How publishing magnate Pat McGovern decentralized his position by investing capital in different companies.
How publishing magnate Pat McGovern decentralized his position by investing capital in different companies.
The founder of $300-million IDG Communications reveals how he 'grew up' as a CEO. 'In the early days, I was a doer,' says Pat McGovern. 'Now, I try to stay out of operations as much as possible.'
Patrick McGovern, like most people, finds it hard to be everywhere at once. Unlike most people, however, he tries. Round and round the globe he goes, visiting the 65 quasi-autonomous units of a publishing empire, International Data Group (IDG), that at last count included 100 publications in 36 countries with a total of 2.8 million subscribers. And where he cannot be, one division has made up for his absence by fabricating a life-size papier-mâché doll of the man, just for reassurance.
In the field of information services for information technology, Pat McGovern's IDG is the dominant player worldwide. Beginning with Computerworld, a 130,000-subscriber weekly that he began publishing at the outset of the computer revolution in 1967, McGovern went on to found one highly targeted publication after another, some focused on a product line (PC World, Macworld, CD-ROM Review), others on a specialized occupation (Distributique, for French computer distributors and retailers). In the process, IDG has greatly affected the direction and quality of developments in information-handling technology. Microsoft's William Gates says, "A lot of the time, [his magazines] have very powerful influences on the success of a product.'
His empire has made McGovern a very rich man (Forbes counts his personal wealth at around $325 million), but it has not made him an emperor. With a corporate headquarters staff of about 15, McGovern gives his 65 far-flung business units an extraordinary degree of freedom and responsibility. His primary control is financial: his headquarters works as an investment bank, putting money into each unit's worthwhile ventures, denying or withdrawing it from ones that are not worthwhile, while McGovern cruises from office to office like a cheery potentate on a magic carpet, bringing enthusiasm and bonuses wherever he goes.
Clearly, things are more complicated than that. They always are with success stories. To find out more, INC. senior editors Curtis Hartman and Michael Hopkins went to McGovern's Hillsborough, Calif., home to interview him. The house, incidentally, is one he shares with his second wife, Lore Harp, whom he first noticed when her picture appeared on the cover of INC. in March 1981.* * *
INC.: You started from scratch in the 1960s. Now, you head a $300-million company. How has your role changed?
McGOVERN: I'm not sure it has; it's the proportion of time I spend on different parts of it that has changed. I always felt that my role was to acquire a sense of the evolution of information-handling technology, how people might benefit from knowing about this technology, and to discover market opportunities in the communication of that knowledge.
INC.: So your main task is to chart IDG's future. Still, you've got to run your company differently today than when it was a start-up.
McGOVERN: Well, yes. In the early days, I was very much a doer. Now, I try to stay out of operations as much as possible.
INC.: When did you put aside those "doer" hats? In the early 1970s, when you began to launch more magazines?
McGOVERN: I guess it was probably about 1973 to '74. We were maybe a $10-million to $15-million company then, and I still wanted to be involved in everything. But people started to complain about how they couldn't move fast enough on such and such a decision because I'd want to have a say in it, and this wasn't possible because I was spending more time outside the United States, globalizing the company.
My thinking probably went something like this in those days: "Gee, my input is essential here. I've been at it longer and have more contacts, so my wisdom is obviously crucial to our success." But then I thought: "Now isn't this strange. There are probably, in the information business alone, thousands of very successful companies that seem to develop and prosper without a single word of advice or help from me. Perhaps I should go ahead and trust people, and if I've made the right initial decision about them, and if I've had the right concept of the market, then everything should go well." So I began to think of myself as an investor within my own company. I'd say: "Here's a healthy business, here's good management, I think I'll make an investment commitment.'
INC.: A great many entrepreneurs don't give up control so easily.
McGOVERN: Well, I noticed that people tended to behave the way I expected them to behave. If I took a manager aside and said, "I can tell by talking to you that you have just the right skills and qualities to do well in this business; you don't need any help from me, you can do it all yourself," 99 times out of a hundred, that's what happened.
But if I took the person aside and said, "Look, this project is so complicated, I want a report from you every two weeks and a meeting every month so I know that you're up to the job," somehow or other he always got the message that I was a little nervous about his abilities. I showed a little self-doubt. And the self-doubt showed up in less confident behavior, in less crisp decision making, which showed up in low morale in the organization, which showed up in poorer results. And so forth. In other words, the more confidence I had in people, the more they validated that confidence.
INC.: But surely there's always a risk involved in trusting people. How did you cope with that?
