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The One Year, Thirty Minute Challenge :: Week Three :: Finance :: Fixed Costs vs Variable Costs

I hesitated to do this one and especially hesitated to do it early in The One Year, Thirty Minute Challenge because it surfaces most frequently with solopreneurs (or those with just a handful of employees). Larger and older companies have already figured it out or else they wouldn’t still be around. However, when I’ve seen it with past clients and corrected it, the results were so dramatic (it’s been the difference between staying in business and going out of business), I felt like I had to share it early on.

It’s really just a math problem. Instead of explaining, let me illustrate and then give the steps for this week’s exercise.

ABC Company charges $60/hour for their widget repairing service. ABC Company is very busy, doing all the widget repair they can handle. They are always booked a couple of weeks in advance. It might be because they are at the lower end of the widget repairing market. Their competitors charge $75 – $80/hour for the same service. The owner of the company pays his widget repairing employees $35/hour (the market rate), leaving him what he calculates as a $25/hour margin. However, at the end of every month, he just has a few dollars in the bank – not even enough to cut himself a check that would equate to 40 hours at minimum wage. So, what’s the problem? It could very well be that the owner is failing to take into account fixed costs.

Fixed costs are those incurred by the business just by being open. They wouldn’t change, even if the business serviced no customers or sold no products.

To illustrate with our fictitious organization, the owner of ABC Company pays each month –

Rent on the Shop $1000
Payments on Two Trucks $600
Tools $200
Truck Insurance $300
Liability Insurance $400
Utilities $400
Cell Phones $400
Accounting Service $150
Internet Service $100
Health Insurance $2500
Advertising $500
Total $6550

That’s $6550 to keep the doors open and the lights on (so to speak). If the two widget repairers get 40 billable hours per week every week, they log 344 hours per month (40 hours per week * 4.3 weeks in a month * two repairers). To cover these fixed costs shaves $19.04 off each hour that ABC company bills ($6550 / 344 hours = $19.04).

When the owner pays the widget repairers, variable costs kick in. Variable costs are those that are driven by volume of work or product produced – for instance, hourly wages, the cost of materials to build a product, shipping costs for a product, etc. In our example, the owner incurs variable costs of $35/hour in wages and an additional $2.67/hour to pay the employer share of Social Security and Medicare.

Here’s what’s left of the $60 the owner collects from customers –

$60.00   Customer rate
– $19.04   To cover overhead (fixed)
-$35.00   To the widget repairer (variable)
-$2.67   To cover employer share of Social Security and Medicare (variable)
3.29   Remaining margin

So, the $25.00 per hour margin the owner thought he was creating with his pricing and salary policy is really $3.29. Now it’s apparent why his competitors are in the $75-$80/hour range for the same service. It’s also apparent why he has no money left to pay himself at the end of the month.

You might be wondering if I’m exaggerating for purposes of this exercise. Unfortunately, the answer is no. I’ve worked with one client where the margin number was 0 and another where the number was in the single digits.

Let’s move on to this week’s exercise.

1.  For the last three months, go through your checkbook or copy of Quickbooks (or whatever your bookkeeping methodology is) and list each fixed expense.

Here’s a starter list (it’s by no means exhaustive). Go through your records and be thorough in finding every fixed expense.

Rent or loan repayment for your place of business

Vehicle payments or leases

Vehicle insurance

Business insurance (property, liability, E&O, etc)

Health insurance

Professional services (accounting, legal, consulting)

Technical services (website, internet, email, desktop support)

Communication (landline, cell phone)

Office supplies

Advertising

Administrative employees (those who would be paid even if no services or product were delivered)

Property Taxes

Total the numbers and calculate a monthly average for fixed expenses

2.  Calculate the opportunity to cover those fixed expenses – 

For service businesses –

For the last three months, calculate the number of hours for which you can collect money from customers (i.e. hourly charges that you can use to cover fixed costs) and calculate a monthly average.

For businesses that sell products (this calculation is trickier if you sell multiple products with different price points) –

For the last three months, calculate the number of units across which you can spread the fixed costs and calculate an average.

For retail businesses –

For the last three months, calculate the number of hours you are open, across which you can spread fixed costs and calculate a monthly average.

3.  Calculate the fixed cost to be covered each hour or by each unit –

Service – monthly fixed costs / monthly billable hours = fixed cost to be covered each hour

Products – monthly fixed costs / monthly units = fixed cost to be covered by each unit

Retail – monthly fixed costs / monthly hours open = fixed costs to be covered each hour

4.  Incorporate the fixed cost per hour/per unit into your pricing model.

For service businesses

variable cost per hour

+ fixed cost to be covered each hour

+ desired margin

= Customer price per hour of service

For businesses that sell products

Cost of good sold (labor + materials or purchase price)

+ fixed cost to be covered by each unit

+ desired margin

= Customer price per unit

 For retail businesses, the use of the number is a bit different

 Aggregate price of all goods sold in an hour

 – aggregate cost of goods sold in an hour

 = aggregate gross margin

Aggregate gross margin must be greater than fixed cost to be covered in an hour

Calculate this over the course time to determine which hours the retail establishment should be open.

5.  Check these calculations frequently. As volume (more hours or more units) goes up, fixed costs per hour or per unit go down, until you increase volume enough that you have to add fixed costs (hire another admin person, buy another truck, lease a bigger building). At that point the math changes again.

6.  I realize this week’s exercise can get complicated very quickly. If the simple examples in this exercise aren’t sophisticated enough for your business, consult your accounting or bookkeeping professional.

