Old-Fashioned Values: New Industry Success

Succeeding with old-fashioned values in a new industry 1 (revised September 2010) Adapted by CH Besseyre des Horts from C. A. O’Reilly III & J. Pfeffer (2000) : Hidden Value, how great companies achieve extraordinary results with ordinary people, Harvard Business School Press, pp. 99-117. 1 1 CASE STUDY THE SAS INSTITUTE : Succeeding with old-fashioned values in a new industry TREATING PEOPLE DIFFERENTLY (and better) than they expect to be treated, and differently than other companies in the industry treat them, is not something that only works in retailing.

Even in the world of high technology and software development, there is a case to be made for being different. And few companies in this industry are as different as the one described in this chapter : SAS Institute that was ranked in 2010 the #1 Best Company to Work For in the USA 2 , # 10 in India 3 and among the 25 Top Employers in China 4 . SAS Institute, the largest privately owned software company in the world, is an anachronism. “In an era of relentless pressure, this place is an oasis of calm.

In an age of frantic competition, this place is methodical and clearheaded. In a world of free agency, signing bonuses, and stock options, this is a place where loyalty matters more than money. ” In a world of outsourcing and contracting out, SAS Institute outsources and contracts out almost nothing. Day care workers, onsite health professionals, food service workers, and even most security guards are all SAS Institute employees. In an era of managed care, SAS offers a full indemnity health plan with low deductibles.

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In almost every respect, SAS Institute seems like a throwback to an earlier era, to a time when there were long-term attachments between companies and their people, and large, progressive organizations such as Eastman Kodak, S. C. Johnson, and Sears offered generous, inclusive benefits in an effort to enhance the welfare of their workforce. Not all observers seem to approve of this form of employment relationship. Some people say that SAS Institute reeks of paternalism or a plantation mentality in a world otherwise dominated by market like labor market transactions.

For instance, an article in Forbes stated, “More than one observer calls James Goodnight’s SAS Institute, Inc. , ‘the Stepford software company”‘ after the movie The Stepford Wives. In the movie, people were almost robot-like in their behavior, apparently under the control of some outside force. Another article noted, “The place can come across as being a bit too perfect, as if working there might mean surrendering some of your personality. ” Of course, no one is forced to work at the company, and there are many nearby opportunities available.

SAS Institute is so inclusive and comprehensive in what it does for its people that it makes some observers, more accustomed to the arm’s-length, occasionally adversarial relationship between employers and employees now so typical in organizations, uncomfortable. Certainly, aspects of the company’s generous benefits, spacious, campus-like grounds, and concern for the total welfare of all of its people seem out of place in contemporary management practice. What a puzzle!

How can a company that operates like firms did fifty years ago succeed in today’s economy-not only that, but succeed in one of the most high-technology sectors of that economy, software? SAS Institute poses a second mystery. The conventional wisdom is that turnover is endemic and inevitable in high technology in general and software in particular. In these industries 2 3 http://money. cnn. com/magazines/fortune/bestcompanies/2010/full_list/ http://www. greatplacetowork. in/best/list-in. htm 4 http://www. topemployers. com. n/en/employers/OurProjects/ChinasTopEmployers2010/CertifiedorganisationsA Z. aspx 2 there is a tremendous shortage of people, and job hopping is an accepted and even expected part of people’s career strategy. But SAS Institute, with no signing bonuses, no stock options, no phantom stock-none of the gimmicks that have come to be taken for granted as ways of inducing people to join and remain in companies-has a turnover rate of less than 4 percent. Never in the more than thirty-two years of the company’s history has turnover been above 5 percent.

SAS Institute is located in Cary, in the Research Triangle area of North Carolina. It is surrounded by numerous pharmaceutical companies, as well as by IBM, Northern Telecom, and many other high-technology and software companies, so SAS people would not have to move geographically if they wanted to change jobs. How in the world has SAS Institute kept its turnover so low and succeeded so well in wooing and retaining the talent that has permitted the company to flourish? BACKGROUND SAS Institute was founded in 1976 by Dr. James Goodnight, John Sall, Anthony Barr, and Jane Helwig.

Goodnight, today the CEO, was an undergraduate in applied mathematics at North Carolina State University in the 1960s. The son of a hardware store owner, he helped pay his way through college by moonlighting as a programmer. After graduating, Goodnight worked for General Electric on the ground control system for the Apollo space program before returning to North Carolina State to obtain his doctorate in statistics in 1971. He then joined the faculty on a so-called soft money appointment-a position in which you had to go out and get the grants to pay your own salary.

Goodnight and Barr, who had worked for IBM for two years developing an information system for the Pentagon and was now also working at State, thought it was wasteful to have to write a new program every time students wanted to do a new statistical analysis. “They decided to develop a uniform program that could be used over and over, and that could solve lots of different kinds of [statistical] problems. ” Having developed such a system, they leased SAS (Statistical Analysis System) to other agricultural schools in the region and to some pharmaceutical companies.

When the soft money began to dry up, they were told they could stay on at the university but would have to pay their own salaries. Instead, they left and formed their own company. When that company, SAS Institute, Inc. , began in 1976 as an independent entity, it already had 100 paying customers and was cash flow positive. Except for a mortgage on its first building, SAS Institute has never had any debt, nor has it ever had to raise outside venture or other equity capital. What about ownership of the intellectual property? “North Carolina State ceded them all copyrights on the program in exchange for free upgrades. If this seems generous, consider that in the 1970s there really wasn’t a software industry and no one knew what software was worth. As Jim Goodnight recounts, when his wife would tell people her husband worked in software, they thought it was some type of clothing or undergarments. One of the cofounders, Anthony Barr, sold his 40 percent stake in the company for about $340,000 in 1979. Jane Helwig left to found another software company, Seasoned Systems, with her husband and then decided to attend medical school. She now practices obstetrics/ gynecology, and her stepsons, Mark and David Helwig, work for SAS Institute.

