The Center-Cut Solution

I own five successful restaurants in Seattle, but I recently came very close to owning none. My five restaurants gross about $ 10 million a year; employ 300 to 400 people, depending on the season; and, through most of the 1980s, produced a decent profit on a small margin. In the early 1990s, however, I found myself with the same problems so many other businesses have faced in recent years—declining income, growing expenses, operating losses. I had to cut costs drastically or go under. There are lots of ways to address this predicament, and I chose a common one: downsizing. Now, the conventional approach to downsizing is to eliminate frills and peripherals. My trouble was that except for waste, which I also attacked, I had no peripherals. I had to cut at the center. Instead of lopping off limbs, therefore, I cut off the head of my company. Remarkably enough, it worked. Squeezing the Juice out of Restaurants Things started going sideways in a serious way when I opened Sharps Fresh Roasting restaurant in December, 1990. Opening night saw Seattle’s worst snowstorm in 40 years. I had two customers, cops who came in to get out of the cold. The next night I had three customers—the same two cops had brought their boss. Seattle was a sheet of ice, and business was nil for weeks. Next came the Persian Gulf War. Everyone was glued to CNN and uninterested in my brand new restaurant. After that, the recession hit Seattle full force. Boeing began laying people off. Then my landlord, a former restaurant owner himself, told me my new concept was all wrong. “Why don’t you just do another Von’s?” he kept asking. Von’s was my downtown restaurant. It had a polished mahogany interior, a ceiling covered with Seattle artifacts like taxi doors and water skis, and a thoroughly northwest menu featuring fresh salmon, Alaska king crab, and prime beefsteaks; but it was still basically a city saloon. Sharps was a bold suburban experiment, my contribution to restaurant history, and I was beginning to have some serious doubts. Was it boring? Did it surprise and delight the customer? Had I gone too far? Not far enough? I was bleeding so badly that my other four restaurants, though still in the black—or perhaps I should say in the gray—couldn’t make up the shortfall. My business was dying, and its death would certainly bring on my own economic demise as well. Personal loan guarantees would see to that. I had been in the restaurant business for 25 years, I had worked as hard as I knew how, I had innovated, delegated, and empowered, I had struggled through earlier crises and basked in the sunshine of great success; and now I was going to lose everything unless I could come up with some powerful magic to turn my company around. The truth of the matter is that restaurants have been in a bind for some time. That’s how I found myself experimenting with the new Sharps concept in the first place. Food costs have been rising. Labor costs have increased markedly since Congress raised the minimum wage and eliminated tip credits as a means of offsetting wage expense. Health costs too have been spiraling out of control. Worse yet, customers’ incomes have shrunk. Today, both husband and wife have to work to match the earning power just one person had 30 years ago. On top of it all, the foundation on which fine dining has prospered for 60 years has crumbled. Ever since the repeal of Prohibition in 1933, most restaurants have relied on the sale of spirits to offset their very small margins on food. This formula no longer works. For two highly commendable reasons—increased health awareness and stricter enforcement of the laws against drunk driving—restaurants sell a lot less alcohol than they used to. In my particular case, I’m afraid I can add lousy cost control to the equation. We were just not managing expenses in a way that brought dollars to the bottom line. In fact, waste and theft often frustrate management and destroy restaurants. In our case, I estimated they were costing up to 9 % of our gross revenues. So I found myself in the jaws of a vice. My costs were rising, and my customers, by eating at home, were demanding lower prices. Charging $ 15.50 for 8 ounces of salmon would simply no longer do. I knew I would have to abandon that plateful of expensive protein so dear to American restaurants. I also knew I would have to focus harder than ever on service, excitement, variety, and quality. The heart of the Sharps Fresh Roasting concept followed directly from that analysis. If expensive protein wasn’t the answer, then I’d try inexpensive protein—or at least less expensive protein. But how do you make less expensive protein tasty? How do you get top round to taste like prime rib? The answer we came up with was slow roasting. Sharps takes five meats—beef, lamb, pork, chicken, and turkey—fruitwood smokes them, roasts them for three-and-a-half