This exercise is incredibly important and could be the difference between staying around to serve customers for many years or being gone in just a few months.

If you have questions on this week’s challenge, contact me at 816-509-9838 or mchirveno@clearvision.consulting

Use the comments section below to benefit other business owners and managers by sharing insights you gained by working on this week’s challenge.

The One Year, Thirty Minute Challenge :: Week Two :: Business Continuity :: Data

Business Continuity is the discipline that enables your organization to keep operating or quickly return to operations after an unexpected event – be it a natural disaster, man-made incident or even a catastrophic event caused by the actions of an employee or contractor.

The One Year, Thirty Minute Challenge will return to the topic of Business Continuity later this year when we focus on operational items, but this week we’re going to focus on one of the most valuable and irreplaceable assets in your organization – data.

You can buy more buildings, equipment, vehicles and hire more people, but you can’t buy more data. Data represents not just the historical performance of your company, but more importantly, the historical performance of your customers. And nothing is a better predictor of future behavior than past behavior. This data is a rich resource as you use it to increase efficiency and effectiveness internally. Externally, you can use it to segment customers and prospects and communicate with those distinct groups more clearly – even down to the individual level.

In the course of this exercise, I’ll be mentioning companies and products to illustrate specific types of offerings and capabilities. Some of these I use and some I don’t. However, for all of these, I don’t get any type of kickback or referral fee, they are for illustration only.

If you work in a larger organization with dedicated tech resources, you might be saying, “We’ve got this covered. We have a robust business continuity plan and we have people dedicated to taking care of this.” Good enough, but skip to the bottom for some bonus content on the topic of stored data.

Let’s get started.

Identify all of the data collected or stored by your organization. Here’s a starter list –

  • Financial data in your accounting system
  • Sales data in your order entry system
  • Customer and prospective customer data in your CRM system
  • Operational data in your ERP system
  • Inspection data in your manufacturing system
  • Marketing performance
    • Website analytics
    • Response rates from advertising campaigns
    • Response rates from email campaigns
    • Social media posting with responses
  • Shipping data in your logistics system
  • Supply order history and vendor performance in your procurement system
  • Employee data (including tax and benefit selection) in your HR system
  • PLC programming for your manufacturing equipment
  • Computer code for any software developed in-house
  • Policy and operations documentation
  • Promotional materials (templates, logos, sales collateral)
  • Legal documents (incorporation papers, employment contracts, client contracts)
  • Usernames and passwords for company accounts (website code, website hosting, accounting system, CRM system, social media accounts, online banking, eftps.gov, state DOR, state unemployment)

 

Enlist the help of others on your team to identify other data created or collected in your organization. Also include the location of all important documents that only exist in a physical format (signed contracts, incorporation papers).

With your complete list in hand, identify where all of that data resides. For example –

Data Location Backup
Quickbooks Accounting System Bob’s PC
Customers and Prospective Customers salesforce.com
Website Mary’s PC
Sales collateral, logo Tom’s PC
Incorporation papers File cabinet in Amanda’s office

Some users might use have an application installed locally (Quickbooks, for example) but save the data file on the company’s local server. Make note of both. In case of a failure, you’ll need a copy of the application and a copy of the data.

Now circle back and note (in the third column) where that data is backed up (i.e. a complete, up-to-date, readily accessible copy). If you use cloud-based applications (Software as a Service or SAAS), for example – Quickbooks Online, salesforce.com, zoho.com, your data and applications are already automatically available in case of a localized emergency. However, for all other data that resides on a local personal computer or local server inside your organization, note where the data is backed up. This is essential in case the piece of equipment that houses the data has a catastrophic failure or the entire location is destroyed or becomes inaccessible.

Consult with your in-house or contract technology expert to craft a data backup plan for each piece of data. For all locally hosted data, select a backup solution that, at least daily if not more often, makes a copy of all data and stores it on devices that are not in the same physical location as your organization. Here are a few options to consider –

  • For mission-critical data residing on a local computer or server, you might consider an always-on cloud based backup like carbonite.com. Any time the device connects to the internet, the carbonite.com software will push an updated copy of the files you select to their cloud storage site – all happening without any intervention from the user.
  • There are cloud-based storage solutions available from many excellent providers including Amazon (AWS) and Microsoft (Azure). These services can certainly be used for backups, but many companies have opted to store their live applications on these cloud-based services instead of on local servers. They are fast and reliable.
  • Many companies have crafted hybrid private/public cloud solutions where data is stored both locally in a company-owned hosting facility and in a public cloud facility – sometimes simultaneously.
  • For all paper-only documents, consider scanning them and keeping an electronic copy.

 

Remember, the goal here is business continuity. You want as little disruption as possible to your operation in the case of a natural or man-made disaster.

Once your backup plan is in place, check backups regularly and make sure you can restore production systems from the backed up data.

If your organization uses specialized hardware to create, capture or utilize data (barcode scanners, RFID scanners), you’ll want to have spare hardware on site to restore operations immediately.

For some organizations, being closed for even several hours can represent the loss of thousands of dollars in revenue. Having a strong business continuity plan, especially as it relates to data, can ensure that you can continue to provide services, create goods, bill customers and pay employees without disruption.

