Cdi Corporation Business Information, Profile, and History

History of Cdi Corporation

CDI Corporation provides temporary technical and engineering services for the growing ranks of manufacturers who wish to limit their permanent labor costs by 'outsourcing' portions of their product development labor. Through its Technical Services division, CDI supplies the automotive, aeronautics, petrochemical, and other industries with a broad range of highly skilled temporary employees; the company also undertakes projects at its own in-house engineering facilities. In addition, CDI operates two smaller divisions, Temporary Services, a traditional temporary employment agency providing clerical and secretarial workers, and Management Recruiters International, the leading American executive search firm. Of the three divisions, Technical Services is by far the largest and for many years has returned a modest, steady profit; Management Recruiters is the smallest but is highly profitable; and Temporary Services has struggled since its creation in 1982.

The field of technical services is largely a post-World War II phenomenon. In the prosperous three decades following 1945, several economic developments made possible the growth of the technical services industry. Primary among these was the increasing importance of technology itself, which required manufacturers in nearly every field to stay in touch with the latest innovations across a spectrum of engineering and scientific disciplines. Particularly for companies in highly technical, capital intensive industries such as automobiles, avionics, and defense, it became imperative to develop new products from design to assembly line in the shortest possible amount of time. This meant carrying a staff of engineers larger and more diverse than was actually needed at any one juncture. At the same time, increasingly competitive markets tended to penalize those companies that were 'top heavy' with excessive overhead costs, prompting employers to seek methods of reducing the number of their full-time employees receiving full benefits and high wages. One means of reconciling these opposing needs was to hire extra engineers on a temporary, limited-benefits basis, and it was to provide such a service that CDI was founded in Philadelphia in 1950.

Known originally as Comprehensive Designers, Inc., CDI was among the first to offer temporary technical services to the manufacturing industries, or what would later be called 'outsourcing.' As the provider of an entirely new service, CDI grew slowly during its first decade, its revenues never rising above $2 million. The company's future prospects were excellent, however--the automobile industry was at full throttle and the Cold War had created a permanent defense industry--and in 1956 CDI hired a young aeronautics engineer, Walter R. Garrison, who would eventually help the company capitalize on its advantageous position. Garrison was born in 1926 in St Louis, earned bachelor's and master's degrees in engineering from the University of Kansas, and started his career as a structures engineer with Boeing Airplane Company. When Garrison learned of the higher pay offered by technical services companies he joined CDI as its chief engineer in 1956, and two years later he was made vice president and a director.

In 1961 Garrison--who, along with his family, controlled about 45 percent of the company stock--and two colleagues bought out the languishing CDI and set about spreading the gospel of technical services. Their timing could not have been better. With a war brewing in Vietnam and the arms race roaring, government defense expenditures would soon reach levels unmatched since World War II. In turn, the defense industries would develop more sophisticated products at ever more rapid rates, requiring the sort of temporary technical labor pool CDI could supply. Garrison expanded his base of operations, opening recruitment and business offices around the country to accommodate the automotive, space, and petrochemical industries, as well as defense. The concept of technical services was solid and business grew for CDI and for the industry as a whole. In 1967, industry sales were estimated by Barron's at $500 million and CDI was already ranked number one or two with revenues of $40 million, about 80 percent of which was related to defense spending.

Because it was in the temporary services business, however, CDI's revenue was subject to severe fluctuations as major contracts came and went. For example, its 1967 sales of $40 million were up more than 100 percent over the previous year thanks to a single contract for work on the Lockheed C-5A aircraft; when that ended in 1968, revenue dropped accordingly. On the other hand, CDI was uniquely well adapted for such cycles, as most of its costs were tied to a labor force that could be laid off and rehired with complete flexibility and without the rancor usually incurred in doing so. CDI paid its employees a higher salary than they would otherwise receive, but with limited benefits and no assurance of future work. In practice, since the company was growing and jobs were plentiful throughout the 1970s and beyond, most CDI employees had all the work they wanted.

CDI's defense-related contracts declined sharply in the early 1970s with the end of the Vietnam War. Impressively, the company did not suffer any overall lapse in sales, having established its presence well enough to build new business in other industries. As early as 1971, CDI's defense customers comprised only 33 percent of sales, with the remainder supplied by such all-star clients as Coca Cola, Philip Morris, Mellon National Bank, Shell Oil, Magnavox, and about 145 other manufacturing firms in the United States, Europe, and the Middle East. The company employed some 3,000 technical specialists at any one time, shifting them from city to city as needed by individual contracts.

A new wrinkle in CDI's service was the gradual creation of its own engineering facilities, where small projects could be handled from start to finish by CDI's employees and then delivered to the customer. This method was substantially more efficient than the usual policy of sending technicians to the customer's plant, where a lack of familiarity tended to slow the initial stages of work. Over the years, CDI continued to expand its in-house capability, and by 1990 as much as 40 percent of its revenue was generated by work done on its own premises.

