Private company FD of the year Terry Courtney has been at mine clearance company Pearson Engineering for 16 years. It's dedication that's really paid off.

You could be forgiven for thinking that industrial innovation and world-class engineering were dead in places such as Tyneside. Visions of closed-up shipyards and ghosts of manufacturing loom large in the imagination. But a few miles downriver from the Wallsend yards, one company is proving that Geordie ingenuity still exists.

Terry Courtney has been FD of Pearson Engineering since 1989. He arrived when the firm was about to go bust. Since then the company has survived, thrived and is now a leading supplier of equipment to the US military. Indeed, it’s been such a success that Courtney was named the LDC Private Company FD of the Year at the Real Finance/CBI FDs’ Excellence Awards at the end of April. This is turning into a good yearâ¦

9.30AM Courtney’s in already. But before we get down to business, we’re off to the canteen for a coffee and some toast (a perk for all staff). It’s a chance for Courtney to start his story at the beginning. “I’d always been with large organisations. This was the first time I’d come into a private company,” he says. “It took a lot of getting used to. The whole immediacy of everything was fantastic. If you work in a bigger company it takes a long time for anything to happen. Whereas here, you say something casual to someone and you turn round and they’re doing it!”

And doing it they certainly are. Pearson designs and builds mine clearance accessories for tanks. Essentially a plough is attached to the front of an armoured vehicle in order to scoop up and dispose of any mines in the tank’s path. It’s a hugely successful product and Pearson has buyers in countries from Belgium to the US.

The company’s success gives the lie to the notion that the engineering and manufacturing industries are dead in the UK. “A lot of end-product manufacturing up here is dead, it’s true,” Courtney says. “But I think manufacturing has just become more modular â“ all the parts are done in different places. You’d hope that the high added-value bits are done here in the region. It’s not always the case, but Pearson certainly is a high added-value company. Most of our people are first-class honours graduates in engineering.”

10AM Managing director Randall Flack stops into Courtney’s office for a quick chat about research and development. R&D is a key cost, given that Pearson’s success is based on innovation. “We try to come up with new products, but it’s bloody hard,” Courtney says. “Over the past few years, we’ve basically had two new products: a

system which marks a mine-free path, and a remote control package. The new thing we’re developing is ‘route-proving capability’, which makes roads safe from mines, sabotage and so on. That consists of stuff we’ve already developed â“ the mine clearance elements â“ and new stuff. In three years it’ll be another thing we can offer. But we have to put the intellectual engineering work in first.”

A component of Courtney’s triumph at the Real Finance awards was an impressive 33 per cent return on capital employed. “We haven’t got many fixed assets that require investment,” he says. “It’s basically all working capital. We get advance payments on each order â“ that goes a long way. The components only stay a short time before going out as finished product. And because the balance of payments is usually on delivery, the time lag between us getting paid and paying our suppliers is very short.”

10.45AM Courtney grabs a moment to catch up on emails and phone calls. It’s one of the great things about being FD in a smaller company: he clearly has a role to play in virtually every part of the business. “It’s only 35 people, so it’s not too tough,” he says. “I hardly do any accounting. I don’t have to spend my time working out what a financial derivative is or anything like that. Also, I don’t spend much time reading in-depth reporting standards publications.” Sounds good to meâ¦

Pearson’s success so far has been built on keeping things simple. They’ve got a good product and they know how to sell it. The FD has to reflect that simplicity in his relationships with the operational parts of the business. “You have to keep developing products and if you want to have engineers who are keen to develop stuff, you have to let them do it their way,” he says. “So it’s about striking a balance between engineers and finance.”

Knowing when to keep a tight rein and when to loosen the purse strings is something that comes naturally to Courtney after all these years. “We try not to have rules, but guidelines,” he says. “Any resource is available to everyone, if they need it.

“It shouldn’t be up to the FD whether you spend money on upgrading the computers or whatever,” he goes on. “It’s a function of what’s necessary in the business â“ what’s it going to achieve? I’ve been in firms where you have to do capex forms to demonstrate that expenditure will bring about discounted cash flow of X amount and what-have-you. You’d find the sums wouldn’t add up, but you wanted the thing anyway so you’d just go back and change all the numbers!”

So how does the FD ensure the budgets are adhered to? “You have to make sure people go through the right process â“ they can’t just go out and spend £100,000 on whatever they like,” says Courtney. “There are some constraints, of course. But if someone needs a new laptop, that’s not my call. I should be making sure that whoever’s decided that it is necessary is doing it for the right reasons â“ and knows whether we can afford it.”

