WSJ 12-4-98

Article 2 of 5 THE FRONT LINES

Competent WorkersAnd a Complex LeaderKeep Big Oil in Check By Thomas Petzinger Jr.

12/04/98 The Wall Street Journal Page B1 (Copyright (c) 1998, Dow Jones & Company, Inc.)

Lima , Ohio -- ANOTHER ROUND of Big Oil mergers has begun, generating panic over plant closings and job loss.

Jim Schaefer has been there. Two years ago, after leading a stunning turnaround at the huge British Petroleum facility here, he watched foreign ownership drop the ax on his plant. Yet today, the refinery is flourishing under new ownership, its future seemingly secure in an era of excess capacity.

This week and next, I'll share the Lima saga as a palliative for megamerger defeatism. No matter how inevitable the forces of consolidation, the culture of a work force and the creativity of a community can still make a difference in the fate of a factory. "You don't have many stories this complex, gut-wrenching and heart-wrenching," says Mr. Schaefer, "where everyone turns out happy."

On the surface, his background befits that of a hard-nosed corporate commander. The son of a Cleveland chemical engineer, he studied college chemistry in high school, graduated first in his class and enrolled in engineering at Catholic University in Washington, D.C. He was student government president and tennis captain. Later came the Harvard M.B.A.

But Mr. Schaefer is more complex than his CV suggests. He spent his formative years as a plumber and bricklayer's helper, jobs that teach respect for the knowledge of hands. In search of diverse cultures, he took 88 days after graduate school to circle the world on $20 a day. His Harvard classmates leapt at investment banking; he took a planning job in iron ore.

His career was marked as much by dissidence as competence. While his employer, Hanna Mining in Cleveland, was raking in profits, he warned that an ore depression was imminent. He quit the firm just before the bottom fell out. Joining Standard Oil of Ohio, he exposed the faulty economic assumptions on which Sohio had just laid out nearly $2 billion to buy Kennecott Copper. Senior colleagues were not amused. But he earned ever-higher positions, including assistant to the chairman.

SOHIO HAD long been owned by BP when Mr. Schaefer drew his biggest challenge, in 1993: running the company's giant, old refineries in Toledo and Lima . Though widely seen as bull's eyes of excess capacity, the plants were "tarnished jewels" in his view, with huge potential. In particular, Lima , a town of 48,000 located far from everywhere, possessed a powerful work ethic (he marveled at how many people held second jobs -- like removing tree stumps) and mechanical inventiveness (which he attributed to the town's farming legacy).

So when top management gave Mr. Schaefer three years to increase profits by $7 million, he answered by promising $60 million. When the future is in jeopardy, an outlandish goal can inspire amazing performance.

The strategic element of his plan involved expanding the plants' market. Other retailers in the region sold foreign-made gasoline imported to Ohio. By expanding into that market at wholesale, BP could pocket part

of the profit the other retailers paid to pipelines. But the plan was meaningless unless Lima and Toledo could refine a lot more product at lower cost.

Mr. Schaefer believed rank-and-file workers would drive productivity gains because they best knew the work -- and because with less transferable skills and families, they had the biggest incentive to save the plants. But supervisors also were vital, both in applying knowledge and in removing themselves as obstacles. So every 90 days Mr. Schaefer convened senior managers and union leaders to set specific improvement goals. (They met in a state park lodge instead of a conference center). Every 30 days he asked front-line managers to commit to specific improvements.

And nearly every day, Mr. Schaefer ate his lunch with the workers, ultimately all 900. In three years he spent so much time shuttling between the plants that he went through 300 books on tape. He carried pizzas to tank fields and cafeteria trays to control rooms. Here is the strategy, he said, now tell me about the obstacles. He acted quickly on every response, sometimes on the spot. Someone said maintenance inspectors should carry tool boxes in their trucks. Fine, he answered, buy the tools today.

THE PLANTS were soon engulfed in change. A barrel of crude began yielding a more profitable mix of products. Gases once burned as waste became revenue producers. Maintenance downtime evaporated. In an industry that celebrates 1% improvements, Lima 's output swelled by 20%.

Mr. Schaefer always suspected BP would eventually move to sell Lima , profitable or not, to focus more on its strength in producing crude oil. But he was positive the improvements -- and more importantly the culture of continuous improvement -- made the plant attractive to buyers. When BP indeed put Lima on the block, he wrote an article in the Lima News assuring the community a sale was likely.

So you can imagine his shock in late 1996 when BP, without negotiating, rejected all offers as inadequate and announced the century-old plant would be shuttered for good by the end of 1998. Mr. Schaefer quit, unable to act as spokesman for the closing of a plant he swore he could preserve as a going concern.

He landed in a top post at Cleveland's glass-making Ferro Corp., where he scored quick productivity gains by applying the leadership principles he'd perfected at BP. Then, in March 1998, he received a call from Dave Burger, mayor of Lima , to recruit him for a secret plan.