Finally on a semi-related note, create, if you don’t have one, a document destruction policy. Data is incredibly valuable but it also creates liability for your organization. A well-crafted, strictly-enforced document destruction policy can mitigate that liability. After consulting with tax and legal professionals, let’s say that you decide you need to keep 7 years of financial records and, for marketing reasons, you need to keep 10 years of customer order data. At that point, securely destroy all other data. If you have other data, outside the scope of your document destruction policy, it can be subpoenaed during a legal proceeding – going back decades if you still have it available. However, if you can demonstrate that you have a document destruction policy and you follow it by destroying all data outside the boundaries of the policy, you can eliminate that potential exposure. In addition, you don’t have to pay to store it and don’t have to pay to retrieve it should be requested.

If you have questions on this week’s challenge, contact me at 816-509-9838 or mchirveno@clearvision.consulting

Use the comments section below to benefit other business owners and managers by sharing insights you gained by working on this week’s challenge.

 

The One Year, Thirty Minute Challenge :: Week One :: People :: Critical Path

List three people whose absence, if they quit or were unable to work, would have significant operational impact on the business.

  1. _______________________________________
  2. _______________________________________
  3. _______________________________________

 

For each of those people, identify the operational impact.

  1. ________________________________________________________________________________________________________
  2. ________________________________________________________________________________________________________
  3. ________________________________________________________________________________________________________

On the graph below, plot the three people listed above based on their probability of leaving and the risk to the organization if they were to leave.

Presumably, if they made it into this exercise, they’re going to land in the top half of the graph – i.e. their departure poses a risk to the organization. There are two situations that could make a departure particularly perilous –

  • The employee is a critical path component in your company’s delivery of products or services – i.e. if this employee was gone, your ability to generate revenue would be crippled. Depending on the length of the absence and the depth of this employee’s involvement in critical path activities, this could put the entire enterprise at risk.
  • The employee is a single point of failure – i.e. this employee is the only one who possesses a particular skill or a particular body of knowledge.

 

In either of these situations, the urgency for addressing a departure ratchets up significantly. For this exercise, the action items below assume the only variable is the employee’s decision to stay or go. However, no person or company is exempt from unplanned events. That being the case, addressing these Critical Path employee issues is always urgent even if the current employee(s) is the most loyal and dependable in the organization.

For all the employees in this exercise (on both sides of the vertical axis), create the list below.

Employee Most Critical Skill Successor Percent Ready
Mary Set up new vendor Hannah 50
Bob Enter new orders Alice 20
Mary Do Payroll Steve 0
Tim Update Admin Settings in CRM Sarah 80

It’s possible, maybe even desirable, that a single employee will be listed more than once. If they have more than one critical path skill or single point of failure capability, you might want to split those skills and capabilities among multiple successors thereby eliminating the single point of failure. List the successors and their percent of readiness.

Create an action plan for each successor to make them proficient in the critical path responsibilities. The plan should include –

  • Knowledge to acquire
  • Skills to master
  • Experience to accumulate
  • Relationships necessary for execution and support

 

Assign mentors for each activity (it might be someone besides the current employee), establish milestones and set target completion dates. Check in with the mentors and successors to ensure that skills transfer is taking place.

If you have no one in the organization who could successfully execute the work of these critical path employees, start the process of recruiting, hiring and onboarding suitable successors. In addition to your normal regimen of finding new employees with shared values and cultural fit, add the skills required for these tasks to the job requirements.

Finally, for those employees who plot to the right of the vertical axis (high risk to the organization and likely to leave), move quickly to mitigate the risk. What can you do to keep them in the organization until you’ve identified and trained a successor? If they are seeking greater challenges, can you assign them more interesting work while they identify and train their own successor? Given the critical nature of the activities it might be unlikely, but can you identify a vendor, contractor or consultant who could step in if the employee’s departure put the business at risk?

Finally a bit of homework (definitely more than the 30 minute exercise). Document the work of every critical path employee. Create documentation that details –

  • The “why” behind each of their activities
  • The people they interact with to accomplish the activities – vendors, customers, peers, supervisors and subordinates
  • The systems they use (including usernames and passwords)
  • The data they enter into those systems
  • Any equipment they use to perform the work
  • Who they call if that equipment malfunctions
  • Any materials they use to perform the work
  • Where they obtain replacement materials
  • Any reports they use to inform their work
  • Any notifications they make prior to, during or after the work
  • And finally, complete, step-by-step instructions for the work itself

If successors are not on board when you start this documentation process, you might have to do it yourself to make sure it’s complete and easy to follow.

If you have questions on this week’s challenge, contact me at 816-509-9838 or mchirveno@clearvision.consulting

Use the comments section below to benefit other business owners and managers by sharing insights you gained by working on this week’s challenge.

 

Would you be disappointed if 2020 looked exactly like 2019?

I’ve been asking myself that question. And now is the right time to ask it. The time between now and mid-December has been called the “100 day sprint” or “the most important 100 days of the year”. Why? Because everyone is back in the office after summer, back in the routine and hunkered down for a busy three and a half months. For some companies, it’s the run-up to a busy holiday season. For others, it’s time to prepare 2020 strategic plans and operating budgets.

In a very real way, the foundation for your organization’s 2020 is going to be laid in the next 100 days. Do it well and 2020 could be your best year yet. Do it poorly or don’t do it at all and 2020 might be just a carbon copy of 2019.

