Interview with Jack Stack
Jack Stack is the founder and Chief Executive Officer of SRC Holdings Corporation, an award-winning, employee-owned organization based in Springfield, Missouri. Springfield Remanufacturing Corporation and its 22 subsidiaries provide a wide range of products and services, including engine remanufacturing, packing and distribution, business consulting and banking. SRC employs 1,600 people and generates annual revenues of about $400 million.
Kaizen: Where did you grow up?
Stack: I was born in Chicago in 1948. My father bought a house in Elmhurst, Illinois, and I lived in Elmhurst from the time that I was about three years old to about 30. Then I was transferred to Springfield, Missouri, where I’ve spent the last 31 years of my life.
Kaizen: It sounds like you were a wild card as a youth—you were kicked out of college and seminary and fired from a job at General Motors?
Stack: I just couldn’t find what I really wanted to do in life. My dad worked in a factory and had a college degree and believed in everybody in the family working. So I had an unbelievable number of jobs as a child. I delivered newspapers and sold Christmas trees and went door-to-door selling. Then I worked at a post office delivering mail. I was a janitor in high school; kids would leave from school and I’d clean the classrooms and the restrooms. I worked all my life; I always worked at something.
Then I went to college and I couldn’t handle the boredom. I went to strong Catholic Schools, so it was all repetition: nothing was interactive; nothing was exciting. It was mostly rote. So I didn’t pay a lot of attention.
When I went to work, I worked in organizations where you could get the job done fast, and I had a lot of time on my hands. At General Motors, my job was picking parts. You had to pick 400 line items in eight hours; that was the minimum expectation. I could be done by 1:30 or 2:00. I had nothing to do, so I went and played poker in the back room with the guys because that was more active. Eventually we got caught and I got discharged. They didn’t think that my vocation was to be a General Motors employee.
Kaizen: But your father worked at International Harvester and got a job for you there?
Stack: He got me a job in the mailroom, so I had the opportunity to work in the mailroom for a while. I always had good relationship-building skills and people liked me and took care of me. If they hadn’t, I probably would have been discharged from that operation. But they kept pressuring me to go to school and be something.
International Harvester gave me challenging jobs; they threw me in over my head and I just loved it. I had ten jobs in ten years, and every one was twice as hard as the previous one. They had faith that I could get it done, and I could get it done. I wasn’t good at showing up on time, but I would work late into the night and be totally focused on whatever assignment they gave me, and I had the tremendous satisfaction of pulling everything together to get it done. I could get it done, which was really a skill that I began to develop.
But at the same time, being a young kid in this massive factory, whenever they gave me this big job I would always go through this cycle. I began to believe that there is this crash factor that one has to go through — I call it the “freakout factor.” Every time you have this new job, you think it looks small and you can do it. Then you get into the job and suddenly it turns into this big thing. And you say, “What did I get myself into?” Then, depending on how fast you freak out, that’s how fast that job gets smaller.
I was good at freaking out fast. I’d call my boss in the middle of the night and I’d tell him I couldn’t do it. I’d embarrass myself and tell him I’m not the right guy for the job. Then I’d wake up the next morning at rock bottom. From that point on you say to yourself, “It can’t get any worse.” And then, suddenly, you take the assignment on.
This happened to me six or seven times in my career. I began to watch other people we put in positions to see how fast they’d hit that wall. The faster they hit the wall, the more entrepreneurial they were. So I was always watching for the person that you promote to find out how they lose total confidence in themselves—they have this breakdown. And they wake up the next morning and say to themselves, “It can’t get any worse than this.” And then it gets better from that point on. That was what happened to me when I worked at International Harvester.
Kaizen: In what you call freaking out, is there two parts? One is quickness—sizing up the situation and realizing that you have a big problem—and then resilience in being able to bounce back when you’re overwhelmed?
Stack: It’s an entrepreneurial trait to be quite naïve. Naïveté is really, really good because it’s the point by which you start. You have the confidence. It may be a little bit stupid to think you can leap tall buildings in a single bound, and then you find out you can’t jump very high.
Once International Harvester gave me a public relations job. The plant had never had a PR department. It was the largest manufacturing plant in the Chicagoland area, where the corporate office was, and it never had plant tours. They didn’t want to show the people off.
They put me in charge of Public Relations. Now, I can’t write a paper. I can’t write a sentence. I’ve got to write newsletters, PR notices. I’ll never forget sitting there in front of that blank piece of paper and just staring at it for days. It was like a piano was on my back. Finally, I was like, “Look this job is not for me. I can’t handle this job. I didn’t go to school to do it. I don’t like it.” Then I made an ass of myself. The next morning I woke up and dug the hole deeper; I didn’t ladder my way out of it. So I went back and said, “Okay, I’ll do it,” and I did it. It’s a trait that I see quite frequently in a lot of people.
Kaizen: In all these jobs at International Harvester, what made them say, “Let’s give him this new job and see what he can do”? You were a kid who started in the mailroom. What were they seeing in you?
Stack: Well, I think they saw my ability to work with other people. Like I said, I had good relationship-building skills. It was a timing issue because most of the people were ex-World War II people — confrontational. Management was a big issue inside the factories. Nobody sat down and really talked to anybody.
The average age in the factory was about 55 years old. I was single. I didn’t have the responsibilities of children and home and car payment. I was carefree and loose. I think they missed that, embraced it, appreciated it about me. As strong in discipline as they were, they liked a bit of mischief and fun and laughter.
It broke the monotony of the situation, because International Harvester must have been very, very stale from the ‘50s and ‘60s. It was the “organization man” mindset: you worked in a box. The second guy I replaced sat in the same chair for 26 years. It was, “Do your job, nothing more and nothing less; just do your job.” It was process oriented. I broke every rule there was. Someone told me to be quiet and I would talk about it. Someone told me it can’t be done—well, we did it.
Kaizen: Aside from International Harvester’s stale culture, from your book The Great Game of Business it sounds like it was a rough culture with lots of conflict.
Stack: We had the worst union, UAW. Local 6 was the worst UAW in the United States. It was the toughest union.