hours, then lets them coast in a slow oven for 18 hours more. This process (with some proprietary refinements) produces meat so filled with juice and flavor you can hardly tell the difference between the lean cuts we serve and the more expensive, fattier cuts you might order in a steak house. Our meats are not only healthier, they cost half as much as the food in traditional American-fare restaurants. That means we can price entrees under ten dollars—a magic number if you’re out to attract suburban customers—and still recapture some of the margin on lost liquor sales. Sharps, I figured, would meet the public’s demand for low-cost, high-quality dining. What’s more, I calculated, slow roasting would meet some of the other imperatives as well. It cuts waste, for example, and, by reducing the variety of raw materials, helps to ensure freshness. Service speed is another plus. With roasts ready to slice for immediate use, we get quicker service and higher customer turnover. Simplicity and efficiency also keep labor costs down. With less total culinary work than standard restaurants, Sharps uses more semi-skilled help. Best of all, spit roasting makes a great spectacle. I always try to make my restaurants visually interesting, and it’s never easy. Grocery stores do better food displays, galleries are better with art, and revolving tower-top restaurants will beat your view every time. So at Sharps, we’ve got an 8-by-20-foot roasting works right in the middle of the dining room with an ornate smoking oven, lots of polished machinery, and stainless-steel spits turning huge slabs of meat and 60 chickens at a time. It was as close as I could come in Seattle to a front-row seat in Henry VIII’s kitchens. It was as close as I could come to a front-row seat in Henry VIII’s kitchens. But all of this together was still not enough. The war and subsequent recession were killing us. After six months, Sharps still wasn’t breaking even, and my other restaurants were earning only marginal profits. Operating costs were starting to come out of my own savings. I couldn’t close Sharps; doing so would make me immediately liable for the $ 1 million I had borrowed to open it. And I didn’t want to borrow more money—even if the banks would let me have it, which I seriously doubted. Anyway, deep down I still thought the Sharps concept was great. I just needed to cut my overhead and improve my cash flow so I could prove it. Restructuring and positive cash flow had to be my top priorities. Yet bad publicity about cutbacks would hoist a red flag. I needed a blueprint to reestablish cash flow and adjust strategy while keeping my employees, customers, purveyors, the banks, and the media happy. Contemplating My Own Kremlin It was one of those perfect summer days with an infinite blue sky, wispy clouds, and a cooling breeze. The sun danced on the water, the kids were turning cartwheels on the lawn, and I was brooding about Mikhail Gorbachev. Recent news reports detailing the disintegration of the Soviet Union rang unhappy bells with me. Gorbachev was presiding over the dissolution of his empire; I was presiding over the dissolution of mine. But there was more to it than that. There was a similarity I was missing, a subliminal parallel between Gorbachev’s situation and my own that kept tugging at the edge of my awareness. In all of history, the USSR was the world’s largest centralized management system. Down to the last detail, everything was planned at the center, directed from the center, reported to the center. Situation-specific local management was disallowed. Information systems took precious time converting data to a fatuous pap and then filtering it up the bureaucratic ladder. In the end, the system grew so top heavy, expensive, cumbersome, and unresponsive that it simply collapsed. But what did the fall of Communist Russia have to do with a Seattle restauranteur? The answer that came to me that lovely summer afternoon was: almost everything. What did the fall of Communism have to do with me? The answer: almost everything. Several years earlier I had empowered our frontline employees with a program and company credo called WAGS—We Always Guarantee Satisfaction. It gave food servers the authority and power to make immediate amends to customers for slow service, confused orders, overcooked meat, that sort of thing, by giving away food or drinks or even picking up a check. Now it suddenly occurred to me that I had failed to extend this same kind of power and responsibility to my local managers. WAGS had done wonders to increase repeat business and employee commitment and, by proactively identifying problems before customers even had a chance to complain about them, to help us find and correct the causes of each system failure. But where food servers had the power to take action on their own initiative, my line managers—bar managers, restaurant managers, kitchen