How John McCormack's unique approach to managing people and information produced one of this country's premier growth companies
JOHN MCCORMACK IS PERCHED ON the edge of a stuffed chair in his new house outside Houston. He is a great big bear of a man, and right now he looks poised to snatch a fish. In one hand is a remote control device that he keeps pressing to fastforward a videotape on the large-screen television in front of him. Whenever his visitor tries to ask a question, he holds up the other hand and says, "Sh! Sh! Listen to this! Listen to this!"
On the screen, the founder of the Benihana of Tokyo chain of Japanese restaurants is telling his life story. McCormack has just recently gotten hold of the video. You'd think he'd come across another copy of the Magna Charta. "This is great! This is great! Look at this!"
The room is filled with videos, and the house is filled with large-screen televisions, three all told. Indeed, the house is filled with every type of gadget known to modern man, and often more than one of each. The kitchen, for instance, has two dishwashers, two stoves, a huge refrigerator, and two double sinks -- which seems like a lot for people who eat out six nights a week. There are four whirlpool baths, a swimming pool with air-conditioned cabana, a steam bath, and three ice machines. (McCormack says he frequently has house-guests and wants them to "feel at home.")
The living room has a 20-foot-high, floor-to-ceiling fireplace carved out of a slab of Italian marble that he had shipped directly into the port of Houston. The staircase is white oak and glass-sided, rising to a catwalk overlooking the living room. If you don't care to walk, there's an elevator running up to the master-bedroom closet -- a huge room in itself, featuring, among other things, McCormack's 10 pairs of cowboy boots. Then there are the custom-made windows, doors, carpets, and sofas, not to mention the humongous playhouse that alone cost $10,000 to build. And, oh yes, the 12 bathrooms.
The house just won't quit, and neither, it seems, will John McCormack. He is completely wrapped up in the life story of the man from Benihana, and nothing can distract him. This is not, in fact, unusual. He tends to get wrapped up in the things he cares about -- his house, his business, his family, his videos.
You often get the sense, moreover, that they are all somehow connected. It was the business, after all, that allowed him to build the house, and it was he and his wife, Maryanne, who built the business. Today she is president of the company. He is the chairman. He is also head cheerleader -- which is where the videos come in.
By his estimate, McCormack spends $2,000 a year on videos and tapes, mostly of the Zig Ziglar genre. He listens to them for bits of management wisdom. In the early days of the business, he would often play the tapes at meetings of his managers, then stop and ask questions. "It was a way of teaching them how to listen," he says," and of bringing the outside world in." Now, he uses them more to motivate people.
At the moment, however, the one being motivated is John McCormack. "This is great!" he says. "You know, there are only so many times you can tell stories about Walt Disney before people get bored."
If McCormack's own story were ever to be put on videotape, boring is one thing it would not be. A former New York City cop turned Wall Street stockbroker, he started his company with no previous experience running a business, and no formal management training. He had not even attended college. What he knew about the business came secondhand from his wife. Yet, in 10 years, he has created one of America's premier growth companies and -- beyond that -- established a whole new standard of success for his industry. People who study his company come away talking about him as another Ray Kroc. Groups in other industries seek him out as a speaker. And visitors from as far away as Japan come to see how he has done it.
What they find is a company built around a radically different approach to people and information. Without giving up any equity, McCormack has figured out a way to make his employees feel, and act, as if they own the business. He has done this, moreover, without paternalism, without corporate "charity," without violating any sound principles of business. Far from being "soft" on people, McCormack's organization is one in which individuals earn everything they get, even their corporate health benefits. The result is a company that has been able to withstand a brutal recession in its market, growing at a time when competitors have withered or died.
On one level, the principles that guide him are based on little more than common sense. Once you see them at work, you have to wonder why so few companies in any industry follow them. Not that McCormack has some formula that can be copied. He doesn't. But he does have an attitude and an approach that is surprisingly rare. That approach allows him, first, to see opportunities in every part of his business, and then to capitalize on them almost instantaneously with the resources available.
