Ameritech has measured about $200 million to $300 million in cash savings every year. That was, one might say, the “low-hanging fruit.” Pehlke estimates there is another $300 million in improvements that can and will be achieved in the next 12 months.
This year’s targets will fund infrastructure expansion with cash generated from working capital improvements instead of adding to the debt base. This a a change from when Ameritech was regulated: Then, there were cash-flow improvement targets.
“We are emphasizing cash-flow management as never before,” says Richard Notebaert, Ameritech’s chairman and chief executive. “We’re counting on it to provide flexibility in meeting the needs of our customers and the business. Cash-flow management simply is an aspect of business operations that no company can afford to ignore.”
Says Vogel: “This shift in the emphasis of cost components confirms the ongoing transformation of Ameritech. It’s a concrete example of the transforming effects price caps can have on a regional
Vogel adds, perhaps a bit sarcastically, “To be sure, Ameritech’s management and line employees have been energized because they are now under a standard GAAP accounting model for the first time in 100 years.”
Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance, and Corporate Finance.