McGOVERN: Diversification. As I started to organize entrepreneurial units in which I could give a lot of autonomy to the people involved, I pretty quickly had enough business units so I wasn't turning over my entire business fortune to one person. Right now, we have 65 separate corporations, each with its own president and leaders. As an investor, I can say that I've put some venture capital into 65 different companies. Of course, we try to add value to each of those companies through shared skills, shared resources, shared cultures, shared success. If one of them goes, or 10 of them, it will be uncomfortable, but we'll survive.
INC.: What do you tell people when you put them in charge of such a decentralized situation?
McGOVERN: First of all, we make it absolutely clear what the situation is. We tell them they're going to have a lot of autonomy but also a lot of responsibility. They'll be in a high at-risk position, with most of their rewards varying according to their performance. Besides that, we explain the company culture. It's a culture that puts a premium on people, innovation, and growth. They'll have to put a lot of time and energy into training and developing people. They'll have to be open to testing new things as soon as they look feasible. And they'll have to aim at a growth of 30% plus per year, and maintain a 10% aftertax profit.
INC.: OK, let's pretend I head one of your entrepreneurial units, and, knowing those ground rules, I see a need for a new publication, Brookline Info World. What do you say?
McGOVERN: First we say, "How much money do you need?" And you say, "Oh, about $10 million." We say, "Where did you find that figure?" Whereupon it gets down to questions like, "What's the size of the market you're going to serve in Brookline? How many subscribers will you have? How much advertising do you think you can get? What are your start-up losses going to be?" and so on. So you draw up a plan and a projection, and then we come back to you and say, "It looks like you're going to need $3.5 million. Go ahead and give it your best shot.'
INC.: And what if I come back for another $2 million?
McGOVERN: We'll ask you to explain what went wrong, and then if we think you went off track somewhere, we'll ask you what you're going to do to reduce the risk for the next $2 million. So we come up with a revised plan. And there will be no problem with your accepting it, because you're going to be a little more humble this time.
INC.: And if I come back again?
McGOVERN: Now, we're going to take a real close look at you, to see if you are the right person for this market. You're obviously talented, or we wouldn't have gotten together in the first place. But maybe you're just not good at sensing market opportunities. Maybe you're a great salesperson. So we would try to find something else for you to do.
INC.: Are you saying you always blame the jockey, never the horse?
McGOVERN: I think we've only had about 4 publications out of 100 that we've ever scrubbed. So, yes, in most cases we've believed in the market opportunity, and where we've had to change, we've changed the manager and kept on with the project.
INC.: All right, but let's suppose I come in well within my budget on this project, what do I do then? Serve my market and grow 30% a year? Is that all I have to worry about?
McGOVERN: Well, the growth rate of 30% is IDG's total growth rate. If you're just starting a business, we would assume a much faster growth rate -- 50% to 100% a year for the first year or so.
INC.: What about profit goals? Would I have to observe them, too?
McGOVERN: Yes, but they would depend on return-on-investment guidelines, and these are a function of how long the particular product or job you're providing information about is likely to exist. For example, if you have information service for a given type of job, and that job is expected to be around for 20 years or so, then we can wait 3 to 5 years to get our investment back.
But if your publication is designed to serve a particular product, like we're doing with a Commodore magazine or the Apple magazines, then we'd probably have to assume that the life expectancy of the product is going to be no more than seven years. And in that event, of course, we would have to have a two-year payback on our initial investment, because the magazine will only be viable for five of the seven years. We'd have to get our money back in two years in order to make some returns on the next three.
INC.: What about pay scales, performance compensation, and the like?
McGOVERN: That's the responsibility of the local manager. He should have control over all the expenses and all the income in the business. So if he wants to give people bonuses of four times salary, based on their performances, that's fine.
INC.: What if I don't want to give bonuses, except to myself and my buddy, and treat everyone else like peons?
McGOVERN: Well, there are some people who are so mesmeric or charismatic that people will pay to work for them. Maybe you're one of them. It may also be a start-up situation, in which people have much lower expectations of what they should be paid. So rather than trying to enforce one rule on everyone, which in the end would fit no one perfectly, we think all these questions should be worked out by the local manager operating within the constraints of competitive salaries in the area. Obviously, though, if there's a compensation structure that's producing a 40% turnover in personnel, then something's wrong.
INC.: So then you'll step in and fix the problem?
McGOVERN: Probably not, because the chances are that things would never have gotten that bad in the first place. We ask every employee in every unit to fill out an evaluation of how well a manager is doing his or her job. How open are managers to discuss problems, how well do they run meetings, how well do they set job goals and do appraisals -- all the things that good managers are supposed to do.
