chapter 1: the result: and $8 billion business success

"Those who contribute to the company should own it, and ownership should be commensurate with a person's contribution and performance as much as feasible."

"SAIC was an unexpected happening. There was no grandiose plan for its future. It was just supposed to be a good place where I could worka nd maybe a few people could join me, so I could continue to live in San Diego and keep my wife happy.

From the beginning, SAIC was an employee-owner firm. In previous jobs with a national laboratory and then at a large corporation, I saw many people leave, taking ideas generated there to start their own companies. These entrepreneurs were quite interested in starting a company for financial rewards based on a new idea or product they had developed. They planned to start a company, grow it, and then sell it or take it public, and go on to the next business venture. That was hardly the optimal environment for research people, and it was not my intention in founding SAIC.

Our goal was to grow a company that would be stable, -- where the staff stayed with the company, even in hard times. In this company, creative research would be considered important, regardless of the size of the contract. Rewards would be fair. Everyone would share in the ownership of the company based on their contributions to our success. That only seemed right, especially if we expected people to work long and hard to help build the company. Also, everyone would contribute to decisions affecting the company -- profit would not be the main driver. We wanted to make enough money to run the business, attract outstanding people, and grow. In many respects, we were not traditional entrepreneurs."


"Art said that we should first seek a private placement to satisfy our immediate cash needs, and then do an initial public offering (IPO) -- that was his recipe for success, and he'd done it successfully severeal times...Something must have happened to stop me from buying into this traditional approach. I had observed that it can destroy a company, and harm all but a limited number of insiders -- most often the top executives -- who do very well financially. This fact usually doesn't concernmost of these early employees. They may, however, fell some remorse about the fact that their original company is disappearing -- being replaced by a new public company."

they were persuaded by an early advisor to sell $200,000 of SAIC stock in a private placement (the investors netted 10x), but he doesn't like it, so they never did it again.

"I do not recommend the venture capital approach if you can avoid it because an inordinate amount of the ownership ends up with disinterested financial investors. ...

More than 80 percent of SAIC's employees own company stock, and over 90 percent has been the historical pattern for decades."

"Revenue and earnings grew at a compounded annual growth rate of 33 percent over this time period [from founding at 1969 or 1970 to 2006)]"

"..operating income growth was consistent with revenue growth, meaning SAIC maintained fiarly consistent margins over this time period. The margins might be less than other comparable companies at any given time, since I was interested in guaranteeing future revenue growth. SAIC was in the business of selling brainpower, mostly to federal government agencies that did not generally pay high contract fees to begin with. I made a conscious decision to build SAIC around selling the expertise and smarts of our employees and not selling widgets. This meant foregoing higher profits while building significant revenue growth. Even so, SAIC never had an unprofitable year."

"when I decided to start the company, my motive wasn't financial. I wanted to create a company that would attract talented scientists and engineers who would tackle nationally important scientific issues. And they would stay at SAIC because of the challenging problems and a work environment that encouraged creative thinking."

a bullet list of some principals:


Chapter 5: the glue: employee ownership

(much of this chapter was extolling the benefits of employee ownership, which i didn't take much notes on because i am already firmly convinced of this)


state of california audited them when they exceeded 35 shareholders. SEC audited them when they had ~350 shareholders. They eventually started a broker-dealer subsidiary Bull Inc. to make an internal market. Articles of incorporation gave company right to buy back shares when an employee terminated.

open communications, employee participation in decision-making, mutual accountability

stock pricing formula: price = E/W + 5.66*M*P/W_1. E = stockholder's equity. W = weighted avg shares outstanding, derived from diluted eps. M = "market factor", created by independent assesor to reflect values of comparison public companies. P = past four quarters segment operating income after-tax. W1 is another measure of shares outstanding, like W. He also says that EBITDA was a primary driver in this formula, but i don't see it appearing anywhere.

chapter 6: the system: participation in decision making : how we build an $8 billion employee-owned technology company

"research studies show that employee ownership alone is generally not enough to make a significant difference to an organization's bottom line has to be accompanied by something more: participation in decision making.

