Opening the Books, Turning Employees Into Millionaires

Gaming The System: How a traditional manufacturer opened its books and turned employees into millionaires

BY PETER CARBONARA, FORBES STAFF

There are three basic conditions if you want to work for Jack Stack, and they go for everybody from senior executives down to the people who clean his company's bathrooms. The first is you have to learn how to read and understand the company's financials, the second is you really have to believe there is no "I" in "team," and the third is you have to get into the habit of asking, "What could go wrong, and what are we going to do when it does?"

Stack, 68, is the CEO and cofounder of SRC Holdings, a Springfield, Missouri, company owned entirely by its 1,600 employees. Since its launch in 1983, SRC's main business has been remanufacturing engines and other components for trucks, tractors and other heavy equipment, which means taking worn gear and returning it to like-new condition. It's a tough, highly cyclical business. "If GDP is less than 2%, we're flat," Stack says. "If it's above that, we're on fire." Last year, SRC booked $16 million in profits on $532 million in sales to customers like General Motors, John Deere and Navistar.

Over the years, SRC has evolved into a highly entrepreneurial miniconglomerate that has launched more than 60 companies in industries ranging from banking to medical devices to furniture. It has also developed an unusual culture--a humane, Midwestern blend of quantitative management, radical transparency and practical paranoia--that has made it the flagship of what's known as the open-book-management movement.

“A guy who started here in 1983 making $7.50 an hour has now got $1.2 million.”

SRC, a place where sports metaphors rule, calls its distinctive brand of open book "the Great Game of Business." A small but passionate cult of business owners has grown up around two big ideas, which Stack has promoted in two books, The Great Game of Business and A Stake in the Outcome: One idea is that you can boost performance by making a game of tracking and improving key metrics. The other is that if you want employees to care about their jobs as if they were owners, you should make them owners.

There are many reasons SRC has become a model for other businesses--not least of which is that the Great Game promises to bridge a lot of the distrust between management and labor--but the real proof of the idea is that it works financially. In 1983, SRC's survival was a day-to-day question; a share of the company's stock was worth ten cents. Today, its shares, which have split six times over the years, are worth $70.30 each. If you'd been able to invest $1,000 in SRC in 1983, you'd have about $4 million today.

Since its launch 34 years ago--while much of our national discourse has been about who is to blame for the collapse of American manufacturing--SRC has paid $100 million to workers who have cashed out their ownership shares. Dozens have gone on to start their own businesses. Stack says about 30 of those workers, many of whom spent their careers on an assembly line, became millionaires when they quit or retired. "A guy who started here in 1983 making $7.50 an hour," he says, "has now got $1.2 million."

SRC doesn’t just make its financials available to employees--it also puts the numbers quite literally in their faces. The walls of the company's factories and offices are covered with signs, whiteboards and computer screens highlighting standard workplace stuff like "days without an accident" and also metrics tracking every aspect of SRC's financial health (only individual salaries are not disclosed). Opening the books to employees, however, is only the beginning and probably the easiest part of the Great Game. The real work is teaching employees what all those numbers mean--and how they can be moved.  

One morning toward the end of 2016, about 250 employees--men and women wearing jeans, work boots, safety glasses and more than a few trucker caps--sat around tables in a windowless lunchroom in a Springfield factory SRC runs in a joint venture with the giant London-based multinational heavy-equipment maker CNH Industrial. The joint venture was launched in 2009 and is owned 50-50 by its partners. "We remanufacture engines, transmissions, electrical systems, water pumps, axles--anything you can imagine on a farm tractor or an industrial tractor," Stack says.

The morning event was a monthly, all-hands meeting known as "big staff," at which department managers--sales, purchasing, supply chain, operations and so on--review the joint venture's financial health for the month just passed and lay out targets for the month ahead. Spreadsheets with all of the relevant numbers were projected on two large screens. Managers--the guys wearing Dockers and shirts with collars--did most of the talking, but the numbers underlying the targets had all been generated in tandem with the workers in the room. Individual departments and workers get into the nitty-gritty of setting and hitting targets at weekly meetings called "small staff." Setting standards and making forecasts are obsessions here, and all of the numbers start with line employees. As Stack often says, "Nobody knows the job better than the guy who is doing it."

“Nobody knows the job better than the guy doing it.”

At the lunchroom big staff, finance was spoken casually and fluently--cost of goods sold, profit before taxes, inventory levels, insurance costs and the like. Most of the people in the room were not SRC shareholders--they were employees of the joint venture, not SRC directly--but part of every employee's compensation comes in the form of bonuses tied to profitability. Operations director Steve Choate, who has been with SRC since the beginning, told the group that profitability for November looked good. "We're on track for bonus," he said to a round of applause. (Ultimately, they came up short.)

Mounted on the wall at the front of the room were five full-size traffic lights, just like you'd see above an intersection, indicating the joint venture's current health in five broad areas: People, Safety, and Cost were green but Quality and Delivery were red. Choate would explain later that Quality had been subpar because of flaws in a particular engine that required fixing under the joint venture's customer warranty. Delivery, meanwhile, had been off because the venture had been having trouble keeping its most popular products in stock.

