It doesn’t unnerve me to see nothing on the company’s horizon. I want SEMCO and its employees to ramble through their days, to use instinct, opportunity, and ingenuity to choose projects and ventures. – Ricardo Semler, CEO, SEMCO1. Admiring though many are, few have tried to copy him. It seems that the way he works, letting his employees choose what they do, where and when they do it, and even how they get paid, is too upside-down for most managers, But, just maybe his is the way for the new world of business.
SEMCO SA (SEMCO), a Brazilian company which manufactures over two thousand different products including industrial pumps, cooling towers etc. and also provide environmental and Internet services, saw its revenues growing from $32 mn in 1990 to $212 mn in 2003 (Refer to Exhibit I). It achieved this growth rate in an economic environment characterized by staggering inflation, and chaotic national economic policy in Brazil. 3 Between 1982 and 1998, SEMCO’s productivity increased nearly sevenfold and profits rose fivefold.
SEMCO was also one of the most sought after Brazilian companies as far as employment was concerned. Turnover among its 3,000 employees was about 1% during the period 1994 to 2004. Repeat customers accounted for around 80% of SEMCO’s 2003 annual revenues.
The gross industrial product was down by 14%, 11%, and 9% in 1990, 1991, and 1992 respectively, and between 1990 and 1994, 28% of Brazil’s capital goods manufacturers went bankrupt. 4. Ricardo Semler, The Seven Day Weekend: Changing the Way Work Works, Portfolio 2004. The culture at SEMCO was unique in the sense that there were no power-packed job titles; employees including top managers themselves did the photocopying, sent faxes, typed letters, and made and received phone calls.
There were no executive dining rooms, and parking was strictly fist-come, first-served. Organizational profits were shared with the employees and the salaries were set by the employees themselves. Behind this ‘maverick’ organization was Ricardo Semler (Semler), the CEO of the company who referred to himself as the Chief Enzyme Officer. Wrote Semler, “If you ask me to describe it in conventional business terms, I’d have to admit I have no idea what business SEMCO is in.
For years, I have resisted defining SEMCO for a simple reason: Once you say what business you’re in, you create boundaries for your employees, you restrict their thinking and give them a reason to ignore new opportunities. ”5 Semler’s way of thinking resulted in an organization which had no conventional structure, no organizational chart; no fixed CEO, no VP’s, CFO’s, COO’s or CIO’s. There were no long-term strategic business plans, no career plans, no job descriptions or dress codes for the employees. Some of the important organizational decisions like relocating a unit or acquiring a company were taken on the basis of employees’ votes. A visit to Brazil in 1952 prompted him to think about the prospects that a “vast, undeveloped country”6 like Brazil presented. During this time, he was working on a centrifuge technology capable of separating oil from vegetables.
With an urge to start his own business, he selected the city of Sao Paulo to start his venture, SEMCO, a contraction of Semler & Co, in 1953. Soon after, he obtained a patent for his technology. Through the 1960s and 1970s, SEMCO was mainly a manufacturer of marine pumps. In the late 1960s, 90% of the sales of SEMCO were to the Brazilian shipbuilding industry. SEMCO was a hierarchical organization with 12 layers of management. According to a Fortune article, “Fear was the governing principle. Guards patrolled the factory floor, timed people’s trips to the bathroom, and frisked workers as they left the plant. Anyone unlucky enough to break piece of equipment would replace it out of his own pocket.
Semler’s vies on running the company were completely different from those of his father. He felt that the company in its existing form was too rigid. He wanted to replace the old way of doing business and planning with a participatory style of management. But the old guard at SEMCO was not open to this, with the result that Semler fired two-thirds of the top management. Commenting on this decision, he later said, “The only solution was to make a radical shift in the direction and capabilities of the company, and that included changing the majority of the leaders and creating a new mentality. This bordered on the irresponsible in terms of scope and speed, but in the end, saved us.
There might have been a safer or more mature way of doing this, but I was 21 at the time. ”9 Organizational Structure Semler started out with a functional organizational structure at SEMCO. Under this structure, decision-making took a long time and each department took independent decisions that sometimes were not in the interests of other departments. Then, the company shifted to a matrix structure. 10 But, unhappy with its effectiveness, Semler changed the structure of the organization once again. In 1986, the company was divided into autonomous business units, each headed by a general managers. Semler thought that this would result in effective participatory management, but it didn’t happen.