Many companies in the employee ownership community, including such businesses as furniture manufacturer Herman Miller, Inc., and engineering and construction contractor CH2M HILL - have experienced the payoff that results from combining ownership with participation. We validated that result at SAIC "

"Although teams of individuals were quite often called on to address the com- pany's major problems, to be successful these teams needed to be led by strong, dedicated individuals. Throughout our history, we have counted on the individual to be responsible for solving problems or directing a group to solve it."


Growth was a big driver in SAIC. Resources were distributed to all levels of management to grow the company—an unconventional approach practiced by few of SAIC’s competitors. But while the process fit an employee-owned com- pany, it had its drawbacks. To gather the resources to respond to large pro- curements, resources by necessity often came from many sources within SAIC, a difficult but not impossible coordination job for the managers involved. THE SYSTEM 81 Managers made decisions—that was their job—but they also created an environment and culture conducive to engaging employees at all levels in the decision-making process. This unique SAIC culture was one of participative management, where employees were encouraged to engage in the decision- making process by giving their candid suggestions, recommendations, and opinions, and managers were expected to solicit and listen to this employee input and consider it carefully in making decisions that all would ultimately be expected to abide by. Participative management at SAIC meant that ev- eryone’s opinion was valued; it did not mean that all employees had to be in agreement for decisions to be made by the company’s managers.


In a rapidly changing world faced with complex issues, informing a large number of employees, debating the issues, and arriving at conclusions was a time-consuming process. It was therefore used most effectively at the policy level, where the line and project managers received their guidance for day-to-day business approaches and decisions. Adding to the complexity of this management decision-making approach is the fact that the solution to most major issues is seldom clear-cut, nor necessarily is there a single “best” solution, and no amount of communication and discussion could clarify the issues beyond a certain point. “Management by exception” streamlines the process in participatively managed companies. The old saying “if it’s not broken, don’t fix it” is often suggested as a useful management precept. But this approach—which is generally appropriate for employee-owned companies like SAIC—overlooks the value of preventive maintenance. Preventive maintenance can at times be simple. Passing on ample quantities of verbal and financial recognition (in- cluding equity) for work well done is useful, but is best done by the line management structure, not through the participative committee vehicles mentioned earlier in this chapter, because line managers can be held ac- countable. It is often more difficult to hold a committee or ad hoc employee group accountable. In addition, broad-based management can be implemented with vary- ing degrees of skill. It’s all too easy for endless meetings of large committees to occur with no clear-cut decision or recommendation to management— except to postpone the decision to another meeting. For this reason, broad- based decision making has sometimes been attacked. This process is often associated with the slow bureaucratic management process practiced in the legislative and executive branches of the U.S. government. However, despite its shortcomings, the participative approach has the overwhelming advan- tage of ensuring that all possible solutions to a problem have an opportunity to be heard. It is particularly effective with an action-oriented or involved committee chairman who can rapidly draw out ideas and contributions and synthesize the better ideas. If the broad-based management process does not work efficiently, or in a timely manner (possibly because of severe fundamental disagree- ment), then management decisions should be forced on key issues THE SYSTEM 83 using interim or trial approaches. Line managers must jump in to break logjams and keep the process moving. The need to sense the failure of this process is critical or staff frustration and disillusionment are the result. The larger the organization, the harder this is to sense and the more cumbersome the entire process becomes. Peri- odic reconstruction of the deliberative bodies or committees is thus essential to bringing in new enthusiasm for the process and to prevent atrophy. The job of listening and responding intelligently to the options that one can elicit from employees on topics of company interest can be stress- ful for managers. It takes time, attention, and dedication. Company com- munications systems are stressed to provide timely information and communication. But employee owners want to be heard, and they want to know that their views are evaluated fairly. Often, the right answer comes from unexpected places. Employees who are temporarily not as involved or harried can at times think more clearly, objectively, or innovatively and find the best answer. One thing worse than having too much consensus decision making and em- ployee participation is to listen to only a few inner-circle advisors. Yes-men and purveyors of only good news abound in all organizations, while man- agers must deal with unpleasant, harsh realities much of the time. Insula- tion from reality as seen from the company’s grassroots is not healthy in any company and can lead to disaster. THE ROLE OF COMMITTEES Employee-owned companies develop a wide variety of management vehicles over time to encourage employee participation in decision making and to fa- cilitate broad-based management. At SAIC, our widespread use of commit- tees was particularly notable. While not the first—or the last—company to use committees to encourage employees to become actively engaged in their company, SAIC is unique in their proliferation (more than 100, at their peak), the number of employees counted as members, and their major im- pact on the organization. The charters of these committees often over- lapped, and few subjects were considered taboo "

list of major committees:

chapter 7: the organization: organized for growth

as organizational units grew, they were often split in two. this allowed a path to promote talented managers to division heads. division heads had their own profit/loss statements and minimal oversight/interference from the head office (but strict financial controls). they were encouraged not to check with head office before pursuing new initiatives. they often setup their offices next to a large client, and then staffed from the local region.

