Jack Stack, President and CEO of SRC Holdings Corp talks about what it means to make bold moves in business. He shares advice on how being more creative in business and deciding which paths to take all while making sure your employees not only understand the decisions being made but that they're part of the process.
Episode with guest: Jack Stack
President and CEO of SRC Holdings
(This episode was recorded in May of 2020.)
Welcome to the "Change the Game" podcast, where we share stories of open-book management and highlight capitalism at its best. Thank you for tuning in to the seventh episode of the "Change the Game" podcast with special guest Jack Stack. This episode was recorded during the COVID 19 pandemic crisis in May 2020. Here's your hosts, Rich Armstrong and Steve Baker.
Steve Baker 0:23
Hey everybody, it's Steve Baker. It's great to have everybody on board today. We're very excited about today's show. And this is our open book community huddle where we connect and discuss powerful ideas and share tons of useful stuff. Hello, Rich Armstrong, my co-host and president of the Great Game, how are you?
Rich Armstrong 0:41
Good, good, thanks. How are you?
Steve Baker 0:43
Good, really good. Glad It's Friday. But, man, it's amazing how much work is getting done remotely. I'm so proud of our team. It's great. Now let's get serious. So Charlotte Eckley, our head of operations and longtime SRC and Great Game person here on our team, she noticed that there was a quote in Dennis Sheppard's office. So Dennis, if you don't know who he is, he's Jack's right hand, he's our CFO and in-house counsel. You know, I really respect this guy. But we wanted to share this with you. It's a Margaret Mead quote, that really, I think speaks to what we're trying to do with the Great Game. And that is, "Never doubt that a small group of thoughtful, committed people can change the world. Indeed, it's the only thing that ever has." And I just love that thing. I'll probably bring it up at the end as well. But I just wanted to share that with everybody. What a great quote: "Never doubt that a small group of thoughtful committed people can change the world. Indeed, it's the only thing that ever has." Man, that's good. Inspiring stuff. So we're gonna jump right into things because I think we're gonna need the extra time with Jack. What do you think, Rich? Should we just jump in?
Rich Armstrong 1:51
Yes, let's do it.
Steve Baker 1:53
Awesome. So it's Jack Stack, guys. It's our very special guest. He's our founder, our CEO, he hates long introductions. So I'm going to keep this medium-sized. Inc magazine has called him one of the smartest strategists in America. They dubbed him the father of open-book management. He's a prolific author, who in addition to writing the foreword to our new book, “Get in the Game,” has also written "The Great Game of Business" with Bo Burlingham, and also "A Stake in the Outcome" with Bo. And his most recent book, with Darren Dahl, is "Change the Game: Saving the American Dream by Closing the Gap Between the Haves and the Have-Nots." Look at those books, baby. I love it.
Rich Armstrong 2:35
Hey, where's your book, Steve? You have "Change the Game"?
Steve Baker 2:37
Well actually, Rich, I gave that one to you, because you haven't read it yet. Jack, welcome. How are you doing, Jack?
Jack Stack 2:47
I'm doing great. How are you guys doing?
Steve Baker 2:48
That is great to hear. Yeah, we're doing really good, really good. So Jack, this week we kind of took our theme from the blog that you wrote with Darren Dahl entitled "Bold moves to reinvent your company for the new normal," which is, if you haven't read it, guys, you need to read it. Could you start by defining for us what a bold move is?
Jack Stack 3:09
We always encourage everybody to have a long-term plan. Some think it's 12 months, some think it's five years, some think it's 10 years. We work with 10 year periods of time. We rapidly came to the close of our 10th year and we had a significant objective that we wanted to hit. But we knew that at the end of every 10 years we hit a recession, so it's in a recession where you really want to be able to kind of redo things and reinvent and fix. You get a real chance for a do-over every 10 years during a downturn, you really get a chance to look at things you didn't look at or didn't have the courage to look at. And so our plan was rudely interrupted with this virus.
But by the same token, we had in the eighth, ninth and 10th year of our 10 year plan, made ourselves a promise that that would be a period of time we'd fix things. You want to fix things in a downturn. 2017, 2018 and 2019 were really good years; they were barn-burners, and we spent a lot of time servicing the customer. But we had things we had to fix. Retention was a challenge and became a critical number. We had to fix facilities, we had to fix wages, we had to fix time of work--we had to be careful in terms of overtime. And we put in a lot of training, a tremendous amount of training on our way to fixing things. So when the downturn came, we would then do the final touches in terms of the changes that we would make and then we would restart ourselves over a 10 year period of time. That's always been the game, all right? That's our game and that's how we play it. And again, as I said before, we got in the Black Swan. And so the Black Swan is a tendency to reevaluate where you're at. So we were at a point where the things that we really wanted to finalize in terms of the fixes, we fell a little bit short because we had to go into another program. And the program was that with the unexpected surprises, we had to figure out the immediate safety and survival of the people and the immediate safety and survival of our cash position--survival in terms of what lines of credit do we have. We went into a three-stage period where one, is collect everything you have, find out what your assets are, and see how long you can stretch them, or at least begin to have a bank account where you then can start talking to people in terms of their needs and their wants and their desires in terms of tapping that source of cash. So the first phase was completed in our company within the last six weeks. We really worked hard in terms of safety, health care, preventative maintenance. And we are just so blessed right now to say that because of the responsibility that people take upon themselves, we haven not had one incident of 1800 people in this particular period of time. We also then laid out the money; where was the money at? And then we shared with everybody where the money was at. So that was the first step in the crisis.