As each business unit had different functional departments, the business units followed the characteristics of a functional structure, and rivalry developed within the units. After this, SEMCO tried to adopt a kind of lattice structure where self-managed teams of six to eight production workers were provided the autonomy to decide on matters related to production including budgeting. SEMCO also established factory committees in the various business units consisting of workers. Representatives of these units met the top management and discussed any workplace issues. The factory committees created an environment of trust and cooperation, and employees started taking number of work-related initiatives. Procedures that were not adding value to the organization were questioned by the employees.
These radical changes in the company made the middle managers feel threatened, as they felt they no longer held positions of power and authority. This resulted in a third of them quitting over the next year or so. The empowered workers started multi-tasking and came up with a number of innovative measures for workplace improvement and cost reduction. In one of the factories, the employees divided themselves into three units of 150 people each, with independent responsibilities in the areas of finance, sales and manufacturing. This practice of taking on independent responsibilities was reinforced by the development of the Nucleus of Technological Innovation (NTI).
The first group of this sort was started in the mid-1980s, when three engineers received permission to operate without any interference from management. The group had the freedom to select the area of work and set their own work practices. The group’s mission was to explore new areas of business, look into the operating practices that were prevalent at SEMCO and suggest measures for improvement. The salary par of their compensation went down but they were given a share in the revenue they generated through operational cost savings they suggested, royalties earned through the development of new products, and earnings which were made through the sales of their skilled services to the open market.
At the end of six months, when the first review occurred, the group had 18 projects to work on. This model was used to an increasing extent, and in 1998, around two-thirds of SEMCO’s revenue came from such units and two-thirds of its employees worked in these units. It was a symbiotic relationship as SEMCO had the opportunity to develop new competencies at reduced risk levels while the NTI group had the support of an established company which supported them at points of trouble.
By 1998, SEMCO had outsourced most of its functions to other companies or moved these to its satellite firms, which were a refined version of autonomous units like NTI. The main company only retained functions which were considered strategically important for the organization. SEMCO spun off nearly two dozen satellite companies, which were entrepreneurial units started by SEMCO employees. These satellite companies contracted back some services to SEMCO in addition to soliciting independent business. According to Semler, “SEMCO had no official structure. It had no organizational chart. ” SEMCO was made up of Associates, Coordinators, Partners and Counselors.
Six Counselors coordinated the general policies and strategies of SEMCO and were responsible for inspiring the seven to ten Partners who were leaders of the business units, which catered to a product or service. Coordinators, like production supervisors or area foremen, comprised the first level of management. All the other members were known as Associates. The organization resembled three concentric circles; the innermost circle representing the corporate level and the outer representing the operational levels, with Counselors in the innermost circle, followed by Partners in the second circle and Coordinators and Associates in the outermost circle.
One of the six counsellors took up the job of CEO for a six months tenure. Thus, there were four titles and three management layers in SEMCO. (Refer to Exhibit II) The job of the Coordinator was either temporary or permanent. Anyone who had the competence to do the task could opt for the position of a coordinator. SEMCO did not have any receptionists, secretaries or personal assistants. The autonomous business units were not permanent setups. Their life depended on the revenues they generated. When a new avenue for business opened up, a new unit came up. When a unit could not generate revenues, it was closed. Hence, the number of units was not steady.
As of 2004, SEMCO had nine units. The number of people associated with these units also varied from time to time. The project teams at SEMCO come together according to the need for staff. Project teams often consisted of SEMCO associates as well as members of satellite firms and outside contractors. SEMCO’s autonomous business units consisting of 150 to 200 people each with specialized skills have given SEMCO the agility to deal quickly with threats and opportunities. For example, if an associate saw an opportunity in the market, he/she could share the idea of exploiting the opportunity with his/her colleagues and could create a new unit for working on that assignment.
Analysts believe that one needs formal (and somewhat rigid) processes in place in order to move forward in an organized manner if there are more than 150-200 members in any work group. Says British Anthropologist Robin Dunbar, “The figure of 150 seems to represent the maximum number of individuals with whom we can have a genuinely social relationship, the kind of relationship that goes with knowing who they are and how they relate to us. ” That number appears in studies of communities, of effective plant sizes and effective military units. 12 The business units in SEMCO split ‘replicating like an amoeba’13 when they reached the critical mass of 150-200.The replication of business units into smaller units as and when the need arose created units small enough to operate with a commonly shared set of values, philosophy and culture. The organization was bound together by the three interdependent core values: Employee Participation, Profit Sharing and Free Flow of Information.
