Jack Stack is a business pioneer and one of the world’s best business strategists. He is Founder, President and CEO of SRC Holdings Corporation. He’s been called a “top 10 minds in small business” by Fortune Magazine and is the author of two bestselling books: The Great Game of Business and A Stake in the Outcome. Jack has served as a world judge for the Ernst & Young Entrepreneur of the Year Awards Institute and as an advisor for this group since 1998. He has also written for Inc. Magazine and The New York Times and has addressed thousands of audiences on the topic of open-book management.
Jack joined host Robert Glazer on the Elevate Podcast to discuss The Great Game of Business, open-book management and much more.
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Listen to the podcast here
Jack Stack On Winning The Great Game Of Business
Jack Stack discusses The Great Game of Business, open-book management, the benefits of gamification, the power of income statements, and more.
Our quote is from Steve Jobs, “Great things in business are never done by one person. They’re done by a team of people.” My guest Jack Stack is a business pioneer and one of the world’s best business strategists. He’s a Founder, President, and CEO of SRC Holdings Corporation and has been called the Top 10 Minds in Small Business by Fortune Magazine and is also the author of two bestselling books, The Great Game of Business and A Stake in the Outcome.
Jack has served as a world judge for the Ernst & Young Entrepreneur of the Year Awards Institute, and as an advisor for this group since 1998. He’s also written for Inc Magazine and the New York Times and has addressed thousands of audiences on the topic of open-book management. Jack, welcome. It’s great to have you on the show.
It’s great to see you. Great to be here. Thank you for the invitation.
I’m always curious to start a little bit at the beginning. Jack is a child. Did he show attention to business and entrepreneurship? Was there a lemonade stand? What interests you when you were younger?
I love starting businesses. My first one was watching a turtle hatch down in Salt Creek, then it’s watching these little things go into the creek and say, “Why don’t I take them back and sell them for $0.25 a piece?” Instead of a lemonade stand, I had a turtle stand.
Did you sell turtle eggs?
No, I sell turtle babies.
The actual turtles.
It got shut down by the government.
My first business was shut down by my grandmother who found out I was taking the train to buy candy and resell it. Similar experience there.
I should have been satisfied with just a turtle. I went after the snakes and everything else like that. I had an entrepreneurial urge at a very early age but then, by the time I was nineteen, I failed at everything I tried, so I had a really good experience in terms of getting failure out of my life early. I wanted to be a priest and save the world. They told me my vocation was to be a priest. I went to high school and barely got out with a C. My dad said, “If you go to college, you’ll wound dead in corporal punishment.” I went to a Franciscan school where they teach you into submission.
That was his requirement.
For sure.
Now they won’t send a kid to a school if they talk un-nicely to them. It’s amazing how the tables have turned.
My dad came from a Jesuit background. That was some of the finest education they had at that time. I failed there too. By the time I was nineteen, the government didn’t want me, the education system didn’t want me, and the church didn’t let me. I had no other choice but to go to work. The only thing I thought was missing in my life was a job.
Did you go to college?
I went to college and I got kicked out on the last day of the second semester of my freshman year. I was asked never to come back to the county level. I can’t come back to college, but I then went to work for General Motors. I went to work then I moved to another facility and I ended up going to night school for ten years. I went to college because I had promised my mother-in-law that I would get a degree.
Your mother-in-law? Not even your parents.
My mother-in-law was pretty tempting in terms of if I was going to marry her daughter then I better get a degree.
You needed a college degree. How did you end up at International Harvester?
To be frank, I was caught playing poker in the bins with some General Motors employees. They told me that my vocation wasn’t to be a General Motors employee. My dad was working internationally, got to college, and said, “Come in here. You’re going to go to work.” I was sent to the mail room of a factory that was 26 acres under one roof.
This is a classic mailroom-to-boardroom story. I like it.
I found that in our company, the two most powerful people were the mail person and the plant manager. Between me and that top job, everything was confidential. Nobody saw anything. It had been a World War II factory which means that it had nothing but security. You had these six different badges to be able to move to one organization and the mail guy got to go everywhere. I learned more about the company through the mail.
That’s how you learn the business. That was your education.
I got to see it all. Eventually, I got promoted by seniority. You post the job and you get a job. I spent two and a half years in the supply chain. I was never on the factory floor because I didn’t have the pass to be able to go see the assembly. It was crazy. It was insane. It was a locked-down secured organization where you didn’t get even to see the end product.
If you want to see the end product, you leave work early and go to the back room and get to see a few of the tractors loading in the rail cars. You talk about the industrial society, security, and fear of someone getting your products. It was the most intimidating organization when you couldn’t go to see what it was you were doing every single day.
[easy-tweet tweet=”In the industrial society, there is always the fear of someone stealing your products.” via=”no” usehashtags=”no”]
How old were you at this point when you worked yourself into the GM role at the SRC division at International Harvester? What did you do at the division?