The second step then is, okay, if it is going to be all brand new, and you're basically starting from scratch again, and you've got a blank sheet of paper, what's it going to look like? What is the new normal? What is the new normal going to be? And then we use, obviously, the forecasting techniques that we write often about, and we go through a data-crunching process and our people then lay out a plan for the balance of the year. So we want to get ourselves into a situation where we immediately can understand what is going to be happening in terms of our business. And I will tell you this: we are forecasting the balance of the year to be about a 25 percent difference than the previous year. Okay? That's from all the inputs that we have in the organization.
Once you normalize, and you've got to come to the reality that that's going to be reality for a while, the third step is the bold-move step. I mean, my God, we got through this recession; the thing I like about the bold moves is that when you go from survival to a norm to a future, then you’ve got people looking up. You've got them looking at something really that they want to do, that they want to get to, instead of moping around feeling, “Woe is me, I'm screwed, there's nothing I can do about it.” You've got to have mechanisms to pry that kind of attitude out of people in order to believe that there is an opportunity and then start the wheel, grease the wheel, get it moving, and then ultimately, you're going to find yourself on the other side of the crisis.
We just finished the new normal, like I said before, where we're facing the realization that we're going to have a really tough second quarter, we think we're going to have a spike in the third, and we think the fourth quarter is going to be really strong. And the reason we do is for valid reasons. One is that we will get better, we will figure out how to live with starting all over again and opening up all over again. We'll make a lot of mistakes at the very beginning, but we'll fix the mistakes that we have. But that's what happens when you start all over again; you walk, you don't necessarily run. You've very cautious. But over time, we will improve, we will figure out ways of adding capacities to restaurants, or how to be able to allow people to come in and have additional square footage and still live with the distancing rules. We will figure things out, and it'll take us some time to be able to get there.
But in that period of time, this is where we're challenging our people: Now that I know all this, what are your bold moves? What are your dreams? Bold moves are things you really wanted to get at but you never got at, you're never really honest about it, you didn't have the courage to be able to fix it. It could be a bad customer; it could be a customer that for a long period of time you've been financing, you've been working, you've got shrinking margins. And you know, when you're going to start all over again, would you really, really start all over again with something that's been such a pain in the ass for such a long period of time? And I know customers for life, but then in the last 10 years, we have a tendency that so many of our businesses are being financed by the larger corporations and larger corporations are taking advantage of the long lead times in terms of the cash cycles. And you know, there are just really cool things that you can do in order to be able to have bold moves. Like right now, there's a lot of levels of distribution that we hadn't gone down in the past that there's no reason for us now to not broaden our distribution. There's no reason that we can't be talking to some of our suppliers to develop joint ventures with. Instead of trying to figure out how they get a markup on a markup on a markup, maybe we get together and we joint-venture on how we can utilize cash better. Maybe there are strategic deals that we can make in order to be able to use our receivables that if somebody is in trouble, maybe take a piece of equity in terms of the deal, okay? There's so many buildings, for instance, that are going to be reducing their income relative to rents, it's going to go on the market for sale and the real estate market is going to have a tendency to drop. This is a time that you would want to buy because prices have been so high in the past. And I do realize that you have to have the liquidity, but let me just tell you this: you don't have to have the amount of cash this time going forward as you would have in the past five years, because the values are going to be driven down to such a case that anybody who can come in with something strategic or something with a bold move, could get in at a really low price.
So if you have this idea that you've wanted to be able to present or you've presented in the past that didn't go over very well but you still have a great belief in it, now is the greatest time to dust it off, present it, go after it. And don't let money stop you. There are all different ways of making deals out there, where it doesn't necessarily mean that there's going to be a significant investment in terms of cash. Two organizations that compete against each other that fight competitively and keep their margins down as a result of their own competition could get together and maybe collectively increase the price. And then split the margins and have better cash flow, better balance sheets, and better futures in terms of the bold moves that you would like to be able to do. There are people, for instance, who may have had a price increase scheduled and think, “Well, this is the worst time in the world to have a price increase.” When is the best time in the world to have a price increase? There is never a good time to have a reason to increase your prices. If you're sitting there and you're cutting your costs and you're giving it away, eventually you're going to have to sit there and increase your prices anyway, right? I mean, increasing your prices and having a value proposition that you're now selling for an undervalue is insane. Because if, in fact, you have something of significant value, sooner or later, in order to be in business over a period of time, you're going to have to be able to price it at a reasonable level.