These three values stemmed from the belief that participation in design and implementation of work procedures would give employees control over their work; profit sharing would bring in a sense of ownership; and the availability of information as when needed would help the employees understand to improve their work practices continuously. Semler introduced the concept of linking pay with performance. Linking pay with performance ensured that costs went down while production and profits went up. Semler also conceived the idea of distributing one-fourth of each division’s profit to the workers. An elected committee was made responsible for the design and allocation of this fund. With the recession continuing into the early 1990s, cost reduction remained an important objective in SEMCO.
The only exception however was layoffs. Laying off workers was a difficult option, as Brazilian labor law required every dismissed worker to be paid two years of severance pay. It was then that a factory committee approached Semler with a paycut proposal. The proposal had three segments. The employees would accept pay reduction if the percentage of profit shared with workers was increased from the earlier 23% to 39%, if the management took a pay reduction of 40% and if workers were given the right to approve of expenses by the company. Not having any alternative, Semler accepted the proposal and it became a landmark in the development of a participatory culture at SEMCO.
SEMCO employees were allowed to choose one of the nine (11 for an executive) compensation options or a combination of them (Refer Exhibit III). This reward system encouraged employees to innovate and take risks. Employees preferred compensation packages that maximized returns for themselves and for the company. More revenue generation resulted in the organization supporting more risky ventures and supportive infrastructure. New ideas proposed by employees were decided upon quickly and decisively. While working on a project, employees had the freedom to choose their own job titles to deal with outsiders, depending on the role they played in the project.
Employees could choose which work they would like to do, where they would work, how the work should be done and when to do it, and to decide collectively on their team leaders too. This flexibility and freedom to make a choice was extended to a newly hired employees as well. The newly recruited employees were taken through a session known as ‘Lost in Space. ’ During this session, the new recruits could try out their hand at various jobs in different units during the initial 12 months. They didn’t have any specific responsibilities or job description. After 12 months, they were given the opportunity to work in the business area that fit their interests.
Identification and development of core competencies led to continuous career and skill development. As employees were given complete freedom to think creatively, career development in SEMCO was frequently characterized by new spin-offs and project groups. SEMCO had a voucher system where an employee could buy back his Wednesdays in exchange for 10% of his salary. After retirement, if the employee felt like working for the company, the voucher could be returned. This process was one of the mutual benefit, as employees got the opportunity to plan and work on a project in retirement, while SEMCO retained the knowledge and expertise of its employees.
Employees who wanted to get hired or promoted to a leadership position, had to go through a process where she/he would be interviewed, evaluated and approved by the people who would be working under her/him. At SEMCO where there were few control mechanisms, freedom and accountability were inseparable. The performance of employees was measured on the basis of their contribution to the bottom line, and each associate was also measured according to this norm. Those who did not measure up to the mark were asked to leave. Budgeting and planning were done every six months, and at this time, each unit had to justify its continued existence as a separate unit. If it could not, the resources were moved elsewhere.
All the innovative work practices at SEMCO evolved out of questioning existing work practices i. e. , evaluating whether the existing work practices suited the changing needs. Semler wanted his colleagues to question the basis of continuing with any conventional practice. As Semler put it, “Employees must be free to question, to analyze, to investigate; and a company must be flexible enough to listen to the answers. ”14 It was this questioning which drew SEMCO to the conclusion that success at SEMCO should not be measured only on the basis of profit and growth. “These are all by-products of running a company where employees are encouraged to establish their own sense of balance. 15 At SEMCO, there were no fixed revenue targets for business units and hence each unit found its natural size where it could maintain profitability and keep customers happy.
The idea thus resulted in the organization encouraging its people to start new businesses rather than expanding an existing business beyond its natural limits. This culture also helped SEMCO in eliminating massive layoffs. The autonomous units were responsible for bringing in new business. There were times when interaction with customers gave an employee the idea of venturing into a new business segment. For example, through their interaction with customers buying cooling towers from SEMCO, SEMCO employees realized that customers were having trouble maintaining the towers and also found the cost too high.