I went to work in nineteen until I was 30 in Melrose Park, Illinois billing engines and tractors. I had ten jobs in ten years, and then they finally said, “We want you to take this plant manager’s job down in Springfield, Missouri. We’re having a lot of problems with the factory. We want you to either close it or turn it around.” I flew down to Missouri and took a look at it. I thought, “This is a jewel. This is a lifetime opportunity.” I came down.
I didn’t know there was a Missouri State. I just grew up on the streets of Chicago. I come down there and it is a tremendously entrepreneurial community. It was not like working with the UAW or working with one of the toughest unions in the country. When I came down here, people said, “Give me the tools to do the job and get the hell out of my way.” I was like, “Are you kidding me? There are people in our society that want to get something done?” I fell in love with them.
I fell in love with the people. There was no way we were going to shut it down and all of a sudden, we went at it. We played a lot of manufacturing principles to it and they engaged. They got fired up and we were knocking down corporate awards like you couldn’t believe from ‘78 to ‘81. There wasn’t anything that we didn’t go after to try to beat and show everybody and seventeen manufacturing plants that we’re the best. We had the time of our lives. We ran into the biggest depression recession. For International Harvester in ’81 and ‘82 was a depression. We laid off a thousand people a week for two years. This company went from 115,000 to 11,000 people and I was in Springfield, Missouri running one of their facilities.
What was the impetus for that? Was manufacturing collapsing, the auto industry, or the product expired? With 90% down, it would seem like the business economy wasn’t that bad. It must have been some micro and macro mixed in.
By 1983, interest rates were at 22%. That was the top. At the same time, we couldn’t compete globally. We were so indoctrinated in terms of the industrial society principles. In order to work under that leadership model, you had to have eight people who did the work of one person when I went out there to build a crankshaft.
Is it because of requirements?
We keep adding people. We added a forecast. We had a production control and a warehouse. You can count it. We had a tool and I set up a machine tool before the operator went to work, then we had a guy inspect it after that. It’s an insidious amount of overhead you’ve never seen and we couldn’t absorb it. Everybody, globally, trusts their people and they just smoke this. They came at us. They just dropped the trailers off in San Diego and drove across the United States. We couldn’t compete. We couldn’t lay off people fast enough. We had $6 billion of debt to 200 banks and interest rates were even eating us alive.
The parent company is struggling and you have this jewel that’s doing well. You and some of your managers get this idea that they probably potentially need some money to buy it out and do it without any of your own money. A little bit of your own money. Was it $100,000 in cash and $9 million in debt? Is that right?
To the penny.
Tell us how that came about and what led you to buy out SRC.
We’re closing factories all over the world. We’re on the front cover of every newspaper, magazine, and television about one factory after another. My people would see it in the papers. They’ve come up to me and said, “Should I get married? Should I get a car? Am I going to have a job? Am I going to go?” Unemployment was 12% at that time when we shut down factors. It was pretty damn cold.
I’m the plant manager figuring, “I’m just one phone call away if we shut down this factory.” We’re not part of the core business. This isn’t what they started to chop off. It was anything that they got cash for. I read in the newspaper that they ultimately put it up for sale. My boss didn’t even tell me until I saw a tombstone in the Wall Street Journal that said the remaining factory centers were for sale. It has bidders. I finally went to my people and had a meeting with them and said, “Don’t get married. Don’t buy a car. We’re going into a rough time.”
I said, “One of three things are going to happen. They’re going to shut us down. They’re going to sell us to somebody else or if we do survive, it will be brutal.” I thought I could get this monkey off my back that if I did have to close them, I could show them that I tried something. I suggested we buy the business. I did not have the foggiest idea.
I’m guessing you didn’t know what an LBO was at the time.
No, I didn’t. The only thing I knew was how to build an engine. I was very good at building engines. That’s all I spent for years in that company, knowing how to build the best product, which they told me was the engine. I didn’t spend one day realizing that the product was the business. That was the biggest transformation of my life.
I left that meeting because I thought the employees would say, “Are you crazy, buy a business?” They were so afraid, they didn’t follow anybody anywhere just so somebody could give an answer. I went out to borrow money. I took my blueprint of an engine and my holistic wanting to save the world 300 job mindset and went to the bank and couldn’t care less. They couldn’t care less about how great an engine was.
Also, the rates were 20%. It couldn’t have been cheap capital.
They did not want you to borrow. I went to 50 people for two years to try to borrow money. I was turned down every time but one. I learned so much by having to write business plans. After the 10th business plan and ten denials, I realized that this is not hard. I couldn’t figure out why this company they worked for fourteen years never showed me the statistics that they looked at when they evaluated how strong the business was.
