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John Costello is CEO of Cherry's Industrial Equipment has a heartfelt story about what being transparent with his business has done for him and his team. Today he shares how he leans on the principles of open-book management to help keep the conversation going and how it's helped his team be creative during this time of economic crisis.
Episode with guest: John Costello
CEO of Cherry's Industrial Equipment
(This episode was recorded in May of 2020.)
Announcer 0:00
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 eighth episode of the "Change the Game" podcast with special guest, John Costello. 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
It's the “Great Game of Business podcast, where we are changing the game by reinventing and reimagining capitalism. What would it be like to save the American Dream by closing the gap between the haves and the have-nots? Let's find out. Our big, hairy audacious goal is to transform 10 million lives in the next 10 years. I'm here this morning with my co-host, Rich Armstrong, president of “The Great Game.” Rich, it's been some pretty crazy weeks here. We've probably been busier working remotely, I know. And so what's your big thing going on at SRC right now, from the perspective of a general manager of one of the SRC businesses?
Rich Armstrong 1:04
Well, I guess probably, most recently, is just trying to get a handle on our forecast on out. You know, we certainly spent the last six weeks keeping our people safe and healthy. And now we've done our forecast over the next 90 to 120 days, and then on out the next 12 months. And we had kind of an interesting session last week, with each of the divisions going through their SWOT analysis, you know, and really understanding where we’re at in terms of opportunities, threats, not only in the next 90 to 120 days, but also in the next 12 months. And it was a good process to go through. It gives us both laying out what kind of challenges we have, but also it really kind of highlighted how good we have it, in terms of the opportunities we have and to be able to work through this and be stronger at the other side.
Steve Baker 2:01
And you did promise me that you would not share with our audience where I landed on the strengths, weakness, opportunities and threats map, right?
Rich Armstrong 2:10
You ended up in every one of the quadrants. I'm not sure how that happened.
Steve Baker 2:14
it's great. I'm like a Swiss Army knife. Well, guys, we are really excited. You know, Rich is my co-author of our new book, “Get in the Game: How to Create Rapid Financial Results and Lasting Cultural Change.” Today's theme is capitalism at its best. And we've got a very special guest with us, John Costello. I've been trying to come up with a quote, or an in-the-news kind of a thing. And I ran across this one from Bob Riley, the former governor of Alabama. He said that, “Hard times don't create heroes. It's during the hard times when the hero within us is revealed.” And I think that's pretty cool because as leaders, especially in an open-book environment, we have to be our very best and our heroes should be evidence or revealed or manifest. And so think about that: “Hard times don't create heroes, it's the hard times when the hero within us is revealed.” So I hope that's as inspiring to you as it has been for me.
So let's introduce our guest this week, John Costello. He's a super guy. He's president and CEO of Cherry’s Industrial Equipment Corporation out of the Chicagoland area. You might remember John, if you attended our 28th annual conference last year. He told his heartfelt story, you know, started out as a sales assistant and moved up through the ranks to owner. He started his open-work journey just a couple of years ago in 2018, and is an active part of the community. He's from Downers Grove, Illinois. He lives with his awesome wife, Kim, and three beautiful kids. Now I've met Kim; she is awesome. I have not seen his kids. So the beautiful part, we'll have to take his word for it. It's Jack, Grace, and Leah. John, thank you for joining us today and taking time to share with the community. How are you?
John Costello 3:56
I'm great. Great to see you, Steve.
Steve Baker 3:58
Are your kids beautiful?
John Costello 3:59
They are. Absolutely beautiful. Thank goodness they take after their mom.
Steve Baker 4:04
[Laughter]. Well, John, you know, the first time we met was at last year's Gathering of Games in Dallas. And you really grabbed everybody's hearts and minds when you told your story. And I'm sure you're going to do it again today. Can you tell the folks listening and watching today a little bit about your business without tearing the heart from my chest?
John Costello 4:25
Sure, sure. So before I do that, I do want to call out my team. So I've got a bunch of people on the phone here or listening in. So to Team Cherry’s, thank you again for a great week.
So yeah, my story, the story of the company. The company started back in 1983. We manufacture equipment, ergonomic equipment that helps manufacturing plants transfer stuff on and off of pallets. It's really kind of a niche that, for like us, it's Fortune 500 companies and instead of using labor or helping people, they bring in our equipment to make them more productive. So that’s the business side of it.
When I came into the business, it was a small company. There were just four of us; we’ve grown to 18. And I've gone through some transitions, you know. This part of the story is that the founder took me and his nephew and made us partners. And really at that time, we weren't aligned as to how to run the business. He wanted to run it for a lifestyle business, I wanted to run it for growth. And we can get into this a little bit more later, but we were not aligned. And really, from that moment on, it was, how do we make changes? And there were also some problems with the culture of the company. We didn't want to share financials; financials were really only kept with a spare few. Why share it with the employees? Nobody should ever know what the profit of the company is.
