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Process

The Evolution of Business Operating Systems

June 18, 2024• Process

“It’s dangerous not to evolve.” Jeff Bezos

Over the last ten to fifteen years, the concept of entrepreneurs “systemizing” their businesses and using a “Business Operating System,” has become exponentially more mainstream and attainable. In general, regardless of the system used, an intentionally systemized business should consistently outperform any competitors who lack an intentionally organized system on which to operate the business as a whole.

But to understand and confirm which system is optimal for you and your organization, whether you’re already using one or not, it is important to understand the evolution of Business Operating Systems. If you are already using a Business Operating System like EOS®, Scaling Up®, or others, this article will help you either confirm that you’re using the right one for you and your organization, or help you discover if there is a better option out there for you. It will take you back to the early beginnings to help you understand how these systems evolved, what key differences exist between the more popular ones (to help you gain clarity on which one is most optimal for you) and explain the differences between a prescriptive system and a principled approach.

Why Do I Need a Business Operating System?

“Every system is perfectly designed to get the results it gets.” W. Edwards Deming

Whether you realize it or not, your business already is an “operating system,” whether that is by default, having organically taken shape as the business has grown, or by intentional, well thought out design.

  • If your business is not growing as fast as you want it to, your business is a system designed by default to grow at a slower rate than you would like.
  • If your business is not as profitable as you would like, your business is a system designed by default to generate a lower profit than you would like.
  • If you struggle to find and keep good employees and your people are driving you nuts, then your business is a system designed by default to find and retain people who are not of the caliber you need, and therefore, they drive you nuts.
  • If you struggle with customer or client attrition due to inconsistencies with your products or services, your business is designed by default to produce inconsistent outcomes which drive away your customers or clients.
 
If you want a better result, you need a better system.

What is a Business Operating System?

A Business Operating System is basically an organized set of processes through which a business manages strategy development and execution to guide the energy and focus of people within the organization and achieve common goals as it grows.

Two of the more well-known systems in the market over the last two decades have been Scaling Up and EOS®. Both systems are based on similar fundamentals and are generally prescriptive and static. More on this later.

The Evolution of Business Operating Systems – A Brief Overview

While the concept of systemizing a business has its roots as far back as the Industrial Revolution, it started to become more popular and formalized in the early 1900’s. One key figure in this development was W. Edwards Deming, an American engineer, statistician, professor, author, lecturer, and management consultant. Deming is widely credited with helping to launch the quality revolution in Japan after World War II through his work on statistical process control and his famous 14 Points for Management.

For those of you who appreciate history, other early thought leaders in the field of systemizing businesses were:

  • Frederick Winslow Taylor:  Known for his work on scientific management, Taylor’s ideas emphasized the scientific study of work methods to improve productivity. His book “The Principles of Scientific Management” (1911) is a seminal work in this field.
  • Henry Ford:  While primarily known for revolutionizing the automobile industry with his assembly line techniques, Ford’s ideas also had a significant impact on the concept of systemizing business operations. He was President of Ford Motor Company from 1906 to 1919.
  • Peter Drucker:  Drucker was a management consultant, educator, and author, often referred to as the “founder of modern management.” His book “The Practice of Management” (1954) is a classic in the field and covers various aspects of managing organizations, including the importance of systematic approaches
  • W. Edwards Deming: Deming, as mentioned earlier, was a key figure in the quality revolution in Japan. His book “Out of the Crisis” (1982) outlines his management philosophy and principles, which emphasize the importance of quality and continual improvement in business processes.
  • Eliyahu M. Goldratt:  Goldratt’s book “The Goal: A Process of Ongoing Improvement” (1984) introduced the Theory of Constraints, which focuses on identifying and improving the constraints that limit a system’s performance, leading to more effective systemization.
  • Michael Gerber:  Gerber is known for his book “The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It” (Originally published in 1985), which emphasizes the importance of systemizing and standardizing business processes to achieve success and scalability.
  • Jack Stack: In his 1992 classic, The Great Game of Business, Stack lays out the process for how he and 12 other employees from International Harvester purchased a part of the company that remanufactured truck engines, and took it from $16 million in annual revenues to over $1 billion over a twenty-five year period.

See our list of over one hundred recommended books for entrepreneurs, divided into 19 different categories.

Until Gerber released E-Myth, most of the research and writings on systemizing businesses was focused on the operational aspects of the business, and especially on manufacturing. Gerber was among the first to focus on the organization as a whole and applying the idea of systemization to its entirety.

Gerber’s book addressed the common dilemma facing most entrepreneurs, that of being stuck as a technician in their own business. Many entrepreneurs simply don’t understand how to systemize things through the creation and delegation of process playbooks in order to get out of their own way and scale their business.

If you would like to learn about an affordable option to bring in a Lean Expert facilitator to help you get your business out of your brain and documented into outstanding playbooks, in just nine days instead of the nine months to nine years it takes companies to do it on their own, learn more about our friends at Process Optimizer®

Mastering the Rockefeller Habits

In 1991, just a few years following his founding of YEO (Young Entrepreneur’s Organization – now known as EO, or Entrepreneur’s Organization), Verne Harnish created the Birthing of Giants program, in partnership with MIT and Inc. Magazine. For the next ten years, Verne committed his time and energy to exploring and developing the foundational ideas that became known as the “Rockefeller Habits.”

In 2002, Verne published the book, Mastering the Rockefeller Habits. Two years later, shortly after the passing of my father, I joined the YPO (Young Presidents Organization) Southern Seven Chapter as President and CEO of our Veneer Manufacturing Business, Erath Veneer, and together with my Forum, we studied and implemented many of the tools and concepts from Verne’s book. I was thirty-two years old. While the book contained a valuable set of tools and concepts, they had not yet fully evolved into a holistic system, as they later would be when Verne published Scaling Up, Mastering the Rockefeller Habits 2.0.

(L to R: Greg Cleary, Michael Erath and Duane Marshall at Patrick Lencioni’s 2020 UnConference)

During the late 1990’s, according to an article written by Verne Harnish, one of the founding members of the Detroit Chapter of YEO, Gino Wickman, who later went on to create EOS®, was using the Rockefeller Habits tools and techniques to turn around and eventually exit his family business. According to Verne, “He (Gino) later became one of our early coaching partners when we started (Gazelles). He specifically represented and exclusively used the Rockefeller Habits to coach other companies on behalf of my firm – and was an outstanding coach for us.”

As often happens in the entrepreneurial world, a person works for an organization, learns a set of skills, and in doing so comes up with either a better way to do things, or a way to solve problems they see as not being solved with the existing product. The courageous ones often go off to start their own business to make those improvements and take them to market. This is what Gino did sometime around the turn of the century, and what I did with two close friends and important colleagues, Greg Cleary and Duane Marshall, some 20 years later.

Traction

According to Gino’s LinkedIn profile, it was in September of 2000, after leaving Verne Harnish and Gazelles, that Gino took what he had learned and experienced to that point, and began evolving and creating what eventually became EOS, the Entrepreneurial Operating System. In 2007, Gino published the book Traction, a very impactful book that has been embraced by entrepreneurs around the world and has led to him scaling the organization that teaches his system (EOS Worldwide) to now have nearly one-thousand “implementers” in countries around the world.

In 2011, after transitioning from YPO to EO, again with a Forum Group I was in, we read and worked together to self-implement “Traction” in our own businesses. For me, this was a more applicable solution than the original Mastering the Rockefeller Habits, because the system was more holistic and there was a simple to follow path to implement the tools. Even so, based on my prior experiences as an entrepreneur, there were some parts of EOS where I felt the specific EOS tool didn’t “fit” my organization or culture, like their People Analyzer™. In other cases, during the course of my career and time in YPO, I felt that I had found a different tool, from a different system or thought leader, that would accomplish the same outcome but in an even better or more impactful way. As a result, I substituted out some of their tools in favor of tools and concepts which I felt were better suited for my organization or would lead to better results. In some cases I even created and added additional tools rooted in concepts from thought leaders like Jim Collins, Simon Sinek, Ken Iverson, and others, which I felt filled in some gaps that I found to exist within EOS.

Gino’s evolution in creating EOS, as laid out in the book Traction, was an important improvement because it provided a prescriptive and linear approach that made it easier to implement than Mastering the Rockefeller Habits. At the same time, while evolved, it was also limiting in that it had a defined starting point, a singular path through the system, and an ending point (graduation), from which point you are on your own, without additional and evolving resources to support you as you grow. In addition, it offered a finite toolbox of just 20 tools, which have not evolved in two decades. Deviating from the process was frowned upon, and if the system or process of implementation didn’t fit an organization, the organization was generally expected to bend and morph to fit the system, not the other way around.

Scaling Up – Mastering the Rockefeller Habits 2.0

In 2014, coming on the heels of the significant success of EOS and the book Traction, Verne Harnish released Scaling Up, Mastering the Rockefeller Habits 2.0. Verne’s new book was a further evolution of Business Operating Systems for two main reasons. It both incorporated more tools and concepts around strategy and cash, which many people felt were weaknesses of EOS, and instead of requiring a linear approach, Scaling Up allowed the user to take a non-linear approach by picking the area where they felt the greatest struggles, and working their way through the system in whichever order they felt was best.

By making this adjustment, while still a basically prescriptive system, taking a non-linear approach gave Scaling Up an advantage over EOS for those entrepreneurs who felt that EOS was a bit too restrictive and was boxing them in.

At this point, the world of Business Operating Systems had gone from a handful of great tools and ideas with Rockefeller Habits, to a holistic, prescriptive, and linear system (EOS), to another holistic, prescriptive, but non-linear system (Scaling Up).

The Birth of a Principled Approach

In 2015, after having lots of success self-implementing my own “customized” version of EOS in my own business, I began to exit that business and became certified as an EOS Implementer® in May of 2015. In the early days, because of my experience as a user and from my own personal journey as an entrepreneur – one of great successes, devastating failures, and a “reincarnation” of sorts, which I wrote about in my 2017 best-selling book, RISE: The Reincarnation of an Entrepreneur – I was very successful within the EOS community. In both my second and third years I broke the long-standing records for revenue generated as I ramped up early and fast. It was during that time that I met and grew to be very close friends with Greg Cleary and Duane Marshall, two other EOS Implementers who were among the most successful and tenured in the community.

During our time as EOS Implementers, we operated under a license agreement, which allowed us the flexibility to not only teach our clients EOS, but also work outside the system and teach them other tools and concepts as necessary to help them achieve their individual goals in ways that made the most sense depending on their unique culture and also relevant to their industry. That flexibility was in many ways key to the collective success Greg, Duane and I were having relative to other EOS Implementers.

