Cardno ERI

For Immediate Release

Diversification Helps Cardno ERI Outpace Limited Growth in Remediation

Whether they’re faced with increased competition in a tight market or lower client spending in recessionary times, companies adopt diffrent response strategies, sometimes polar opposites of one another. One ﬁrm may decide to trim peripheral business and service lines, shoring up the brand by focusing on core competencies. Another may see the need to diversify into new service areas, geographies, or client sectors.

Cardno ERI(Lake Forest, CA), a $40-million environmental consulting and engineering ﬁrm with the majority of its business in the remediation sector, chose the latter strategy. To be fair, it wasn’t out of reaction to the economic slump. “We started mapping that strategy out three years ago,” says Steven Zigan, Cardno ERI’s CEO. “We wanted to get more diversiﬁcation with our current clients, by getting into larger programs and more upstream parts of their work.” The company also sought to grow geographically and expand its client base beyond its strong position in the oil industry into other industries, such as power and chemicals, as well as the public sector.

Zigan claims to have made signiﬁcant progress in implementing the ﬁrm’s diversiﬁcation strategy. From a geographic standpoint, “we won approximately $4 million in divestment projects with a major client in Virginia and New York.” The company also recently received a ﬁve-year, $12.5 million contract from the Federal Emergency Management Agency (FEMA) to support cleanup work at underground storage tank sites throughout the United States, and it won a ﬁve-year master service agreement with a major utility that has an annual spend of $90 million to $100 million. In addition, “Our litigation support and compliance management work have markedly increased in the past six months, with the litigation support being utilized internationally,” Zigan says. ERI, which recorded $40 million in revenue in 2009, has grown consistently since its founding in 1989. The largest annual revenue increase—35.2%—came in 2005; since then, growth has slipped to still impressive levels of 20.1% in 2008 and 11.1% in 2009.

Zigan believes last year’s slower growth rate was probably due to the economy, but the growth continued because much of the company’s work is regulation-driven and must still be undertaken. The ﬁrm’s largest clients “are very proactive with regard to remediation,” he says. Overall, he expects his diversiﬁcation strategy will allow the ﬁrm to outperform the remediation industry generally over the next three to four years, achieving 10 to 12% growth this year.

A major driver for Cardno ERI’s business has been property transactions, and “as those transactions have diminished, so has our work load driven by that industry,” Zigan notes. “I anticipate good growth from that driver in the next few years as major energy companies readjust their land portfolios.” He adds that state reimbursement funds have experienced shortfalls in the amount of work they are reimbursing, but “fortunately, very little of our work is driven by reimbursement funds, so the impact on our work has been minimal.”

With its major client sector, the oil industry, the volume of work hasn’t been interrupted substantially, Zigan reports. Overall budgets for existing site portfolios may have decreased anywhere from 5 to 20% depending on the client, but other initiatives, such as potential property transfers and demolitions, have tended to replace any reductions in work on ongoing portfolios.

He adds that regulatory agencies have been “more willing to close environmental cases that deserve to be closed, but funds that were spent on those cases are being redirected to sites that need more work. Sometimes the sites that need more work are not in the same area as the sites that were closed. Where necessary, we have diverted our staff to our new regions and new clients.”

Although more than 90% of Cardno ERI’s business comes from the private sector, “we established a federal sector a few years ago and are steadily making inroads,” says Zigan. “We have also succeeded in getting work with county and city governments. We project that our public sector work will grow as fast or faster than our private sector work, perhaps exceeding 15%.”

Like other remediation ﬁrms, Cardno ERI has adjusted as clients change preferences in contracting mechanisms and curtail their risk appetites. “We are seeing increasing demand or interest in using unit rates— ﬁxed fees for routine tasks—as opposed to the historic time and materials billing method,” he reports. “Different energy companies have tried cost-to-closure pro-cesses at different times. We see them generally migrating back to the unit rate structure, which makes better sense given all the uncertainties with remedial timeframes.

“Because we are always progressing projects effciently toward closure, I believe the unit rate structure is the best contracting vehicle for us, our clients, and the reimbursement funds,” Zigan continues. “Margins for unit rates are good when you can ﬁnd and establish effciencies.”