Tight financial controls included preventing division heads from taking big financial risks that "bet the company".

So, this structure led to recruiting and retaining better people, reacting quicker to new opportunities, and working more closely with clients, a competitive advantage. disadvantages included higher costs due to duplicated financial and contract support functions, and less integrated information systems. overall, "the positives clearly outweighed the negatives".

"organic growth: little things beget big things": the company didn't turn up its nose at small contracts because they sometimes led to bigger ones later

chapter 8: the plan: no grand plan

they didn't have a detailed long-term strategy in the early days, aside from

1. recruit smart, inventive people 2. give these smart, inventive people wide-ranging autonomy and authority, consistent with prescribed financial restraints 3. keep a constant lookoup for opportunities, near-term and over the horizon 4. when a promising opportunity presents itself, unite around it and focus the company's efforts and resources to make it happen

However, there were detailed, disciplined, systematic short-term financial plans (annual at first, and later, quarterly, mid-year, and annual), which were more commitments by the division manager to the CEO than just plans.

" By contrast, operational planning was a bottom-up affair, but it was hugely important to me in managing the company. Every year, each line manager prepared a detailed plan for the coming year. These got worked over at successive layers of the organization and eventually got to me where intense negotiations went on to nail down exactly what each profit center manager would commit to. They also told me where they needed help and what new areas they wanted to explore. Each one wanted some resources from corporate to pursue their ideas. All this took a lot of time, which bothered me, but it was absolutely necessary to get their financial commitments nailed down, coordinated, and supported because I was going to hold each manager strictly accountable to meet his or her plan. Over time, this operational planning got very compli- cated with quarterly, semiannual, and year-end reports and revisions, and the management information system had a hard time keeping up. But we managed to keep reasonable tabs on what people were doing financially while giving them as much freedom as possible to run their organizations. The main motivation at SAIC for having the planning process was to ensure that the company would meet its desired targets for stock price growth. If there were gaps in certain areas, then discretionary funds could be directed from the corporate "guideline" pool to shore up those divisions or to pursue new programs. SAIC's fiscal year ran from February 1 through January 31, and planning instructions--including bid rates and other plan- ning guidelines--were sent to the various organizational units at the end of September, giving them October and November to work on their annual plans before corporate reviews began. The plans would be collected in the beginning of December, with inputs consolidated by corporate during the first couple weeks of the month. The last weeks of December were spent in plan review meetings with each of the line organizations. This was the line organizations' opportunity to brief me on their plans--with an emphasis on business development. The system worked because the company rewarded managers who in- creased their revenues within certain targets, and managers worked hard to ensure that the minimum targets were met. It also worked because managers were rewarded for actual performance--not for the difference between planned and actual performance as managers are at many organizations. There was therefore no benefit in negotiating a conservative plan or in sand- baging results. This approach resulted in less predictability in the planning process. Being an employee-owned, private company allowed SAIC to tolerate this unpredictability in favor of the possibility of exceeding growth targets. However, the markets in which public companies today operate sometimes value predictability over absolute performance. Public companies today therefore do more top-down planning because the emphasis and priority is on hitting the plan. Variance from the plan--sometimes even a positive one--could have consequences. In SAIC's early days if we saw an opportunity, we pursued it--often to good result. ... "

note the recurring focus on increasing revenues -- this is mentioned many other times that i didn't bother to write into the notes

Later in the company's life there was a strategic planning committee, although it tried to have a light touch. The CEO seems to have been in charge of a large discretionary slush fund ("guidelines") which was used to finance strategic activies.