Greg had even started a mastermind group called the Millionaire Coaches Mastermind Group, which consisted of around 25 of the most successful and entrepreneurial EOS Implementers at that time. Under the freedom of the license agreement we had with EOS, we collaborated and shared ideas around how to make improvements and additions to the ways we were working with our clients. It allowed many of us to begin teaching our clients additional concepts and providing them with new and improved tools so that we were able to evolve with them as they grew and add significant value for them beyond what otherwise should have been considered time for them to “graduate” from EOS.

In 2018, after scaling EOS from 1 to nearly 200 EOS Implementers, Gino sold a majority stake in the company to a Private Equity Firm. As is often the case, things began to change. Late in 2019, EOS Worldwide began a transition to a franchise organization. While this was a smart and understandable move for the Private Equity group that purchased EOS to make in terms of improving their valuation, the Franchise Agreement removed many of the freedoms that we had to be flexible with our clients in order to meet their needs. For Greg, Duane, and I, our values were no longer aligned with the organization where we had achieved so much success.

“Never be so sure of what you’ve got, that you wouldn’t take something better.” Chris Voss

(L to R: Duane Marshall, Greg Cleary and Michael Erath after a hike near Michael’s home in Phoenix in 2019)

Next Level Growth and Pinnacle Business Guides

In November of 2019, after Greg and Duane had parted ways with EOS, and at a time that I was seriously questioning if I could continue under the coming franchise system, the three of us met for a long weekend at my home in Phoenix.

We spent the weekend working off of portable whiteboards by our pool and ideated on how we could take everything we had learned over our careers, break the mold of the typical, prescriptive systems and create a flexible framework based on principles that would solve the common frustration with Business Operating Systems being too “rigid.” It was that weekend that the concept of a principled approach was born.

In the beginning, Greg, Duane and I set out to form a partnership, and my official role was going to specifically focus on leading from the Finance seat, while Duane focused on Operations, and Greg on Marketing and Business Development. The three of us worked together to build and create the initial framework and the early-stage foundational tools, many of which were rooted in our collaboration from the Millionaire Coaches Mastermind Group.

Due to a personal family tragedy earlier that year, I was forced to disengage as we neared the formation of the legal entity that became Pinnacle Business Guides, and I was not able to make my return until the entity had already been formed and me re-joining as a partner was no longer feasible. To keep things simple and collaborative between us, we agreed that I would continue to build my own brand, Next Level Growth, in Phoenix and do so as a Firm of seasoned entrepreneurs turned Business Guides, who would all participate as active members of the Pinnacle community. In turn Pinnacle would leave growing the Phoenix-metro market to me and Next Level Growth.

In 2020, Pinnacle Business Guides and Next Level Growth, entered the market as the newest evolutions in the world of Business Operating Systems. Pinnacle and Next Level Growth are principle based and flexible, not prescriptive, making them more about the user and the outcomes desired than being just about the system. With Pinnacle and Next Level Growth, as with EOS and Scaling Up, the user gets a Business Operating System based on a core set of fundamentals. However, with Pinnacle and Next Level Growth, it is a system based on outcomes and the user following a principled approach, so that the resulting system is custom-tailored to fit, as opposed to a more rigid system requiring the user to adjust to fit the system.

From Prescriptive to Principled

Notice that I refer to Pinnacle and Next Level Growth as a ‘principled approach.” This is something that our friend and fellow Pinnacle Business Guide, Mark Whitmore, wrote about in a post on Linked In. “I’m thinking about the differences between prescriptive and principled – how the one is a list of actions, and the other is a set of ideas on which to build something. The first, prescription, tells you what to do regardless of who you are. Generic. Paint by number. Plug and play. There is no room for dynamism- simply pull these levers and follow these instructions and you will get these results. Check-the-box predictability.”

A principled approach, however, opens up a wide array of possibilities. While a principled approach still requires basic fundamentals, it allows the user to be creative, to select the right tools and concepts to achieve the principle based on what is right for the organization, regardless of the source of those tools or concepts. A principled approach is entrepreneurial. It also presumes that the entrepreneur ultimately knows what is best for his or her organization, versus a prescriptive system, which presumes that the system, and its creator, knows what is best for every organization.

A prescriptive system is limiting. There is a strict protocol to follow. For many organizations that is good enough. But if you’ve never been challenged and mentored to think with a 10X mindset, if you’re not sure what really is possible for you and your business, if you want to build something truly elite, you will eventually need the freedom, flexibility, and creativity that comes with a principled approach and an Expert Guide (think of a Guide like a Sherpa, helping you up Mt. Everest). That is something you rarely find with a prescriptive system and an implementer or coach.

Pinnacle and Next Level Growth are founded on the same five basic principles that have been around for centuries, and will be around for many more to come, with some minor modifications and variations in each of their approaches. These principles are focused on the user – on outcomes, flexibility, and customization – not a prescription. The approach is system agnostic and while there are “best-practice” recommendations to guide you, in the end it isn’t about which tools and concepts you choose to implement. Instead, it is about you being focused on the right things to ultimately get the Big Outcomes you want, and more than just helping you get a better Return on Investment, it is ultimately about you earning a meaningful Return on Life.

At Next Level Growth we call this framework, or approach, The Five Obsessions of Elite Organizations®.

The Five Obsessions of Elite Organizations

At our core, Next Level Growth’s team of elite Business Guides help entrepreneurs, and their leadership teams, build elite organizations by learning, operationalizing, and executing a disciplined focus on Great People, aligned around and driven by an Inspiring Purpose, consistently training on, executing, and improving Optimized Playbooks, in a Culture of Performance, while proactively Growing Profit and Cash Flow. These are the Five Obsessions of Elite Organizations. Would you and your organization be better off if you took a disciplined approach, together with an experienced Guide who has walked the path before you, to these Five Obsessions?

You can follow any of the links above to access a series of deep-dive articles and free downloads on each of the Five Obsessions so that you can begin using our tools, concepts, and principled approach in your own entrepreneurial business.

The Path to the Pinnacle

In 2023, Greg and Michael teamed up to write The Path to the Pinnacle, a book filled with inspiring stories of how clients of Pinnacle Business Guides and Next Level Growth have done unique things that are specific to their cultures and values to accel in each of these five principles. As I’m writing this article, I’m also deep into the creation of my third book, with the working title Five Obsessions of Elite Organizations®, which should be released in the first quarter of 2025. You can sign up to receive pre-release updates and specials through the link below.

Learn more and sign up for updates at FiveObsessions.com

Next Steps

Want to learn more about how to adopt a principled approach that will give you the freedom and flexibility to scale your business in your own unique way? Follow this link to explore the world of opportunity that opens up to you when you chose a principled approach over a prescriptive system, and feel free to connect with one of our Elite Business Guides to start a conversation if you have a burning desire to build something truly elite.

 

Read More →

Growing Profits and Cash Flow – The fifth of the Five Obsessions of Elite Organizations®

December 5, 2023• Entrepreneurial Freedom, Process

“Profit, and cash flow, are like oxygen. You don’t realize how much you need them until suddenly, you don’t have them.”

Gregory Cleary & Michael Erath, The Path to The Pinnacle

This is the longest, and most detailed article in the series. I chose to keep it this way because I don’t want to just give you high-level concepts, but rather real-world examples and ways to actually begin doing specific things that will make an immediate impact on your organization’s financial health.

The Importance of Resilience – A Personal Lesson Learned

When the terrorist attacks happened on September 11, 2001, I was thirty years old and the President and CEO of Erath Veneer. We manufactured and sold hardwood veneer and about eighty percent of our business was export, primarily to Europe and Asia. Our customers would typically travel to the US every one or two months to inspect and purchase product.

Even though the closure of airspace in North America only lasted two days, it took six to nine months before our overseas customers began to return to travel. Many of them were distributors, and they had large inventories and low overheads, so they survived off of their inventories during the global economic lull that followed. We, on the other hand, were a manufacturer, with significant fixed cost structures and debt service.

Our sales dropped an average of 60% in the two quarters following the attacks, and we quickly ran dangerously low on cash. In my youth, I was aggressively growing the business, focusing on opening new markets and expanding capacity, but I wasn’t intentional about simultaneously building a war chest of cash reserves and assuring sufficient access to capital, so our balance sheet was not in the position to weather such a storm.

While we did survive and go on to begin growing again, it would not be until 2 years later, when I joined the Young Presidents Organization (YPO), that I would begin to really learn and understand the tools and concepts I needed to build a more resilient company. Many of those tools and concepts provide the framework for this article.

To read more about Michael’s own entrepreneurial journey, a journey filled with successes, failures, a business partner’s embezzlement and fraud, felony convictions, and federal prison time, followed by his rebirth from the ashes of it all, read or listen to RISE: The Reincarnation of an Entrepreneur. A journey about which well know author and founder of the COO Alliance, Cameron Herold says, “I’ve met countless entrepreneurs over the course of my two-plus decades in business, but few have stories as dramatic—and, in the end, as inspirational—as Michael Erath’s.”

Over the course of my career as both an owner of multiple businesses and now a mentor and Business Guide to many more, I have seen how many entrepreneurs, and even many business operating systems, view profit and cash flow as the result of everything else. While in theory that thought process makes sense, I believe that to truly build an elite organization, the entire premise on which Next Level Growth was created, you must be intentional and proactive about the fifth of the Five Obsessions of Elite Organizations®, Growing Profits & Cash Flow.

In this final article in our series on the Five Obsessions of Elite Organizations, I will take you through five disciplines and concepts that I hope will be both easy to understand and begin to implement, and which will also help you improve both your profitability and your net cash flow quickly. They are: Internal Financial Literacy, Profit per X, Cash Conversion Cycles, Cash Flow Forecasting, and the Power of One.

Growing Profits and Cash Flow

Internal Financial Literacy

Many business owners are reluctant to share financial statements and other measures of financial performance with their leadership teams out of a fear that the people around them will either get distracted, or greedy, if they know the profitability of the company, or scared knowing how much the company might be losing in slow times. I would argue, however, that if an entrepreneur surrounds themselves with leaders who do not have either the financial understanding of, or the appreciation for, the risks the entrepreneur is taking and often personally liable for, then they have the wrong leaders sitting around the table.