So, what should you be looking at right now? I have a longer list, but if you can’t swing a full-blown strategic planning exercise (which, in my opinion, you should commit to), I’d turn my attention to these four items first –

  • Ask hard talent questions – Do you have the right people in the organization who can take you where you want to go in the next 2-3 years? If not, can you develop existing staff or do you need additional talent? Do you have chronic personnel problems you’ve been reluctant to deal with – people who are poisoning the culture or who are consistently under-performing? If so, what are you going to do about it? Are there one, two or three people, who, if they left, would put your organization at risk? If so, what have you done to mitigate that risk?
  • Gauge organizational health – Is the company culture healthy? For example, is there clear and complete communication up and down the org chart? Is there transparency so that people have the information they need to make good decisions? Are you and are the other leaders in the organization setting a good example in your approach to work and in your interactions with every stakeholder group?
  • Reexamine value creation activities – Do you know the key drivers of the value surplus for your customers? When was the last time you examined your entire value creation chain looking for opportunities to improve vendor performance, inventory management, cross-department collaboration, processes, quality and logistics?
  • Measure what matters – When was the last time you revisited the metrics on your balanced scorecard? Are they really indicative of organizational health? Are your systems providing data quickly enough and to the right people so your field decision-making is data-driven and your longer-term decision-making is data-supported?

Inertia is strong. The pull of ordinary daily days will drag you right into the holiday season before you’ve taken any time to plan for 2020.

I’ve rewritten this last paragraph several times. Originally it said that you’re busy and looking at just these four things is better than doing nothing at all – that’s true. But, I want to encourage you to do the hard thing and take a much deeper dive into your organization. Don’t make 2020 slightly better than 2019. Make it much better by critically and accurately evaluating the current state of your organization, thoughtfully envisioning what you want 2020 to look like and deliberately crafting a plan to get you from the former to the latter.

Balancing Ownership and Operations Responsibilities

It’s been my privilege to work with several family businesses over the last 13 years. In some, the owners have no day-to-day responsibilities, but have turned over operational responsibilities to a CEO or GM. In others, they are both owners and operators. These clients have spanned several industries. However, in one business discipline, for both types of organizations, one challenge is identical, “When owners exercise their ownership responsibilities, on what should they focus?” The problem is more pronounced when, in their day jobs, they have real operational responsibilities. Those demands consistently tug and pull at them, even when they are attempting to wear their ownership hats. But even those owners who have relinquished day-to-day operations to someone else seem to gravitate towards operational problems. I think there are a few reasons –

  • Operational problems are easier – they are more concrete and the solutions are sometimes very clear (or at least the options for solutions are clear)
  • Everyone has an opinion – we all know what we like
  • There is likely some familiarity with the problem, even if that familiarity comes from another life or work experience

However, to effectively position the organization for health and growth, owners need to focus on a few specific items. I created the list below for a family business CEO to guide her family members/staff (who have operational responsibilities) through an exercise during which they could discuss their performance on ownership responsibilities and operational responsibilities. The list below was on the left slide of a table. On the right side of the table was a list of each employee’s specific operational tasks. Below the table were specific questions and performance metrics for each of the bullet points.

  • Culture – Define, model, build and perpetuate it – Culture is the unwritten code of conduct for the organization. It controls the way we treat everyone else in the organization – employees, suppliers and customers.
  • Learning Orientation – Understand that the industry, employees and customers change and so must we. Embrace lifelong learning realizing that we never will “arrive”.
  • Vision – Define the desired future state of the organization – Business composition, value creation, customer experience, investor returns, corporate image.
  • Investment-Grade Decisions – Focus the bulk of ownership decision-making on investment-grade decisions – those that will impact the organization 2, 5, 10 and 20 years from now. Leave operational decisions to those directly responsible.
  • Leadership Succession – What knowledge and experience will those who run the organization in the future need? How will they get it? What is the sequence of events for a family member who wants to join the business?
  • Stewardship – While every owner benefits from the “golden eggs”, their responsibility is to care for the “goose that lays the golden eggs”. How can we best manage the property, equipment, personnel and finances to ensure that the organization continues to generate maximum returns for years to come?

I want to dig a little deeper into each of the ownership responsibilities.

Culture – Peter Drucker reminded us, “Culture eats strategy for breakfast.” Without a doubt, the most important job of an owner is to live the way they want their managers and employees to live. Do you want employees to put the good of organization above their own personal enrichment? Then take a smaller dividend at the end of the year so you can reinvest more in the business. Do you want employees to be good stewards of the organization’s resources? Then don’t use any of the organization’s assets for your own personal use. Do you want employees to treat every customer like they’re the most important one – even if they generate very little revenue? Then show extraordinary kindness to every employee regardless of their place on the org chart. You get the idea. Your example has far greater impact than the mission statement posted on the lobby wall or the employee commitment that the employee has signed.

Learning Orientation – Ego is the enemy – always has been, always will be. As soon as we believe we’ve figured it out, we’ve started the countdown timer for the end of our business. The founding generation and successive generations may have done everything right in steering the organization to its current state, but their brilliant work may no longer be applicable in the future. Every business that wants to survive must engage in creative destruction (Joseph Schumpeter)– regularly replacing outdated production units (products or services) with new production units that are birthed by innovations in both in product and process. Embrace the core principles that make your organization what it is fundamentally, but “kill all the sacred cows” that keep your organization from effectively creating greater value for current and future customers. Keep growing. Keep asking good questions. Keep hiring people who have your core values but approach the world differently.

