THE HIGHEST LEVEL an INTERVIEW with JACK STACK
On the morning of July 29, 2010, I achieved a personal goal that I never thought would be realized. I spoke with Jack Stack. This is no small thing for Jack is a very busy man. Why would he want to take an hour out of his day to talk to a guy who, at best, is a very faint blip on his radar screen? I’m still not entirely sure, but I do know that what we discussed was important enough for anyone to know. It doesn’t matter if you’re an employee, an investor, a business owner, or just a citizen living in today’s world...Jack’s knowledge applies to you. Jack Stack
(photo courtesy of Becky Lane, used by permission)
And if you take the time to apply that knowledge, you can change your life forever.
Background Springfield ReManufacturing Corporation (SRC) started out as a division of International Harvester Co. In 1981, as a recession hit, Harvester was having difficulty keeping SRC afloat. Jack had worked at SRC since 1979, and was presently the Plant Manager. In order to save the jobs of the 119 people who worked there, he and 12 other managers purchased SRC from Harvester in 1982. Jack revolutionized business thinking as a matter of necessity when he found himself in possession of the company he and his fellow employees had once worked for. Now, survival wasn’t just a matter of everyone doing their jobs. It was a matter of teaching everyone how to make money and generate cash. Now SRC is owned by SRC Holdings Corporation, a privately held company that also owns over 20 other businesses. These businesses were started by SRC and then spun-off, giving their managers the opportunity to become business owners and play a bigger game. In his books, The Great game of Business (1992) and A Stake in the Outcome (2002), Jack explained the lessons he learned during this perpetual acid test of survival and success. He’s still there, today, as CEO of SRC Holdings Corporation. 1
A Summary of Jack’s Ideas
(Comments are my personal interpretations.)
The Great Game of Business In business, there are rules, competitors, and ways of keeping score. And in life, most people enjoy a good game. So how do you get people to learn about financial concepts and apply them in their everyday jobs? You use games, complete with targets, incentives, and information sharing to show everyone what the score is. Open Book Management This is an approach to doing business that involves training all employees to be financially literate, considering their ideas on the merits of the ideas themselves and not on the status of the employee, and giving everyone a stake in the outcome. The Higher Laws of Business Originally published in The Great Game of Business, these Higher Laws form the cornerstone of Jack’s business thinking and are baked into his 1. You get what you give. When you give people the power to make ownership-level decisions, you get ownership-level commitment, ownership-level ideas, and ownership-level results. 2. It’s easy to stop one guy, but it’s pretty hard to stop 100. A company of people who all have personal stakes in the outcomes they create will make better results, including better mistakes, than when people act in individualized functions that are removed from the big picture. 3. What goes around comes around. If you try to coerce, rule with power, and show off, eventually it will come back to haunt you. 2
You have to treat people in ways that help them achieve their goals, otherwise they won’t try to help you achieve yours. And when they get an advantage over you they won’t play any fairer than you did. 4. You do what you gotta do. When what you do has an impact on others, you do what needs to be done to help them succeed. Because that’s the only way for you to succeed. 5. You gotta wanna. If you don’t want to do something, you’re not going to do it. If you want other people to do things, you have to find out how those things will get those people what they really want. Because if they think you’re only trying to get them to do it for your own sake, you’re not going to get the results you’re after. 6. You can sometimes fool the fans, but you can never fool the players. The people playing the game know whether they are playing it for them or for you. They know whether you’re sincere or full of shit. And when you open the books, you give them an even greater ability to take control, to see where they are going, and to want that destination. 7. When you raise the bottom, the top rises. Give everyone in the business the ability to see the targets they helped set, and give them incentives to hit them, and everyone, from the lowest guy on the ladder on up, will benefit. 8. When people set their own targets, they usually hit them. When you give people the ability to pursue what is important to them, and not what you tell them is important to you, they will focus, they will achieve, and they will persevere until they get what they are after. 9. If nobody pays attention, people stop caring. You can’t care about your tasks and your goals if you can’t see the effect they have on other people. You can’t operate in a vacuum forever – the longer you do, the less you’ll care, until you stop caring altogether. 10. Change begins at the top. Real change comes from those who have the right tools to push things in the right direction. This means being credible, having influence, and showing people the way out of bad situations. The Ultimate Higher Law: When you appeal to the highest level of thinking, you get the highest level of performance. When people think beyond the crisis du jour, and start thinking about their futures, you get a level of performance far greater than what you could ever expect by keeping them in the dark and ignoring their needs and their frustrations. 3
The Interview D: Your books have really done a lot for me. I think there are a lot of people out there who have never heard of you who could benefit from your books and your ideas. So I’d like to use this interview to share your ideas with the world.