managers, general managers—were still firmly subordinate to corporate headquarters when it came to payroll, menus, marketing, product development, accounting, training, hiring, and general decision making, just about everything except reservations and breathing. We were still operating under an antiquated line-staff system as obsolete as the centralized communist approach. What a revelation. How could I have missed such an obvious connection? Centralization breeds stagnation. Hierarchies invent complexity, the enemy of efficiency. Bureaucracy revels in red tape and politics. It was true in the Soviet Union, and it was true at Satisfaction Guaranteed Eateries. Here was my silver bullet. Like the Soviets, we were overstructured, overmanaged, and overhead overburdened. So, like Gorbachev, I would slash my center and liberate the company. Indeed, I would go him one better. I would transfer virtually all power and responsibility to my line managers and simply eliminate my corporate headquarters. I would fire my whole corporate staff. It was ingenious, bold, and unconventional. It was also terrifying. But all those salaries were guzzling desperately needed cash. Killing Corporate I think business wisdom in its plainest sense might be defined as discovering what really works. Once leaders have tried out a lot of personal hypotheses and tested a range of ideas from books and school, wisdom gradually forms to point them toward high return-on-investment strategies and behaviors. Young organizations are inefficient because they’re still learning. But because new companies usually don’t have much cash, nascent entrepreneurs compensate for their lack of experience by watching every dollar. The trouble starts when a business begins making money. Resources finally exist for experimentation. The company’s principals try all kinds of things. They’ve read widely and want to road test the management theories they have worked so hard to learn. This is generally a mistake. The company wasted considerably less money when it was brand new and resource poor. Such, I realized, was the case with me. I could see the seeds of my current problem in an insight I’d had years ago when I was first wrestling with the need to delegate and figured out that the company could no longer afford to have me as the hero in every arena and that I had to get some help. Good advice, but I went overboard. From running a chain of restaurants by myself, making so many decisions and micromanaging so many people that I used to dictate letters and memos even while driving, I had progressed slowly to a corporate headquarters with a staff of 17 people. I had a product development department and a director of special events and 4,000 square feet of office space. Talk about centralization. I had the restaurants reporting to corporate headquarters in ways that would make a commissar feel right at home. A company like mine can roll along for years with silly job positions and too much overhead—the result of too much money and too little hardship. But a day of reckoning always comes, and now mine had arrived with a flourish. I was torching 10 % of my personal cash assets every month. Two-thirds of all my bank accounts had already burned, so I had to move quickly. I needed a detailed plan. This was not simply a question of putting the company on a strict diet. I was going to kill our corporate headquarters, and that meant rethinking and restructuring everything we did. It also meant I had to trace the implications of every change all the way to their final outcome. Moreover, I had to get everything right the first time. Trial and error is a fine way to learn when you have the luxury of time and security. But layoffs make people nervous, and layoffs followed by chaos, indecision, and experimentation make people run for cover. If I was going to hold onto my employees, my bankers, my purveyors, and my customers, I had to make these sweeping changes all at once, without warning, and I had to make the whole thing swing into working order overnight. The experimenting had to take place in my mind and on paper, not in the restaurants. Procrastination plagued me. How was I going to complete this huge project, keep it confidential, satisfy all stake holders, and do my regular work? Clearly, I would have to concentrate my energies. Reluctantly, I quit the school board and the Young Presidents Organization. I even decided to give up my occasional Sunday skiing. After reorganizing my life I had an open calendar and a clear desk. I had focus. Procrastination still plagued me. I gave myself stern lectures about the dire circumstances and the need for action and courage. I reminded myself that I had years of experience to draw upon. I told myself that, like most entrepreneurs, I understood my business and knew what to cut without doing fatal damage. I required myself to believe in my own accumulated