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HUMAN RESOURCES

Raising the Stakes
 

Bruegger's Bagels gives its cluster managers more autonomy and a percentage of profits.
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If you want more time for yourself, how about giving your managers a free hand -- and a share of the results

Say you've got an idea for a new business -- a retail or service operation with lots of locations. And say that for all of your enthusiasm, you really don't know how it should work, how to staff it, or even the range of products to sell.

Most company founders like to nail down a system at the outset. They write cookbooks telling new managers how to hire their people and report their numbers, even when to wash their floors. But there's another way to manage far-flung units. Instead of giving managers a set of cookie cutters, you rely on their ingenuity to make things work.

On the surface, letting a bunch of freewheeling managers improvise sounds risky. Won't some of them spend too much on payroll while others scrimp on maintenance? Without any performance guidelines, they might. But the founders of Bruegger's Bagel Bakery have shown that it's possible to set standards where you need them without robbing managers of the motivation to run their shows the way they want. By putting responsibility in the hands of managers and backing it up with financial incentives, you get lots of different minds working on the same problems, notes cofounder Mike Dressell. And because the managers have a stake in what they achieve, the founders can be less involved in day-to-day operations.

When Dressell and his partners, Nordahl Brue and Jim Briggs (who has since left the business), considered the idea in 1983 of launching a food business built around bagels, they knew they had to develop a decentralized approach. They were all busy in other occupations (Dressell had a construction business; Brue was an attorney; and Briggs was an accountant) and didn't have the time or knowledge to get involved in operating decisions. When they opened their bagel shops, they wanted a local manager to take charge -- to do what it took to find competent store personnel and to purchase supplies. In exchange for the headaches and late-night calls the managers would take on, they would reward them with more than salaries. They'd become partners with 20% ownership of the units they supervised (see "Sharing the Dough," page 2). To keep the individual deals tidy, each "cluster" (of up to six units) would have a cluster manager; in the context of the larger organization, it would be organized as a separate S corporation.

Once the basic format was worked out, it didn't take long to get things rolling. The first market was Albany, N.Y., and within two and a half years, cluster managers were working away in four other markets -- Cedar Rapids, Iowa; Minneapolis; Boston; and Raleigh-Durham, N.C. -- with a total of nine stores.

Dressell and Brue, headquartered in Burlington, Vt., monitored the activity as best they could. They visited their partners sporadically, and for the most part, Brue says, they liked what they saw. "Managers took lots of initiative." Not only were they developing their own techniques for managing their units and watching costs, some were inventing their own menu items -- things like pizza bagels and bagel dogs. Various clusters had different styles of bagels (some lighter, some darker) and different lines of juices and sodas. Some had paper goods with the company logo; others didn't bother.

In the early days, Brue and Dressell saw creativity as one of the hallmarks of their operating system. Unlike peers at other companies, managers did things because they made sense (and because they stood to benefit), not because somebody at headquarters had told them to. But as the company got bigger and added stores (by the end of 1988, there were 24), a question arose: had Bruegger's reached a point where some companywide standards, at least for menus and recipes, would benefit everyone? As far as Brue and Dressell were concerned, the answer was yes.

No single incident convinced them they needed to coordinate activities. In some cases, it was economics: until two years ago, for instance, the cluster managers had five different contracts with Coca Cola; if they all negotiated a single deal, they could save some money. Everyone accepted this rationale. After all, the more they saved, the more they earned. But in other cases (what went on the menu, for instance, or how the items looked) the decisions were often fuzzier matters of "consistency" and "image." Given the way things were set up, Brue and Dressell couldn't really order cluster managers to make their bagels browner or to put more carrots in the tuna salad. As long as they were performing well on a financial basis and keeping their customers happy, they couldn't order them to do anything -- not without raising larger questions about the relationship. After all, they were partners. "We had to find ways to persuade them," Dressell notes. What they came to rely on was market research.