J: I’m glad they help you, they really helped us for the last 28 years. D: Which one do you think helped you the most?
J: Well, the first one is the how-to, you know? The second one is what happens after you apply the how-to. The second one is the whole idea of ownership, and the last one I’ve gotta right is about what happens when it’s all over. D: Are you working on that one now?
J: Actually, I’m in the sixth month of a ten year plan right now. Once I get the ten year plan into a mature stage, then I’ll be able to write the book. D: So are you finding now that people who are coming to work for you are already aware of your ideas and have already read your books? And do they come to work for you because of these ideas?
J: Well I’ll tell you one thing, we are a preferred workplace. And we’re in a very sweet spot in terms of the United States. Either people have left here and want to come back, or people have heard about this place and it’s the type of living that they want where they can raise kids and have a fairly low tax base. And the cost of living is significantly lower than other parts (of the country). The economy is very stabilized. We have a lot of positive things working for us. But the whole thing comes to the idea of the open book. Regardless of who comes in, we’ve got to train, train, train, train, train. I mean, it’s so sad that people aren’t prepared when they come to work, from the standpoint of financial literacy, debt literacy, the whole conceptual idea of how to run a company. Regardless of their education and regardless of where they’ve worked, they’ve never had access to the books. D: Do you think that’s something people struggle with on a personal level as well?
J: Oh my god, yes. And what we see is the change in behavior once they get it. Because it not only affects their attitude toward work but it also affects their attitude towards their home, and their savings, and their investments, and the debt that they handle. It’s so sad to be here and see the change and wonder why 4
in the world, with the money we spend in education today, why we can’t have people who understand this when they come to work. D: Do you think the “pay-me-now-and-I’ll-perform-later” mentality you wrote about is part of this problem?
J: I think it’s probably more prevalent today only because of the media and what it writes about the corporate greed, the millions of dollars that are paid out in bonuses, making it sound like its instant gratification. So I think the younger people coming in today, who have been hearing about all the excesses, expect it real fast. In my past 28 years I think there’s been different cycles. In the 60’s, you weren’t allowed to see this information (a company’s books). It was secretive, it was for sophisticated eyes only, you had to be at a certain labor grade in order to get this kind of information, they were afraid that people would trade on it, it was a power thing... So, from the 60’s to the 70’s, anybody in any position in any company never really got it, unless it was a publicly-held company and then there were facts that were published in quarterly earnings after the fact, not necessarily before the fact. And they were never used as tools to perform your job. There was a real disconnection between what your accountabilities were related to making a product or service and a total isolationism of accountability as it related to the success of the company. It was appalling, even today, to see that we still want people to make a great product even though the company is falling apart. Then I think the next evolution was we got into that crazy era of the dot-com company and we created a generation of kids that walk out of college saying “hey I want stock options, and I want them to be vested within a year.” And the Microsoft era led to people coming out (of college) asking for outrageous salaries, with no experience whatsoever. Gratefully, that died when we took a trillion dollars out of the marketplace and the dot-com mentality collapsed. But I would think today, it’s probably somewhat on hold. It’ll be interesting to see where it is. First of all, a lot of people can’t get jobs today, so they’re now looking at things differently than they looked at them before. Regardless of the 30 or 40 years I just mentioned, I don’t think we’re progressing in terms of people that really understand how the business works. D: Do you think that will change by necessity as unemployment rises?