So bold moves right now is just a matter of sitting there saying, Let's dream. How would I make this company perfect? What could I do right now in order to be able to trim it and fix it and make it a really nice place to work and contribute to the community? And people aren't trying to figure out how to put the shine on their own companies right now. This is where companies will differentiate themselves. Those companies that will look at the brighter side of this thing--and you do that again by figuring your liquidity out, communicating when you think your best-case scenario is on a forecast, and then push it away and say, “Okay, now what else can I do? Tap my people, talk to my people.” One of the things that we did in the first two stages is we made sure everybody in our organization knew exactly where all the money was, even to the point of what bank accounts we had the money in, and also our lines of credit. So the banks and institutions that we had, we taught them in terms of how far we can go in terms of leveraging, we gave them the covenants in terms of why earnings are so important in order to be able to have a grasp at additional borrowing, because we are a company that has no access to any of the government loans. So we're kind of too big to be small and too small to be big. And so we fall right in the middle. And so the bottom line is that we're on our own, but when we realize that we're on our own and we're all in this together, it's easy to be able to pull through this crisis. That's a long explanation of what a bold move is, but if anybody has any questions on how to be specific, I can be as specific as you would like it to be, regardless of what service or industry that you're in.
Rich Armstrong 14:02
Jack, when you talk about bold moves, it makes me think that some things that you've shared with us too, is that those bold moves may be market moves, business model moves, but there's probably some bold moves that companies can make as well, like in terms of more transparency. What are some bold moves they can make in terms of really getting their people involved in creating those bold moves and executing on those bold moves? Can you talk a bit about that?
Jack Stack 14:28
We believe transparency is strength. We believe that the open book is the way and works best in a downtime. And what's kind of sad is that it really takes a crisis for people to become more transparent. The last four recessions that I've been through, it's amazing when people just throw it out on the table said, "Look, this is all I got; this is where it's at." And then to watch the behavior and the cultural changes that occur as a result of just being totally honest with everybody in terms of what it is. You know, this is an interesting period of time because there's no reason to be embarrassed. I mean, there was tremendous embarrassment, if you weren't really doing well, or you were struggling and not too many realized that maybe 70 percent of small businesses have already been tapped out. They've been growing the companies at such phenomenal rates, and they've been able to fuel that by all levels of capital, whether it's family or angels or bank loans. And they have now scaled to the point where they can't scale it further, because they're living with what they took on. And these are great companies, okay, these are people that have done exactly all the right things. But by the same token, they're the ones that maybe had a business model that wasn't very heavy on inventories, and very light on cash. These are some of the things that transparently we teach our people.
A lot of people have no idea what the cost of anything is. They don't know the cost of a toy that you're buying for a toy shop, or they don't have any idea of a light bill. Now all these things become real. Now we've got a crisis, so we've got to allocate: how do we pay the landlord? How are we going to pay the food vendors? How are we going to be able to pay the electricity? And then this language occurs, when it really should be occurring all the time because that's how you build sustainability and strength, when you open up the books, and then everybody's asking questions. And then if you don't have an answer to the question, you ask the people to give you the answer. And that's when I believe you get entrepreneurship, innovation, creativity. I really think that what I like about the game that we play is that we really get input, we get new ideas, we get new products, we get new services, and we get bold moves. We get tremendously great ideas, and I can tell you since we've now given everybody an idea of just how much cash is available through inventory and debt, that they feel a little bit more confident in terms of taking risk--and you do want some risk-taking in a downtime because the prices are so low. I think you have more confidence when you're transparent. I think you teach more when you're the teacher. Not everybody's going to know everything there is to know about a business, but you learn more about a business by just talking about the business itself and all the challenges that a business has and the sources and resources of funds inside of it. That's what's helped us and that's why we're very blessed to be where we're at today.
Rich Armstrong 17:40
I think an example of that is our high-involvement planning process. And this last week, you had a lot of the various teams from SRC business units provide a detailed SWOT presentation based on their three month and 12 month financial projections, their revised projections, sort of an interim high involvement planning process. How do you think that went?
Jack Stack 18:06
Well, I don't know how it went for you guys but it really went well for me. I've been trying to get you guys for the last three and a half years to fix things. And you did it at kind of a slow pace, and I was always kind of frustrated. But what happened once you put that second-quarter plan together, once you put the third- and fourth-quarter plans together, then I said, Okay, go back, and now tell me what your strengths, weaknesses, opportunities and threats were on your own plans. I was really impressed by your threats and opportunities--they were all the things I wanted you to fix two and a half years ago. So I got the greatest sense of satisfaction watching you guys put together all your worries and the things that you needed to fix, and then I could end up hitting their targets. Okay, you know what the next meeting is? Tell me how you're going to turn your threats and your weaknesses into strengths and opportunities. That was all I had to say. It was perfect, okay? The last 30 percent of what I wanted this company to get to in terms of fixing things came out at that particular moment.
Things happen faster in a crisis, no question about it. I heard the president of the United States say we lent out more money in the last 14 days than we did in 14 years. The speed of what you move in terms of a crisis is absolutely incredible. And so what we were asking you guys to do were the final touches in terms of fixing your organization, came in that one little SWOT analysis.