And therein lies the real key to his success -- his use of resources. Indeed, McCormack uses resources that other companies don't even know they have. Not just the people, either. Other growing companies, after all, have inspired employees to new heights of performance. What sets McCormack apart is his ability to reinforce his employees' efforts in an almost infinite variety of ways. In particular, he has taken advantage of the technological advances that allow information to be as powerful, and as accessible, a tool for small companies as it is for large. Along the way, he has raised questions about the very definition of what it is that makes a company strong.
He has done all this, moreover, in one of the least glamorous businesses around -- hair salons -- becoming a legend in an industry better known for its moms and its pops. With $21.2 billion in annual revenues, up from less than $7 billion 10 years ago, the hair-salon industry is both huge and growing, but it is still almost as fragmented as it was prior to World War I. Today there are some 155,000 individual salons around the country, mostly run by small operators. Although a few large chains have emerged, no single organization controls even 2% of the market, and 80% of industry volume is still done by businesses with only one salon.
This fragmentation was, in fact, one of the factors that attracted McCormack to the industry in the mid-1970s. Another was the notoriously poor management of most salon operations. As far as he could tell, the vast majority were nickel-and-dime affairs -- thinly capitalized and badly marketed, providing spotty customer service based on the exploitation of undertrained and execrably paid hairdressers. Which is not to say that people lost money on them. And if you could turn a profit on something run as badly as the typical salon, McCormack reasoned, imagine the possibilities for a salon company that was managed like a real business.
As it turned out, the possibilities were quite extraordinary, and McCormack has just begun to realize them. The numbers alone scarcely do justice to what he has accomplished, but they provide a clue. Take sales. The average hair salon with a payroll had revenues of $168,108 in 1986 (the most recent year for which American Salon magazine has figures). The large chains did better; one informed estimate puts their average sales at about $250,000 per salon. But McCormack's 16 salons (most of which operate under the name Visible Changes) were in a different league, averaging $855,387 in sales during 1986 -- and 3 did more than $1.5 million.
And sales are only the beginning. Visible Changes Inc. outstrips the rest of the industry by every measure of performance: average sales per customer (nearly twice the industry average); sales of retail products as a percentage of revenues (almost four times the industry average); turnover (less than one-third the industry average); and so on. To those who know the industry, these numbers are not just good; they are startling, all the more so when you consider how McCormack started out. In retrospect, it's a wonder he even survived. He certainly had no advantages to speak of -- no proprietary product, no trade secrets, no influential connections, no capital reserves. All he had was Maryanne's expertise and his own management ability, and something he calls "Italian mathematics."
Italian math is a concept that has little to do with numbers and much to do with people. McCormack learned it from his friend Nick Leone, whom he met when he was selling washing machines.
As McCormack tells the story, Leone was an Italian immigrant who had come over on a freighter and jumped ship in Philadelphia. After working as a janitor and a chef, he had somehow wound up with a small-time catering hall in Long Island, N.Y., where he eked out a living charging $8 a head. "It was a real loser," says McCormack. But Leone had a dream. He planned to build an elegant hall fit for great banquets, and there he would charge more than $20 a head. Trouble was, he couldn't come close to affording it.
So he hired a designer to draw up some plans, which he began showing to potential customers. Impressed, several of them booked dates at the unbuilt facility. With actual bookings in hand, he was then able to persuade some of his suppliers to extend him credit, thereby freeing up cash. The cash served as a down payment on construction of the new hall, which he also managed to get his food suppliers to help finance. The hall was built, and -- within two years -- Leone's annual revenues had grown from $150,000 to $800,000. Soon afterward, he built a second hall.
"The thing about Nick," says McCormack, "is that he wasn't just a chef, and he wasn't just a manager. He was a creator. It was brains and foresight. He showed me that one and one doesn't have to equal two. Sometimes it can equal three, or four, or even seven. It all depends on who the one and one are." Italian math.
Of all McCormack's stories -- and he has what seems an endless supply -- the one about Italian math probably comes closest to capturing his philosophy of business. He puts little stock in the "science" of management. Rather, he views business as a game of great and diverse possibilities, many of which may not be apparent when you start out. That's because you can never predict how much people are capable of doing. Since you can't know the possibilities, you run the risk of missing them if you don't begin with big enough goals. Many companies fail, says McCormack, not because they lack the necessary resources, but because they set their sights too low.
