3 Principles To Run A Company Sensibly
After writing up the business case of NER Group for our Online Academy, I read Jack Stack and Bo Burlingham's classic about their transformation of SRC Holdings, called 'The Great Game of Business'. I was struck by the similarities between the two.
NER & GGOB
Before I dive into their similarities, let me introduce them for those who have not heard about them before:
- The NER Group is a group of ~20 Spanish businesses that all work according the 'Nuevo Estilo de Relaciones (NER) methodology' developed by Koldo Saratxaga. We wrote about them in a blog, and in our book.
- SRC Holdings is a group of ~60 American businesses that all work according the 'Great Game of Business (GGOB)’, a methodology developed by Jack Stack. Read about them here.
Both Saratxaga and Stack were motivated to adopt their unique methodologies to rescue the struggling companies they were leading. They wanted to save the jobs of people in their organizations.
They thought this could be achieved by giving all an understanding of how the businesses were run—and then involve them in improving them. Their way of saving jobs became a new way to create jobs. These new jobs created new wealth. This wealth, was then shared with those who created it in the first place: all those in the company.
Although both pioneers developed their methodologies on different continents, they share strong similarities.
- Both methodologies were developed decades ago. Both are based on a belief in people. Stack developed the GGOB methodology in the late 80s, and Saratxaga the NER methodogy in the early 90s.
- Both believe the best, most profitable way to run a business is to give everyone a voice in saying how it should be run, and then give everyone a stake in the financial outcome.
- Both methodologies were developed on factory floors, not in fancy consulting firms or over-hyped IT start-ups. Stack developed it at truck engine remanufacturer Springfield ReManufacturing Corp (SRC), and Saratxaga at coach manufacturer Irizar Group.
- Both methodologies took their companies from near bankruptcy to double-digit growth. Read about their successes: here for SRC, and here for Irizar.
- Over three decades each has successfully implemented their methodology in dozens of other companies, and in all kinds of industries: Stack in 60+ companies and Saratxaga in 50+.
There is one main difference to note:
- Their methodologies rely on completely different ways to structure the organization. NER relies on the removal of formal hierarchies. GGOB relies on decentralization but has no problem with formal hierarchies.
Their way of saving jobs became a new way to create jobs. These new jobs created new wealth. This wealth, was then shared with those who created it in the first place: all those in the company.
Similarities between universes
Beyond this difference, there are striking similarities in how they run their businesses. Both are human-centered and use common-sense.
Stack & Burlingham write: "Business is not an art or a science. It doesn't have to be an instrument of exploitation, or a tool of greed, and you don't need an MBA to understand it. It's a game, a competitive undertaking with rules, winners and losers, ways of keeping score, and all the elements of luck and talent. There is no reason why you cannot set up your company so that everybody can play the game together and share the rewards."
This ‘gamification’ of running a business is based on three principles:
First is the principle of understanding. People need to understand how the business is run, and what are the measures of success. Only then can they understand and think about how to influence and improve performance.
This requires two things: demystifying the books, and the setting of standards.
Demystify the books
The start is making all relevant information open to all employees. This means radical transparency about the financial data.
The aim is to break down the mysterious wall surrounding money matters. These walls turn running a business into an elite sport for a select few at the top. You need to remove these walls. Otherwise they keep everyone else in the financial dark ages.
And, it’s not just opening up the books. It’s also about teaching people to understand them—to teach them the rules of business using tools that have been around for a hundred years or more. Think income statements, balance sheets and cash-flow forecasts.
All in the company need this understanding if you expect them to do something about matters—and if you want them to help each other perform better.
Setting of standards
Understanding is not only through teaching about numbers. People also need to understand how their performance influences them, and why they require organization-wide standards.
Standards set the level of satisfactory performance. That number is called a 'standard' in GGOB. Others might have similar things called 'goals', 'benchmarks' or 'targets'. No matter what you call them, they are similar. And they challenge people to perform to the best of their abilities.
There is really no limit to the standards you use. But some are more important than others. So be careful not to overdo them. Most important are standards related to sales, productivity, client and employee satisfaction. It is also important to have standards people can actually use to keep track of what's happening in the business.
Stack & Burlingham: "But remember. Numbers are not magical, and they aren’t sacred. They are important only as clues to the reality that produces them. To use numbers effectively, you have to strive constantly to understand that reality—to move from the abstract to the specific. [...] Never get so far into the numbers that you leave out the human factor. Use the numbers as a tool to get people to contribute more, not less."
Standards in different businesses will be different. However, all in the company must have some way to measure how he or she is performing in the short and long term. This brings us to the second principle - involving.
Once people understand how the business is run, the next step is to expect all to act on this understanding to improve their own performance, and that of others. That's why all in the organization must be involved in running the business, and all opinions matter—because being valued and involved shows the company respects and trusts them to make the right decisions.
There are two parts: annual plans, and weekly meetings.
To involve all in running the business for the long term, both methodologies use annual plans. Each year they develop a plan that includes performance and financial statements defining what people will commit to every month of the year. This plan states the results the business wants to reach that year, and how they are going to reach them.
Having such a plan is just as important as the way the company develops it. Developing annual plans must be done with the input of all in the company, and the active involvement of all in the process. The plan must be realistic, and agreed on by all, especially those at the front line.
Reaching consensus on the annual plan might take time and energy from all in the organization. It is the time to think about the future and strategy of the business, to think about what opportunities to chase, and about how to minimize the dangers that may lie ahead. It is also time for all in the organization to agree on the commitments they make to achieve the results all have agreed upon.
