Everything According to Plan
At most companies, planning is done only at the top -- or not at all. But businesses like Springfield Remanufacturing and its follower, American Images, are tapping hidden sources of ideas and innovation by including all their workers in the process
For Harlan Accola, 1986 was one horrendous year. His aerial-photography business, Skypix, hit a wall and nearly vanished from sight. And he had only himself to blame.
Skypix had started as a hobby. After high school Accola began selling his aerial shots of farms and homes to help pay for his pilot's license, his flying time, and his photography habit. His brother Conrad, also a pilot, joined in to make a few bucks.
When their sideline unexpectedly evolved into a business, in 1980, and made money, the brothers had visions of sales booming to $3 million, and then $10 million. "We thought that's the way it happens," Harlan says. "You hit a niche and an opportunity, and it's magic."
A bookkeeper and later a certified-public-accounting firm furnished financial statements that Harlan didn't understand. "I didn't know anything about business," he admits. "And worse, I didn't think it was important. I thought a financial statement was just something you had to give the bank to keep your loan OK. So I took it, looked at the bottom line, and tossed it into a desk drawer." The brothers' earliest "business plan" was simple: always have enough cash to pay next week's bills.
For a time the Accolas' seat-of-the-pants style held the business together. By 1986, however, their world was coming unglued. Dozens of unpaid creditors were hounding them, and the Internal Revenue Service was demanding overdue taxes. Alarmed, the company's bank called its $240,000 note for working capital. The brothers renegotiated terms with the bank and other creditors and reincorporated as American Images Inc.
Harlan Accola blames his age -- he was 19 when he started Skypix -- and the hubris born of early success. "I thought if I made enough sales, everything else would take care of itself. But I confused profits with cash flow."
American Images is now a $4.7-million business with 54 employees and 22 independent sales reps. The company's seven single-engine Cessnas -- three of them owned outright and four on flexible leases -- operate in 31 states from its base in Marshfield, Wis. Still, Accola's former ignorance of basic business principles gnaws at him. "We grew too fast," he confesses, "and it was simply from lack of planning. We must have looked like a real comedy team to our suppliers."* * *
Since those madcap days, Accola has turned religious about planning. He credits his conversion to Jack Stack, chief executive of Springfield Remanufacturing Corp. (SRC), who has appeared in this magazine's pages before as creator of the Great Game of Business, the revolutionary management system that saved his own company.
The Great Game of Business -- about which Stack wrote a book, published in 1992 -- is not a how-to manual. It's more a worldview that prompts one to think differently about how to run a business. Employing metaphors of sports and competition, Stack argues that companies can thrive if they tap into people's universal desire to win.
When his readers clamored for more, Stack and SRC's staff responded in 1993 with two-day crash courses on the inner workings of their company. Since then, nearly 1,000 folks have trekked to SRC, in southwestern Missouri, to learn what Stack calls "the only sensible way to run a company."
Harlan Accola made his pilgrimage last November. He had read Stack's book and tried to implement its ideas. But he needed a push, he says, to weave Stack's principles into the fabric of American Images.
Stack is no ivory-tower preacher. As chairman and CEO of SRC, he's on the front lines of a business he calls tough, loud, and dirty; a place "where people work with plugs in their ears and leave the factory every day covered in grease." He has built a formidable company on a simple belief -- that "the best, most efficient, most profitable way to operate a business is to give everybody in the company a voice in how the company is run and a stake in the financial outcome, good or bad."
That philosophy translates into the annual planning process that's at the core of SRC's operations. It's a companywide process that holds everyone accountable. The result? Since 1983, when Stack took control, SRC's annual revenues have grown from $16 million to $105 million, and the workforce has expanded from 119 to about 750 employees.
That achievement traces its origins to the siege mentality of SRC's early days. The company began as a division of International Harvester. In 1979 Stack, newly installed as plant manager, was directed to shut it down. But he and 12 fellow managers decided to raise $9 million, buy the plant, and run it themselves.
The deal they signed in early 1983 saddled them with one of the most lopsided leveraged buyouts in corporate history. The new owners had scraped up only $100,000, and they had to borrow $8.9 million, for a debt-to-equity ratio of 89 to 1. "The bank thought we were brain-dead, and it was just a question of time before they'd pull the plug," recalls Tom Samsel, now SRC's vice-president of corporate training.