Next week: A community controls its destiny

Article 1 of 5 THE FRONT LINES

A Mayor's Mission:Tenacity Saves a Plant,A Town and a Future By Thomas Petzinger Jr.

12/11/98 The Wall Street Journal Page B1 (Copyright (c) 1998, Dow Jones & Company, Inc.)

LIMA , OHIO -- ONE YEAR AGO, this city of 40,000 was getting beat up in a brutal international economy. London-based British Petroleum, with more pressing interests elsewhere, was closing its century-old refinery here, even after workers and managers made it a model of profitability.

Lima was "caught in global crosswinds," said The Wall Street Journal. The Nation said BP had robbed Lima "not only of its identity but its dignity." The Guardian of London pictured Mayor Dave Berger at the refinery gate under a headline, "Heartbreak in Sundown City."

But at that moment, Mayor Berger was plotting to take back control of Lima 's economic destiny. Not long ago he succeeded. Most amazing of all, he did it in a way that benefited not just the city but BP itself. Says investment banker Bob Payne of Wasserstein Perella, who was involved in the drama: "I've never met anyone in a big city or a small city more tenacious than Dave Berger, even to the point of risking his own reputation."

Now age 44, Mr. Berger entered the Catholic seminary after eighth grade. During graduate school a decade later, he interrupted his studies to help renovate low-income housing in Lima . Drawn into community affairs, he quit his priesthood studies. Although the antithesis of a politician -- soft-spoken and philosophical -- by 1990 he was mayor.

Within weeks of his election, Lima , already a victim of rust-belt retrenchment, was hard hit by defense cutbacks. Thousands were idled and entire blocks boarded up. But the region fought back. Four new industrial parks inspired local entrepreneurs to expand. Lima 's hospital, community college and YMCA planned an elegant complex.

RESIDENTS were not overly concerned when BP announced it was inviting bids for the refinery, which had turned solidly into the black. But BP wanted to turn over some of the assets to a nearby chemical plant and turned a cold shoulder to all bidders, launching the refinery into a phased shutdown. Lima fell into a collective depression. Mr. Berger, fearing other recovery efforts would be jeopardized, pilloried BP for its "scorched-earth" policy.

The only solution, he thought, was recruiting an offer BP couldn't refuse. Some said he was only setting up himself for embarrassment and the city for more heartache. But he persisted, backed by a task force of business and political leaders.

Eventually, the search led to Wasserstein Perella's Mr. Payne. Though unaccustomed to pitches from small-town mayors, he was struck by Mr. Berger's sophistication and sincerity. "I'll see what I can do," he said.

As it happened, Mr. Payne already had an appointment with former U.S. Budget Director David Stockman, by then a principal in the Blackstone buyout firm. Blackstone controlled Clark USA, an expanding merchant refiner. As Mr. Stockman pondered an offer, Mayor Berger bombarded Wasserstein Perella with task-force data.

By March 1998, the clock was ticking: Lima would run its last crude in October. Finally, Mr. Stockman declared his interest, but with some concerns. Which operations were already shut down? How many workers had been let go?

Keeping plant managers in the dark, the Lima task force snooped for answers. They found that while executing the staged shutdown, workers, astonishingly, were preserving the assets in pristine condition, just in case a qualified buyer stepped in.

Mr. Stockman had another worry: How permanent were the plant's productivity gains? More important, would they continue?

TO PROVIDE credible answers, Mayor Berger turned to Jim Schaefer, whose role in the turnaround we learned about in last week's column. By coincidence, both men were Catholic University graduates. The mayor had even scheduled Mr. Schaefer to conduct a leadership seminar for 150 city employees, before BP's closure announcement drove him from the company.Though since departed from the oil business, Mr. Schaefer leapt at the chance to facilitate the sale of his old plant. In April, he met Mr. Stockman at the Airport Marriott in Cleveland to detail the story of how an old refinery had attained world-class status -- and how the culture of continuous improvement would survive a change in ownership. Mr. Stockman was convinced.

To help Blackstone present the best offer possible, the Lima task force scrutinized every offer previously rejected by BP. Soon the investment bankers reached BP Chief John Browne by phone to offer $150 million, a sum many times greater than anything BP had yet seen. In July, after bargaining the figure to $175 million, BP halted the closing process and announced the sale. Since taking over the plant, says Brad Aldrich, an official of the Blackstone refining unit, "All our surprises have been positive."

Besides receiving cash, BP rescued itself from demolition costs previously charged against earnings. And downtown Lima has become one giant construction site, with 16 projects worth $45 million under way.

"I've never been involved in a transaction that was so well positioned as a win-win-win," says Iain Conn, the senior BP official who presided over the negotiations. Relations with the city had been tense, he admits. "But some of the people who were bloodied by that were able to say, `This is a correct final chapter.'"