J: We still don’t look at (open book management) as a best practice. Those people that in their hearts know it’s the right thing to do, and have the courage to open up their books, I think they’ll continually do it. But the sad part about it is that most best practices don’t come from the ground floor up, they come from academia, and if it isn’t invented in academia then it takes a long time for it to get used as a best practice in business. 5
D: Do you think best practices that don’t come from the ground floor up are less effective? I’ve seen Lean Six Sigma work because it was implemented on the manufacturing floor and I’ve seen it fail because management touted it as the next best thing.
J: You hit the nail on the head there. Most of these things are tools. What I want people to understand are the financial ratios of the company that they need to be working on to create sustainability over a long period of time. There’s like 15 to 20 different financial ratios that you’ve really got to watch and you’ve got to keep working on if you’re going to be able to sustain. That’s the statistics of the company, right? What I was always trying to do is get people to use the techniques, like Sigma Six, because they wanted to make the company better, not because management told them that “hey, Jack Welch said this is really the way we ought to go, so we’ve all got to go this way.” And so we take it off the shelf, we put it in, we talk to the employees, we say “hey if you do this it will change your life forever.” And they look at us like “yeah right, just like to told us that the Hawthorne Study was gonna change our lives forever.” And somewhere between the Hawthorne Study and Sigma Six we got a museum of these philosophies, you know? What I want our associates to do, I want them to look at Sigma Six and say “look, should we apply this so we get better financial ratios?” I want to appeal to the higher level of thinking. I don’t want to keep dumbing people down. I’m not saying that Total Quality Management and statistical process control aren’t really good things. What you were saying, which is true, is that they’re only good things if the “you’ve gotta wanna” is there. And you have to apply them as tools, not as “this one particular thing will change our lives forever.” The only thing that’s going to change life forever is the financial ratios of the company. That’s what they’ve got to be counting on. There’s so many companies that went for the Quality Awards or they fought for the Sigma Sixes and failed. My point is you can succeed really well with Sigma Six but the company can fail. So why shouldn’t we be teaching people what it takes to create a great company and tie that to their performances? Then when they want something to enhance the company, which would enhance its sustainability, then that drives the “you gotta wanna.” D: You’ve stated, and I’ll quote from your book, that “you need a number or a goal isn’t real.” Do you think that a lot of companies don’t have a number, so they don’t have real goals?
J: Well, I think they have numbers, but I don’t think they use them properly. I think most businesses are really proud of the fact that they have a profitsharing program, for instance, and they feel that’s what they need, it’s a variable program that will give (employees) a percentage of the profits. Businesses feel really good about sharing the wealth with them, but if employees don’t have 6
an education on how to make a profit... and there are also a lot of cases where profit isn’t necessarily your problem. They’re missing a lot by not using the other 14 to 19 financial ratios and keep shifting it up. You know, people get bored with just a profit sharing program. And then if you’re in a good period of time and you constantly get it, and then you hit a bad period of time and you don’t get it, people don’t understand the difference between the good and the bad. Because we’ve spent no time telling them how they make a difference relative to making a profit. So in our company, what we try to do, we try to have a different financial ratio every year, so we’re truly addressing the weakness in the company. But we’re also teaching people that ratio so they’ll remember it for the rest of their lives, and we also understand the whole idea of instant gratification. For instance, take the fourth quarter of ‘08 when virtually all credit was closed, assets were no longer bankable, such as receivables and inventories, and the loan covenants quickly shifted to just cash flow. And the banks said “okay, we’re not going to collateralize your machine tools, we’re not going to collateralize your brick and mortar, we’re not going to collateralize your inventories, and we’re not going to collateralize your receivables. The only thing we will lend on is cash flow.” Most companies would still have a profit sharing program rather than shifting, if the market required it, to cash flow and begin to teach people all the elements of cash flow and build a bonus and incentive program or an education program around saying “hey, our lines of credit are shrinking, we’ve got to make moves relative to our assets, we’ve got to get the assets lean, we’ve got to convert that into cash, and then we can get some credit. Then we can sustain.” D: So you have to teach people how to survive.
