How To Effectively Scale Your Business

Chris: Hello everyone. I’m Chris Ronzio, founder and CEO of Trainual. And this is Process Makes Perfect. As always, we’re talking with experts in process creation, automation, and delegation. Basically, the people that know how to make business easier. And today we have with us, Verne Harnish. Verne is the authority in Scaling Up. So much so that he literally wrote the book called Scaling Up following the success of his other two books, The Greatest Business Decisions Of All Time and Mastering The Rockefeller Habits. And I’ve got to say our customers talk about these books nonstop, so amazing books, highly recommend them. He’s worked with thousands of organizations helping them grow successfully and efficiently. And he even founded the Entrepreneurs Organization, or EO, which is a top hub of over 14,000 members across the world. Verne’s the CEO of Scaling Up, which is an executive education and coaching company. And his work has been a huge inspiration for me and growing Trainual from the principles of scaling up, to being a member of eight years of EO. Our brands even share the same color, purple. So Verne, thank you for being here.

Verne: You got it, Chris. Glad to be on the show.

Chris: So I’d love if you would share with our listeners the inspiration maybe, so before EO, before Scaling Up, these principles were obviously founded somewhere. So what kind of gave you the aha? Where did you craft the ideas that went into these books?

Verne: Yeah, so my dad was a successful business person. I kind of grew up around entrepreneurs. Then when I got into college, I helped kinda grow about a $12 million company and ultimately join one of our board members, Dr. Fran Jabara, the late Dr. Fran Jabara, and building the Center for Entrepreneurship. And that’s when I launched ACE, the Association of Collegiate Entrepreneurs. Ultimately then YEO, the Young Entrepreneurs Organization. became EO and, and YEO kind of an organization that we’ve mirrored ourselves around had an executive program at Harvard. So make a long story short, structured to deal with MIT launches a course called Birthing of Giants back in 1991. And as you know, there’s [a] curriculum for startups on every street corner. And I have an MBA which is supposed to help you scale a large company or run a large company, but there wasn’t anything in between the startups and the grownups in terms of the curriculum for what it took to scale. And so launching that executive program with MIT in Inc Magazine, we developed a curriculum, moved about a thousand CEOs through that, many of them who are well known today, and then codified it in a book mastering the Rockefeller Habits. So that was really the genesis of what is Scaling Up, Rockefeller Habits today.

Chris: I love it. And so that book Scaling Up has been so influential and it was actually the content of that book in your coaching program. That formed I think the accelerator program, which is where I started. Is that true?

Verne: It is. So 15 years ago we competed, and we won the contract and it’s our tools, people strategy, execution cash that had been at the heart of the EO Accelerator program. So it’s been a huge honor for me being its founder.

Chris: Amazing program. So we’ll get into the tools in a second. But in another interview you did, I heard you say that there are something like 11,000 startups every hour…

Verne: Every hour, every hour. We’re not hurting for new companies yet in the United States we’re lucky 3% of those companies scale up. In the rest of the world, it’s less than 1% and so you’re quite rarefied Earth if you can get beyond just you as the sole owner and employee of the company.

Chris: So broadly, before we get into the specifics, you know, what do you see is the top couple things that people can’t breakthrough in order to pass that million-dollar threshold?

Verne: Yeah, I actually outline in one of the early chapters of scaling ups called The Barriers, and we really identified three. The first is really right between your own ears. It’s your own mindset, it’s your own education. So we called it Leadership Development and the importance of really developing everybody through the organization. Look no one taught you, there is no manual, and we needed to create the manual for it. Number two is scalable, which gets right at the heart of what you guys talk about around process. And at some point, you can’t keep track of the business any more on bits of paper. You’ve got to start putting systems and processes in place in order to manage the complexity that comes with scaling. And then number three, it’s very functional specific, Chris, and this was [the] research that Dr. Ed Roberts, the senior fellow at the Sloan School at MIT first discovered the key function if you want to scale, is marketing – separate from sales.