For much of my early career, I was also one of those entrepreneurs who concealed financial statements from everyone other than my Controller. It wasn’t until I hired my first true CFO, and also through continuing to read and learn about best practices from my YPO colleagues and authors like Greg Crabtree and Jack Stack, that I began to come around and eventually created a monthly financial review meeting with my leadership team. That step was transformational both in opening their eyes to understanding how day to day decisions they and their teams were making had a broader impact on the company, and also in allowing me to delegate the burden of being the only one in leadership who really carried the stress of the financial roller coaster on which entrepreneurial organizations often ride.

Monthly Financial Review: A Best Practice Recommendation

As I evolved as a leader, I worked with our Controller to create a spreadsheet to which we would export a budget to actual variance analysis report from our financial software as soon as the months were closed. This report listed, each month, what our budget, or forecast predicted, what our actual results were, and then showed the variance. Every line item on the financial report, and this was a detailed, not consolidated version, had the name of a leadership team member next to it based on who within our Next Level Accountability Chart™ was ultimately accountable for that line item.

Any line items that were outside of a pre-determined range in terms of their actual results from what was budgeted or forecast would be highlighted in yellow. This report was distributed to the leadership team as soon as it was ready, and the following week we would add thirty minutes to our Weekly Tactical Meeting and start with a Financial Review. For any line item highlighted in yellow, the leadership team member who was accountable for that line was expected to be prepared to present an update to the team.

Notice that I didn’t say we just highlighted items that missed budget. We highlighted everything that was outside of a predetermined range. If a number was off budget in a negative way, the leadership team member accountable was expected to present to the team on specifically why the number was off, what was being done to correct it going forward, and/or anywhere they were stuck and needed help. Conversely, if the number was off track to the good, they were expected to also present on specifically why they were able to beat budget, what they learned as a result, and how they were going to adjust systems, process playbooks, people, etc., going forward in order to improve future performance based on what they had learned.

That second part is very important. As dangerous as it is to not understand why you are underperforming, it is equally as dangerous to achieve successes and not clearly understand why.

In addition to the profit and loss statement review through the budget to actual variance report analysis, we also would review our Statement of Cash Flow on a monthly basis. Combining this with the financial review helped our team understand how much cash was increasing or decreasing based on operations, financing activities, and investing activities. The more they understood the connection between decisions in the field and the financial impacts on the business, both in terms of profit and net cash flow, the more equipped they were to make intelligent and informed decisions on a daily basis and the more autonomy they gained in their roles.

It didn’t take long before leadership team members, as soon as they received the monthly spreadsheet, would do things like go to our finance team and ask for a printout of the general ledger for lines that were off track and for which they were accountable. Over time, it created a powerful collaboration between the finance team and the rest of the leaders in the organization. A collaboration that would make all of us smarter and more aligned as a team, and which would benefit the organization greatly.

Profit per X

In his 2001 best-selling book, Good to Great, author and thought leader Jim Collins writes, “The Good-to-Great companies frequently produced spectacular returns in very unspectacular industries. Each of them gained profound insights into their economics and as a result built a fabulous economic engine.”

He goes on to explain the concept of “Profit per X,” where the “X” is your “economic denominator.” The one denominator that, if you consistently and methodically worked on growing the ratio of profit per that economic denominator, you would build an outstanding financial engine for the business.

The first time I really wrapped my head around the concept and was able to get very granular, was during my time as President and CEO of Erath Veneer. Many organizations will claim their Profit per X is something like Profit per Employee. Whenever I see that, or hear a coach suggest that, it tells me that they don’t truly understand the concept, nor the power, of Profit per X.

I like to think through Profit per X based on the logic of the simple illustration below. This is actually a whiteboard capture from work I did with one of our Next Level Growth clients as we worked on discovering their Profit per X.

profit per x

If you think of your organization as a sideways funnel, you have to extract target market leads from some population of possible leads, convert those leads to customers or clients, create and provide goods or services, and you have to get paid. Somewhere in that funnel, every organization has a single most critical constraint, or key choke point, that holds the key to driving their economic engine through a focus on Profit per X. Note that every organization has more than one, but to get the greatest impact and not get distracted, you must choose one and only one, that will have the greatest impact on your economic engine.

In the case of our manufacturing business, our biggest constraint was our production capacity. We were a smaller player in a big industry, and the cost of adding just one new production line would be around three-million dollars, and that is just for the equipment. That doesn’t include building expansion, installation costs, and startup costs. Growing our profit by physically expanding our production was cost prohibitive.

At the same time, most of our Operating Expenses (OpEx) were largely fixed costs, with only a few lines of OpEx on our financials being pure variable costs. We knew that until we generated enough dollars of gross profit to cover those heavily fixed OpEx costs, we would not reach profitability. That was what we referred to as our “monthly nut.” The exact amount of Gross Profit Dollars it would take us just to reach break-even for the month.

Armed with that knowledge and thinking about Profit per X in terms of constraints, we soon realized that if we could analyze and consistently make decisions to improve our dollars of gross profit per board foot produced (board feet is a standard unit of measure in the hardwood industry), then we could absolutely build a strong economic engine. We wrote our Profit per X as “$GP/BF” and it became everything to us.

So what about professional service type businesses that are not producing something as standardized as in my personal example?  In most of those cases, I find that human capital is often their greatest constraint. That causes some people to then suggest that profit per employee is the right answer. But the reason I feel that is a mistake is that different employees come at different costs and provide different levels of value. In my opinion, a much better Profit per X in the professional services space is to look at your Profit (Net or Gross) per Fully Burdened Human Capital Dollar Invested. When you look through that lens, the analysis and adjustments take on a much more impactful meaning.

Discovery Is Only the First Step – The Gold is in the Analysis and Adjustments

We analyzed and then adjusted our production mix and changed our sales strategies to focus on species (think product lines) that would help us improve our $GP/BF. We analyzed and ranked all of our buyers in the field by $GP/BF for each specie we produced. Based on that data, we adjusted their budgets and quotas by specie based on their individual performance so that our highest performers relative to their $GP/BF were focused on the species where they performed best. We implemented bonus plans for the high performers to share in their profitability.

We analyzed our suppliers by specie based on $GP/BF, shared that information with our procurement team, and made adjustments to maximize our volume purchased from the highest performing vendors. We analyzed and prioritized our customers the same way. With a finite inventory from which to sell, we looked at, by specie, which customers had the highest $GP/BF and we adjusted our sales efforts to prioritize those customers at the top.

Over the course of just a few quarters, as all of our analysis and adjustments began to pay off, we saw an average monthly gain in Gross Profit of just over $100,000. We achieved that without any capital expenditures and without spending any additional OpEx, which meant that essentially every gained dollar of Gross Profit fell to the bottom line and improved our profitability and net cash flow. It was worth more than $1,000,000 of increased profit annually.

Where are your constraints? If you think through each of them, do you gain any clarity on which one of them, if you consistently grew the ratio of profit per that constraint, would allow you to build a fabulous economic engine? This is hard work and takes intentional focus, but the results are absolutely worth the effort.

Cash Conversion Cycles

Everyone knows that starting a business requires cash, and growing a business requires even more. Growing businesses can consume massive amounts of cash for working capital, facilities, equipment, and operating expenses. But few people understand that a profitable company that tries to grow too fast can run out of cash. A key challenge for the leadership team of any growing business, is to find the proper balance between consuming cash and generating it. Fail to strike that balance, and even a thriving company can soon find itself out of business…a victim of its own success.

cash conversion cycle

The keys to improving your cash conversation cycle are based on making consistent, incremental improvements in the key components impacting the time it takes a dollar invested to return to the business as a dollar received. Referencing the image above, the key components of a Cash Conversion Cycle (CCC) are typically:

Sales Cycle:  From the time you start investing in the sales process with a prospect, until you have a confirmed order to hand off to operations, you have cash going out of the business.

For example, you may have a salesperson take a prospect out to dinner. Cash left the business to pay for the dinner that contributes to the relationship you expect will lead to a confirmed order. Maybe that dinner was a “warm meeting” to ask for a demo or discovery meeting with a broader team. The speed with which your salesperson is able to get the prospect to move from the warm meeting phase to the demo phase, can have a positive or negative impact on your CCC.

When the prospect comes for the demo, do you have a clear ask at the end, or is it open ended? Are you intentionally doing everything you can to guide the prospect to make a decision? That decision may be a hard “no,” in which case you can stop spending cash to try to convert them and go focus on the next prospect, or it may be a “yes,” in which case we can quickly move to the next phase. If you allow them to flap endlessly in the wind without getting to a decision, the cash you have invested to this point is also flapping in the wind, far from your grasp.

Be smart and intentional about decreasing the time it takes for a prospect to move through your sales cycle and you will increase the velocity of cash flowing back into the business.

Production/Inventory/Delivery Cycle:  For a business that produces any kind of goods, you can look at your Production & Inventory Cycle as the time from when you procure your inputs, to the time they go into Work in Process, then into Finished Goods Inventory, and finally out the door to a customer. Most businesses can find opportunities to improve one or more of these segments within a Production, Inventory, and Delivery Cycle.

For a professional services business, there are still elements of this that apply. While you may not have raw materials and finished goods inventory, an accounting firm still has a Production and Delivery cycle. The key to improvement is in looking for all the small, incremental improvements you can make in your processes and workflows that will reduce the time it takes to move through the cycle.

Billing & Payment Cycle: This is the amount of time it takes from the delivery of a good or service, to the time the cash lands back in your account. This is a key area where many businesses lose focus, and, as a result, waste cash.

Let’s start with the billing cycle. When I dig into Cash Conversion Cycle with clients, one of the questions I ask is, “On average, how long does it take from the delivery of your service (I find this is typically much worse with service-based businesses than with product-based businesses) until the customer receives an invoice?” I’ve literally had clients tell me that they hold all invoicing until the end of the month, or worse, that they’re really busy and it usually takes a week or two to get the invoices out. If you take a six-million dollar business with consistent sales, we could presume that they bill $500,000 monthly, or roughly $125,000 per week. If they take 2 weeks just to get an invoice to the customer, they are missing a $250,000 opportunity.

In the example above, if the reason it takes two weeks is because the accounting team is understaffed, and they then say that they cannot “justify” adding another person to overhead, that tells me they are driving with blinders on. If adding one administrative person to the finance team would allow them to get invoices out within one business day, then once those invoices cycle through AR, the company’s cash will increase by $250,000. For a position that might cost $50,000, which might be a fully burdened monthly cost to the company of around $5,500, justification of the position should not be the issue – the new employee is essentially free. And if within 3 months of their onboarding, the company has gained a $250,000 improvement in cash, and their 3-month investment in the person has been about $15,000, I would argue that is an outstanding Return on Investment.