J: Yeah, you have a different problem every year, and every year is not your problem. And sometimes profit sharing is dangerous from the standpoint that you could be forced to sell a product at a higher price just so you can get a bonus program. And I’ve seen that happen, too. D: To switch it up a little, you talk a lot in your books about how to employ The Great Game to companies that have employees. Does it also apply to entrepreneurs who don’t have employees?
J: Yeah, I think it applies to anybody in any revenue-producing business. I have a daughter who has a one person shop and she has to understand the relationships of margins and inventory turns and surpluses and obsolescence and how to price relative to seasons in terms of the marketplace. I think in a person’s head you’ve got two wheels. You’ve got one really creative wheel where you can see the product or the service. That’s the entrepreneurial wheel that goes at about 6,000 rpm. Sitting right next to that is a little wheel called your financial wheel. I think there’s like 600,000 businesses that start every year and 7
85% fail within the first five years. And the reason that they fail is they don’t get that one flywheel, the financial flywheel, going at the same time they get that entrepreneurial wheel going. So you’ve got one wheel going 6,000 rpm and you’ve got one wheel that’s sitting there, rusting out, and then eventually what happens is you start running out of cash relative to the business you’re in, and then that wheel starts. But by that time it’s already too late. So the key is not to get those wheels going at 6,000 rpm but at least getting the financial wheel tied into the business. D: And is the way to get that wheel tied into the business to start The Game early?
J: Yeah, right from day one. I sat my daughter down and said “Megan, you cannot be in this business with a 45% margin and turn inventories four times and try to grow at 15%, it is mathematically impossible to do. You’re going to have to figure out your price points, you’re going to have to have a bigger margin, you’re going to have to turn inventories quicker, or you’re going to have to keep going into debt or get private capital. And if you get private capital you’re going to have to bring on other owners and then all of the sudden you’re going to lose your dream. Or the bank is going to call the loan because you ran out of money.” D: So entrepreneurs have to keep a long-term perspective even when they’re in survival mode.
J: I think it’s absolutely critical. It’s critical that they keep their dream in sight. I think too many people, for instance in the process of a startup, where they sit down and they do a business plan for the sake of the investor, what they don’t understand is that a lot of times when they’re writing those numbers down, they’re losing reality. Those numbers should be their numbers, there should be psychic ownership in those numbers. And then too many times, they are tweaking all numbers for the benefits of the banks, for the benefit of the investor, and they lose their dream in the pursuit of capital. Now it’s not their business plan, it’s somebody else’s business plan. And here’s another thing you cant do: if the numbers tell you that you either can’t grow that fast or you’ve got to be more patient, you’ve got to believe them. And let’s say you go in there and you say to yourself something like “well, I ran my numbers and I’ve ran out of cash, but I’m going to convince Wal-Mart to go from 90 days (payment terms) to 30.” Well, you’re kidding yourself. You can make numbers tell you anything, but to understand reality is a difficult thing to do. D: Why do you think that is?
J: The reason I think that is is because of the influences on your business plan that make you lose sight of your own dream. And people believe they can 8
convince Wal-Mart to go from 90 to 30 days. It’s easy to twist the words around when you’re trying to get the outcome you’re looking for rather than asking “is this real or not?” And I’ve seen many people go into business and all the sudden the opposite occurs - you’re a new business and instead of getting paid on time you get paid later. And when you’re waiting for a paycheck to meet your payroll or to pay your mortgage, and somebody delays it 30 to 60 days, oh my god. D: I’ve worked with a company that pays vendors on 90 day terms. The vendors usually tried to talk the terms down but it never happened.
J: Yeah, not since ‘08. D: Switching gears again, what do you think is the cause of today’s economic climate?
J: I think the economic climate we have today is because of bad leadership. D: On what level?
J: I just think we don’t have strong leaders. And I think some of the leaders we previously had lead us in the wrong direction. D: Leaders in business, politics, or elsewhere?
