Lessons From a Blue-Collar Millionaire

Inc.com | by Bo Burlingham | 2/1/2010
When Nick Sarillo launched his pizza business, he had one goal in mind: to create a corporate culture unlike any he had seen.

It’s Takeout Tuesday at Nick’s Pizza & Pub, and the air is thick with the smells of hot pizza crust, peppers, onions, and cheese. Eighteen young men and women — most of them high school age — form an assembly line between a row of worktables and a long bank of pizza ovens. The kids laugh and shout, even as they focus intently on their tasks.

Nick Sarillo, 47, stands halfway down the assembly line, holding a giant wooden pizza board. As the company’s founder and CEO, he doesn’t usually work the pizza line anymore.

But he is happy to lend a hand when he can, and the kitchen crew needs all the help it can get on Tuesdays, thanks to a program Sarillo launched in March 2009 in response to the recession. A sign in the lobby explains the logic behind the policy:

Kane County unemployment
6.3% vs. 11.1%
Sept. 2008 — Sept. 2009
½ Price Monday and Takeout
Tuesday are here to stay until the
unemployment lines go away.

That is, customers pay half price for pizza in the dining room on Mondays and half price for carryout on Tuesdays. The effect has been to turn the two slowest days of the week into the two busiest. Indeed, the program proved so popular that it initially overwhelmed the kitchens. “Our promise is to have pizzas ready in 15 minutes with no mistakes,” says Sarillo. “We had so many orders that the time got up to 25 minutes. Guests were getting upset. It was OK if I was here to orchestrate, but it got pretty bad if I wasn’t.”

So what did he do? “I built a system to replace me,” Sarillo says. “I put together a checklist of things that had to be done by 4 p.m., so we could handle the volume. It took about four weeks until it could work without me. Now we’re nailing it.”

There are, according to the trade magazine Pizza Today, 70,000 to 75,000 pizza establishments in the United States. Nearly every town has at least one, and — except for arguing over which makes the finest slices — people seldom pay them much notice, let alone think of them as a potential source of business and management wisdom.

And then there’s Nick’s Pizza & Pub.

Its two restaurants in the northwest suburbs of Chicago have attracted visitors from far and wide who have heard about Sarillo’s approach to management and the effect it has had on employees. The numbers tell the tale. In an industry in which annual employee turnover of 200 percent is considered normal, Sarillo’s restaurants lose and replace just 20 percent of their staff members every year. Net operating profit in the industry averages 6.6 percent; Sarillo’s runs about 14 percent and has gone as high as 18 percent. Meanwhile, the 14-year-old company does more volume on a per-unit basis (an average of $3.5 million over the past three years) than nearly all independent pizza restaurants. And customers, it seems, adore the service: On three occasions, waitresses have received tips of $1,000.

Sarillo grew up around pizza. His father, Nick Sr., owned a restaurant called Village Pizza in Carpentersville, Illinois, which he started when his son was in the eighth grade. When Sarillo opened his first restaurant, in Crystal Lake, in 1995 (the other opened in nearby Elgin in 2005), he patterned it after his father’s, right down to the pizza recipe. In one key respect, however, he was determined to make it different. That difference — and the secret of the company’s success — can be summed up in one word: culture.

Sarillo has built his company’s culture by using a form of management best characterized as “trust and track.” It involves educating employees about what it takes for the company to be successful, then trusting them to act accordingly. The alternative is command and control, wherein success is the boss’s responsibility and employees do what the boss says. Think of the Navy SEALs versus the National Guard. Both approaches can work, but they produce very different cultures. If done right, moreover, trust and track can allow a company to be nimble, flexible, and productive enough to perform at the highest level through good economies and bad.