Steve Baker 19:34
Jack, I'm going to throw in some questions that are coming in from the chat box here. Larry asks, "When starting a new company that may need to raise investment, would open-book finances be seen as a liability by investors who may value secrecy?" Maybe open book but private to employees is the right balance versus recording meetings on YouTube is another example, What do you think about that?
Jack Stack 19:57
A lot of businesses that we've been in--and we've been in somewhere between 60 and 65 different businesses and dealing with all kinds of Dante's Inferno when it comes to lending--the only thing that I've really seen as being a detriment is that if you don't know, okay, that is what you know. And you know more by having dialogue, having conversations. You know about your organization, you eliminate unexpected surprises. And in the lending world, the worst thing is an unexpected surprise. That is the worst thing you could ever do: go and tell a lending officer or private equity that you're going to do something and you don't do it. So I think in order to make absolutely certain that you can have a good forecast, you can set a good standard, you have to get buy-in from everybody in your organization. It's going to come down to the covenants and the commitments that you're going to make relative to the loan; it's never been about the secrecy, okay? And it never had anything to do with being ashamed or being confidential in terms of how much money has been in a deal. The strength of the deal is accuracy. I mean, you can go fail; banks will work with you, private equity will work with you, if you tell them in advance what is happening. There's all kinds of ways of deferring payments and spreading things out and changing covenants and changing things if you are in control of your business. And I don't really know how you can be able to work in that kind of environment without having your people knowing and betting on them and making absolutely certain that they truly understand their own individual responsibilities in terms of making the goals. It's the people in your organization who are going to really make the difference, and I don't know how they're going to do it if you're playing in the secret world.
Steve Baker 21:51
Yeah. Communication means a better relationship.
Jack Stack 21:54
To me, communication's got to be over and over and over again. And I think if you want to change a habit or you want to change a culture, you want a behavioral change--it really just comes down to repetition, repetition. And the whole idea is just not to make it boring. Make repetition exciting. And there's probably nothing more exciting than what happens inside of a business. If, in fact, you decide that you want to make it exciting.
Steve Baker 22:19
Choice, and it takes courage to get over our own kind of barriers that we put up.
Jack Stack 22:24
Once you get over that wall, you can't believe how happy everybody is.
Steve Baker 22:30
We've got another question. Here's one from James. It says, "We're looking for a bold move to find new customers. We're a kitchen remodeling company that doesn't have the benefit of having very many repeat customers. Large number of our leads come from home shows and different public events where we speak to people about getting an estimate." So I see how the question is starting to develop here: we're trying to leverage our online presence as much as possible, as well as referrals, but we're looking for other avenues to make up for those lost leads. Any suggestions on a bold move?
Jack Stack 23:02
Yeah, in fact, I was with a customer yesterday and we had a similar discussion. Why not have an additional service that differentiates you from everybody else inside the marketplace? I mean, why wouldn't you sell yourself as consultants? Why wouldn't you sell yourself as specialists? You know, why wouldn't you start to develop a reputation? And you really got to talk to these people, because they really know what they're talking about. Why don't you position yourself in such a way that even before people have an idea in terms of what they want to remodel that you're the top of mind? You are the ones that maybe want to be a little bit classier or fancier; you have to figure out how to get your foot in the door? It's just not the deliverable you have, but it's the quality of the people, the quality of information, the quality of the company, the quality of the brand. I would look for different avenues in terms of maybe I wouldn't necessarily compete in a business where it was entirely based on price; I would figure out what am I going to differentiate for my marketplace and then I would be concentrating on that differential. Because that's where the margins are going to be. The margins are going to be in you having something extra and having something special.
And believe me: you don't have to go very far. All you have to do is sit down there and be honest with yourself. What are our strengths? What are our weaknesses? You've got to capitalize on your strengths. I mean, if your knowledge skill is really, really high in that type of business, man, I tell you people will buy that knowledge, they'll buy that confidence. And maybe it's these quick-hit videos. Maybe you figure out ways, if you can't be knocking on any doors or going to any trade shows, to sit there and talk through different projects that you might have. Go into your histories, build cases. And I'd set a goal. Maybe I'd sit there and figure out how much of my business could be in the project management aspect of this thing. And then price it in such a way so I could cover any defaults that I might have just in the commodities and the applications and the installments. But I would definitely look at my business and say, okay, maybe this is the time to create a spin off, maybe this is a time to do something that I always wanted to do, just get a tax ID and call it a different name or a different business. It doesn't take much to start a different business. Everybody thinks that you’ve got to put it in the business that you had to maximize your overhead. I always like to break them down, and then I like to find an individual that really wants to make a run. And then you give it to the people and you give them the goals and you give them the responsibilities and if you want 10 to 15 percent of your businesses coming from project management or project consultant or whatever you decide is your ultimate skill set, create a division. Create another opportunity. And obviously, find the guys who like to win.