That brings up the next part of this final cycle, the payment cycle. At Erath Veneer, our typical payment terms were Net 30 Days. In reality, customers have a tendency to pay when they pay, and most organizations (ours was no different), simply accept it as they don’t want to upset a customer. Before we started really focusing on it, our average days to pay, with terms of Net 30 days, was running in mid-50-day range, and our Accounts Receivable (AR) would vary around +/- $1,500,000.

There was a time where we would have a member of our accounting team call customers who were past due to inquire about payment. The problem with that was most of those calls would be routed to someone within the customers accounting team. The result was that the two people on the phone had misaligned objectives. Our collections team member was trying to get cash in as quickly as possible, and the person they were talking to was trying to hold on to cash as long as they could. When we made the change to task our salespeople with collecting their own AR, they would talk with their colleague, the buyer, on the other side of the open invoice, and there was always a better relationship between those two people. Also, the buyer often had more leverage within their own company, and one of their objectives was to maintain vendor relationships to ensure they had access to the resources they needed, so there was an incentive to collaborate.

A few other things we did that had measurable impact included modifying how we expressed the payment terms. In addition to stating “Net 30 Days” on the invoice, we would also list the date that marked the 30 days, so instead, our invoices would read, “Net 30 Days – Due February 3rd.” There is always an assumption from the seller that Net 30 Days means from the date of the invoice, but the buyer almost always takes the position that it is from the date the invoice was received. By including the actual due date, in many instances, that alone improved the average days it took a specific customer to pay by 3 to 5 days.

Think about that…if one of our customers typically carried $100,000 in AR and their average days to pay was 50, and just the minor modification above led to a small change in behavior on their end that got us paid just 3 days faster, that is a 6% reduction in AR days for that client, which is worth $100,000 x 6% = $6,000 of improved cash flow. Multiply that across multiple accounts, and the numbers add up very quickly.

Another thing we did, and that I find is an opportunity many companies miss, is sending a “friendly reminder” of an upcoming due date. Many companies wait until an invoice goes past due to begin communicating about that particular invoice, and I believe that is a missed opportunity. We implemented a simple process by which we would send a friendly reminder 10 days before an invoice was due, with a very positive short note about how much we valued the relationship and appreciated their collaboration and timely payment. If we knew who within their accounting team held the keys to getting us paid, we would send the email to them, and we would always copy their buyer. It was a soft, subtle reminder that they needed good vendors, and we needed good customers who would live up to their obligations to pay us on time.

Just implementing those two simple, and essentially zero-cost adjustments, our average AR days dropped from the mid-50s to the upper 40s. While that may not sound like a big move, the impact of a 7-day average reduction in AR days, was an improvement of about 13%, and with an average AR of around $1,500,000, a 13% improvement created roughly $195,000 of improved cash flow that we could re-deploy back into growing the business.

Cash and Cash Flow Forecasting

Most entrepreneurs are familiar with the statement, “Revenue is vanity, profit is sanity, and cash is king.” While this statement is not untrue, I think there is significant flaw…I would say that it is not “cash” that is king, but “cash flow.”

The reason I consider cash flow more important than cash is due to its dynamic nature and its direct reflection of a company’s operational health. Here are several reasons why:

1. Timeliness and Relevance: Cash flow reflects the inflow and outflow of cash over a specific period, providing a real-time view of a company’s financial situation. It accounts for operational expenses, investments, and financing activities, offering a more accurate and current assessment compared to a snapshot of cash at a single point in time.

2. Operational Sustainability: Positive cash flow indicates that a company is generating more cash than it is spending, signifying the ability to cover its ongoing expenses, invest in growth opportunities, and meet its financial obligations. It ensures the day-to-day operations can continue smoothly.

3. Investment and Growth: Cash flow is crucial for funding expansion, innovation, and strategic initiatives. Companies with healthy cash flows have the ability to invest in research, development, acquisitions, or new market penetration, driving growth and competitiveness.

4. Debt Servicing and Financial Health: Cash flow is instrumental in servicing debt obligations, including interest payments and debt reduction. Lenders often assess cash flow to determine a company’s ability to repay loans. A strong cash flow history can improve creditworthiness and reduce borrowing costs.

5. Risk Management: Regular monitoring of cash flow helps identify potential financial issues or liquidity problems in advance. It allows management to make informed decisions to mitigate risks, adjust strategies, or seek additional financing if necessary.

6. Investor and Stakeholder Confidence: Investors and stakeholders often scrutinize cash flow statements to assess a company’s financial stability and growth potential. A consistent positive cash flow demonstrates financial discipline and can attract investment and confidence from stakeholders.

While cash reserves are essential for short-term liquidity and emergencies, maintaining a healthy cash flow is critical for the sustained success, growth, and stability of a business. Organizations with strong cash flow management are better positioned to navigate economic downturns, seize opportunities, and thrive in the long run.

Cash on Hand

There is an important need to balance, in every organization’s particular circumstance, how you approach cash on hand, and you need to understand your cash flow forecasting to strike that balance. I’ll use a specific example from my own business, Next Level Growth to help illustrate this.

In the early days, I was a solo-preneur as I left the world of manufacturing and transitioned to coaching. My operating expenses and overheads were low, and the business generated very good cash flow. I had a great facility with a monthly lease just under $5,000, and not many other fixed expenses. I kept about $10,000 of cash on hand in case we had a downturn, but otherwise, I could shut off variable expenses quickly and the delta between monthly cash flow and fixed costs was high, so there was not much to be concerned about.

As I began to build out a firm of business guides, relocated to a new, much larger and more expensive office, and built out significantly more resources and collateral, things changed.

Thinking about how much cash on hand I needed to maintain as a buffer for slow times, I needed to get a clear picture of what my total monthly cost structure was, what was a fully fixed cost, what costs were entirely variable, and what costs were in between the two extremes. In my case, as of the writing of this article, I have just over $70,000 in total monthly expenses required to run our firm.

Some organizations look at cash on hand through the lens of, “If our revenue dropped to zero, how much do I want to have in reserves to survive.” Different leaders have different levels of risk tolerance, and that reality needs to play into the way this is approached. If you have a very low tolerance for risk, this is likely the right approach to give you peace of mind. If, on the other hand, you are highly risk tolerant, this will probably cause you to tie up too much cash, cash that you would rather be redeploying in growth opportunities.

The balance I try to strike is to look at scenarios where we have a drop in revenue of 25% and 50%. When the pandemic hit in 2020, we had a short-term drop in revenue of about 30% and it lasted for about 5 months. When I consider my business model, I could immediately shut off about $20,000 (29%) of the $70,000 monthly spend without having an impact on the quality of how the business operates. These are variable expenses that are nice to afford and do allow us to enhance the way we do things, but they are not necessary for survival or to maintain an on-brand delivery of our services. So I have about $20,000 that is discretionary, which brings my “downturn” monthly nut to about $50,000.

To be able to operate in an environment where revenues and cash in from operations drop 25%, if I carry $50,000 cash on hand, I can go several months without it causing undue harm. In my particular circumstance, if I carry less than that, I’m putting my business at risk in a sudden downturn, and if I carry more, I’m tying up cash that could be reinvested in growing the business.

Cash Flow Forecasting and Staying Ahead of the Curve

Depending on the business model, there are varying degrees of accuracy in 90-day cash forecasting. When I ask the Finance Team leader of a client company about maintaining a cash flow forecast, I sometimes get pushback that, “Our cash flow is too unpredictable to forecast,” or, “There are too many variables for it to be accurate and valuable.” This is usually code for either, “I’m not sure how to do it,” or, “I don’t have time to do the work required.” Either way, if the leader of your finance team is not providing a cash flow forecast (ideally 90 days out) and reviewing it frequently, I would argue they are underperforming in an area that is a significant part of their job. That is a strong statement and one I make for a reason. Regardless of the variabilities that exist in any given industry, based on historical trends, seasonality, and sufficient data, I believe every business can and should maintain a detailed 90-day cash flow forecast, with as much accuracy as their specific business model allows.

If you disagree, go back to the article I wrote on Most Critical Outcome® and read the section titled “MCO In Practice.” I believe the leader of the Finance Team has a fiduciary responsibility to protect the financial health and cash flow of the business. If they are not forecasting cash and reporting to the team on a regular basis, they cannot fulfill their responsibility to protect cash flow.

At Next Level Growth, our cash flows into and out of five different accounts (we use a methodology learned from reading the book Profit First, by Mike Michalowicz). Two are for receiving payments, one is for paying operating expenses, and two are for savings – one for safety-net cash on hand and one for building cash for quarterly taxes.

Our Controller maintains a spreadsheet that pulls from various resources and includes some manual adjustments that shows me the 90-day forecast of cash flow in and out of each account, together with an aggregate column that shows me total forecasted cash looking 90-days out. We have lots of variables too. If I spend more or less than expected on marketing in a given month, the forecast has to be adjusted. If we add a client or lose a client, the forecast has to be adjusted. But knowing what to expect as we predict the next 90 days of cash allows me to see trends and concerns coming long before they arrive…and that helps me make better, more timely decisions and adjustments.

Leading a business without clear and updated cash flow forecasts would be like a pilot leaving on a cross-country trip without checking the weather forecasts along the route or at the destination. I wouldn’t want to be a passenger on that plane.

The Power of One

The last discipline if Growing Profits & Cash Flow that I want to address is what we call the “Power of One.” When it comes to a focus on financial improvements, many teams either don’t know where to start, or they let themselves be too busy to do the work. As a result, their profit and cash flow is a byproduct that just happens to them, not something they intentionally go after and get.

The idea behind the Power of One is to think about all of the things within your control or influence that affect things like your Profit per X and your Cash Conversion Cycle. Take each of them one at a time, and instead of focusing on coming up with some big initiative, think about what it would look like to improve it by 1% or 1 day. Here’s an example.

Let’s say you are an auto dealership with multiple locations selling used cars. Your Profit per X is probably Profit per Unit Sold, so that is the key to your economic engine. If we start by focusing on profit only, I would ask you to make a list of all the things you can control or influence that impact Profit per Unit Sold. That list might look like:

•   Reconditioning Cost

•   Advertising Expense

•   Acquisition Cost

•   Transportation Cost

Taking them one by one, perhaps you do some reconditioning in-house and some you outsource. If you brought all of your reconditioning in house, you might be able to save $100 per unit when you consider the additional cost it would take you to expand your recon department combined with the savings of not having to pay an outside vendor.

Perhaps you could make improvements to your referral strategy and your “self-generated traffic” strategy with your sales team, to create more “free” leads and reduce your advertising cost per unit by $50.