And it wasn't long before Stack, the leader, realized he didn't actually know how businesses worked. "I was economically so illiterate and stupid it was unbelievable," he says. "I'd studied business in school. I'd been to the best seminars and supervised thousands of people. But I'd been treated like a worker who puts washers on bolts -- I knew only pieces. I guess Harvester thought it was too difficult for us to learn financial ratios or liquidity or how to make a profit.
"Everything we've learned here was through failures," Stack adds. "We weren't skilled in sales and marketing, because that had been done at Harvester's corporate level. On my first sales call in 1983, I lost a $10-million account with our biggest customer. At the end of 120 days we had a negative net worth, and I was so stressed that big clumps of my hair were falling out. One doctor thought I had Lou Gehrig's disease or multiple sclerosis, but a neurologist said it was just nerves. He told me to get a hobby or I'd die."* * *
The specter of impending doom gave rise to a planning ritual that focused SRC on controlled growth, orderly operations, predictability, and wealth creation. Stack involved every SRC employee in the planning and established a bonus system based on hitting the plan's targets. With open-book management, a concept he pioneered, all employees have free access to the company's financial data and can monitor the plan's unfolding. And SRC's employee stock ownership plan gives everyone a stake in the outcome and an incentive for mutual prosperity.
SRC's fiscal year begins on February 1, but planning officially kicks off in October, when Stack and the corporate brass meet with the sales and marketing managers of SRC's 15 divisions in a formal two-day event, usually staged off-site. Here, in brief, is how the system is set up.
Sales drive the plan. The top line of an income statement is sales, and a balance sheet begins with cash and accounts receivable -- both related to sales. Each sales manager presents a month-by-month plan for the year that will yield SRC's optimal 15% growth in both revenues and net income.
Growth targets, SRC learned from experience, should derive from the particular constraints each company faces. Early on, the wheels fell off when SRC tried to expand by 40% a year. It lost control of inventory and manufacturing processes, impairing quality and delivery timeliness. "You can't bring that much product on without killing everybody," says Samsel.
Bob Bigos is national sales manager for the Heavy Duty division. With some 300 people now bringing $50 million to SRC's top line, Heavy Duty is an anchor. It rebuilds engines for trucks, construction equipment, and farm vehicles.
By the time Bigos presents his plan at the October retreat, he's done his homework. He supports each component with meticulous detail to pass the top managers' muster. They question him closely: What impact will his plan have on inventory levels? Is any discounting required? What are the marketing needs?
In the weeks before the meeting, Bigos concentrates on that 15% growth target. He talks to customers, studies market trends, and meets with people throughout his division -- managers, supervisors, and line workers. He analyzes limits to manpower, space, computers, and even the speed of machine tools. If his plan is beyond the plant's capacity, his workers recommend workable alternatives.
He asks Irene Schaefer, the materials manager, if she can supply parts to achieve his goals. At the engineering shop, he questions the status of research-and-development's new products. Will any be part of the mix? "We take everyone's ideas," Bigos says. "Then we blend them down to what we think is realistic."
As he presents his October plan Bigos knows he's supported by the Heavy Duty workforce that helped him build it. "There's so much finger-pointing in business," Stack notes. "People say, 'It's their fault,' or, 'Those guys in sales are bums.' But if you get people to buy into the plan, they develop a sense of ownership. It becomes their plan."
Bigos presents and defends a contingency plan as well. Like the other sales managers, he devises a fail-safe strategy for 15% growth that will be used if his primary plan falters.
Creating plan B is no small job. Individually or in teams, the employees weigh in with their contributions to the fallback position -- what's feasible, what's not? Engineering, R&D, purchasing, operations, scheduling, distribution -- they all must be on board. If a big contract bombs, the backup plan will be activated quickly.
"We spend a tremendous amount of time on the what-ifs," Stack explains. "So we don't want just a plan, we want a trapdoor."
When Bigos's plan earns the approval of SRC's high command, he presents it in its entirety to everyone in Heavy Duty. Now the division has until mid-December to compile the next year's budget -- parts and prices from suppliers, personnel, wage estimates, machine tools -- all focused on the 15% increase in the next year's pretax net income.