An example of a time when a manager went after a new business area without prior top-down planning was the acquision of Network Solutions.

chapter 9: The Pitch: Everyone a salesperson

" At SAIC, selling was very much the job of every technical employee, from managers on down the line. Our philosophy was if you could sell, then you could likely run a division. So long as you were bringing new business into the company, then you would likely be given the opportunity to man- age people and the business units that employed them.

For most of its more than three decades, SAIC did not have a traditional marketing organization. Not only did technical people--scientists, engi- neers, and others--run the company, they also sold for the company.... In essence, the company used a "franchise" model with corporate providing support in the legal, administrative, and financial areas that they had little interest in doing themselves. For managers, this meant that they could de- sign their organization in whatever way they wanted, and pursue almost any technical area or customer that interested them, so long as they didn't con- sume more overhead than planned. This "seller-doer" model of marketing put the initial emphasis on hiring people who were in business areas that SAIC knew something about. ... Says [Matt] Tobriner: "Everybody had to learn to become a marketing agent for the company. And if you weren't good at that, as long as you found someone within SAIC who was willing to keep you alive and feed you work, that was fine. A lot of guys were technically oriented people who were very good at what they did in a narrow specialty. Everybody wanted them on their contracts be- cause they could solve tough problems. But even these people were ex- pected to help write proposals and get in front of the customer and represent the company outside the work environment."

     Some employees were better than others at selling new work to cus-tomers. Some could stand up and do a credible and even impressive sales presentation, while others could not. The people who had a talent for sell- ing were focused on that role. We emphasized technical people in sales roles who could develop and explain in detail how a solution worked and pro- vided real (not an illusion of) benefits. We sought people who wanted to make a genuine impact. "

" But the rewards of winning a new contract, opening up a new market, or growing the business weren't just financial. We regularly gave public "at- taboy's" to employees who had made a significant contribution to SAIC's success. In addition, line organizations were internally known and regularly referred to by the leader's name (e.g., Straker Sector, Hutchinson Group). This practice didn't just humanize the groups, going beyond SAIC's official but functional organizational unit titles such as the International Sector or the Nuclear Technology Group, it served to further motivate some already very motivated leaders. In addition, most of the company's leadership was seated in a conspicuous place at Meetings Week--these leaders considered it an honor to have a seat "at the table." "

chapter 10: The Loop: Feedback and Lessons Learned

 According to Cheryl Louie:

" Dr. Beyster had a fantastically simple management model, based on a cou- ple of financial metrics that you had to deliver on. If you made your num- bers, then you could do what you wanted. These key metrics were timesold--that is, the fraction of hours employees charged to billable con- tracts, versus company overhead--and PBT, profit before tax. And that was the beauty of the model--I could run my organization, make my tar- gets, and then try experiments on the side. And if I was smart, I wouldn't try so many experiments that I missed my financial targets. Some people did miss their targets, and that was a problem for them. "

     While this simple feedback model served the company well for its firstdecade or two, business did get more complicated, and other metrics--par- ticularly the F-factor formula, described in detail in Chapter 12--became important as well.

chapter 12 the bottom line: expect reasonable profit with stock price growth

company goal was 3-4% profit

" Our objective is that profits after tax should be in the 3 percent to 4 percent range. This is reasonable and sufficient to make SAIC an attractive investment to its employees and to provide the resources necessary to build the company--prime reasons why SAIC is not a nonprofit organization. The profits made over and above that objective can be invested in the company's people and its future. There are two "profit pools," one involving bonus awards of stock or dollars to a wide range of people in the company (not focused on the few) and the other used to invest in projects to enhance the company's future. --from Principles and Practices of SAIC "

" AIC was a profit-making organization, but not to the exclusion of the other values--doing what was ethically right, contributing to the na- tional good, creating a good place to work--that were important to the company and its employee-owners. SAIC needed profit to advance its stock price, reward employees, and generate discretionary funds to be used to seed new initiatives, but the company's profit goals were modest, and there was little reason for employees to get overly stressed--except when they missed them. "

