High-flying CEO adheres to mantra 'small is beautiful'

A small Pennsylvania firm whose CEO values "flexible minds" in his employees has managed to outbid the corporate heavyweights of the aerospace world to win federal government contracts. Some say the company's secret weapon is thinking out of the box — but at IS&S, says Geoffrey Hedrick, "We just call it 'thinking."

Space is precious in aircraft cockpits, so designing a sleek, flat-screen display for flight decks to replace the existing chunky devices made sense, figured Geoffrey Hedrick, founder, chairman and CEO of Innovative Solutions & Support Inc. (IS&S). Hedrick and his team of creative engineers design and manufacture flight-information computers and monitoring systems. In an industry dominated by high-tech behemoths with a stranglehold on military and government business, the IS&S approach was novel.

While the Exton, Pa., firm brainstormed and winnowed, competitors wrote more and more lines of code — "building a stone too big to move," as Hedrick would say. IS&S snatched the flat-screen business from the aerospace heavyweights — it's one of the reasons business gurus laud Hedrick's use of innovation as a strategic tool. But addressing the W. P. Carey School's Economic Club of Phoenix recently, Hedrick described his philosophy not as "thinking out of the box." Instead, he says, "We call it just 'thinking.'"

Welcome to Hedrick's high-flying world, where investors are invited to chat, then told they'll be "allowed" to invest a quarter of a million dollars in a mysterious project. Those who do may later reap more than $750,000 on their investments, according to Robert Mittelstaedt, Jr., dean of the W. P. Carey School of Business, who introduced Hedrick. Later, Hedrick described a family culture of entrepreneurship - between his father, uncle, daughter and himself, they've founded 12 companies.

Founded in 1988, IS&S averages annual sales growth of 25 percent, holds dozens of patents, has no debt and almost $100 million in cash, Hedrick said. Results for second-quarter 2005 include a stunning 144 percent increase in net income, to $6.3 million, and 74 percent sales growth, to $19 million for the period ending March 31. Business jumped partly because a new aviation regulation mandating "domestic reduced vertical separation minimum" (DRVSM) - which enables planes to fly closer together vertically — took effect Jan. 20 of this year, driving air-data equipment sales. Documents filed with the Securities and Exchange Commission note a 3,700-device backlog for the company's DRVSM product. Besides the U.S. government, clients include Northwest Airlines, Boeing, Lockheed Martin, Federal Express and Gulfstream Aerospace.

He accomplishes it by solving problems "better and better and better." For example, in 1990, with just nine employees, IS&S bid on a $150 million contract to make altimeters for the U.S. Navy and Air Force. Existing altimeters were mechanical; the government RFP (request for proposal) called for electronic devices. Competitors spent up to half a million dollars during the bidding war that followed, a show that IS&S, with its small marketing budget and frugal leader, couldn't match. That's partly why no one initially took IS&S seriously. In fact, Hedrick recalled, "they laughed at my salesmen."

The new altimeter presented a myriad of challenges beyond the mechanical-to-electronic evolution. Design specs called for a device that could withstand fire and physical shock, endure heavy vibration, yet be enormously strong and lightweight. The device also had to be immune to fungus or humidity. IS&S engineers got to work, producing version after version until Hedrick was satisfied that it met the stringent government standards but could be produced at a lower cost than competitors' offerings.

A key feature also allowed the IS&S altimeter to use less power, running off the equivalent of a 9-volt battery. After his sales staff presented IS&S's proposal, a Navy honcho called with his congratulations, telling Hedrick, "that was the most innovative proposal I've seen in 20 years." Today, he told the audience, "it's still the heart and soul of commercial altimeters."

IS&S's success stems from making a superior product cheap, Hedrick said. It takes "remarkable engineering," of course, but offering the best product at the best price is the only way a small company like IS&S can compete with "400-pound gorillas like Honeywell." Both factors demand innovative thinking, a quality Hedrick looks for when hiring.

"There's a glint in their eye, a wanting to learn, a capacity to innovate. I look for the flexible mind," he said.

Most people just "want the silver bullet that is going to make them a millionaire. That's not what I look for in people."

Managers can encourage innovation in the workplace with something as simple as acknowledging a small job done well. "There's not a person in (IS&S) whom I haven't thanked. It takes energy to understand who is working for you, but it's important," he added. He advocates giving every staff member an opportunity to create something, whether it's a better filing system or a more user-friendly monitor.

But there's another important role for managers sowing seeds of innovation among staff: get them to stretch, Hedrick advised. "Get them to leave their comfort zone. If they've done a mediocre job, tell them. Say, 'you can do better.' Pretty soon, you don't have to say it anymore - they reach that point themselves." That's the fun part, he added, "getting to watch people work to their capacity."

It's not easy to build a creative company that evolves slightly ahead of its industry, as IS&S has done. Over and over, it has landed contracts by producing lighter, stronger, faster, better avionic devices, Hedrick explained, like an operating system using a commercial graphics chip, or a 15-inch flat-panel glass display designed to be viewable from the copilot's as well as the pilot's seat. "We stretch. We push. Until it's completed," he continued.

Two years after the Sept. 11 terrorist attack, IS&S introduced another generation of flight-instrument devices. "We stretched again to reduce the cost by a factor of 10, giving us the competitive edge," he said.

While Hedrick runs a lean company, you won't find IS&S outsourcing technological development overseas, he said. Outsourcing computer code verification and testing — a common practice - "makes testing much more difficult. It takes time to send it to India, Russia or China. We outsource nothing." He also warns against laying off staff or cutting salaries when business inevitably ebbs.