Eve of (more) destruction: document destruction industry leaders discuss growth opportunities for their sector.

Several leaders within the secure destruction industry gathered at the 2005 Annual Conference of the National Association for Information Destruction (NMD), Phoenix, for a one-hour discussion of the critical issues facing the industry and the areas of potential growth.

The Recycling Today Media Group and its Secure Destruction Business (SDB) magazine organized a roundtable discussion on the opening day of the conference, which was April 6-8 in San Antonio.

The participants included current NMD President Chris Ockenfels, who was installed at the conference, and outgoing NAID President John Bauknight IV. Also participating were representatives from two of the industry's largest companies: Vlad Vasak of Iron Mountain Inc. and Nate Campbell of Recall. Tom Thompson of Information Protection Solutions of America (IPSA), a co-operative organization that has been banding smaller regional firms together for joint marketing purposes, also took part.

The following is an excerpted portion of the roundtable, featuring remarks from these industry leaders on the areas that represent the most growth potential for the information destruction industry. (A more complete transcript, found in two parts, is available at www.SDBmagazine.com.)

SDB: In terms of vertical integration--records management, product destruction--where do you see the best opportunities there in the next five years? Where should a savvy shredding company be focusing some of its other efforts?

CO: It depends on the owner's expertise. There is a lot to do with records storage, a lot to do with recycling, a lot do with media destruction. If somebody wants to come in with something different--the electronic media storage--there are all kinds of parallel or complimentary services to offer. I don't know that it has to be a specific one. It can be whatever fits your demeanor or motivations.

TT: I think if you're talking to the same person in most cases for all those services, you have to be able to present it as sort of a one-stop shop even more. You can work with a customer and the more value you are to him as far as providing different services, I think that helps you. But you really can't get away from your core competency, either.

JB: We are a little bit of a horse of a different color in that we largely grew from product destruction back into document destruction and then added records storage. But I think, in the future, electronics will become bigger and bigger. We keep talking about identity theft, and the hits that they can make on electronic media vs. paper media are tremendous as far as the amount of information.

I think there are certainly add-ons that we as a company see as trying to be a total provider in the information management process. I think Recall and Iron Mountain, represented here, recognize that and have those as different business units.

That's the other side of it. Does it have to be the same company doing it all? Possibly, but they recognize that they are different units of business for them and they keep those separate for a reason, I am sure.

VV: I think it's important to remember we're in the information destruction industry, not the paper shredding business. You look at the companies that are industry clients and, even if they became paperless, we're going to be evolving along that chain and providing information destruction in whatever form their information is stored.

If you are a recycling company, which was there to follow the paper upstream, and now you're in the shredding business, suddenly information changes from paper-based to electronic, then you see those people fading out again. Somebody else might come in.

And, so, to me, I would say there are a bunch of opportunities. If you are there to offer a suite of services to your customers, then you'll keep evolving. If your customers change from one form of medium or storage of information to another, then you're there to evolve with them and you're there to provide those services. To me that's what really differentiates the key kind of core companies in this business from the ones that are in it for other reasons.

NC: I'm not, and Recall's not, too concerned with the paperless office right now. We don't see that being in the near term. Obviously, we're taking steps to be there for the future digitization. But at the end of the day, we don't see paper going away any time soon. Otherwise, we wouldn't have invested so heavily in the consolidation and acquisition companies.

JB: I think it's increased in volume, particularly in the medical sector. We do business with lots of hospitals in our area. For example, one hospital is scanning everything, holding it for 90 days and then disposing of it. That helps my shredding business. Doesn't necessarily help my storage business, but then it helps the media vault side, because they end up creating more media. I think overall, the increase in the last five years has been huge. People still like paper and like to hold it.

CO: Take this scenario. One memo 10 or 15 years ago used to be put up on the employee bulletin board where everyone could see it. Now, in the computer age, everything gets sent out as e-mail. Everybody prints it. After it is printed, it gets read, put in a file, then it gets stored, then it gets destroyed: 25 copies instead of one, now. So, the computer hasn't really hurt the business at all.