There were some moments, too, where I remember, like earlier, where the owner was trying to share the income statement and the balance sheet. It was my first look behind the scenes, behind the curtain. And I'll never forget, he said, “Hey, look, this item here; it's marketing fees.” I said, “Yeah. What is that? Can you explain?” Because, I said, “I see the expenses further down.” He said, “Well, that's really something that we want to do just to limit how much the salespeople make, because I think they're making too much in commission.”
And it kind of struck me as, really, why? Wouldn't people be motivated more if they knew what the true profit was? Let's be open and transparent. And it was kind of a life lesson at that point in time, like, when you're running the company, you can do whatever you want but this is how we're going to run the company. And those are some things along the way that always kind of stuck with me. There's got to be a better way, a better system. How do you engage people? And how do you let them know exactly where the company is at?
So I made it through without crying. I mean, it was a little bit more emotional last round.
Steve Baker 7:27
Thank you. I'm still emotionally intact right now.
Rich Armstrong 7:31
John, I think you referred to your situation with your previous partners as kind of a “business divorce.” And I think a lot of businesses have a similar experience. Can you talk a little bit about those challenges and how you got through those?
John Costello 7:50
Yeah, I think it started where we were 50-50 partners. And I didn't really know what that meant. But really, in our situation, when we became 50-50 partners, it was really whoever yelled the loudest got heard. And, you know, I'm not that sort of person; I don't like to yell or scream. And it just kind of started to permeate through the organization. And then there were alliances of like, am I going to be with Dave? Or am I going to be with John? And then we weren't really fully aligned on how to run the business. At the end of every year, he's like, “Let's just cash out; let’s not reinvest into the business.” I kept saying, “That doesn't make any sense. Let's reinvest. Let's look for an exit at some point in time, whenever that is, and let's try and get a multiple of that.” But it just didn't work. We tried to separate sandboxes--you play there, I’ll play here--and we spent more time in the other person's sandbox, constantly looking at what they were doing versus what I was doing. We couldn't reconcile our differences. And I think that's why the best term is a “business divorce.”
So at that point in time, we had to figure out who's staying and who's going. I’ll never forget it: we sat across the table, we had somebody there. And he had been out of the business for about three or four months for some personal reasons. And I looked at him and he said, “I'm ready to come back in.” I said, “Well, I think we need to talk; we’re at a point in time where either you need to buy me out, or I need to buy you out, or we find a third party or we hire attorneys. What do you want it to be?” And it was really an emotional day for the both of us. And it was really at that point where I thought, great, it's out in the open, this should be easy. And then we fought for the next six months as to what the value of the company was. Going through it was tough, but it was really honestly the best thing possible for both of us. Later in life, I talked with him and he said it was a great move. You know, he was so married to the business; he didn't have a work-life balance. And for me in the organization, it was really best to have just one leader, and just to give everybody the mission and where are we going? And things really kind of cleaned up after that. So that was back in '14, '15. We've been on a rocket ship ever since.
Steve Baker 10:22
Wow. So you started with The Game about two years ago, you started to implement it. If you had to look back then and compare it to today, what do you think is different now versus when you first started out?
John Costello 10:36
Yeah, so we started playing The Game, really, for financial reasons. We were still looking for a bank to finance it that I was paying my partner, there was seller financing in place. And there were only like three people in the organization who really knew what was going on. It was me, the CFO and the accountant. And I was really struggling at that time like, how are we going to make payments? And so that's when I really decided I'm playing the game. So in ‘17, when we first started playing to where we are now, I mean, it's really pretty remarkable. We've paid down debt, at a substantial rate. This year will be a little different. But I think the biggest change is just really engaging people, letting them participate at a high level and opening up the books. And then even from ‘17 to now, how we play the game, how our huddles are, it's remarkable. I mean, it really is amazing.
From that first three or four months where it was “poor-casting”--not my term, I think it’s yours--it was terrible. From week one to week three, there were huge discrepancies. We were just kind of getting better with every month. Now, this past year in--I think it was January or February--we had an outsider who was in. And I think I may have said, “Be on your best behavior.” But it really was one of those phenomenal meetings. We're going through actuals, and to forecast, to budget, we were within two or three percentage points, which was really, really amazing. And the guest that was there was like, “Is this pretty typical? Is this normal?” And I said, “It is; it's become the new normal.” But from ‘17 to now, it's really great.