I busted my ass making engines and tractors. I thought that it was all about making the product. That’s all my accountabilities related to and here I go out to try to borrow capital. There’s a whole new set of specifications that the rock designed around the success of a business. I’ve been a manufacturer all my life. I did all kinds of programs and I began to realize, if you want to increase productivity, you have to take the constraints out of the process.
I thought, “Why are we not showing these people the debt-to-equity ratios? Why don’t we tell them the margins? Why don’t we tell them the cost of goods? Why can’t we explain to them receivables and payable offsets on the bail and sheet turnover side?” It just amazed me that we were out of money and I’m looking at a whole new blueprint on how to build a business.
After the tenth time, I said, “If I ever get the chance to have this business, I’m going to spend the rest of my life teaching people that they need to understand the specs of a company and that the job is related to the success of the company. Not necessarily this service or the product that you’re making. The product is the company.” I began to understand how to run a company.
I tell young entrepreneurs, I said, “If you want to learn business, it’s not in the MBA. Go try to raise yourself money. When you get kicked out, then just modify your business plan. Try to figure out what they’re teaching you. Don’t be discerned because the answers are there somewhere.” We got the business by default. We got into a bank that was closing down their LBOs. We got into a bank that had fired its president and the chairman of the board. They were talking chaos.
We went to them and said, “I hear your book in bad loans. Would you like to look at this one?” It’s a doozy. It was a divine intervention. We got on the lending committee. We were able to negotiate the loan on a leveraged buyout deal, all of a sudden, on February 01, 1983, we had a business to run and we had mouths to feed.
You probably have no working capital too.
No, we had $8.9 million. One of the million was in a receivable that we could at least pay out over a long period of time. There was a little bit of self-financing, but not a lot. We had nothing. Our bank was up against the wall. We could not make a $50,000 mistake.
Did you personally guarantee the loan or was it just corporate guaranteed?
We guaranteed that we would stay around to recover whatever wasn’t going to be recoverable. All thirteen of the leadership team had to sign out. They got us all.
You buy this business, the economy is still terrible and you have no working capital. You have huge debt, and now all these people are looking to you to save their jobs and allow them to get married otherwise. You’re like, “I have to do something different here.”
I also had a bank at the closing that didn’t send me their lending officer because they had fired them for booking bad loans, and then they tried to negotiate out of the deal. This is how bad it was when I had seventeen people in the lawyer’s office to close the deal. They were pretty angry at us. We became in their spotlight. They didn’t want it once they found out.
You started in the workout group, that’s what it’s called, right?
Yes, it did.
Special loans. For those tuning in, we had Brad Peterson on previously and talked about it. You don’t want to be in the workout group or special loans. This is like a time out for people to borrow money.
There’s a guy they keep in a bank in a dark color suit. They let them out when you’re defaulting on a company and it’s not pleasant. We had to figure out that the only way we could survive was to be able to at least forecast what was going to happen. We understood that banks will put up a lot of things. They’ll put up with plans that go awry, if you miss your forecast, it’s a sign of having a weak leadership team. They panic right away and they start restricting the money that you can get.
What we had to do was figure out how to come up with a system by which we could accurately forecast what our financials were going to be. We came to this conclusion. What if we sat down and took out an income statement, balance sheet, and cashflow statement? We filled it out as part of our staff meeting. I thought there would probably be no better way than taking the income statement and that Bob was in charge of sales.
The people on the front line are the ones who need to help you fix this stuff, but they don’t even know the language or what it is.
You go into a meeting on the first day back from work and you see a blackboard, an income statement, and a name next to the income statement. Bob was sales, Irene was material, and Joe was labor. By the time we got done with that income statement, we said, “Holy crap. There’s someone responsible for every line of this income statement.” I’m sitting there going, “Why are we doing these 360 reviews? Why are we doing all this analysis in terms of whether someone needs an IPP or an improvement program? It’s right in front of us for God’s sake. This is what we’re supposed to do.”
Bob is supposed to sell $5 million a month. If you look at what the industrial society had done to Bob, we said, “Bob, you need eleven calls a day. Seven of them are old, and four of them are new. You have to run the DVD X amount of time.” It had nothing to do with the top line of the sales line of the income statement.
All of a sudden, when we got down this thing. We look at ourselves and say, “If we go out and do this for each other, we got something special here. Why don’t we get together on a weekly basis and instead of having a staff meeting, why don’t we just sit there and project what we’re going to do for a given month? Why don’t we show where we all come together and we can make a difference? We could probably turn this thing around if we can do what we say we can do.”
It was incredible to be able to realize that the income statements and the financials were nothing more than the stories and the activities of the people in the organization. They were afraid of the numbers but they didn’t realize that numbers were their stories. When we created the psychic ownership between what their responsibility was and how they fit into the income statement, all of a sudden, you got teamwork and you had a game. What you were looking for fourteen years that I’ve been with this OEM was what was the connection? What was missing in terms of me making this great product and the Wall Street tearing this business down?