SDB: What about when those printers get to the end of their lives, or other electronic communication devices, how well positioned is the industry to serve the electronic media and product destruction sectors overall?

JB: I think we're very well positioned. I think from an equipment standpoint, the manufacturers have certainly grabbed hold of it. Fortunately, a lot of the shredding equipment is diverse enough that you can run different materials through the same piece of equipment and get a common result.

The upside potential of it, I think, is that there is a lot of revenue to be made on the front end and the back end as far as electronic recycling is concerned. I think, as probably happened with paper, the front-end revenue will probably come down as competition heats up. But I think we're very well positioned.

NC: Whether it be paper or a computer, were not just recycling stuff, you're seeing them actually look at a secure destruction program. I think the NAID members that are on the more progressive front are certainly positioned to capture that consumer marketplace. I don't see it as rocket science; I think we're all thinking about it.

FACTA does talk about computer destruction. It's looking at what the business does--the office. The office isn't just looking at recycling anymore. The office is actually looking at securely handling their critical documents, whether they are personal information for a bank or their computers that have all their critical data or code. They are taking a much harder stance. And that only supports us, and I think as a result, we all have to adapt to that kind of change.

CO: That would be one of the biggest issues NAID is arguing among itself right now: what to certify for e-destruction and what not to right now. We're pretty much only going to look at physical destruction. It's the only way you know that the information is gone.

Software wiping to where the hard drive can be really used again, that's going to be a tough bullet ... we're in the information protection business, and the only way to ensure it's gone is through physical destruction.

VV: I see a very strong parallel to the way the recycling industry kind of evolved within the shredding industry. But it was at that point it was driven by fiber value. Most of the people out there claimed to be providing a wonderful service. It's all driven by what can I get for the material on the back end. It's not driven by, "I want to kill this first, now what do I do with it."

These people are all about, "We want this material, and, oh in the process we'll shred it, so there's your solution."

But I think it will evolve and I think you will get people doing it for the true reason, which is the destruction or the termination of information, but I don't think we're there yet. I think that there is a long way to go.

SDB: Do you believe the sales argument that people will eventually accept and want to hear is that the first priority is to destroy it?

VV: I think it will be forced either by legislation or by stuff not being destroyed the way it is supposed to be destroyed--stuff getting out there, then someone is going to get sued, and suddenly people are going to pay a lot more attention.

JB: FACTA spells out the fact that the sheer transfer of goods to a third party, simply some people taking their computer to a non-profit, for example, in and of itself does not constitute proper disposal. So, they've set the table for that.

SDB: Nate, I think you said there were estimates in your organization that saw the industry potentially being a greater-than-S2 billion industry. As you see the industry going forward, there is clearly the opportunity in the electronics area. What about other segments, like the shredding of pharmaceuticals or product destruction? Where do you as a group see the biggest opportunity, perhaps in a nontraditional or non-information segment?

JB: I don't mind saying for Shred First that [product destruction] is 50 percent of our business. We move in our operation 400 or 500 tons of material per week through our facility, and about 50 percent of that is product and about 50 percent is data. For one plant-based operation, we're edging on a busy week about 1 million pounds, and half of that is product; so, to answer your question, I think it's huge. We do a tremendous amount of business, I don't think it's a secret, with the music industry.

I think there is a tremendous upside for non-conventional markets.

VV: I think anything where the intrinsic value of the material is greater than the commodity value. If the value of the tennis shoe is made for a couple of bucks in Thailand but sells for $95 on the shelf, then the intrinsic value is a lot more. That difference is something that needs to be protected.

Ultimately, if you define it that way, it's no different from a check. The commodity value of the check or piece of paper is a fraction of a cent, but the intrinsic value could be $1 million.

If you buy that argument, than anything with an intrinsic value that is greater is a candidate.

CO: Plus if you have a recall item and something gets out, there could be a liability issue.

SDB: Do you think the industry has seen that non-traditional space come close to where it's going to be?