That is one failing of which McCormack himself could not have been accused in 1976, when he moved to Houston to launch Visible Changes. Back then, he was talking about building "the McDonald's of hair salons." He envisioned a chain of upscale salons located in shopping malls, catering to men as well as women, doing a high-volume business, and churning out immense profits. The salons would be clean and fashionable, and staffed with hairdressers trained in the latest haircutting techniques and committed to customer service.
Now this vision raised all kinds of perplexing questions. Where, for example, would he get the money to build these salons? How would he get into the right malls? How would he attract men as customers? But, all that aside, the picture still had one glaring flaw: the hairdressers.
The typical hairdresser in 1977 was a young woman in her early twenties who had never attended college, or even finished high school. She had gone straight from hairdressing school to work in a salon, where she earned less than $10,000 a year -- probably much less. (Even today, the average annual income of a hairdresser is only about $12,000.) She had no loyalty to her employer, nor even to her profession, which she saw as a dead-end road. She believed that, to get ahead, she would have to do something else -- say, become an airline stewardess. Turnover in the industry ran upward of 30%.
Enter Italian math.
McCormack simply refused to accept this version of the hairdresser as a given. For an example of what the profession could be at its best, he had to look no further than Maryanne. Not only was she the consummate professional, she had gone so far as to build her own salon in Valley Stream, N.Y., which she was selling. Granted, she was hardly typical, but she did raise questions about the stereotype. Who could tell what other hairdressers might become, given a real chance?
As it turned out, he was right, a fact that amazes people in the industry today. "Next to McCormack, other salon owners look like Little Bo Peep," says Michael Cole, president of Salon Development Corp., a Minneapolis consulting firm that advises salon operators on modern management techniques. "He knows how to squeeze every ounce of potential from people. He just doesn't miss a stroke."
McCormack does not, in fact, miss many strokes, but it is a little misleading to suggest that he "squeezes potential" from people. True, he designed the company's management systems and still tinkers with them constantly, adding a bell here, a whistle there. The effect, however, is not to coerce people, nor is it to shower them with gifts. The genius of his setup is that it forces people to decide for themselves whether they want to grow and develop. Those who don't, leave. Those who do, are offered opportunities beyond their wildest dreams.
Consider Tony Hatty. Seven years ago, he was living in his native Detroit, working as a hairdresser, making $90 in a good week, a grand total of $4,680 per year. At the time, Detroit was in a recession, and Hatty was fed up with both the profession and the city.
So he moved to Houston, intent on finding a new career. There, one Saturday morning, he came upon a Visible Changes salon in a mall, and he couldn't believe his eyes. "There were 30 people waiting in line," he recalls. "I thought they were giving something away." On investigation, he discovered that -- not only were they not giving anything away -- they were charging $15 for a haircut, a premium price in those days. Hatty decided to give haircutting one more whirl.
He's glad he did. Today, Hatty is the superstar of Visible Changes's 300 haircutters (90% of whom are women). Company plaques adorn the walls of what he calls his "office," a small cutting station overlooking the concourse at Houston's West Oaks Mall. In addition to the awards, he has won a total of nine company trips in recent years, to places like the Bahamas and Cancun, Mexico. In 1987, he earned more than $60,000 at his job -- about five times the industry average. "If you had told me seven years ago where I'd be today," he says, "I'd have laughed in your face."
Here's how the system works:
In a typical five-day week, Hatty spends 50 hours serving about 100 clients, 99% of whom request him by name. That's good for him, because he earns a 35% commission each time he's requested, as opposed to 25% for walk-in customers. And since he's requested more than 75% of the time -- and has passed the required tests -- he is allowed to charge a premium price of $23. (For haircutters with a 50% to 75% request rate, the price is $21; otherwise, a customer pays the basic fee of $19.) Hatty's haircutting thus brings in revenues of about $2,300 each week, of which he gets $805 per week, more than $40,000 per year.
But that's just the beginning. Hatty also sells his clients between $600 and $700 of hair-care products each week. His commission on the first $120 goes to pay for his health insurance. On the rest, he earns 15%, or $72 to $87 per week. So, between haircutting and product sales, he's up around $45,000 per year, with health insurance (an unusual benefit in the industry).