[easy-tweet tweet=”Income statements are nothing more than the stories and activities of the people in an organization.” via=”no” usehashtags=”no”]
When we were able to connect the two, it became one of the most powerful things that we had ever witnessed in our entire lives. What happened is that we appealed to people’s level of intelligence that most people weren’t appealing to. They didn’t believe people could understand that. They didn’t believe people would go, “Maybe they’re right,” considering everything is going on now in terms of the debt world. Nobody was training people in terms of being able to determine how the haves get it and how the have-nots not get it.
It became very obvious to us that the have-nots started to play the game and the haves didn’t have the foggiest idea how to play. We figured that we could differentiate a company by creating smart business people, even though we were making engines and tractors. We would get a better tractor and a better engine. It was like, “Why didn’t we think of this in the first place? If we gave them the financial information, would they do less than what they needed to do?” No, they’ll do more than what you ever asked them to do because you weren’t asking them to do enough in the first place because you thought they were dumb and stupid. We began to run this smart company.
You used the term game, and eventually, you called this open book management system, The Great Game of Business, which you’ve talked to a lot of other companies. It’s an interesting analogy. I heard someone say once, “None of us would go to a basketball game or a football game if we didn’t know the score, what the rules were, is it the first quarter or half time.” People were throwing a ball around the field. We hear the term gamification a lot, but people need to know the rules, what winning is, and when the quarter is over. The term game was interesting out of here because there are a lot of people who don’t understand what game they’re playing in there.
I come back from the banks and I’m a hot shot. I get all this excitement. I thought I found something new. I’m like a kid in a candy store. I’m going to roll this out to a couple of hundred people to tell them everything about ratios and how you compare to competitive data. They look at me like I’m out of my mind. They said, “That’s your job. It isn’t my job.”
For about four months, it was disappointing from the standpoint that I thought they were too lazy to learn. Until one day, I began to realize that they didn’t have any confidence that they could learn. They were so afraid of it. They’re so afraid of bankers and checkbooks. For some of them, we had to do 5th-grade compounded math in order for them to be able to do percentages. Once we revised, there was fear. We then use the concept of a game.
It’s also context. It’s interesting you say that. I’m involved with an organization called Build. Build adds an entrepreneurial curriculum to a high school. The kids in this high school do remarkably better than kids in the same curriculum. What happens is they have context for their education. When they’re writing marketing copy, they understand English. When they’re studying math, they only understand, “This is why I need to understand statistics. Here’s the context.” It gives context for this learning that they probably never had before.
We did a test run 30 years ago at Chick-fil-A. They were going to run it according to the FDA rules. The other one was going to compare, what happens if we taught them the business. What if we taught them ticket sales and how to talk up ticket sales? How about sales and marketing? What if we told them how the business made money? Which ones do you think will produce? Why do you think their retention of the youngsters was there? Someone once called one of the parents and they said, “Why does your son work there?” He said, “We’re learning the business.”
He’s learning the business. He likes the business. It was amazing that once you begin to teach people the scorecards, that’s when the innovation occurred. All of a sudden, one kid takes a Chick-fil-A, walks away to the mall, and goes out there and gives it as a free sample. I had the idea of knowing how to grow the business and how to build the company.
He understood what the goal was. He understood what it could look like. What are the tenets of the great game of business? What are the core tenets?
Our core tenet is that we do two buy-ins a year. It sounds like the biggest. What we do is we go to everybody in the organizations. We give them all the data. We give them the financial plans for the next five years and tell them everything that we need to know in order to be able to be successful. We have to convince them and show them that we’ve gone out there and done our homework and do our work. We give them the financial plans, then they review them. We have a meeting and they vote on whether this is crazy.
When you get our lease done, people have a debate in terms of whether or not we could meet these things or not. It’s powerful. We go out there and we get the buy-in from the people. We then go out there and we put a plan together based on the tools they need in order to be able to execute the plan. All plans come from the ground floor up. No financial plans come from the top down. They all come from the bottom up. It’s their plan. Not my plan. When they own it, they do better than anything that I could do and I never guide them in terms of the direction.
[easy-tweet tweet=”All financial plans come from the ground floor up. Nothing comes from the top down. When the people in a team own it, they do better than you could even imagine.” via=”no” usehashtags=”no”]
The interesting thing is the high-involvement planning. There are only eight steps in the high-involvement plan, but the first two are the most important. That is reading the macroeconomy, then reading the microeconomy. Fifty-five percent of what we see comes into the macro on a business that you’re going to go into. The balance is the other 45%. We look at the macro side and the micro side, then we put this plan together with the input of everybody inside the organization. We then set the plan in motion and we back it up by frequent.
