Silicon Valley

What a difference a couple of months make. In December 2000 with a talent shortage and full employment, CEO's of some companies were repeating the phrase "talented people are our company's No.1 asset". Only months later in March 2001 the same CEO's were announcing major workforce reductions in an attempt to reduce costs. On the one hand, employees are valuable assets contributing to the company's profitability; on the other hand, they are dispensable when profitability is at risk. Is there another way to view the relationship of employees to profitability?

Changing the role of employees from being hired hands to active business partners and owners became the focus of one Silicon Valley company in their quest for profitability. This article will illustrate how this company challenged traditional beliefs and adopted an alternative way of management that not only has been successful but also has resulted in sustainable profits for several years.


COMAC Inc. From Problem to Profit

COMAC Inc.'s distribution centre had over 115 employees in 1992. They were organised by 8 managers into 11 departments each with a supervisor. Revenue was $US 6.5 million or $US 56,500 per employee. There was no profit, largely because of the cost ($10K per month) of compensating customers for the company's mistakes. Employee turnover was about 20%.

COMAC

Established in 1970, COMAC Inc. (www.comac.com) is a provider of product and trade literature for small and large companies in North America. So if you are a medium to large company with extensive product and marketing literature rather than warehousing and distributing this information yourself, you can outsource this to a company like COMAC who will be able to store digitally, track and distribute on demand this information to prospective customers, salespeople and distributors. COMAC expedites 95% of their orders on the same day with a 98% satisfaction rate from their customers.

The company is privately held and recently became a subsidiary of Iron Mountain. The entire company (all eight US locations) had revenues in 2000 of $22.5 million and profit before taxes (and after bonus payouts) of $5.7 million. Work satisfaction as measured by employee turnover was reduced from 20% to 2% in 7 years.

CEO Mike Smith expressed his frustration:

"I wasn't enjoying running this business, it wasn't creative. The work was stressful for me and everybody else. There had to be a better way of becoming successful and enjoying work."

Mike came across Jack Stack's book "The Great Game of Business" in which the concepts of open-book management were described (see Open-Book Management) He distilled Stack's ideas of open-book management into his own approach, added incentive-based compensation, and began to apply it with COMAC employees in 1993.

OPEN-BOOK MANAGEMENT

Jack Stack and his colleagues developed many of their ideas at Springfield Remanufacturing Corp. (SRC) (www.srcreman.com) in the early 1980s and outlined these ideas in a book "The Great Game of Business". All the employees at SRC - from janitor to CEO - know exactly what they contribute, what they cost the company and how they depend on each other to be successful. Their common scorecard is the income statement, cash flow statement and balance sheet. Everybody is an owner and partner.

The results of 'playing the game' at SRC have been a spectacular growth in sales, above market salary and stock rewards for everyone, job security and an employee satisfaction rate that led SRC to be included in the list of the 100 Best Places to Work in America.

Six years later in 1999 the distribution center had 43 employees with 3 managers, no departments or supervisors. The fulfilment centre was reorganised into 2 primary teams – Operations and Customer Service. Revenue was $7.5 million or $176,000 per employee. Profit was $2.7 million. Employee turnover was down to 2% and all business partners earned above market salaries.

The COMAC Solution

In addition to open-book management, and incentive-based compensation, employer-employee partnerships and teamwork are important factors in COMAC's success. These four principles are explained and illustrated below.

Principle 1: Employee - Employer Partnership

In the traditional model of running a business employees do only what is directed by their manager, have little control over raises or bonuses and feel that profits are often made at their expense. Managers in this environment withhold information because they assume employees are incapable of understanding their problems and responsibilities. Additionally their focus is on their own department/function, reducing costs and meeting budget - controlling rather than growing the business.

Mike Smith (CEO): Borrowing on Stack's ideas we took them further. We challenged the assumptions upon which the traditional employee-employer model is based and adopted different ones:

Assumption 1: Employees can comprehend high-level problems and understanding the financials if they are given the relevant financial information and it is explained to them. That's what CEO's have to do; many of them aren't MBA's.

Assumption 2: Employees are interested to know about Profit & Loss statements and other financial measures when it affects their interests, e.g. take-home pay.

Assumption 3: Employees have to rely on themselves and as independent contractors are willing to take risks and learn in order to earn above market rates for their work.

Assumption 4: Creating a culture that brings out the best in every individual is far more interesting and fun for everybody involved.

A good test of the efficacy of some of these assumptions is the problem of increased workers compensation premiums that faced the company in 1992. A rash of back injuries had significantly driven these costs higher.

Sayeed Chaudhury (24 years at COMAC - was Managing Director of the distribution center and now COO): Mike asked me to look into reducing the costs of injuries — this was before we started open-book management and incentive -based compensation. So in 1993 I brought in videos on safe lifting and back and shoulder harnesses for people lifting boxes and other heavy items. I thought this would fix it but what I did had absolutely no impact on back injuries. However, by 1995 we had no back injuries that year and with the exception of one minor injury we continue that record today! It's very clear to me there was no ownership of the problem until everyone had a financial interest in controlling the cost of workplace injury.