So we would get a report card on this guy at Brookline Info World, and we would be able to ask him about this problem with turnover. Perhaps it has something to do with the way he's been paying people. Of course, he might have good reasons for wanting a 40% turnover, but at least he, and we, will know how his employees are evaluating him.
INC.: How does this report card affect your assessment of the manager's performance?
McGOVERN: It would set a base line against which to measure his rate of improvement. I think management is a trainable skill. So the guy sits down with his people and says, "Look here, I've got this terrible meeting score, why is that?" And they will say, "Well, you're a half-hour late for every meeting; you talk all the time, so no one else can get a word in edgewise; and then you leave and there's never any follow up.'
That way, this manager learns what everyone sees as wrong with his performance, and perhaps how to correct it, and meanwhile everybody else gets to ventilate anger and frustration, which is also good.
INC.: What about reader surveys?
McGOVERN: Sure, they help evaluate an editor's work. They're also a leading indicator of what's going to happen a year from now. Suppose readers rate the publication "best quality," "most useful," "want to pick up first." Well, you can count on that publication doing much better in the year to come. By the same token, if there's any falling off in enthusiasm, we know it's heading for trouble.
INC.: Let's talk about your enthusiasm for a moment. Everyone in the company talks about how infectious it is. How do you make use of it?
McGOVERN: For one thing, I try to read all our publications. Grant you, we publish 1.6 million words a day in 18 different languages, so that's a bit of a challenge. When I see a story I like I send writers and editors a little note, a cartoon note, telling them to keep up the good work. Also, at the time of the Christmas-bonus distribution, I try to see every U.S. employee in the company who earned a bonus. I go around and personally give each one a card and a check.
INC.: Every U.S. employee?
McGOVERN: Yes. You can learn almost everything there is to know about an organization by walking through its offices -- the structure of the place, its style, the attitude and morale of the people. It's also the best way of keeping everyone informed. At least once a year, I visit our non-U.S. operations (sometimes a surprise visit), and give them a report on how well the company is doing worldwide, where we're going, and what our goals and values are.
INC.: Did you have to learn this personal style, or did it come naturally?
McGOVERN: It's simply the golden rule. How would I like to be treated if I worked for this company? I would want to be made to feel that I was doing something important. I would want to be recognized and appreciated. And I would want to be fairly treated.
INC.: Do you really think you can make people feel appreciated and fairly treated without sharing your profits with them?
McGOVERN: Well, in terms of economic fairness, I don't think financial rewards are that important in themselves. More important is a belief in the mission of the company, that it is doing something important for mankind, and the sense that their part in carrying out this mission is being recognized and appreciated. That's the point of the ESOP program.
INC.: What do you mean?
McGOVERN: Twenty percent of the company is owned by its employees in an employee stock ownership plan, and we're aiming for that to be 51% by 1990. One of the ESOP program's goals is to provide some incentive for the units -- like Australia and Japan -- to share information among themselves.
But the other is to shift ownership to the people who have given their blood, sweat, and tears to develop a successful business. There are too many instances in which the founder of a company dies in a plane crash, or wants to go live on a yacht somewhere, and the company passes into the hands of outsiders. I wanted to make sure that the future control and direction of the company would be in the hands of the people who built it, the current employees.
INC.: What if they quit? Can they carry their shares with them?
McGOVERN: No, all shares are retained in the ESOP trust. When someone leaves, he or she gets paid the fair market value for shares at the time, so the majority control of the company is -- or will be by 1990 -- in the hands of the current employees at all times.
INC.: What about risky new ventures? Don't you find people getting more and more conservative, frightened that the proven earners like Computerworld will be dragged down by the unproven ones?
McGOVERN: No, not really. Most people seem to agree that it's good for the company to grow. Growth is what provides opportunities, after all, and so senior management always tries to balance commitments to new products with the profitability achieved by the mature products.
INC.: You yourself are said to have a great sense of the market. Where do you get it?
McGOVERN: In IDG, we have the largest market-research group in the world, in our field, so I read all the reports. But I also get a firsthand sense of the facts from going to most of the trade shows and from talking to customers.
INC.: How much time do you spend doing that?
McGOVERN: About 30%. In fact, I'd like to see everyone in the company spend at least 10% of their time with customers, even the accountants.
INC.: What do you do with the other 70% of your time?
McGOVERN: Twenty percent goes to visiting our various offices, here and abroad; maybe another 20% reviewing goals and plans versus results; then 30% looking for new opportunities, reviewing possible new commitments.