J: Well this is why when you talk about economic climates it’s a very, very broad subject. If you take the housing bubble, I think people had really good intentions, and wanted everyone to have good homes, and we modified some regulations so we would let buyers in that didn’t necessarily follow the acid tests we had previously set up. Because we were hoping when we did it for the best intentions, we would do better. And nobody had the stones to stand up and say “whoa, this is wrong.” And then it gets out of control. When you have a statistic that says the safest bet in America are home mortgages because they only default one-tenth of the time, then that creates a package that you can go sell to low-interest rate countries. And now you’ve got the peddlers out there and it becomes a real house of cards. So you had really bad leadership right from the very beginning. How old are you, Dan? D: I’m 32.
J: Okay, I’m 61. When I had to go buy my first house, I had to have 20% down. I had to have it. My first foray into open-book management was buying my first house. And the restrictions on that house were for the safety of the mortgage markets. And then, all of the sudden, people were allowed to get 110% on a 9
mortgage. D: You know what my down payment was?
J: What? D: 1%.
J: Yeah. See... D: Lucky for me I bought what I knew I could actually afford.
J: I’m glad you got a house, I really am. All I’m saying is there were disciplines when I bought my first house that taught me a significant lesson. D: I think those lessons are going to have to come back.
J: Well, if we had stuck with the rules from the very beginning we wouldn’t be having this problem. So our leadership model broke down. D: What do you think will happen now with the housing market?
J: I think the housing market will eventually come back. I think what’s got to happen is we need more confidence. There’s a tremendous amount of money that’s being accrued and a tremendous amount of money in savings and that money’s not going to come out until we see some leadership that’s going to promote confidence instead of animosity and anger. We have a leadership mentality today of “let’s fuel up the mob. Let’s get the ropes out and hang these guys.” It’s crazy. You couldn’t speak to your people in a business the way our government is speaking to us. And it’s happening every single day. This deal with the lady in the Agricultural Department? If I were running a business and that happened, the first thing we’d do is say “take a leave of absence until I can figure this out. Because you knew if we made a mistake on this deal we could go to jail, we could get sued, we could lose our company. We’ve been in business long enough to know that there’s two sides to every story.”* And to have an administration that has no business people whatsoever... I mean, they don’t even understand best practices. * In April 2010 a video was posted online showing USDA official Shirley Sherrod giving a speech at an NAACP convention that appeared to have racist connotations. She was asked to resign, and did so. Afterward, the full video of her speech was released to the public, providing the whole context of her comments and dispelling the perception that her comments were racist. The Obama Administration apologized and requested that she come back to work in a new position. She declined the offer. (Sources: cnn.com and washingtonpost.com)
D: Do you think they’re even going to be able to help with the situation?
J: You know what’s going to help the situation is the vote. If people vote, we will then start working towards a better form of leadership. D: You mentioned in The Great Game that if we want to improve the economy then businesses have to create jobs.
J: It’s definitely business’ responsibility, not government. There’s no way I believe the government creates jobs. D: Given that unemployment is rising, how can companies create jobs?
J: Well, they’ve got to look at the cup as half full and not necessarily as half empty. I believe, and I have believed since the second quarter of ‘09 that we are in a recovery. Since the second quarter of ‘09 our employment has gone up over 200 people. I’ve added over 200 people because I believe the recovery will continue for the next eight years. I believe we are on a real economic boom right now. I am hiring people. I am spending money. I am all in. And we (as a country) need more people who have confidence. D: So do you think confidence is the key?
J: I think confidence is the key and I think confidence is the opportunity. All these guys are sitting there saying “oh, I don’t know Jack, I think there’s going to be a second dip” or “I don’t know about cap and trade” or “I don’t know about health care” or “I don’t know about financial reform” or “I don’t know about all these things and until I can figure them out I’m laying tight.” Okay, fine, you guys lay tight. Because a recovery is more difficult than a recession. Because when you recover, you’re trying to buy stuff from people who haven’t manned up, or you’re trying to buy stuff from vendors that you’ve established overseas that are now experiencing cost increases, problems with containers, late shipments because they’re so far away. When these guys who are looking at the cup as being half full decide to recover, they’ve still got a learning curve to go through. They’re going to have to bring people back, train people, take a person off a job so they can teach the person who’s coming in. The recovery is brutal. And a lot of businesses aren’t making the kind of investments needed to handle that. They’re milking the profits, they’re putting the money in the bank, and they’re waiting for a more confident period. D: So can a recovery cause businesses to need people but not be able to find them?