Kaizen: What did you learn at International Harvester about management and dealing with those kinds of problems?
Stack: It was obvious to me that people wanted to win; they did not want to just coexist. They did not want to walk into an empty box where the jobs were boring. IH’s management didn’t make it exciting — it was boring as you could believe. The result was conflict.
So my concept was: How do you get people to feel like winners? So I would set up these crazy little games—anything that meant someone could feel good about themselves. Once they started feeling good about themselves, they had an edge on almost anybody in the organization. My organizations could outperform because we made everybody feel like they’re number one and they were the most important thing in the world. When we hit a target, we’d throw our fists up in the air and celebrate. We’d party and do crazy things.
Kaizen: What’s an example of making a game out of a boring job to make it exciting?
Stack: We were shipping tractors to Russia to save the division, and they didn’t think we could get all these tractors out. They told us it was an impossible order: We had to do 700 tractors. So I put out a scorecard, and every day I would post how many tractors went out—15, 20, 30, 40.
But the cool thing was the finish line—it was the tension and whether you could or couldn’t do it. I’ll never forget the time that we did it and we put balloons all across the board and how good everybody felt.
You begin to realize you can do anything you really want to do—because of the ingenuity of people, and the ability to be able to put a team together. If you can put that team together, it’s almost like you’ve doubled the size of your intellectual capacity. When you use the wisdom of the crowd, it’s incredible what can happen.
The greatest one I had was when I became a superintendant of manufacturing when I was 26 years old. Five general foremen had been told they were going to have the job. They were all my father’s age and I was 26. And I don’t know a machine tool from a hammer. They just threw me down there, and the closest guy in age to me had spent 30 years more in the profession.
I did a freakout again. I went out the night before and had too much to drink. I woke up and I was petrified. I walked in and said to the five foremen: “Listen, it’s not my fault that I have this job. I didn’t pick this. I know you’ve been promised the job. All I can tell you is I will work my heart out to get you the tools to succeed and to get out of here as fast as possible to make room for one of you guys. But by the same token, if any of you guys try to go behind my back or you don’t want to play by the rules, I will personally punch you in the nose on the shop floor.” I told them that. They thought I was crazy and they said, “Why you would do that?” I said, “Because both of us would get fired at the same time. We have a policy here if two people get into a fight, they both get fired.” And I said, “That’s all I’ve got.” I walked out, and I could see these five old guys with gray hair, bent over, walking back to their departments saying, “This is the craziest son of a gun I’ve ever seen in my entire life!”
But I was also able to give them numbers and information that they had never had in their entire careers. We had an Iranian programmer down in the bowels of the storm shelter. I’d go down there, and he was developing a productivity report that was only given by carbon copies on a Thursday night, prior to a staff meeting. This guy had been paralleling this thing with a big IBM 76. Nobody was paying any attention to any of those reports. I went down to him and I said, “You mean to tell me that you can give me my productivity every single day?” He said, “To the penny.”
I had five departments at that time: five general foremen, 26 supervisors, and 500 UAW guys. Ours was one of seven divisions in the plant. We would all go to the staff meeting and we’d all get beat to hell on productivity. We didn’t know the day before or the day after; all we did was prayed to God that we wouldn’t get killed.
My division was the seventh out of seven: $53 per person is what we were running. We had all kinds of bottlenecks because of union contracts and compromises. The previous plant manager went in and said, “We’re going to run 300 crank cases through this machining line, and there’s going to be no rework area.” Well, there are 1,172 perishable tools in this line, and they didn’t tell the perishable tools when to fail. So obviously you had a lot of rework, and rework kills your productivity. The unions had flat rate allowances, so they would never allow any productivity changes, like tool changes and tool set ups and things like that.
So when I started to teach them they were lowest of the seven. I would have the Iranian give them their numbers every single day. The first several weeks, they didn’t want to look at them. Then they started to look and wanted to know why there were so bad. What did we need to do to be able to improve them? We were able to talk to the union—to tell them that we needed to make the changes on the three shifts, do the tooling on the second shift. We did more things because people wanted to be winners.
By the time we ended up, we were turning $72 per person, up from $53. The other divisions were chasing us.
Then we started to make bets with the other departments. I bet one machining superintendant that we could take him on. One time it was within a sixteenth of a cent in terms of productivity. He was running $72.16 and I was running $17.19 all the way to the very end. His department lost $500. We took the $500 and had a party inside of the department.
I’ll never forget one guy. We got down to one guy out of our 500 who was holding everybody up. I went to him and I said, “Look, you’re the key here.” This was a Wednesday, and we had Wednesday, Thursday, Friday, and then the contest was over. “If you don’t turn it on and do 79, we’re not going to take this guy.” He said, “I come to work every single day for 25 years. I have exceeded my quota. I performed better than anybody else in the organization. And you come around here and you change the whole parameter of the game.” I said, “Listen, I’m not trying to change anything. What’s it going to take for you to do 79?” He said, “Okay, I’ll do 79 if you promise me you won’t change my standard so I still could be number one in the entire department.” He did 79 and we won; that was the whole thing. And then I had my general foreman go on a bike—we had a little bell on the bike—and he rode around the competitor’s organization ringing his bell.
We did those things because jobs are boring. Here we had the most incredible numbers, and we did it by having fun. We tricked people into learning things they didn’t want to learn.
But there had been this invisible wall between everybody—and it was crazy, it was absolutely insane, and it was stupid. Those are some of the things that would cause us to lose the manufacturing edge that we had in the 60s and the 70s.
Kaizen: When you were just 30 years old, IH sent you to Springfield, Missouri, to head its Springfield plant. Were you ready for that leadership role?
Stack: It was like everything else. Anytime there was a pile of crap, they threw me into it. This was a big pile of crap. I didn’t know where Missouri was, let alone Springfield. I took my wife and kids and jumped off the face of the earth. No family down here, didn’t know anybody.