" The standard notion of profit is that it is a reward for taking risk--the riskier a venture, then the greater the profit should be. Many of SAIC's con- tracts were--particularly in the early years--cost plus fixed fee; that is, the government would reimburse all of our out-of-pocket costs and then award us a fixed negotiated fee. These contracts were of relatively low risk to the company and our negotiated profits were also relatively low. In some cases, contracts were firm fixed price. We negotiated a bottom-line contract amount that we had to live with no matter how much our costs were. These were by nature of relatively high risk to the company, and our negotiated profits were significantly higher. When we developed new products, the up- front investment of our time and money--coupled with the very real risks of failure--generally required even higher profits. Our philosophy of making a reasonable profit permeated the organiza- tion. Employees were able to deal with customers more comfortably be- cause there was no pressure to generate high profits. With government clients, who themselves might never benefit from the rewards of private in- dustry, SAIC employees never felt they were exploiting the people who em- ployed them. "

" If a division was going to survive and thrive in SAIC's intensely compet- itive environment, it had to have more than a great idea and happy cus- tomers--it also had to achieve certain financial targets. These targets were predictable and reasonable, especially when compared to other (especially product) businesses where profit margins several times SAIC's expected tar- gets were the norm. The key metrics included revenue growth from year to year. The goal for profit before tax was static for 15 years at 6 percent for our government busi- ness. In the commercial space, 7 or 8 percent was typical, and eventually our government business profit target increased to 7 percent. Another key metric was proposal submittals--the total value of proposals submitted during the year. The target for proposal submittals was four times revenue. This pointed up the fact that if the divisions weren't writing many proposals, they weren't going to meet their revenue and profit goals. The proposal win rate was also important. We had a relatively low win rate in the early days for a govern- ment contractor because we were so diversified--if a division had a 40 per- cent to 50 percent win rate, we thought they were terrific. Eventually, the win rate became 70 percent. The fourth metric was accounts receivable--the money that had been billed to customers but not yet received. Accounts re- ceivable had to be 60 days of revenue or less.

         INTERNAL INVESTMENT STRATEGIESThe use of discretionary resources to invest in company growth was an im- portant tool for driving performance throughout the SAIC organization. SAIC used a variety of budgeting methods to manage its profit and loss (P&L) centers, which might hold 10 to 300 employees each: · Budget elasticity: Budgets were scaled to the volume of the business base. For example, if during a reporting year a division or group grew beyond their annual revenue plan, they were allocated the majority of the extra overhead (OH) and general and administrative (G&A) funds to continue growing the business. If the division chose not to spend it, their internal profit would be increased by the amount of underspending and their bonus pool computation would be en- hanced. Similarly, if the division underachieved the growth in their annual plan, their scaled OH and G&A budgets declined, possibly forcing a reduction in spending to meet their profit target. · P&L taxation: The internal management (P&L) reporting, while pro- viding OH and G&A budgets scaled to increasing or decreasing busi- ness volumes, allocated a small portion of that budget from each division, nicking its profit slightly. The allocated budget was accumu- lated at the corporate level to dole out to meaningful initiatives that a specific division might not have been able to afford on its own without underachieving its profit plan. This accomplished two objec- tives: (1) It allowed corporate initiatives to be funded in addition to some of the important grassroots division initiatives; and (2) it gave me access to both resources and investment ideas. These were im- portant to technology and business development. THE F-FACTOR: DRIVING BOTTOM-LINE PERFORMANCE As a scientist, I knew from personal experience that numbers--hard, meas- urable, quantitative standards--drive employee performance. As owners, the company's employees had a very personal stake in their company's per- formance. The better they performed, the better the company performed-- helping to achieve a higher stock price and broaden the available opportunities. But how did employees know that what they did today would result in a stock price increase months into the future? Peter Pavlics, SAIC's comptrol- ler, led the effort to develop a tool for allocating bonuses that linked em- ployee performance with metrics supporting stock price growth that we called the F-factor formula. The F-factor formula was comprised of the key metrics that drove the company. This new set of metrics included revenue growth and profit rate, including a cost of capital charge to motivate good balance sheet management (e.g., good receivables management). These pair- ings were plotted on a chart so that anyone could readily see exactly what combination of revenue growth and profit percentage--say, 16 percent rev- enue growth and a 7 percent profit margin on that growth--would help drive a 10 percent to 12 percent overall growth in the company's stock price. Hitting the target earned the division an F-factor of 1.0. But, if they could do even better--say, revenues came in higher than the 16 percent tar- get used in the previous example--then the group could earn an F-factor of 1.2 or 1.3 or more--up to 2.0--resulting in more bonus for the group. Some businesses were in markets that couldn't generate that kind of revenue growth. They could, however, generate a higher profit margin. The F-factor formula accounted for the trade-off in revenue growth versus profit rate-- divisions could achieve a 1.0 F-factor with relatively low revenue growth so long as their profit rate was sufficient to push up the F-factor. Conversely, a division with relatively low profit rate could make up for it with higher rev- enue growth. There was a direct trade-off. So it was totally acceptable for a group to generate less revenue as long as they brought their target profit to the bottom line. According to Tom Darcy, the message was clear: meet or exceed your F-factor targets, and you will be rewarded. Says Darcy: The bonus pools were built around the F-factor concept and related targets for year-over-year revenue and profit growth. The targets were designed to achieve the performance necessary to support a double-digit percentage of annual stock price growth. Everything else fell from that. Bonuses were earned at all levels of the organization and were allocated to employees from the pools by managers at each of these levels. On an overall basis, bonuses were designed to be paid 50 percent in cash, 25 percent in vested stock for the short-term portion, and 25 percent in four-year vesting stock for the long-term portion. High performance by employees was also re- warded with four-year vesting stock options as an additional long-term in- centive, which further enabled them to participate in the continued growth of the company.