wisdom. I also began carrying a looseleaf binder with me wherever I went. It allowed me to record my thoughts instantly and served as a constant reminder of the urgency of my situation. At last, I started work in earnest. For five months I worked on the plan in every spare moment, seven days a week. Nights, weekends, and early mornings were devoted to figuring out how to save my company. And, finally, the answer began to unfold. Filling in the Blanks In the beginning, I had nothing but blank pages, but I began adding tabs like Timing, Cash Flow, Electronics, and Personnel Changes. I even had a section on Personal Changes and Self-Motivation. I’d go to the office at 3:30 most mornings, put on coffee, and set to work. Usually I started with the numbers, so I’d turn to the Pro Forma section of my binder where I was putting together all my projected income and expense figures. I needed to save at least $ 225,000 off the top—in addition to the 9 % I needed to recoup by cutting waste and increasing efficiency—and I took it one piece at a time. For example, what happened if I eliminated my special events (mostly banquets) director? It saved $ 25,000, I noted in the pro forma. But it also meant I had to talk to the various restaurants about a banquet process and give each of them systems for booking, planning, billing, and staffing. That too went into the pro forma. It also required some notes in the Electronics, Accounting, and Assets Location sections. But more responsibility for those managers also meant higher rewards and incentives, which sent me to the Salaries section and then back again to the pro forma. And then of course I had to ask myself if it would work. Handled by my special events director, the banquet process had been very tidy, but if local managers were going to make banquet decisions on the spot, the whole thing would be messy and hard to track. Would it be a good tradeoff? I decide that it would. It would take special events out of my control and put more power and responsibility into the hands of the managers in the restaurants. And messy or not, that was precisely what I wanted to happen. Eventually I had a 25-category, 300-page notebook. Uppermost in my mind throughout was the elimination of corporate headquarters and its bureaucracy, which weighed us down and threatened to capsize our ship, so I named the emerging plan after my goal for line management: 100 % Power and Responsibility, “100 % PAR” for short. We would still need a central office, I reluctantly concluded, because we’d still need a company accountant to do our taxes and write certain corporate checks. And then of course I would need a desk somewhere. But I would call this trimmed central office the “workroom” to underscore the message: headquarters is dead. The buck doesn’t pass. Line management is this company’s engine. We’re putting 100 % of our power and responsibility at the edge, the cutting edge, and 0 % at the center. Once and for all, we’re putting an end to the silliness of corporate staffers pontificating to the line managers who actually serve the company’s customers every day. Besides, doesn’t the very word “corporate” have a nasty ring to it? And isn’t “corporate” traditionally the scapegoat for most company ills, real or imagined? Killing corporate would eliminate that scapegoat and emphasize line responsibility. It would also force new company procedures to replace at least some of the missing staff. This too would be a positive turn. Among other things, I was eager to do away with the masking effect of home office accounting. Shipping off invoices to corporate for processing blurs their significance. They come back in effect sanitized, devoid of the emotional content that might otherwise spur line managers to higher efficiency. The better approach, I decided, would be to do as much accounting as possible at the local level. It would give restaurant managers a far better grasp of how their revenue dollars were used. Analyzing and approving bills in-house would dramatize the fact that all management decisions incur expense. Moreover, I wanted to put the fear of restaurant-death into my managers. Nothing is so wrenching as not having enough money to pay bills. A CEO can talk himself blue in the face about controlling costs, but a confrontation with insufficient cash to meet expenses is truly memorable. Now unit management would begin to see and feel the tenuous life thread of cash flow. Beginning again with my pro forma, I pursued these changes through my binder to Accounting, Electronics, Training, Salaries (I’d have to upgrade my restaurant bookkeepers and give them more money), and so back to the pro forma. Every change had implications that branched again and again, every branch had an impact on costs, one way or the other, and I had to capture everything. To replace the biggest staff functions of all—planning, problem-solving, and