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Unconventional Wisdom

Third, the ownership package attracts veteran managers. "We've been fortunate enough for the past six years to have good people knocking at the door," says Paul Avery, vice-president of operations. And with their many years in the trade, Sullivan, Basham, and Gannon have brought in former colleagues.

One such recruit is Larry Siegel, a 10-year Steak & Ale veteran who came on board to manage Outback's first unit. "This was a chance to make a little money and end up with something in my pocket at the end of five years," Siegel says. "After all that time with Steak & Ale, I got squat. I thought this was as close as I'd get to working for myself."

Siegel has now moved on to become a director of operations, or joint-venture partner (JVP), for a franchise group building Outbacks in Tennessee and Mississippi. JVPs, of which there are about 30, run the regions. They receive 12 weeks of training, in which they're drilled in all aspects of an Outback operation. (At the core of the training program is Outback's statement of principles and beliefs -- the mission statement over which the founders deliberated long and hard in the early days.)

It is a highly lucrative arrangement. A joint-venture partner invests $50,000, just as a unit manager invests $25,000. In return, the JVP receives a $50,000 base salary, plus 10% of the cash flow generated by the restaurants in his or her group, after the general managers are paid their 10%. It works out to 9% of the total cash flow, after expenses.

Sullivan illustrates the setup with an example of a JVP who has 10 Outbacks: "Let's say those 10 are generating $6 million a year in cash flow -- $600,000 each. The JVP would end up with $54,000 per unit, or $540,000 total, plus the $50,000 base. Then let's say that 10 years from now, the partner ends up with 25 restaurants. That JVP will probably have built an equity position of $6 million to $7 million."

With the restaurant managers and the JVPs taking close to 20% of cash flow between them, the corporation receives 80%. "It seems so foreign to people for a company to give up 20% of the deal when we're putting up the capital," says Sullivan. "But I look at it as sweat equity. It's hard work, the managers put heart and soul into it, the results are incredible, and we all benefit."

Outback's general managers are experienced restaurateurs, by and large, who need little supervision. That allows the JVPs to focus on area development -- site research for new locations and the hiring and training of new managers. "I'm not the normal district honcho who comes in and beats you over the head and leaves," says Siegel. "I'm a second set of eyes."

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Decentralized Control
A visitor to Outback's command post in Tampa is struck by the informality and compactness of the headquarters crew. It's just 55 people -- many in accounting -- tucked away on one floor of an office building, with neckties nowhere in sight. "It's easy to get to 5 or 10 restaurants," Sullivan explains. "But getting to these next levels is tough, and the only way we know to do it is to decentralize."

There's no human-resources department. Sullivan, Basham, and the company's other key executives hire the joint-venture partners, who in turn hire the managers, who then hire the 75 or 80 people who staff an Outback. "We believe people work for people," says chief financial officer Bob Merritt. "A lot of restaurant turnover is self-inflicted. If I hire you as a staff person and it's my job to train and motivate and develop you, I'm going to have a lot more invested than if I just call personnel and say, 'I just fired somebody -- send me two more.' "

To run a decentralized company with confidence, top management needs to trust the judgment of the troops below. That starts with the JVPs. "They're all people we've known in the past," says Paul Avery. "We know their successes, their philosophy on people, their commitment to quality."

In selecting general managers, the JVPs look for people with a good track record and superb people skills. The managers in turn are picky about whom they hire as kitchen staff and as servers, bartenders, hostesses, and busboys. Job candidates have to pass an aptitude test, which assesses basic skills such as making change at the till. (Early on, the test was given to the whole workforce, and the median result has become the baseline requirement for all hires since.) That's followed by pattern interviews, which assess judgment -- how a candidate would react in certain situations. Every applicant interviews with two managers and must be approved by both of them. A friendly and outgoing disposition is pretty much a job requirement; the company uses psychological-profile tests to help get readings on a candidate's personality. "We try to hire friendly people and teach them to wait on tables and cook food, versus hiring waiters and cooks and trying to teach them to be friendly," says B.J. Stone, a JVP with more than a dozen Outbacks in the Washington, D.C., region.

But the reason people flock to Outback is that the food is very good, the portions are prodigious, and the prices are quite reasonable. Each Outback makes everything from scratch, and the company incurs a much higher food cost than most restaurants do; in 1993 its cost of food was 39% of sales, versus 36% or less for most restaurant chains. The menu was designed by Gannon, with help from Warren LeRuth, one of New Orleans's premier chefs. LeRuth told Gannon that if he wanted to run a steak house, he'd better use high-quality meat. For a supplier, he recommended Bruss Co., of Chicago.