" For managers working hard to make their F-factor targets, there were a number of simple but powerful variables they could employ to help generate the kind of profits that they needed. Perhaps the most important metric was timesold, which, as we have previously discussed, is the ratio of direct labor dollars incurred working on contracts to the total labor dollars incurred in a specific period of time. Working with SAIC's financial analysis specialists, I knew that in order for a business unit to achieve its plans, it would have to run at a timesold of 75 percent. This means that, on average, the business unit's employees were charging 75 percent of their collective time on the job to customer contracts, and 25 percent to overhead activities. We would then use exception reports to track the performance of each business unit on timesold, and other key metrics. If all of a sudden an exception report (published every two weeks) showed that a particular business unit was running at 72 percent instead of the planned 75 percent, it im- mediately became obvious that there was a problem, and action had to be taken to first understand why this variance from plan had occurred, and then correct it. There were legitimate reasons why a business unit might have a lower timesold percentage than anticipated. The unit might be bidding larger programs, or its contract mix might have changed. But if the staff wasn't being used productively, then this was an indication that certain business managers had problems that needed to be fixed and that action should be taken. Tracking timesold was a very effective way to quickly get at prob- lems in the cost control of labor, since labor was the greatest cost for SAIC. SAIC has traditionally operated on 13, four-week accounting periods throughout the year. At each period end, there would be a complete operat- ing report of all the key metrics. SAIC's financial staff visited or contacted each of the operating units and went through the key metrics in the report, identifying what had happened during the accounting period. In addition, SAIC's CFO made a regular presentation to brief me on the company's fi- nancial status, highlighting potential problems and opportunities. Says Tom Darcy: Each month we would sit down with Bob and go through a complete fi- nancial review of the company. In addition to more traditional reviews of revenues, contract performance, and areas of business opportunities and risks, we would also review where business units might be missing key op- erating metric goals such as those for timesold or accounts receivable. There was a process for business units to identify and act on the problem metrics they were worrying about and, if they didn't, there was also a pro- cess to try to identify these types of problems early on at the corporate level. Help from Bob could come in different forms depending on the situ- ation, but in all cases people know he would be quick to act on early warnings. When businesses were struggling, the first priority was to understand the problem and to assign people to try to help the struggling business unit. If the problem ultimately couldn't be solved or the issue turned around, my view was "We gave it our best shot--chalk it up to experience." I could be very patient with people who asked for help, and I would bring all the re- sources of the company to bear on a problem. But I was quite impatient with people who were not transparent or not willing to reach out for help. "

summary list of metrics:

my note: why is it that revenue was prioritized over profits? i've heard that other consulting firms do it this way too. This book makes it sound like it's because it provides for more "stable growth". However, i suspect, rather, that it's because consulting firms aren't scalable business models in the sense that they can't increase their margins through economies of scale. So, there is only so much that profits can improve. However, just as in any business, giving individuals an incentive to improve profits would be giving them an incentive to cut corners or to overcharge, so there is the usual disadvantage without the usual advantage. Also, consulting business is won by biz-dev, and so being bigger (i.e. having done big projects in the past) provides a sizable advantage.