Then there are the annual bonuses. Once a quarter, his performance is rated on a scale of 1 to 10, with points for attitude, customer service, and success in meeting both his own goals and those of the salon. If he scores a full 10 points every quarter, he is entitled to a bonus -- an additional 10% of his $45,000 -- at the end of the year. On top of that, Hatty earned a "superbonus" in 1987 by being among both the 50 most requested hairdressers and the 50 top people in product sales. All told, the bonuses added $8,000 to his income, bringing his compensation to $53,000. The balance came in the form of profit sharing, a flat 15% of gross pay for everyone in the company -- a benefit that costs Visible Changes as much as 45% of its pretax earnings in some years.
And that doesn't include the trip he won to the Club Med in Port St. Lucie, Fla. Or the training sessions in advanced haircutting techniques that the company offers. Or the encounters with top people in the haircare and fashion industries, whom McCormack brings in four times a year to spend a day at the company. But, perhaps most important, a strictly financial account of Hatty's compensation does not include such intangible rewards as the satisfaction he gets from serving customers.
Customer service is, in fact, one of Hatty's favorite subjects. "John and Maryanne have always stressed the importance of taking care of your customer," he says, "but I've found that good customer service, even great service, isn't enough. I try to give my clients fantastic service." The quality of his service is reflected in his 99% request rate. Because of it, he is sometimes asked to share his secrets with his fellow haircutters during in-house training sessions. There he talks about the little things he does -- giving three business cards to each customer, for example, two to pass along to friends, the other noting the next appointment and recommended products. But he also talks about the big things. "You have to believe in what you do and get customers to respect you for it," he says. "That involves taking good care of them. You have a great opportunity in this company. It's the chance to make a real difference for people, to make your customers feel good about themselves."
Tony Hatty is by no means a typical Visible Changes employee, but he is not all that much of an anomaly, either. On average, the company's haircutters earn nearly $33,000 per year. That may be only about half of what Hatty makes, but it's close to three times the industry average. And relatively few salon companies offer any benefits to speak of, even health insurance. Profit sharing is virtually unknown.
More to the point, though, Hatty is a symbol and a role model. He represents the opportunities that the company offers anyone who cares to seize them. In that regard, he is not alone. As of January 1, 1989, 100 employees will be fully vested in the profitsharing plan, with assets approaching $100,000 each. And that group will keep getting larger.
Bear in mind, however, that there is nothing altruistic about Visible Changes's compensation system. Every bonus, every perk, every benefit, every compensation dollar is tied to some specific achievement or action. Haircutters get what they do because they've earned it, not out of the goodness of McCormack's heart.
This is not to suggest that McCormack lacks generosity, or that he does not care about his employees. On the contrary, he says that his greatest satisfaction comes from helping people grow. "What really drives me is the idea that haircutters will someday be taken seriously," he says, "that they're not dingbats but people getting car loans and home mortgages. It gives me a tremedous kick to make productive citizens out of people the educational system wrote off."
But productive citizens are not charity cases. McCormack believes that, for people to grow, they must first take responsibility for themselves, and his system demands just that. The purpose is to make employees feel that, whatever they accomplish, they have done it themselves. They have made their own decisions and earned their own rewards. They deserve what they get.
Thus, for example, health insurance is not a right; it is a benefit, one you earn by selling $120 of products per week. On the other hand, if you don't file any claims in the course of a year, you get a $200 rebate ($400 for family coverage). The same reasoning applies to the advanced training sessions. Hairdressers have to earn the privilege of attending by meeting their goals for two months running. Similarly, hairdressers have to compete to get on the "artistic team," which develops new haircuts and travels around the United States and Europe demonstrating them.
It is an incredibly intricate system, but not the least haphazard. "There isn't a single thing we do that isn't done for a reason," says McCormack. And the reasons go beyond creating productive citizens. Every aspect of the system is related to the broader needs of the business. It is no accident, for example, that so much of a hairdresser's compensation depends on the rate at which customers request her. The goal is to make employees focus on customer service, and to encourage each to build her own clientele. Profit sharing? It ties employees to the company, gives them a stake in its long-term success, and may provide the capital required for future expansion. The product sales incentives? They have boosted Visible Changes's product sales from 4% to 22% of revenues (versus the industry average of 6%), thereby adding $1.5 million to gross profits each year.