11.30AM The FD looks over some contracts, updating and tweaking them. Managing Pearson’s numerous customer relationships is a crucial part of the job. -He’s now, he admits modestly, something of a dab hand.

“I learnt it on the job, and I really enjoy it,” he says. “Reading through Ts and Cs is a bit dry, but arguing about the details can be great.” And what makes a good negotiator? “As far as I can see, it’s to do with understanding the person you’re negotiating with; making sure you’ve got valid arguments; preparation, of course; and not being frightened to ask for things.”

12.15PM Courtney’s on top of the contracts. But there’s an issue that’s come to light over one subcontracting deal with a local manufacturer. The engineering team aren’t 100 per cent happy with what will be delivered to the customer, so they’ve asked the FD to sit in on their meeting.

The typical Pearson order will start with an enquiry and lead on to an RFI before the team puts together a proposal. “The engineers do the engineering and I’ll do the commercial side,” says the FD. “To do that well, and get the pricing right, you’ve got to understand what’s in the rest of the contract. But I won’t worry about the technical stuff. The engineers can ask, ‘Will it work at minus 42 degrees?’ My job is just to remind them what specs we’re signed up for in the contract.”

1PM Time for lunch, so we’re back to the canteen for steak and chips. It’s free, as usual. It’s also a cut above what you’d expect, given the size of the company. But with turnover fast approaching £20m, Pearson needs to be set up to handle further growth. Courtney’s aware that the next stage of the company’s development will be crucial to its long-term health. He’s seen the company grow from near-bankruptcy in 1989 and says the next task is to ensure its expansion doesn’t create any problems in the short or medium term.

“We jumped from about 12 to 35 people, which was a fair step up,” Courtney says. “It meant we had to develop communication systems way beyond just 12 people working together in the shop. But we’ve managed it. If we had a hundred people, we’d need something a lot more formal. But at the moment, we could probably treble turnover and need barely any more staff.”

So is that likely? What’s the smart strategy at this stage? Sensible planning and constant innovation. Oh, and a healthy dose of FD’s pessimism. “My biggest fear is that we will run out of people to sell to,” says Courtney. “Mostly because they’ll already have the stuff we sell. It won’t happen in the next year or two, but still... That makes it even more important to focus on ‘intellectual engineering’. That’s where the value is.”

2PM It’s back to the office to take a look at a recent export licence directive from the DTI. Since Pearson makes military equipment, it’s subject to myriad rules on selling overseas. It can be a pain â“ but Courtney says things have actually improved in recent years. “It was all getting clogged up, and the DTI couldn’t cope with it all,” he says. “So eventually they reviewed the system.”

Pearson can now apply for a catch-all rolling licence for its products, rather than seek a new licence for every sale â“ an infinitely better process, from the FD’s viewpoint. “It means we know we can fulfil any contract we might be negotiating,” he says. “Under the old system, you couldn’t apply for a licence until you had a contract signed. So you might have to go back and apologise to the customer [if the licence was refused].”

Courtney points out that Pearson’s products are not the kind of defence equipment that the government is overly worried about. Selling mine clearing ploughs is not high on the list of security risks, at least not for the MoD. (I briefly imagine a rogue regime stockpiling huge metal blades for some lawnmower-style killing machine in the mould of the Iraqi supergun â“ but nah, coalition forces have nothing to worry about.)

Doing business globally does have its risks for an FD, however. The danger of patent infringement and intellectual property violations, while small, must be considered. Then there’s forex risks and credit risk. It’s issues like these that have tested Courtney in recent years. “There’s a lot of legislation, updates, new regulation,” he says. “And most of it doesn’t apply to us, but the only way you can know that is by reading up on it.”

His office walls are lined with folders labelled with all the countries where Pearson has done business. From Canada to UAE, the list is impressive. Courtney gives me a relieved “no” when I ask him whether he has to visit all the countries himself. With four young children, the 50-year old FD wouldn’t relish travelling the world negotiating contracts. He’s perfectly happy in the office, yards from the Tyne.

3PM Financial controller Helen Livingstone stops in with a pricing query. Getting the prices right (particularly for first-time customers) is absolutely crucial. And after 15 years, Courtney’s a pro. “It takes balls and experience,” he says. “You’re not dealing with someone who only has a limited amount of funds â“ they’re mainly governments and they all work in huge budgets, so they can get it from somewhere else if they need to. They’ll find the amount of money that they think it’s going to cost. And if you can influence them getting their budget right by planting the right expectations there in the first place, then you can justify the price.”