These commitments are important. All in the organization must be motivated to make the plan work. And they must know they can count on others to do the same. You only get that kind of commitment when people are able to participate in the process, knowing they are responsible for what comes out of it.
Stack & Burlingham: "High-involvement planning helps companies transform their planning process from an annual, time-consuming ritual to a highly informative, educational journey that involves everybody at every level of the company in understanding the big picture and the importance of looking forward into the marketplace."
Another important practice is to involve all in the short-term running of the business. This enables them to offer creative input on a daily and weekly basis.
Both methodologies rely on the rhythm of weekly meetings. In these, information from all parts of the business is shared to build an accurate, shared, real-time view of company performance. They inform all about their performance, and show who is accountable.
GGOB calls these meetings 'weekly huddles' and NER 'commitment meetings'. During these meetings teams first give each other a brief update on how they performed on commitments made the previous week, and follow by aligning their collective commitments for the week ahead.
These meetings should not be seen as ordinary staff meetings. Rather, they should be seen as a weekly ritual to facilitate peer accountability over commitments made to each other.
Stack & Burlingham: "The weekly meetings are like a heart-beat. It's the business rhythm, a communication rhythm, where everybody is kept informed and involved in the process. [...] The regularity of the meetings provides a rhythm of communication where all people are kept informed, involved, and engaged in moving the company forward."
The gamification of running a business is based on three principles: (1) Understanding, (2) Involving, and (3) Recognizing
The third principle is about recognizing people's efforts and contribution in reaching their commitments, and those of the company. Both methodologies give all people in the company a direct stake in company success and failure.
Stake in the outcome
Both make use of profit-sharing schemes. GGOB advocates an annual bonus with hefty payouts when standards in the yearly plans are reached. NER simply advocates a minimum of 30% annual profit sharing.
The success of both depends on people's understanding of their respective rewards scheme. This means the schemes must be communicated and explained to everyone in the company. And all should be able to influence the outcomes. If people don't get it, or don't believe they can influence it, they are unlikely to be motivated by it.
That's why all people need a clear understanding of the opportunities to directly increase their rewards. Then it is up to them to collectively identify what and where these opportunities are, and to help each other chase them. It allows all to think and act as entrepreneurs.
It can be done
Saratxaga and Stack created businesses with levels of engagement and involvement that can change lives forever. During our Bucket List visits we have seen such environments over and over again. They allow everybody to think and act like entrepreneurs and owners.
You can create such environments. If you wish to do so, there are 4 crucial things to note before embarking on the journey.
1. Be convinced
Before running your business in this more sensible way, you must first have a vision of what is possible. You must believe this alternative way of running a company can have an impact on your business. You must be convinced people can do extraordinary things. You must also realize that it can change lives at the same time.
2. Visit another universe
Reading and hearing about it is one thing. Visiting another universe to see it in action is something else. That's why you must see it for yourself by planning a practitioner visit. When visiting this other universe, you will see people can do extraordinary things and share in the rewards. You will see people talking about the business like seasoned entrepreneurs. You will come away with proof that it works, and you will gain valuable, practical knowledge.
Saratxaga and Stack created businesses with levels of engagement and involvement that can change lives forever. They allow everybody to think and act like entrepreneurs and owners.
3. Collect dreams, fears and feelings
Before transforming your business, start by collecting input from all people in the organization: that is, input about the realities of your business. If you want all to act as adults, you will have to treat them as such and ask what they think. You need to understand what they think your business is doing well, and not so well. You need to know what they see as opportunities, and the issues they face.
After this is done, every organization should be able to reach the other universe if they really want to, and persist. According to Stack and Burlingham it takes about 6 months to really get going with their methodology. Then you need another six months to deeply embed the practices and stay true to the discipline. To get really good, and start to see long-term, sustainable results, give it a good 18 to 24 months (similar claims are made for the NER methodology).
But when you do persist you will see people start to think and act differently. You will see people, previously used to just showing up for a job, are now people who understand how to run a business.
Isn't that something every organization wants?
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Great summary, Rebels! You need to accept that, depending on their own professional history, some of the participants will be very skeptical at the beginning and sometimes remain that way. Once they see that you are serious about this and that your intentions are genuine, a majority will start embracing it. So you need to keep the faith.
Yes excellent summary , to clarify SRC only has 10 businesses in the group currently, however they have spun off over 60 businesses over the past almost 40 years. As such SRC has a likeness to a Venture Capital industrial conglomerate. They have used the proceeds of these spin offs to largely fund the repurchase of employee shares when they have left and or retired. The "Stake In The Outcome" has two parts , the annual bonus, paid quarterly, 10%, 20%,30%,40% on meeting qtly and annual budgets and secondly employee ownership. Jack believes that ownership may not need to be shared to play the GGOB, however shared ownership should be part of the ultimate plan. In addition he believes just handing out equity will not have the desired outcomes if the other pillars of their philosophy are not embraced: Know and teach the rules of business , Make the results transparent.
"I dispensed with the false comfort that making detailed plans can bring – and falling back on the notion of control – in what was a highly uncertain environment. Detailed annual plans may have been standard practice a hundred years ago, but in our modern world this is far from ideal.”
Most of us know monopolies are bad. “They have no incentive to deliver better products or to get more efficient.” And if a monopoly can do whatever it likes, the victim is likely to be the customer. If it exists outside an organization, measures can be taken to end that. Within organizations, creating monopolies seems standard practice, but why!?