I went in the first day and talked to the organization. I told them I was there to help them and do what I can to get them the tools to do the job—the same thing I tell everybody. I promised them I would give them a visible idea of everything that goes on and they’ll be as transparent as they want. And I said, “Do you guys have any questions?” And this guy raised a question: “How old are you, anyways?” I said, “I’m 30 and feeling like 50.”
I was actually sent down here to either close the facility or to get it up and running. IH banked on it being closed. I basically fell in love with the people. As tough as it was up in Chicago, this was so much easier.
In Chicago, my guys went home to Indiana, Wisconsin, or Illinois. There wasn’t a suburb like Rockford where everybody kind of knew everybody, knew the factory, and stood behind the business. In Chicago it was tough to get the whole idea that we’re in this thing together.
But down here in Springfield, it’s this community; it’s like a cul-de-sac. So I was able to pull everybody together. They were also very entrepreneurial down here. They didn’t have a union contract. They were the type of people who came off farms and did things with their hands.
So what we did is we taught them how to run the business, we taught them how to be profitable, we taught them how to be safe, we taught them how to provide good quality. And as we began to teach them, they taught us.
Kaizen: What did the Springfield plant do?
Stack: It was building transmissions and engines and anything that you can imagine that went on a crawler tractor for construction, or a highway truck, or a farm tractor, or industrial equipment. Any component that was on there, we had the responsibility for remanufacturing it and getting it back out there, for the entire International Harvester company.
Kaizen: What was the plant’s financial condition when you arrived?
Stack: They were losing $2 million a year. For a small operation, that was huge.
Kaizen: Did you have a timeline for turning around or closing it down?
Stack: Well, they gave me about six months.
The plant’s up-to-schedule condition was about 28 percent; that’s how on-time delivery was. It was horrible. Their inventories were growing because they didn’t have very good manufacturing discipline. The plant was developed as a sales and marketing tool, and it was run by sales and marketing people with no manufacturing experience. That’s why I got the job: to discipline the manufacturing.
In manufacturing, you have a lot of metrics, a tremendous amount of metrics, when it comes down to the product. I knew how to handle the metrics. The metrics really motivated the people. If you can measure it, then you can play the games, and you can have success, and you can have wins. If you’re 28 percent on-time delivery and every time you go to 30 or 40 or 50 or 60 percent, there’s cause to celebrate. You also draw inventories down.
One thing the employees never had access to was the financial metrics, because they were heavily burdened by corporate overhead. So we started to create our own common-sense financials to tie in with teaching the employees the metrics of manufacturing. Then we taught them the metrics of the business. If you can do both at the same time, it’s perfect because most companies just teach people how to make a product or a service. They don’t teach them how to make a company. If you’re focused on making the company, you have to have great products and services.
Most companies’ processes have a tendency to dumb people down. You always have: Go out there and do a good job. If the company fails, they can’t put two and two together. But if you teach people what it takes to make a successful company, then the products are better, the services are better, because they are totally cognizant of the fact of where the end zone is. Instead of running them from the 20 to 20 yard lines and they’re getting frustrated because they can’t score—when you give them the balance sheet and the income statement, then they know how to score. So we then taught them that and within six months we were smoking.
Kaizen: That’s great. But even so International Harvester as a whole was in deep trouble and heading toward bankruptcy?
Stack: Arthur Andersen Consulting came in and said that in order for IH to go into the next decade, they had to have a significant change of leadership. So in 1980, they started bringing in these whiz kids and hotshots without any industry experience. They came up with an analysis that said: in order for the company to go forward, it really needed to break the UAW. So they took on the UAW.
An ex-Xerox guy and ex-Continental Can guy were the two head guys. They knew nothing about our business. They took the UAW on, and the UAW walked and they stayed out on strike for six months. We weren’t prepared for a strike. We brought in inventories. It was pathetic. We ended up with a tremendous amount of debt. We ended up with 6 billion dollars of debt by 1981—and then interest expense went up to 22%. We were hemorrhaging like crazy.
But here in Springfield we were doing really well. We didn’t strike because we were non-union, so we were doing good. But it didn’t matter because the whole company was going down. IH had to start selling assets all over the place.
Once they came back from the strike, we didn’t change one work role. We didn’t gain a darn thing. It was terrible how many things they were negotiating for that meant absolutely nothing; a very, very bad strategic move. That killed the company. IH had to start selling assets all over the place.
Our people in Springfield were looking at the assets sales and the factory closings and were panicking. They were trying to figure out what was going to happen. They were asking me whether they should get married, whether they should have a kid, whether they should buy a car. I’m questioning the whole concept of leadership. I’m sitting there saying to myself, “Here you are, a bigshot in a small town because you’re working for a big company, but in reality you can’t help people. When the company tells you to shut the factory down, there’s not a damn thing you can do about it; you’ve got to shut it down.”
I could see the handwriting on the wall—that we were no longer part of the core IH businesses—so it was only a matter of time before they were going to take a bullet.
Finally, I just couldn’t take it anymore. I said, “Look, don’t get married, don’t have a kid. The economic reality is we’re not going to be part of this company, and several things could happen. One: They shut us down cold and there are no severance packages. They just let you go in an unemployment market of 11%. Or: They could sell it. Or: if IH did survive and owes that kind of money, it’s going to be a brutal comeback.”
So I suggested that we try to buy the place. I was hoping that they would say “You’re crazy,” because I didn’t know anything about running a company. I knew how to make things but I didn’t know how to make a company, because I was never taught how to.
But this is my mental outlook: This was just a cop-out. I was sitting there saying, “What could I do for these people? I can’t do anything.” I dreaded the fact that I had to lay them off, so I thought if I said, “Let’s try a buyout,” and if I failed at that at least I felt I tried. The employees were so petrified at that meeting they would have followed anybody—they would have followed Rin Tin Tin. So I ended up trying to do an employee buyout. It took me two years of negotiations.
Kaizen: That process sounds tedious, with lots of setbacks. You knew nothing about raising capital investment money at this point, so you were learning everything on the job?