Verne: And you need marketing not just to attract customers, but talent, investors, even attention in the marketplace. So the three barriers, leadership development, scalable infrastructure and marketing.

Chris: I love that you said marketing, and I want to touch on that for a second because for me it was a mental barrier that I was not a marketer and for so long I thought of myself as an operations person. And I think a lot of startup people do, they use that as an excuse where maybe they’re good at the thing, but they’re not good at marketing. So do you see that as a challenge and is it a mental thing to overcome?

Verne: Yeah, it really is a mental thing. Cause what’s interesting is marketing is very cerebral. It’s very logical. It’s very numbers-driven. You actually want kind of the walks, engineers, I mean folks who go into marketing had, have backgrounds in mathematics and physics, Steve Jobs his favorite subject, everyone hears about is calligraphy course, but he loved physics and history, very analytical kind of subjects.

Verne: It’s why he ultimately led the marketing function at Apple when it truly scaled. And so marketing is an analytical function different than sales, which is really a relationship function.

Chris: And I had no idea how process-oriented it was. I thought marketing is just the creative people on the whiteboards, but it really is just tracking metrics, right?

Verne: Yeah, it’s super process-driven and that’s why again, the analytics are the ones that you ought to be hiring and look into to drive marketing.

Chris: Okay, great. So let’s get into some of these growth tools. You mentioned them, they’re on the website, they’re fantastic resources. And there were two in particular that stood out for me, were really influential for me as I was building my companies. The first is the One-Page Vision Summary or the One-Page Plan I used to call it and I’ll just leave it to you to kind of open up what this is and why it’s so important.

Verne: Yeah. You know we talked about as you scale, the key is you’ve got to get everybody on the same page, but you’ve got to have the page for everybody to get on. So we became well known in the first book, Chris, with the One-Page Strategic Plan. Now it was a big one-page. It was an 8.5 by 11 sheet of paper. And so when I wrote the new book, Scaling Up, we said let’s have a summary because the One-Page Strategic Plan is quite detailed. There’s, every item on there you need to figure out if you really want to scale successfully, but it’s not all the things that everyone else in the company needs to know. And so we took the key items off that original one-page and put it into this vision summary, and it really has three components. Top is what you might call the vision, and that is four components. It’s the big hairy, audacious goal. Where are we going to be in the next 10 to 25 years? And even in turbulent industries like technology, Mark Zuckerberg put out a 10-year plan for Facebook. So the vision summary really has three components. The top third really summarizes what you call your broader vision? And it’s got four components. The big hairy audacious goal, your 10 to 25 year. And then what are your general rules? We’re going to call those core values. What are the boundaries, your three brand promises and then what’s that bigger ‘why’ than just making money called the purpose. Once you’ve got that, then the middle third is, okay, given our vision, what do we have to do this quarter, this year in the next three to five years? And then the bottom third says, all right, given that, let’s go to each individual or team in the company and say, okay, what can you do to contribute?

Verne: And that way everyone’s got a very clear long, medium and short term look at where we’re headed with the company.

Chris: So if someone was to work on their system, the system of their business, is this the place to start? This is the thing to do first?

Verne: It is, yeah. It’s going to be the foundational decisions that they are going to drive all the rest of the decisions in the organization. And then as you know, we created a tool we call pace and you really have got to pick up the pace within the organization. That’s our process accountability chart. Because, one of the things that happens is we get so focused on the functions of the business – and we have a tool called FAC the Function Accountability Chart – hey, we’ve got to get accounting rite, and sales, and marketing and HR, and IT and operations, that we forget that the real work occurs across those various functions.

Verne: This set of four to nine processes that drive companies, and just as you’ve gotta be clear, who’s accountable for the function, who’s driving marketing? You’ve got to be clear who are driving each of these four to nine processes and ultimately those accountabilities need to roll up to the head of operations. It really should be your COO or head of operations, that kind of number two person whose job is, once you’ve said, this is what we’ve got to do, they’ve got to figure out how we can do it the most efficient way possible.