The other thing is, is the way people participate. It's not every meeting that we have everybody raising hands, but we definitely have people that know the numbers. If something's wrong, right away it's not a manager or me saying, “Why is the number wrong?” They know, and they can get back to the team? Or it's like, “Hey, I realize that we're paying too much for garbage.” Whatever it is, you know, those are conversations that are coming up in the huddle that never would have happened two years ago. And all the meetings have been positive. That's the other thing that's great. We didn't have that back in '17. It was more like silos between departments. Now, we don't really feel that.
Rich Armstrong 13:28
John, were there any surprises you saw when your people started to learn the business? Anything that you felt was like, “Wow, this is not something I expected”?
John Costello 13:41
I think early on, the surprises for me--this is back in ‘17--were are they going to run for the doors, you know, once they see what the financials are? Right? So that was the first thing and that wasn't the case. The other surprises along the way were questions of, what happens if we pay down debt first? What are we going to do with some of this money? You know, I see that we have all this net profit; where does that go? You know, those financial questions along the way.
There's been engagement from people who I wasn't quite sure would understand it. And that was really kind of a surprise--I mean, a really good surprise. One other great surprise along the way--here comes the waterworks, sorry--is I have a woman who works for me. She took the financials home, and she sat across the table with her husband who runs a business or is in a business, and she was talking with him about the income statement and the balance sheets. She came back to work the next day and said, “It's really kind of a remarkable conversation that I had with my husband. I never would have though, in months previous, that I could have done that.” She was very proud of the fact that this is what we were doing and that she understood it. So those surprises, and I think we're in the process of changing the culture of the company. It really is an all-for-one. And people are really kind of figuring out, you know, why is it that we do this? Is it for each other? Is it to support the company? Is it to make sure that everybody's well-being is taken care of? And that really is part of The Game. And that's been a surprise along the way.
Steve Baker 15:43
And don't worry about just letting the waterworks flow. At this point, I should go ahead and give you the warning, folks, this is an adult broadcast, there will be emotional outbreaks, probably some language, maybe some violence, we'll see what happens. John, so now let's flash forward a little bit. Tell us first about your family and what you've dealt with during this pandemic?
John Costello 16:06
Back on March 15, my wife, she works in the business as well. And she's like, “I’m just not feeling well.” And so she left, and my wife never gets sick. And I remember coming home, and the next day, she's like, “I think it's a cold, I'm just not sure.” And it turns into a flu. And she was really kind of laid up; I mean, she had eight days of a low grade fever. And then a couple of days after that, I was feeling really kind of tired and lethargic. I was just chalking it up to being, “Man, what a stressful week; all these decisions that had to be made.” And then I ended up being laid up as well for a couple of weeks. And my son got sick as well--not to the same level as the two of us. But we were separated. I mean, thank goodness, we have a three-story house. So my wife was upstairs, I was in the basement, and the kids were basically locked in the room, and we really didn't leave the house. Through the pandemic, you really see the kindness of others. We had some friends down the street who had offered to go and move all the kids stuff out of a dorm room. We thought, “Oh, my gosh.” People were bringing food to our house, grocery shopping for us. I mean, that was really, really powerful. It's really good to see how much people care in stuff like this.
Steve Baker 17:50
Yeah, that had to be a nightmare.We've been sheltering in place, but we feel great. We're healthy. I can't imagine dealing with a whole house full of sick people, plus the dorm rooms and everything else. And now you got this untestable virus going around the house, not knowing what's gonna happen next. So you're dealing with all that now. How do you deal with the business challenge? What's been going on with that? It’s probably not what a lot of people would guess, that you had to shut down and that there's all kinds of stuff going on on that side. You actually had the opposite problem, didn't you?
John Costello 18:26
Yeah. Since we service the supply chain, our business actually ticked up. I mean, we had just frantic calls, people looking for parts, big Fortune 100 companies buying $4,000, $5,000 worth of parts and saying, ‘“Send them to us the next day.” And we kind of questioned them and said, “Why?” And they said, “Well look, if this machine goes down, we're in trouble.” Because they were trying to prepare, they weren't sure. We had an uptick in orders, you know, or expedited orders--can you get this machine to us sooner?--and so while that was happening, we had a couple other people who tested positive here, one who actually ended up in the hospital. And it was really tough at that point in time: what do you do? And I remember pulling the managers aside and said, “Look, we've got shut down. I mean, there's no way that we can do this. Everyone that's working remote is going to continue to work remote, but people are doing production. We just have to shut down and clean up.”
And so we did that. The company's been around for over 35 years and it was the first time that we've ever shut down. And I actually went in, at this point in time I’d had two weeks of self-isolating and I went into the office and we had another brave soul who came in for a couple of hours a couple of days a week. But there were some times where I was just there on my own. And the thing for me was, this is surreal. What's going on? How could this be happening? I know a lot of other business owners are feeling that.