J: No, I think what will happen is what happened in 1970 when all the sudden 11
the recession ended and the market went crazy. Three things happen - first, the unemployment rate goes down. Second, businesses make their people work more hours. And the third thing is the lead time for parts goes out. When you have those three things, the next step that occurs is inflation. And then that has a tendency to throw water on the hot fire. So you’ve got to plan for how you’re going to get out of this recovery, and you have to work out your problems really early. If businesses decide, say around November, that there’s going to be gridlock, everybody then starts spending money, and then what you’re going to have is an economy that’s actually too hot, not as efficient, productivity will decrease, and then you’ll see high interest rates or high inflation. D: That makes sense.
J: It’s common sense. And that’s the hardest thing for people to understand. D: I think that’s the biggest thing I learned from your books, that reality is...
J: ...the hardest thing to understand. D: Exactly. So what do you think about the belief that job security is dead? Do you think it’s true to any extent?
J: I think there are some people who believe that. There’s a lot of people that have families and are really worried about what’s going to happen to their kids. And they totally understand that if we don’t create a sustainable business over a long period of time then they won’t have jobs. And then what are we really leaving (their kids)? I think there’s a lot of great people in this world who have great interests and great hearts that really understand what needs to be done and will do it. I just don’t think that we Americans who are running companies believe we can sustain them while people are going around on unemployment. D: So how do businesses solve that problem?
J: Hmmm... D: Because, as you stated, we can’t rely on the government to do it.
J: You know, I was with a Fortune 500 CEO last week and he told me, “Jack, I just came from the CEO roundtable, and we have now said to ourselves we’re going to take the gloves off. We’re tired of being pictured as the victims, we’re tired of them pulling our pants down and spanking us on the butt, and we’re now going to take our gloves off.” Since that time, I’ve watched most of the business shows, and I am seeing more and more CEOs getting in there and taking the gloves off, 12
and that’s what you need to do. That’s where you’re going to start seeing the leadership. When they were taking these guys into Congress and trotting them around like caged criminals... come on, you know darn well that if you take the Bank of America guy, beat the hell out of him, and embarrass him in from of everyone in the world, he does nothing but go back to North Carolina, pull his boys together, and say “we’ll screw these guys right to the ground.” This is a very, very lousy thing to say but there’s an old statement in Ireland that says if you grab a person by the balls all you get is a handful of piss. And that is what’s going on. So now you’re going to see the businesspeople take the gloves off. And what happens is the leadership doesn’t understand the compounding effect. They may have a serious intent to solve a problem, but what happens is they can never get at the problem. Let’s assume that they want to fix something, but by the time they fix it and add all these other things onto the fix, it detracts from the fix. If you look at financial reform, this bill that’s coming in that has 2,000 to 3,000 pages that still have to be written, if you saw the things that were tacked on to this... this is what the real fear is. The fear is they’re really just not going out there and trying to give everybody health care. They’re trying to close the insurance companies and pay the doctors at a specific level. They recognize that the US medical field is the highest price in the world, so they’d like to compress wages through public options. These are the things that drive people absolutely crazy. D: This clearly ties in to what you wrote in The Great Game, about how health care is one of the biggest problems we face and how you weren’t sure what the answer is. Do you feel you have a better idea of it now?
J: Well, I believe this: I am a CEO and I should be working at the solution. There is a problem and I am not giving that problem to somebody else. I know that in order to solve the health care problems of my people, that the first thing is if I have healthy people I don’t have health care bills. So rule #1 here is what are we doing to make certain that everybody is healthy? Rule #2 is am I getting the best from the providers I’m paying? So I sit on the board at a local hospital. I sit on the board at a local hospital to make sure we’re not doing any dumb things that are going to increase our costs and our expenses and we’re not putting capital into things we cannot cost-justify. I am getting off my ass and I am going into the hospital systems. And god bless them for at least putting a member on the board that’s part of the marketplace. I think one of the solutions we should have on all not-for-profits is that one third of the board members should be outside of the hospital. I say things to those doctors and I say things to the (hospital) administration that they’ve never heard before. D: Give me an example.