In 1972 Garrison began to diversify his business by acquiring--for about $1.3 million in stock--a headhunting firm called Management Recruiters International (MRI). Unprofitable at the time of its purchase, MRI picked up steam and was soon adding offices from coast to coast, the bulk of them franchised. The recruitment business had been very good for CDI, consistently returning higher rates of profit than the Technical Services division or the more recent division of Temporary Services. MRI focused on the recruitment of middle managers--those earning between $25,000 and $125,000--the largest segment of the managerial ranks and those most likely to make a number of career changes before settling on a permanent employer. The baby boom generation ensured that the middle management niche would remain crowded for years to come, and MRI had little trouble establishing itself as the leading American job search agency. Though never more than a fraction of CDI's total business, MRI often made heavy contributions to the corporate bottom line; in 1982, for example, recruitment provided only eight percent of overall revenue but 35 percent of operating income.

A number of Garrison's other attempts at diversification were less successful. In 1970 CDI bought PMI Corporation, a California construction firm that never yielded satisfactory returns and was sold off in 1981. In 1978 Garrison no doubt raised some eyebrows around the directors' table when he announced that CDI had invested $7 million in a partnership formed to develop a casino in Atlantic City, New Jersey, where gambling had recently been legalized, with plans including a 16-story hotel to be built on three acres of boardwalk property. However, the complexities of gaming laws proved too much for the prospective developers and the deal fell through--probably for the good of CDI, which could have had little hope of surviving in a business that has seen many more experienced players lose everything they wagered.

The business of technical services was vulnerable to recession, as CDI learned in the severe downturns of 1974-75 and 1982-83, and even in the best of times was a business of paper-thin margins: 1984 revenue of $300 million yielded a paltry $7.1 million net, for example, a ratio of about 2.5 percent. For that reason, even as Garrison built CDI into the country's number one supplier of technical services, he continued to look for acquisitions in more lucrative fields. In 1982 he plunged into the traditional end of the temporary employment business that provides clerical and unskilled workers, a field dominated by such firms as Kelly Services and Manpower. Temporary services is a much larger market than technical services and is perhaps less vulnerable to recession, both characteristics that made it a tempting choice for expansion by CDI. Garrison added offices as quickly as possible during the 1980s, justifying the new division's red ink as an inevitable side effect of such rapid growth.

As late as 1988, Garrison still talked of needing 500 offices in his Temporary Services division 'to achieve the excellent financial returns that Kelly ... has achieved,' as he told the Wall Street Transcript, but in the meantime the division continued to lose money. After reaching a peak of 145 offices and $111 million in unprofitable revenue in 1989, Garrison finally called a halt and began pruning the division of its worst performers. Two years later the number of offices was down to about 100, the division still lost money, and Garrison made a puzzling decision to buy his way deeper into the quagmire. For an undisclosed price, CDI acquired Todays Temporary, a Dallas-based company with revenues of about $50 million and a healthy operating income. Whether CDI would find the right formula for this segment of its business was an open question.

After weathering the recession of 1982-83, CDI went on to triple its overall revenue by the end of the decade, with peak sales of $921 million in 1990. Propelling this explosive growth was the ever-increasing acceptance by large manufacturers of the temporary technical services concept. As American firms became more conscious of international competition, they were pressured to invent, develop, and market new products faster than their Japanese or German counterparts. They found that the employment of engineers on a job-by-job basis offered maximum flexibility with a minimum of fixed overhead. CDI won new clients in virtually every corner of the industrial marketplace, most notably General Motors and other auto industry companies. America's largest automaker, GM had been losing market share to the Japanese for 20 years, partly because its top-heavy engineering staff could not design and produce new models as quickly as its overseas rivals. GM's sluggish development pace translated into lost sales when consumers could not find the features they wanted in GM cars and instead bought Japanese models.

To rectify this situation, GM and the other American automakers made increasing use of technical services in the mid-1980s, cutting permanent engineering staff and farming out more and more of the development process. CDI was one of the primary beneficiaries of this change in strategy. It is one of the few service companies large enough to handle the massive engineering work involved in automobile production, in some cases taking over the entire process from artist's concept to tooling specifications. By the end of the 1980s, the auto industry was easily CDI's largest market, generating about 40 percent of the Technical Services division's $740 million in 1990 revenue. With Detroit companies still getting used to the idea of outsourcing, CDI's prospects in the field of automotives appeared limitless. The downside of such a concentrated sales picture was demonstrated in 1991, however, when a sharp recession in Detroit lopped $100 million from CDI's revenue and saddled the company with its first annual loss in more than a decade. In the interests of greater stability, CDI will no doubt seek to reestablish the more balanced revenue portfolio it enjoyed in the 1970s and 1980s.

Principal Subsidiaries: CDI Corporation; CDI Marine Company; CDI Telecommunications, Inc.; Baystar Service Corporation; Continental Consultants, Inc.; Interglobal Technical Services, Inc.; Midwest Technical Inc.; MTI Corporation; Stubbs Overbeck & Associates, Inc.; CDI Engineering, Limited (United Kingdom); CDI International, Limited (United Kingdom); CDI Transportation Group, Inc.; Modern Technology & Design, Inc.; S.T.S. Information Systems, Inc.; CDI Temporary Services, Inc.; CDI Temporary Services, Ltd. (Canada); AAAA Temporary Services, Inc.; Interim Temporaries, Inc.; Lang Corporation; Timesavers, Inc.; Management Recruiters International, Inc.; CDI System Services Group; CDI-Professional Solutions Group, Inc.; CDI-PSG, Inc.; Innovative Information Systems, Inc.