Paseman and Associates: The Accidental Start-Up, From White
This is my favorite case study because an uneducated "Okie", who had a lot of common sense, innovation, and drive really built a company of value under horrible handicaps.
It was the height of the great depression (the early 1930s) when an out-of-work oil field mechanic decided that it was ridiculous for oil companies to install permanent drilling derricks over each drill site. He conceived the concept of a portable drilling rig which revolutionized the oil industry.
Now this out-of-work mechanic had a few handicaps that might lead you to believe that he would never make a successful entrepreneur. He could barely read and couldn't write. He had absolutely no experience in either management or finance and therefore developed some unique opinions that should have killed his company's chances. For example, he believed "No man who wears a necktie can be trusted." And, "Never put your money in a bank or do business with a banker or you'll lose it all." And, "Never plan beyond today. The Lord will take care of tomorrow regardless of how much you fret."
He was a frugal man so that when he was laid-off, he had over $400 hidden in a sock (a small fortune in that era). He watched his savings dwindle to $325 in three months while he searched for "respectable" work and then he decided to risk $200 on his portable drilling rig concept. At this point the mechanic sold the International Harvester Truck dealer of Tulsa on his concept and borrowed a ten ton truck to demonstrate (the dealer couldn't move his inventory and agreed to the loan if he received payment-in-full when the mechanic sold his rig). He rented (at $10/month) a 50-ton draw-works from a hoist manufacturer (balance to be paid when the rig was sold). He purchased useable scrap steel ($30 down and $70 when the rig was sold) and spent all of his spare time (the hours when he wasn't standing in long lines looking for work) building his rig. It took him three months.
On his first demonstration, the drilling manager immediately saw the advantages of the concept an immediately bought the demonstrator. Oddly enough, the mechanic was thinking of asking for $7,000 (taking price he hoped would be at least $5,000) but when the manager seemed so enthused, the mechanic raised his price to $10,000. When the manager didn't balk, he then added $3,500 for the truck. He left the demonstration rig at the site and hitchhiked home to await his $13,500 payment. He felt that the $8,500 profits would hold his sock in order until he found "respectable" work. However, when the check came, it was accompanied by an order for 10 more units at $13,500 each.
This caused our mechanic a very real personal problem. One cannot build 10 drilling rigs in his spare time and still search for proper work. If he accepted the order, he might miss out on a safe job. While he debated as to whether to return the order or not, another oil company (whom he had never demonstrated to) sent him a purchase order for 15 rigs, and so the mechanic's company was born.
Now, $8,500 doesn't go too far when you want to build 25 drilling rigs unless you use some sound money-leveraging principles. Here's how our Okie made his money stretch:
- He put an advertisement in the local paper requesting the cream of mechanics for top wages (75¢ an hour) provided that the candidates accept the following terms: (a) they would have to work 50 hours/week in a farmer's barn (which he rented for $5/month); (b) they would be given only rent money and groceries until the rigs were delivered and payments were made; and (c) no interest would be paid on back wages. Five applicants for every opening showed up and he selected the cream.
- Since this was a sizable order for both truck and hoist dealers, they agreed to supply him with 5% down and the balance when he was paid. Of course no interest was charged.
- He found several grocery stores which agreed to sell him all of the food his employees needed at 50% down, the balance when he got paid. Thereafter, every worker received a large sack of groceries each evening after work.
- The scrap steel dealers drove a harder bargain. They received 25% down, 25% after two months, and the balance when he got paid.
- Since excess inventories of paint, cables, chains, etc. existed, he rarely paid over 5% down and the balance when payments were received.
When the twenty-fifth drilling rig was delivered, his sock had dwindled down to $2,300. When he was finally paid, the company was in a cash-rich posture, a position which never changed until it was sold in the 1950s.