Rich Armstrong 26:06
Can you share with us is what you think the US economy is going to be in the next few years? Do you see the economy quickly coming out of the crisis in 2020? Or do you see us sliding into recession in 2021, and beyond?
Jack Stack 26:19
My forecast has not changed. It hasn't changed since '09. I'll do short term: second quarter will be really rough. And that's from learning experience on the openings. A lot of controversy on the openings, a lot of mixed formulas on the openings. But eventually, look, there's a real negative side in terms of not getting this economy rolling and I've seen it too many times. Right now our mental health center here is at capacity and overwhelmed with people who are depressed or scared or afraid or have anxieties and all those things that go along with it. And then you see the food lines and everything of this nature. So there is a real, real importance, because the other side of it is that the consequences are horrible, right? So we really got to get going.
I think it'll be August, again, until we get the learning curve smoothed out. I also think that there will be a jump. Personally, I really think people aren't spending any money. I mean, I think more people are saving money now than they ever have. So there's kind of a pent-up demand of cash. And I think that the government has provided unemployment compensations in order to be able to hold our breath through July. But I also think demand will come back. And I think it'll start coming back as early as August. I think again, you're gonna have a really, really strong fourth quarter. I mean, we rushed to things, whether it's toilet paper or pork or entertainment or beaches; we're hungry.
Will there be some significant changes as a result to the industries going forward? Yeah. And that's one of the things that's really going to be industry-specific, market specific. When you think about mass transportation: are people going to be buying more cars now and not getting on trains and buses because you can't get the distancing? Will that change the whole automobile market? Will they come back and eliminate clunkers? You really have to be able to do a lot of data crunching in terms of trying to figure out what '21, '22, '23 is. We do a pretty good job of that by our high-involvement planning processes and bringing in all the current data. I think that you will see a stabilization in '21, '22 and '23.
My fear, and this is the biggest fear that I have, is we're slowly, slowly, slowly being taken over by government. Okay, we're slowly being taken over just by the fact that they are providing so much into the business. I've always been afraid that we needed a separation between the private sector and the public sector. And I think the public sector is going to be having more and more restrictions in terms of businesses and not less. So that to me is one of the things that we have to deal with in that particular point in time in order to be able to get beyond stabilization. I think we're stable; in '21, '22, '23, a lot's going to have to do with just how much is the free market going to be free? And then how much is it going to be really dictated by policies and procedures? My fear is that the people who'll be dictating the policy and procedures have no idea the collateral damages that it has on businesses. I mean, we can see a period when we want to do really good things, but they haven't really thought them through. Like they didn't really talk to a lot of business people. The extra $600 that maybe somebody doesn't really need or pays more than what they really have. To me, there's a fear that government is ultimately going to be taking over business. And if that happens, then I think we'll be back to this flat line. I don't think we'll see the innovation and the creativity.
What was fascinating in the 70s is all the small businesses that started as a result of the downsizing of the Fortune 500 companies. There were people who left those fortune 500 companies, and they had brilliant ideas, they were brilliant workers who were trained really well, and they got laid off, and they got shut down. Unemployment hit 12 percent by 1983. But yet, these entrepreneurs wanted to start their own businesses. That was the beginning of the entrepreneurial revolution. So I just hope that [another] entrepreneurial revolution occurs, and it has that fire in the belly. Unfortunately, there's gonna be some scrap, there's gonna be some obsolescence, there's gonna be some losses, but we really got to be able to figure out how to fire it up. I just don't want all of us to be in big-box companies.
I was invited to go to Australia, when Australia was just owned by big companies. You couldn't finance a receivable, you couldn't finance an inventory, because they didn't address any small businesses in Australia. Then they had a world strike, and they began to realize how tied they were to the economy and if they had a recession, and the economy is all big business, there was no elasticity to pick up the people. And so we worked with them really hard to be able to open up their economy, understanding that the strength of the economy was the ability of all these great entrepreneurs, these contributors.That's really been our strength in terms of our country. We get our unpleasant surprises, but there's this fierce competition that we have in everyone, I just don't want us to see that loss of competition. I don't want us to be depressed by things that are just absolutely ridiculous, and rules and regulations that really hurt people more than they do to protect them. I think sometimes our society feels that it's their responsibility to take care of us. And I really have a hard time thinking, "Well thank you for protecting me from myself," as if I can't protect myself. So businesspeople have to stand up. I mean, you really have to stand up, we have to quit taking shots, and we have to quit having the media tell us about how bad we really are and we just go into a cubby hole, and we really don't say, "Screw you." And we’ve got to defend ourselves. So I think a lot is going to happen in '21, '22, '23 amongst our communities. If our community starts standing up and saying, "Hey, without revenue, there's no society." You know, get it, say it again: without business, there is no society. And I don't know how they're gonna try to figure out how to have a society without having revenue-producing people.
Rich Armstrong 33:07
I mean, is there anything specific that this community of businesses we're talking to right now can do?
