The Happiness Index

Posted by The Great Game™ Team on Sep 30, 2022 2:10:08 PM
Sergio Paiz, CEO of PDC Comercial, discusses how he improved his company and transformed the lives of his workers at the 2022 Conference in Kansas City.

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Episode with guest: Sergio Paiz

CEO of PDC Comercial

(This episode was recorded in September of 2022.)

 

Key Episode Take-Aways:

1. Being good is good business.(click to jump to this topic below) My grandfather, he had this huge heart, he really genuinely cared for the people that worked in the company. And back in the 1950s, he created the first ESOP program and the first profit sharing program in Central America. And he always told me, being good is good business.

2. When you can teach it, you learn it faster. (click to jump to this topic below) I started to read about finance. This stuff isn't as difficult as I had thought. So I became self proficient in finance by reading a lot of finance and accounting books. Then I said I could probably learn this stuff a lot faster, if I would apply it in the company, and I did. And then I got this crazy idea. And I said, you know, if I could teach this stuff, I could learn a lot faster. So I went to a local university and said, Can I teach finance? And to my surprise, they said, Yes. And I ended up teaching for about a decade corporate finance. This is one of the great insights I got in this experience, that there's something magical that happens when you teach, I really was starting to understand the concepts at a different level by teaching.

3. After learning about The Great Game of Business, some experiences were done within the company. (click to jump to this topic below) The first thing that we did, is that we taught everybody in the company, basic finance. We're doing this through our company app, we basically redid the whole course in Spanish from scratch. 2000 Associates now connect to the app. The next thing we did was understanding our critical number. We implemented two goals, one was last year's owners earnings plus 10%. This is always a formula, we did away with the budget negotiations and the inherent conflict of interest of that negotiation. And then the second goal is always region or area specific, depending on something that we might want to improve locally, in a region or in an area. The next thing we did was drill down with the execution. Execution is really hard, you can have a beautiful plan, but it's worthless unless you can execute. And in my experience, execution is the most difficult part. Finally, we empowered our operating teams through the MiniGames, which have been fantastic.

 

Continue scrolling to read the full episode transcription.


Announcer  00:00

Welcome to the change the game podcast, where we share stories of open book management and highlight capitalism. At its best. 

 

Sergio Paiz  00:08

It was a cold morning in September of 2002. And I received the worst phone call of my life, had news that my father had just passed away in an airplane accident. And I had just graduated from college. And I was in my first job here in the U.S. So I had to drop everything, and head back home to my home country of Guatemala. Guatemala is this small country, right below Mexico. And you see we come from a family business, my grandfather, he was an orphan, came from very humble beginnings. And he was also this incredible self made entrepreneur. He eventually, with the help of my father and uncles, they created what became the largest retail company in Central America. And eventually, this company was bought by Walmart some years ago. But my grandfather was also this incredible teacher. He was teaching us to be entrepreneurs, since a very early age, we were eight years old, and he had bought us certain cows. And we started this small dairy company, those were the first shares, I had received of a company from a very early age.

 

Sergio Paiz  01:34

But my grandfather, also he had this huge heart, you know, he, he really genuinely cared for the people that worked in the company. And back in the 1950s, he created the first ESOP program and the first profit sharing program in Central America. And he always told me, I never forgot, he always told me, you know, being good is good business. Never, never forget that. So I was coming down, I was I was feeling a bit overwhelmed in the funeral service, there were hundreds of people, lasted for several days. And at the end of the funeral service, a friend of my father comes to me and says, you know, we got a critical situation, it's an urgent situation, I need to talk to you. So she comes to my house, and tells me, you know, your father had bought this distribution company some years ago.

 

Sergio Paiz  02:26

it was called Codisa, it distributed the brands that are on the screen. And she said, you know, the company's in deep financial trouble. My father, for some reason, thought this was going to be his next legacy. The company was selling about 50 million a year at that point, but it was losing millions, millions of dollars a year. And that company had a huge bank debt. And the banks were now very nervous that my father was missing. So my father's friend, she told me, you know, you're not going to like to hear this. But I think that you should step in as CEO of this company. And she said, you know, leadership is taken. Leadership is not given, you need to step up to the plate, and you need to assume that responsibility.