Today, James Goodnight owns two-thirds of the company; the other cofounder, John Sall, owns the other third. Goodnight’s two-thirds stake of SAS Institute means that, according to Forbes, he is the forty-second richest person in the world. John Sall, also a billionaire, is not active at all in the 3 management of SAS Institute and does not want to be. He sees himself ” as a statistician and a software developer-not a businessperson or a manager. ” Over the years, the SAS program has expanded to become a twenty module system for data warehousing, data mining, and decision support. “With 6. million lines of code, the massive program is used by the U . S. Census Bureau to count and categorize population, by the Agriculture Department to develop crop forecasts and by the long distance phone companies to figure out how much to charge for each call . ” Banks use SAS Institute software to do credit scoring, hotels use the product to manage frequent visitor programs, and catalog companies use the system to help decide which people to mail particular catalogs. The original statistical analysis package that was the foundation of the company currently contributes less than 2 percent of total revenue.

SAS Institute operates on a worldwide basis. In 2009, the company has many sales offices in the United States and more than 400 offices globally, as well as 600 licensed distributors. Ninety-seven percent of the Fortune 100 companies use SAS software, as do more than 93 percent of the Global 500. SAS Institute has more than 45,000 customers sites throughout the world in 122 countries 5 . Because SAS Institute is privately owned, information on its finances is not publicly available. Figures 1 and 2 present information on sales revenues for the past 23 and 33 years.

SAS Institute is currently the largest privately owned independent software company. SAS Institute has enjoyed double-digit revenue growth since its founding. Year Revenues (millions US $) 1986 98 1990 240 1994 482 1998 871 2002 1. 180 2005 1. 68 2007 2. 15 2008 2. 26 2009 2. 31 Figure 1 : Annual Sales Revenues for SAS Institute 1986 – 2009 6 Figure 2 : SAS’ Annual Revenue History 1976 – 2009 3 5 6 SAS Institute company fact sheet (http://www. sas. com/company/about/statistics. html ) Annual report SAS Institute 2009 (http://www. sas. com/corporate/annual-report-current. df) and company fact sheet (http://www. sas. com/company/about/statistics. html ) 4 The company has no single competitor that provides precisely the range of software products it does, but in segments of its business it competes with companies such as SPSS that offer statistical analysis and graphic packages, with vendors of decision support and graphics, or with database management companies such as Oracle; Although originally running only on mainframes, SAS applications run on midrange computers, workstations, and personal computers as well as on a variety of mainframe platforms.

The company is to use Internetand intranet-based applications. SAS Institute has spent in 2009 about 23 percent of its revenues on research and development, an amount that has remained remarkably constant over the years and is about twice the average for the software industry. SAS Institute employs about 11,325 people (end of 2009), approximately 38% of them work at corporate headquarters at Cary. Almost all of the company’s software development occurs at Cary, with the other offices performing account management and service support.

If anyone thinks that SAS Institute’s success was foreordained by its being at the right place at the right time, a comparison with SPSS is particularly revealing. SPSS was founded in the late 1960s by three Stanford University graduate students to offer packages for statistical packages. SPSS incorporated in 1975 and set up its headquarters in Chicago. In August 1993, SPSS offered stock to the public. SPSS applications originally ran only on mainframes, but in the 1980s they were migrated to a personal computer operating environment.

In 1996, desktop revenues were almost 80 percent of total revenues. SPSS traditionally offers data analysis and graphics software, process documentation, and various management products. More recently, SPSS principal activity has moved to provide technology that transforms data into insight through the use of predictive analytics and other data mining techniques : SPSS solutions and products enable organizations to improve decision-making by learning from the past, understanding the present as well as anticipating future problems and opportunities.

Although its origins in a university were similar to SAS Institute and it was founded at about the same time, the growth of the two companies has been quite different. In the fiscal year that ended December 31, 2008, SPSS had revenues of $302. 9 million 7 , less than one-seventh that of SAS Institute and about 1,200 employees compare to more than 11,000. SPSS was subsequently acquired late 2009 by the giant IBM 8 in order to reinforce its predictive analytics solutions’ offerings. Strategy SAS Institute’s business strategy is built on relationships.

As described in the company’s 1996 annual report, “The Institute is founded on a philosophy of forming lasting relationships with our customers, our business partners, and our employees. These critical relationships, combined with our leading-edge software and services, together form the basic elements of our success. ” Relationships are important because, unlike many software vendors, SAS Institute does not sell products and subsequent upgrades but rather offers site licenses, provided on an annual basis after a thirty-day free trial. The software is not cheap. A charge of $50,000 a year for 50 users is typical. ” However, the licenses include free upgrades to new versions of the software and outstanding customer support. Initial first-year revenues are less than if the product were sold outright, but over time, revenues from a given customer will be 7 8 http://www. corporateinformation. com/Company-Snapshot. aspx? cusip=78462K102 http://www. spss. com/ibm-announce/ 5 higher as long as that customer remains with SAS Institute. The company’s license renewal rate is over 98 percent.