Vision – No one has a bigger stake in the game than those who have invested their resources in acquiring and operating the business. And no one should have a clearer picture of what that business could or should be. Sadly, I’ve run into several circumstances where that is not the case. Managers or staff members see much more potential and promise in the organization than those who own it. They have a greater awareness of the organization’s challenges and greater clarity of the incredible upside if new markets, products or services were added. Many times, the vision of the founder, which might be several generations old, is still the mold for the business. There’s nothing wrong with that if the vision is big and embraces the change that inevitably happens over the course of time, but frequently that’s not the case. Owners must ask hard questions about the continued viability of the business model (how do we create value and is that value sustainable), the need for ongoing revenue and asset growth and the perception of the organization with customers and in the industry. Then they must craft a vision that clearly depicts a desirable future state for the organization.

Investment Grade Decisions – The challenge of building something that will outlive you is pretty daunting, but that’s the purview of owners. Whether your exit plan is to sell the business, get a payout from the business, pass it on to the next generation or something else, today’s investment decisions make those future plans possible. With the vision firmly in hand, the challenge is to make decisions that truly merit board attention – markets to enter, product categories to launch and facilities to build. It’s tempting to spend time talking about buying delivery trucks, replacing computers and painting bathrooms, but the management staff is more than capable of making those decisions. Give careful attention to the capital and operating budgets at the beginning of the year and, within those constraints, leave those decisions in capable hands. If there’s a seismic shift in the world during the budget year, it’s certainly appropriate to revisit the budget. As the organization grows in size and complexity, there will be increasingly more operational things that clamor for your attention. That makes your commitment to entertain only investment-grade decisions even more important.

Leadership Succession – I didn’t list these in order, but if I did, this probably should have been pushed further up the list. Very few things are more important than the people who are leading the organization. Owners, especially those who have chosen to turn over day-to-day operational responsibilities to a CEO or GM, must be diligent to find, support and invest in the person who will act in their stead every day. For those owners who have operational responsibility, DNA doesn’t automatically equip those in your family tree to successfully lead in the organization. So, whether it’s in the family or someone else, what readies someone to take the reins in the organization? Organizations that successfully pass the torch from one leader to the next are very deliberate about defining the hard skills, soft skills, knowledge and experience that must be present for those in key positions. Then, they make sure they put potential leaders in positions to build those skills. Let me hasten to add this, once the leader is in place let them lead. I hate to pull out an overused quote, but this one from Steve Jobs is pretty good, “It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”

Stewardship – These stats from the Family Business Alliance should give us pause – More than 30% of all family-owned businesses make the transition into the second generation. 12% will still be viable into the third generation. 3% of all family businesses will make it to the fourth generation and beyond. Every time I read these stats, I think about Aesop’s fable, The Goose and the Golden Egg. If you don’t remember it, a man possessed a goose who laid a golden egg every day. Over time, the man became dissatisfied with just one golden egg every day. He decided to kill the goose and get all the eggs at once. He killed the goose and cut it open. He found no golden eggs inside and the goose was dead. While every owner should enjoy the financial rewards from their business, the ability to change the financial trajectory of an entire family is a wonderful gift. Those who are inclined to take advantage of the opportunity must skillfully manage the resources of the organization so that it continues to create value for customers and generates adequate returns for future generations of owners. To borrow from the fable, enjoy the eggs, but your primary responsibility is to nurture and care for the goose.

Ownership is not for the faint of heart – whether you’re involved in day-to-day operations or not. The challenges are many and the stakes are high – many times effecting the lives of family members and employees who depend on us. That being the case, I want to remind you of something we learned from Gary Keller in his book The One Thing. We don’t want to run the organization the “best we can do it”. That implies that the ceiling is our current level of skill and knowledge. Instead, we want to run the organization the “best it can be done.” The distinction is subtle, but it carries with it a commitment to stay hungry, stay curious, learn, grow and be the best owners we can be.

Flywheel and V-REEL

I recently read Jim Collins newest book, Turning the Flywheel, in which he drills down on the Flywheel concept introduced in Good to Great. For a quick refresher, the flywheel for an organization is a virtuous cycle of actions, each building on the previous, that, when executed consistently and with excellence, build self-sustaining momentum for the organization. To illustrate, I’ve included the flywheel for my company below.

ClearVision Consulting Flywheel

You can see how each action propels the organization into the next. As intensity and depth of effort increase on every rotation, velocity also increases, accelerating the growth of the organization and making it healthier with each turn. As the flywheel turns faster and faster, the weight of the flywheel, which early on seemed to work against you as you struggled to execute each action, now begins to work for you and the flywheel becomes almost unstoppable.

I was introduced to the flywheel several years ago when I first read Good to Great. Like a lot of Jim Collins’ material, it’s an enduring bit of business genius. But when I revisited the topic this time through the new book, I couldn’t help but think of how well it paired with the V-REEL framework from David Flint’s excellent 2018 Book Think Beyond Value.

In Think Beyond Value, Flint introduces the V-REEL framework – a tool that helps business owners and managers think through their organization’s value creation activities using fives lenses –

  • How do you create value?
  • How rare is that value?
  • What factors erode that value?
  • What factors enable that value?
  • How long can the value be sustained?

It didn’t take long to make the connection between the two tools. The flywheel is a virtuous cycle of value creation activities (Flint’s first question). Those activities only remain valuable as they differentiate the organization and make their product or service unique or desirable in the marketplace (Flint’s second question). Stewards of the organization must constantly be vigilant for those factors, both internal and external, that impede or diminish the effectiveness of the flywheel activities (Flint’s third question). At the very same time, they need to infuse those flywheel activities with resources that make them more effective and efficient (Flint’s fourth question). And finally, stewards of the organization must ensure that the flywheel activities continue to build sustained competitive advantage for the organization – that is, they still have meaning in the current competitive environment (Flint’s fifth question).