And then the other thing, too, is there were moments as a business owner, where I thought maybe I can just strong-arm this, there's got to be a way around this. I'll work harder. I'll work longer. You know, we're gonna get through this. There's no way it's going to affect the company. And that's just absolutely not true. And I remember I got through that week, and as many people as I could I tried calling that Friday, if not over the weekend, and that Monday, just to thank them. Because you realize at that point in time, that that company is not you; the company is the employees. And they have to be safe, and they have to be healthy. But there's also the other side of the coin, too: they have to have a company to come back to. So it's this balancing act that I know a lot of business owners are probably going through.
Rich Armstrong 21:07
John, we took the theme of this podcast based off the blog that Darren Dahl wrote about your stories, Capitalism at its best. A lot of great stories in there, by the way. But I was just curious about what is your story that really says capitalism at its best?
John Costello 21:31
Yeah. So the day before we closed down--we’re in two different buildings. And I went next door, and [choking up]... sorry.
Steve Baker 21:41
We got you, buddy.
John Costello 21:44
So there's this guy, Jerry, that works for us. And Jerry has been with us for about eight years. And I remember turning to him and I said, “Jerry, we're going to close down next week.” And he looked at me and he said, “I don't know how I'm going to be able to work remotely; you know, I don’t have internet access.” And I just said, “Look, we'll figure it out, we'll pay you; don't worry about that, that's the least of my worries.” And he kind of pounded his chest and he said, “Thank you. I really appreciate that.” And he said, “I gotta tell you something I've never had a chance to tell you. I've read ‘The Great Game of Business’ cover to cover more than once. And on 2/20 of 2020, I became debt free.”
Steve Baker
I love it.
John Costello
It was amazing. It was just so amazing. And then at the very end of this, he actually said, “It's capitalism at its best.” I said, “Holy cow. Where did you come up with that?” He goes, “Really it is capitalism at its best. I mean, you're allowing and teaching people how to fish; you're giving them all the skills so they can go out and do the work themselves. That's capitalism at its best.” And I said, “Wow.” He said, “I don't know if you know this. But this is an advertisement for the Great Game of Business. This is exactly what they were talking about at the Gathering of Games. And, you know, he truly believes it, and is following that. And we see that with not only Jerry, but really with a lot of our employees. I mean, there were some great conversations through this about, John, what do we do? I want to refinance my house, stuff like that. So it's great to hear that people are taking the same lessons that they're learning at the business and trying to bring them home as well.
Steve Baker 23:36
Well, Jerry, I don't know if you're listening or not, but we love you, man. Just keep preaching the gospel. IThat's the big idea, right? Can we close the gap between the haves and the have-nots? And the reality is, it's like what Dave Ramsey says, I say this all the time: Money flows from people who do not understand it to people who do and John, you are teaching people how money flows and how money works, and that's the big thing. And as part of this community--the community's really special, different-- and sometimes we get a little spoiled, we get a little bit complacent about how, well everybody's like this, you know? Not to be Pollyanna, but what are most of your conversations like with ordinary or citizen entrepreneurs, you know, people who haven't been enlightened, like all of us have?
John Costello 24:25
You know, once we got through just understanding what the rules were as far as the shelter-in-place in Illinois, and then there was a scramble about the Paycheck Protection Plan, and it was so confusing, and everybody was trying to navigate that. And so once that kind of settled, I really did find that a lot of business owners were reaching out to each other, whether they're a vendor of yours, and it always kind of started the same way: Hey, how are you doing? Is your family healthy? And how are you coping? And then very quickly, it would just turn into, well, this is what's going on in my world. And I did kind of feel bad for some of the companies that aren't playing the Game. You know, one owner was saying, “Look, it's just been me, my controller and my accountant and every single day we meet and we're trying to figure out what to do.” I wasn't going to sit there at that moment in time and say, “Well, that's not the same thing with us.” But I did commiserate that that's kind of a lonely journey, you know? And I said, “Maybe you want to share some numbers with some of your employees.” And I think at that point in time, he was like, “I can’t do that.”
In at least three or four conversations, these other owners really felt kind of helpless. And they're reaching out because they want to get affirmation or confirmation from other people that either things are really that bad, or they're really that good. And for me, I was just sitting there saying, “You know, it's good right now, but we want to make sure it doesn't turn bad.” And I was sharing with them some stories about how we forecast and we did a scenario at DEFCON 1 all the way to DEFCON 4. And he goes, “Really? You had that conversation with your employees?” And I said, “Yeah, but we also said, we don't want to get there. But this is what it would look like if we did.” And there was a little bit of shock on the other end of the line.
Steve Baker 26:31
Hmm, so I need to jump in here because I think it's important that some of the audience has not become familiar with the DEFCON story. Can you tell us a little bit about how you learned about it, and then how you implemented it?