Of course, there aren’t too many commercial applications for mine-clearance equipment, so finding and securing government orders is the bread and butter of the business. Courtney takes a few minutes to check the latest procurement news on a US government web site. It’s something he has to do on a regular basis. And negotiating with public sector agencies is not a run-of-the-mill conversation.

“You have to know how it works in any given state,” he says. “Obviously I’ve not got an

encyclopaedic knowledge of every country. But, for example, we’ve had a number of contracts with the US, so I have to know how their system works in some detail. They have a menu of terms and conditions which they pick out and put into a contract. So it might only be 20 pages long but it cross-references to loads of different rules called Defense Federal Acquisition Regulations Supplement (DFARS). The more you know about them the more you can work out any problems in advance. And then you can agree a price.”

They’re skills that make Courtney indispensable to the company. With such a small finance function, and the majority of the 35 staff being from an engineering background, the need for a commercial FD is paramount.

3.45PM Courtney takes a call from his broker at foreign exchange provider Travelex. It’s a routine conversation: a lot of Pearson’s revenues are in foreign currency. “We do deal with quite a lot of foreign money, especially in the US where the government only wants to deal in dollars,” he says. “Of course the rates that we’ve got can be a

problem. Once we’ve done a deal in the US, we want the dollar to be as strong as possible â“ at least until we’re paid. Recently, of course, it hasn’t been. But then, if you’re doing business anywhere around the world you’ve got to be able to hold prices in your customers’ currencies. They don’t want to deal with different prices.” Given the innate complexity of dealing with governments (see box, below), it’d really make the deals hard to tie up.

4.15PM Time to make a few calls. The FD also browses the management accounts. The Pearson business model is simple: invest well and the results will come. “The largest chunk of spending we do is buying the components in,” he says. “We know how much products are going to cost before we build them. The project manager then works within a budget because we know what sort of margin we should be making on it. And if we find ourselves with a much reduced margin, then there’s a red light and we want to know why that’s happening.”

Once Courtney has his R&D and salary budgets finalised, he says he’s happy to let the business run itself. “The rest is slightly peripheral. Rent, say. What can I do about it? Squeeze the last penny out of it? I could spend my whole life looking for cheaper gas, but to what purpose? You look at it now and then, of course â“ you don’t want to waste money. But my time’s better spent trying to get an extra one per cent on the price rather than saving one per cent on the water bill.”

5PM The day’s nearly over. Despite the attention he garnered for winning a Real Finance award, you get the feeling that all the tea in China wouldn’t tempt the FD away from his beloved Newcastle. The corporate life, with its bureaucracy, holds few attractions. (Besides which, he might have to wear a suit.) “There’s a tendency to feel inadequate in a smaller company,” he says. “And you look around the business community, at other FDs, and think ‘all these people know so much more than me’. But then I think, ‘Has this got any relevance to what I’m doing?’ Not really. So I don’t worry about it.”

What Courtney is doing is providing the financial control, risk management and commercial nous to allow a largely unheralded company to punch above its weight â“ to be a global player. And despite his modesty, he’s doing a pretty impressive job.

Doing business with governments

Pearson does business with governments all over the world, so Terry Courtney has become an expert in negotiating with “Sir Humphreys”.

“The hard thing about dealing with governments is that they all want to see evidence of value for money through competition in their tendering. We like competition, and of course we like to win in that environment. It’s the fairest way to show value for money in a marketplace. Otherwise you end up usually trying to work it out through some

complicated formula. And it’s almost always their formula â“ as you can imagine, it’s not the most attractive pricing structure in the world.

“It’s never an elected official or a general that you’re talking to in these deals. Generally it’s someone â“ certainly with the size of our contracts, which to them aren’t huge â“ who’s not too important. Someone like me, just on the other side of the world. And you just have to get to know them.

“Sometimes the MoD will want to look at every single cost in a contract. There’s a government formula which says you have to identify all the bought-out costs, bought-out parts, estimated hours, and so on. You also have to show how you got your hourly labour rate; and you’ll be allowed an ‘overhead recovery rate’ based on last year’s figures and your forecasts for this year. They send an accountant in to look at that. Then there’s a government percentage profit margin that you’re allowed to work in â“ that’s based on key ratios in your balance sheet.” Enough!

And they say that government has started tackling the red tape issue...

Tags: engineering, terry courtney, mine clearance, pearson engineering,

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