There are only a handful of business activities that approach “holy grail” status and value creation is one of them. I hope introducing these two tools helps you step back and take a fresh look at your value creation chain. A 500-word post doesn’t come close to doing justice to either of these two books, so I hope I’ve sufficiently whetted your appetite to hit your favorite bookstore (brick and mortar or online) and pick them up. Here they are on Amazon:

Turning the Flywheel

Think Beyond Value

I Want to do for Strategy what Chip and Joanna Gaines did for Shiplap

I’m going to go out on a limb here and guess that six years ago, you had no idea what shiplap was. Neither did I. But thanks to Chip and Joanna Gaines and their hit HGTV show FixerUpper, shiplap is now part of the national consciousness. Everyone wants at least an accent wall’s worth of six-inch, horizontal wood goodness in their home.

Even though shiplap has been around for decades, it took someone to champion it – to sing its praises to a new generation of homeowners. I want to do for strategy what Chip and Joanna Gaines did for shiplap.

I love strategy –

Truthful evaluation, thoughtful options and deliberate actions to move an organization from the current state to the desired state.

Leaders in every organization feel the tension of the gap between where they are and where they want to be. That tension is supposed to be there. It’s one of the things that gets us to the office, shop, kitchen or factory every morning. But tragically, many leaders feel the pressure to close the gap but lack the tools to make it happen. Leaders randomly marshal the resources of traditional functional areas like marketing, production, finance and HR to transform the organization and close the gap, but in the absence of an overarching discipline that coordinates the objectives and work of these functional areas, the transformation is uneven and short-lived and the organization reverts back to business as usual. Businesses of 6, 8 or 10 people need the same overarching discipline, just like businesses of 6, 8 or 10 thousand.

That’s why I love strategy. It’s the neglected discipline – the one that, when employed, spurs conversation, creates collaboration and generates a singular focus for the organization. It’s the discipline that deliberately and methodically moves the organization to where it wants to be and, in the process, engages and builds up everyone involved.

Just like every homeowner who says, “I’ve got to have some shiplap in my house”, if I can get a business owner or manager, no matter the size of their enterprise, to say, “I have to incorporate strategic planning into my organization”, I’ve done my job. And if I have the privilege of helping them in that process, that’s a bonus.

It’s Not Personal. It’s Strictly Business.

Paramount Pictues

I received a referral for a new client a few months ago. The person who sent it was certain this business owner could benefit from working with me. Given the strength of the referral, I worked especially hard to make contact with the prospective client/business owner. I just did a quick count of the text messages we exchanged – 55, plus phone calls and two in-person meetings. For the last meeting, at his request, I spent the morning in two of his team meetings. Over lunch, as I reviewed what I heard and saw that morning, I made a couple of initial observations that I thought were pretty insightful. Apparently he agreed since he stopped me in mid-sentence and used his iPhone to email my recommendations to his staff. This happened twice during our meal.

I prepared a proposal and sent it within a day or two. Needless to say, I was feeling pretty good about landing this one. I had already provided a ton of value and completing the items in the proposal would have added additional top line revenue and improved customer retention.

A couple of days later, my proposal was rejected. I’m not sure why, but this one was particularly gut wrenching. I had worked really hard to prove my worth to the organization by providing value from the beginning of the relationship (This was typical of the way I work with a prospective client. I don’t sell. I just start consulting.) But since my initial recommendations were so enthusiastically embraced, I figured this was a done deal. FYI, in the time since this happened, I’ve seen one of my initial recommendations implemented via content in a customer email blast that I’m now subscribed to.

In the midst of all this, I thought about a well-worn quote from the Godfather. As the Corleone family discussed killing the person who attempted to murder their father, son Michael assured the rest of family the motive behind the planned kill was “not personal, but strictly business.” I’m not attempting to draw any equivalency between a rejected business proposal and planning a murder, but hear me out. Even though my rejected proposal was just business, it felt personal. There was an extra sting to this one because of the effort I had poured into it.

In reality, in the daily press of work, it’s business AND it’s personal. When we pour our passion, care and best effort into our work and it’s unappreciated, ignored or rejected, it feels like a punch to the gut. When our best proposal, painting, computer program or chicken parmesan isn’t good enough, it stings. It makes you want to gather up your stuff and go home. But would you want it any other way? I can’t imagine many things more miserable than work without passion. We long to leave a large piece of ourselves in every work product. We couldn’t live with just “mailing it in.” I’ve found the sting to be especially acute for business owners. Since everything about the organization is “them” – the product or service, the marketing, the sales, the delivery – when rejection comes, it feels especially personal.

So how do you navigate through when business feels personal?

I’ve told clients more times than I can count that your worth is NOT what you do at work. That is solid advice. If our worth is tied up in what we do or who we make happy on any given day, life will be a roller coaster – riding high today and in the depths of despair tomorrow. Work is fleeting. Find your worth in something that cannot be taken away. I find mine in my Christian faith. Find yours.

Divorcing our worth from our work is the foundation, but here are three practical things to do when business feels very personal.