John Costello 26:44
Yeah, so thank you for the Great Game. It was one of the first live Q&As that you guys did, and it was about the Black Swan, and in there Jack had talked about a DEFCON one through four, you know, what would it look like? We color coded ours, but what would it look like if things continued normal? And so I took that, and it was the huddle right after that, that we did some slides and put it out there. And maybe it was too high-level, but I at least wanted people to understand business and cash. You know, those were the two things. If we’re bringing in new business, we're okay. If we're collecting cash, we're okay. And so with us, we did a scenario of what would it look like if revenues went down by 80 percent, 60 percent, 50 percent? We color coded those, and what would happen if cash went down correspondingly? How would we burn through our war chest? So we spent a big period of time last year as a group talking about a possible downturn, as part of our high level planning. And so we decided that we were going to build a war chest so that was part of our conversation with this. We're going to burn through cash first, of our war chest, and then next, we may have to use availability on our line. And then, this is how we're going to weather the storm. So it was nice to be able to have that conversation with everybody--just at least lay it out. Ours is an incredibly positive group, and I think there were some that were raising eyebrows of like, we just had the best first quarter that the company's ever had, why are we talking about DEFCON one through four? And at that point in time, we had to sit there and say, because we want to be prepared for what's going to happen.
Rich Armstrong 28:43
Right. You got a big audience here. What kind of specific advice would you give everyone listening right now? What's going through your head?
John Costello 28:50
When I was working alone, it was really kind of a reminder that the reasons for playing The Game or the reasons for considering playing the game for every business business owner out there, is however scary you think it is, you’ve got to talk to people, you’ve got to share the story, you got to tell them what's going on. If you're worried about financials, that's the best place to start. You have to share it with them. Because if you don't share the financials with them, they're just going to make up their own assumptions, their own stories about what's going on. And at a time of such uncertainty, that everybody's going through right now, that was really the thing that was the best for us, is we were certain because they could see the numbers. There was reassurance that they could see where we were at. And also by having a huddle week to week, so again, those that are playing, we missed one huddle and that was only because I was sick and we probably should have done it anyways. But we decided at that point in time that this was the most critical thing for us, we had to continue playing, you know, we had to do the huddle. We weren't really set up for people working remote. And that was a surprise, as maybe for some other business owners, and we quickly had to adapt. But the huddle has been the life raft for us, just an opportunity for us to meet. I think every first five minutes of the huddle, I mean, it's awesome. People are so glad to see each other, and again, that's a reassurance that people really like each other, that they really, care for each other. And then being able to walk through the numbers; if there's an event that happens, we're only really one week between huddles to actually see what's going on.
Rich Armstrong 30:48
John, you mentioned several times the concerns or the fears that some owners have, in doing what you just described, right, and the financial transparency of it all. Why do you think people have those fears? I mean, what is the core of that? Why don't more people embrace this?
John Costello 31:11
I think part of it is courage, you know, it’s just really taking that first step. The second part of it is, sometimes you can feel that the business is just you, and you have to kind of disassociate. John Costello is not Cherry’s Industrial; Cherry’s Industrial is its own own person, its own being. And I think the other thing, too, is, it's hard to talk about money. I think it's almost the way that everybody's brought up: you don't share salaries, you don't share this and this. So it's hard to share, really, how much money does the company make? I think there's also a part of it, too, is that if you're making money, how do you share that with the employees? Right? So if you're turning good profits, how do you share them? And what is their take going to be on it? And that was kind of a fear for me. It hasn't turned out to be because now it's like, well, if they see that the company is profitable, that's a good thing. You know, we're going to take that profit. And as long as we get the cash, we're going to reinvest back into the company. And we're going to keep out-marching our competitors, we're going to stay ahead of that.
And the other thing, too, that’s great is that when you finally share it, you'll have those moments where you're gonna have somebody that actually questions something that they’ve never, ever questioned before. Right? They were afraid to question the owner; I think there's still people who are afraid of questioning me, but at least you have a forum now where somebody can raise their hand and sit there and say, “This doesn't seem right; this doesn’t look right.” Or, “why are we spending this? This doesn’t make any sense.” And that was never the case in the past, right? It was kind of a top down, and so you would do this and kind of hand out orders. Now you want somebody to raise their hand and say, “Why the heck are we spending $10,000? This doesn't make any sense.”
Steve Baker 33:14
And then you can have a conversation like adults, instead of top-down like a parent-child. I love that. And it's rare. I mean, it really is rare that people get an opportunity to do that. Because as you say, most people don't run their businesses this way. And most people aren't comfortable questioning the boss, and here's a chance to talk about it without it becoming an us-against-them conversation.
John Costello 33:35
Yeah.
