How SAS Continues to Grow
The typical Inc. 500 company is young, vital, and giddy with potential. SAS is the company Inc. 500 winners want to be when they grow up.
Thirty years ago, SAS—employees pronounce it Sass—was No. 15 on our inaugural ranking of fast-growth private companies. (It made the Hall of Fame in 1985, after six consecutive appearances.) Most of SAS's fellows on that early honor roll have since met orderly or disorderly ends, or been altered beyond recognition by acquirers. SAS, by contrast, is a $2.4 billion business-analytics juggernaut, with 12,000 employees and an unbroken 35-year track record of revenue growth. In 2010 and 2011, its celebrated culture vaulted it to the top spot on Fortune's list of Best Companies to Work For. You want frosting on that cake? SAS is still private.
SAS (Statistical Analysis Software) was founded in 1976 by James Goodnight and several colleagues from North Carolina State University. Originally designed to mine agricultural research, SAS's software was quickly adopted by corporate, government, and academic customers. As advances in computing allowed organizations to begin frenetically hoovering up data, SAS was there to help tweeze meaning from it all. Its software is now installed at more than 50,000 customer sites.
Unlike many entrepreneurs, Goodnight hasn't talked much over the years about changing the world. He has been too busy creating one, on the company's 900-acre campus in Cary, North Carolina.
Goodnight likes to say that, given the nature of his business, "95 percent of my assets drive out the gate every evening." Touring the campus with an employee, a visitor can understand why those assets are so eager to return. We drive by the two subsidized day care centers; the site of the annual summer camp; the work-life offices, where eight social workers assist with drawing up wills, arranging elder care, and the like; the health center, with its 57 doctors, nurses, physical therapists, nutritionists, and psychotherapists. There are soccer and softball fields, tracks, and a tennis court. In the aquatic center, employees splash across a 75-foot pool. In the aerobics studio next door, a cardio class is just getting started. The indoor basketball and racquetball courts are deserted at the moment, but the weight machines and pool tables are busy. So is the hair salon, where Goodnight gets his own locks cropped. (Both Goodnight and co-founder John Sall have homes adjacent to the campus.) Sculptures surprise the eye at every turn. The buildings are awash in paintings, some created at an on-campus studio. Subsidized meals served in four sleek, airy cafeterias are cheap and surprisingly good. Children eat alongside their parents. In one, a piano player tinkles, "I Only Have Eyes for You."
"Really, you just have to give people a great place to work."
Dr. G, as he is affectionately known to staff, is as modest as his benefits are munificent. Emerging from his office in the company's brand-new six-story tower, he greets an assistant and tells her he wants coffee-can he make her some while he is getting his own? At 6-foot-4, Goodnight looms without intimidating and sometimes speaks so softly, he is difficult to hear. He answers questions succinctly, elaborating only when the subject is some technology that excites him or the problems of U.S. education.
Surrounded by glass cases that display the geodes and minerals he collects, Goodnight spoke with editor-at-large Leigh Buchanan about building a business whose promise hasn't dimmed in 35 years.
SAS was No. 15 on Inc.'s very first ranking of fast-growth companies, in 1981. What was the company like back then?
SAS was five years old when Inc. started doing the list. We were growing 100 percent a year for the first six years, I think. We were very busy writing programs and trying to expand. There wasn't a sales and marketing department at first. We just waited for the phone to ring. So many customers were calling to get our software that after a while, it started to affect our programming productivity. So we had to hire a salesperson to answer sales questions. We finally got a marketing department in the late 1970s.
To what extent was the company's direction carefully planned, and to what extent was it improvisation and luck?
The software and technology industries move very rapidly. We don't even try to plan out more than two years, because from start to finish, that's about the time it takes us to do anything really big. We just think in terms of what's the most important thing to be working on now.
Was there a watershed moment, when you knew the company would be successful?
It was profitable in six months. We never had any doubt it would be successful.
Is there anything you wish you had spent more time on back then?
We worked pretty intensely those first 20 years or so. I would usually come back to work after dinner. I wish I'd spent more time with my kids.
SAS is famous for its culture and benefits. How did you lay the foundations for that?
