Spirax-Sarco Engineering: The Power of Direct Sales

How would you describe the culture of the business at Spirax?

When I moved to England, it was my first experience of corporate life. It was a challenge going from managing a mid-sized German company to being a regional general manager, responsible for seven or eight operating companies with frequent travel. Today Spirax-Sarco are on the FTSE100; right now, they are at 59, but recently were as low as 52nd largest company on FTSE.

They have annual revenue of £1.3 billion with an operating profit of 23%, which is high for an engineering company. I can speak for Spirax, which is one of three very successful legs Spirax Sarco stands on. One of them is the steam specialty business, which is Spirax-Sarco and Gestra, a competitor they acquired several years ago. They do steam systems, condensate management, controls and thermal energy management. So what does that mean?

Mars Bars are covered in chocolate, which needs to be melted at some point in the process. Enormous vats of chocolate have to be heated in a very controlled fashion; too hot the chocolate burns, not hot enough the chocolate cannot flow. The best way to heat it is steam. Not the steam that comes out of your coffee cup, but the steam which is under pressure. If you heat water under pressure, it gets hotter than 100 degrees, which you guide to a big vat of chocolate. That steam goes into the chocolate in a controlled manner and becomes condensate.

It changes from gas to water and is boiling hot so you have to handle it properly. It has to be guided while simultaneously utilizing its energy with heat exchanges. The hot water runs into condensate traps which are drained when full. Spirax-Sarco Gestra have a worldwide annual revenue of £755 million at a profit of 23.6%, if I'm not entirely wrong, which is again extremely high for an engineering company.

Engineering is very often lower, which is why they are in the FTSE 100. The second leg is electrical thermal solutions, which I am not too familiar with. It is basically the same thing as steam but with electrics. If you are in Alaska and drilling for oil, the oil will not flow if it is too cold, so you have electrical hoses or wires which run along the pipeline ensuring the oil is heated. That is a very crude explanation of what they do, and they are called Chromalox in the US and Thermocoax in France.

The third leg is Watson-Marlow.

They also have that leg, which is very successful with pumps and tubes.

How is the direct sales team at Spirax organized?

The companies have synergies for IT and HR but the sales teams are separate. Each entity’s knowledge is highly specialized and they remain segregated where possible. Within Spirax, for example, there are both food and beverage and pharmaceutical industry specialists in identical areas, because they use different appliances.

Do sales staff cross sectors for Spirax and Gestra in Germany?

Yes. In Germany, Gestra and Spirax are sister companies and have complementary products for complementary groups of customers. There is total clarity in who approaches each customer because their respective approaches are so different. In the early days, a team of five or six people – which is manageable for communication – would bid on anything that moves. Today there is a very clear idea of each team’s specialization.

Where there is too little business to allow for specialization, everybody does everything. When business grows to allow for specialization, it is much better for selling, more enjoyable for the sales team and beneficial to the customer.

Does the customer really value the specialized knowledge of the plant and its systems?

Yes, in the past you would walk into a plant and see gigantic boilers bigger than a two-bedroom apartment, with someone or a team holding all the knowledge of how to run the boiler, use the steam and manage the condensate. Today, this has changed and the knowledge and people are no longer there. A Spirax engineer bridges that gap to the customer. The more specialized Spirax is, the better it is for a customer.

That is also interesting, because when Spirax buy a business like Gestra, it is not a cost saving plan where you rationalize manufacturing or cut costs. They almost buy complementary assets to serve the same customers on different parts of the plant.

You would not have a Spirax and Gestra engineer visiting the same customer because they have different needs, but what happens at the customer is fascinating and was lovely for me to see. Spirax refers to this as generating unrecognized need. Slightly less than half the Spirax-Sarco steam specialty business revenue is from repeatable maintenance. If a flow trap fails, you have to have a new one. An additional 35% of all revenue comes from unrecognized need.

The direct sales engineer visits their customer simply to keep in contact. They spend an enormous amount of time walking through the plant, wearing their crash helmet and vest. They feel the boiler temperature to understand it while talking with the customer. The Spirax-Sarco engineer knows a lot and the customer knows what they need. Suddenly, a sales engineer realizes an opportunity the customer was not aware of. If you take that hot water and guide it to a heat exchanger, you would save money, which is good for the customer.

Due to the knowledge of the sales engineer, the customer realizes he could save money. There were little projects which would have a payback period of two years. From year three, the customer and Spirax engineers are making money, which is a win-win situation.

Spirax have deep expertise and knowledge in steam systems which is effectively what the customer pays for, in addition to implementation of the product?