Stack: My first call to the bank—all I had was a letter of intent—the letter of intent that I wrote the IH company asking them to sell me the place. The guy laughed at me and he started asking me these dumb questions like, “When are you going to pay this money back?” And I went, “Wow, really good question.” I didn’t plan on paying it back; I needed to save the jobs.
Kaizen: International Harvester was asking for about $6 or $7 million?
Stack: I offered them $6 million, but eventually got up to $9 million in two years. The letter for intent was for $6 million and they said, “No, we’ve got to have $9 million.” I got a line of credit for $8 million and a receivable for them for a million, or something like that.
Kaizen: Your debt ratio was huge: You and your colleagues raised $100,000 but had to borrow $8.9 million to buy the Springfield plant. At the time, did you realize it was the largest debt-ratio for a leveraged buyout in American history? What made investors willing to stake you at those rates?
Stack: Well, they saw a lot of assets. They saw inventories. They saw a building. It was a leveraged buyout, so they pretty much felt that they could sell the assets and recover some of the debt. That was what I thought. But then the day I signed the papers, my lending officer wasn’t there because they had fired him for booking bad loans. He didn’t show up.
Bank of America was in tremendous disarray: they had fired their CEO out in California, and they’d fired their president out in New York. They were desperately trying to survive and we got caught right in the middle, and we were very fortunate to get the loan. Because they were getting out of leveraged buyouts at the time, so it was like divine intervention.
Kaizen: How was it for you psychologically taking on that debt and responsibility? Were you scared, confident—both?
Stack: Naïve, totally naïve. If someone told me 89:1, I wouldn’t know whether that was 98.1 degrees body heat. It meant nothing to me. We had a chance. I found later on it was really significant, but we were naïve. We were not afraid.
Kaizen: Who else was involved in buying the plant with you?
Stack: I wanted to make everybody owners; I wanted everybody to have 100 percent. “All for one, one for all” — all these things you grew up with — Robin Hood and things like that. But the bank wouldn’t take all the employees so they said, “We’ll take the management team because we don’t want to chase people all over the United States paying back this debt.” So they took the 13 managers and then I designed an equity formula for them. Then I went to the thirteen and they all chipped in the $100,000.
Kaizen: After SRC Holdings bought the Springfield plant, what was your first priority?
Stack: Well, I felt strongly that I had to drive down inventories as fast as I could. But I was amazed about how stupid we were because I didn’t negotiate an IT contract with International, so I ended up with no computer system.
I had to scramble because the banks were now getting mad because they found out what they had done. So we started this income statement, this manual income statement. I would have a huddle on a Wednesday. We’d get everybody together and forecast for the month what we are going to do.
It was absolutely extraordinary to have this “Aha!” moment: for every single line on my income statement I had a person that was responsible for the line. It was amazing. And then for every line on my balance sheet, I had someone who was responsible for the line. I had spent fourteen years writing job descriptions and accountabilities and going to all these schools and measurements. And here, right in front of me, was the purest form of measurement I had ever seen in my entire life.
When a person says he’s going to sell a million bucks—then somebody buys as a result of someone buying that million dollars—and then someone hires as a result to someone selling that thing. The income statement folds out as nothing more than stories about people—that’s what numbers are. But more importantly, they’re standards that people set for each other.
I came from a world where most of the standards were set by industrial engineers, and you then had to fight with the hourly guy on the shop floor to convince him that you could make that many pieces in that short a period of time. Now all of a sudden, I began to realize that — holy cow — the marketplace sets your standards; people set your standards. Very few people understand that it’s what we say to each other that is the most important thing. Our actions are based on what we see.
So I started to run this huddle, and I started to build financial statements on the walls of the staff room. We’d come in and fill them out every week. We’d fill out what we thought we would sell for that particular month, then what the balance sheet was going to be, and what the cash flow statement was. It was brilliant. Everybody took the psychic ownership. We had transparency. What you had then was peer pressure. But you also had, at the same time, reward and recognition. That was everything that I was looking for. I was looking for stability. Income statements and balance sheets and cash flow haven’t changed since the 1400s. So I had the stability of the financials, but the change occurred with the numbers. And that was what made it entertaining; that’s what made it exciting.
Some people hate change, some people love change; well, here I had both. Sales is always going to be here, profits are always going to be down here, cash starts the balance sheet, equity ends the balance sheet. The irony of the situation is that it hadn’t changed since the 1400s. But what blew me away was so few people knew how to interpret them; so few people knew how to read them.
I began to realize that most failure occurred not because an entrepreneur didn’t have the ability to service or make something: they had no idea of the metrics of the business. So we began to teach the metrics and we appealed to a higher level of thinking in people. We just didn’t give them a worksheet on how to build a transmission. We said, “You’re running a company, and these are the metrics of the company.” All of a sudden, it’s 28 years later, and they’ve just been outrageously successful from that point on.
Kaizen: Your method seems to have three elements: motivation, power, and knowledge. Employees are motivated if they connect working hard to rewards that matter to them, if they have some control over the process, and if they know how what they’re doing fits the big picture. But there’s also an empowerment element?
Stack: There’s a psychic ownership. That’s what you want. You want them to have the ownership of the line. When you go into that meeting and you’ve got to post that line, you’ve got to actually physically walk up and say, “This is me, this is my organization.” It’s very powerful.
Kaizen: It breaks down traditional barriers between management and owners.
Stack: There are no barriers.
Kaizen: Right. People know there is a division of labor and what everybody is contributing. There is a bottom line: everyone knows it, everybody has ownership.
Stack: There are no divisions. That’s the fabulous thing about numbers: it is what it is. Everybody sees it.
Kaizen: In your two books, The Great Game of Business and A Stake in the Outcome, you explain in detail what you have come to call the “Great Game of Business.” Can you summarize its core strategy?
Stack: Here’s what happened to me. I always thought it was crazy that we would lay people off. They’d go out to the parking lot with the pink slip, and that would be the first time they knew that the company was in trouble. It always broke my heart that you had to lay somebody off. You’re affecting families and everything of this nature.