Jack Stack 33:14
Oh, I mean, we can enhance our business education, come on. I mean, I think our colleges have tried to put out entrepreneurial programs, I think they've tried to put innovation centers on. I think we've pumped up people with a lot of hope, and I just think that this whole element of financial literacy has been suffering for such a long period of time. And I think as a result of being so economically illiterate, we're now taking on more debt, not less debt. Do we really understand what debt is? We create a lot of false hopes in terms of startups and businesses, because we don't teach them balance sheets and income statements and cash flow statements. And we don't teach him that you’ve got to listen to what these things tell you, because what they tell you is what you should be doing.
And everybody thinks that because we got an internet or because we got a Google account, we can go out there and we can start a business. And then sooner or later we tap out our parents, we tap out our credit cards, we tap out our commercial loans, and then we go to private equity. And you know, this is not a good social model. The model is that you live within your means, you develop the earnings, which is just telling people how efficiently you're using cash. You figure out what your cash is, and then you make the necessary investments based on the people that you have, but you'd never outrun or out-gun your resources. And we've just created an opportunity here that I think is suicidal, that we're just told everybody can succeed. Go out there and try it; be a hero.
I'm as guilty as anybody. I used to go to the Inc 500 meetings and we were praising the fastest-growing companies in America and I knew personally that 90 percent of them out there couldn't meet payroll on a Monday. And we've lived on that edge. And I think whenever you have a no-brainer economy like we had--a no-brainer economy is anything greater than 1.5 percent--anytime you have that, anybody can make it for a period of time. And they're really not focusing in terms of what's going to happen when you go into a downturn. You haven't been really good stewards of your business; you've maybe taken risks that you shouldn't take, maybe there's just a little bit too much optimism in there. And I always thought that financials were one of the things that just brought you down to earth. And if you had the guts and the courage to listen to what the ratios were telling you, that's how you're going to build sustainability over a long period of time. So then we thought if we taught more people that, our people then would become good businesspeople, they would go home, they would run good homes, they would be out in their communities. And we would at least develop some roots in terms of sustaining that concept that business can be good, business can do good. And, you know, there is a brighter side of capitalism. That's what we try to do.
Steve Baker 36:07
That's a big takeaway: the brighter side of capitalism. People misunderstand capitalism so much. I think I'm gonna grab some more questions from the chat box if that's okay. So Jack, this one's from Steve. He says, "We've got PPP, which buffers nicely. The next several months, how do we maintain a sense of urgency across the team?" Very good question.
Jack Stack 36:32
Again, Steve, my recommendation is I've never seen more sense of urgency than when you throw all the cash in the middle of the gymnasium, and then all of a sudden you have everybody in the stands come down and take what they think they need. And by the time everybody takes out what they need, there's nothing left. And that's when people really get a point. That's when they get a sense of urgency there. You have people standing in line wanting to be able to get something out of what you dropped off in the gym that isn't there. Or you're going to have to have a banker that's hiding in the stands that's going to dump a wheelbarrow of cash out there in order for you to survive. I think you have to create the reality, and reality is the toughest thing to teach somebody. It's when you're out, you're out.
One of the things, Steve, I like to do when we have these crises--and our guys know that around here--is I like to get rid of the anxiety and that fear real fast by saying, "Okay guys, the worst that can happen is the bank's going to take your business away, so let's work from there." It's like you take all the pressure out of the room. Go to your worst case scenario. Go to the point where the banker's gonna take the keys of the business. You're going to lose the business. Go to your worst nightmare and get it over with.Then bring your team together and say, "Okay, what do we need to do in order to make certain that we just don't have this nightmare? What can we do right now? Can we cut spending down? Can we stretch it out a little bit longer? Can we go online? Can we go curbside? Can we create deliveries? Can we create new distribution channels? Can we broaden our coverage? All of us can become salespeople, but I think people become salespeople only when they're working together to be able to create a great company. I don't think you can get that kind of buy-in if everybody's in a silo or everybody's got accountabilities and responsibilities, and they don't add up to anything. I think these are the times when you lay out on the table where everybody learns the most, the quickest, the fastest. And this is the time where you get the greatest ideas. Don't miss that opportunity.
Steve Baker 38:42
This is sort of a related question from Nitesh. "Jack, with SRC being in manufacturing, and markets in the growth phase, how does the organization plan layoffs or salary reductions?" Any new thoughts around this?
Jack Stack 38:58
You have a choice: you can go command and control, or you can try to get them to really volunteer what they think they can do. And your first reaction is normally command and control. You're going to really go out there and dictate to everybody, and then you're going to wonder, Well, why isn’t anybody participating? And they're really not participating because you really took the roles and you thought it was your responsibility. It works much better when you can figure out how to develop the wisdom of the crowd, the consensus of the people, in terms of the challenges and the opportunities and the ideas and the routes and just even the workloads in terms of what you may be shifting and concentrating on. But what happens then is that you start prioritizing, what's the difference between your needs and your wants, okay? And what you really want to do is start to get priorities in order to be able to get the results that you want. And the only way you can do that is to be able to... you don't know everything that's happening inside your organization. You get the ideas [from within].