Rich Armstrong 33:36
Interesting comment about John's earlier experience or story about his original partner. It says one lesson to learn from John's experience, if you're going to start a business with anyone--family, friend, former colleague or a newcomer--begin that conversation with, “What if one of us wants to leave?” And have that conversation openly. And work that out in front. It eliminates headaches and heartaches.
Steve Baker 34:08
Yep, for sure. And that's a tough conversation to have. Right? Well, you're assuming we're gonna get a divorce? No, let's make sure we put it down on paper so we’ve got a way. And most of the time you hear that from somebody who's been through it the hard way. So yes, you've dealt with that. Guys, it is time to open up to the community. Let's get some questions in here. We do have a couple. Rich, do you want to take any of these?
Rich Armstrong 34:36
Well, I just thought this was an interesting one because this is a common question. And John, maybe had some thoughts on this. We talk about employee ownership a lot in this community, because we talk about the stake in the outcome side of things and there was a question about is an Aesop or employee ownership is that an essential component of the Great Game of Business? And I kind of look at that two ways. One is, is that a central component in terms of stake in the outcome, but also is it required to really get all the benefits that we see in terms of the Great Game of Business?
John Costello 35:12
So we've taken some steps. In the past, I talked about a phantom equity that was put in place back with a previous owner, but it was really never documented. So right now, I do have three key employees that we put a program in place for them with some true equity. But we've always looked at, what does it look like for me on exit? And an AESOP would certainly make sense. We're still kind of at the exploring stage, but we love the idea of getting everybody sharing. It makes sense. I mean, if we're talking about the numbers, how do you really turn it from being focused on bonuses to being focused on ownership? And so that's something that we're evolving into, but we've taken kind of a little baby step so far.
Rich Armstrong 36:18
A lot of people are surprised that 80-plus percent of the people or the companies that we work with are not really in a position to share equity, but they still use a lot of these practices and approaches to running their business just to create that psychic ownership, that belief that I have a say in this company, and I understand what's going on in the company and what I can do to make a difference. There's a lot of powerful parts of this that doesn't require that equity side of it. Now with that all said, is that as you continue to teach your people the business, eventually it's probably going to get to that conversation, “What about equity?” And I think you just have to be prepared for it. But we've had many, many, many Great Game practitioners that have never taken that next step as equity and have had some really nice long-term, short-term bonus plans that provide them the necessary stake in the outcome to feel like they're being rewarded and recognized for the efforts they're making.
Steve Baker 37:19
Yeah, I would agree with you, Rich. And I know that you're kind of the resident expert on employee ownership, not only because you've been an employee-owner for most of your life, but also because you're on the board of directors of NCEO, the National Center for Employee Ownership. And I would agree with you, I just think it's cool to see the creativity that we see in the community of people, as you just kind of ended with your comments. You know, people like Hilcorp or even H-E-B, you know, folks who have got the short term, midterm, and long-term idea in mind. And there are so many options, you know. I love being part of an Aesop but it certainly isn't necessary to play a Great Game. That's for sure.
Rich Armstrong 38:00
You mentioned NCEO. What I've experienced in the employee ownership community is the opposite effect happens, where people have provided equity in the intent to engage their people. But they didn't match that with business education. And it actually became even more frustrating for the CEO or the business owner. It was like, Why don't they get it? Why don't they?
Steve Baker 38:24
Yeah, I'm doing all this; why don't they get it?
Rich Armstrong 38:28
I think the combination is so important. It's needed. But certainly the first priority is just teaching people the business, giving them a voice in how the business is run and providing a good reward and recognition for their efforts. And I think you have the principles in place to drive the right kind of engagement.
Steve Baker 38:51
And a lot of these topics are discussed in our new book, “Get in the Game,” by Rich Armstrong and Steve Baker. All right, so here's one from Kevin: “Great job, John. How has your employee turnover rate been since implementing the Great Game? Did you lose a few folks who just didn't get it?”
John Costello 39:10
Yes, we did. So there are 18 of us; in '18 we lost one person. And last year, we lost another person. And the person last year just didn't want to participate at all, just didn't quite understand it. It made it easy; I mean, we didn't have to fire them. They just worked their way out. The person previous, they found a different opportunity, and we wished them well. I think they were playing the Game, but maybe at a little different level. So it's been great for us and also for the new hires that we took on. We actually used our huddle as this kind of a way for people to get to know the person and for this person to get to know the company. And the person that we hired, he said that was one of the reasons why he came to work for us. He had other opportunities but it’s because he got to join our huddle and see how we shared the numbers. He had never seen anything like that before.
Rich Armstrong 40:34
What about your cash? I mean, right now with a lot of businesses, there's a little cash runway that they're all kind of living under to try to get through this so they're positioned on the other side. Can you talk a little bit about your position right now and what your thoughts are going forward?