Early 2009, the economic crisis situation has not impacted the optimistic view of the market as expressed by Jim Goodnight in the 2008 annual report : “In 2008, organizations of all sizes—spanning every industry and geography— felt the effects of a slowing economy. Though everyone is still trying to see the light at the end of the tunnel, I am optimistic about the future, and I’ll tell you why. Businesses have been forced, by necessity, to get back to basics—to focus on the essentials that can help them weather this economic crisis. If the market has taught us anything, it is that no matter how bad things get, they will get better.

How individual businesses conduct themselves in the face of such dire economic circumstances will help determine who will be around when things begin to improve…” 9 This positive vision was confirmed early 2010 by Jim Goodnight in the 2009 annual report : “Our optimism and determination in the face of an uncertain economy paid off last year, and we finished 2009 – our 34th consecutive year of growth – with global revenues of US$2. 31 billion, up 2. 2 percent over 2008 results. Our revenue from software sales alone jumped 3. 3 percent at a time when the software revenue of other major vendors has been declining.

Customers are increasingly turning to SAS® solutions to maximize effective customer relations, more effectively manage operations and engage in better risk management. Software revenue was strong in several areas, including customer intelligence, credit risk, supply chain and text analytics, attesting that companies striving to survive in a down economy, and succeed in times of recovery and growth, need such solutions to answer complex business problems, spur innovation and enable success. ” 10 Customer support is one key to maintaining satisfied customers. SAS Institute has one technical support person for every 100 customers.

Customer loyalty is intense. Like many software companies, SAS Institute sponsors user group meetings. One difference is the loyalty of the users who attend these meetings. “SAS veterans of previous user conventions wear up to 20 badges on their jackets as a demonstration of loyalty. ” Howard Dresner, research director for the Gartner Group, sometimes speaks at SAS user group meetings and commented, “I was afraid that if I said anything negative they [the users] would lynch me. ” Product development at SAS Institute is also based on staying in very close touch with customers and giving them what they want and need.

Jim Goodnight said : “Listen to the customers. Give them the software they want. There is no reason to develop software they don’t want. . . . Once a project is underway, we’ll have a few of our customers come in that we know are interested. in a particular area and have meetings with them and have them test the software we’ve developed. . . . If we could make these products fit the needs of half a dozen companies through these strategic partnerships, it will pretty well fit the needs of other companies as well” One way information is acquired is by meeting with users in user group conferences.

SAS Institute has six regional user groups in the United States, one international group, and a dozen country-specific user groups. It also sponsors a number of user group conferences throughout the world each year. At user conferences, the company holds a contest asking questions about the SAS software, for which “customers have been known to study for days. ” 9 10 Annual report SAS Institute 2008 Annual report SAS Institute 2009 (http://www. sas. com/corporate/annual-report-current. pdf) 6 Each year the company sends each of its customers a “ballot” asking what features they would like to see.

From tabulating the results of that ballot, the company decides on its development priorities for the coming year. The company does not have a focused product strategy, nor does it engage into along-range planning. Goodnight believes that the industry is evolving too rapidly for such planning and, as he puts it, “I am not as much of a visionary as Bill Gates, so I can’t tell where the industry is going”. The company will not turn down a product idea that seems sound, even if the idea doesn’t fit tightly into the existing product line.

As David Russo , formerly the vice president of human resources commented, the company operates on the philosophy of the educator Maria Montessori, namely, that creativity should be followed not led. Russo noted that “if you’re hiring creative people, you give them their head, you tell them that it’s all right to take chances and you mean it, they will do their best. ” People at SAS Institute are encouraged to do new things. David Russo commented: “Have you ever heard us talk about the holes ? He [Goodnight] says that he’s dug a lot of holes. The only smart thing is knowing when to quit digging. . . We don’t know if it’s going to make a lot of money for the company or not. But the technology out there is exciting and it might turn into something. Go for it. ” As one consequence of this customer-focused, employee-initiative product development philosophy, SAS Institute is developing video games and is moving heavily into educational software. Neither of these areas is within the scope of its traditional focus on statistical and data mining products. These new products are being internally incubated, not obtained through acquisitions.

One other important element of SAS Institute’s business is its drive for market share and revenue growth. David Russo commented that the company, and Jim Goodnight, wants the software everywhere. “If it’s a choice between making X dollars per sale or having more people have the software, he would rather have the software everywhere. He [Goodnight] thinks that there is no reason that any midsized or large enterprise shouldn’t be using SAS. They should be using SAS for everything. So his perspective is, it should be out there. And as a result, he’ll try anything. ”

SAS INSTITUTE PHILOSOPHY AND VALUE The fundamental way that SAS Institute operates has been the same since its inception and is premised on a small, consistent set of values and beliefs. One is the desire to “create a corporation where it was much fun for the workers as for top management. ” Two principles are inherent in that statement. The first is the principle that all people at SAS Institute are treated fairly and equally. In its practices and day-to-day operations, the company is a very egalitarian place. Jim Goodnight nor anybody else has a reserved parking space.