  • Remember why you do your work the way you do it – You do it, because that’s the right way. Your training and experience inform the methodology and the result. Your work is your autograph. You’d do it that way again even if there were no audience, because that’s the way it ought to be executed. Take satisfaction in a job well done. If you knew a better way, you would have done it that way. If, by chance, you produced a sub-standard product this time, own it and fix it next time.
  • Commit to deeper learning and improvement – On the heels of doing the job the best you can do it, realize that all of us can improve our craft. We can all learn and grow. Use being rebuffed to motivate you to dig deeper and get smarter.
  • Use the rejection to narrow your focus – Simon Sinek would tell you to find people who share your “why”. Seth Godin would tell you to find your “tribe” – your smallest viable audience. When your work is rejected, understand that it wasn’t for them and use the feedback or in the absence of feedback, use the experience to close the circle a little more and produce work for people who are aligned with your values, share your taste and appreciate your approach to work.

The next time business feels personal – and it surely will – own it. Be glad you have a job you care that deeply about. And instead of buckling under the disappointment, harness it for your benefit.

Can Long-Term Strategic Initiatives and Day-to-Day Activities Co-Exist?

When a new initiative is rolled out in an organization, it’s often with a great deal of hype and enthusiasm. Everyone buys in and adoption is good, but then work life starts to happen. And that’s the problem with work life – there’s so much of it. The initial enthusiasm for the new initiative gets swallowed up with mundane everyday activities. Pile on top of that urgent matters that require immediate attention. Sometimes the urgent matters are problems – remedying a customer issue, dealing with an under-performing vendor or working with a wayward employee – but they could just as easily be a new opportunity that must be capitalized on now. These all conspire to drain needed resources from the new initiative. Many strategic plans, new sales campaigns and quality programs have died at the hands of work life.

What if there was a framework that you could employ during work life that let you navigate mundane activity, address urgent matters AND push everyone involved forward towards the overarching initiative?

In the end, the success of every new initiative is about execution. Execution that pushes the initiative effectively through the organization and into the work-a-day world of every executive, manager, supervisor and front-line employee. The Everyday Framework is a series of steps that reframes the mundane and the urgent and aligns them with the overarching initiative (if possible) and strengthens the organization. The exciting thing about the framework is that it’s easy to use for managers and supervisors and it’s easily “caught” so that everyone in the organization can apply it.

Reframe the Task – Stephen Covey reminded us to “Begin with the end in mind”. When navigating the mundane, fixing the urgent problem or capitalizing on the immediate opportunity, work to identify and verbalize how that task pushes the organization towards the overarching initiative (strategic plan, new sales campaign, etc). To illustrate, let’s say one of our new long-term strategic objectives is to decrease product delivery time from four days to two days for 90% of all orders. Today’s issue has to do with billing for an order from a brand-new customer. The customer wants to set up an account and be billed since they plan on doing more business with us in the future. However, upon submission of their billing information, we find some problems with their credit information and even find some unfavorable credit reporting in an industry reference publication. We could work with the employee who reported the problem to get this new customer set up and billed (and we should), but it would be best to reframe this problem and examine it in the light of our strategic initiative. In order to get this new customer his or her order in two days (in fulfillment of our long-term initiative), do we need to make changes to our order process to identify problems like this earlier? Do we need to look for a way to programmatically check credit reporting when the order is submitted online? Do we need to change the sales process so prospective clients with credit problems are excluded from the sales pipeline? Reframing problems – and slightly expanding their scope if necessary – attaches larger meaning to the problem and makes solving the problem tactical instead of operational, moving the organization closer to reaching its long-term initiatives.

Say No – Tied closely to the previous step is this one. If addressing today’s “new, great opportunity that must be acted on now” doesn’t push the organization closer to meeting its long-term initiatives, maybe you should just say no. Sometimes it’s difficult if the shiny new thing comes from someone at the top of the organization, but that’s the beauty of the framework. If everyone uses it, then every team member knows that every activity – mundane task, urgent problem or emerging opportunity – is subject to the same scrutiny. And if it doesn’t push the organization towards reaching the long-term initiative, the answer has to be “no”, at least for right now.

Put Employees First – This isn’t the right time for the “are employees the most important stakeholders?” discussion, but there’s no doubt they are an essential part of the organization. When urgent problems surface, they are, most of the time, screaming to be solved right now. Our natural reaction is to solve them ourselves or get them quickly to the person who can solve them best and fastest. What about using urgent problems as a training opportunity. Take an employee who has the requisite knowledge to solve the problem but has never had the opportunity and walk them through it as you solve it. Or pair them with the staff expert in solving the problem and let them walk through it together. It might take slightly longer, but afterwards you’ll have a deeper bench. If today’s urgent matter is an emerging opportunity, show the employee how you step through an evaluation to make the determination whether to pursue it further. This helps the employee to see how you evaluate opportunities in the light of the organization’s mission, vision, values and current long-term initiatives. If you give employees a raise every year, but never invest in their growth via training, your ROI on that employee diminishes – i.e. more money for an employee with the same skills.

Go from the Outside In – In the press to make to make problems go away or make the internal processes behind our mundane tasks easier for us, we occasionally make decisions that generate unintended consequences. Many times, the recipient of those consequences is not us, but our customers. By making life easier for us, we make it harder for them. Amazon famously sits an empty chair in every meeting. That chair represents the customer. It’s a physical reminder to make decisions that get the customer better products and services, make transactions more frictionless and deliver more value for their money. When problems surface, start with the customer perspective and work inward, navigating through the company’s internal processes. Solve the problem so the customer wins.