Sarillo is the first to admit that he is an unlikely spokesman for the benefits of a strong company culture. When he launched Nick’s, he had never heard of company culture. A former construction worker, he got into the business, he says, because he had three young children and there was no restaurant in the area at which families could get together, kids could play, and parents could relax and have fun. He didn’t have a management philosophy — at least not one he could articulate. He did believe, however, that he had a choice about how the business would be run. “Everyone I knew who’d had a business told me, ‘No one cares like an owner. No one works as hard as an owner,’ ” Sarillo says. “They said, ‘Watch out. People are going to steal.’ I set out to prove them wrong. I wanted a place where everyone worked hard and cared a lot; where people enjoyed coming to work, felt good afterward, and weren’t motivated to steal. If I couldn’t have that kind of business, I didn’t want to have a business.”

In the end, he built the kind of business he wanted by developing a unique management system. Not only is it strikingly effective, but it’s a stark illustration of the notion that good ideas can spring from the most humble of sources. If you look closely, you can identify 10 key ingredients of Sarillo’s recipe for building a company culture that delivers.

1. Feel your community’s pain; share its joy
Half-Price Mondays and Takeout Tuesdays are symbols of Nick’s ongoing commitment to the communities in which it operates. So was a decision in August 2008 to surprise the guests one Thursday evening by picking up the check, in recognition of the tough times many were facing. “It cost us $20,000,” says Sarillo’s partner, Christopher Adams, “but it created tremendous buzz.”

It also reinforced the company’s reputation as a community bulwark — a reputation it has been assiduously building since Day One. The restaurants host fundraisers almost every week, with the company contributing 15 percent of the gross profit generated by the event. In addition, Nick’s sponsors two or three large benefits a year, many of them for families facing high medical bills because of a health crisis. For the benefits, the company donates 100 percent of its gross profit for the day, and servers often kick in their tips. “I have never known them to turn away anyone with a legitimate charitable purpose,” says Crystal Lake Mayor Aaron Shepley.

All of this has an ancillary benefit for the business. “It reminds our team members how incredibly different we are from any other place they know,” says Adams.

2. Hire only A+ players
Forty-one percent of the company’s 182 employees are ages 16 to 18, almost all of them still in high school. The others include a large number of mothers, college students, and people whose main job is somewhere else. Such employees do not typically make for a stable work force. Yet people who work at Nick’s seem to find the culture irresistible. “When I come here, I really don’t feel like I’m coming to work,” says server Aubrey Judson, 25. “My boyfriend doesn’t understand it. I just like to be here.” She works only on weekends, she adds, as she has a full-time job at an online advertising agency during the week.

Her job as a server was very likely the more difficult of the two to land. Just one of every 12 applicants to Nick’s gets hired. “I was really surprised by the process,” she says. “You get interviewed twice, and you take a personality test.”

The explicit goal of the process is to hire only the best of the best — A+ players, in the language of the company. People who inquire about a job receive a handout detailing the company’s purpose and values. They are advised not to waste their time applying unless, after perusing the sheet, they think Nick’s sounds like a place they would like to work. If they decide to move forward, they first have a talk with a manager. Nearly all of them are then invited to an interview. Twenty percent of those are invited to a second interview. Two managers are in each interview, and one sits in on both. In other words, candidates need four yes votes from three managers to receive an offer. Those who aren’t selected get a thank-you note and a voucher for a free pizza.

Along the way, the applicants are scrutinized and tested. There is a lot of role playing, not to mention the occasional off-the-wall question. “They asked me, ‘What are you doing to improve yourself physically, mentally, or spiritually?’ ” says Scott Jewitt, who had been a manager at Bennigan’s, Lone Star Steakhouse, Boston Market, Panera Bread, and CiCi’s Pizza before joining Nick’s in the fall of 2008 and now is an operating partner. “I was speechless for a moment. It was so different from any interview experience I’d been through. And I’m not an amateur.” Ninety-six percent of those hired stay at least a year.