In effect, the various policies and incentives serve as guidelines for the employees, pointing them to the kind of behavior that will benefit the company. Both John and Maryanne, moreover, work tirelessly to make sure that people understand the rationale. That's important not only because it encourages them to do what's best for Visible Changes, but because it reinforces their sense of earning the rewards they receive. Put another way, it gives them a sense of proprietorship -- without equity. (The McCormacks themselves retain 100% of the stock in the company.)
Nor is the system limited to haircutters. Salon managers are paid according to their respective salon's volume, with the manager of the top-performing salon getting a brand-new Nissan 300ZX as well. The best receptionist receives an award, a company trip, and a chance to move up. Even the trainees have performance goals. Each is expected to sell $135 of conditioner treatments per week to the customers whose hair she shampoos. If she doesn't, her training as a haircutter is slowed down until she can meet her quota.
Not only does the system work, but the haircutters themselves contribute to its refinement. By decision of the employees, for instance, every haircutter must achieve a request rate of 25% within three months, and 50% within six months, or leave. "They set high standards," says McCormack.
The people management system is, without question, the foundation of Visible Changes and the primary reason for its success. The hairdressers, after all, are the ones responsible for the extraordinary bonds that the company has with its customers. But the system does not operate in a vacuum. On the contrary, it works as well as it does only because the rest of the company is geared to providing the support that the hairdressers need in order to do their job.
The salons, for example, are designed to reinforce the message of quality service: gray ceramic tiles on the floor, black tiles on the wall, dramatic lighting -- all working together to make customers feel that they are getting a $50 haircut for $20, instead of paying $20 for something worth $6. Indeed, the first salon looked so expensive that it scared some customers away; Maryanne had to post a price sheet. Since then, McCormack has continued to invest in ambience, spending several hundred thousand dollars every couple of years to redecorate the salons from top to bottom.
The same kind of thinking goes into most other aspects of the company's operation, from the time and effort that the McCormacks put into motivation, to the allocation of marketing dollars, to the programs for assuring consistency throughout the chain. (The latter emerged as a problem when haircutters began moving from location to location and found that different salon managers used different terminology to discuss haircutting techniques. The solution was to put Maryanne -- who had developed the Visible Changes approach to haircutting -- on videotape.)
And then there is the computer system.
On any given day, McCormack can tell you whatever you might want to know about the current state of his business. For openers, he can give you the previous day's sales volume at each location, and show how it compares with other days -- or weeks, or months. Not just the totals, mind you, but haircutter by haircutter and product by product. He can also break out the numbers by category, showing what each salon and haircutter did in the way of recuts, requests, and walk-ins. Then he can tell you about customer mix, by age and by sex. And whether previous customers are coming back. And how often. In fact, he can give you the name and address of each customer, as well as his or her birthday, anniversary, children's ages, date of last visit, and number of visits this year.
Thus customers routinely get birthday and anniversary cards with discount coupons enclosed; the most loyal ones receive thank-you gifts at Christmas as well. Or McCormack may see that a particular product is not selling well, and design a special promotion around it. Or that one stylist is doing a land-office business in perms, which suggests that she knows something about selling perms -- perhaps something others should learn.
He constantly scans the reports for clues about the business, looking at the numbers from every angle. Sometimes the effort pays off in unexpected ways. A few years ago, he happened to notice that men generally represented about 55% of the clientele at his mature salons. That observation gave him a rule of thumb by which he can judge the growth potential of the newer salons, allowing him to base his marketing and staffing decisions on something other than pure instinct. It also gives him another motivational tool. "I can tell somebody who is making $350 a week how much more she'll be earning in a few months."
But perhaps most interesting is the fact that McCormack has such a computer system at all. He estimates that he has put almost $1.5 million into developing it over the past eight years. More to the point, he began doing so in 1979, when the company was less than two years old, with sales of $1.3 million. At the time, it was largely a matter of faith. He loves numbers and felt he needed accurate ones to guide the company in a period of explosive growth. If pressed, however, McCormack would have been hard put to prove the investment's worth. Then the recession hit, and even the skeptics had to believe.