 

Sergio Paiz  03:23

So that I did, I stepped in as CEO of this company, very young, I was feeling very nervous. Frankly, I was feeling very insecure. I would remember I was so nervous. Sometimes in the morning, I would even be nauseous before going into the office. I had no idea what I was doing. I had no business experience. I had no finance experience. I had no leadership experience. But as I learned more about the company, I understood the company was worse than I thought. Company had a broken culture. Everything was a mess. It was a chaos. We started to uncover frauds all around the company. I even remember there was this big theft of inventory that was going on from the main warehouse. That was orchestrated by this criminal group that was led by a local gang member. So things were even starting to get a bit dangerous.

 

Sergio Paiz  04:20

The banks, the banks kept calling me every week, they were pressuring me, their tone intensified, their threats intensified. And I had no idea what to do. I was basically looking at the ceiling every night I could not sleep, just wondering how do I get out of this mess? And I remember, you know, working hard was not the solution. I was working very hard, but three years into the job. I was failing miserably. The company was even losing more money. We had even more debt. And I just didn't know how to how to get out of this mess. Eventually, I woke up one morning with this pain in my chest, and I was having a nervous breakdown. Go to a hospital. And, you know, the doctor said, it was a family friend. He said, Sergio, what are you chasing? You know, what are you doing? You need to slow down, change your lifestyle. So the doctor gives me this book that changed my life forever about a morning routine. So I started to wake up very early in the mornings, and started this morning routine about self development, and inner growth and reflection. I started to read for hours, every day, I would read and re-read books, I would summarize them, I would study the books, I develop this profound passion for knowledge.

 

Sergio Paiz  05:46

I started to read about finance. And I said, you know, this stuff isn't as difficult as I had thought. So I became self proficient in finance by reading a lot of finance and accounting books. Then I said, you know, I could probably learn this stuff a lot faster, if I would apply it in the company. And I did. So everything I was learning, I wasn't applying in the company. And then I got this crazy idea. And I said, you know, if I could teach this stuff, I could learn a lot faster. So I went to a local university and said, Can I teach finance. And to my surprise, they said, Yes. And I ended up teaching for about a decade corporate finance. So this is one of the great insights I got in this experience, that there's something magical that happens when you teach, I really was starting to understand the concepts at a different level by teaching.

 

Sergio Paiz  06:41

So, as I was enjoying my mornings growth, I stumbled upon this great book, called The Great Game of Business. And I couldn't put the book down once I started reading it, it really clicked. You know, we shared the same backgrounds of being from almost bankrupt companies. But what really clicked with me was that we were people oriented companies, we shared the same values. And this is something that clicked with me, right from the story of my grandfather, that he really emphasized the importance that being good, is good business. And this is something that has been rooted at my core, how can we be genuinely be good companies that really care for the people and the communities we serve?

 

Sergio Paiz  07:35

So, you know, I made many, many mistakes in my career. But I did get one decision right from the beginning, one decision, and that decision was to instill our purpose of transforming lives. And, to date, this has been the most important decision and the pillar and the foundation for our culture. So after finishing the book, I was amazed by this framework, it was very complete, it was holistic. And I said, you know, learning by trial and error, organizational systems, not only takes too much time, but it can be really expensive. So I thought, you know, I think it's a lot smarter if we learned from somebody else's trial and error. So I said, you know, why don't we learn from, from the people that have done this already. So I call the Great Game, they assigned a great coach John Williams, came down to Guatemala, did an excellent job. And we successfully implemented this framework in our company. 

 

Sergio Paiz  08:38

So today, I wanted to share with you very briefly some experiences that we have done within our company. So the first thing that we did, is that we taught everybody in the company, basic finance. We're doing this through our company app, we basically redid the whole course in Spanish from scratch. 2000 Associates now connect to the app, and they have all these pre-recorded content on basic finance. Now, not all the content is pre-recorded, you have to go to live face-to-face sessions as well. And the important thing for us is that the face-to-face content is taught by leaders of our company. So if you're on the leadership team, you need to teach finance at least once a year. And this goes back again, to this magical thing that happens that as our leaders teach, they're really grasping and understanding the subject at a different level. 