3. Learn, grow, compensate
Getting hired at Nick’s is a ticket — not just to a job, but to the company’s training program, which is elaborate, rigorous, and ongoing. It begins with a two-day orientation, which includes more role playing and discussion of the company’s purpose, values, and culture. That’s followed by 101, a four-hour stint in the kitchen, where everybody goes through a basic pizza-making course. The new hires then separate into work groups and move on to 201, in which they are trained and certified in specific jobs. A pizza maker, for example, may take two to four weeks to reach the level of proficiency required for certification, after which she can make pizzas on her own. When she gets certified in two other jobs — say, salads and sandwiches — her wage goes from $8.25 to $9 per hour. After certification in six positions, it increases to $9.50 an hour, and she gets a red hat. (Up to then, she has been wearing a tan hat.) Certification in nine positions earns her a black hat and a raise to $11 an hour.

It’s her choice, however, whether she goes for any certifications beyond 201. She can stay at one certification as long as she likes. Then again, she might want to go on to 301 and become a trainer, which offers a variety of benefits, including eligibility for profit sharing and preference in scheduling. To qualify, she must achieve mastery in her certifications — that is, a top rating on a one-to-five scale — and read the book Mastery: The Keys to Success and Long-Term Fulfillment, by George Leonard. She then takes a three-day course on communication and leadership. At the end of the course, she receives a Leadership 301 Passport with a checklist of 30 specific behaviors she is required to model or recognize someone else modeling. She has five weeks to complete the passport, which involves observing and describing two such incidents for each behavior and getting a member of the leadership team to sign off on it. Finally, she takes a train-the-trainer course. On completion, she becomes a trainer.

4. Systems are for building trust
This is not the sort of training curriculum you expect to find in a company doing just over $7 million a year in sales. Then again, the same could be said about all of Nick’s systems — from hiring to inventory management to the handling of workplace conflict. Pretty much everything that happens in the business has been thought through, defined, and taught, right down to the best method for greeting a customer.

Take the process of opening and closing the kitchen. In a typical restaurant, a supervisor is responsible for both, has a long checklist of things to be done, and tells everyone what to do. At Nick’s, by contrast, the whole kitchen crew is responsible. To help people keep track of what needs to happen, there is a laminated “ops card” for each task involved. Each ops card is red at the top and green at the bottom and has its own slot in a converted timecard holder. In the morning, when staff members come in, the ops cards are in the slots with the red end showing. Whenever a task is completed, someone turns over the corresponding ops card so the green end is showing. By closing time, all the cards are showing green. It’s then the manager’s job to make sure they are all red again before people arrive the next morning.

The system is an important mechanism for creating a trust-and-track culture and for breaking the habits of command and control. “Managers trained in command and control think it’s their responsibility to tell people what to do,” Sarillo says. “They like having that power. It gives them their sense of self-worth. But when you manage that way, people see it, and they start waiting for you to tell them what to do. You wind up with too much on your plate, and things fall through the cracks. It’s not efficient or effective. We want all the team members to feel responsible for the company’s success.”

Some people would no doubt find such a regime unbearable, but Nick’s employees appear to thrive under it, especially the high school students. “Parents tell me, ‘I don’t know what you did to my kid, but whatever it is, keep doing it,’ ” says Sarillo.

What Sarillo has done, on one level, is simply to treat high school students — and everyone else — like intelligent, responsible, and, above all, trustworthy human beings. “All of our systems are geared toward creating a culture of trust,” says Sarillo. “A lot of people would say trust is intangible. We’ve made it tangible by putting these systems in. They allow you to see whether the trust is there and whether the way people behave is promoting or undermining trust.”

5. Coach in the moment, not after the fact
To be sure, just about every company has systems of one sort or another. A common one is the annual performance review, which almost all management experts would say is essential for giving employees the feedback they need. But Sarillo doesn’t believe in performance reviews. Rather, managers and employees are trained to coach in the moment, providing feedback immediately.