Then I came down here and then I saw the fear in everybody’s eyes about whether they should have a kid during that economic period. I questioned the whole model — somebody working for somebody else. I came out of that hierarchical organizational structure: everybody’s coming from the top down. Nobody ever, ever questioned whether people like working for somebody or not. All the studies and all the conferences and all the degrees that I eventually attained—not one was ever centered around, “Maybe people don’t like working for somebody else.”
When I began to write business plans for the banks, I went to 50 some organizations to try to borrow money because I had a horrible, horrible business plan. Because of the customers I had, nobody wanted to finance International Harvester on a receivable when they already owed 200 banks six billion dollars. So I ran these financial statements. I got angry at the banks. I got angry at the company—because the company never taught me how to run a company. They never taught me how to measure the success of the company, with the idea that 115,000 people would do their jobs and it would work: you’d have a great product, you’d have a great service, you’d have a great company.
So I promised myself that if I got this company, I would really teach people what it takes to be successful. They would never ask again whether they should have a kid or buy a car. If they can understand the balance sheet, they can sit there and say to themselves, “If you’re 89:1, you’re brain dead and you’re in trouble, so maybe I ought to hold things off for awhile; maybe I ought to make some decisions that I didn’t make in the past.” I never found a more honest way of always telling everybody what the condition of the company was. I never found a truer way of letting them know what the company was.
Once I found that, I said to myself, “Let’s change the leadership dynamics.” At the early stages, I was trying to develop an accelerated learning process for them to get it. Remember, I wrote it out 50 times and I got it. Figuring financial ratios, seeing the messages what you have to do, and listening to the bankers, saying, “This is good, this is bad.” I finally began to think like them. I felt if I could do this, then why shouldn’t everyone in the company be able to do it?
They were reluctant at the very beginning and that’s when the idea came of telling people that business is no different than Monopoly, it’s no different than sports. Business is a game: It has rules, it has scorecards, and it has an outcome. Those are the three elements of the game.
I kept thinking that if I could create this game, then instead of having an organization structure that is top-down, we would be working together at fixing the game. We wouldn’t be working at fixing each other. Remember, [W. Edwards] Deming said that the Achilles heel of the American management system is the way the Americans manage. Nine times out of ten, when we have a problem we shoot the person. But nine times out of ten, you’ve got a systems problem. But if you don’t have a system then you go after the people.
So what we decided to do was to use this theory of the game. When we had a deviation or a variance, we said to ourselves, “What are we doing wrong with the game?” Then we’d fix the game.
That became a new leadership platform. People weren’t working for somebody else; they were working for each other first. We broke it down by all of the responsibilities of the financials. Everybody assumed the financials and took ownership of them. They all came together to see what they could do for each other.
Kaizen: This is a revolutionary approach to management: Part of it is not working for other people but working for yourself. And part is that work is not a “living dead” drudgery, as you call it. Work should be fun. Another part is treating employees as people who can understand how a business works and not as cogs in a machine.
Stack: But every time we had a deviation, though, our solution to the deviation was a game. It was not an order. It was, “How do we develop something of interest so that once they fix the deviation people feel like they really created a win?” Then there was the whole conceptual idea of building winners. I saw it on the shop floors of Chicago. Once you got them feeling like winners, they don’t want that to change.
Life is tough outside of work; why make work so bad? Why not feel good? It’s not that hard. It’s small wins, too, not big wins. People will compete for pennies, they’ll compete for pizzas, they’ll compete for margaritas. You don’t have to have that much for them to be able to win.
Kaizen: You also introduced “open-book management” here. What is that?
Stack: For my lifetime, no one was ever allowed to see the financials. Even today, instead of being more transparent, we’re becoming less transparent. We’re not opening our books; we’re hiding our books even more. It’s the most ridiculous thing I’ve ever seen in my entire life.
The whole part of the Game was that they had to understand the scorecards. The first rule is that the marketplace sets the rules, so we spent a lot of time bringing the marketplace to our people. We bring it hard to them twice a year. Who is your competition? What do they make? What are their financials? What are their competitive edges?
We really, really train the people, and then we forecast. Once we forecast, we then ask the associates to vote on the forecast. Do you believe we will sell this much? You have as much information as our sales and marketing people, now you make the call. Is this the financial plan? Once we establish the financial plan, you can either hang it out there or you can live it every day.
The next part is to change the scorecards. Put the financial scorecards everywhere for them to see, and they see what they need to do to improve. If they have a lousy shipping month and it affects sales and builds inventories, then let’s get a game. Let’s figure out what we have to do. Let’s pay attention, focus on it by playing a mini game. We had the Great Game, which is the big game of building the company, to have it sustain over a long period of time. Then we had all the mini games that fix the variances and the deviations, that don’t threaten people.
Kaizen: Let’s turn to the fears and criticisms of open book management. One is that if you open your books to the employees, conflicts arise. What’s behind that fear?
Stack: I used to think the first fear was that if employees saw what the company was making they would ask for more money. That was number one. Number two is that they would think their employees would take their ideas, start their own companies or compete against them, or go to work somewhere else. I used to think that.
Later on in life, I began to realize that few CEOs really understand financials. They’re totally reliant on CPAs; they’re totally reliant on bookkeepers. They farm out a lot of the financials in the operations. They’re totally reliant on lawyers; lawyers tell them not to do it, not to share it. Their family-owned companies never shared their books with anybody else for a variety of reasons. But any downside that I have ever come across the last thirty years paled in comparison to the benefits of open books. There really isn’t a sustainable reason.
I just wrote an article for The New York Times, and I included someone I thought was a skeptic. I called a skeptic up and he goes, “Oh no, I’ve never been a skeptic. I haven’t done it for two reasons.” I said, “What are the reasons?”
He goes, “Well, one is that I’m more afraid of the unknown than the known.” I said, “What are you talking about?” He said, “Well, I’m afraid if we have bad period of time and my people see bad numbers, then they’re going to leave and they would go somewhere else, and I couldn’t handle them not knowing.”