During the proceedings, which lasted about 45 minutes, Stack, the only SRC guy in the room wearing a sport coat, stood at a wall with a group of managers trying to be inconspicuous. When he had entered, he'd been recognized instantly--as he is everywhere at SRC--with a chorus of "Hey, Jack!" and then surrounded by a small crowd of people wanting to shake his hand. He's SRC's resident father figure or maybe its favorite uncle. He pays attention to everyone he meets, laughs easily and often, remembers names and asks about kids and sick relatives.

Stack hates government regulation and says his all-time favorite business book is Atlas Shrugged, Ayn Rand's Objectivist doorstop, his brand of capitalism is not of the bare-knuckle variety. To him the most important aspect of how his company operates is that workers and management take shared responsibility and rewards for everything, including profits. Rand surely would have considered that hopelessly softheaded, but it has helped create an unusual degree of trust between managers and workers. When times are good or when they are lean, as they have been for the last few years, everyone at SRC knows why. Donna Harlow, 54, a warehouse worker who has been with SRC since 2010, says, "Its kind of nice knowing where you're at." Samantha Roderick, 26, a customer-demand analyst, says, "I don't worry that anybody's lying to me."

Jack Stack might have made a good parish priest if he hadn't been kicked out of the seminary. He grew up in a big, blue-collar family in Elmhurst, Illinois, was educated in Catholic schools and briefly studied for the priesthood. Following that and a stint in college, he got a job sorting auto parts in a GM factory and then got fired for playing poker during his abundant downtime. Finally, his dad got him a mailroom job with his own employer, International Harvester, the equipment manufacturer later bought by Navistar.

And it was here that Stack, a young man on the verge of permanent-screwup-hood, learned how to use his gifts. He was smart, outgoing, funny and imaginative, a regular guy who drank and swore and smoked. But he was also disarmingly honest and compassionate. All of that combined to give him a whiff of what you might call priestly authority. He was the kind of guy people wanted to please.

International Harvester eventually saw those qualities and began giving him management jobs. Stack says his initial reaction to trying to manage cynical, unionized autoworkers was to freak out. Eventually, though, he learned he could motivate workers by, first, simply sharing everything he knew (including financial and productivity data) and, second, appealing to their competitive and entrepreneurial impulses. Working for Stack became a series of little contests (or "mini-games," as they would become known at SRC). Beating a target for reducing re-work, for instance, meant a pizza-and-beer party paid for with the money that was saved. Hitting a new production quota meant winning a cash bet with another department about who could do it first. "What's wrong with having fun?" he asks.

In 1979, International Harvester sent him to take charge of a failing 200-employee nonunion remanufacturing factory in Springfield. "Anytime there was a pile of crap, they threw me into it," Stack once told an interviewer. "This was a big pile of crap." Soon the company announced plans to shutter the plant if it couldn't find a buyer. Stack and a group of managers decided to get their employees together, buy the plant and run it as a worker-owned operation. Stack hadn't glimpsed some secret fortune in the plant that had escaped International Harvester. Mainly, he says, he just dreaded having to fire a lot of people and go home a loser.

In the process of buying the plant and trying to get it back on its feet, Stack and his team realized they knew scarcely more about business, particularly finance, than the blue-collar men and women they claimed to be leading. From the beginning, Stack and his team made a point of including workers in their attempts to educate themselves. With the company just barely putting one foot in front of the other through the deep recession of the early 1980s, the possibility of layoffs or bankruptcy was always real. If he had to fire people, he told himself, it would be a little easier on them (not to mention him) if they understood the economics. He was also smart enough to sense that the best answers to a lot of the company's daily challenges--e.g., how to reduce waste and downtime, how to keep inventories low--weren't going to come from management.

“What’s wrong with having fun?”

Warren Burros, 76, an SRC warehouse working supervisor who retired in 2006, says it took a while for Stack's ethos of openness and shared responsibility to take root. Some people, he remembers, used to speculate that all this "open-book jazz" was really just another swindle by the guys in suits, that there were really two sets of books: a bogus set for the workers and a real one for management. It took years of growing profits and employee-stock-ownership accounts--and no layoffs--for that skepticism to fade. Now a credit counselor with a Springfield mortgage company, Burros says it was a different feeling than he had ever had at work. "You were walking in sync with your boss," he says, "but you still knew he was the boss."

The goodwill came to count for a lot, especially in tough times. Late in 2008, for instance, SRC's automotive unit, which was remanufacturing car engines for General Motors and boat engines for Mercury Marine, was caught in the economic downdrafts of the financial crisis. But when orders from the two main customers dried up, the unit was able to shift resources into new efforts that had already been pitched by workers, including making natural gas pumping units and remanufacturing engines for the U.S. Postal Service. Because they knew and trusted the numbers, the workers didn't have to be convinced that something had to change; they volunteered to go to a four-day workweek so that no one would lose a job.