J: Well, they wanted to put a CyberKnife in town and we were trying to figure out 13
the cost of the CyberKnife and they were saying “well we need a cyberknife in order to get this doctor from Saint Louis, and we can’t get this doctor down here because they have equipment up there they don’t have down here.” And I said “fine, that will enhance the hospital, but how many cases are we going to have?” So we ran the cases and said “holy Christmas, those things are going to be forty to fifty thousand dollars a piece because there of the limited amount of people who will be using the CyberKnife.” D: So because of the limited number of people using it, you have to raise the cost per procedure.
J: Yeah, to be able to cost-justify a two-and-a-half million dollar piece of equipment. If you’ve only got forty people a year and the equipment is two-pointfive million - I think it was higher than that, it was like six million bucks - but then I think the programming fee was like $250,000 a year. You sit there and go “man, you don’t have any volume.” This was for brain aneurisms. And the CyberKnife could go in there, it was an invasive surgery, versus going in there by cutting the skull open. But on that side you may have a $20,000 bill. Manually, you’ve got $20,000 and you do it mechanically you’ve got forty to fifty thousand dollars. D: So it might be less invasive, but much more difficult for patients to pay for.
J: Right, so you what you do is you say “look, what we’ve got to do is wait until the technology advances to the point where we can treat more than just aneurisms.” D: And now you’re doing more procedures with the same equipment.
J: Which drives down the costs. D: So this isn’t something this hospital considered before?
J: Well, a lot of hospitals want to be on the cutting edge in terms of technology so they can attract the physicians, because there’s a severe shortage of them. You want your hospital to attract the best and the brightest, and those that are on the cutting edge, and you want to have the bragging rights and the marketing rights. You want to promote your hospital as if it’s... what’s in Rochester, Minnesota? D: Mayo Clinic.
J: Yeah, you want to be Mayo, right? D: Right. But not everybody can be Mayo. 14
J: Right, I agree. Well, those are the little things, like safety procedures. Manufacturing has been developing safety statistics, analysis, processes, and it’s interesting to see hospitals come in and they want to know how we PTAP an engine. And those are preproduction models where we lay everything out to make certain that everything is fine before a situation occurs. We look at this thing from a totally different perspective before we put it into production because of the quality implications later on. The hospitals are looking at more manufacturing procedures. They’re looking at putting incentive programs on primary care physicians in terms of how many people they can see, because the more people they can see the more overhead they can reduce in terms of the clinics. D: So if hospitals are getting smarter along those lines, what do you think this health care reform bill is going to do affect them? Is it going to affect them positively?
J: No. I don’t think it will affect them positively. I think the quality is going to get worse, I think the shortages are going to increase, and I think what will happen is there will be a very elite society where someone’s going to be a doctor and he’ll call me and say “Jack, I will be your doctor but you’re going to have to pay me $5,000 a year up front. And I will then give you two or three visits a year.” I think you’re going to see another market evolve. I think what will happen is you’ll have rogue hospitals and physicians. People will go after making as much money as possible on the marketplace, and then the government will come in and slam it again. D: Well like you said (in your book), “there’s no more expensive way to solve a problem than with bureaucracy.”
J: Well they don’t understand what a regulation is. Like this regulatory reform bill they came in with. I was in a restaurant the other day and a banker came in and I asked “so what’s the impact going to be?” And he said, “the impact is there’s going to be so much overhead, relative to the checks and balances, that you’re going to have to put that overhead somewhere, right? So it’s either going to go to the customer or we’re just going to quit making very small loans because they’re really not worth the paperwork to get done.” He said “those five to twenty-five thousand dollar loans, no bank will want to do anymore.” People don’t see the compounding affect, you know? These reforms trickle down. Banks will still do the big loans, because they can amortize all the added overhead costs. But all the sudden you’re going to have small business people who can’t afford that allocation and they won’t get loans. And yet at the same time we’re trying to figure out how to spur small businesses. 15
D: So what’s the solution there? Small businesses will just finance everything themselves?