His health plan is no different from that of the day care workers. There is no executive dining roomeveryone regardless of position can eat at one of the on-site company cafeterias, where highquality, subsidized food is accompanied by a pianist playing during the lunch hour. Everyone at SAS Institute has a private office, not a cubicle. Dress is casual and decided by what the person feels comfortable wearing. As Goodnight explained, “Four of us started the business. When we started, there were no employees, we were all principals. What we tried to do was to treat people who joined the company as we ourselves wanted to be treated. . . The 7 company is characterized by an egalitarian approach. ” The second important principle is that the workplace should be fun and people should be treated with dignity and respect. This philosophy comes from Goodnight’s early experiences. When he worked for General Electric on the Apollo space program, although the work was interesting, the job environment was not good: “We had guards at the door every day. . . . We had to sign in. You’d go down the hall and put your quarter in the machine and get a cup of coffee out. A lot of these things, I found somewhat offensive. Essentially, SAS Institute believes in the power of reciprocity-that people feel obligated to return favors that are done for them. Or, more prosaically stated, if you treat your people well, they will treat the company well by being loyal and dedicated in return. Jim Goodnight has commented that he likes being around happy people. Who wouldn’t ? He and other SAS Institute leaders believe that if you take care of your people, they will take care of the company. As one manager put it, the basic philosophy “is one of trickle down-if you treat people well, things will take care of themselves. A third, interconnected part of the philosophy that guides SAS Institute is a belief in and reliance on intrinsic, internal motivation. Part of trusting people is treating them like responsible adults and relying on them to do a good job. Barrett Joyner, vice president of North American sales and marketing, noted that “the emphasis is on coaching rather than monitoring and controlling. Trust and respect- it’s amazing how far you can go with that. ” The importance placed on people comes from the fact that SAS Institute operates in a business critically dependent on intellectual capital.

David Russo, who was head of human resources for more than seventeen years, explained: “The best way to produce the best and get the best results is to behave as if the people who are creating those things for you are important to you individually. Every night at 6 o’clock, all of our assets walk out the door…We just hope they come back at nine the next morning.. If you believe that, then it’s just a waterfall of common sense. It just means that you take care of the folks who are taking care of you. . . . Why we do the things we do is what’s important.

The things we do are secondary. . . . They are just a natural outgrowth of a philosophy that if you really mean that your people are important, you will treat them like they are important. ” The final part of the SAS Institute philosophy comes from an important insight about the business and economic benefits that come from creating an environment in which both the physical aspects the workplace and the services offered to employees relieve the stress and the day-to-day concerns of people: “We believe that an employee with some of the normal workday stresses relieved . . is more productive, not only for that day, but comes back more refreshed and able to be more productive that second day . . . and so on,” explains Russo. “The point of the strategy is to make it impossible for people not do their work, ” by removing as many distractions and concerns possible. The ideas that people are important, that if you take care of them they will take care of the company, and that taking care of them involves treating them as you yourself might want to be treated are not particularly novel or complicated.

What makes SAS Institute fairly unusual is that it actually lives by these simple precepts. Implementing this philosophy requires taking 8 a long-term approach. SAS Institute definitely thinks long term. Goodnight commented, “We only take a long-term view of all issues. Since any project will take at least one to three years to come to fruition, a long-term perspective is required This long-term perspective extends to the management of people at SAS Institute.

HOW SAS INSTITUTE MANAGES ITS PEOPLE The management practices SAS Institute uses are all premised on the idea that in an intellectual capital business, attracting and retain talent is paramount, and that the way to attract and retain good people is to give them interesting work to do, interesting people to do it with, and treat them like the responsible adults that they are. It is a management system based on trust and mutual respect. The fact that it is so unusual says something about most contemporary organizations and their leaders.

The fact that the system works so well says a lot about human potential and what it takes to unlock that potential. Benefits and the Work Environment SAS Institute is probably most famous for its generous, family-friendly benefits and pleasant physical work environment. As already mentioned, everyone (including assistants) has a nice private office and is provided with the latest computer equipment. As in many organizations, the philosophy and practices reflect the founders’ early experiences and their reactions to those experiences.

Goodnight tells about interviewing for a job as a computer programmer-a job he did not take- when he was a young man: “The programmers sat in desk after desk, lined up row after row, in a building that was like an aircraft hangar. No walls, no privacy. ” Company headquarters at Cary consists of eighteen buildings scattered over a 200-acre campus-like setting with a lake and beautiful grounds and forests. The grounds feature outdoor sculpture and picnic areas, as well as hiking trails. People sometimes bring their friends and family to the grounds on the weekend for picnics or hiking.

The building are architecturally interesting, with atriums and light wells. Goodnight himself oversees their design. They are beautifully decorated with art – something that a committee of four, including an artist-in-residence as well as Goodnight, attends to. Company policy is for people to work about thirty-five hours a week, or a 9 to 5 work day with an hour for lunch and exercise. If you call after 5 P. M. , the voice mail system tells you that the company is closed. As David Russo noted, if you shot off a tell gauge shotgun in the parking lot on a typical

Wednesday at 7 P. M. , you wouldn’t hit anything. Goodnight and other senior leaders have the same schedule. Betty Friend, the director of corporate communications, has contrasted SAS Institute with other software companies, commenting, “you know that old joke about Microsoft having flex time, they don’t care what 18 hours you work? ” The company believes that people don’t perform effectively when they are tired. Jim Goodnight commented: “I’ve seen some of the code that people produce after these long nights and it’s garbage. You throw it away the next day and start over. . . You have got to be alert and sharp to be a good programmer. . . . I’d rather have sharp, focused people that write good code that doesn’t need as much testing. I recently came back from a Microsoft conference and they said that now Microsoft has three testers for every programmer. ” 9 The reduced work hours permit people to have both a job and a life. It means that women don’t have to give up their careers if they want to see their children. As a consequence, at SAS Institute more than 50 percent of the managers are women, a relatively high percentage for the software industry.

The company has been able to attract and retain both men and women with its work-family balance. The company has a number of other amenities and benefits, such as an on-site 7,500-squarefoot medical facility staffed by six nurse practitioners, two family practice physicians, a physical therapist, massage therapist, and a mental health nurse. The average waiting time to be seen, if you have an appointment, is five minutes. When waiting times increase (for instance, because of the growth in the number of SAS people), the medical facility adds people, adjusts hours, or does something else to reduce the waiting time.

