United Rentals

"Ten years ago the rental industry was even less formal. Sunbelt, now the second largest rental company, used paper notebooks to communicate pricing to its rental branches, while United Rentals used mobile devices instead of paper, but neither had real pricing engines. Branch managers felt the pulse of the local market and priced accordingly, communicating to their salesforce via email. Opinions varied from one branch to the next, and customers played the branches against each other. New systems, using external expertise in pricing and software, combined with an internal analytics team to gather the input of branches, made pricing much more rigorous."

"Rental equipment is an industry in which even expert observers assume there’s no chance to thrive. There are no obvious barriers: anyone with financing can start a company, buy equipment, and rent it out. Yet United Rentals, along with number two player Sunbelt Rentals, has built tremendous, compounding success through a feedback loop of scale and continuous improvement."

"United Rentals knew early on that addressing customer dissatisfaction with deliveries was a major opportunity. Late deliveries also brought excess cost and lost pricing. Rental equipment might be only 2 percent of the cost of building a high-rise, but if the equipment is not there or not working, dozens of other processes stop. High-wage workers stand around waiting, delays back up, and the customer gets angry at the rental company. An outflow of the early kaizen events was a visual fix for late deliveries. Did the order get taken correctly, with the customer specifying exactly what kind of setup was wanted on the 60-foot boom lift? Did the customer know exactly what was needed, or could the customer have benefited from a quick consult with an expert? Did the order include the phone number and backup number of the person who would take delivery on site? Is it a cell phone? Is the delivery address correct? If it is a large jobsite, what gate should the truck deliver to?"

"There is a distinctive use of technology in operations at United Rentals. One workflow is used to increase the efficiency of the customers’ operations, even at the expense of short-term revenues. Telematics data now allow the company to track where the equipment it has rented is sitting and how much it’s being used. United Rentals calls its system Total Control, and its customers can look at a dashboard to see statistics on their own equipment utilization. Maybe this shouldn’t be shocking, but it turns out that customers don’t use the equipment all that efficiently. They are renting because they know they don’t use it enough to buy, but often on a large jobsite they forget it’s even there, paying fees every month for equipment that has no purpose. One way to think about that from the rental company’s perspective is, well, great. No maintenance, no problem—money comes in; costs are low. The United Rentals way is to tell the customer, “Hey, you don’t seem to need this. Let us come pick it up and save you the cost.” Revenue might be lost for a few days until the piece is rented again, but the customer is happy. And technology extends the efficiency benefits further into the system, making the whole jobsite better as opposed to just the operations of the rental company."

"POSTMORTEM Most companies we follow don’t get the first step right for starting compounding growth: good operations, founded in continuous improvement, that drive a widening gap versus competitors. Margin expansion is great, but it only really counts if it is systematic and repeatable. Margins at United Rentals have improved by more than double the industrials group average over the past decade, through systematic improvements."

"Finally comes raising margins at the acquired companies, systematically, so the process can repeat in a virtuous cycle. Lots of companies do acquisitions; far too many in fact. There are reasons why most acquisitions fail to create value: trying to buy companies without a well-defined way to improve them consistently is an uphill fight. United Rentals has had a great deal of experience acquiring companies and integrating them into its system successfully."

"Lessons from United Rentals •   Continuous improvement and operational excellence are as applicable to services or software businesses as they are to manufacturing. •   Developing an operational edge can be even more powerful in hypercompetitive industries, partly because it’s so hard to survive in the first place. •   Incentives have to be tailored to the current needs of an organization—and then evolved over time. •   Feedback from employees can create a virtuous cycle. Those on the front lines are often a great source of ideas. •   There is a temptation in both the old and new economies to offload assets and become more “asset light.” The reality, however, is that the assets are usually still there. •   Systematically leveraging your operational expertise into someone else’s business through acquisitions is an incredibly powerful way to compound returns over time."