By the mid-80s, journalists, academics and business owners began making the trip to Joann's Expressway Lounge, a now long-gone Springfield dive, where SRC folks congregated to drink and play pool and where Stack, a Miller Lite in his hand and a cigarette in his mouth (he's since quit smoking but not beer), held regular office hours. SRC eventually launched a small consulting unit to teach the Great Game method for a fee. Every year, hundreds of devotees and new converts come from around the country--and even the world--to meet under SRC's auspices to share experiences and renew the faith.

All of which suggests an obvious question: If the Great Game is such a good idea, why isn't everybody playing it? Rich Armstrong, president of SRC's Great Game consulting unit, counters that a lot of companies have adopted the Great Game or some aspects of it, including Whole Foods, Southwest Airlines and American Electric Power. Still, despite the passion of its fans, the idea has never really caught on with a wider audience.

For one thing, open book flies in the face of the traditional command-and-control culture that has dominated American industry, leaving most business leaders reluctant to try it unless they are desperate. For another, implementing open book is hard. "I think what it really boils down to is how willing are you to be completely vulnerable to your employees about much money you are making or, in our company's case, losing," says Michael Kiolbassa, 54, president of Kiolbassa Provisions, a San Antonio maker of sausage and other specialty meats. Kiolbassa is a satisfied customer of SRC's Great Game consulting unit, but he adds, "A lot of people say it's like dropping your pants."

Tellingly, Stack has even had trouble selling the concept to his own family. When his daughter, Meghan Chambers, launched a women's clothing store in Springfield in 2004, she refused to open her books, despite her father's pleas. Only when she ran into cash-flow problems a few years later and needed financial help from her father to survive did she agree to give it a shot. "I was carrying a lot of stress," she says. "I had weight loss and wasn't sleeping, and my dad finally looked at me and said, 'Why are you doing it all? Why are you taking it all home and not sharing it with everybody? You know they have ideas. You know they'll help you through this.' "

As soon as she started reviewing her books line by line with her employees, Chambers says, they started contributing money-saving ideas, and the business started to turn around: "The amount of stress that released from my shoulders and my body was pretty incredible once the clouds parted and everybody was on board."

Stack likes to tell a story of a friend in the fireworks business who visited his supplier in China. He asked to see the factory and was shown a group of huts spaced widely apart so that a fire in any one of them wouldn't cause the whole thing to blow up. The moral Stack drew from the story was to be constantly encouraging his people to build new huts. "We do start businesses all the time," he says. "When you teach people the financials, they get a pretty good idea of how to run a company." The strategy not only reduces risk but also keeps operating units small, making them more amenable to the Great Game approach and also making them easier to sell if SRC wants to raise cash.

Sometimes, SRC contains its risk while starting businesses by creating joint ventures, like the one with CNH. That deal generates $4.2 million a year for SRC. But the contract gives CNH an annual option to buy out SRC, and Stack believes that sooner or later CNH will use it.

Last year, six young SRC executives volunteered to take on the job of figuring out a way to replace the joint-venture revenue when it goes away--part of an ongoing strategic-planning effort to get the company's up-and-coming leaders working on SRC's big challenges. Another group of workers, for instance, looked at the self-insured company's rising health care costs. Their recommendation? "They told us to raise our premiums and reduce our deductible," Stack says.

The day after Election Day, over sandwiches and sodas from the local Schlotzsky's, the joint-venture group was looking to talk about a possible new line of business: rebuilding and reselling a vehicle often seen on work sites. A unit of SRC currently remanufactures engines and other components for the vehicle, which SRC isn't ready to disclose, for two corporate customers.

The possibility that got the SRC employees stoked is this: If we can make money remanufacturing components, couldn't we make even more money rebuilding the entire vehicle? There are currently more than a million of the vehicles at work in America. More to the point, Environmental Protection Association emission standards have jacked up the costs of new units. While a new one goes for more than $60,000, SRC might be able to sell a remanufactured one that would not have to comply with the latest emission regulations for $48,000. "We think it could be a $20 million business in a few years," says Ken Cook, a member of the project group and director of operations with SRC's Great Game.

“If the Great Game is such a good idea, why isn’t everybody playing it?”

First they've got to prove they can do the remanufacturing, which means budgeting enough money to buy some old vehicles to experiment on. They figure they'll need at least ten, plus money to hire a "wrench turner" to take them apart and to pay for the time of the engineers who will figure out which parts can be saved and which will need to be tossed. The group decided to ask for $200,000.

While the young men spoke, Stack ate his sandwich and listened, occasionally asking a question or tossing out a playful insult. He seemed to be making an effort not to dominate the meeting, but it was no use. The young guys kept asking, "What do you think, Jack?"

As it turned out, he loved the idea. Asked after the meeting what downsides he saw, he shook his head dismissively: "None."

The financial bar is relatively low for new businesses at SRC; they don't need to look like world-beaters as long as their fundamentals are solid. "In order for us to invest in a business," Stack says, "they have to be able to absorb their overhead and have cash flow, not necessarily make money. After they get up and running on their one product, they're asked to diversify."

The company has launched numerous businesses that have failed, but Stack has learned to take that in stride. The success of any one business is less important than the process of constantly looking for new opportunities.

"We start new businesses every year," he says. "This is fun."

Source:  Forbes Magazine