Our higher staff are no different than they were 40 years ago. ago. We go in with a blank income statement, a balance sheet, and a blank cashflow statement. Put it together in terms of their staff meetings. They then cover anything from material and significant value. They’ve been on a 40-year run of which they had earnings of 39 out of 40 years. I realized this system was that powerful. I had to pay off the loss that we had in our first year, but I had no idea that it was going to be this simple.
You probably were the one loan that paid the bank back during that time.
We had one kid who realized that inventory was a way to get out of debt. If we could drop the inventory by $2 million, then we could save 18% interest expense at the time. We put $360,000 on the savings. We took $180,000, put in a bonus pool, then we were on a roll. The next year, I was walking the shop floor, and we were looking for the next critical number. Sure as heck, the janitor came up to me. He goes, “You talk about cashflow and balance sheet and job security. You’re full of it.” I said, “What do you mean I’m full of it?”
He said, “I looked at your receivables the other day, and 76% of our receivables are in the truck market. The Truck market adds a recession every six years, so you’re going to lay us off anyway,” and he keep walking. This guy is right. It’s like a giant of industry. I called my staff together and I said, “Did you know that 76% of our receivables are in the truck market? We have to do something about this right now.” I learned from the janitor. It was like the more we were able to teach people, the more they taught us. The more they taught us is incredible and they still do.
I’m going to play devil’s advocate for a few minutes. I’m probably going to ask you all the things that the non-believers would ask. Give us the proof. How big was the organization’s size-wise revenue when you took it over? What is it now? It is all employee-held, right?
It’s employee-owned. We started out our first year at $16 million in sales. All of a sudden, we were an employee-owned company. We realized that we had to pay a stock price because their stock price was going to the ceiling. I hit a million shares of stock and it was $100,000, so it was $0.10 a share when we first started out the business.
Now, it’s $940 a share from that $0.10 share price. That tells you that the value of the company continually increased year on year. On the top line, we began to realize that we had to figure out a way to become liquid in terms of paying off our shareholders. We started to make investments in other businesses.
Which are employees, so they wanted to buy a house.
They wanted to cash out. We were probably being evaluated anywhere between 8 and 11 times multiple, depending on the season. What that means is you have to figure out other ways of being liquid or you’re going to have to sell the company if you want to have a good time with all your friends.
It’s like an internal run on the bank.
We spent enough companies and we spun off 65 or 66 companies in the last 40 years by investing in people who understand the game, then we provide the seed capital. They then buy that business from us and we use the sale of the company to put on the balance sheet to be able to have the cash and be able to pay the $940 stock price that they have today.
These are all in your ecosystem. They work with you. Some of them are and aren’t.
You’re getting into my flaws now. My flaws were that when we took off, we thought we could do everything. We got into organic spices. You couldn’t believe the businesses that we got into. Fifteen of them were venture capital deals. That was a tough period of our lives because startups are impossible. They were hard. We learned our lessons on startups because when the startup didn’t work, we had to take people from our other facilities. Put them into those facilities to be able to teach them the culture. We got diluted and it took us a period of time to get it fixed.
If you were going to take all the deals that we sold and the companies that we have, the companies we brought to Springfield, Missouri, which was even more terrible, it was the reciprocation, and the domino effect that we had in terms of the system itself. There’s probably over $2 billion in businesses in this community. We have twelve companies and we’re doing about $650 million in sales. Our balance sheet is powerful because we sold about twelve companies during that particular point of time period.
I want to play the devil’s advocate with people. I was terrified initially in our business. I went through a presentation you were at, but I was terrified of open book early on. I thought, “People know this information.” It requires a lot of education. There is an assumption that maybe there’s a single owner or a group of owners. Particularly, if you’re in anything with inventory. Profit, and money that goes out the door to investors are very different things and it requires education. You told everyone it was bad. You told everyone how it was doing, but it was bad. My business is going great. I’m making millions of dollars a year. Why do I want anyone to know that? What’s the response to that?
I’m not going to tell you to change what works but it’s worked. In most cases, people are more ashamed in terms of what they’re making than what they are. It’s the fear of disclosing. In the manufacturing world, if you make over 5%, that’s huge. We’re not talking about tech companies per se and those that can hit the long ball. I can’t tell you the number of companies that struggle. Around 600,000 companies start every single year and 10% of them last for five years because of what? They all run out of cash eventually.
The people don’t know why they’re running out of cash.
It’s been easy to get to this particular point in time. It’s going to be interesting to see what’s going to happen instead of being able to watch it now or you got to watch a penny. We’ve been on a real terror in terms of low cost and low money. Now you get those inventories and they surely make a difference in terms of the interest expense that people have. I think that people look at this thing as a powerful tool. A lot of them don’t even know how to read an income statement. I can’t tell you that I’m shocked that companies and executive positions will ask what a PBT is.
