Expect the Unexpected

Bruce Gillis

As I sit on a jet bound for Montana, in Corona Spring, I am reflecting on the things in life that have been unexpected. Pandemic deaths counted in hundreds of thousands. No traffic to speak of on the busiest streets and clean air over LA. All very much unexpected…at least by me.

For the past seven weeks I sheltered in place in my partner’s Chicago townhouse with two of her grown daughters. That was unexpected, but a gift of sorts. Not only did I not board a plane for seven weeks – which may be unprecedented in my adult life – I did not even get in a car. My company’s sales plummeted as the pandemic emerged here in the U.S., the expected result of an unexpected event. Then, sales to one of our chain store customers accelerated and actually surpassed the level of a year prior…very unexpected and still hard for me to explain.

Now, I am headed for another month of sheltering in place at my Montana cabin with my eldest daughter. We will work remotely, eat healthy, probably stream documentaries about rock climbing or environmental calamities, and hike on the weekend days. This is all an expected part of our time together, which is another unanticipated gift.

One Sunday, many years ago, I was visiting San Francisco and called Patty Brenner Jackson to confirm our plans to meet that afternoon. The first words out of her mouth were, “Have you talked to Tony?” (Tony is her brother and was then my business colleague). “Your plant burned down.” That was unexpected. At the time, our small equity investment firm was the proud majority owner of the fourth largest bed pillow manufacturing company in the U.S., with headquarters and our largest plant then smoldering on its concrete slab in Middletown, Indiana.

I did not see Patty that day. I called Tony, then headed to SFO to get on whatever red-eye departure could get me to central Indiana earliest the next morning. As you might imagine, I did not sleep. My mind churned chaotically through a thousand thoughts of what needed to be done…immediately…by me and by others. I reflected on the many GSB cases and discussions that had addressed this type of situation. Oh wait, no I didn’t. There were none. By the early morning hours, my mind started to focus on one thing that I actually did know how to do. By virtue of having done a plant location project with McKinsey, I did know about how states compete for new industrial employers, the services provided by economic development offices, the tax incentives, and so forth. And, of course, due to my questionable career choice, I had plenty of experience creating financial models to analyze the various options. GSB clearly contributed to this aspect of those early morning hours.

My flight arrived in Indianapolis about 75 minutes before Tony’s, so I encamped at the U.S. Air Club and started dialing for dollars. (There were no websites or email in those days, so knowing the first call to make in each state was an advantage.) I knew labor costs and logistics favored a move south of Indiana, so I contacted the governor’s offices in Kentucky, Tennessee, and so forth. My task was to act quickly to restore the lost production capacity. And so I acted, much as I suspect each of you probably would have done, to take the necessary and expected actions in response to an unexpected event.

The unexpected for that event did not end when the ashes of the fire were cold, however. A team of investigators arrived a short time later, including an Indiana Fire Marshall and federal ATF personnel. Their task was to determine what had happened. To do so, they conducted forensic tests and interviewed everyone who worked for the company. (The fire had started on a weekend night, so there were no “witnesses,” per se.) That was all expected. I knew their work would require some of my time, but I did not expect it to be more than a slight distraction from my work.

You may have heard the old joke. Three retired businessmen are sitting by the club pool in Florida. The first says, “When my business burned down, I decided to just take the insurance money and retire.” The second one says, “That’s a coincidence, the same thing happened to me.” The third man says, “Well, my story is a little different. My business was destroyed in a devastating flood.” Which prompts the first man to ask, “How do you cause a flood?” Well, I had heard the joke, so I anticipated questions about the company’s organization, financial strength, and rebuilding plans.

A few days later I went to my initial “interview,” which was really a deposition. The investigators introduced themselves. They said some preliminary things about their process and how this was all routine, I presume to put me at ease. Then they asked questions about my role in the company, the relationship between Cedar Point Partners and the pillow company, and the business’s financial health. As it happens, business was booming at the time of the fire. In addition to normal order flow, we had been contracted to make licensed Barney throw pillows. (You remember Barney, the purple dinosaur from a popular children’s TV show.) The plant was operating three shifts and the company was growing and profitable. I told them all of this and referred them to the audited financials previously provided to them. My belief was that understanding the strong financial health of the company would squash any idea that management or investors might have benefitted financially from the fire.

And then the trip down the rabbit hole began. I think it started with the question, posed somewhat accusatorily, “Mr. Gillis, who is this Arthur Andersen guy and why wasn’t his name included on the list of people to interview?” I was a little surprised but I calmly explained to them about accounting practices, the role of external auditors, and the structure of the U.S. accounting industry.