Right off the bat, we decided we were going to invest in making the work environment as pleasant as possible. The first thing we put in was health care, because we'd all had that at the university and we all had families. After the first year, we added profit sharing. Profit sharing is a wonderful thing. We added child care because one of the owners of the company was pregnant. She said she really wanted to stay at home with her baby and not work anymore. We didn't like that idea.
Having these things are very beneficial to the company. A Stanford professor wrote an article about how our benefits affect retention. He estimated that we save between $60 million and $80 million a year not having to replace people. Our turnover has seldom exceeded 4 percent a year, and a lot of that is retirement. Just yesterday, I signed 20-year, 25-year, and 30-year anniversary letters. I do that once a month. It took me 15 minutes to finish them, there was such a huge bundle.
How do you calculate how much to reinvest in R&D? How do you determine where that money should be spent?
Since the early '80s, we've had an annual ballot, called the SASware Ballot, where thousands and thousands of our users vote on suggestions that have come in over the past year. We listen very carefully to what they want. Usually within a couple of years, at least the Top 10 items they vote for are implemented. I also like to send R&D people to our user conferences. They get a lot of information there.
We just don't do something unless we're sure there's a market. We usually handle that through development partnerships with customers. We say, "We're going to build this for you." The customer will work with us to make sure all their needs are being met. And the long-term goal is to resell that to other places.
We always report R&D as a percent of revenue. So if revenue doesn't grow as much as we had planned for, then R&D comes down. I like to see it at between 20 percent and 22 percent. Most companies will spend so much more on marketing and sales and promotion.
You've weathered five recessions. How do you make it through tough times?
We have a very simple philosophy: Try to make sure the percentage revenue growth is higher than the percentage expense growth. It's a magic formula.
And how do you do that?
Right now, looking at our numbers, our expense growth is higher than our revenue growth. Anytime that happens, I put a freeze on hiring. We're up by 4 percent hiring this year. We can't sustain any more. I think we've got over 300 open positions right now. But what I do in this situation is, I just call HR and say, "Hey, don't hire any more people." I don't care how many people we're looking for. As a software company, 75 percent of our cost is people. So if I can control costs by not hiring, then it's fairly easy to keep things in check.
"Some of our folks thought we were crazy not to IPO, because we could be millionaires overnight. That was just the mentality in those days."
What was the most recent recession like for you?
It was like a cliff we went over. At the end of October 2008, new sales revenues were up 12.5 percent. In November and December, it almost stopped. We ended up by only 5.1 percent for the year. Everyone else was laying people off, so our people were really concerned. They were spending a lot of time talking amongst themselves about when layoffs were going to be announced here. So in January 2009, I did a webcast where I made it very clear that we weren't going to lay off anyone, that we had sufficient funds to weather the storm. I did ask everyone to cut down on expenses. In the end, revenue rose about 2.2 percent that year. Expenses went up less than 1 percent. So we were pleased. It was a good thing to put everybody's mind at ease.
Who was the most important hire you ever made?
Back in '81, I hired a man named Art Cook to set up our office in the United Kingdom, which was supposed to cover all of Europe. Art decided to move the headquarters to Germany. He was right. It turned out much better for us to have our operations on the Continent. So Art was responsible for growing our organization in Europe when we were just starting to globalize.
Speaking of globalizing, you folks have offices in 56 countries. What has been hardest about going into those markets?
The hardest thing is finding a great local manager. We've gone through quite a few in different countries before we've found the right one. That's so important, because the local manager sets the tone for the company in that country. It's taken us a long time to get China moving.
Now we're going through a process where, instead of having a single country, we'll roll up three or four together into a regional management structure. That allows us to share resources better. We can't have a banking risk expert in every country. By grouping countries together, we can have specialists serving each region.
Most software companies make a big deal about encouraging creative developers. You expect creativity from everyone, including support staff. How do you achieve that?
We look for people who fit. And if you're not creative and hardworking, then you won't fit very well. So we're hiring creative people from the start. The surroundings, too-all the paintings and sculptures inside the buildings and outside on the campus-I believe that fosters creativity. And really, you just have to give people a great place to work. One of our most creative groups is our landscaping crew. Everybody who does the grounds here is a SAS employee. They have the same benefits I do. And they feel a lot of pride in the company.