"All too often, United Rentals experienced the opposite dynamic: the stock market didn’t place a high multiple on its own EBITDA and would pay a higher one for its targets. Maybe fewer deals at lower prices would have yielded better results—more profit generated from the acquisition dollars spent—but it would have also been a slower process, limiting the rate at which the company’s strategic scale advantage over the industry could grow. The cost of not compounding earnings as quickly must be considered as well; United Rentals redeployed capital with a high degree of efficiency all throughout a 10-year run. Most companies don’t have enough opportunities to do that consistently."

"The second step is using the improved profits to acquire new assets. The fragmentation of the rental industry is fertile ground for acquisitions, and thanks to its operational strengths, United Rentals has both ample targets and plenty of cash to deploy."

"I loved making “obscene profits” for the shareholders of United Waste, and again with United Rentals, and again with XPO. It meant that my team and I were doing our jobs in creating the most value for the investors who trusted us with their money."

"Control Your Outcomes You’ll find it’s much easier to succeed at M&A if your acquisition process is aligned with your business plan and your high-level strategy for creating value. With United Rentals, for example, I could clearly envision what companies I wanted to buy and why—the list was right there, hundreds of small companies doing the things we intended to do on a grand scale."

"In addition, I knew that I’d be able to relate to the people I’d be negotiating with in these deals, because rental business owners on the whole are entrepreneurial, and so am I. The tenor of negotiations has a major influence on controlling the transactional outcomes. With the United Rentals acquisitions, I knew that a compatible mindset across the negotiating table gave me a high chance of success."

"United Rentals is a good example of an integration process that proved it could go round after round. In the three months after I founded the company, we acquired six equipment rental businesses to give our concept a physical presence. From there, we began to execute a methodical M&A strategy that integrated about 250 independent rental businesses into our branch network, including our landmark purchase of U.S. Rentals in 1998. U.S. Rentals was the second-biggest equipment rental provider, and the largest acquisition in the industry up to that point."

"That’s the part of United Rentals’ history people tend to remember: the roll-up. What’s less apparent is the hard work and the loads of humility it took behind the scenes to buy up businesses at speed and emerge as one cohesive company with a shared culture. My first piece of advice is simple—set your priorities up front and don’t stretch your team too thin, or your service levels could deteriorate in the business you bought, or your legacy business, or both. Competitors will try to poach customers and personnel when changes are underway, and any slipup leaves you vulnerable."

"Give Yourself a Break The only time I’ve felt truly lost was when I stepped down from United Rentals in 2007. I started looking for my next big thing, but I couldn’t find it, and for the first and only time in my life, I became depressed. Maybe I was just coming down from the rush of success, but I’m an ambitious person by nature and a dealmaker by inclination. Now I had no deal going, no industry sector where I could envision working my magic. What was next for me?"

"XPO By the time I was looking in earnest for a new venture in 2010, the world was rapidly moving into an extreme phase of instant gratification in communications and data access, thanks to smartphones. The trend toward on-demand everything, which I had bet on with equipment rental ten years earlier, was now well established. And the concept of dynamic pricing, which we had deployed so effectively at United Rentals, had by now increased the profitability of a whole raft of other industries, including transportation, entertainment, and hospitality. I knew that whatever line of business I went into next, tech was going to be essential to making a lot of money."

"I was discussing the construction industry with one of the analysts when he asked me what I thought about going into construction equipment rental. I hadn’t heard of it, but I kept an open mind. It turned out to be exactly what it sounds like: Companies buy machines like boom lifts and backhoes and rent them out to contractors who need the equipment but don’t need to own it. My team and I moved fast to scrutinize the industry before concluding the big trend was the most exciting we’d come across so far. The addressable market had only 15 percent rental penetration, which didn’t make any commercial sense. A lot of the equipment in the remaining 85 percent was sitting idle on worksites getting rusty and dusty. We could capitalize on that disconnect. In addition, the equipment rental industry was growing organically; had only one national provider, a subsidiary of Hertz; and offered thousands of potential acquisitions, without widespread computerization or standardization. It was a big, juicy opportunity, and only a matter of time before economist Adam Smith’s “invisible hand of capitalism” swooped in. United Rentals was born."