The SEMCO unit involved worked on the idea and decided to start a business of maintaining the installed towers where the charge to the customer would be 20% of whatever savings customers generated having the towers maintained by SEMCO. Of this figure, the unit would share 80% of the income with SEMCO and retain the remaining 20% for the unit’s own use. In SEMCO, any new business idea had to clear a three-step test. The first step was that the proposed area of operation had to have a high level of complexity so that there was a high entry barrier for outside players to get into the same area. The second requirement was that the offering should be of high-end products or services in the segment, so that SEMCO could build on its reputation as a premium player in the industry.
In addition, SEMCO should be able to carve out a niche in the market thereby making it a major player in any industry it was in. With different units offering different services, it became easier for the clients to scale up their partnerships from a business service offered by one unit to multiple services offered by a number of units. Uniformity in the organizational culture across units helped clients to relate to the different units easily. Thus, clients like Wal-Mart, GM, Bank Boston and Unilever moved up from doing business with one unit to become customers of several SEMCO units.
Leadership and Change Management Semler can be credited with sustaining the radical changes at SEMCO. He nurtured changes that might have been viewed as taking away his power and authority. He created an empowered environment where employees could innovate continuously. An idea he generated would later permeate to the whole workforce. For example, after seeing a company order file cabinets orth $50,000, which were meant only to keep documents which were hardly ever referred to, Semler said that every person in the company should clear his own file cabinets of documents which were never referred to and keep only those that were necessary. This soon became a biannual exercise at SEMCO.
The ‘clean-out’16 sessions which started at the offices later got extended to the company’s factories too, where workers got rid of old machinery and scrap. Semler also believed that employees were capable o handling any situation in an empowered environment. This made him delegate almost everything. Semler believed that when treated as adults, employees would behave as adults. For employees who were conditioned to control and authority, the kind of empowerment that Semler provided them with, resulted in their insecurity being pulled out into the open.
In one instance, the employees conducted two strikes resisting the development of a flexitime work practice in the organization. But soon, the environment of greater independence for workers transformed the employees and made them harbingers of change. At all points during the process of change, the organization ensured that it respected individual beliefs. This was manifested in its respect for its employee’s right to join the union and the right to strike. Some of SEMCO’s satellite units had pockets of autocracy and people who were more comfortable in that environment slowly shifted to those pocket thus showing that SEMCO respected individual beliefs even in the process of change. SEMCO was transformed to a culture based on democracy and shared leadership.
When Semler initiated the change management process, he made sure that employees knew about the developments in the organization. From an organization that was rule-driven, it went on to become a decentralized organization with the top management driving the autonomy, and from there it moved on to become more of a federal organization where the individual units were driving the growth of the company. According to analysts, one reason for the success of SEMCO has been the willingness of Semler and SEMCO’s managers to adapt to change. When it came to the sensitive topic of organizations invading e-mail privacy, Semler had an interesting position here too.
Semler maintained that though the company owned the network, desktops or laptops, they were private. Said Semler, “We have no access whatsoever to their data, even though it is very easy to use to check what people are doing. We have no control whatsoever. We want no control whatsoever.
The SEMCO way of running an organization is slowly but steadily being accepted as a very effective method of business management. The BBC series ‘Reengineering the Business,’ included SEMCO while focusing on the five most successful management structures across the globe. CIO magazine selected SEMCO (the only Latin American company in its list) among the most successfully reengineered companies in the world. Fortune magazine referred to SEMCO as a “lab for creative management. ” Semler has been profiled in more than 200 magazines and newspapers including The Wall Street Journal, The Financial Times, Fortune and Times. The World Economic Forum has cited Semler as one of the global leaders of the future.
In conventional business practice, whenever the revenue generation of a company goes for a toss, the values and beliefs that the company associates itself with, get affected. Not so with SEMCO. Unconventional though it may be, SEMCO’s belief in treating people as adults has created a benchmark in concepts like empowering people. Semler had a major role to play in the way SEMCO became a choice company for its stakeholders. As Charles Handy said, “The way that Ricardo Semler runs his company is impossible; except that it works, and works splendidly for everyone.
References Books
- Ian Stewart, Does God Plays Dice The Mathematics of Chaos, Blackwell Publishers, 1990.
- Ricardo Semler, Maverick: The Success Story Behind the World’s Most Unusual Workplace, Warner Books, 1995.
- Malcolm Gladwell, Tipping Point: How little Things Can Make a Big Difference, BackBay, 2002.
- Ricardo Semler, The Seven Day Weekend: Changing the Way Work Works, Portfolio 2004.