He had seen the recession coming long before it arrived, thanks to his own energy-related investments, which warned of a glut in the oil patch. The major challenge was to prepare his people for what lay ahead, no easy task. The company had been growing at a heady clip for six years, fast enough to place it on the INC. 500 for two years running. From 1979 to 1983, sales had gone from $1.3 million to $9.1 million, and the number of salons from 3 to 12. People had grown accustomed to working in that kind of environment: sales booming, salons opening, a constant influx of new customers. Somehow, he had to make them understand that all this was going to change -- and get them to believe that the company could do just fine anyway.
Throughout the year, McCormack worked hard to put people in the right frame of mind. "He kept telling us that the recession was coming," recalls Cleta Gordin, a hairdresser, now a salon manager, "but it was our choice. We didn't have to participate in the recession if we didn't want to." At the same time, he kept an eye on every indicator he could think of, from the price of oil and gas stocks to the sales of men's suits. "Men's clothing," he says, "is always the first thing that's hit."
But, most of all, he watched the numbers that were coming out of his computer. Finally, in early 1984, he saw what he had been anticipating. "The walk-in traffic started to deteriorate." The recession had arrived for Visible Changes.
Right away, McCormack began focusing on ways to stimulate business. While other companies were cutting back on marketing, he cranked up television advertising, spending $250,000 in three months on hundreds of spots. The result: more than 20,000 new customers. Hoping to keep them coming back, Visible Changes handed out thousands of discount coupons. McCormack then watched his computer to see how the coupons worked. The customers did indeed return -- but less than 1.5% brought their coupons. Obviously, he didn't have to cut prices.
Meanwhile, he was taking a close look at the salons. In the boom times, they had benefited from the heavy flow of traffic in the malls, but the flow had already fallen off, and McCormack suspected that even long-term customers might be staying away. The company did a survey proving him right: customers were avoiding the malls so as not to be tempted into spending money. "All of a sudden our locations went from being pluses to minuses," he says.
That had important implications for the salons. In the past, they had never done business by appointment. A customer could request a particular haircutter, but then had to wait until she was available. There was logic to the practice. Given the popularity of the malls, appointments weren't necessary. Besides, McCormack had wanted to avoid the additional overhead. Now, however, he had to revise his thinking. If customers weren't coming to the malls anyway, he had to draw them in by giving them the option of making appointments.
But how could he justify increasing overhead at the start of a recession? The answer, it turned out, was simple enough: he would make the new appointment policy pay for itself. First, he would turn it into another privilege that haircutters could earn. Those with request rates of 60% to 75% would be allowed to book appointments on weekdays; above 75%, they could schedule appointments on weekends, too. To cover the extra overhead, he would let the more requested haircutters charge higher prices. A "senior" cutter, with a request rate of 50% or more, could add $2 to the price of a haircut. (Up to that point, haircuts at Visible Changes had cost a flat $18 for women and $15.50 for men.) Finally, he would introduce new incentives for selling retail products, as a way of increasing the revenue generated by each customer visit.
The plan looked good on paper, and employees accepted it enthusiastically. The question was: how would customers respond? The recession was deepening, and people were worried about money. In the midst of all this, Visible Changes was raising its prices. Other salons, meanwhile, started cutting theirs, in hopes of attracting enough business to stay afloat.
One by one, salons all over Houston began to go under. So did restaurants and other small retailers. The shopping malls looked like ghost towns. Stores were boarded up. "For lease" signs appeared on the windows. Concourses echoed with the footsteps of the few patrons who remained.
McCormack knew that some of these patrons were coming to Visible Changes, but how many? He watched as the numbers held firm, and then slowly began to move . . . up. With growing satisfaction, he saw the customer count rise by 5%, 8%, eventually 13% overall. Product sales did even better, increasing a full 15%. By the end of 1985, McCormack could breathe a sigh of relief. Visible Changes had not only survived the year; it had grown another 12%. "We needed a recession to find out who we were," he says, "and what our customers really thought of us."