There were some problems which might amuse you. The management organization
consisted of just the mechanic for the first 15 months. When government auditors
came in to inspect the books, they were unhappy to learn that there were no
books. The record keeping system was very simple. In the top right hand drawer
of the company's only desk, all unfilled orders were kept. In the upper left
hand drawer, all unpaid bills were kept. When an order was filled or a bill
paid, it was pulled from the drawer and thrown in the wastebasket. "That way, we
could always open a drawer and know what was coming in and what was going out."
All other records were kept in the mechanic's head.
The auditors didn't feel that this was an acceptable accounting system and give our Okie 30 days to develop proper records. He hired his first staff man, a cousin of one of his mechanics who was an educated man (he had finished high school and had once had a bookkeeping course). When the auditors returned 30 days later, they found a single sheet of paper which was a combined balance sheet, income statement, and miscellaneous additional items. They were extremely unhappy and when they started to padlock the door, the president pulled out a dozen socks (filled with about $650,000 in cash) and told them to "take what you think is fair."
When they took more than what the president felt was fair, he hired a qualified accountant, told him to leave his neckties at home, and to protect him the "next time those bandits come." The new controller was also given the following instructions: "Don't put a penny in the banks. Put 10% of all cash into dimes so that we can melt them down for silver if we have to. Don't keep any bills larger than a $5 bill because counterfeiters never work that low."
For months, this controller was developing ulcers concerning himself about the vast amounts of unprotected cash he had to carry. Then he started cutting out newspaper stories of holdups and left them on the president's desk. After several months and dozens of stories of how people had lost everything in holdups, the controller asked his president about the high risks they were taking with their bundles of cash. It was then that he learned that his president hadn't read the newspaper clippings because he could hardly read. So the controller read him the clippings aloud, scared the president, and was allowed to place half of the company's cash in five different banks. The other half had to remain in reachable cash. When the controller retired 20 years later, he handed his replacement in excess of $4,000,000 in dimes, ones and fives. The company had never been robbed.
From a production and service standpoint, this company also had unique problems. For the first 250 units produced, the company never used anything but scrap steel. This forced unique production practices. Each rig was completely built by one master mechanic and three apprentices. Since the materials were scrap, each rig had to be engineered and built from supplies on hand. No records were ever kept and since serial number 131 was completely different from serial numbers 130 and 132, the field service people had to be extremely flexible and innovative. However, since he only hired the cream, this was never a real problem. When the Japanese government started buying all of the scrap steel that they could get their hands on, the prices rose so the Okie was finally forced to use new steel.
In the late thirties, the oil companies' demands finally exceeded his master mechanics' engineering abilities and he was forced to hire a real engineer. When the poor man first showed up to work, there wasn't one blueprint or one written production instruction in the entire company (it now employed over 500 people: 1 accountant, 1 engineer, 1 woman who handled all the clerical jobs, 1 president, and 496 production mechanics). It took this engineer four years to convert the company to sound engineering control systems.
The company continued to be unique in many operating modes. When the Second World War hit, the government asked them to quote on building barrage balloon launchers. They quoted $12,000 while the next lowest bidder quoted $62,000. The company made $8,000 per launcher in profits while their competitors made less than $6,000 per launcher.
These uneducated people pioneered many of the innovative and sophisticated
techniques used by today's most progressive companies. Let's come back to our
Okie mechanic in later cameos to illustrate common sense solutions.
Although not covered in the text itself, what fascinates me is the economic context (The great depression, which I believe made a lot of his "money leveraging techniques" possible) and the order in which he implemented his systems:
- Preliminary Marketing
- Self financing (No VCs)
- Product Creation
- First Customer Sale
- He employed what I call "Sandra Kurtzig" pricing. Ms. Kurtzig (with whom I once had a meeting) would sit across from a sales prospect and when the question came up "How much does it cost" would say: "$10,000". If the guy didn't blink, she'd say "per module". If the guy didn't blink, she'd say "per year". If the guy didn't blink, she'd say "initially".
- Customer Financing (Again, no VCs)
- Selection of Key personnel
- Installation of Management and Control Systems