I saw a toy store that was completely shut down. But they just figured out that Easter was going to be their Christmas, and came up with the idea that, '”Hey, people aren't going out there and getting Easter baskets, so what if we went out there and bought 12 items, kept everybody away from having to go to the stores, and we would use some of our vendors, we would then package them and we'd send them out? And they were able to get through a month by just one idea in terms of Easter basket. Easter basket orders went crazy. They hit a niche in the marketplace. Stay in tune with the needs of the market that you're in. Find out the pain points; whenever there's a pain point, there's an opportunity, there's a new idea. Challenge your team for ideas. And I'll tell you one thing: once you crack something like this open, it's kind of invigorating, it's exciting... I got all these good ideas. I mean, flush them out, get them out on the table, and then gamble on a couple. And gamble on where you can afford to lose.
And this is what's critical. One of the things we've always set aside was money to take on risk, money to be able to put into wild and crazy ideas. And we put a lot of money in wild and crazy ideas, but it was money that we could afford to lose. And it really doesn't matter whether it's $50 or $500 or $50,000; if you start somewhere, if you make that one risk investment, you learn everything there is regardless how big or small it is. And you won't make the same mistake the second time, and you'll learn by the second time or third time. But then comes that point of diversification, the point of being able to take people's ideas from the floor and transform them into revenue producing products, because that's what we are. In our businesses today, the minute we have a new idea, we better be working on the next. Because if you're going to go and you're gonna get a customer, and you're gonna get a sale, and you're gonna be really thrilled with that order, from that point on that marketplace is going to want you to reduce costs, they're gonna want more than you ever wanted in your entire life. And the way to be able to cover it over a long period of time is you’ve got to have another one ready, okay? You got to keep inventing one right after another after another.
Rich Armstrong 42:54
I just wanted to point this out, Jack, because we can answer pretty quickly. But it shows a little bit of the international reach we have. This is Mark from Africa, that's actually implementing GGOB and OBM in African communities living in high-density wildlife areas to help create sustainable businesses to support and conserve local forests, elephants, lions, zebras, and wildlife. So quite the business. He says he's new to the Great Game of Business, and he's just looking for the best way to actually get help in terms of implementation of these practices internationally. And I just wanted to point out that this is one of the challenges that a lot of international folks can't necessarily come in and work with our coaches or work with their workshops, but we are launching a new community site in June that gives all access to a lot of information, a lot of resources that we can help them. So Mark, just write that down, put that on your calendar, that will be in June. And I think that's a great way for you to incorporate yourself into the community and maybe help you with some implementation of this.
Jack Stack 44:08
Mark, I noticed that you're living in Zambia. We did a two-year term down in Zambia. The World Bank asked us to go in there and bring the Great Game of Business into Zambia. And we put the Great Game of Business in the ZCM, the largest copper mine--in fact, they had five copper mines, and we visited every one of the copper mines for two years. And what was the amazing thing about it is because 85 percent of the GDP of Zambia at that time was copper. And if anybody needed to diversify the business and be able to stabilize the economy, it was your country because your country has just been so well educated and so brilliant. But because of more coming from the government, they obviously had rules and regulations and didn't want them to be entrepreneurial. But once we were down there, all we saw was opportunities. Once the copper mine pricing crashed on the marketplace through no fault of anybody in Zambia, it was met with a recession and then ZCM had to sell to Anglo America. And so they lost the publicly held mines where the government was no longer responsible for 85 percent of the GDP; copper was. But what we got from a lot of people in Zambia, or people that had learned about business, that the Great Game of Business did nothing more than teach them that they had the opportunity to be able to start their own businesses. And so after the Anglo Americans bought ZCM, I used to get letters from people in Zambia, saying, Jeez, I just started an electric winding company, and it was so good that I really understood what it took to run a business, I was glad I got the confidence to be able to start companies. I mean, it was crazy how many opportunities opened up once the state kind of lost control and then the marketplace had to take over. And people really became entrepreneurs. I still think that that's there. I think that there are so many opportunities in that area. It's incredible.
Steve Baker 46:18
I love that you specifically have a story about Zambia, where he's working. So what's cool is these are both kind of family or people related. The first one is from Ben, he says, "Jack, I'm sitting here with my 12 year old son, also named jack"--so there's a bit of a suck up going on here; no I'm kidding--"and he has just started reading 'The Great Game of Business.' So little Jack's question is, when you say every business has to do two things, make money and generate cash, does make money refer to gross profit, net income, or something else?