decision-making—I began picturing a weekly meeting where managers would discuss company headaches and opportunities. I wanted them to see problems not as mistakes, a word that puts people on the defensive, but as targets for everyone’s input. Our fundamental rule would be, “No one is wrong or right, everyone is a resource.” Including me. The resource concept would be the foundation of our weekly meetings. I decided to call this new collaborative process “ally management.” While I was convinced that ally management could successfully run the company and replace the corporate staffers, there were still the practical problems of communication and decentralizing accounting. Without central accounts, my managers were going to need their own computers and accounting software. And without the central office as a clearinghouse for information, they were going to need some efficient means of staying in touch with each other and with me. By asking hundreds of questions and consulting several outside experts, I was able to plan our own small electronic revolution. The workroom would get a state-of-the-art voice-mail system. Computers in the restaurants would be altogether upgraded and reprogrammed for in-house accounting and rapid processing of profit-and-loss calculations, which I wanted to start producing weekly. The computers would be interconnected with modems, eliminating the corporate mainframe (for which I’d paid $ 150,000 just seven years earlier). All the restaurants and the central workroom would be linked by fax machines. I would carry a mobile phone so I could be reached at any time. And we’d produce our own menus in the work-room with a laser printer and a high-speed, high-volume copier. This was hardly an impressive list by the standards of a billion-dollar corporation, but for us it was a dazzling array of gadgets. Except they were not gadgets at all, of course, but tools—an important distinction in my mind. Our computer and electronic updating was late, perhaps, but we weren’t just buying wizardry for the fun of it. Our needs were specific, the prices were finally right, and the goal was strategic—100 % power and responsibility to line managers. I now had a reason to believe that electronic tools for quick communication and greater line control would radically change my business. I went on tracking the theoretical cash-flow effect of 100 % PAR with my evolving pro forma. For weeks on end, I worked at translating my plans into hard numbers. Meticulous review of our profit-and-loss statements—the most intense financial study of my life—helped me see more and more new possibilities. I crunched numbers and redid the pro forma until it made financial sense. I was discovering how to make my business work, and the paper results were encouraging. If I could indeed slice 9 % from our operating costs, then those savings along with the cuts in our corporate staff would see me through while I perfected Sharps Fresh Roasting. Managing Morale The looseleaf-binder-and-pro-forma exercise also convinced me that, despite the urgency of the situation, I could not phase in 100 % PAR overnight. Hiring experts to upgrade our in-house computers; installing faxes, modems, and phone systems; training line managers in computers and accounting—all of this would take time. And despite the positive impact of empowerment, ally management, and the electronic revolution, I knew that reconfiguring the company would trouble employees, especially managers. I was afraid they would think that we were going into Chapter 11. To counter negative thinking, I began working on a variety of big promotions for immediate activity and cash-flow impact. Since promotional money was something we didn’t have, I had to find it. I wrote dozens of 25-page presentations that included detailed descriptions of possible events, scrupulous explanations of expected product or publicity benefits, and itemized budgets. Then I hit the streets, presenting my proposals to potential sponsors. The process was exhausting, but one in ten did agree to sponsor a program. I wound up with a glassware giveaway promoted by a soft drink company through a radio station, parasail sky races for the Special Olympics that started at one of my restaurants and ended at another, reggae bands celebrating a new beer, comedy nights and rock-and-roll concerts for the benefit of the Northwest Homeless Fund. The restaurants would be busy and so would the managers. That ought to undercut any fear of Chapter 11. Another main concern was our suppliers. Layoffs make purveyors extremely anxious, and just one of them going COD would launch a domino effect. If my suppliers began insisting on cash, that would scare the banks. And if word then got around that the business was in trouble, that in turn could frighten off customers, sealing our fate with purveyors and sending our employees out looking for new jobs. It