Once the darkest days of the Houston recession had passed, McCormack discovered that he didn't have much to do. The company was running smoothly, and the opportunities for growth were limited. There were no new shopping malls being built, so they couldn't open up new salons in Texas. As for the rest of the country, McCormack was afraid to expand too far afield without management that he and Maryanne had trained.
They had already tried that once, in 1982, opening in two locations in Florida under the supervision of McCormack's cousin. It had been a disaster. The salons had lost money from the start. Bewildered, McCormack had gone to investigate, dressing up as an old man in a false beard and battered hat and coat. From a bench near one of the salons, he had been appalled to see unkempt hairdressers, out of uniform, working in salons that were themselves a mess. "My cousin wasn't minding the store," McCormack says. "Nobody seemed to give a damn." He had sold his interest in the salons and sworn off out-of-state expansion until his own managers were ready.
And so the recession put McCormack in an ironic position. What had made his company successful in the first place -- its extraordinary management system -- now prevented it from growing, at least for the time being. It is not an uncommon dilemma. Entrepreneurs often get to such a point. Typically, they grow bored. Then, sometimes, they become destructive and start pushing their companies too hard and too fast. Alternatively, they cash out, deluding themselves into thinking that retirement will solve their problems.
McCormack considered retiring, but he eventually came up with another way out of his quandary, one that would reduce Visible Changes's dependence on the Texas economy without taxing its people systems. He decided to go into the product business with his friend Sam Brocato, one of the leading hairstylists in the country. The two of them would become 50-50 partners in a company called Brocato International, which would develop and distribute a new line of shampoos, conditioners, and the like, to be sold through hair salons.
On the face of it, there was nothing radical about the plan, aside from the fact that both of them would be facing new challenges. For one thing, they would be competing against dozens of other lines, using the same channels of distribution. But most of those were coming from product and design people. "We knew we had to have a hook," says McCormack. "Our hook was understanding the salon business."
The same hook led him to another opportunity: he would take the Visible Changes computer system and package it to sell to other salons. For that purpose, he set up another company, Wisp International, together with Brocato and Richard Reisinger, the developer of the software.
Once McCormack had set his sights, things began to happen. Brocato worked with Maryanne to perfect the hair-care products, which he had already started to develop. Reisinger focused on the computer system. As for McCormack, he concentrated on the marketing strategy -- and an unorthodox strategy it has turned out to be.
To listen to McCormack, you would scarcely know that he is selling shampoos and computers. These products, he says, are "management tools for salon owners." The Brocato brochure touts the hair-care products as "a new way to do business," And McCormack believes it. He believes that he is selling not just products, but experience and expertise. He wants to show other salon owners how he did it, and how they can do it in their own businesses. The products -- wonderful though they may be -- are simply a way to reach people. With this goal in mind, McCormack has developed a marketing strategy that relies heavily on the principles of Italian math.
Like his competitors, he is working through independent distributors, but there all similarity ends. To begin with, he is using the same distributors, hair-products distributors, to handle both the shampoos and the computers, rather than selling the latter through computer dealers. And these distributors are being treated in new and different ways. The largest ones don't necessarily get the business; McCormack chooses only those who he feels understand what he is trying to accomplish. And, unlike other product companies, Brocato International does not fly prospective distributors into headquarters, all expenses paid. McCormack says he does not want them to make a commitment based on the number of shrimp at the reception, but on whether they think they can make money. Moreover, salespeople of distributors receive a lower commission than customary -- 12% versus the standard 15%. In return, McCormack will put 3% into the new profit-sharing programs he wants distributors to set up for their employees. (That 3% contribution will be matched by the distributors.) The distributors themselves will be able to earn equity in Brocato International, according to their success. If they purchase for resale $1 million of product in both 1988 and 1989, they'll get 1/2% of Brocato's stock. If they do twice that volume of business, they'll get 1 1/2%. Says McCormack, "I want these guys to have a vested interest in how well I do."