CO: No, not at all. I think people are hitting on it here or there ... but they haven't really put together a marketing focus on it. As soon as the lawyers get involved, you'll really see the escalation.

VV: There's probably too much action in the paper market for people to really have to get creative and think, "Where else can I offer my services?"

You'll probably see it on the back end of the curve if demand ever falls off for document destruction. People will then have equipment capacity that can be used for something else.

SDB: Where do you see the cost pressures coming from right now? Is it labor? Is it fuel? Insurance? A variety of things?

CO: Fuel is going to affect different people different ways. If you're on site, fuel is going to be a bigger burden on you. Or, like us in Iowa, we have a lot of transportation costs because we have to travel so far; we don't have a million people in a 30-mile radius. But you adjust and try to get more efficient with every ton you get.

JB: I think it's made us a better operator. It was off radar for us until February of last year, when we budgeted $12,000 for fuel and our fuel tab was $22,000 for the month. We recognized we needed to do something, which ended up being a fuel surcharge we put into place. It also made us a better operator because we bust our operational folks on density, density, density: route density.

We've added five or six trucks in the last 12 months, but we're spending the same amount of money on fuel per month as we were a year ago.

NC: I think at some point you're going to have to see that we've absorbed all of the costs that have risen and we've done it maybe because of the increase of paper prices--that has helped. But at some point those paper prices probably start to change, and you'll see the impacts to the actual business.

VV: I think Nate's right. It will be interesting to see a downturn in the paper price cycle. It might sort out the real players from the [others].

CO: But, by the same token, it'll also thin out the competition and increase some of the margins if [a decrease in recycled paper prices] takes out some of the people who are out there basically lowering the market value of our services.

VV: You're coming back to how you sell your service. If you sell it as, "I'm selling you information insurance or protection," it's a lot easier for a customer to accept the fact that their price is going to go up at some point, compared to if your shredding service is to give it to the recycler and you're treating it as waste management.

That's the issue: What are people buying? It comes down to a quality issue or a quality sales task.

SDB: This industry has grown a great deal in the last five years, and it sounds like you see a similar pattern over the next five years. Do you see more opportunities than challenges?

CO: I would say it's going to continue to grow, as you start getting down to doctors' offices with one or two doctors, everyone is going to need a shredding service.

NC: That bigger market is still there, and I think it's just a matter of who is going to capture it. So, I think there will be some good growth in the industry as a whole.

I don't think you'll see consolidation knocking it down. I think you'll continue to see a lot of competition in every market.

JB: I think you are going to see, as mentioned earlier, more of a regional effect and that companies are going to have to have a larger footprint that they service. But does it have to be national? I don't think so. I think there will always be plenty of business for a regional or even a state-level company. When I look at our book of business, we've had a lot of local business.

TT: We've been growing at a phenomenal pace, but I do think somewhere along the line NAID is going to have to somehow get more education out there and get to these operators who are not going to do this the right way and play by the rules.

There has to be some accountability, but I don't really want to see government make that accountability come true.

VV: As far as the overall view, I think the industry is going to keep growing without a doubt. But is it going to be a free ride? Absolutely not. It's going to get a lot more serious in terms of more legislation, there's going to be more responsibility, more liability.

The serious players, be they large or small, I think are going to do well. But people who think they're in for a free ride, I think, might find it a little bit harder.

ROUNDTABLE PARTICIPANTS KEY

* Nate Campbell (NO) of Recall SDS, Newark, Calif.

* Vlad Vasak (VV) of Iron Mountain Secure Shredding, Boston

* Tom Thompson (TT) of Information Protection Solutions of America (IPSA), Chicago

* Chris Ockenfels (CO) of Document Destruction and Re cycling Services, Cedar Rapids; current NAID president

* John Bauknight IV (JB) of Shred First LLC, Spartanburg, S.C.; past NAID president

* Recycling Today Media Group/Secure Destruction Business(SDB), Editor Brian Taylor and Group Publisher Jim Keefe