Inc. case study

The case
Many managers reflexively brag about how people are their company's key assets. Yet in a business culture that lionizes Neutron Jack and Chainsaw Al, corporate words and deeds don't always match up. In managing for the bottom line, the human factor all too often gets pushed to the sidelines.

But Ed Ossie has built MTW Corp. around one vital element: a people-first culture. MTW's fortunes rest on how well its "stakeholders" work together. To ensure that they do work well together, the company crafts an "expectations agreement" with every employee who comes in the door. It's a document that's intended to promote clarity, honesty, and openness. When those qualities are in place, Ossie firmly believes, the company unlocks its workers' potential. Turnover at MTW is nearly one-fifth the industry norm. Revenue growth has averaged 50% a year for each of the past five years. Is a company like MTW what the new economy is really all about?

Getting religion
Ed Ossie had a long and distinguished career at Texas Instruments, putting in 19 years of hard work, during which he helped build a software business for the semiconductor giant. Ossie grew his division from a start-up venture to an operation with 1,500 people in 25 countries and revenues topping $200 million.

But success, as it often does, came at a price. Ossie flew 2 million miles for TI, racking up points with the airlines while running a deficit on the home front. In 1994, in the midst of fighting the corporate wars, Ossie saw his marriage fail, leaving him a single parent with a son in grade school. Even as he triumphed at the office, his life tipped off its rails.

But not long afterward, in 1995, Ossie connected with Dick Mueller, an IBM alum who had gone off to start an information-technology company, MTW. MTW provided software services mainly to insurance companies and state governments. Mueller wanted Ossie to come join him and run a business that would break the mold in the area of human relations. MTW's defining characteristic would be that people mattered above all else. Their needs and ambitions would guide the company's growth. They would form its competitive edge.

Ossie, now 46, joined MTW in January 1996 as its president and CEO. In March 1997 he took a sabbatical to attend an executive management program at Stanford's Graduate School of Business. There he met Jeff Pfeffer, a professor and the author of The Human Equation: Building Profits by Putting People First. Pfeffer's thesis was simple. While most companies professed to value their employees -- their "key asset" -- they rarely practiced what they preached. Managers told employees what to do instead of allowing decision making to rise from the ranks. Managers also rarely shared sensitive financial information with their workers. And at the first hint of a downturn, pink slips would fly. Pfeffer believed -- in fact, his research showed -- that when employees felt secure, empowered, and listened to, they not only worked smarter but produced higher returns for shareholders.

Jeff Pfeffer says that there's "an enormous body of literature on management practices" endorsing the value of those "softer" considerations, yet they're ignored by most companies. Why?

Pfeffer thinks that there's a "knowing-doing gap" in many companies. The result is that "memory becomes a substitute for thinking." In other words, things are done a certain way because they always have been. "Senior leadership doesn't really believe in this soft stuff," Pfeffer continues. "There's a commonly held idea that you've got to be mean and tough. Fear is abroad in the workplace. And that does not turn knowledge into action."

Pfeffer's ideas resonated with Ed Ossie. This was just the encouragement he needed to push the people-centered approach at MTW even further. When Ossie left Stanford he was fired up and ready to go back to work. Ossie, in fact, was so taken with Pfeffer's teaching that he asked Pfeffer if he would join MTW's advisory board. Pfeffer replied that as a consultant he charged several thousand dollars a day; MTW couldn't afford him. But he believed in Ossie -- and in his commitment to MTW's philosophy. So Pfeffer made Ossie an offer he couldn't refuse: he'd advise MTW in exchange for stock options for as long as Ossie took his advice.

Why guess, when you could know?
Jeff Pfeffer's options have increased in value by 350% since he began advising MTW, in 1998. That's not surprising, considering that since Ossie joined the company, its sales have increased from $7 million to nearly $40 million. Last year MTW's net operating income was more than 14% of revenues. During Ossie's tenure the head count has grown from 50 to 215, and the company expects to add another 85 people this year.

Ed Ossie believes that the bedrock of MTW's success is the "expectations agreements" that he and Mueller exchanged when Ossie joined the company. Crafting such a pact between employer and employee is a practice borrowed from Stephen Covey's The Seven Habits of Highly Effective People. It involves the articulation of both professional and personal goals dear to each party. In Ossie's case they included his making significant time in his life to be a good parent to his son. They also included a mandate to grow MTW's value by shifting its focus from simply providing technology services to also developing proprietary software that would fetch higher margins.