There are actually three forms of feedback at Nick’s. The first is called a feedback loop and applies mainly to new employees. At the end of a shift, a trainer will ask, “What is one thing you did well, and — if you could replay the tape — what is one thing you would do to enhance your performance?” It’s a two-way conversation, hence a loop.

The second form is called performance feedback and, again, usually comes at the end of a shift. After observing someone’s performance, the manager or trainer will mention one thing the person did well and one thing he or she should try to improve.

The third form is direct feedback and happens in the moment. Suppose, for example, that Sarillo observes a host with her head down as a guest walks by. “With a smile on my face and in a nice way, I’d say, ‘Eyes up, Rhonda. Remember, five steps with every guest.’ ” He is referring to another mechanism: Smile and greet a customer whenever you come within five steps of one.

As for deciding when to provide feedback, managers are taught that everything is an interview. “We do a lot of role playing in our job interviews,” Sarillo says. “When you observe a behavior, the question is, Would you have hired that behavior? If yes, you can recognize it. If no, you can coach it. But either way, you should do it in the moment.”

6. A consultant can be more helpful than you think
Sarillo says he first got the urge to expand to new locations in 2002, but he wasn’t confident in his ability to do it without outside help. So he brought in an accountant and then a couple of consultants. “They all talked about control, control, control,” Sarillo says. “I felt like I was on Mars. What I was doing was obviously working, but I didn’t know anyone else who ran a business this way. I mean, I’m an ordinary guy. If I can do it, anybody can.” Then he met a consultant named Rudy Miick. “He asked all the right questions,” says Sarillo.

He decided to hire Miick, who didn’t come cheap. Sarillo estimates that, in 2003 and 2004, he spent $200,000 preparing to expand, 80 percent of which went to pay for Miick’s services. That’s a lot of money for a business doing just over $3 million a year in sales. But Miick played a key role in helping the restaurants streamline their management systems, which helped reduce employee turnover from 185 percent to 20 percent. Given a cost of $1,500 to recruit, interview, and train a new employee, the drop in turnover alone saved almost $250,000 a year.

7. Turn negatives into positives by making talk safe
Sarillo uses a system called safe space, which allows employees and managers to have difficult conversations by following certain well-defined rules. One rule, for example, is that statements must be based on data, not feelings or speculation. Another rule is to identify “the moose in the room” — that is, something many people are aware of but no one is talking about — the goal being to nip gossip and rumors in the bud. Adams, for one, feels that safe space is “the most important way we create trust in the organization.”

One team member recently used safe space to question Sarillo about a sarcastic remark he had made. Sarillo had intended it to be good-natured joshing, but it came across as pointed criticism. “I said, ‘Holy cow! I didn’t realize it,’ and I apologized,” Sarillo says. “It reminded me that sarcasm can be lethal when you’re the boss. I have my share of imperfections, and I love it when team members call me out on them. It’s not a threat if you have a culture based on trust. In fact, it proves that the trust is there.”

8. “Why” is more important than “what” or “how”
Sarillo likes to say he doesn’t tell people what to do. Instead, he prefers to explain the situation and let them choose. Of course, giving people choices rather than orders requires trusting them to do the right thing. But it works the other way as well: They have to trust you enough to believe your explanation of the situation. That means making sure they understand why they are being asked to do whatever it is you want them to do.

Explaining the “why” is particularly important, Sarillo says, for young employees. “Today’s teens are as strong and as good as any previous generation of workers, but you need to share the ‘why’ with them. The days of ‘do what I tell you’ are gone. You simply won’t be successful.”

That can present a challenge for managers accustomed to giving orders, as Sarillo discovered the hard way. In 2005, he and Adams set a goal of having five restaurants by the end of 2010. To achieve it, they realized they would need experienced general managers to run the restaurants they had. The three people they wound up hiring came out of established restaurant chains. On the surface, the managers embraced the company’s purpose and values, as well as the systems that support them. Eventually, however, Sarillo decided he had to let all of them go. One tip-off was their inability to control costs.