Consider the bagel dog, a sandwich that Ed Davis, the cluster manager in Raleigh-Durham, developed in 1985 as a way to expand his market. Davis never considered his bagel dogs big money-makers, but he thought their following was enough to justify keeping them. But, unlike other sandwich items, they had to be cooked, so headquarters thought they were more trouble than they were worth and offered to do a test. Bruegger's spent several weeks comparing North Carolina units that offered bagel dogs with others that didn't. It calculated the costs of handling the item and even ran promotions to gauge the sales potential. The test showed they weren't nearly the draw that Davis thought, so Davis found dropping bagel dogs from the menu relatively painless.

Today Bruegger's is a $20-million company with eight cluster managers operating 32 stores, and responsibility for what goes on the menu is largely in the hands of a few corporate types in Vermont. To assure quality standards, the company uses, among other tactics, mystery shoppers. If cluster managers have new ideas -- and they're encouraged to have them -- they fill out proposals. Before an item gets adopted, it goes through extensive testing (usually in more than one market).

Does this mean that the cluster managers are no longer in the driver's seat? As far as the menu goes, yes.

But as far as running the individual businesses, cluster managers have plenty of room to manage as they like. They can experiment with pricing (a turkey sandwich goes for $3.30 in Boston versus $2.35 in Minneapolis); hire and fire their own people; structure their own organizations and compensation programs (some cluster managers are beginning to bring in partners, for example, who will eventually have equity positions); and anything else they think will contribute to their cluster's success.

Once a year, all of the cluster managers convene in Burlington, where they talk with Brue and Dressell about goals for their operations. It's more like a meeting among partners than a traditional budget review, notes Kurt Schreck, the cluster manager in Minneapolis. "There's a lot of trust. I might not hear from either of them for several months."

As the wrangling over the menu suggests, managing in this sort of environment has its challenges. On the one hand, says Dressell, you want people to maintain basic standards. "But we also want them making their own decisions. We don't want them looking to us for everything." When cluster managers don't work out (in 4 instances out of 14, they haven't), severing the ties can be dicier than terminating an employee. Beyond the emotional issues, Dressell offers, there are the legal and financial aspects -- Bruegger's has a six-page contract full of them -- of having to buy out partner shares.

But as he and Brue see it, the complications pale compared with Bruegger's growth over a short time. By giving people stakes in their own businesses, they've attracted higher-caliber managers than they might have with more ordinary compensation packages. "We get an attention level that can't be matched," Brue says.

What's more, it's allowed the founders to remain as removed from day-to-day management as they want to be. Brue, for example, is currently on an 11-month sabbatical in England; Dressell will take time off beginning next fall. "Of course, we can't prove it," Brue says, "but we think we're far ahead of where we'd be if we'd tried to control everything."


SHARING THE DOUGH

Making partners out of managers

Want managers to "sweat" the details? Giving them the responsibility and the authority to make decisions might help, but it probably won't have the same impact as making them partners. Here's how Bruegger's Bagel Bakery does it:

* The basic deal. In addition to a $30,000 salary, each "cluster" manager gets a 20% interest in an S corporation made up exclusively of the bagel stores he supervises. "We wanted to make it juicy," says cofounder Mike Dressell. Cluster managers pay $100 or $200 for their shares. At year end, they get their prorated share of the pretax profits in cash. The rest goes to the majority partners, Dressell and Nordahl Brue.

* How they become vested. While cluster managers have rights to actual ownership, the shares aren't really theirs for 10 years. The vesting schedule doesn't begin until a manager has been through the first year. After that he becomes vested at a rate of 10% of his shares per year.

* How deals are terminated. Although they're "owners," cluster managers remain employees "at will." If they leave Bruegger's or are terminated, Dressell and Brue agree to buy the vested portion of their stock at the market rate, as determined by an independent appraiser. The buyout (principal plus interest) begins within 30 days of the final appraisal and must be completed within a period of five years.

* How new partners come in. As the number of units within clusters grows beyond what cluster managers can handle, Bruegger's is creating a second tier of partners, known as area managers. They get a smaller piece of the pie than cluster managers (around 5%); all preexisting shareholders agree to be diluted.

Last updated: Mar 1, 1990




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