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Pitney goes for growth: CEO Michael Critelli is determined to steer Pitney Bowes, the 83-year-old postage-meter company, into the digital age.

Visit Michael Critelli, the chief executive of Pitney Bowes, in his office and ,you'll learn a lot about the man and the company. For starters, Pitney's six-story headquarters in Stamford, Conn., is not in the fanciest part of town. It's tucked into a neighborhood of tidy working-class homes. Critelli's office itself is comfortable but utilitarian, its only striking asset a view of the sparkling waters of Long Island Sound.

Critelli is an intense, straightforward man. He speaks thoughtfully, with the precision of a Harvard Law School grad (class of 1974), and he is prone to discuss what he calls "the paradox" of his life: "I've always believed that you stay secure by continuing to move forward. The least safe place is to stay where you are."

Although Critelli was speaking about himself, he could just as easily have been speaking about Pitney Bowes. The $4.4 billion company--where he has worked since 1979 and which he has headed since 1997--cannot stand in place. Widely known and respected for its iconic postage meters, it can no longer afford to be defined by them.

Critelli's mission is a tall one: bringing an old-line manufacturing firm into the information age. While Pitney maintains its historical lock on the postage-meter industry, old-fashioned paper mail is itself under siege. The struggling U.S. Postal Service faces a steadily declining volume of mail, as more people pay bills online and communicate via cell phone and the Internet. "The biggest issue is, how does Pitney Bowes grow?" says Bob Goldsborough, an analyst at Ariel Capital Management, a Chicago-based money manager.

Growing hasn't been easy of late. Pitney's earnings for the first half of 2003 were $233 million, down 15 percent from the same period last year, largely because of the hard times among large financial services firms, Pitney's best customers, and the fact that the company took a charge for exiting the aircraft-finance business. Longer term, Critelli has told Wall Street, he aims to increase revenues by 4 to 6 percent a year and earnings per share by 8 to 10 percent a year.

Critelli hopes to make that happen with a strategy to reinvigorate the company. He's lobbied in Washington in support of the Postal Service and the mailing industry as a whole--a $900 billion industry with 9 million employees. To bolster the cause, he enlisted support from fellow CEOs, including Ann S. Moore of Time Inc. and Chris McCormick of L.L. Bean. "What shocked me when I began this effort was how many members of Congress cared very little about the mail industry," he says. "Their attitude was, 'I don't use the mail for correspondence or bill payments and I don't like the junk mail I get, so I don't care if the industry survives or grows.'"

Among other initiatives, Critelli is promoting "intelligent mail," a technology that enables the sender to track letters, making mail more useful and secure. "If you put a bar, code on a piece of mail and use software to track it in the Postal Service, you will know whether, the customer has truly put the check in the mail," he explains.

Perhaps most important, Critelli is reimagining Pitney Bowes. While the company continues to hold 80 percent of the domestic and 62 percent of the global postage-meter market, Critelli is redefining it as a leading service provider in the much larger mail and document-management industry, even though Pitney has just 3 percent of that $250 billion market. He was the first CEO to talk about a mail and document industry, partly out of strategic necessity, partly to explain his growth-by-acquisition program. "There's nobody who has the vision that we do to make everything happen. And the skills. And the competencies. We're in a unique position," he says.

An imprint that became an icon

0n Dec. 9, 1901, inventor Arthur Pitney Filed a patent application, in Stamford, for the First postage meter. It was a black mechanical box that had to be taken to the post office, where in exchange for, say, $100 in cash the meter would imprint letters with $100 worth of postage in the form of a red eagle affixed with a tiny "PB." The genius of the device was that it enabled companies to avoid multiple trips to the post office but still allowed the Postal Service to collect its tariff. On April 23, 1920, Pitney's American Postage Co. merged with Walter Bowes' Universal Stamping Machine Co. to form the Pitney Bowes Postage Meter Co. Talk about first-mover advantage: A century later, one out of every five letters has a "PB" imbedded in an eagle in its upper-right-hand corner.

Pitney Bowes is one of only three companies worldwide that are licensed to manufacture and own postage meters in the United States, despite legal attempts to break the stronghold. These companies in turn lease the machines to customers. The two other companies are Neoposte of France and Francotyp-Postalia of Germany. Both have much smaller market shares than Pitney's.

In 2002, 87 percent of Pitney Bowes' operating profit came from manufacturing, selling and leasing mailing equipment, usually in three- to five-year contracts. It has an installed base of 1.3 million postage meters in the U.S., down slightly from last year.