I said, “They know anyways. They know it by your gestures. They know it by your attitude. They know it by the sales. They’re not stupid. You’re making them stupid by not sharing it with them, because they know something’s wrong. And you’re probably scaring them worse because they don’t know. And you’re not exercising the ability for them to be able to help you through that difficult period of time.”
The second one was he didn’t know how to create a fair equity bonus system inside the organization. I said, “Our bonus system is the same for everybody else. We pick one financial ratio inside the company, and then everybody is playing to beat that one ratio. That one ratio comes out of the financial process that shows where you’re weak in the company. You’ve got to have the courage to fix your weakness. If you fix your weakness, then you can go to the next year and then you’re going to have another weakness.” And he said, “Oh, so they all can make 15 percent of their salary?” I said, “Yeah, in good times when they do better than market, they deserve better than market. They can make 15 percent.” He goes, “Oh, well that answers that question.” People just don’t read the book.
I think it’s crazy, because I can’t define how freeing this is as a leadership style. I can’t tell you how free it is for a CEO, especially when I see all the CEOs out there that believe they’ve got to have all the answers, that they are the ones who can solve all the problems. They harbor this fear that it’s their family money, so they deserve all the rewards and feel employees don’t understand the risks that they take and the debts that they have.
Kaizen: So it’s freeing in one sense that you are not quite delegating, you’re outsourcing. The wisdom of crowds; you can trust your people. If they have the knowledge and the power, then it’s going to be win-win. And it motivates them to solve problems so that it doesn’t all come back to you as the guy who has to solve all the problems.
Stack: I delegate everything. They’re very smart. They’re very educated. They know the pattern. They know it’s their responsibility.
Kaizen: There are critics who claim that open-book management leaves a business vulnerable to competitors. You don’t. Why?
Stack: I never had it happen. We run a conference to teach people what we do. My competition has never been at one of those conferences. Anyways, take the system; it’s going to be tough to duplicate the people.
You know what happens, I guess, is that when you play this Game and you really listen, everybody wants a crystal ball, but you have a crystal ball in your ratios. In the area of profitability, efficiency, and solvency there are maybe 10 to 15 different ratios in each one of those categories. You can get 15 ratios off an income statement, you can get 12 off a balance sheet, and you can get 10 off a cash flow statement. You compare those ratios to the marketplace: that tells you who is best practice; it tells you who are the big players; and it tells you what you can do relative to the practice that you’re in.
Where the courage comes in is that you’ve got to fix the ratio. If you don’t fix the ratio, then over a long period of time it’s going to affect sustainability. So, what we do is have the courage every year when we take everybody’s stories, we consolidate the financials, we compare the ratios to their industries, we find out where their weaknesses are, and we then put the incentive program to be able to fix the weakness. People are incredible; they’ll fix it. Then next year we’ll have a different weakness.
Kaizen: SRC is a big and complicated company—how long did it take for you to work out and fine-tune the Great Game of Business to your satisfaction?
Stack: I don’t think you know that you achieved the results until you look into the past. I think every year is brand new. Even though we do five-year and ten-year plans, and we do them every year. Every year is a new Game; you reinvent yourself again. You don’t realize it’s successful until you look at millionaires who have left the company, and the fact that there are new other people setting up, still having a quality life. Success is something you look at in the rearview mirror.
Kaizen: How long would you say it took you to develop a good pattern?
Stack: I’d say the pattern took two years, when it truly became a pattern. Knowing how many times you have to do it, where it can’t be boring. I think if you have a repeatable pattern, I think that is what creates the accelerated learning. I think culture’s behavior is affected by repetition, repetition, repetition. The idea is that it can’t be boring; you’ve got to figure out how to have a skill where people aren’t bored. If you can work beyond the boredom, then you’re probably going to be better than everybody else in the marketplace.
And so our repeatable pattern is twice a year the marketplace is brought to the people. Once a year they do a financial plan, going on five years as a result of that. We have weekly huddles. Our bonus programs are quarterly. So they know what to expect. In other words, every year we’ve had 58 sales and marketing meetings so far. So they know what to bring to the table, and they get better at bringing it to the table because the marketplace is always changing.
So when our people know that they’re going to have to go in front of all the people in the organization, and they have to make this presentation, and it’s going to be in six months, that means every day, after the presentations, they keep working on making the next one. So they know what to expect. And once it becomes a pattern, and once you’ve worked out all the bugs in terms of whether it’s dull or it’s boring—and that’s what you’ve really got to work on, is to create the excitement, the fun, that really, really thrilling moment where they cross the finish line—then you’ve really got it hot; then you’ve really got it smoking.
You see, what happens here is people just take a piece of it. They come in and go, “Wow, your incentive program is the best I’ve ever seen.” They’ll just put in the bonus program; they won’t provide the education in making profits.
Debt-to-equity was our first critical number — it had to be. So I had to teach everybody how they affected debt-to-equity. I spend one year teaching them debt-to-equity. Well, after one year they got debt-to-equity, and then the next year was diversification, because a janitor told us that all our eggs were in one basket, and he was right. We had to diversify, so we went on a diversification binge.
People want a crystal ball; they don’t know they have it in front of them. It’s there. The business tells you what you really have to do, what directions you have to take, but you have to have the courage to take them.
Kaizen: Clearly your system has worked. In 1983 you had 120 employees and by 1991 you had grown to 650 employees. How many employees does SRC have now?
Stack: We have 1,200 here and another 400 overseas.
Kaizen: You paid $9 million for the company in 1983, and by 1991 the value of the company had increased by 18,300 percent. How much is the company worth now?
Stack: We’ve cashed out $57 million worth of shareholders, and the company today is worth $83 million dollars. It’s about $135 million from $100,000 but we’ve got 880 shareholders. They all had the opportunity to be owners.
Kaizen: Business Week has called Springfield, Missouri a “management Mecca” because of the thousands of businesses that have come to observe SRC’s management strategies. You also have a website with a wealth of information. What do you most want managers to take away from visiting SRC?
Stack: We really believe that this is our economic strength. We believe also it falls on deaf ears. A fraction of businesses in the United States practice this.
