An Owner Vs. An Owner’s Mindset: How Companies Can Bypass The Doldrums
The smart people at Bain & Co. know how to crunch numbers and this one’s a doozy: of 8,000 companies the consulting firm looked at globally, each having crossed the $500 million-in-revenue line, fully two-thirds stalled out. Often, the doldrums settled on these companies suddenly and without much warning.
And, the Bain partners Chris Zook and James Allen tell us, the problem isn’t typically a broken business model or a market with exhausted opportunities, but rather the calcifying forces of bureaucracy, complexity and internal dysfunction.
To re-energize a stalled out business, the Bain partners recommend a re-simplification of the business, elevation of front-line (customer-facing) employees and adoption of an owner’s mindset. Admirable examples of well-known companies that shook off the doldrums include Starbucks (SBUX) and Home Depot (HD).
Perhaps it all sounds obvious, but the Bain thinking takes us through these and other turnaround stories in a way that could help us see faults – and opportunities – in our own companies. From my perch working with employee-owned companies, I’d add just one thing: why settle for an owner’s mindset when you can power the business with actual owners?
At the risk of repeating myself, a wide survey of research concluded that employee owned companies tend to out-perform other firms. And a separate study found that the most common employee ownership format (S-Corporation Employee Stock Ownership Plans) outperforms other retirement savings vehicles. Not familiar with ESOPs? You can find a list of the largest ones here.
Non-employee-owned companies have to struggle with a concoction of compensation and management formulas to try to achieve an owner’s mindset, and still often fail. But ESOPs, by making employee actual owners, typically enjoy a boost in productivity; a reduction in management-worker friction; the benefits of a low-waste, self-policing workforce; and the bubbling up of many helpful ideas. Owners, in other words, acting like owners.
The example of production hours saved by Schweitzer Engineering Laboratories might tilt your thinking to employee ownership. As might the example of Paladin Capital, a holding company for trucking operations, which enjoys low turnover – and the associated lower operating costs – in an industry riven by disloyalty and high turnover.The Bain partners note that companies still run by founders vastly outperform those in the hands of professional management. (One suspects the relative youth of a founder-run company tilts this analysis a bit. But still.) The trick is how to pass that founder’s urgency along to the next generation. The truth is, the urgency already resides in the workforces of most of the employee-owned companies I have come to know. The founders chose that ownership format not merely as an exit, but to reward the employees and ensure the company’s long-term viability.
At Hisco, the front-line employees have always been paramount, and the industrial supplier has 40-plus years of industry-beating results to show for it. No doldrums here.
Stalling out is a particular risk in low-growth industries dominated by giant players. How to compete, for instance, against the likes of Wal-Mart Stores (WMT), which has hammered costs down so low in the grocery business? Visit a WinCo Foods store some time. The 100-store, employee-owned chain, operating at the discount end of the grocery business, manages rapid growth and strong profits. An ESOP since 1985, WinCo boasts more than 400 front-line employees with more than $1 million in their ESOP account and hundreds of retirees similarly well set.
The Bain partners cover the impressive record of private equity funds in buying and turning around under-performing divisions of large publicly-traded companies. Smarter, more focused investment decisions are one factor. Stripping out costs is another. We agree. And increasingly, we see a small but growing number of smart private equity firms anxious to team up with employee-owned companies to achieve the best results. That’s the story at Atlantic Plywood.
The best way to deal with corporate doldrums, of course, is to never suffer them in the first place. And a combination of smart management and employee-owners who problem solve at Central States Manufacturing has kept the company growing through recessions and other hard times.
An owner’s mindset is great – if you can figure out how to instill it in employees. But I’ll bet on actual ownership every time.
Mary Josephs, founder and CEO of Verit Advisors, led ESOP advisory at Bank of America. You can reach her at CEO@verit.com.