Ossie explains that the value of an expectations agreement is that it involves "empathic listening," in which each party articulates his or her goals and then has them repeated back by the other person. "People want to be heard, and if you can communicate to someone that you not only heard him but you understood what he said, that's the greatest affirmation you can give another person," says Ossie. "If we hadn't done this, we'd just end up guessing what matters to each other."

Every employee that joins MTW writes an expectations agreement, for a simple reason. "A lot of people are here because their expectations were not met somewhere else," says Ossie. At MTW, new hires are encouraged to put it all out on the table. Ossie says the process allows employees to name what's most important to them. Sometimes people want flexibility to handle special family situations, be it an aging parent or a child with special needs.

The expectations agreement is a two-way, ever evolving document that follows an employee throughout his or her career at MTW. It's reviewed, and potentially revised, about every six months. Sandy Clark, who came from Zurich Personal Insurance, a large insurance company that was once a customer of MTW's, says that in a large company "a lot of time you put your heart and soul into something, and then it doesn't get implemented." She says that doesn't happen at MTW, where there is a clearer sense of mission. "The company is aware of where you want to go, and you are aware of where it's heading."

Take Dan Carier, for example. After MTW developed a proprietary software tool called progression methodology, Carier's agreement stated that the company expected he would stay up to speed on that tool's use. For his part, Carier recalls, "I had some expectations regarding geographic flexibility." It appeared he might have to move to California to follow his wife's job. "I wanted to continue on the project I was working on and have the same responsibility," he says. MTW understood and agreed to comply with his wish. "I felt I was in control of my destiny," Carier says.

Dean Ammons feels the same way. He values his agreement as much for the broad commitment to mutual understanding it cultivates as for its specifics. Ammons, like more than 80% of MTW employees, came out of a large company. He worked at DuPont and then Texas Instruments. At those places, he says, he felt "buried." At MTW, with the expectations agreement, "I've got something I can wave at people if they don't follow through. If I have a complaint and I'm not happy, I'll knock on Ed's door."

John Van Blaricum, who works in marketing, says that his expectations agreement, like most at MTW, is a mix of general and specific goals. In his case he had no trouble articulating a handful of the latter. He wanted support from the company in broadening his experience in software marketing, he wanted to find a mentor to help him grow professionally, he wanted to get involved in a number of professional trade associations to increase his knowledge of the industry, and he wanted more exposure to business operations in order "to learn more about the business, and not just marketing."

MTW's management assented and then responded in equally concrete terms. It wanted him and his team to redesign and redeploy the company's Web site by a certain date. It wanted him to write three articles about MTW and get them published within a six-month period. And it wanted him to go to a certain number of industry conferences to ramp up promotion for a new market. Writing an agreement with that level of detail, recalls Van Blaricum, "helped me plan and focus my efforts for the coming year. It gets you to reflect on what you've been doing, as well as project what you should be doing."

Though an employee's expectations agreement is intended to be reviewed every six months, MTW builds flexibility into the process by trying to time the update to occur at the end of a particular project. Similarly, the review isn't a meeting between a boss and a worker; rather, it involves the employee's sitting down with the team leader of that particular project over lunch. "We want someone you've been working with doing this, because they know what you're up to," Ossie explains.

What follows when expectations are clear
The expectations agreement, Ed Ossie firmly believes, reinforces some other key drivers of MTW's success, namely low turnover, a focus on careful recruiting, and compensation linked to increases in the company's value.

Low turnover is a distinct competitive advantage for MTW, as it operates in an industry -- software and information technology -- that's rife with opportunity and, therefore, transience. "There's a lot of impatience with jobs that aren't fun," says Ossie. Turnover in the industry averages 30% a year. MTW's turnover rate last year was 6.7%, a figure approaching the natural rate of attrition. In fact, turnover has shrunk dramatically since Ossie arrived at MTW, when the rate was 24%. It has fallen each year since then, eventually reaching its present level.

The high retention rate is also partly due to the time, care, and expense the company invests in recruiting. "We want to build a culture that will sustain itself by having people stay put," says Ossie. MTW has five full-time recruiters and awards workers bonuses for referring candidates that the company brings on board. It now finds about 60% of its hires through employee referrals.

MTW's interview process is nothing if not thorough. After one phone interview with a recruiter and another phone interview with a technologist at the company, who assesses a recruit's technical skills, the job applicant is flown by MTW to its headquarters, outside Kansas City. There a candidate will typically interview with five people on staff, including at least two members of the senior management. "We want them to get a sense of the long-term potential of the job," says Ossie, "and the only way they can get that is by speaking one-on-one with someone from senior management."