If you adjusted your buying strategy to increase the percentage of street buys relative to auction buys, you might find that the savings in auction fees by adjusting the ratios saves you $25 per unit.

Maybe as a byproduct of the buying strategy adjustments and intentionally renegotiating your transportation contracts, you could reduce your transportation per unit by another $25.

All in, the above changes could result in a savings of $200 per unit. If you have 3 locations and each location sells, on average, 1,000 units annually, then your profit will increase by $600,000, and if you keep those gained efficiencies, as your unit sales grow over time as you grow the business, that savings and the resulting gain in profit will grow with you year over year. The long-term impact of just that one exercise, can yield millions of dollars of added profit and cash flow over a period of just a few years.

Pricing Strategy – A Final Thought on The Power of One

Very few organizations I meet really focus on their pricing strategy and, in fact, most of them are quick to discount prices and rarely consider the power of raising prices. I believe organizations should be just as intentional about their pricing strategy as they are on expense management.

I’ll share two brief, and powerful points on this. Think about your favorite restaurant. Let’s just say that the average ticket value for the restaurant is $50 per person. Most companies are afraid to raise prices because they are concerned they will lose too many customers, and restaurants are no different. But consider if, as a guest of the restaurant, they adjusted their prices across the menu by just one to three percent, so that the average ticket value went from $50 to $51 per person. Most people would agree that there would not be any measurable drop-off in traffic or frequency as a result of such a small change. However, if the restaurant has 20 locations, and they average 100 guests per evening per location, that’s $2,000 per evening. If they are open six nights per week that’s $12,000 per week, times fifty-two weeks. That turns into $624,000 of additional gained profit over the course of a year.

If a business operates on a 50% gross margin, they could raise prices 2% and afford to lose 3.85% of their volume, or in the case of the restaurant, their traffic, and still generate the same dollars of gross profit. If their gross margin was 30%, they could afford to lose up to 6.25% of their volume and still generate the same dollars of gross profit (see the download below for your own copy of the referenced tables). If their volumed drops by less than those amounts, their real dollars of Gross and Net Profit go up.

The second point I want you to consider is the negative real impact on gross profit dollars of discounting your prices. Typically, discounts happen in the range of 10% or more. For this example, take the same company operating at a gross margin of 50%. If they decided to discount their prices by 10% to attract more sales, they would need to see an increase in volume, or traffic, of 25% just to generate the same dollars of gross profit. If their gross margin was only 30%, they would need to see volume increase by 50% just to keep the same actual dollars of gross profit flowing into the business with a 10% discount on price. Discounts are dangerous and almost never generate enough increase in volume to offset the loss of real dollars of gross profit they cause.

Download a free copy of the Price Increases, Discounts, and Impact on Gross Profit Dollars Tables.

You Must Do the Work to Get the Results

These are the key disciplines that, if you will begin to focus on them and prioritize them, will yield outstanding results over time, and they will yield results that will remain with you for the life of your business.

We have a quote from author Larry Winget on the wall in one of our hallways at Next Level Growth that says, “The only thing standing between you and what you want, is you and what you are not willing to do.” Intentionally growing profits and cash flow is hard work because it requires you to spend time working on your business, not in it.

Would it be a ridiculous idea to have a conversation with a Next Level Growth Business Guide to learn more about our approach and how we can help you build an elite organization? Are you against filling out the form below have a free conversation? You may be one simple step away from a whole new level…the Next Level. What have you got to lose?

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Optimized Playbooks

Optimized Playbooks – The third of the Five Obsessions of Elite Organizations®

October 31, 2023• Process

“Every system is perfectly designed to get the results it gets.” W. Edwards Deming

Where are you frustrated within your organization?

Are you frustrated by people? Then your systems, or processes, for recruiting, hiring, onboarding, developing, and removing people are designed, or at least being executed, in a way that frustrates you.


Are you frustrated by a lack of growth? Then your systems and processes to attract target market leads, convert them into customers or clients, keep them happy, and retain them is designed, or at least being executed, in a way that frustrates you.


Are you frustrated by a lack of profit and/or cash flow? Then your systems and processes to optimize profit and net cash flow are designed, or at least being executed, in a way that underperforms expectations and frustrates you.


The Root Cause of Almost All Your Business Issues

Since leaving my career as an owner and CEO of manufacturing businesses in the hardwood industry and transitioning into my work as Founder of Next Level Growth and Business Guide, it has become very clear to me that the root cause of almost all issues in business is either one of people or process, and if you don’t have optimized Process Playbooks for people to train on and follow, you cannot always be certain that people are your problem.

Imagine a scenario where you took the best professional NFL football players by position, assembled them as a team, and put them up against a team randomly assembled of NFL players who were all backups for their positions. All things being equal, the All-Star team would likely win almost every time. If, however, the All-Star team did not have playbooks, was not allowed to practice running plays, and did not receive any coaching, while the team of backups was given well thought out playbooks, studied them regularly, practiced running the plays on a regular basis, and received consistent coaching, I would put my money on the backups to beat the All-Stars every time.

There is incredible power in using Optimized Playbooks, which is the third of the Five Obsessions of elite Organizations®.

Optimized Playbooks

Onboarding or Waterboarding?

Why is it that outside of the business world, every professional has some version of a Playbook? Sports teams draw up and practice set plays. Actors have scripts. Musicians have compositions and set lists. Each of them spends countless hours studying and practicing their plays, scripts, or compositions so that they can perform at their absolute best.

Only in the business world, do we, as professionals, avoid creating defined, documented, and optimized Process Playbooks. We expect people to come into our organizations and perform, but we don’t onboard them through a great process and train them on optimized playbooks for their role. Instead of being well onboarded into an organization and a job, most employees get waterboarded. We may expect excellence in our outcomes, but our systems are often designed for mediocrity, at best. As a result, employees suffer, their teams suffer, their leaders suffer, the company suffers, and in the end, the customer suffers.

The short video below is a great representation of how most new employees feel as the result of a bad onboarding experience…

Process Playbooks versus Procedures

The third obsession of elite organizations is Optimized Playbooks. When we talk about Playbooks, we are not talking about hundreds, or thousands, of pages of highly detailed documentation. Those are what we call Work Instructions, or SOP manuals. Documents like those can be helpful in onboarding and training new employees who are deductive learners, or to satisfy some regulatory requirement, but documents like those are rarely, if ever, referenced once they are produced.

Process Playbooks are essentially checklists, or a sequential outline of the high-level steps, in order, to go from a triggering event, like receiving a purchase agreement, to delivering a product or service and collecting a payment, a desired outcome. At the very front end of most businesses, there are Process Playbooks for the Marketing or Business Development Team…they define how the organization attracts target market prospects. Then comes a Sales Playbook to map out and define how to convert those prospects into customers or clients. Following the Sales Playbook comes the Operations Playbooks, everything about how to make the products or deliver the services once there is an order to fill or a new client to onboard. The outcomes of the Operations Playbooks typically serve as the inputs to the Finance or Accounting and Admin Playbooks, everything about how money moves and reporting flows through the organization.

Overarching all of that, it is important to have an Employee Journey Playbook that covers everything from the time a need to fill a seat is recognized, through recruiting, hiring, onboarding, development, and eventually offboarding.

Do It Yourself

When thinking about Playbooks as high-level checklists, think about the Pareto Principle, also known as the 20/80 Rule, that 20 percent of your inputs get you 80 percent of your results, so document the 20 percent that gets you the 80 percent. Where more detail would be helpful, we suggest creating a video library to supplement the Process Playbook. So many people are used to learning from content like YouTube videos, consider creating screen share videos for detailed instructions on how to do things within your CRM, ERP, or HRIS systems as part of the training for employees.

You can even use simple cell phone videos to show employees how to complete steps of your Process Playbooks that will provide them the greater detail. Some of our manufacturing clients use cell phone videos to show the details of how to set up a machine, and other technical aspects of production. We have hospitality clients who use simple videos to provide the training details on how to greet a guest and how to address and work with an unhappy guest. If a picture is worth a thousand words, a video is worth many, many more.

A simple approach to begin documenting your processes and building out your playbooks is to think about what action triggers certain things to happen in your organization. Then, before you start documenting what you currently do, get clear on what the optimal outcome of the process should be. As a side note, this exercise is best done with a small group of high performers from each team rather than by one individual. The group approach both brings a diversity of ideas and also creates greater buy-in through participation.

Start with the trigger and work with the team to determine what the very first step should be and document that. From there, talk through what the next step should be, and look for areas where things break down, issues arise, or there are frustrations. Try to come up with a better, or more consistent way to handle that step to eliminate the problems, then go to the next step and repeat. At the end of this, you should have a clear process that, when followed, gives you a very high likelihood of consistently achieving the optimal outcome you desire.

Once your processes are documented and organized, you need to distribute them to everyone and work through them with every employee so that, for their role, regardless of tenure, all employees are clear on the processes they are expected to follow. This also allows you to clarify what you need them to do when they encounter nuances, or situations, that are non-standard and require deviation from the process. How much room do they have to figure out a solution on their own? How much input do they need to get from management?

That last part is summarized beautifully in a quote from Isadore Sharp, Founder of the Four Seasons, who said, “You systemize the predictable so you can humanize the exceptional.” The more we can systemize the predictable things that happen within our organizations, the more we free people to use their creative minds to humanize everything else and create exceptional experiences both inside and outside the organization.

Faster and Better Path to Done

In my experience, it takes most organizations who go down the do-it-yourself path of documenting their Process Playbooks anywhere from nine months to nine years to get the work done. The problem is that they often overcomplicate it, or ironically, they get too busy in the day-to-day firefighting that would be significantly reduced if they had their Process Playbooks in place. As my friend and co-author of The Path to the Pinnacle, Greg Cleary likes to say, “Process takes pressure off of people.”

At Next Level Growth, we often introduce and refer our clients to our friends at Process Optimizer, a team of certified Lean experts with specific training in working with organizations to build Process Playbooks. When our clients bring in the experts from Process Optimizer, they get their Process Documents done and delivered in just nine days, start to finish, and they also get a full year of follow up coaching to help ensure they get their Playbooks fully optimized and embedded in all of their training systems. Follow this link for more information on working with Process Optimizer.

Remember, almost all of your issues can be traced back to either a people issue, or a process issue, and without Optimized Playbooks, you may have people with the potential to be great actually being penalized, or exited, because you failed to give them a key resource to be successful. Once you have your systems designed and aligned to create excellent outcomes, with effective training (practice) and coaching in place, only then can you truly create an accountable Culture of Performance, the fourth obsession of elite organizations, which I will explore in the next article in this series on the Five Obsessions of Elite Organizations®.