SAS Institute recognizes that time is money and that time spent obtaining medical care can’t be used on work. The facility is free to employees and their families, although there is a small copayment required for the massage therapist. The company’s full indemnity health plan-not an HMO or a PPO, and with no managed carehas a $100 deductible per person, $350 per family, and covers first dollar costs for many things. Nonetheless, SAS Institute’s health care costs are $1,000 per employee below the average health care costs for plans that aren’t nearly as ich as theirs. The SAS Institute health plan includes vision care, hearing, a go dental plan, free physicals, free mammography, and many other benefits. Gail Adcock, the manager of corporate health services, noted that the goal of her group was to keep people at work and to decrease turnover, not simply to save money. SAS Institute also provides on-site Montessori day care, with one staff for every three children. Although the day care was originally provided completely free, SAS employees now pay about one third of what the comparable fee would be in the market.

Between the on-site and subsidized off-site care, SAS Institute provides child care for 528 children. SAS Institute has a fitness center that includes a large aerobics floor, “two full-length basketball courts, a private, skylit yoga room, and workout areas segregated by gender. . . . Outside, there are soccer and softball fields”. All of this is free to employees and their families. SAS Institute provides towels and even launders exercise clothes, also for free. The company estimates that 65 percent of its people use the exercise center two of more times per week.

SAS is noted for its snack facilities-refrigerators and small eating areas- scattered throughout the buildings. Every Wednesday afternoon, plain and peanut M&Ms are distributed to these snack areas on every floor and every building. SAS Institute uses 22. 5 tons of M&Ms a year. SAS Institute was one of the early companies to offer benefits for domestic partners. It provides on-site help in arranging elder care. The company provides financial assistance and paid leave for adoptions. The company’s cafeterias provide excellent food at subsidized prices, with live piano music in the background.

Families are encouraged to use this facility, and many parents will eat lunch with their children who are at the on-site day care facility. A program provides undergraduate scholarships to SAS Institute employees on a competitive basis. The company even helps with housing: It sells some of the land it owns to employees at discounted prices so they can build homes. The idea behind all of this is to remove distractions that keep people from focusing on their jobs and also to reduce the stresses that come from dealing with the common demands of life. 10

For SAS employees not working at Cary, every effort is made to provide similar levels of benefits and amenities, either on site or by purchasing them for employees at local vendors. The idea is to provide Cary-level care for everyone. Performance Management David Russo’s theory of performance management is simple: Give people the tools to do their jobs and then let them do it, while holding them accountable. “Every SAS product manual includes the names of the developers and testers who created or updated the software. ” Try finding the name of any person in the product manuals for most software companies, such as Microsoft.

SAS Institute has eliminated the performance appraisal form. David Russo explained the decision: “We don’t do performance appraisals. Why? Because they’re stupid. Because everybody hates them. Because they take an inordinate amount of time with always a negative result. ” Instead of formal appraisals, managers commit to spending time talking to their people and providing feedback on a regular basis, at least three times a year. In return for getting rid of the appraisals, managers also committed to walking around and talking to their people.

Russo believes: “If there were a good performance appraisal process, everybody would be using it. . . . So what happens is companies institute a new performance appraisal process, it works for a while because it’s new, and all of a sudden it starts to slide and then they start looking for something else. . . .I don’t think you can really manage someone’s performance. I think you can observe the results. . . . I think you can set short- and long-term goals. And you can sit back and see if it happens or i1 doesn’t happen. The company’s fundamental approach to performance management entails setting high expectations for both conduct and performance, which then become self-fulfilling, and giving people the freedom to do what they like to meet these expectations. John Boling, director of the educational technologies division, said: “When I’ve wanted to do research, I’ve had the opportunity. When I’ve wanted to travel, I’ve had the opportunity. When I’ve wanted to publish, I’ve had the opportunity. It’s been pretty much my taking the initiative. . . . We assume that you have talent, creativity, and initiative.

You have to be able to take that and run with it. ” SAS Institute operates on the basis of trust. Violations of that trust are not sanctioned. The company, therefore, has no sick days or sick leave policy. Nor does it have a sick child care program. Jim Goodnight believes if a child is sick, it should be home with its mother or father. Commenting on the company’s sick day policy and the issue of trust, David Russo said: “We don’t have sick days. If you’re sick for six months, you’re going to get flowers, you’re going to get candy, you’re going to get a lot of concern and a lot of visits.

If you’re sick for six or seven Mondays in a row, you’re going to get gone. It’s a simple thing. . . . Now, do we have free riders ? Absolutely, and guess who figures them out? Their peers. Management doesn’t have to take care of that. They surface and they either get right or eventually . . . they get gone. It’s just the way it is” 11 Managers are evaluated principally on their ability to attract and retain talent. The company believes that in a business based on skill and know-how, if it can get and keep the best people, the rest will take of itself.

Pay Practices SAS Institute provides none of its employees with stock options, phantom stock, performance shares, or similar schemes. Goodnight has referred to stock options as Ponzi schemes. The company does contribute to the maximum allowed by Internal Revenue Service regulation, 15 percent, to employees’ profit sharing (40lk) retirement plans. There is no matchingemployees do not have to contribute anything. SAS Institute has done this for more than twenty years, a record unmatched by any other company. A small bonus based partly on the company’s financial performance, typically on the order of 5. percent to 8 percent, is paid at the end of the year. Base salaries are quite competitive with the industry and are adjusted annually, although people have taken pay cuts to work at SAS Institute because they value the work environment so highly. Salary increases are based on supervisors’ assessments of an individual’s performance, so in that sense, there is a merit pay system. However, SAS Institute tries to deemphasize the importance of financial rewards because most SAS managers don’t believe money is a very effective motivator.