Managers consult employees even about capital expenditures. Last fall Bigos turned to Candy Smalley, team leader for Heavy Duty's fuel-injection-nozzle unit, because $10,000 had been appropriated for tooling in her section. "I wanted torque guns," she says. "But they were too expensive. So we decided to spend the money on an automated stamping machine -- it's like a brander that stamps each nozzle with a diamond symbol that means 'remanufactured.' It reduces the jarring your wrists and elbows get from hand-stamping 600 nozzles a day."
SRC's chief financial officer, Don Ross, synthesizes the divisional plans and budgets to assemble an overall plan for a final review by Stack and his senior people. Once the directors approve the plan at their January meeting, it kicks off on February 1.
Throughout the year, everyone compares performance with the plan. "Jack Stack feels that if you're off more than 5%, up or down, you're out of control," says one division general manager. "Nobody gets mad if you bring in extra profits, but the point is, you should have known you were going to do that."
Deviations from plan are quickly noted, because of the astounding information flow inside SRC. The game plan incorporates eight documents: an income statement, a balance sheet, a cash-flow analysis, a sales and marketing plan, a capital plan, an inventory plan, an organizational chart, and a compensation plan. ("You can undoubtedly get by with fewer," Stack writes in his book. "We did for years.") But the scorecards for the Great Game of Business are the weekly divisional reports.
Every two weeks, division managers meet with SRC's executives to report their numbers. On alternate weeks they caucus with their lieutenants at the division level. Following each meeting the managers and supervisors gather their people to discuss the company's financial status. The employees know what the numbers mean. And they care. Their bonuses and the value of the ESOP are on the line.
A key part of Stack's survival strategy has been to get employees to think and plan like owners. The company spends more on financial education than on job training. In 1993, for example, it devoted 31,300 employee hours to business education, at a cost of nearly $300,000. Job-skill training, meanwhile, consumed 11,200 hours. Employees learn what's at risk and what's to be gained, and everyone knows how to make a difference.
"It's not like you have just one meeting and learn everything on the financial statement," says Kevin Dotson, an ex-marine who works in the Heavy Duty warehouse. "I learn more every time I go to a meeting. But you do understand the lines on the statement that you actually affect. That's how you see how you can be more efficient or how we as a small team within a large team can improve so the next group can take the handoff more smoothly. We all have different jobs, but we're all pulling for the same goals."* * *
In late 1992, inspired by Stack's book and the SRC model, Harlan Accola set out to build a planning system for his company. American Images had struggled back from its near debacle in 1986 but still had a ragged feel. It had a computer system with powerful software, but nobody really knew how to run it. The lead-generation and telemarketing area, a core of the business, was weak. Accola still wasn't well versed in financials, and the business wasn't making much money.
So, early the next year the Accolas took the critical step of bringing in accountant Dennis Kearns. He'd been controller of a cheese company that, in 12 years, had grown from $3 million to $50 million. After it was sold to Kraft General Foods, in 1990, Kearns stayed on for two years before he started to look for a small company at which he could make a difference.
Kearns's experience matched the Accolas' needs, so they brought him in as an equity partner with a one-third share. "We wanted to keep him around long-term," Harlan Accola says. He rounded out the team by hiring a data-processing expert and a telemarketing specialist.
The Accolas had never set an annual sales goal, but now, with expertise in key disciplines, they established $3 million -- 50% growth -- as the 1993 objective and hit the target handily. With tighter controls, American Images learned to exploit its switch from speculative photography to custom work. Most of its competitors approach potential customers -- owners of homes, farms, or businesses -- with the aerial portraits already in hand. And that had been the Accolas' approach, too, until 1987. Since then, lining up customers in advance has made it easier to schedule the flight crews, each composed of a pilot and a photographer. In 1993 and 1994, through better qualifying of leads generated by mass mailings and telemarketing, the sales closing rate reached 85%, with an average sale of $500.
The company's formal planning commenced in October 1993, when the Accolas, Kearns, and nine department heads gathered for several days to hammer out monthly objectives for 1994.