INC.: I've heard that some of those commitments get made, on local initiative, without your even being aware of them.
McGOVERN: That's true. When I was in Sweden last year, I was handed four magazines that I didn't even know we published. They had been started in the last three months or so. Now, obviously, if these people had needed $2 million or whatever to get those publications going, I'd have heard about it. Their idea was to do a couple of issues as an experiment. If it's a winner, then they will go ahead and put it down in their plans for the coming year; if not, they can write it off as a pilot project or something. I have no problem with that. It's what they should be doing. How can I tell a manager in Scandinavia whether there's a need for a CAD/CAM magazine there? He's got 50% of his compensation riding on decisions like that, so he's not going to make them lightly. You assume he's done his homework because he's sharing the risk with you.
INC.: Have you made any big mistakes when setting up new ventures?
McGOVERN: Sure, but most of the mistakes we've made with new products have come from responding to what we saw as the competitive situation, rather than attending to the customers' needs. For example, we launched a PC Jr. magazine a few years ago primarily because our competitors were all trying to launch one. Everyone said, "We've got to get in there right away or we'll lose the market.'
Of course, there was no market. The product hadn't even been announced yet. But along with four other publishers we went ahead anyway, the product flopped, and we all lost millions of dollars. We should have stuck to our style, which is to find people with a need and create a product to fill that need.
INC.: But when you discern that need, don't you have to move impossibly fast?
McGOVERN: We can move very quickly. Computerworld was launched in three weeks. We launched one publication in Europe in three days. That's the great advantage of our decentralized entrepreneurial style: when the opportunity is there, we can move very fast. I keep chastising people for letting the competition set the rules. If you focus on discovering the needs of people who are going to buy your services, you can almost ignore the competition. It's clearly better to find a big new opportunity and be 100% of the market, even if, as inevitably happens, you end up having to give up some piece of it to the people who come in after you.
INC.: Why did you decide to grow your company overseas in the first place?
McGOVERN: Well, there was some idealism and some practicality in that decision. We believed, idealistically, that technology was going to improve the quality of life of people around the world, and we wanted to be a part of that. On the practical side, the fact was that in 1970 the United States had about 65% of the world market in information-handling technology. By the year 1990, however, our research showed that it would be down to 40%. By the year 2000, it would be only 20%. One of our driving forces is to keep growing in new countries so that we'll maintain at least 90% coverage of the world market.
INC.: Speaking more generally now, I wonder whether your policy of creating autonomous units of responsibility would work for a three-product business that does, say, $20 million a year?
McGOVERN: Sure. I think there's a lot of value in organizing any business in small units. We have 65 companies, which means that our 3,000 people work in companies of fewer than 50 people each. Any manager can easily know the names and distinctive performances of 50 people, and they can know him. That way everybody feels close to the business and its mission.
INC.: What do you do about empire builders?
McGOVERN: One of my jobs in the company is to keep my machete handy. When a company gets to 200 or 300 people, that's the time to break it up. I might get four definable business units out of it, and four company presidents where there were four department heads. All the energy and faster decision making of a small company are thus preserved, and all the psychic income.
There's also a far greater surface area exposed to the demands of the customer. I believe that this is the organizational style of the future: a network of small companies affiliated through shared goals and values, and a common sensitivity to the needs of the customer.
INC.: Do you have any evidence of this?
McGOVERN: I can't show you any quantitative surveys, if that's what you mean, but it stands to reason. The crucial thing in business is imagination and initiative, and in large bureaucratic organizations people always have a tendency to censor their own imaginations and to balk at taking the initiative. They're afraid they can't sell the idea to the boss, even though they know they can sell it to the customer. Our philosophy has always been, if the market wants it, you can do it.
INC.: What's the downside, if any, to this policy?
McGOVERN: You give up some economies of scale. People see the same opportunity and reach for it, so there is overlap in some products.
INC.: In other words, waste.
McGOVERN: Yes. But as I travel around the world I am constantly struck by the fact that the most free and most decentralized markets are also the most efficient at producing wealth. The vast wealth of Japanese corporations, for example, comes out of those neighborhoods in Tokyo where there are thousands of little shops, all selling computers, audiocassette players, and things like that. Then I go to the socialist countries. Here's a wonderfully organized, centralized economy, and it's dead. They're not creating new products. They're not even fulfilling basic consumer needs. Communism is wonderful in theory, as sharing is wonderful, but the organization required for it goes against human nature. You can't motivate people with the ideal of equal shares for everyone. Everyone wants to express and be recognized for his or her own individual capabilities and contributions.