You sit there and go, “You’re supervising 2,000 people and you’re asking me what a PBT is?” Why it’s the best-kept secret in the world, I don’t know, but it’s destructive. I wish we had our work-ready employees from the education system that would understand the game and it’ll make such a total difference. Not only their wives that work, but their wives that work at home, too, because they’ll be able to run up.
These are the same people borrowing $200,000 for student loans to make $40,000 a year. Half of Americans lease cars. How is the lease payment determined on a car? No one could tell you that it’s a depreciation plus interest to try to figure out whether they can afford that or not. I still think it’s crazy that we let people graduate high school and learn all this stuff in these classes without basic financial literacy. No kid should be allowed to sign a $200,000 college loan without a mandatory personal finance course.
I agree. They got ripped off but think about the people that are on the payday loans. It’s the saddest thing you’d ever see.
I pay off credit cards but I got some marketing. I always know that it’s high, but I got a credit card thing, and now with interest rates. I was seeing 29.9%. I was thinking it’s probably cheaper to go to a loan shark. If you’re not paying that off, you’ll never get out of that. I remember 20%, but 30% is crazy.
I read the same thing you did. I went to the shop, I got 9%. If I used the credit card outside the shop, it was 20%. If I had a cash advance, it was 29%. Are you kidding me? I don’t think we know a compounded interest. It’s probably one of the most misunderstood.
Unfortunately, we know the negative side of it, but not the positive side of it.
I do know the positive side because I do see that once they understand how the finances of a company work. They begin to take it home. I do see them take it home. We have family-friendly financial programs for them so they understand entirely what they need to do in order to be able to survive. We also have all kinds of backups in terms of credit unions and things of this nature that we can work with the credit unions on to be able to get them out of these high-risk situations and get them back into a product.
Nothing is cooler than a balance sheet at the end of the year where they have their 401(k) and they have their stock in it. We say to them, “Go fill out the rest of them. Go fill out your cash, go fill out your building or house,” minus your debts to then come in and say, “Before I started this program, I had nine debts. I’m down to four.” I was like, “Oh God, thank you. It’s working.”
When you rolled this out, what were the concerns or what did you not anticipate? Were people on your team pushing back around we can’t show them all this stuff? What was less than or worse than expected?
My first low shift was this thing is going to work and if it works, I’m going to owe a lot of people part of the $9 billion. We lost $55,000 in our first year of $100,000. We’re down to$45,000 right on book, then we make $1 million the second year. They give us a six times multiple. Also, when I look at that thing, I go, “I owe $6 million.”
You only had $100,000 equity your first year and you lost.
You leverage. You can’t understand.
Leverage is amazing or crushes you. One of the two.
That’s how private equity does it. They don’t use their money. They figure out how to use everybody else’s money and they’re out before anybody else is.
I’ll make one statement in one question. Since you launched the game, I’m curious about what’s changed in terms of the marketplace that had you adapted the Great Game of Business. One thing that has blown in your favor is technology and all these dark websites. It generally seems like information wants to be free these days, and the notion that you could contain information is much less of a reality, which makes it maybe easier to go with something like this. What has stayed the same and what has changed over time?
I remember someone asking us to put this in a book. I told her, “Lady, I can’t write a sentence let a book.” She said, “We love to have it as if you’re sitting across the table talking to somebody.” Three editions later, we finally got to what she wanted. She wanted a common sense approach in terms of what this meant to people’s lives, and then that led to book tours.
I ended up in Bellwood, Illinois, in Austin, and Bellwood, Illinois. It’s like the screw machine capital of the world. All the owners are in there with their T-shirts on and their shirts rolled up. Their cigarettes are in there. Their thought leadership is like letting them strike. We drink beer with them every night, but it’s an annual thing. They’ll strike then we’ll take them up.
Now, if I go there and try to talk about overall management, they’re going to kill me. I said, “Why did I send a taxi cab? This is ridiculous. I’m telling these guys.” I was having a confrontational discussion with their people every year in terms of what the business is going to look like going forward, and that has changed. People were beginning to realize that there was something to be said about everybody going after the same target.
I also think this change. There were a lot of people who didn’t believe in planning. This is another thing that was very difficult. We do a good job of planning out where we’re going to be. Whereas, most of the people said, “There’s no reason to plan stupid. They’re all breakable. You can’t make a plan.” They don’t understand this. You’re not going to get there without a plan. If you have a contingency, it’s even smarter to be able to get to where it is.
During the whole planning process, people are beginning to think a little bit longer than they had in the past. I do think some odd stuff is at this point. I was embarrassed my entire life by people coming together and classifying. I’m like, “Open book, the Great Game of Business.” Although, we did use the Great Game of Business as a tool to teach people to have the confidence to be able to learn it.