This was followed a short time later by another obtuse question, to the effect of, “We see the name ‘Resolution Trust Corporation’ listed as a creditor on your balance sheet. Who is involved in that entity and is it an affiliate of Cedar Point Partners?” (The Resolution Trust Company was formed in 1989 to sort out failing financial institutions. Along the way it took over 747 S&Ls with nearly $400 billion in assets, which was a lot of money at that time. One of those S&Ls had been our principal lender, which is why the RTC appeared on the balance sheet.) Now, leading up to the time of the fire, the RTC was a regular front-page story in both news and business media. I was stunned that the investigators did not know about it. I don’t actually remember how I responded to this question. I must have explained to them about the then-current financial crisis, the U.S. Treasury’s creation of the RTC, the basics of lending, and so forth. What was going through my mind was that this might not be such a minor distraction after all.

Then came the real clincher. It was something like “Mr. Gillis, we have learned that the morning after the fire, you contacted agencies in other states to explore relocating the plant there. Why was this the first thing that you did? How could you have known what to do and whom to call so soon after this event?” (the implication being that I had known the fire would occur). So this was it. I was a “person of interest” because I had acted quickly in the face of calamity.

In response, I think I said something terse, as calmly as I could manage, such as, “That is what I was trained to do.” In retrospect, what I should have said was: “No, you idiots, that is not the first thing I did. The first thing I did was figure out how to get to Indiana as quickly as possible. And, since my personal role in the company is primarily financial oversight, the second thing I did was figure out how cash flow would be affected for the next 30 days (or until an insurance settlement was reached). Then I thought about who among our customers, suppliers and service providers needed to be notified and what the content of those communications needed to be. Then I looked at our finished goods inventory position at other plants to determine what could be poached to fill critical Indiana orders without causing a larger fulfillment problem. Then I worked through the night to assess the implications of the lost production capacity and all of the possible options for shifting production to other plants for the short term. This required making assumptions about availability of raw materials, assessing scenarios for moving key personnel from Indiana to those locations and housing them on a shortterm basis, adaptation of equipment to produce different products, analyzing shipping time and freight cost differentials, and so forth. Then I started thinking about how the lost capacity should be replaced. How much capacity would we want to build? Should it be built all in one place? Where should that location (or those locations) be? What would the costs be for fixed capital investment, one-time move and start-up expenses, and ongoing operating costs? How would our future plant capacity configuration and the (presumed) efficiency gains from having new facilities affect our strategic competitive position? Then, and only then, did I turn my attention to which state agencies to contact. I think it was the 23rd or 24th thing I did.”

Those are the things that went through my mind on that first sleepless night. That is what a GSB MBA does in a situation like that, right? It is what any of us would have done. Unfortunately, though, I did not have the presence of mind to say all that to the investigators at the time and make them feel as dumb as I wanted to make them feel. Being surprised by the unexpected leads to not giving the best responses.

The surreal experience of that investigation went on for a while. Along the way, they floated numerous possible theories that would be motive for arson. One of these was that some employees were involved in a Barney pillow theft ring. Another was that an angry woman burnt the plant down because her husband, who worked at the plant, was having an affair with another woman who worked at the plant. And so it goes.

Management was unsure at the time why the investigators seemed to believe that the fire was caused by arson. An answer to that was provided in the final investigation report. The conclusion was that the fire was arson because there was a large amount of hydrocarbon breakdown residue in the materials found on the slab, a finding believed to be consistent with the use of an accelerant to start the fire. This perhaps should have been a surprising conclusion. However, it was not. It was not a surprising finding because the business primarily produced polyester-fill pillows and polyester is made from oil. The many tons of polyester contained in our raw bales of staple fiber and in finished pillow inventory equated to hundreds of barrels of oil. So finding lots of “hydrocarbon breakdown residue” on the slab should have been no surprise to anyone. And at that point, it was not a surprise to management that this logical finding led to a flawed conclusion. We had come to expect that level of thinking.

If you are curious, everything worked out fine. The investigators went away to investigate other fires. The insurance company eventually settled our claim. The business interruption was managed as well as one could hope. Customers understood and stayed loyal, which is to say that we continued to be a very competitive, high-service vendor so they continued to buy from us. The plant was rebuilt – in Indiana. The company prospered and was later sold at a handsome gain, thanks largely to Tony, whose market timing was brilliant.

The fire was just one episode in professional life that shaped what I now come to expect (and what I still don’t see coming). There have been quite a few others. If one encounters the unexpected (or illogical or untrue) often enough, it is no longer unexpected. Alice got used to the surprising realities of life in Wonderland as did Dorothy in Oz. We all have become inured to living in an alternate political universe. So very little surprises me anymore. Except for the grizzly bear sow. I did not see her coming. But that is another story.