John Costello 40:48
Yeah, so we're doing very well right now for cash. A couple of things that we uncovered during our huddles is just really that payments are being delayed. In Fortune 500 companies, you would think that they would pay on time. What we found is that no matter what the terms are, people are taking an extra 15 days. And so this is a process that was put in place by the managers and the employees, we just started calling people early. You know, with people working remote, it's hard to get a hold of people. Just imagine you're calling a company that has an AP department and that person is working from home as well, and they've got their own challenges. So just trying to get somebody on the phone was hard. So we haven't had to tap into our line or our war chest just yet. We did put a pause on making additional principal payments to pay down the debts. And then we did take advantage of the paycheck protection plan.
We have seen a downturn in new business in the month of April, about 30 percent. We're not sure what May and June look like. We do know what our open orders look like for June and it's not very good. So I think we were ahead of the curve, in that we had prepared for some of this. I think there's gonna be some interesting days ahead for us, and it's really hard to tell when the shelter-in-place, when restore Illinois is going to happen. I mean, it could be months that are out there. So, we're being careful. The other thing we decided as a company is to pay our vendors on time. You know, our vendors are our lifeblood. If they're not building assemblies or stuff for us, we'd be in trouble. So we made a point to make sure that every employee got paid. And then our vendors get paid.
Steve Baker 43:05
Fast pay makes fast friends.
John Costello 43:07
Yeah, absolutely. Right.
Steve Baker 43:10
I think that's great. Here's kind of two questions that I'll put into one, and I'm going to ask them first to John, and then Rich, if you want to throw in any comments from a general Great Game perspective. “I've attempted to convert daily job work, especially on the shop floor, into savings. Response has been tremendous. But it's somewhat difficult in starting formats, or arriving at standards on things that we've already changed the format on.” It continues on to say, “Is it okay to struggle initially? And what have you experienced when you started?”
John Costello 43:42
Ours was kind of interesting; we went very, very fast. We were just pushing our people-- maybe too hard--just to try and get ahead of the curve. And then we had to slow down. And so that's really kind of where it's been for us right now: it’s fast and then slow down, really to make sure that everyone's safe. We're kind of at a slower pace right now. And it's also a challenge too because you have to prioritize which orders take precedence. So it's been interesting for us where we had to engage a lot more people in the organization, at the production level, meaning is this customer open? Will they take the equipment, you know, will they take it on time? Do we have to store it? So there was a lot of stuff that we normally don't have to do from a production standpoint. There's a lot of juggling, and our guys have been able to do that. But I guess the answer is fast and then slow, and we'll see when we pick back up again.
Steve Baker 44:49
Rich, what do you think?
Rich Armstrong 44:50
Well, I think you have to embrace the fact that it may be a little messy at first and I think you need to just talk about some of the leadership characteristics to go along with it--be vulnerable, be humble--that we're not going to get this right. We're all trying to teach each other the business here and feel free to change it up if you need to.
But at the same time, I would say that the real power in this is the consistency. So there's some things that you need to stay very disciplined on, and I think John mentioned it several times, one is keep those huddles. If you're making the commitment to play the Game and say that we're going to meet this time, every month and every week and stay consistent to that, because your people are going to be watching that. How consistent are they going to stay with this process? And use that opportunity to just continue to teach people the business.
Steve Baker 45:46
Since we're on the topic of both the business side and the people side, and you guys touched on this a little bit earlier, could we go backwards just a little bit and talk about the business side of things? Are your sales people commission? And if so, how have you adapted the Great Game bonus structure with the commission sales force?
John Costello 46:11
Our salespeople are commissioned; we pay our bonuses based off of a salary. So the commission's not factored into that. We've always been a very sales-oriented company, and my background comes from sales. So you know, it's a tough job. And we kind of feel like that's the driver. You know, if you're not selling anything, you're not building anything. We're not invoicing anything, no cash comes in. There have been some changes to the comp plan, but they still get commissions and a bonus on top of that.
Steve Baker 46:49
So you're able to kind of blend what the industry standard is in your world, commission salespeople with keeping them on the team instead of being lone wolves with their own interests at heart first.
John Costello 47:02
Right.
Steve Baker 47:03
That's good. I think that's a very common thing that we do here. As we implement with different companies. If there is a commission salesforce, there's always a question, what should I do? So we appreciate your comments very much, John, and your experience on that.
John Costello 47:17
You know, there's a question there about the PPP I'd like to answer that one. So that was another thing that we had talked with our group about, and I know that there's changes going on, but our feeling is that we're going to continue to use it for payroll, and then any money that is not used, we're just going to give back. And that was everybody in the company was like that, that makes 100 percent, you know. So as far as the PPP forgiveness, we will for payroll, because that week of a shutdown, it was more than a week. So it really kind of changed what we were doing. And I think that was really the purpose for it is to make sure that every single employee was whole. And that you kept them all. The rest of it, you know, if we were going to use it for other things, we just kind of thought we'll hang on to it, we'll pay it back or pay it back with interest. But that's our thought.