As David Russo put it, ” A raise is only a raise for thirty days. After that, it’s just somebody’s salary. ” It’s one thing not to emphasize financial rewards in software development and administration. But SAS Institute eschews the piece rate system even for its sales organization. Account representatives do not receive commissions on sales. Goodnight noted, “commissions do not encourage an orientation toward taking the customer and building long-term relationships. ” Also, a commission culture tends to be more high pressure and high stress than what the leadership wants for their company.

Barrett ]oyner, head of North American sales and marketing, described their philosophy and approach to achieving performance: “We have sales targets, but mostly as a way of keeping score. I want to make the numbers, but I want to make the numbers the right way…. I’m not smart enough to invent on a formula. People are constantly finding holes in incentive plans. ” He commented that many companies used incentive systems a of signaling what was important, that is, as a communications device. Joyner said that instead of using incentive schemes for this purpose “Here, we just tell people what we want them to do and what we expect. To further downplay individual short-term performance, SAS Institute does not even post comparative sales data by name. Some observers believe that this kind of pay system does not encourage the best people to join and remain in the organization. Instead, the thinking goes, these high-potential people will go to places where they can do better financially. There is, of course, no way of definitively answering this concern. However, Barrett ]oyner had the following cor on this issue: “As you know, we move people around a lot at the Institute, so even though we have low turnover, account representatives may change assignments.

I frequently get calls from 12 customers that say, “I don’t want to lose my account executive. ” How many software firms do you know where that happens? ” Training, Career Development, and Mobility SAS Institute believes in training, but it is almost all internally done. New employees receive an orientation program from senior managers history of the company, its vision, and its values. New employees learn about the products, the organizational structure, the business model, and the customers. Long-time employees really enjoy and value helping with this socialization. A lot of technical training takes place.

For instance, in a nine and a half month period in 1997, about 400 technical training seminars were held that had a total of 3,000 people in attendance. In the sales organization, new people receive two weeks of training in Cary, but the company is moving to a five to six-week program delivered over a six-month period to beef up sales training effort. SAS Institute does not offer tuition reimbursement for outside classes. Although it has sent people to outside management or leadership training programs on rare occasion, the emphasis is very much on doing things internally.

SAS Institute tries to make it easy for people to move laterally – there are no functional silos. As David Russo noted: “There are no silos of research and development, there are no silos of marketing and sales, there are no silos of technical support. Everything is based on a tool kit. If your tool kit fits this division’s model for business and you want to do that, chances are pretty good you’ll get to do that. And if two years later you see something else you want to do and it’s across three organizational boundaries, you get to do that….

In an intellectual capital organization like ours, the most important thing you can do is engage the individual’s energy so that they can apply it to the thing that excites them most, their work. ” SAS Institute believes that people will have three or four careers during their working lives it would like for all of those careers to be within SAS Institute. The company has a very flat organizational structure. Depending on the particular division, there are only three or four levels in the company. Jim Goodnight has twenty-seven direct reports.

He noted that “my management style is to let people manage their own departments and divisions with as little interference from me as possible. ” The company structure is fairly informal, and the firm does not have a formal organization chart. One of the most important aspects of careers at SAS Institute every manager is a working manager-they do their own jobs as managing others. This model even extends to Goodnight, who spends about 40 percent of his time programming and leading product development teams. He noted, “running a big company like this is pretty boring. Another dimension is the ability to move from an individual contributor role to a managerial role, and back, without penalty. A number of people have preferred less managerial responsibility and more programming activity, and this is possible. This practice is consistent with Russo’s previously cited philosophy of letting people do what they’re good at and what they want to do-and permitting them to discover what they like and are good at by doing it. 13 As one might imagine in a company with a strong culture, fit is important in hiring, promotion, and retention decisions.

SAS Institute wants people who are team players, not those who seek to stand out, to be particularly important, or to be treated like stars. Barret Joyner encourages people to think about what they really want out of their jobs and to be clear and direct about this. In considering this question, one former employee said, “I want to be able to have performance that permits me to do whatever I want. When I walk down the hall, I want to feel like ‘I’m the man. “‘ ]oyner told this individual that this sounded like a wonderful goal and that he (Barrett) would him achieve it-at another organization.

As David Russo has SAS Institute is not a good place for someone who wants to feel like a star feel or particularly important. At SAS Institute, everyone is important and the contributions of all are valued and recognized. Outsourcing and the Use of Temporary Help SAS has a simple policy with respect to the practice of using contract programmers supplied by so-called body shops (for instance, in India or Pakistan), a practice common in high technology, particularly the Silicon Valley. It doesn’t use them. It also has a simple policy respect to contracting things out-it doesn’t.

SAS Institute used to have an outside public relations firm, but has now taken this back inside. SAS Institute does its own training; develops and prints its own materials, including marketing materials and product manuals; and even runs its own publishing organization that publishes books about the SAS program, including those written by outsiders. Why does it do this? Barrett Joyner said, “If you want something done right, own it and control it. ” He noted that most companies contracted out activities in an effort to save on costs.

They frequently got products or services that may have cost less, but were also of lesser quality. The question soon becomes, How little can one get away with? SAS Institute is not that focused on short-term costs in the first place, so cost savings are less critical. It is focused on doing things in a quality fashion, and it believes the best way to ensure quality is to manage the process internally. But why not contract out “non-essential” or “non-core” activities such as health care, day care, the food service, and so forth?