One time, I was out giving a speech and this kid in the class said, “How are you guys so smart to use gamification back in the ‘80s?” I go, “We’re vindicated.” All these years, people would sit there and say, “Business is not a game. Business is serious.” I’m not serious enough and you’re blowing it off. It’s much more important to me and my families are dedicated to it and tied to it. I know they probably don’t even tell your families what it is or how it works. There is this openness in terms of understanding that it’s a way to drive a culture.
It’s an interesting way to create a 100-year-old company. Sustainability is always based on innovation. They can innovate because they know the rails by which they innovate. They understand how things work and the mechanisms of it. I believe that we’re seeing much more in terms of productivity improvements, which we need drastically, but we’re still small on the education side. It’s horrible to see what kind of financial literacy we’re still getting today. That hasn’t changed. It’s as bad now as it has ever been. We don’t understand the power of it, and as a result of not understanding it, we get what we have now. We got a lot of messages today.
In some ways, it almost seems like if you launch this today, people would be like, “This is perfect. People love gamification. We have the dashboards and the technology.” They wouldn’t believe that the system is as many years old as it is now, over 40 years.
I don’t think people realize that maybe some of their turnovers also bored them. Smart people get bored fast.
They want to feel part of the process and some control. Also, during tough times, the best thing that you can give people is some concept of control or ownership over the situation or saying, “Here are the numbers. If they get worse, we’re going to have to do that, but we’re all looking at the same numbers. We’re making the same decisions.” That feels a lot better than sitting there waiting for the other shoe to drop.
The power is when you need help, they know what to do and who to cover. When you give them the opportunity to set their targets, they do not shoot at other people because they know when they miss a target, it’s great if somebody else could help them out, pick them up, and bring them to the party. Whatever generation you want, they want to make a difference. Even the Boomers want to make a difference.
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What do you think about the role that business can play in education? I read your statement that said, “Our real business is education.” Listening to you now, that becomes a little more apparent. It seems like there’s benefits beyond the business itself, for the people and humanity, and education in the types of things that we need to know as we go through our lives.
What we’re most proud of is that we bought our jobs years ago. We anchored our job security finally based on knowing the rules of the game by teaching everybody what markets they’re in and where the competition is. We would show them what standards were established in terms of the marketplace. We’d never be asking them to do more than what the marketplace is but if they did better than the marketplace, they deserve better than the marketplace.
We also then brought in the concept of equity. The equity to us has been the most incredible thing you could imagine. We have generated at least now $116 million of equity that has left the company because we’re in our third generation of employees. That is going through our community at a 3 to 4 times rate. It’s amazing to see the people catch out here. They get paid over a five-year period of time. They don’t stop. They go back and they invest it. They’re starting landscaping companies. I’ve seen people buy trailer parks.
Is this when they leave, when they’re still employed, or both?
They’ve retired. I have one guy tell me that he’s now running a Dave Ramsey course for his churches. This guy had more of those subpoenas than anybody I’ve ever seen in my entire life. Every time the sheriff would come, I knew we were going to have to garnish his wages. I said, “Warren, you’re telling people how to stay out of debt?” He goes, “What better person?” I go, “God bless you.” He played all the principles. He and his wife went out to dinner the night before they laid their plans out. They had their scorecards. It’s fun. It’s crazy.
How did new employees buy in?
First of all, you have repetition but the idea is not to have the repetition be boring. It has to be as exciting as it possibly can. It’s in the rhythm. It’s the fact that we do that two times we lay out the plans or they lay out the plans. It’s a total program that’s based on quarterly bonus programs and bonus programs drive the stock prices. There are a lot of movements going on in terms of their edge. Our year is going to end in December and I can tell you, they had it forecasted to the dollar what’s going to happen because they know what the impacts are going to be on their stock price.
Morale has been good. Retention is good. Getting through the pandemic was using the same principles. That was hard because the principles are simply to know the rules, have a scorecard, and have a stake in the outcome. If you think about the problem that we have with the pandemic, I can tell you, on Friday nights, we’ve stayed around here because the government made some rule changes. We had to figure out how to tell them the truth by Monday morning but we followed the same pattern. It got us through it and we’ve built a pretty healthy education process that not only gives to the people that are working here but also gives back to the community.
We have a hundred people in the Springfield community on boards and education committees. We try to do most. We have a day of caring at the United Way and we’ll bring in ten not-for-profits and teach them the disciplines of the game. There has been a lot of success in the not-for-profits once they began to realize that a margin of admission can go hand in hand.
You think about when you put a business together, why not tie everybody into where you want to go? Why wouldn’t you listen to everybody in terms of where they want to go and see if you can meet somewhere in between? We have about a $250 million equity position minus the $165 million that went back into the community. There’s truly a bright side to capitalism.
That segues to what I was going to ask you. A lot of times, employees don’t appreciate the decisions that managers have to make or otherwise, that are hard and focused on not self-optimization, but what’s best for the team or the company. For example, we had a lot of people who were upset that we modified our policy about where people could work. Our jetsetter or policy. That turns out because the government has not kept up with people’s desire to work from anywhere. It was creating a legal and administrative mess that we couldn’t manage.