 

Sergio Paiz  09:41

The next thing we did was understanding our critical number. For a critical number we were first deciding you know, where should we pick our critical number from which financial statement. I started to learn that people really get and understand the income statement that's easy. A little bit less the balance sheet sheet and the cash flow statement. For our case, people were a little bit lost there. And even a little bit worse, when you start to understand the relationship between these three financial statements, then people really sort of lost it. So so we said, you know, can we simplify this? And I think our role as leaders is to simplify, you know, simplification is really, really hard. Leonardo da Vinci said, Simplicity is the ultimate sophistication. And Warren Buffett said, you know, this is not a diving competition, we're not getting extra points for degree of complexity. So how can we simplify? And we had this idea that maybe we could roll everything up into a single financial statement? So we basically try this. And we said, what if we charge a 10% on the assets that are being employed, and we put this as a capital expense in the income statement.

 

Sergio Paiz  11:03

And you know, if a company is able to pay its operating expenses, and on top of that, it's able to pay the capital expenses for the assets as being used, and it's positive at the end of the result, then, we're assuming you're not going to have a cash flow problem as well. So we basically summarize the balance sheet and the cash flow statement in a single financial statement. And furthermore, we divided this financial statement into five accountability buckets. And these five accountability buckets are further broken into operating and capital expenses. And these are further broken into individual line item accountability. Now, the net result of this financial statement, you might be thinking, well, this is the EBA statement. And it is, but you know, when I was starting to learn finance, I thought Eva was a lady. So, you know, EBA was such an intimidating term for me. So we said, we're not going to use that term, internally, we defined this term, which we call owners earnings. And I really think that the earnings that matter most to owners, which is everybody in the company, are the earnings that not not only cover the operating expenses of that business, but also the expenses to use the assets that are generating the sales. In other words, value is generated when the return on the asset exceeds the cost of the shareholders capital. And we really want it to drive, this concept that everybody in the company is is really a great capital allocator. They are owners of the business and the ownership thinking where everybody acts, and thinks like an owner. So after simplifying this, then it really became very simple. 

 

Sergio Paiz  12:50

Our two goals that we implemented, one was last year's owners earnings plus 10%. This is always a formula, we did away with the budget negotiations and the inherent conflict of interest of that negotiation. And then the second goal is always region or area specific, depending on something that we might want to improve locally, in a region or in an area. The next thing we did was drill down with the execution. And you know, execution is really hard, you can have a beautiful plan, but it's worthless unless you can execute. And in my experience, execution is the most difficult part. Execution, in my experience has a lot to do with alignment and with communication. So we again, use our company app, we opened the books with our 2000 associates. And we have volunteers every month that volunteer and present the company's financials in a very simple and graphical format. We further continued executing through our weekly huddles where we Ford forecast, the month and the year. And this is done in a virtual meeting of about 30 minutes where people from different countries connect to this meeting. 

 

Sergio Paiz  14:08

And finally, we empowered our operating teams through the MiniGames, which have been fantastic. And I just wanted to show you a MiniGame here of the warehouse that they proposed to save on stretch film, without compromising security or quality of the operation. And today, just this game has generated about $80,000 in savings a year.

 

Sergio Paiz  14:34

And the most beautiful part of all, is that we are able to share the profits with everybody in the company. When we reach our goals. And people are happy. People are really happy. We call this our happiness index. We measure it every six months not only internally but also to the company's families. And it's really interesting the insights you get from the families in this survey, but it has been really, really gratifying to see this number go up through time. 

 

Sergio Paiz  15:06

So, in the end, you know, when transitioned from a distribution company to a home cleaning company and also a dairy goods company to business units through several acquisitions, The Great Game of Business framework has been working really good. We have grown our EB data 25% compounded rate for the last 14 years. The math with that sort of translates to about doubling our EBITDA every three years. But you know, I think the most important thing for us is that we are able to live our purpose of transforming lives. Transforming lives, internally within the organization by aspiring to be the best company to work for in Latin America. And transforming lives externally, by aspiring to be a company that has an impact on the community it serves. So, in the end, you know, people are really happy and I think in the end, I'm a true believer, that being good, is good business. Thank you very much.

 

Announcer  16:15

The Change the Game podcast is produced by The Great Game of Business. To learn more, visit greatgame.com

Topics: Critical Number™, Company Culture, Conference, International Business

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Hosted by Rich Armstrong and Steve Baker the Change the Game podcast highlights true life stories of organizations influencing positive change by doing business differently. They’re teaching people how business works and closing the gap between the haves and have-nots. It’s capitalism at its best. Inside each episode, you’ll discover stories of entrepreneurs who are Changing the Game.

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