PREMIUM ON RISK MANAGEMENT

As for risk, clients are asking the ﬁrm to share more of it. “We don’t mind doing that when all the parameters are known or the scope is within our control,” says Zigan. “It works well when the goal is specific and predictable, such as the installation of a speciﬁc number of wells or a remedial system. However, you never know how big the plume is until you look, so you can’t assume the risk that those wells will adequately delineate the problem. If you knew how big the plume was you wouldn’t need the wells to ﬁgure it out in the ﬁrst place. It is very diffcult to predict the mass and variety of chemicals in the subsurface, or how fast they can be removed.”

Another factor is the regulatory agencies, which “don’t always grant closure when the risk has been remediated,” Zigan explains. “Add to that the vagaries of access to adjacent properties, and the risk gets pretty unpredictable. Therefore, it is very risky to predict how much time and money it will take to get regulatory closure.”

Strategic Information for a Changing Industry
Environmental Business Journal, Volume XXIII, Number 3, 2010

All that said, “risk can be somewhat controlled if the number of cases in a portfolio is large enough. Hopefully, you will have estimated too high on some and too low on others so that the average cost will be the same.”

Zigan has observed the trend towards more sustainable remediation practices and stresses that his ﬁrm is by no means a late-comer. “Cardno ERI has always considered energy and material consumption when designing or retroﬁtting our remediation projects. Our clients’ demand for sustainable remediation has always been high and I anticipate it will get even higher.

An example of more sustainable project execution is Cardno ERI’s development of a bioreactor system that routinely reduces high concentrations of methyl tertiary butyl ether (MTBE) and tertiary butyl alcohol (TBA) in groundwater to non-detect levels. Approximately 36 of those systems are in use throughout the U.S. and have proven to greatly reduce the amount of carbon consumption, according to Zigan.

“We are also working on a similar device for perchlorate and are searching for a teaming partner who would be interested in helping us take it from the bench scale to a ﬁeld test. Cardno ERI evaluates each of our systems routinely to determine when it is time to switch to a new technology—say for extracted vapor or water treatment. While being innovative ourselves, we are also quick to adopt new and better ideas. As the industry develops new sustainable processes, Cardno ERI will learn and incorporate those methods.”

Looking forward, Zigan sees his principal management challenge as keeping up with the ever more diversiﬁed accounting requirements of its ever more diversiﬁed client base. “We now need a consultant to advise us on tax requirements for the 28 states where we are doing business.”

As for marketing, the principal challenge is “getting new clients to give us the chance to prove ourselves to them,” he says. “Once we do, we can keep that client. The majority of our work comes from clients we’ve had for over 13 years. We’ve been doing work for our biggest client for over 18 years.”

EBJ REMEDIATION SURVEY 2010:
Professionals speak out about the challenges ahead.

What do you think is most important challenge the facing the remediation industry in 2010?

“Funding for projects either through federal methods or via lending institutions. The money needs to be freed up.” “Economic strain on clients and government.” “The economy and the drivers for brownﬁelds revitalization.” “Mergers and acquisitions and the general economic health of our country and our clients.” “Investment in property and redevelopment—i.e., land values.” “Uncertainty in funding, regulatory enforcement.” “Troubled companies bidding projects at unrealistic numbers.” “Getting the proper staff, and keeping them.” “Addressing sustainable remediation issues and controlling cost-to-client through negotiation of win-win agreements with regulatory agencies.” “Increasing incorporation of sustainable and green remediation practices and approaches—e.g., further use of renewable energ[y] in remediation methods.”

What do you think is the most important challenge facing your company in 2010?

“Identifying new and emerging markets [that are] being driven by rule changes, and the technological and industry shifts towards “green” innovation and sustainable remediation methodology.” “Growing fast enough while maintaining high quality to meet the demand for our technologies.” “Maintaining adequate stafﬁng levels now to be ready to address projects as the economy recovers.” “General decline of pay scale in the industry. Lack of interest among professionals to join the industry. Mechanics often bill at higher rates than environmental professionals.” “Bidding against stiff competition and balancing client desires to take on greater risk.” “Availability of funding and pushing clients to do something.” “Availability of growth capital.” “Increasing sales in the face of shrunken budgets.” “Providing value-added services to our clients.” “Cash ﬂow to purchase new capital equipment.” “Remaining competitive and coming through the current economy with a strong balance sheet.” “Being more proﬁtable on the work being performed.” “Getting work and staying on top of new technologies.”

Source: EBI Inc., EBJ Remediation Survey, 2010
Strategic Information for a Changing Industry