J: The small businesses will have to go to angel investors, they’ll have to get private equity, they’ll have to go to their parents... They’ll be driven further into the underground. D: So will VC become a bigger industry as a result of all this?
J: I think you’re going to have institutions that don’t take deposits making a lot of loans, and you may have a whole new system out there. If there’s that much money getting very little interest in those institutions, why wouldn’t you have more of those goofy savings and loans? And instead of having less drive-by payday loan places which are milking people, you’re going to have more. D: Wow, that’s scary to imagine one of them on every street corner. They’re everywhere already.
J: Well, you put money in a safe bank you get a quarter of a percent, right? These guys are making 18% a month. It’s tragic, but where are people going to go? D: And you think this will increase?
J: I do. If you think about the private equity market, it was basically set up on a 22% annual return at one particular point in time. You know equity is really expensive, right? And you go to equity if you can’t get debt. Debt is supposed to handle growth and profits and equity is supposed to handle growth and losses. Typically what happens, if a company loses money they want private equity money in there to be able to cover losses, they don’t want bank money to cover the losses. So you get a higher return on you’re equity because you get more risk. Well what will happen if you can’t get any debt from the banks? You’re just going to go into higher forms of private equity and, this may be going out on a limb, but you’ll be borrowing from those payday loans and those payday loans are backed by private investors that are looking for the same types of returns you’d get if you owned stock in the company. D: I don’t think you’re going out on a very long limb with that one.
J: Yeah, I know... D: So anything else you’d like to say to someone striking out on their own, either by choice or because they can’t find a job? What kind of parting advice would you give them? 16
J: Well I’d say they’re the real heroes. These are the risk-takers. I really think that people want to make a difference, and I’ve never stopped believing in the fact that by starting a company and creating a job that it’s a very fulfilling and rewarding act. There’s that Senator or Congressman from Indiana, who is leaving the Democratic party and going back home to Indiana because he said “if I create one job back in Indiana it’s more than the one job I’ve created here, in all the years I’ve been in Washington, DC.” The entrepreneurs are the revenue-producing product. Without the entrepreneurs there is no society. Government doesn’t create revenues. The guy or girl that starts the business is the one that creates society. Without those people creating small businesses and succeeding in those businesses there would be no society. There would be no funds for regulation or education or safety. People have to realize that these businesspeople are truly the revenue producers of our society. They’ve got to feel like they’re the most important people in the world! And somebody’s got to make them feel that important. D: Well, I’ll try to do my part.
J: I think you will. I read some of your stuff. I think some of your stuff is really good. D: Thank you very much! I think one of the best ways to figure it out is to talk to people like you who know their shit and can talk on a level that puts people in a realistic mindset.
J: The only way is to talk about it and write about it. And the more you talk about it the more you realize what you don’t know. I’m a big advocate of the idea that if you really want to learn, then teach. D: I agree. That’s how you learn what you don’t know. Otherwise you don’t know what you don’t know, and that’s a problem.
J: Well what you’ve got to do is play the crowd. You have to realize every time you go out and write something or say something there’s somebody in that crowd waiting to nail you. Then what you do is learn from that person who’s trying to nail you. You learn something every time. D: Something I learned from your books is to recognize my fallibility even if I think I’m right.
J: The whole idea of communication is fascinating. You can put thirty people in a classroom and you can start with the first person and whisper in their ear “tell that last person that they did a good job.” And after it’s been whispered to thirty 17
people it comes out totally contorted. But if you whisper in someone’s ear “one plus one is two” it’s amazing how many times it gets repeated accurately.
Credits and Rights Introduction, commentary, and interview questions copyright © Dan Bergevin 2010. Interview responses and Jack Stack photo copyright © The Great Game of Business, Inc. Used by permission. Published by Capitalized Living Post Office Box 2172, Layton, Utah, 84041
Interview with Jack Stack, President of SRC and author of The Great Game of Business