The answer is actually quite simple: Those activities are viewed as being “core” at SAS Institute. If the company is organized around the attraction and retention of talent not through throwing money at people but by providing a good work environment, then activities involved in building that work environment are actually quite central to the company’s operations. Many people at SAS comment on how other firms make poor decisions about what are and are not core activities and get themselves into trouble in the process of ostensibly saving money. 14

ANNEX EXCERPTS FROM THE 2009 SAS INSTITUTE ANNUAL REPORT Source : http://www. sas. com/corporate/annual-report-current. pdf 15 Leadership and innOVaTiOn Our customers can count on us – today and tomorrow. Our leadership is built on the combined strengths of our software, our domain expertise and more than 34 years of experience helping customers across organizations, industries and governments around the globe succeed. We listen to customers to understand their needs, and we give our employees the freedom to explore new ideas to address those needs.

While our company continues to grow, we remain true to our long-standing goal of helping customers transform how their businesses work and sustain a culture of factbased decision making. Our business analytics framework provides customers with a flexible and straightforward path for achieving their key objectives and gaining maximum return from their information assets. Today, SAS is the world’s largest privately held software company, with more than 11,000 employees and staffed offices in 55 countries. Together, we provide software and services to more than 45,000 sites in 119 countries.

And the guiding principles that launched this company in 1976 are still the foundation of our growth and success: ? Commitment to customers. ? Appreciation of and dedication to employees. ? Adherence to the highest standards of quality and performance of our software. ? Continual innovation that creates lasting value. As the economy continues on its journey toward recovery, we pledge to maintain and enhance these principles, for they have proven their value in helping us achieve success since the company’s inception in 1976 and will continue to do so for many years to come.

For more than 34 years, SAS has given our customers THE POWER TO KNOW®. www. sas. com | annual report | 2009 Jim Goodnight, CEO and founder of SAS. LeTTer FrOm The CeO Our optimism and determination in the face of an uncertain economy paid off last year, and we finished 2009 – our 34th consecutive year of growth – with global revenues of US$2. 31 billion, up 2. 2 percent over 2008 results. Our revenue from software sales alone jumped 3. 3 percent at a time when the software revenue of other major vendors has been declining. Customers are ncreasingly turning to SAS® solutions to maximize effective customer relations, more effectively manage operations and engage in better risk management. Software revenue was strong in several areas, including customer intelligence, credit risk, supply chain and text analytics, attesting that companies striving to survive in a down economy, and succeed in times of recovery and growth, need such solutions to answer complex business problems, spur innovation and enable success. Growth rates of our industry-based software solutions were highest in financial services, government, health care, insurance and retail.

Strong sales to financial services firms demonstrates the confidence these companies have in our ability to help them solve intricate business issues and navigate changes in customer needs, business models and regulatory oversight. The public sector showed growing interest in using data as a key strategic asset for combating fraud, halting declining tax revenues, managing service levels and achieving greater transparency. And retailers turned to our software solutions to improve margins and counter the effects of sluggish consumer spending by taking into account regional, local and even storelevel buying preferences of their customers. IDC, Worldwide Business Intelligence Tools 2008 Vendor Shares, Doc # 218598, June 2009, www. sas. com/news/analysts/idc-ww-bi-tools-2008. pdf 2 www. sas. com/news/analysts/chartis-risk-0609. pdf 3 www. sas. com/news/analysts/chartis-credit-risk-0709. pdf 4 www. sas. com/news/analysts/chartis-risk-1109. pdf 5 Gartner Research, “Magic Quadrant for Enterprise Marketing Management,” by Kimberly Collins and Adam Sarner, July 15, 2009. See the full report at www. gartner. com/technology/media-products/reprints/sas/vol6/article2/article2. tml 6 Gartner Research, “Magic Quadrant for Data Quality Tools,” by Ted Friedman and Andreas Bitterer, June 9, 2009. See the full report at www. gartner. com/technology/media-products/reprints/dataflux/167657. html SAS is well-positioned to continue helping our customers succeed. Our strong commitment to research and development – we reinvested 23 percent of revenue back into R&D last year – resulted in another year of prodigious innovation. We released 21 new products or bundles last year, including SAS 9. 2 platform Phase 2, which included classic SAS products as well as 87 usiness intelligence and data integration solutions. The capabilities of SAS software were again validated in 2009 by leading analyst firms. In June, IDC called SAS the “overwhelming leader” in advanced analytics,1 saying that enterprises choose SAS Analytics more often than the other 16 analytics suppliers combined. Chartis Research again named SAS as the leader in its Operational Risk Management Systems 2009 report in June. 2 SAS was also named as a leader in the firm’s July report, Credit Risk Management Systems 2009,3 and in November, SAS was ranked No. in the prestigious RiskTech100 rankings, an annual international listing of the top risk technology vendors. 4 Gartner positioned SAS in the Visionaries quadrant of the Magic Quadrant for Enterprise Marketing Management 5 and placed our DataFlux subsidiary in the Leaders quadrant of its Magic Quadrant for Data Quality Tools 6 in June. In September, the firm placed SAS in the Leaders quadrant of the Magic Quadrant for Operational Risk Management Software for Financial Services. 7 And in December, Gartner placed SAS and DataFlux in the Visionaries quadrant of the Magic Quadrant for Data Integration Tools. www. sas. com | annual report | 2009 In November, Forrester Research gave SAS top rank for cost and profitability analysis and a top score in product strategy and vision. 9 And in December, Forrester ranked SAS Customer Intelligence No. 1 in optimization, analytics and reporting, and installed base. 10 SAS also had a strong showing in application usability, real-time analytics, budget management and forecasting, architecture and campaign design. Of the top 100 companies on the 2009 FORTUNE Global 500®, 92 are current SAS customers.