A shift toward services and (gasp!) PR

This core business is a stable profit machine: 75 percent is a recurring revenue stream, which makes Pitney beloved by investors. Analysts expect the company to generate about $550 million in free cash flow before dividends this year. "The thing that attracts us is their dominant franchise," says Ariel's Goldsborough. "That's what excites us every day of the week." It also helps explain how Pitney Bowes has managed to introduce every subsequent innovation in the field, such as the ability to download postage to a meter over the phone in the 1970s and over the Internet in the 1990s.

Despite such success, Pitney Bowes is a company trying to hang on to its storied past while actively preparing for the future. It still manufactures postage meters in a plant in downtown Stamford, assembling them from parts made in Asia. But, Critelli says, "by the end of this year we will have wound down from the components manufacturing and be completely out of Stamford manufacturing by the end of next year."

On the services side, Pitney faces stiff competition. Its many formidable competitors include Xerox, which is in the mailroom-services business, and Ikon Office Solutions, which offers document management.

For better or worse, Critelli is betting that growth will come from selling services related to mail and documents. Pitney Bowes Management Services, which runs customers' mailrooms and copy rooms, now accounts for 22 percent of revenue. In 2002, Aetna signed a multiyear agreement with Pitney to re-engineer how it sends out checks and explanations of benefits. Pitney will run a 66,000-square-foot communications center that will produce over 505 million images and 186 million pieces of mail a year. In addition, Pitney provides backup for producing Aetna's most important documents. Even higher on the food chain is a division called Document Messaging Technologies, which accounts for 5 percent of sales. The division advises companies on how to make sure their paper and electronic mail are integrated with their paper and digital files.

Critelli is betting that Pitney Bowes can leverage its expertise with mail to get into the more complex issues caused by the convergence of phone, fax, email and other digital and paper documents. With its wealth of engineers, cryptographers and even workplace anthropologists, as well as 2,300 patents and several laboratories, Critelli believes the firm is uniquely adept at helping companies organize their various forms of communication. "There's a huge amount of value in engineering and managing communication processes within an organization," he says. "To a large degree, they are unmanaged."

And Critelli is busy rebranding Pitney, no small endeavor since the firm's strong suit is engineering, not marketing. Amazingly, its public relations department is only three years old. The company launched its first major marketing campaign in more than 15 years in February. Critelli has complained that Pitney's image is "frozen in time." One challenge is shaking the lowly mailroom image and attracting attention. As Chief Marketing Officer Arun Sinha, who joined Pitney from PepsiCo, puts it: "The big problem is, how do we explain what we do?"

It's remarkably difficult, without descending into jargon. Pitney's tagline is, "engineering the flow of communications." The company bills itself as "the leading global provider of integrated mail and document-management solutions." Translation: Starting with its expertise in the mailroom, it can help companies save on how they send out customer statements, keep track of important files or coordinate paper and electronic versions of documents.

Take Harvard Business School, which brought in Pitney's Document Solutions Center in Woburn, Mass., to handle global requests for copies of the school's 12,000-plus case studies. Pitney managed the conversion from a manual fulfillment process of paper files to a system of electronic files that can automatically email customers the cases in the loan of Acrobat files with the click of a mouse. "It was like changing a tire on a car [while] going 60 miles per hour," says Greg Mroczek, manufacturing manager of Harvard Business School Publishing.

Going forward, a key part of Pitney's strategy is making acquisitions in the highly fragmented, $250 billion mail and documents industry. "We're essentially inventing an industry," says Bruce Nolop, Pitney's chief financial officer, who is leading the acquisition push. Under Critelli, he says, Pitney has "changed From a narrow horizon to an unlimited horizon, and from being a relatively mature company to a growth-oriented company."

A good example is its purchase last year of the PSI Group, the largest mail presort company in the U.S., for $150 million. Presorting is a type of work sharing, a practice in which the Postal Service hands off a specific task to a private company in exchange for lower postage. By sorting, classifying and assigning an additional bar code to bulk mail, PSI customers receive postage discounts. PSI has a 5 percent market share in a $1.2 billion market. In other words, like its reinvented parent company, it has a solid foothold in an emerging industry, but still a long way to go.
Revenue Breakdown

Pitney Bowes

Global Mailing 69%
Capital Services 4%
Document-Messaging Technologies 5%
Management Services 22%

Source: UBS

Note: Table taken from pie chart.

First-class Single Piece Letters

Billions of pieces

1998 54.3
1999 53.8
2000 52.4
2001 50.9
2002 49.3

Source: United States Postal Service

Note: Table taken from line graph.
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Title Annotation:Profile
Author:Spiro, Leah Nathans
Publication:Chief Executive (U.S.)
Geographic Code:1USA
Date:Oct 1, 2003
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