Click to read the next article in this series, a Culture of Performance.

Download a full sample of a great Employee Journey Process Playbook

And receive a $500 coupon towards a workshop with our friends at Process Optimizer, courtesy of Next Level Growth.

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The Five Obsessions of Elite Organizations™

Unlocking Greatness: The Five Obsessions of Elite Organizations®

September 19, 2023• Entrepreneurial Freedom, People, Process, Team Health, Vision

Jim Collins opens his 2001 best-selling book, Good to Great, by stating that, “Good is the enemy of great.” Having spent more than 20 years growing my own businesses, followed by more than 10,000 hours across well over 1,000 days guiding strategic meetings with the leadership teams of more than 100 entrepreneurial organizations, I could not agree more.

The Trap of Contentment

So many entrepreneurial leaders become content with good as being good enough and end up trapped in their own businesses. I was fortunate to spend  fifteen of the first twenty years of my career as a member of the peer groups YPO and EO, with a short time also spent in VISTAGE. From my time with each of those organizations,  one thing became very clear to me. Most entrepreneurs, to some degree, achieve success at the expense of their relationships, their time with family, their physical health, or their emotional health.

I created Next Level Growth because I believe it doesn’t have to be that way.

Build an Elite Organization

At Next Level Growth, we focus on Helping Entrepreneurial Leaders Build Elite Organizations®. What Collins refers to as “great.” In his book, Collins shares from the findings of his research, that the organizations who made the leap from good to great had something in common. They were all lead by a team of disciplined people, engaged in disciplined thought, taking disciplined action. It’s important to break this concept down if you are going to be able to apply and operationalize it in your own organization, and it is from this concept that the Next Level Growth Approach was formed.

The Five Obsessions of Elite Organizations®

This is the first post in a series of six, which will walk you through each of the Five Obsessions of Elite Organizations and how to use them to create a custom-tailored system from which you can build your own elite organization. We call this the Next Level Growth Approach, and it is not a prescriptive system, but rather a principled approach. When you follow a prescriptive system, you are bound by the system and forced to make tradeoffs to fit within its constraints. When you embrace a principled approach, primacy is placed on outcomes relative to your goals and vision, within the flexible framework of a set of principles. This unlocks tremendous freedom and creativity, and allows the user to design a custom-tailored system in which to operate relative to the principled approach – the essence of greatness. But first, let me clarify why building an elite organization is worth the effort.

When entrepreneurs follow the Next Level Growth Approach and begin building elite organizations, they are more able to begin delegating to a capable team, aligned around a common set of values and a common purpose, in a systemized and scalable business, where expectations are clear, performance is measured and reported on, and leadership constantly invests in coaching and developing people, while providing them an environment where they can perform at their natural best.

When this happens, entrepreneurial leaders begin to experience a sense of freedom. Their organizations become more efficient, more self-managing, and less dependent on the founder and the leadership team to be deep in the minutiae of the day-to-day.

Hear from long-time Next Level Growth client about his experiencing Return on Life.

We find that these elite organizations bring a special discipline, commitment, drive, and passion to consistently excel to a very high standard in each of the Five Obsessions. Simply put, the Five Obsessions are: Great People, aligned and driven by an Inspiring Purpose, consistently training on, executing, and improving Optimized Playbooks, in a Culture of Performance, while proactively Growing Profit and Cash Flow.

The Five Obsessions of Elite Organizations
Most people are familiar with the “Right People, Right Seats,” analogy made popular by Collins in Good to Great. While I absolutely agree that you need Right People, those who share your values and whose behaviors consistently align with those values, in the Right Seats, meaning they have the skills and desire to perform their roles to a high level, I have discovered a 3rd leg to this stool that is missing if you truly want to build an elite organization: an Inspiring Purpose. When you have the right people, in the right seats, and they are inspired by and emotionally connected to your purpose, they will bring an even greater level of creativity, passion, ingenuity, and effort to the work that they do and will ultimately be even greater ambassadors for your organization.

1. Great People

In the first of the Five Obsessions, Great People, we teach what we refer to as an “A-Player System.” It consists of five foundational concepts to help organizations excel at Right People in the Right Seats: Behavioral Core Values, The Next Level Accountability Chart™, an Onboarding System, Quarterly Calibrations, and a Performance Solutions System designed to either coach up, or coach out, the under performers. I will expand on three of these five here. The Next Level Accountability Chart™ is an evolved and advanced version of both an Organizational Chart as well as the EOS® Accountability Chart™, that we have created over several years of refinement with hundreds of clients ranging in size from just a few million in revenue to organizations nearing $1 billion, and from every industry segment imaginable. What specifically makes it unique and valuable is the inclusion of what we call MMOs™, an acronym for the 3 critical components of a seat on the Next Level Accountability Chart:  Mission, Most Critical Outcome®, and Obsessions™. With this foundation in place, team members from the CEO to the front lines will have absolute clarity of expectations for success in their roles. What’s more is that you can also use this concept to clarify expectations of Board seats, which can be helpful especially in the early days of forming a Board of Directors. When the Next Level Accountability Chart is in place, it is used to feed quarterly coaching conversations, or what we call Quarterly Calibrations, which utilize the second concept for Great People, the A-Player Talent Assessment. Our next blog post will dive deeper into this obsession. The tools around these two concepts help create exceptional alignment around expectations and consistent communication to drive alignment throughout the organization and provide coaching on a continuous basis. W. Edwards Deming once said, “Every system is perfectly designed to get the results it gets.” If you want a better result, you need a better system. The Performance Solutions System was specifically designed to help leaders and managers overcome the two most significant barriers to a Culture of Performance:  The emotional cost, and the story-telling trap. Most leaders and managers tolerate mediocrity far too long because they are either resisting difficult conversations with team members because such conversations come with an emotional cost to the leader of manager, so they naturally avoid what they know will be difficult, or, they fall into the story-telling trap, believing the excuses and reasons they are given as to why a team member consistently misses their goals and fails the meet expectations. Having a well designed system that helps overcome these barriers is crucial if you want a Culture of Performance, and at Next Level Growth, we believe that our A-Player System is the most comprehensive approach to building a high-performing and values aligned culture.

2. Inspiring Purpose

The second of the Five Obsessions, Inspiring Purpose, is about storytelling. As humans, we are all storytellers. Most organizations make significant investments in PR and marketing, but it is almost always externally focused. Elite organizations also make investments in understanding, articulating, and in fact, marketing things like their Just Cause, Daily Purpose, their vision, their strategic initiatives, and their Flywheel internally. This provides team members something that they can emotionally connect with, and when you bring an emotional connection to what you do and why you do it, you get better, more consistent performance, and you can accomplish even more and at a higher level.

3. Optimized Playbooks

Optimized Playbooks is the third of the Five Obsessions. Outside of the business world, every professional has playbooks and a practice schedule. Whether it is an athlete with a playbook to study, or an actor with a script, they have playbooks and they are consistently practicing so that when it is gametime, or time for the performance, they are ready to execute flawlessly. Only in the business world do most professionals operate without playbooks and without any meaningful practice. Our fourth blog post in this series will dive into playbooks and practice schedules.

4. Culture of Performance

The fourth of the Five Obsessions is a Culture of Performance. When you have a team of A-Players, and they are inspired by the purpose behind what they are doing, they want to know how they are doing – if they are winning or if they are falling behind. It is important that they know the score and the key details, in real time, to know how to adjust the way they are playing the game. Imagine watching a basketball game with no scoreboard and no stats. It would be like watching practice. But when you add a scoreboard, and everyone knows the score, the time remaining, the team fouls, and the teams are tracking statistics and checking in at every time out so they can review the data and make real-time adjustments, that is not only more interesting, but it drives our competitive human nature and leads to higher level of performance. To build an elite organization, you must obsess about a Culture of Performance.

5. Growing Profits and Cash Flow

The last of the Five Obsessions is something that, unfortunately, most Business Operating Systems and many entrepreneurs view as a byproduct of everything else…Growing Profits and Cash Flow. While in theory one could argue that this mindset is correct, you live in the world of reality, and in reality, to be a truly elite organization, you must consistently obsess about Growing Profits and Cash Flow. The best organizations are constantly fine tuning and evolving their pricing strategy, their cash conversion cycle, and improving the financial literacy of their teams and leaders. They understand what drives their economic engine, have identified what Jim Collins calls their “Profit per X,” and are analyzing their decisions and strategies through that lens. You have to think of both profit and, even more importantly, net cash flow, as the fuel that feeds the engine you are building in your business, and that engine is what drives your Inspiring Purpose. No profit, no purpose. Over the next 3 months, we will be releasing blog posts diving deep into each of these Five Obsessions, unpacking the specific tools and concepts we share with the organizations who are members of the Next Level Growth ecosystem and working with an elite Next Level Growth Business Guide on their journey to the summits of their business mountains.

Click to read the next article in this series, Great People.i

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Clear the Fog for Better Decision Making

August 15, 2023• Entrepreneurial Freedom, Process, Vision

How often do you pay “Dumb Taxes” in your business?

I just finished the Audio Book The Road Less Stupid by Keith J. Cunningham and, spoiler alert, the book is about why smart people do dumb things. The author asks the reader, “how much money would you have right now if I gave you the ability to unwind any three financial decisions you have ever made?” Cunningham calls this “paying a dumb tax”. He says, “we don’t need to do more smart things, we just need to make fewer dumb mistakes. Every one of those three decisions you would love to unwind was an avoidable mistake.” The vast majority of our dumb tax is a direct result of emotional, overly optimistic, and poorly thought-out decisions. The solution to paying these types of taxes is allowing yourself thinking time.  

When we run ourselves to the ground by constantly “doing”, we are not thinking at our highest level. We are much smarter than we allow ourselves to be at times. True wisdom is tapped into during dedicated moments of deep reflection, what we at Next Level Growth call a “Clear the Fog” Break.

What is a Clear the Fog Break?

Keeping your head clear and your focus strong is what this tool is all about. Great leaders have the habit of taking quiet time to think. That means escaping the office on a regular basis for 30 minutes or more. By working on yourself and the business, you will rise above feeling frustrated and overwhelmed, to a clear-headed and confident state. As a result, when you come back into the business, you will be laser-focused and in the right leadership frame of mind. 