What’s crazy is it that it works. We see it time and time again. Now we’re living long enough where we’re seeing our kids do it. I have two daughters who own their own businesses. I’ve seen my daughters go the traditional route, and then I see them converted to the Great Game. You can tell the differences in terms of the way the business runs and the way they work and the way their associates are tied into the organizations. This is something that we’re giving back to anybody who wants to take a piece of it. It’s just something that we really see as one of the best practices.
It drives you crazy when you see the Arthur Andersons and the Enrons and everything that’s happening in our society today, and you know that it’s due to the lack of transparency. You know that if we were practicing open books those things wouldn’t happen, because too many people know about it. It’s not an inclusive group of people who are called “sophisticated.” There is a phase the SEC uses in terms of sitting there determining whether or not you should have the information or not, whether you are a “sophisticated associate.” It’s pathetic.
GE just had 18 people in here two weeks ago. I was blown away. They brought them in from as far as London, and it was an honor to have GE. One guy had 27,000 people working for him. They got it. I was amazed, they got it. I turned to the guy and said, “Look, if you want to put this as a GE practice, I don’t really care because it’s a very, very sound practice.” It’s one we need in our universities; it’s one we need in our politicians. I just see it as a significant tool in terms of economic survival. Why not teach people how to make a great company, why not teach people how to make a great university? University life is more hierarchical than International was in the 50s and 60s. I served on a lot of boards at universities, and they’re good people, but it’s crazy.
Kaizen: You have received many recognitions for your successes—you’ve won a National Business Ethics Award, been called the “smartest strategist in America” by Inc. magazine, won the National Entrepreneur of the Year Award in 1991, and many, many others. Do such recognitions add to your sense of satisfaction with how much you have accomplished?
Stack: I am the most realistic person in the world and know that in our society we eat our young. I know that I am one DWI away from total disgrace. It doesn’t matter all the things that you have built up because it can end in a heartbeat. I also know that this has really been hard, because it’s one thing to go out and consult—it’s one thing to go out and teach it—but it’s another thing to consult, teach, and then have to live it every single day, knowing that if you blow it inside this company, nobody will buy it on the outside. The pressure has been more of a concern than the praise.
I knew all these guys. I was on Tom Peters’s board, for instance. He’s one of the most brilliant guys you ever saw in your life, but he couldn’t run a company to save his life. I know Franklin and Covey, with the time-management company. These guys can’t run companies! To be able to run a company and practice what you preach is just a pain; it’s painful. You’re realistic, because you’re about a snap of a finger away from failure. You don’t get heady with anything that you’ve achieved.
Kaizen: So it’s one thing to develop a theory, even if it’s a very good theory, but it’s another thing being able to put that theory into practice? It’s another skill set to have both of those and then to walk that walk consistently now for several decades? Do you have a strong set of accomplishment? Is that your primary reward?
Stack: I have a strong sense of when you can take credit for accomplishment, and that’s after you leave an organization and it sustains for five years. This is back to the rearview mirror philosophy.
Kaizen: So that is going to be the test: to what extent is SRC a Jack Stack success and to what extent it is a Jack Stack plus a whole bunch of other people built this thing that sustained. Your big success will be when you leave five years after?
Stack: Right. The goal is to create the sustainability.
Kaizen: What is next for Jack Stack?
Stack: This is by far the best year we’ve ever had in our 28 years. It’s just incredible how well we’ve done this year, in the worst economic period. I can’t believe it. I think the real test of a company is what happened in the fourth quarter of 2008, when everybody was panicking and everybody was trying to figure out what was going to happen.
Yet this company figured out how to position itself for another ten-year run. I was so proud of this company, the way it set up a ten-year run. I have never seen a company set up for a ten-year run where it has only a few things to fix in order for it to be able to make those ten years. I’m in the final tweaking process right now, making absolutely certain. Maybe it took us 30 years to get here, but to be able to see it from a distance over a ten-year period of time.
Kaizen: What has been the best thing to you about being an entrepreneur?
Stack: I think what’s incredible is that when I came into Springfield, Missouri, there weren’t a lot of jobs. What has really transpired is how we have been able to create jobs. We created enough jobs where even our kids can stay in Missouri; they can stay in Springfield. It’s really rare. I’ve got five kids and they are all here and they’re all having grandkids. In 1979, I didn’t think you could find a job for a child in Springfield.
But now to have built this organization that has created this culture that is attracting Fortune 500 companies to Springfield. It’s really dynamic to be able to know that within a three-year period of time we could create 2,000 ancillary jobs around the 1,200 that we have here. That is mind-boggling to see the ability to create jobs.
For instance, we brought John Deere in and then we worked with them on a program. They liked the Game, they liked the people, and then they had the right to buy it out. So they bought it out and put a global operation here. This will turn into like 300 to 400 jobs. There are 250 there right now; that’s outside of our 1,200. We’re now bringing in everything—what is really cool is that we built this economic development program that is really going to provide opportunities for people.
Kaizen: What has been the most challenging thing for you about being an entrepreneur?
Stack: You don’t like to go into places in town where you meet people who didn’t make it at SRC. It’s not a very pleasant thing to do. For whatever reason, they decided to leave. It’s a small community. You’d like to have a perfect record; you don’t always have a perfect record, so you feel bad about the losses that you had in terms of people. That’s probably the most significant thing.
Kaizen: Looking back, what thinkers, writers, or consultants were most influential on your business philosophy?
Stack: I liked Herb Kelleher a lot, from Southwest Airlines. I always thought he was really good. From a politician standpoint, I liked Richard Gephardt. He was the one that took the vote when they were going to impeach Bill Clinton. He was the Majority Whip in the House of Representatives, and he was able to stand up — a tough guy. He now serves on the board of Ford and really has a passion for this Great Game. He was always a big believer in it.
My writer, Bo Burlingham, is probably one of the smartest guys you could ever run across — inquisitive. He came from very high ethics as a writer; couldn’t even compromise the guy. He was always at the truth. He drove me absolutely crazy. I come from Chicago and I could say something and understand what it means, but he could actually break it down into what it really means for someone else to understand it. He gave me a communicative ability that I didn’t really have.