There's kind of a Willy Wonka aspect to the place. You give out 22 tons of M&M's every year. And I hear you have syrup rooms in the basements.
We have break rooms on every floor of every building. Once we started getting up to five- and six-story buildings, one of the architects came up with the idea of creating syrup rooms. We can just pump the syrup for the different soft drinks through the buildings in plastic tubes. That way, you don't have somebody clanging around with those big canisters all the time.
We really ought to quit doing the M&M's. But if we did, everybody would think, Oh, my God! What's wrong? They are cutting back! I personally haven't eaten an M&M in 25 years.
How has your thinking about going public changed over the years?
Over the years, I've become more anti ever going public, mainly because of the Sarbanes-Oxley rules and all the restrictions that government is putting on corporations. It's like our government hates corporations. That bothers me, because I believe corporations drive job growth much more than the government.
But you considered an IPO during the dot-com era?
Some of our folks thought we were crazy not to IPO, because we could be millionaires overnight. That was just the mentality in those days. We never even got close. The first thing our auditor said was, "Before you go public, you need to put in a financial system that we know how to use. And the one we know how to use is Oracle." It took us almost three years to get that up and running. By that time, the dot-coms had gone bust, and no one even wanted to think about going public. I'm glad the software was so difficult to install.
Have many employees left to start their own businesses? Have they adopted SAS-style cultures and practices?
A few have started their own companies. I don't pay any attention to them once they're gone.
Are there any management trends over the past few decades you've found particularly compelling or dismaying?
I don't keep up on a lot of the business trends. I'm not big on reading business books. I get copies of all of them, because people want me to put a comment on the jacket. Every once in a while, I'll get interested and read one all the way through.
"I've never really thought of myself as an entrepreneur. I think of an entrepreneur as someone who wants to make a lot of money. That's never been at the top of my list."
You're very involved in improving education. What approaches have you seen—in terms of policies, new kinds of schools, teacher training, testing, etc.—that in your opinion show the most promise? Where are we going off the track?
We are in many ways teaching the same way we did 50 years ago. Back then, there weren't a lot of distractions. You had a TV with a very limited number of stations. Now they've got 1,000 channels, iPads, iPods, cell phones, video games, the Web. Kids are surrounded by technology at all times. There's such enormous finger pointing at teachers. Teachers are teaching the way they were taught to teach. But kids have changed. Today, they are absolutely different. You must find a way to motivate them to learn.
To me, technology is the solution. They come in every day with their laptops, and the teacher makes suggestions for things they can look at. The teacher becomes more of a mentor or coach, versus someone standing up at a blackboard and lecturing. We developed software, Curriculum Pathways, that is geared toward that-letting students interact with the material in a way they can't with textbooks. More than 50,000 teachers use it.
Cary Academy [a private school for Grades 6 to 12, created by Goodnight, Sall, and their wives in 1995] was one of the earliest schools to adopt one computer per child. The teachers all have their own websites. All the assignments are online. Right now the kids are on their second generation of tablets, which is a laptop where you can write on the screen. That's not the same thing as an iPad. We have got to improve education in math and science. But we're asking kids to type their work. It's much easier to write when you're solving equations. So just giving kids computers where they can write as well as type makes a big difference.
Entrepreneurs often describe themselves as restless. Given that you are not a serial entrepreneur, how does that restlessness manifest itself?
We don't start company after company. We start product after product and division after division. There's all this general-purpose software out there that's used by everybody. We decided to develop products for specific industries and go strongly after trying to be the No. 1 software company in each industry. That's when we got into our drug-development software for pharmaceutical companies. In the financial sector, we created a risk solution, primarily for the European banks that are under Basel II requirements. We're one of the top anti-money-laundering companies in the world.
After 35 years at the top of the same company, do you still think of yourself as an entrepreneur?
I've never really thought of myself as an entrepreneur. I think of an entrepreneur as someone who wants to make a lot of money. That has never been at the top of my list. There's this creative thing in me that wants to have my work used-like the author of a book who wants it read.
What's going on with succession planning?
Succession planning is a topic that you just don't discuss. Because if you name your successor, everybody else is going to leave. We are continuing to grow our management internally.
What do you plan to do when you retire?
I'm going from here right into the ground.