He also wants them to do more than sell hair-care products. He wants them to help educate salon owners about how better to run their salons, using the methods developed by Visible Changes. Distributors will get instruction in teaching those methods, and they will be encouraged to invest some of their profits in a new chain of Brocato beauty schools, to be staffed by, among others, people from Visible Changes. "The products are just the vehicle to get the dog moving," says McCormack, who is not as gifted at metaphor as he is at business. "The dog is the beauty schools, which are going to produce stylists who will want better products." In the short term, he predicts Brocato's sales will reach $50 million by 1990. "But I really don't know where the future will be," he says. "We're priming things for an explosion."
Meanwhile, back at Visible Changes, employees are discovering that they have an array of new opportunities -- as teachers, product salespeople, management consultants, even owners of their own salons. McCormack thinks he may at last have the management talent needed for expansion. And the capital is available as well, in the form of profit-sharing money belonging to all those employees who will soon be fully vested. Some of them, he believes, will be interested in opening up their own salons -- with McCormack providing additional capital, if need be, up to 49% of total equity.
Italian math again. You see, it is all connected.
At the moment, moreover, the whole crazy dream shows every sign of working. In its first eight months, Brocato did $2 million of business. Wisp is up to $1 million in sales after 10 months. And Visible Changes completed 1987 with earnings of about $1.5 million on about $15 million in sales, up 10% for both.
Nor is McCormack alone these days in thinking he will succeed. "You can't underestimate the potential leverage that John has," says Michael Cole, the Minneapolis consultant. "Most salon owners are comatose. They live their lives hoping things will get better. John can take these new products to them and say, 'How would you like to have shops like ours?' Everything he does has transfer value. And he's not the least bit worried that people like me will steal his ideas. Why? I guess because he feels he can create new things much faster than other people can steal."
There is a story that McCormack frequently tells about an old man named Abe, whom he met on a beach in the summer of 1972. He was 27 at the time and flat broke, having recently lost about $1 million on Wall Street in the crash that followed the boom of the early '70s. He had invested heavily in the "story stocks" and, almost overnight, had gone from being a New York cop to a high-flying stockbroker, complete with Jaguar, limousine (with two drivers), and a closet full of custom-made suits. His girlfriend, Maryanne, had dumped him. Nevertheless, McCormack had had a ball. "I remember telling my father that I couldn't understand why people worked for a living," he recalls.
He soon found out, as all of his stocks came crashing down, wiping out his entire net worth. Shortly thereafter, he wound up on Maryanne's doorstep. She took him back, but -- try as he might -- he could not shake his depression. Every day, he would drop her off at the salon where she worked and drive to Atlantic Beach. "I spent a lot of time examining myself, and I didn't like what I saw," he says. No college, no training, a deep mistrust of people. "I had been burned a lot of times."
One day, he says, an old man waved to him from down the beach, and he waved back. The next day, the old man was there again. "He sat down next to me, and he could see I was depressed. He said, 'Tell me your problem." McCormack started talking. "He let me go on and on. Finally, the old man looked at me and said, 'You lucky son of a bitch. It took me until I was 40 to lose my first million. You're still in your twenties."
Over the next three weeks, McCormack returned to the beach every day and talked with the old man he calls Abe. "He told me how he'd lost everything he had three times," McCormack says. "He had learned something different each time."
Gradually, he says, the old man rebuilt his onfidence and showed him how to get back on his feet. "He had me look at all my assets and liabilities. I could speak English, I had a lot of friends, I liked numbers, I could find my way around. Those were all assets. Abe said, 'It's not the greatest-looking balance sheet, but there are people coming into this country who don't know half of what you know.' Abe encouraged me to go to work for somebody who started with less than me. Not somebody out of Harvard or Yale -- I'd feel inferior -- but an immigrant who had started with nothing." That's exactly what McCormack did, going to work for a concentration camp survivor named Bernie Milch, who sold industrial washing machines. And that was the job that brought him into contact with Nick Leone, the immigrant who taught him about the importance of aiming high.
Looking back, John McCormack has to struggle to comprehend how far he has come since then. "Sometimes I pinch myself," he says, sitting in his new house. "To make several million dollars a year is something I never dreamed of. I mean, I was a cop; Maryanne was a hairdresser. Then, when I went to Wall Street, she dropped me. I was living like King Kong. She said, 'Come back when you return to reality.' And I did. And look what's happened."
He shakes his head. Italian math.