Like SRC, American Images began with sales goals. "Because we're in a niche, with light competition, we have the luxury of deciding how fast to grow," Harlan Accola says. "But there are constraints. Financing receivables poses one limit because we have few hard assets and our inventory is a database of leads. That's not much use to a banker."
Also mirroring SRC, the managers came prepared with input from each person in their sections. "It wasn't nearly as in-depth as what SRC does," Accola says. "We were trying to figure out what was realistic in sales and production. They asked their people, 'Can you make this number or that number?' It was a start." The group worked through everything from lead-generation costs to financing needs and debt retirement.
Following the SRC model, Accola wanted his employees to share responsibility for the company's success. So in 1994 each pilot-photographer team targeted a "per place" goal of keeping the cost of each job to $72 or less. They knew the cost factors: film and processing, aircraft and fuel, flight insurance, lodging, health insurance, and wages -- $9 per flying hour for the pilots, about twice that for photographers. For jobs that cost less than the $72 standard, crews could earn bonuses of 30% of the savings.
Though each employee understood his or her individual goals, complications developed when few could comprehend how those goals meshed with the company's master plan. Each crew member did collect, on average, about $3,500 at the end of the year. "They really went after that number, but it caused some problems because they didn't know the company's big picture," Accola says. In their haste, photographers occasionally shot the wrong place, or the pictures had long evening shadows, when, to keep hotel costs down, the pilots stayed out late to cram in extra assignments. "They beat the $72 target, and they got pictures," Accola says. "But what if we can't sell them?" This year's revised formula calls for only half the bonus to come from per-place savings. The rest is based on the company's bottom line.
Despite such false starts, 1994 was American Images' best year ever -- it reached revenues of about $4.7 million, a huge leap from 1993's $3.7 million. After-tax profits rose as well, to about 7% -- considerably better than 4.9% the year before.
Kearns attributes much of the improvement to the discipline of planning. Everyone is aware of how mailings and telemarketing help control costs. "We've been diligent about making sure a customer is serious before we do a shoot," says the accountant. "Also, people are coming up with money-saving ideas. One photographer did research and found an insurance company for airplanes that charged 50% less than we were paying. Some motivation was the per-place bonus, but still, it's a dramatic change."
Throughout 1994 Kearns's three-page Thursday reports listed weekly sales, accounts payable and receivable, cash balances, inventory levels, and leads generated. "It's a pulse point," he says, and the vehicle by which the company compares performance against the plan.
Though it's taken some time, department heads are starting to grasp the value of the plan. Accola says, "We all depend on it now. It's essential. Understanding the plan has brought out more dedication from the managers. They can see that we're not getting rich off them. We're all just trying to build something."
Still, because most employees were not with the program, he enrolled in last November's Great Game of Business seminar. He was impressed by Kevin Dotson, the warehouse worker, who spoke to the group. "At SRC, they talk about their successes, but you also hear about the training they've done to get to that point," Accola says. "I realized that our employees weren't going to become as dedicated as Kevin Dotson without education."
Within weeks of the seminar, Harlan and Conrad Accola and Dennis Kearns started working on getting people to think independently. "My frustration is partly my own fault," Harlan says. "In the beginning I wanted to be in charge, the one everybody runs to. But after a while I got sick of it. Our people didn't make decisions because we'd made it clear we didn't want them to.
"I think our planning process will have a bigger payoff as people see more clearly how they affect the big picture," he says. This year the company's managers are embarking on an educational regimen focusing on the income statement, the balance sheet, and the cash-flow statement. "These managers get the financials now, but they need more schooling in what the numbers mean," Accola says. "Once they get a better grasp, we will have them teach their people -- if they know they'll have to teach it, they won't fake an understanding. I can't expect miracles, but I'm looking for commitment and involvement from the bottom up."
Accola recognizes that the ESOP is a big motivator at SRC. "There's a strong feeling here that unless we devise a good bonus plan and eventually a stock ownership plan, our current success won't last," he says. "There's no doubt in my mind that people must have a stake in the action if you want their help. We've wondered recently about giving up equity," he continues. "My view is that if the three of us are smart enough to grow this business to $10 million, who's to say that if we had 100 people all pulling in the same direction, we couldn't do $15 million. I think a lot of entrepreneurs, including myself, have to give something away to get something back. We're dealing with a different workforce now."