MTW's practice of sharing stock with employees also discourages turnover -- and motivates better performance overall. Each new hire receives options on 250 shares the day he or she walks in the door. (The options vest in four years.) On day two that employee is eligible to be awarded additional options in one of three ways: being recommended by a customer, being recommended by a manager, or being recommended by a team member. The senior management puts the most weight on the last one. Praise by a peer is especially valued by the management because it wants to encourage team members to share information with one another.

A sense of teamwork is reinforced at MTW because employees own the majority of the company's stock -- 53.5%. Also, MTW is an "open book" company. It shares financial information with all employees, clarifying expectations about its companywide financial goals. It's a strategy that seems to be paying off. Three years ago MTW, which is privately held, had its accounting firm value the company's equity. The stock, according to the accountants, was then worth 58¢ a share. Today it's worth $5.11.

Edward O. Welles is a senior feature writer at Inc.

The company

MTW Corp., based in Mission Woods, Kans.

Business: Provides Web-based software and consulting services to clients primarily in state government and the insurance industry from its central location and from five regional offices situated close to customers.

Financial summary: In 2000, sales were close to $40 million.

Management: CEO Ed Ossie, 46, joined MTW after being recruited from Texas Instruments by former MTW chairman Dick Mueller, age 55. Mueller now sits on MTW's board of directors and remains a major shareholder in the company.

Capitalization: MTW is privately held. Employees own 53.5% of the stock. The balance is owned by two outside investment firms, Mellon Ventures and the Halifax Group, which last year took big positions in MTW, helping provide it with working capital for future growth.

Strategy: Increase margins by developing proprietary software for MTW's current consulting clients. Improve employee retention and performance by recruiting carefully and making job expectations crystal clear.

The CEO and the professor

The man who has been whispering in CEO Ed Ossie's ear is Jeff Pfeffer, a Stanford business-school professor of organizational behavior, whom Ossie met when he attended an executive management course at Stanford, in the spring of 1997. Ossie was impressed by what Pfeffer had to say back then, and now the professor sits on MTW's advisory board.

Pfeffer is the author of The Human Equation: Building Profits by Putting People First. His research over the past decade has focused on a quest to understand what increases a company's value the most. His simple answer: people and how they're treated.

Specifically, Pfeffer says that several variables contribute to the long-term success of a company: employment security; recruiting for cultural fit as opposed to expertise; an emphasis on continual training; pay that's contingent on group as well as individual performance; decentralization of authority; and an egalitarian culture that freely shares information. Pfeffer acknowledges that those factors "are soft, and hard to measure." Consequently, while corporate America gives them lip service, it rarely emphasizes them. But aren't they really just common sense? Pfeffer's response: "Common sense is very uncommon."

Pfeffer teaches smack at the epicenter of one of the world's modern economic miracles, Silicon Valley. And yet he's far from impressed by what goes on around him. He is, in fact, quite scathing of the management techniques he sees at work in many of the vaunted companies in his own backyard.

"Silicon Valley management is abominable," proclaims Pfeffer. Pressed for specifics, Pfeffer is quick to tick them off: too much outsourcing, a free-agent mentality toward the work, an overemphasis on financial rewards, and contempt for the customer. It all adds up to a shifting, mercenary, narcissistic mÉlange that erodes loyalty and continuity inside organizations. And absent those elements, Pfeffer believes, it's hard to build a growing, lasting business.

Best practices

Two or three times a year CEO Ed Ossie and other members of MTW's management hold "People First" meetings with employees at various company locations. Each meeting begins with a roundtable, in which employees at that office report on business and on how to improve it, as well as on anything that might be happening in their personal lives. In the second half of these two-hour meetings Ossie reports on events companywide and on MTW's financial performance. (All employees are stockholders; MTW is an "open book" company.) Ossie says the intent of the meetings is to encourage a free-flowing exchange that's not just informative but also affirming of MTW's culture. "The basic tone is that there's more to life than what we do for the next hour."

MTW "hires for fit and trains for skill." It seeks flexible, open personalities and then offers extensive and ongoing training so employees can reach their potential. Marcie Wibright, a recruiter who reluctantly left Southwest Airlines and joined MTW, recalls that she started at MTW on a Monday. "That Wednesday I was on a plane for Chicago to go to a training class," she says.

At MTW the emphasis is on team. The typical team at MTW numbers from 5 to 10 people, and teams work on discrete projects. They can be quickly dissolved and reformulated. "They're virtual and collapsible," says Ossie. While management sets an overall strategy, the teams are expected to generate ideas about new markets, products, and directions that the company could address. "We want to unlock 100% of the intellectual capacity of people every day," says Ossie.

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