Start Small – Researching a new problem or sometimes navigating the most routine task occasionally exposes a much larger problem – one that is going to be expensive and time-consuming to solve. Since many times the problem is urgent, we’re tempted to throw resources (money, talent) at it so we can get back to business as usual. In the heat of the urgent moment is not the time to authorize a large expenditure. Jim Collins, in Great by Choice, taught us to “fire bullets, then cannonballs” – that is start small, spend the least amount of resources possible on a potential solution or opportunity, work out the kinks, prove our market or methodology then, after careful evaluation of the “bullets”, invest more heavily in a permanent solution (cannonballs). Don’t be pressured into long-term fiscal irresponsibility to solve a problem that’s causing temporary discomfort.

Be Accountable – The framework ceases to function if this piece isn’t in place. Every person at every level of the organization must exercise ownership for the success of the overarching initiative, the urgent problems that surface and the routine tasks of everyday work. Those who lead the organization must set the example, prioritizing their work so that urgent matters never overshadow important ones. Leaders must model the steps –

  • Reframe Daily Tasks in the light of long-term initiatives (a strategic plan, a new sales campaign, a new quality program, etc)
  • Say No to the daily tasks that don’t push the organization towards fulfillment of the long-term initiatives
  • Put Employees First by using immediate tasks as training opportunities, teaching new skills and how the immediate task aligns with long-term initiatives
  • Go from the Outside In by keeping daily problem solving customer-centric
  • Start Small by spending the least amount of resources on immediate problems and routine tasks thereby preserving resources to achieve long-term initiatives

 

Being accountable means owning a task until it is completed. It means taking responsibility for research, communication, execution, documentation and follow-up until every “t” is crossed and “i” is dotted. It means giving up the right to blame another employee, department, vendor or customer or counting on them to fix it. It means wringing all the learning out of problem or opportunity, so you can put the knowledge in your bag of tricks for the next time.

The Everyday Framework embraces Jim Collins’ “genius of the AND” operationally. Complete mundane daily tasks AND stay focused on long-term initiatives. Solve immediate problems AND develop employees. Evaluate emerging opportunities AND preserve resources to execute long-term initiatives.

Maybe I should have led with this, but here’s why the Everyday Framework is so important. Organizational growth, both financially and operationally, must be deliberate. Leaders often craft plans to make that growth happen. But, more times than not, those plans remain unexecuted because they’re simply overshadowed by the press of daily activities. Leaders can’t “will” their teams into execution, because team members lack the tools to balance or prioritize the conflicting demands of long-term initiatives and immediate tasks. The Everyday Framework is that tool.

The Best Methodology for Aligning your Team Probably Surfaced in 1982.

Commander’s Intent first appeared in the US Army Field Manual 100-5, Operations in 1982. However, it wasn’t original with them. It was borrowed from the Germans who developed it as they fought Napoleon during the French Revolution. The Germans called it Aftragstaktik.

So, what does this 225 year-old methodology have to do with your organization in 2019? Traditionally, military operations were centrally controlled. High ranking officers would diligently plan troop movements and equipment deployments, carefully orchestrating every skirmish. But, when the first bullet was fired, the plan immediately became outdated. Enemies didn’t respond as anticipated, equipment malfunctioned, soldiers were wounded or killed and couldn’t execute the carefully conceived plans. At that point, troops up and down the chain of command were paralyzed or limited in their ability to respond because they only had the original plan and when it became impractical or impossible to execute, they had to improvise which may or may not have been in the best interest of the mission or in the best interest of their fellow soldiers.

Enter Commander’s Intent. Commander’s Intent succinctly describes what constitutes success for the operation – the final desired end state. At the outset of a mission, the ranking officer would describe to a small group of subordinates the desired end game of a mission. The officer would also define guardrails for these subordinates and give them authority to make decisions within the bounds of these guardrails all pointing towards the successful completion of the mission. These subordinates would then pass the strategic intent of the mission to their small group of subordinates and define for them a more narrow set of guardrails between which they could make independent decisions all while pushing towards the successful completion of the mission. This repeated until the lowest ranking soldier in the fight understood the Commander’s Intent. With the Commander’s Intent well in hand and the span of control understood, officers and soldiers up and down the chain of command could more easily respond to rapidly changing conditions on the battlefield and, with their understanding of the end game, make adjustments that took into account new realities and pushed towards the successful completion of the mission. Paralysis and indecision were replaced by real-time intelligence gathering and mission-appropriate “counter-punching”.

These are probably obvious, but there are a few key ingredients in this process and everyone involved must buy in –

  • Everybody must be crystal-clear on the end game (i.e. the Commander’s Intent). It is the responsibility of superiors to explain it simply and fully and to spell out the “why” behind it. It is the responsibility of subordinates to keep asking questions until they get it and the rationale behind it. Nothing less than full understanding up and down the chain of command will do.
  • Everybody must understand their span of responsibility. The guardrails must be clear so that everyone knows what they control for themselves and their subordinates.
  • This crystal-clear delineation of responsibility must be accompanied by trust. Because subordinates have clear visibility into the thinking of superiors they can see the strategic value of the mission. Because superiors have clearly defined the outcomes and span of control, they can trust the field-level decision making of subordinates knowing they will be aligned with fulfilling the Commander’s Intent.

The application in your office, factory or farm is apparent now, but let me make one more important point. To make this work, ego must be put in check. Will every downstream decision be perfect? Doubtful. Will there be an expensive mistake from time to time? Probably. But the growth in your team and the improvement in dynamic decision-making skills in your organization will more than make up for it. This is the methodology for building agility in your organization. Your challenge as the boss is to relinquish autocratic control. To make this work, you must embrace your responsibilities as leader, coach and teacher.