Effectively everybody in the organisation has evolved from a hired hand to become a business partner. Where formerly the norm was defending turf or position, in this environment the focus is on what tasks have to be done.

Principle 2: Open-Book Management

In order to treat employees as business partners they need to be given information on how their business is performing. The greatest source of power for business owners, CEO's and Managing Directors is information. Giving up control and sharing all information may be difficult for some senior managers to embrace.

At COMAC the whole team reviews the income statement every month against budget and last month's results in a meeting that may last two hours or more. People learn the numbers - what they mean, where they come from and what impacts them. All financial goals for the month, quarter and year are clear and available to all. Similarly the salaries of every business partner - including their base and bonus— are known to everyone. The objective for all involved is to generate profits.

Mike Weston (6 years at COMAC —was Operations Supervisor and now Managing Director): In the other companies I've worked for the supervisor/managers' role was to hand down edicts. It's very different at COMAC. For instance in our April meeting I reviewed our March performance. Questions were asked, for example, "Why were meals and entertainment $2000?" If no one knows the answer we will look at the general ledger after the meeting to get the details. We also ran some 'what-if' scenarios, looking at the impact of the economic slowdown on COMAC's high-tech customers. Is every single person at the meeting interested in understanding these numbers? No; but more than 90% of our business partners are engaged. The reason we do these meetings monthly is to continually learn and improve our business and keep us all focused on the scorecard.

Mike Smith (CEO): The job of the manager at COMAC is to openly share good news and bad news. In a partnership a manager doesn't hide mistakes from employees or juggle the numbers or push the benefits of a particular action and withhold information about the risks. The complexities of business keep us all humble.

Principle 3: Incentive Compensation

Incentive compensation is about creating and distributing wealth to those who produce it. Employees are not rewarded for length of service nor do they receive annual raises or bonuses.

At COMAC business partners begin with a base salary that's a bit below market rates. They have the potential to earn significantly above those rates from incentive compensation. The Milpitas fulfilment center has had a bonus payout every quarter since 1994. But this bonus is always at risk. There is no guarantee partners will continue to receive a payout.

At the monthly meeting every partner sees how much profit came in, and after subtracting retained earnings for company expenses and capital investment, how much profit will be applied to the quarterly bonus pool. The bonus is allocated to the Operations or Customer Service team on a percentage basis depending on the contribution of each team to the outcome. Within each team each partner receives an equal distribution. The net effect is that company performance and team performance very directly impact individual salaries.

Nancy Schwab (9 years at COMAC— Client Services Manager): During the interview process I was told about the incentive compensation program. I didn't believe them initially. I was surprised positively. If I slack off it directly impacts my salary. 50% of my salary comes directly from the incentive bonus program. But more importantly this program makes my job a lot easier. I am very confident when I market our services to potential customers that other team members in the warehouse will deliver what I am promising.

This is risky business. This approach isn't for everyone. Prospective employees that need a predictable paycheck and are not willing to take a calculated risk will not choose this type of company.

Mike Weston (Managing Director): I checked them out before making my decision to come here. They had a good track record of profitability, good leadership and good systems. Like any other employment decision, you have to do your own due diligence.

Principle 4: Teamwork

Mike Smith (CEO): Team rules!!

It becomes very clear in the monthly profit and loss meetings that what each individual partner does impacts the company, their team and ultimately their family. From a compensation perspective the participating unit is by definition team-based so individuals in the team have a vested interest in improving the performance of other team members by providing feedback.

Mike Smith (CEO): We don't coddle non-performers. None of our teams can afford to.

One way of minimizing the risk to the team's profitability is to hire people on a temporary basis. This ensures time for learning and for other team members to assess the capabilities of the temp.

Buck Walters (Managing Director in Chicago): I was concerned about orders not being processed and that the Customer Service team might need more people. The team responded that time by redistributing workloads and hours to minimise the impact on profitability. But other times the pie will be bigger with an additional headcount. But it is a team decision; they know the tradeoffs.

Lessons for Business Leaders

Well what are the lessons from COMAC?

• Actions do speak louder than words. Leaders need to organise their company differently if they are to avoid 'dumbing down' their people assets
• Financial information and financial incentives creates motivated business partners
• Employees are as capable of learning to analyse the financials as CEO's
• Building a sustainable enterprise, increasing work satisfaction and job security are not mutually exclusive outcomes for business

Where to begin? The transformation of COMAC began with a leader who was willing to take risks and try something new. Are you willing to be the Jack Stack or Mike Smith of your organisation? Who could argue that harnessing the power of many minds rather than just the boss's or the senior managers is not a far better way to succeed in business.