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New Kauffman CEO McDonnell on DST’s roots, lunches with Mr. K

Tom McDonnell is making a move from one Kansas City institution to another.

In September, McDonnell revealed plans to retire at year’s end from his role as chief executive of DST Systems, and on Dec. 4 the Ewing Marion Kauffman Foundation announced that McDonnell would become its new president and CEO, effective Jan. 1.

McDonnell helped start DST, a company that provides information processing and software services and products, in 1969. Today the company, which began as a spinoff of Kansas City Southern Railways, employs some 13,000 people worldwide.

At the Kauffman Foundation, McDonnell will oversee an organization with an asset base of $1.8 billion and a mission centered around entrepreneurship and education. McDonnell has served on the Kauffman Foundation’s board of trustees since 2003 and as board chairman since 2006. He succeeds Carl Schramm as president and CEO. Schramm resigned in January after 10 years at the Kauffman Foundation, and trustee Benno Schmidt has led the organization in an interim role since then.

McDonnell took time last week to sit down for an interview with Silicon Prairie News. What follows is the first half of a two-part story, starting with a sampling of McDonnell’s reflections on the growth of DST over his 43 years with the company and transitioning into a question-and-answer about DST and the Kauffman Foundation’s founder and namesake, the late Ewing Marion Kauffman.

For more on McDonnell and his new role, see our previous story: “Kauffman tabs DST’s McDonnell as CEO, names Kreamer board chair“.

On DST’s entrepreneurial roots:

“This was a sort of an entrepreneurial company that came out of a corporate structure because basically I joined Kansas City Southern, the railway, in 1968, and we started DST in 1969. And the reason for that was the fellow who ran Kansas City Southern, Bill Deramus III, was kind of an entrepreneur in his own right.”

On the industry conditions when DST got its start:

“The mutual fund industry up until that time was a little bit unrecognized, but then it started to get more visibility. But one of the challenges was record keeping for who owned mutual funds. …

“At the time we got into the business there were about 30 banks that were doing shareholder accounting. Most of them had tried to adapt traditional stock transfer systems, which wasn’t quite that easy. So with this explosion of growth in the industry, a lot of issues were coming up in the back office. In fact, the Securities and Exchange Commission had shut down a couple funds because their back offices were out of control.”

On the importance of DST’s emphasis on technology:

“If you look at all the businesses that we’ve gotten into over time, generally we’ve led with significant investments in technology and continuing investments in technology that differentiated us from the rest of the crowd, so to speak. Because when we got started, we were not a big competitor. I mean, our competitors were people like JP Morgan, Irving Trust. There’s a lot of names that aren’t around anymore but at the time were big. … All of these were in the business, and they had massive amounts of money, but they couldn’t come to grips with the technology.”

SPN: With its spinoffs, DST has often been an example of innovation from within. What can large companies do to spur that sort of innovation?

TM: “Well, to me, it’s all a question about what climate you create for risk. So like at Kansas City Southern, when I got there we had the mutual fund manager, which led to us developing the DST business. But Kansas City Southern owned a travel agent, they had a tax preparation firm, they had a whole range of things. And (it’s a question of) if the company has the environment that lets people take risk, acceptable risk. Because if you’re in an environment where if you take a risk and it doesn’t work you fail and you’re fired, it’s pretty hard to foster entrepreneurial thinking and entrepreneurial activities.

“I don’t know that a big company can say, ‘OK, tomorrow we’re going to go be entrepreneurial.’ It’s a question of, does the senior management accept the kind of risk equation. And, by the way, if you’re in a big company or any company you say, ‘Look, we want you to go out and start something. We’ve got to limit your risk to whatever emotional damage it gets you if it fails’ … because if you put a disproportionate amount of risk on the individual it won’t be able to perform.

“So I don’t think companies can, at least overnight, become entrepreneurial by a decision. It’s really something that’s got to be embedded in the organization and in the management.”

SPN: With time comes additional perspective, so it may be a little soon for this, but looking back over your tenure at DST, what is most pleasing to you about what you were able to do?

TM: “DST, like many companies, it’s all about the people. And the best thing is, you know, having the relationships with the people, seeing not only the businesses succeed but the people succeed along with it and grow and share in the prosperity and success of the company. We can say yeah, we’re the biggest mutual fund processor or yeah, we have the largest market share in the U.K., which we do, or Canada, which we do. You know, we’re the leader in most of our businesses; that’s because the people that have been involved in the business have understood what it takes to put the customer out there first, deliver them a high-quality product for a legitimate value proposition and succeeding in the company. And the best thing is when people come around and say, ‘Hey, this has been great,’ and ‘Look what I’ve been able to do with my family,’ or this, that or the other thing. That’s the satisfaction.”

SPN: You built a business at the same time, for a point, as Mr. K. Did you know him, or what was your level of interaction with him?

TM: “I didn’t really know him. I met him a number of times early, and then later on in sort of civic things met him. … But, as I mentioned in an employee meeting the other day, Deramus at Kansas City Southern was a friend of Mr. Kauffman’s, and I think was actually the first outside director of the Royals way back — way back — when. And occasionally — you know, Deraumus was kind of a character — he’d call and say, ‘Hey … we’re going to lunch with Ewing.’ So what that meant is I was going around listening. So I got to see a little bit of him. …

“He was a pretty pragmatic, straightforward, very candid guy. So what I knew of him, those were the impressions I would’ve drawn. But to say that I knew him in any intimate sense would not be an accurate statement.”

SPN: From those lunches, or from watching his company from afar, what lessons did you take?

TM: “I think the lessons that everybody has seen with Marion Labs and Ewing Kauffman was … the willingness to step out and take risks, whether it was licensing pharmaceuticals much differently than a lot of the other organizations did, but also building a business on getting the right people and putting the right reward systems in for people and sharing the success with them. And that’s, you know, mutually satisfying.”

For the second half of this interview, stay tuned to Silicon Prairie News in the coming days.


Credits: Graphic by Danny Schreiber. Photo of McDonnell from kauffman.org.

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