During your next break, use any one of the Clear the Fog Questions to get started:

  1. What is one thing my business, my team or I should start doing that we’re not?  
  2. What is one thing my business, my team or I should stop doing?  
  3. What is one thing my business, my team or I are doing that is going well?
  4. What is a major hassle (for our team members, for our customers/clients, or for our vendors) that needs to be resolved?
  5. What can we do to be more proactive versus reactive?

So, instead of paying avoidable “dumb tax”, choose the road less stupid by scheduling regular Clear the Fog breaks for better solutions than what your emotional, untamed brain will come up with in a reactive moment.

Free Clear the Fog Worksheet

Use these questions to help to see clearly in your business and gain the confidence to simplify procedures and efficiencies.

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The First & Second in Command Relationship (Founder & Operations)- Building Trust

August 1, 2023• People, Process, Team Health

As a former “Second in Command/Change Agent” inside organizations working directly with, and for, CEOs, I know what it’s like to feel as though you’re on a whole different planet, or at least speaking a different language. These relationships are typically Yin and Yang, and when operating in harmony, can bring beautiful balance. But when forces are opposed, this can create chaos and destruction.

Now, as a Next Level Growth Business Guide, I often see this dynamic play out as an outsider witnessing the Integrator/Operations Leader/Second in Command (insert #2 title here) feeling frustrated that the Visionary/CEO doesn’t trust them to do their job for one reason or another.

From my experience if you’re the Second in Command, here are 3 ways to build trust with your CEO:

  1. Start by asking the right questions and listening to their story. Understand their WHY.
  2. Make them feel heard before moving on to implementing a solution- sometimes they are not looking for the execution of an idea, but rather a sounding board. When in doubt, ask.
  3. Choose empathy. Before approaching a topic, try figuratively sitting in their seat. Attempt to understand their perspective, needs, and fears. Assume the best intent.

Zoom out and try to see things from their vantage point. Remember…

  • Trust is scary. The stakes are high.
  • Handing over a piece of your business and putting someone else in charge can be nerve-wracking.
  • They may not be able to see how the pieces come together in the same way that you can.
  • They need to feel included. Consult and inform them on the decisions that are important to them using a Decision Matrix (available below). Ultimately, it’s their name, reputation, and resources on the line.

If you’re working with an entrepreneurial founder or CEO, and you’re saying to them, “just trust me,” stop. They want to be able to trust you. That’s why they chose you to work as their right hand, they just might not know how. It’s your job to figure that out. You’re the one who puts ideas to action, you may also need to be the one to extract their ideas and implement the right ones effectively. Be their guide, and make it a safe place for them to live 25,000 feet above the business.

“No matter how invincible a CEO might feel, they should never underestimate the value of having a partner. You need someone you can trust, be vulnerable with, and open up to. The yin to your yang. You need someone who will tell you the truth, including when they think you are wrong, so you can keep moving forward in a positive direction.” – The Second in Command, Unleash the Power of Your COO by CAMERON HEROLD

If you’re a Senior Operations Leader in the Second in Command role, remember, you were hired for a reason. The relationship is about trust, and it may require you to manage up so that you have what you need to be successful in your role and execute with the organization’s best intentions in mind. I also recommend picking up a copy of The Second In Command, by Cameron Herold. Read it to learn more about the relationship dynamic between you and your CEO and how to build trust in the relationship.,

Free Next Level Growth Decision Matrix Worksheet

Get aligned with the decisions with important decisions using the Decision Matrix.

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How to Create an Employee Engagement Process

June 27, 2023• People, Process, Team Health

I recently met with a CEO and, among other things, we discussed issues with engagement on the Board level of his organization. He was finding it difficult to get them committed to showing up, participating, and doing the work that was required. Ultimately, it was resulting in more work on fewer people’s shoulders.

He said to me, “when I make a commitment, I follow through.” I told him I agreed and that’s how I operate as well, and it’s disheartening that others don’t do the same. I said, “It’s up to us to make sure the team knows that engagement IS the expectation and that nothing less is acceptable. We need to look at the process, not the people. Our recruitment efforts should help ensure the right people, but we need to look at our process around engagement too.”

When I hear Employers, Managers, and other Leaders tell me they are experiencing “engagement issues” saying participation is just not at the desired level, they often follow it up with one of two reasons why they think it’s happening:

Reason 1: People.

We have the wrong people.

Reason 2: Expectations.

Our expectations are too high, the world of work is different these days.

I have another Hypothesis.

When I ask Leaders what their employee engagement process consists of, I almost always get a blank stare or some fumbling of information about how they host company-wide team-building events, do surveys, gift cards or other incentives.

Those might be a PART of the process, but my follow-up question is, “what is THE process for getting and keeping employees engaged? And, is it documented and communicated with the right people on the team?” Developing a strong process that is focused on employee engagement makes all the difference.

Your Employee Engagement Process needs an update.

Leaders, remember that you must set AND hold the standard for all expectations in your organization, including engagement. When engagement is the expectation, and you have a process to support that, you will have no choice but to have engaged team members. You’ll know when you have it right when the feeling is… engagement is our culture – it’s just the way it is around here.

When you’re faced with a problem like employee dis-engagement, approach the problem systematically… state the problem, get clear on the specifics of the problem and revisit your process.

When we can clearly identify the problem, and commit to doing something about it, it’s already half solved.

Here’s an example of how to set and keep a standard of engagement inside your organization with an Employee Engagement Process.

HR (or someone responsible for this function) owns the process.

  1. Starting from the Interview Process – check in with the applicant to gauge their interest (monitor the follow-through of candidates in the hiring process as a KPI).
  2. A warm welcome in Onboarding Process.
  3. Set the expectations for engagement in Orientation and all Meetings.
  4. Have a process for gauging training success and onboarding satisfaction within first weeks of new hire onboarding.
  5. Monitor meeting attendance and Average Meeting Scores (if you’re not scoring every meeting, you’re missing a real-time opportunity for engagement feedback).
  6. Formal and informal employee/ manager feedback process. Example: Annual Performance Evaluations and Quarterly Coaching Conversations.
  7. Recognize engaged employees company-wide (positive feedback loop).
  8.  Make it a two way street- ensure their feedback is heard, addressed and implemented where appropriate.

The result?

Engaged employees, by design. Don’t blame the people if engagement is off, blame the process. A well-designed process will help you identify if you have the wrong people.

Free Quarterly Coaching Conversations Download

A key to employee engagement.

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5 Tips to Cultivate a Culture of Resilience

5 Tips to Cultivate a Culture of Resilience

June 6, 2023• People, Process, Team Health

There is one common trait that all successful entrepreneurs share—resilience. There are two definitions of resilience I like: “the capacity to recover quickly from difficulties – toughness,” and, “the ability of a substance or object to spring back into shape; elasticity.”

It can be challenging for entrepreneurial spirits to understand why others stay stuck or get defeated easily because we see the opportunities for change all around us. When we, as entrepreneurs, face difficulties, we do our best to spring back and recover quickly because we have no other choice. We get a sense of enjoyment from the challenges because we know it leads to growth.

This mentality can be difficult to carry into your organization. When people feel defeated, how do we inspire them to keep pushing through? How do we not allow minor setbacks to stir up negativity and cause major issues?

There’s a unique characteristic many visionary founders have. They are charismatic. They have the ability to inspire others to see what they see through their rose-colored glasses, past the reality of what’s happening in the present. They can paint a picture of a colorful world that does not yet exist through only their words and passionate delivery. They can leave people in awe and excited to follow their lead. They are the changemakers.

These visionary types have a way of understanding people and their needs. When the organization is small, this charisma is what continues to inspire their team to keep going.

But what happens when you’ve grown so quickly that you now have an army of people? At any given time, half the team could be seeing what you see, on the train moving quickly toward all the possibilities in the colorful promised land. The other half, dragging the team down thinking about jumping off at the next station or slowing it down by grasping tightly to the fear of derailment.

If you want to create a culture of resilience and avoid the inevitable setbacks that come from scaling an organization, you need to prepare for this occurrence and prevent poor performance before it starts.

James Baker, former Secretary of State introduced the 5 P’s: Proper Preparation Prevents Poor Performance.

You need to cultivate the type of environment where development, growth, toughness, and elasticity exists, thrives, and becomes the norm.

You’ll need to teach resilience by naming it, discussing how it shows up inside your organization, and explaining why it’s critical to everyone’s success.

It can no longer come from just you as the visionary founder. Resilience will need to exist in every member of the team and be strengthened by its leadership.

“Resilience comes from deep within us and from support outside us. It comes from gratitude for what’s good in our lives and from leaning into the suck.” Sheryl Sandberg, Option B: Facing Adversity, Building Resilience, and Finding Joy.

As people that embrace the suck, we know the trait of resilience comes from within, but we can forget that the support outside of us is what keeps that light on. This is what we need to be for our team. The light that helps others see what’s possible.

How do we cultivate resilience in our organizations?

Brene Brown, American professor, lecturer, and best-selling author writes in the book Gifts of Imperfection: “having a sense of purpose, meaning, and perspective in our lives allows us to develop understanding and move forward. Without purpose, meaning, and perspective it is easy to lose hope.”

If you are working towards building something great, you have a sense of purpose that keeps you going. You may or may not have named exactly what that purpose is, but it gives you hope of a brighter future which helps you overcome adversity more easily.

We know that external motivation only gets us so far. Motivation from outside yourself can be helpful, but being internally motivated by your own values and goals is the only sustainable approach that provides long-lasting and more meaningful results.

To build an organization that cultivates resilience start here:

  1. Help individuals find their own sense of purpose.

Purpose comes from deep within. It’s personal. As leaders, it’s our job to help people discover their own purpose and tie it to their role in the organization.

  1. Create meaning around goal setting.

When people know their purpose, they need to set goals that allow them to live out their purpose. Help your team develop a deeper connection to their goals through the lens of their personal purpose.

  1. Show people they can remain optimistic through gratitude.

A practice of gratitude helps people see the good in everything. When something doesn’t seem great on the surface, we can help others shift their perspective to gratitude and away from negativity.

  1. Tie the company’s goals to the individual’s goals.

Real buy-in only occurs when personal goals and values are aligned with organizational goals. To tie your team’s internal motivations with the goals of the organization you help people show up as their best selves and continue to perform at a high level.

  1. Support internal motivation through external motivation.

Helping people connect with their sense of purpose creates internal motivation. As humans, it can be hard to sustain motivation. High-performers seek out coaches, advisors, and accountability partners but your team might not see that as an option. Weave coaching, mentorship, and accountability throughout the company so it’s reinforced at every level.

Cultivating a culture of resilience strengthens your team’s ability to overcome obstacles and turn threats into opportunities. When everyone inside the organization practices resilience your team will be unstoppable.