But I’m sure there’s a lot of others. In my early career, I had one guy who was in the Korean War. He was a leader, and he got shot in the war and had some serious injuries. I worked for him for a long time. Anything that I ever did, I didn’t do good enough. As good as I did it, there was always one more step that I could have done. That drove me absolutely crazy. He could communicate in a way that, when you walked away, you just said, “Darn, why didn’t I think of that?”
Kaizen: What was your inspiration to challenge the odds and make American business history? Why not settle for an easier life and do more, say, bass fishing?
Stack: Listen, I don’t even look at the money. I don’t even think that I can take the wealth that’s been created out of this company. I know that I have enough that, if something happened to me, my wife would have an earned income going forward, and that’s about all I really care about. If I sat down and counted, it just doesn’t feel right. I came from a very, very good family; it worked for everything it had, and it was wage oriented. This whole idea of equity is mind boggling. I want people to understand that for every dollar’s worth of earnings they can make it eleven times multiple if they really understood it, but when it comes to myself, I don’t count with money.
Kaizen: Having made your financial goals, what motivates you to continue working hard in business?
Stack: It’s not remodeling, it’s finishing. I’m just trying to finish the picture so that it will be sustainable over that five- to ten-year period of time. Maybe it’s an impossible final act, but I think that I’m about 80 percent of the way there and I’ve only got 20 percent left. That’s the exciting piece of it.
But life deals you some really cruel blows. Until I was 40 I was scared to death. I got raised in a family with a fear of failing. Then you get to 40 and you say to yourself, “Well, the white male life expectancy is 73.” And at 40 you go, “Oh man, I don’t want to go through the next years of my life being afraid.” So you calm down. You try to get a bit more courage. You can start seeing a path through the woods. Then you begin to realize that, in the pursuit of retirement you ask “What would I do if I retire?” You get these unpleasant surprises. Because I was planning on retiring at 40 and saying, “This is it, I’m gone, I’m cashing out, I’m doing things.” Then you go to fifty, and then you go to sixty. Just see what happens when you get there.
Kaizen: About your “finishing the picture” metaphor. You have a vision of what you want to accomplish and you’re 80 percent there, so it’s that drive to finish?
Stack: I have three major projects. I’ve got two joint ventures in process. If the joint ventures turn out as well as our previous joint ventures, that will build a huge annuity for the people in the company. Their balance sheets are really strong right now; they’re just so solid. One is a three-year term and one is a ten-year term. Once we get those things working, the only thing we’ve got to do is replace some business at one of the other factories, and then they’re on that path. Those are the last three things that I think need to be done, and we can transition this thing into a younger organization.
Kaizen: What is the best advice you’ve been given from a mentor?
Stack: One of the higher laws is that you get what you give. The more you give, it’s incredible how it comes back. You can be down to nothing and give somebody a helping hand, or you can give something, and then next week something comes along that you just can’t expect. It’s simple to sit there and say the Golden Rule is “Do unto others as you would have them do unto you.” But the whole idea of paying it forward, giving it back, that’s what’s it all about.
As I wind down, that’s what I keep thinking about now: how do you keep giving it back? This process has been our way of giving it back, and to be able to make it as affordable for anybody that wants to see it, understand it, have it. It’s like the more we give, the more our company is successful.
Which is ironic because one of the reasons people don’t want to do this is they think that someone is going to steal something from them. They don’t understand that when you teach people the business, you’re teaching people debt literacy, you’re teaching people economics, you’re teaching them financial planning. You’re making that person better at home and in their own lives by teaching them what we’re trying to teach here. This is a huge, huge program that affects so many people’s lives, it’s incredible. The dividends are that people look at you as a healthy company. They look at you as, “Wow, I trust these guys.” And that’s very, very important in any business transaction that you do. It’s allowed us to have successful years, successful giant ventures, and successful organizations.
Kaizen: In closing, what advice would you give to young people just starting out in their careers?
Stack: One thing I’ve observed is that if you go to college, that the transition from your senior year to your freshman year—it would be great if you had a dream. Whether it is being on Broadway, running a music store or a retail store, you should definitely pick something you love when you go to college. Then when you’re in college, the curriculum should be centered around teaching that person how to attain what they really love. I watched my daughter go to school with this whole idea of building a retail center to revitalize downtown. Every course she took, as difficult as the course was, was always a reflection of her dream. It was amazing because she struggled in school until she had this dream. So when she went to an accounting course, it wasn’t just accounting — it had a connection.
Build your business plan. My daughter built her business plan for four years in college. She had every professor working for her. It was brilliant. Even when she went to the banks after she graduated, she did her business plan and then went back to the professors again and had them look at it and had them critique it and built it. She did fabulously in college; that was the best time in her life. Not really, because she’s doing fabulous right now. She went from that great period of time. I really think that they’ve got to have some connection. That’s why the MBA programs were built on the idea that you go out in the real world, find out what you want to do in a couple of years, then take your MBA. That’s part of it. But there is this part where we could give them one thing — whether it’s a farm, whether it is a manufacturing facility — they need some substance to be able to draw the knowledge and apply it somewhere to something.
So many kids are desperately moving from one area to another area; they’re jumping around and they don’t have any stickiness. We run an organization that’s for all the college kids in town—it’s a packaging operation where we knock down things and put the kids in. They get the Great Game. They have to do the financials every single week. What’s interesting is now, for the first time, they understand why you do engineering, they understand why you do sales and marketing, and they understand why you do accounting. It’s amazing just to have that income statement, and all of a sudden it organizes their thinking in college. They’re not just taking a course in ethics; they’re taking a course because it ties to something.
Have any dream. Make it up! Be a turtle hunter. It doesn’t matter. But have something to apply your knowledge to. It’s a simple, simple thing.
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This interview was conducted for Kaizen by Stephen Hicks. For more information about Jack Stack and the Great Game of Business, see www.GreatGame.com.
© 2013 Stephen R. C. Hicks. All rights reserved.