And in the US, 80 percent of new commercial accounts were small and midsized businesses, showing that organizations with annual sales of less than $500 million also recognize the value of business analytics from SAS. In all, nearly 1,400 new customers around the world chose SAS. Customers new to SAS in 2009 included: Anglopharma, Bombay Stock Exchange, the Clorox Company of Canada Ltd. , Hong Kong Efficiency Unit, Fiat Automoveis, Lego Systems Inc. , Loyalty New Zealand, Niagara Health System, Dex One Corp. (formerly R. H. Donnelley), Telefonica, TV 2 AS (Norway), WestJet, Wet Seal Inc. , Wistron Corp. nd Vattenfall. Looking forward, we believe that 2010 will be another strong year for SAS. While economic recovery is under way in many parts of the world, it won’t be quick and it won’t be easy. Organizations will react by continuing to focus on improving customer-centricity, enhancing top-line revenue growth and optimizing their businesses in 2010. SAS is well-positioned to play a critical part in recovery efforts. By providing our customers with a business analytics framework that can grow over time, we empower them to meet both the demands of today’s economy and the opportunities of tomorrow with: ?

Data management capabilities that improve the flow of and access to information throughout organizations. ? Greater insights into data for making quick, meaningful decisions. ? Risk analysis and optimization solutions to save money. ? Customer intelligence and marketing automation to drive sustainable revenue growth. ? Social network analysis to uncover fraud and terrorist threats as well as business opportunities. Finally, as a debt-free global company, SAS offers our customers another valuable commodity: stability.

We attribute this to our 34-year focus on listening to our customers and meeting their needs with robust, reliable and relevant products and services. SAS is poised for growth again in 2010. The momentum is greater than it has ever been for this company, and the future looks promising indeed. Sincerely, James H. Goodnight, PhD, CEO 2009 | annual report | www. sas. com 7 Gartner Research, “Magic Quadrant for Operational Risk Management Software for Financial Services,” by Douglas McKibben and David Furlonger, August 28, 2009. See the full report at www. gartner. om/technology/media-products/reprints/sas/vol6/article3/article3. html 8 Gartner Research. “Magic Quadrant for Data Integration Tools” by Ted Friedman, Mark A. Beyer and Eric Thoo, November 25, 2009. See the full report at www. gartner. com/technology/media-products/reprints/sas/vol6/article5/article5. html 9 The Forrester Wave: Business Performance Solutions, Q4 2009 report, www. sas. com/news/analysts/forresterwave-bus-perf-q409. pdf 10 The Forrester Wave: Cross-Channel Campaign Management Platforms, Q4 2009 report, www. sas. com/news/analysts/forresterwave-cm-104330-1209. pdf TabiLiTy and GrOwTh – 34 years and COunTinG SAS achieved its 34th consecutive year of growth in 2009, with global revenue reaching US$2. 31 billion, up 2. 2 percent over 2008. SAS saw healthy sales growth in multiple industries. Sales to the retail industry increased by 12 percent, despite a very challenging environment for that sector. Sales to the health care industry were up by 8 percent. And sales to the oil and gas industry increased by more than 30 percent. Our growing network of alliance and channel partners played an integral role in 25 percent of new sales and half of the top 50 global deals.

Specifically, there are strategic initiatives including partnerships with leading business consultancies and systems integrators, expansion of in-database activities across multiple partner platforms, and a continued focus on building third-party channels. Partnerships with global systems integrators such as Accenture, Capgemini, Deloitte and Wipro Technologies offer customers the specialized resources and expertise to deploy SAS Business Analytics throughout the enterprise. In addition, SAS continues to drive the momentum of in-database analytic innovation with technology partners such as Teradata and Netezza.

Global Presence, Global success SAS’ revenue growth remained distributed around the globe. The Americas accounted for 44 percent of total revenue; Europe, Middle East and Africa (EMEA) contributed 45 percent; and 11 percent came from the Asia Pacific region. Of the 120 countries where SAS does business, 83 percent saw growth in software sales. Among mature markets, growth rates for software sales were highest in the US, the UK, Canada, Germany and the Netherlands. In developing markets, doubledigit percentage gains were achieved in most of Eastern Europe, the Middle East, South Africa and pockets of Asia and Latin America.

Even in a challenging global economy, SAS did not waver in its commitment to our 11,000 employees and our core belief that happy, healthy employees are more productive. In 2009, SAS was again recognized as an employer of choice around the world. In the EMEA region, we received workplace awards for our offices in Germany, Sweden, Belgium, Norway, Portugal and Finland. In the Asia Pacific region, we received workplace awards in China, Australia and India. In the Americas, we were recognized in Canada and Mexico, and as this annual report was being roduced, we received notification that we ranked No. 1 on the FORTUNE 100 Best Companies to Work For list in the US – our 13th consecutive year on the list. www. sas. com | annual report | 2009 2009 reVenue revenue by region Americas 44% EMEA 45% Asia Pacific 11% Other 1% Health Care 2% Energies & Utilities 3% Education 3% revenue by industry Financial Services 42% Retail 4% Life Sciences 6% Manufacturing 6% Communications 7% Services 11% revenue Growth 1976-2009 Government 15% 2009 | annual report | www. sas. com