Free Quarterly Coaching Conversations Download

A great starting place to cultivate a culture of resilience is to integrate quarterly coaching conversations. Download this overview to get started.

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Align and Measure Employee Results with Most Critical Outcome

Align and Measure Employee Results with Most Critical Outcome®

May 16, 2023• People, Process, Team Health

For most companies, the biggest investment they make is in human capital. As important as it is to get this substantial investment right, few organizations are actually tracking, or know how to measure, the value they are getting in return. And when that’s the case, they can’t truly know if they’re getting an adequate return on investment (ROI) for their human capital expenditure.

Understanding ROI on Your Human Capital Expense

Most Critical Outcome® (MCO™), a concept I initially began to develop in my manufacturing business in 2011, and later evolved as part of Next Level Growth over more than eight years of working with entrepreneurial organizations, fills that gap.

MCO offers a way to effectively measure and validate ROI on team members across an organization, from the CEO to the front-line employees. It’s simple, powerful and has the potential to be a transformational tool when it comes to developing team members, creating clarity throughout the organization, and increasing profitability.

When I was a top-performing EOS Implementer®, I was frustrated by how many organizations failed to execute the “Measurables for All” concept under the Data Component™ of the Entrepreneurial Operating System®. There just wasn’t a clear way to operationalize the concept, so for many companies running on EOS®, it was more theory than anything put into action. As we tell our clients at Next Level Growth, success lies in your ability to operationalize the concepts that you believe in. If you cannot operationalize the concepts you espouse, and measure the outcomes, you’re wasting your time and energy talking about them.

Upgrade From “Measurables for All” to Most Critical Outcome®

MCO provides specific clarity throughout an organization’s accountability chart, and ties the outcome of each seat back to the most critical impact it has on the organization’s financial performance. In essence, MCO is a “measurables for all” approach that ensures everyone in an organization has a clear understanding of what winning looks like in their role relative to performance expectations, and helps clarify the path needed to achieve the desired result.

The best way to think about and understand how to operationalize MCO is through the lens of ROI. For any seat in the organization, there is a fully-burdened human capital investment the company is making in putting a person in that seat. The MCO clarifies the measurable outcome that, when met or exceeded, will validate a sufficient ROI for the investment the organization is making in the specific person in the seat. A person who consistently meets their MCO goal is a good investment for that seat. A person who struggles, is either not in the right seat, or needs more coaching and development. The data doesn’t lie and gives leaders greater clarity in where they need to spend time coaching and developing, or sometimes changing, team members.

Most often a lagging indicator, the MCO of a seat should support the seat which it directly reports to on the Accountability Chart and is often tracked as part of a team’s monthly scorecard. On a daily or weekly basis, the two to four key drivers associated with a specific MCO (think daily or weekly activities that drive the MCO) are generally tracked on scorecards or scoreboards, as they are the leading activities.

MCO In Practice

Sandy has been a Next Level Growth client for several years and is the owner of a manufacturing business. We began developing MCOs across the organization with the company’s leadership in 2019. We began by asking them to imagine they were no longer employees of the organization, but were instead members of a Board of Directors and they were hiring a CEO to run the organization. In that situation, we asked them, “What would be the single Most Critical Outcome® they would expect their CEO to deliver for the company?”

The answer was growing the enterprise value of the organization, in real dollars. For the CEO to achieve that, the MCOs of each member of the leadership team must support, based on each team member’s area of expertise and focus, driving the MCO of the CEO to whom they report. So as we worked through the same exercise for each seat we ended with a President, reporting to the CEO, whose MCO was “EBITDA dollars to goal (in their case, budget).”

There were four seats reporting to the President, a VP of Business Development, whose MCO was “revenue dollars to goal,” a VP of Operations, whose MCO was “net operating income dollars to goal,” a VP of People, whose MCO was “percent of right people/right seats to goal,” and a VP of Finance, whose MCO was “net cash flow dollars to goal.”

The finance seat is often an interesting one, as the role is more about reporting and analysis, so the VP of Finance does not as directly control the components of net cash flow in real dollars the way the VP of Operations would control the inputs and outputs of net operating income. The logic with this MCO for the VP of Finance was that the leadership team wanted this person to be so obsessed with protecting the net cash flow of the organization, that the moment they saw an indication of a future concern, by focusing on their specific MCO, they would be coming to the weekly leadership meetings raising their concerns and ensuring that the entire team was aware of the future risk and taking early action within each of their areas of focus to stay ahead of the concern.

Beyond the Leadership Team

As we began rolling this out through the organization, we followed the same logic for each seat. In operations, for example, there was a Production Manager directly reporting to the VP of Operations. To support the VP of Operations’ MCO of net operating income dollars to goal, the Production Managers’ MCO was established as a ratio of “throughput per direct labor dollar to goal.” They measure their production throughput against the direct labor dollars being spent to obtain the throughput, and if the Production Manager meets or exceeds goal, the VP of Operations is more likely to meet or exceed their MCO of net operating income dollars to goal.

Taking it one layer deeper, there are several machine operators reporting to the Production Manager. For each of them, we established an MCO of “throughput per shift to goal.” Again, if each machine operator met or exceeded their individual MCO, the Production Manager was likely to meet or exceed their MCO, and the VP of Operations was more likely to meet or exceed net operating income to goal.

In each of those cases, the MCOs for individual positions reflect the Most Critical Outcome® they can achieve that impacts the MCO of the person they are directly accountable to.

There’s a reason why this level of specificity is important for success. I often tell the teams I work with that, “the root of most frustrations lie in uncommunicated expectations,” so by creating clear expectations there will likely be fewer issues and frustrations. In fact, at Next Level Growth, we believe that organizational leaders owe it to their employees to create clarity that lets them know if they are winning or successful in their roles and to be able to know how and where to help them.

Most Critical Outcome® – A Vehicle for Clarity

At Next Level Growth, MCO is a concept we teach on the very first day we work with a client. At the end of the first working session, everyone on the executive team has identified their MCO and we document it in their Next Level Accountability Chart. Their homework is to begin building it out for the rest of the organization. Within the first 90 to 120 days, and with our help and guidance, most have it established, communicated, and tracked for every seat in their company.

Chris Connelly, owner of the architectural firm Pinnacle Design, has seen the efficacy of MCO first hand.

“We’re only three months into our work with Next Level Growth and I have not been this excited about the future of Pinnacle Design since it was founded almost 28 years ago,” Connelly said. “I’m so thankful for our amazing leadership team and everyone at Next Level Growth. We are all very excited for the journey ahead.”

At the end of the day, there has to be an outcome that creates success for an organization. Business success has to factor in measurable results. If an action doesn’t eventually generate profit and positive net cash flow, it doesn’t help an organization achieve its purpose. No cash flow and no profit…no purpose.

Learn more about how Most Critical Outcome® could help your organization effectively measure employee productivity by requesting a free consultation with a Next Level Growth guide.
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Confront the Brutal Facts to Create a Culture of Commitment

Confront the Brutal Facts to Create a Culture of Commitment

April 25, 2023• People, Process, Team Health

“Leadership does not begin with just a vision. It begins with getting people to confront the brutal facts and act on the implications.”   – Jim Collins

In his best-selling book, Good to Great, Collins talks about the need for leaders to investigate the brutal facts and realities of the organization and to have the discipline to call them out. Here we’ll outline the 3 things Elite Organizations do differently to resolve problems swiftly and climb their business mountain with greater speed and agility through a Culture of Discipline.

Many fast growth companies move quickly, but stall in reaching their full potential. There are many reasons why, but often it’s simply a matter of not using their most critical resource wisely: time. We waste time listening more to opinions than facts. We weigh opinions and prioritize emotions, leaving us feeling drained, without truly accomplishing anything. It takes time to think clearly and articulate the facts of the issue. Time spent confronting the brutal facts is time well spent, which increases your forward momentum, and helps you take the right actions, quickly.

3 things Elite Organizations do Differently to Create a Culture of Commitment:

Build a Team of Disciplined People.

The magical power of Elite teams does not exist without great people. People who share the organization’s values, are aligned and driven by an inspiring purpose, and who work towards a shared vision. Great people need to be in the right seat in the organization to excel to their full potential. High performers desire to have their focus on excellence and thrive in a culture that creates, supports, and rewards these efforts.

“When you have disciplined people, you don’t need hierarchy.”   – Collins

 

Train Disciplined People to have Disciplined Thought.

“Simple can be harder than complex. You must work hard to get your thinking clean to make it simple.”   – Steve Jobs

Using a framework of rigorous thinking and communication helps identify the true facts, not opinions. When everyone is on the same page using a shared language and structure for communication you get the right things done.

Remember, opinions are not facts. Encourage the team to better define their statements with facts. When you’ve clearly identified the real issue, the problem is nearly solved.

Here is an example of how to state the brutal facts in place of opinions.

“I think we’re growing too fast”

We grew 50% last year, and our capacity only grew 30%

“We’re not looking for the right people.”

We’re not using the Core Values Hiring Guide and Accountability Chart in our hiring process

“Our owner is checked out”

Owner missed half of the Leadership Team meetings the past two Quarters

“We aren’t generating enough leads”

Our sales process requires 30 leads a week to meet our annual targets. We are getting 10.

“Our processes are too complex”

Our production process has 22 steps and 8 of those steps are unnecessary.

“When you have disciplined thought, you don’t need bureaucracy.”   – Collins

Disciplined People with Disciplined Thought Must Take Disciplined Action.

Accountability of a project or task requires clear ownership. Projects that move you toward your larger goals often require involving multiple people in the organization, but only one person should be ultimately accountable for it getting done. When in doubt, consider using RACI. Responsible, Accountable, Consulted, Informed.

      • The Accountable Person– owns the completion of the project and is ultimately accountable for the outcome.
      • The Responsible Person (or people)- own tasks or components of the project.
      • The People Consulted– who needs to provide input for the project? These people should be consulted.
      • The People Informed– these are the members of the team that need to be informed of project status/completion. For example, in your Weekly Tactical these are the people receiving the high level updates.

When you’re laying out projects (ROCKS) it’s important to know who owns the Project and what is the definition of successful completion? Consider using the Next Level Growth Project Planner to clarify the important milestones, timelines and desired outcomes.

Free Next Level Growth Project Planner

Clarify your important milestones, timelines and desired outcomes. ​

When you have disciplined people on your team, involved in disciplined thought, taking disciplined action, you have a better understanding of what is important to achieve and what is not. Your time and energy is better channeled into the things that move the organization forward.

When you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance.

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