Lessons From a Small Company Grown Large
Southern California today is a hotbed of small business. But is it a good place to grow a small business into a big one?
“Not as good as it used to be,” says the founder of a major local company--who is joined in his verdict by the chief executive who succeeded him. Joseph Jacobs, 81, founded Jacobs Engineering Group 50 years ago in Los Angeles, and the company remains a prominent resident of Pasadena--but only because it made a tough decision three years ago to keep headquarters here.
“Southern California used to be a great place to attract talented individuals for your firm, but that is not as true today,” says Jacobs. He and Noel Watson, Jacobs Engineering’s president and chief executive, cite “high home prices, inferior schools and an anti-business climate in Sacramento” as drawbacks to contemporary Southern California.
To be sure, Jacobs’ business isn’t hurting, and it’s keeping its headquarters here for good reasons. The firm now employs 10,000 people worldwide--more than 700 locally--in engineering, factory design and site supervision, up from fewer than 7,500 a year ago. Its total revenue for the fiscal year ended Sept. 30 is roughly $1.8 billion, and the order backlog is at record levels, with orders increasing to build plants for customers in Southeast Asia and India.
International work is a big reason why Jacobs decided to stay.
“Los Angeles is a great jumping-off point for international business, whether in Europe, Asia or Latin America,” Watson explains.
The global operations are yet another new phase for Jacobs Engineering, which has survived a terrible business downturn in the mid-’80s and the transition to a non-family chief executive.
After 50 years, the company offers a lot of insights to small companies wanting to be large about what makes the difference between long-term growth and gradual decline.
Make it a business, not a family affair, advises Joe Jacobs. “I was determined to avoid a “family business,” he wrote in his 1991 autobiography, “Anatomy of an Entrepreneur.” Jacobs, the son of Lebanese immigrants, came West in 1943 with an engineering degree from Brooklyn Polytechnic University to a job with a Northern California family company making pesticides for the wine industry.
When hard times hit, the founder’s son couldn’t bring himself to cut the staff. But the company declined. The lesson for Jacobs was that “we do not have the luxury of being compassionate if it is at the expense of the rest of the employees.”
Jacobs founded his engineering consulting firm in 1947 with no intention of ever bringing his children into the business. The company prospered in postwar Southern California, building the chemical plants and oil refineries that served the area’s growing industries.
In 1967, when the company had 100 employees, Jacobs looked beyond California. He sent Watson, a 30-year-old chemical engineer from the University of North Dakota to New Jersey to win business from pharmaceutical firms and diversify the customer list.
Later, the firm prospered in the oil boom 1970s. Joe Jacobs’ connections in the Middle East got the firm a big job in Jordan, erecting a potash complex near the Dead Sea. Jacobs Engineering was like one of today’s shooting-star high-tech firms--its revenues zoomed to $380 million in 1981.
But then the price of oil declined and Jacobs Engineering’s revenue fell to $190 million. The company had to make some tough decisions. The engineering business works on projects; when there are fewer projects, employees are let go. But that doesn’t make personnel decisions easier.
Jacobs says one of his top executives worked seven days a week during the downturn to try to protect his employees. But he didn’t get the top job. “Watson did because he made the tough moves and took the heat,” Jacobs says.
The business has grown dramatically in recent years. Yet “it’s tougher than ever, with every customer demanding low costs,” says Watson. He has just entered a joint venture in Mexico so he can “send work on the Internet to engineers in Mexico City, where the cost of labor is $20 an hour including facilities, compared to Houston, where it is $50 an hour.”
Is that good for U.S. engineers? “Sure it is,” Watson maintains. “Because the whole level of business has increased, I can employ more American engineers to do brainpower work.” Jacobs’ U.S. work force grew 7% last year, as its global work force expanded by 20% because of acquisitions in France and India. The company is heading for $2 billion in revenues for fiscal 1998.
The firm’s long-term success, says Joe Jacobs, is due to the transfer from entrepreneurial management to the “different set of skills that Noel possesses. He is more disciplined than I am and a better CEO than I would be at this stage for the company.”
Analyst Marc Sulam of Donaldson Lufkin & Jenrette says approvingly that Jacobs Engineering is “methodical. It is expanding internationally with its customers, doing so in a very disciplined way.”
Joe Jacobs and his family own roughly 16% of the stock, but Jacobs’ three daughters are not going to inherit the company. Jacobs, like other major entrepreneurs, says of inheritance: “We entrepreneurs enjoy the game of risking all to build the business. We don’t want to deprive our children of that.”
Jacobs’ daughters have stock worth millions of dollars, but most of the $124 million in stock that Joe Jacobs and his wife, Violet, own will go to their foundation for the support of the poor and of the free enterprise system.
Jacobs Engineering, meanwhile, is moving to a lower-rent building in Pasadena to cut costs, leaving the building on Lake Avenue with the Jacobs name on the roof. “Our lease is up,” Watson says with a shrug. “We can lower our costs in the new building.”
That kind of discipline allows small firms to grow large--and might help all of Southern California attract and hold new business.