was the restaurant chain that Jack built. Unless I could keep everyone comfortable and at ease through a major downsizing and what some might perceive as a foolhardy restructuring, nothing could prevent the chain reaction that would finish me off. I had done all I could in terms of cash flow and customer activity. The final piece of preparation was the plan itself, carefully reasoned, thoroughly documented, and totally reassuring—or so I hoped. I began writing a formal package to distribute on what I had come to think of as Just-Do-It Day, when I would reveal 100 % PAR to everyone at once in 60 pages of numbers, explanations, and projections. I wrote five different presentations for the various interested parties: managers, employees, purveyors, bankers, and the press. I included several pages about coming strategies and events. I described plans for new menus, a new smart-drink non-alcoholic beverage line we were introducing to bolster bar sales, a summer Dungeness crab festival, a new bar game, and the introduction of Family Sundays to spark what is traditionally our slowest day. I explained how the company’s restructuring would enhance cash flow, open the door for new growth, and allow further development of the Sharps concept. The overall picture was full of good news and hopeful signs, which I tried hard to communicate. I was scared to death. Just-Do-It Day was all over in eight hours. I bounded out of bed and delivered the 200 packets I had stacked on my office desk. Next I drove to every restaurant and explained the changes to my managers, posting copies of the plan for everyone else. I mailed descriptions of 100 % PAR to banks, purveyors, and the press. I spoke to each member of my corporate staff in person, trying to soften the blow with severance pay and a full explanation of my thinking. Some of them tried to bargain, some were angry, and a few even congratulated me and said I should have done it all months earlier. In one case, I found myself in tears. Just-Do-It Day was all over in eight hours. The center of my company was gone: the place felt like a morgue. Altogether, I laid off the corporate president; the operations manager; the directors of marketing, training, product development, and special events; three of six accountants; three secretaries; and, in the restaurants, five bar managers. When the day was over, the center of my company was gone and with it my own support system, the people who ran my errands and kept me company. The place felt like a morgue. Allies and Benefits On the other hand, my line managers had new responsibilities and powers, new salary packages, and new bonus incentives based on a percentage of cash flow. The plan paid additional dividends quickly. The pared-down version that went to the media led one newspaper to do an upbeat story for the front page of its business section. The thoroughness of the package I sent my bankers helped me persuade them to give us a 90-day principal reprieve during our slowest months. The new, lean workroom allowed us to move from 4,000 square feet to 800, with an 80 % reduction in rent. It now houses our central filing, prints menus, writes payroll checks, does taxes, and gets almost as much done as before at about one-third the cost. I was part of the improvements too: my new office overlooks an alley. We moved quickly ahead with the electronic revolution—voice mail, carry phones, modems, sophisticated PCs—and started using all of it. (I made half of each restaurant manager’s salary increase contingent on mastering the new PCs and the accounting packages that we got to go with them.) The crowning touch was ally management, which has worked better and produced more benefits than I had dared to hope. Its first challenge was cost control, a problem we still had to solve or lose the business. At the first session of the ally management meeting—the general managers of the five restaurants and I meet every Thursday from ten to four—I simply opened the topic of cost control and sat back with pen and paper to take notes. It was an uncomfortable test for me. Costs really had me worried, so I desperately wanted to take charge as I always had in the past and get things moving quickly. I had to force myself to be patient. The others began trading ideas, and I wrote them down. The meeting became a forum for self-instruction. In the course of the next couple of hours, we came up with several dozen simple ideas for limiting costs—everything from holding a hellfire stop-theft meeting with employees to putting the hand-held liquor dispenser in a container overnight to see if it was leaking. Over the weeks that followed, the list grew to 30 pages, and we now review and alter our cost control sheets once a week. There is always some addition or improvement. As managers started coming up to speed on their new accounting software, a whole new set of ideas began to