As usual, the devil was in the details. Each Nick’s Pizza & Pub has a just-in-time purchasing system, whereby food and beverage usage is tracked daily and orders are placed two or three times a week. A physical inventory is done once a week and then matched against the prior week’s count, minus usage, plus purchases, to make sure the costs are under control. The goal is to keep beverage costs at about 22 percent of revenue and food costs at 20 percent.

But week after week, the costs ran too high, and physical inventory counts didn’t jibe with usage and purchases. When Sarillo finally investigated the problem, he traced it to the managers’ inability to let go of their old habits. “Their idea of leadership was telling people what to do,” he says. “They had someone else put in the numbers, and when the numbers came out wrong, they didn’t dig deeper to discover why. Because they didn’t know the ‘why,’ they couldn’t share it with the team members. When you know the ‘why,’ it’s really easy to figure out what to do, but sharing that kind of information wasn’t how they’d been trained to manage.”

In the end, Sarillo turned over the responsibility for tracking costs at the Elgin restaurant to a 24-year-old woman named Jenny Petersen, who had begun working at Nick’s when she was 16. She solved the problems in four weeks. She could do it, she says, because she cared about the ‘why.’ “I think it’s a matter of personal drive and ambition,” Petersen says. “You need the drive to ask questions and do the research. If our inventory numbers are off, there’s got to be a reason. I like finding out what it is.”

9. “Trust” without “track” is an invitation to trouble
In retrospect, Sarillo acknowledges that hiring those managers was one of his biggest mistakes in recent years. It became a big mistake, however, because he wasn’t paying attention. For two years, he was totally focused on laying the groundwork for a new Nick’s in Chicago, which was supposed to open in mid-2008. Only after that plan fell through did he turn his attention back to the existing restaurants. The company was in serious trouble, mainly because he had invested so much time, energy, and money — about $300,000 — in the Chicago project, but also because of slumping sales and out-of-control costs at Elgin and Crystal Lake.

From a distance, he attributed the problems to economic factors over which the company had no control. But as he looked more closely, he realized there was more to it. The cost-control issues were symptomatic of something deeper. The general managers weren’t supporting the systems, and so the company’s culture was beginning to change.

And yet Sarillo had to admit that the problems were ultimately his responsibility. Looking back, he says, “The big lesson is accountability. Results are results. You have to be real about how people are doing. I wasn’t holding those managers accountable for their results and their behavior because I wasn’t keeping close enough track of what they were doing.”

10. Beware of growing before you — and the company — are ready
Sarillo didn’t keep track in part because he was mesmerized by growth. He had decided to expand into Chicago, in the belief that a Nick’s there would provide visibility the company could never get in Crystal Lake and Elgin.

He was eventually forced to cancel the Chicago project, however, when he lost his bank financing in mid-2008. The turn of events appeared at first to be a disaster for the company. It turned out, however, to be a blessing. “Because we were not able to do Chicago, we wound up doing something more important: fixing the culture in Elgin and Crystal Lake,” says Sarillo. “If we’d opened in Chicago, I wouldn’t have had so many financial problems, but I would have had much, much bigger cultural problems. By the time I found out about them, it might have been too late.”

In the process, he learned an important lesson about the type of management he will need in the future. “I’ve decided there are two ways to get the right person to run one of our restaurants,” he says. “One, you can get a new manager like Jenny Petersen, who hasn’t already developed bad habits somewhere else. Or, two, you can get a manager with experience in the industry who’s completely fed up with the corporate way of doing things and thinking, I really need a change.” That’s the story with Scott Jewitt, the operating partner at Crystal Lake.

So is Sarillo still committed to opening other Nick’s Pizza & Pubs? “Oh, yes, I feel more inspired to grow than ever,” he says. “People really do want to have a meaningful place to work, and that is one thing I know how to do well. So how could I not want to keep doing it for more and more people? I mean, what could be a more fulfilling life?”

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