Rich Armstrong 48:29
John, I think that's really good advice. It's really come up a lot with questions about how to use the PPP. I think there's a lot of confusion around it. And even some questions to us about it, you know, should you use it within your bonus plan, the stake in the outcome plan, and, you know, our advice is very similar to yours. Use it to protect the paychecks of your employees, and be sure you be careful and document everything you do around this because we're not sure--there could be a lot of lawsuits around how people are going to mistreat this program. And the best thing to do is kind of treat it like a debt and use it as a way to say we're going to pay this back and before any kind of gains are provided in other ways for the business. So I appreciate your approach to that.
Steve Baker 49:23
Yeah. I think it speaks to the culture you're building. Right, John? I mean, it's about honesty and integrity and making the right decisions based on the the best thing for the company. Are we building a lasting organization? And that's something that we just don't learn out in the world. I mean, a lot of the talk around our virtual offices at the Great Game has been, you know, how do we teach the next generation? And right now they're learning from people who shouldn't be talking about stuff. So we are the new teachers. Business is the way it's gonna happen in the future unless we want a bad future. So, I sure appreciate what you're doing there. I think we have time for just a couple more. It looks like there was one that was more probably for both of you. I think it’s, “What are the top two questions business owners are most concerned about, or want answers to the most?” Let's go John first, and then we'll go Rich.
John Costello 50:27
I say for me, the first is to return to work. What is that going to look like? And then the second thing that's probably keeping every business owner awake at night is how long is this gonna last? And nobody has answers. And even on the first one, it's so hard because the return to work means that it's gonna affect a lot of people within the organization. Right? And you want to make sure that you're doing it the right way. But I don't know if anyone knows what the right way is right now. I mean, there's so many things that are out there. I mean, if you watch the news, or read or talk to experts, everybody has their own idea. So we're trying to figure it out as a group and see what works for our company. And I think that's the key. And if the decision can be made as a company, it's gonna be much better than the owner having to make the decision.
Steve Baker 51:24
I love the way you tap the wisdom of the crowd. Man, that is so cool. And it takes some major humility to do it; it takes guts. Rich, what do you think that two big ones are? Take into consideration all the people you're talking to every week.
Rich Armstrong 51:38
Well, I don't think I can answer any better than John. I mean, I think that's exactly it. I think that’s the one that's keeping a lot of entrepreneurs and a lot of business owners awake is first of all, how long is this gonna last? And what can I do right now to keep the business stable until that demand comes back? And I think people are trying to be very creative with that. And, of course, what’s the back to work going to look like as well. I think those are the two questions. He nailed it.
Steve Baker 52:13
My biggest concern is, when we go back to work, are you going to invite me?
Rich Armstrong 52:20
You can come back to work; you just gotta stay in your cave.
Steve Baker 52:26
[Laughter.] Yes, Steve, stay in the Bat cave. I love it. Well, I got to thank you, John Costello, so much for being the guy that you are, the leader that you are, and part of the community. Really appreciate it, John; thanks so much.
John Costello 52:41
Thank you guys.
Steve Baker 52:42
I'm going to wrap up with a couple of things. One is there was not a question here, but something from Ryan who actually worked for SRC for 14 years. He says, “So GGOB is built into me after 14 years at SRC. I recently made a career change and the new organization practices a lot of the fundamentals, which has made my transition much easier. My director also just finished reading the book, ‘Great Game of Business,’ which by the way, there is a new book called ‘Get in the Game’ by Rich Armstrong and Steve Baker, and loved it. Thank you for everything you guys do and I hope to put all my colleagues into your weekly meetings. Lastly, great job, John, your stories are inspiring to everyone.”
So thank you, Ryan, for saying that. And glad you can be a part of it. And then Steve has asked a question, not me, Steve Curlis. So wait, there's a book? Yes. It's called, “Get in the Game,” by Rich Armstrong and Steve Baker. And Jack has a new book, “Change the Game.” That's right. So don't forget, lots of good books to read.
So I'm gonna wrap up. Remember, guys, we got to keep the conversation going. Send us your questions, your best practices, ideas or challenges, your victories. You are the backbone of the economy and you are not alone. We’ve got to stand together and collaborate. We’ve got to keep doing this so small- and mid-sized sized businesses can flourish. We’ve got to evangelize. Let's connect to like-minded and like-hearted people in this global Great Game community and make a global impact. So, John, thank you. Rich, thank you. Thanks, everybody. Have a great weekend.