It wasn’t that we wanted to tell people what they couldn’t do. It’s just we can’t have people working from anywhere and not know where they were. There are implications to that. You can’t just work from France without having an entity in France or otherwise. I assume that being a 100% employee-owned company changes this decision-making and some of the culture around things like this. It helps people not feel like it’s us versus them but that, “Here’s the facts.” In that example, I said, “Here’s all the data. If you have an idea for a better policy, we’d love to hear it.”
Everyone has a playbook. Every year, the playbook is designed by a series of events that ultimately accumulate and everybody knows where they fit. Everybody knows what could happen. Everybody knows the opportunities, the careers that are going to be required as a result of the success of the organizations, and where they make a difference.
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The idea is to be able to get them to have a little bit of fun and have pride in what they do. We do a lot of them. There’s another phrase that we use to be able to eliminate the differences between a happy ending and a confrontational ending. That is the fact that when we have a problem, we play a minigame. We know exactly what formula you can use from a balance sheet or cashflow statement to be able to drive a self-funding problem that you have and to be able to fix it and have the courage to be able to do it.
We were trying to make this like Vegas. We were trying to make it so that you want to come in and see what you did the prior day, what shipments were out, or what receipts came in. It’s a language that you begin to enjoy. You begin to take a little bit of pride saying, “Why isn’t business a sport? Why isn’t it cool? Why are we talking more about the positive aspects of the business instead of all the things that we need to fit around whatever generation is coming along?” I was on Dice and the Millennial got out there and said, “We will save the world.” I followed them and I had no other choice but to sit there and say, “As soon as you grow up, you’ll be able to save the world.”
You have a lot going on, running a business, father, and grandfather. How do you balance the needs of leading a major corporation with family life? How do your family values and also influence your approach to business?
I wrote in the 1990s that I wanted everybody to have a 40-hour work week only from the standpoint of being able to have some time with their families, kids, and everything growing up, then we had the pandemic. We were working 60 to 70 hours dragging and they would take a picture of a book I wrote saying, “What are you doing to my family? This may vary over time. My Monday is killing me.” My conclusion is don’t write a business book because it will haunt you for the rest of your life.
A lot of business books don’t age well.
We have people that underline and say, “I thought you said this in 1990?” I go, “Things change in 33 years, things of this nature.” You have to focus on the change. Our largest shareholder inside our company is the guy who started in 1983 and makes $4.45 an hour. He’s making $18 an hour now and he has $3 million in stock. The stock price went up 20% last year. This guy is making $50,000 on a salary and he picks up $600,000 on a 20% gain at $3 million. Isn’t America a great country? He’s a 75-year-old guy going down there. I said, “Steve, why are you working?” He said, “For my kids.” It’s crazy.
When he says his kids, is that the model behavior?
He doesn’t want to retire. He wants to keep working. I said, “Please, diversify your assets.” He goes, “We are diversified. Our company is diversified. We have twelve companies.” I said, “Okay.” He’s got it figured out. He’s going to leave it for his children. Good people.
The last question for you and this is can be multi-variant. It can be singular, repeated, personal, or professional. What’s the mistake that you’ve made that you’ve learned the most from?
I believe in the system so strongly. I started to create more companies that we could handle. We made some stupid deals. We got into a salon. Someone gave us a business plan. It’d be a good idea to create a salon just for the daughters of the mothers who go to the salons to bring their daughters. We could differentiate this term as a marketplace. We could take this thing to the moon then we got into bringing in the Seventeen Magazine. They wanted to invest in it and it became a good idea.
It was a horrible idea. We knew nothing about the salon business. We knew nothing about the daughters. It was crazy. It was one of the biggest lessons we learned in our lives. We’ve got ahead of our skis. We looked at them, we had twelve more companies in this portfolio and we began to realize that startups were nice to be able to be kind to your society and your community to be able to invest in people that have their dreams.
Probably about 9 out of 10 of them are just dreams. We had to clean up that mess for a couple of years, and then we finally decided we were going to invest in anything with the joint venture. We’re going to joint venture with the people who have ongoing concerns. That was a big difference in terms of our lives but we cleaned it up. We made a mistake and we learned a lot. We’re not just in a salon business.
Evolve, but focus. That’s what I take from that.
Focus on what your strengths are.
Jack, thank you for joining us. We’ve known each other for a while. We’ve tried to make this happen. I’m glad we finally got to sit down and have this discussion.
It’s great to see you, Bob. Thank you and thanks for everything you do.
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Important Links
- SRC Holdings Corporation
- The Great Game of Business
- A Stake in the Outcome
- Apple Podcast – Elevate
- Castbox – Elevate
- Spotify – Elevate