surface. Responsibility for his own labor costs brought home to one manager the inefficiency of using a $ 12-an-hour cook to peel potatoes. To discourage waste and theft, another began teaching his employees that the typical restaurant profit margin is 4 % , not the 25 % many of them assumed. Someone else noticed that buying supplies in small amounts increased their perceived value and encouraged conservation. I was astonished at how rapidly we brought costs into line. In less than a year, we achieved the 9 % total savings I had targeted in the pro forma. (Savings at individual restaurants have ranged from 5 % to 12 % .) Yet soon I would like to tear up these commendable cost control sheets and start over. If that seems an odd thing to do, consider the benefits of having to recreate all that expertise. Information goes stale. It takes new insights to hold one’s own attention. Ally management’s second challenge was product development. Here too, the necessity to innovate educates managers better than corporate force-feeding. The most pressing item on the product development agenda was the ailing apple of my eye, Sharps Fresh Roasting. Clearly it needed something more to surprise and delight customers, but I still loved its ingenious new concept. Moreover, I had personally guaranteed its million dollar debt. We started our comeback using ally management for recipe refinement. We invented 40 new items based on our five roasts of lamb, beef, pork, chicken, and turkey: Bubba’s Enthusiastic Jerk Chicken, Satay Pork, Grandma’s Old Fashioned Chicken Dinner, No Sin Turkey (7 % of calories from fat), Jack Daniel’s Old No. 7 BBQ Beef, and Rio River Red Pork, to name a few. We also attacked the decor. We are a stone’s throw from SeaTac International Airport, so someone came up with the idea of calling the bar The Bent Prop. We combed rural airports and airplane graveyards all over the Northwest and came up with two hundred airplane propellers that had been bent in bad landings. We hung them from the ceiling. We worked hard getting restaurant critics interested. One writer did two articles about our recipes. In all, Sharps was reviewed and highly recommended five times. Revenues began increasing month by month. A year later, Sharps Fresh Roasting is the gold mine I always believed it could be, and I’ve starting selling franchises. My landlord—the man who originally insisted Sharps was a bad idea—bought two. Believing Our Own Story It was ally management that rescued the fresh roasting concept, and I think it can save us from a national epidemic of restaurant deaths. It was also ally management that solved the cost problem I’d struggled with in vain for 20 years. I’d tried bonuses, praise, threats, outside consultants, classes, tapes, videos, and seminars. Nothing had worked very well or for very long. Now, without Herculean effort, we’ve achieved the best cost control results we’ve ever had. From 1991 to 1992, cash flow went from negative to positive for a 200 % turnaround, and I’ve recouped more than half the cash lost during our negative cash flow period. What happened? How did all this come about? Here’s my analysis. Information is a hot topic—organizing it, processing it, storing it, accessing it. But these activities, in my estimation, may not be what matters most. In the marketplace, information’s role is to stimulate action. You might even say that knowledge not acted upon is worthless. With this in mind, I maintain that information’s most important feature is believability. If I don’t believe it, I won’t act on it. This is the strength of 100 % PAR and ally management. Because we create all our information ourselves from scratch, we believe it. Because we believe it, we’re ready to act on it, much more ready than we would be to act on the advice of a business school professor, however distinguished, or, for that matter, on a directive from the CEO. And action, in my opinion, is the cardinal rule of management. The crux of ally management is both subtle and obvious. It provides a forum for line managers and allows them to participate in shaping company destiny. It gives them incentives very much like the owner’s—a percentage of cash flow, defined as net profit with depreciation added back in and principal payments against debt subtracted out. It helps them act. I see quicker company change, more powerful motivation, and a much more confident and hopeful culture. We have achieved the best cost control numbers in the history of the company. We have reduced the time it takes to produce end-of-the-month financial statements from ten days to three. We have done away with our bureaucracy and turned business around in a down market. In the process, we have reestablished a basic capitalist principle: making money. All this because our managers are managing themselves.

The Center-Cut Solution

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