Jack Stack 46:54
Okay, there's really two things. When we first started the company, it was one of these black swans, right? I mean, it just shut us down. We had no money so we started the company. And so when somebody finally said, Hey, what's the mission statement? We said, "Don't run out of cash and don't destroy from within." Okay, so that really takes precedence over what you just read. Now let's talk about the cash aspect of it. Let me just tell you this: more sales without margins that just work. Okay. So margins are really, really, really important in terms of looking at what your business is, right? It's through margins that you can figure out how much expenses you have, you can put back in terms of business. So the whole idea of an income statement is just measuring how well you're doing with your money or somebody else's money. To me, it's always come down to the cash flow statement. The biggest problem everybody makes when they’re trying to teach their people business is they spend too much time on the income stamp, right? I have seen highly profitable companies just totally run out of cash. And once you're out of cash, you're out of there. That was why our statement was, "When you're out of cash, you're out of here." But the whole idea was to be able to teach people how to preserve it, how to replenish it, how to leverage it, and then how to make certain they continually reinvested it and you made the proper investments in terms of the cash that you generated as a result of the income statement. So profit is a means by which maybe somebody uses a measurement to determine just how much money you could borrow or how much money you have. I mean, we've had businesses that have had very, very thin margins, but turned inventories 37 times which generated a tremendous amount of cash flow. So we could, because we had such great supply-chain people, we could turn inventories so quickly, small margins, but heavy on the cash flow, just because of our people knowing how to use the balance sheet.
So I may be going a little bit too far. I'm just trying to make it as simple as I possibly can. It's that the income is really good because it's just a barometer on how well you're using cash. But it's the cash that you really want to focus on. And a lot of people don't open up their books because they think people are not going to understand how much money they make. And the reality is, that's really not the measurement. I mean, the people that really have that excuse, in terms of not wanting to share what the profits are, are probably so much in debt and what they should be explaining to people is, yeah, I made this investment, I bought this machine, I bought this building, and I'm really trying to pay it off. And once I pay it off, then we have more to put back in the company. And then you come along in a period of time where cash is cheap, and everybody feels like why not borrow as much money as I can right now, because I'm never gonna see interest rates the way they are, we get sucked into that deal. And then all of a sudden, we have this Black Swan and they cut you off on your lines of credit, your borrowing. And even though it's at the lowest rate you could possibly have I mean. We do have a real emphasis on trying to teach people where the money goes in the company, so they become good stewards of the cash.
Rich Armstrong 50:30
There is a bit of a follow up question, Jack, that a gentleman just wants to know if we have a cash reserve target ourselves and what but that burn rate is the other guidance? Where do you stop and hold in terms of your cash, in terms of a capacity of so some sort?
Jack Stack 50:52
Well, I can only tell you what we did. Ten years ago in ‘09, it was our fourth recession. And we knew that there was going to be a recession again within the next 10 years. And we set aside a goal to raise $100 million in cash for the next recession, which we anticipated to be around 2019 or 2020. Everybody in the company knew that; we never had any problems. In 10 years, I never had anybody yelling at me because we were saving this money for a rainy day. And I really just felt that history told us that five years after every recession we had been through, we doubled the value of the company, because things became bargain purchase opportunities. And so we built a war chest of $100 million in that particular period of time. We needed to make absolutely certain that that was earning some investments. At the end of that period of time, we ended up with $56 million, just in liquidity and cash. We put a substantial amount in some businesses--buildings that we own that we were getting rental income off of. And then we had a joint venture that we had invested in and kept money in terms of the joint venture. So we got to $100 million dollars, we ran the numbers, and it looks like at a worst case scenario, by the end of the year, we would deplete that thing by $8 million to $10 million if they all did that plan that they've been able to produce. It will obviously take our debt up. We did put a lot of things on hold. And we didn't want to at this particular point of time.
But even if it's like I said before--$50,000, $10,000, $100,000, $200,000--the whole idea is to start the process of putting risk capital aside so you do have the opportunity to make the investment. Ultimately, what I've seen over the past, is that the things that basically hold the company back from growing--a lot of people think it's cash, but I will tell you more about always seeing it, we don't have the people ready to be able to take advantage of the opportunity. That's what drives me crazy more than anything. Ten years you have a really good run and then you have a recession, but in that in that nine year period of time, the restraints of growth, it really has to do with not feeling that we have the entrepreneurs, the people who take advantage of the opportunities, so think that whatever you can take out of retainer. I think anything, I think you should budget in that risk capital that you can afford to lose. I know that sounds flippant, but you have to be able to start generating the concept of risk and reward.
Steve Baker 53:53
Well we are at time. Jack Stack, I want to thank you again.
Jack Stack 53:58
Thank you guys. I hope this upturn happens much faster than I just predicted.
Steve Baker 54:02
Yeah, for sure. Listen, guys, this week we want to be perfectly clear, it is time for your bold move. We need to all be in the game. So you need to get in the game and you need to do it now; it's the perfect time to do it. You’ve got to remember you're not alone. So we’ve got to stand together. Like Jack said, we've got to stand up, we've got to collaborate. We just have to pull it together to be a force for good that business truly is. It's up to us to invest in each other and to get in front of this before there's no small business or mid sized businesses left. So to make a really truly world changing impact, we've got to be creative, and we got to collaborate as business people. That's why we're building a platform as Rich mentioned earlier, to allow us all to connect with like minded and like hearted people in the global community of Great Games. So more information to come with community. Let's stay a community; that's what community does. Thanks, everybody for coming. Bye bye.