Chris: Okay, so you just said a bunch of stuff and I want to unpack this a little bit. Alright. The first thing, the vision summary, when you’re putting this together, this is the thing to write down and share with all of your employees, how soon should you do it? Should you do it at day one of the business? Should you do it before you hire the first person? When do most companies do this?

Verne: Well, you want to layout an initial vision, but it does take five years. It’s like a child. Their personality really isn’t baked in until they’re about age five. Now it’s interesting, and the research is clear on this, their personality at age five is just going to be a more hardened self of the age at age five when they’re 55. Same with the company. So it took five years for Airbnb to figure out what they were going to be when they grew up. Even these unicorns, it takes roughly three to five years to figure it out. So don’t carve anything in stone. You’re going to do a lot of iterations with lots of different customers and product offerings until you finally figure out, “Hey, this is what we want to be when we grow up.

Verne: But once you’ve hit that five-year mark and you’ve kind of put it down in stone as Atlassian did, they were about three-year mark, and we helped them use the Mars mission to discover their core values. And they went from 50 employees that 3,500 employees in a $32 billion market cap. But what hasn’t changed are those initial core values they discovered back when they had 50 employees.

Chris: It makes sense that you say five, I read somewhere that the ideal time to go public to IPO would be six to 10 years. You’ve got to figure out the foundation first before you really skyrocket. Right? Yeah.

Verne: And side note, everyone’s delaying now going public. And there are some real financial reasons for that.

Chris: Okay. So you, you start to write things down, you share at least the vision with the employees about where we’re going. The rules about our workplace and what makes us who we are and what everybody’s responsible for quarterly and for the year. So now the process accountability chart, the first time I filled this out, it was me in every box. And I’m sure you’ve seen that with the, with the real micro-companies. So as you start to hire different people for each of those functions to take on and own each of those processes, how do you handle that kind of division of cells? You know, where one person does everything and it goes from then 10 people or 20 people. How do you, how do you navigate that most efficiently?

Verne: Well, first I want to back up. You know, there’s really three rules about the people that you put in those boxes, and they can be outsourced. You know, I had an outsource bookkeeper when I first started Gazelles, what’s now today Scaling Up.

Verne: So you might not need these people full time, but they absolutely have to pass three rules. Number one, they have to fit your culture. Number two, they shouldn’t need to be managed. If you feel like you’ve got to look over their shoulder and monitor what they’re doing constantly then you’ve got the wrong person. And number three, they ought to allow you, you know, if you feel like you could do it better than they could, then you’ve got the wrong person. I remember my first bookkeeper, Claudia Smallwood, she was a neighbor across the street first I knew culturally she got me because her husband, he was a very successful entrepreneur and she was the early bookkeeper for him. So she got entrepreneurs, and she got the scale of [the] journey. Number two, I didn’t need to manage her at all. I didn’t have time. I would just send over information and magically numbers would come back and every once in a while she’d say, “Hey look, Verne, I know you’re busy. I remember those early days when Bill was scaling, but I’ve seen something interesting in your numbers.” And I’d go like, “Wow, Claudia, that’s helpful.” So there are those three tests of who you put in that box.

Chris: I think micro-management is really just a lack of trust and a lack of trust is a lack of training to be able to do the thing the right way and that people really should wow you or why are they there?

Verne: Yeah, exactly. And look, when you’re starting out and even scaling, none of us have these, you know, extensive corporate universities that large companies do. Now we’ve become that outsource corporate university through our growth institute because we know that if you want a 10x the company, you’ve got a 10x the knowledge of the people within the organization.

Verne: And the whole idea that cheap labor is a competitive weapon is gone according to McKinsey. Beginning of this year, 2019, it’s now smart talent that’s replaced cheap labor as your competitive weapon in the marketplace. So you do need to continue to develop the leader that’s within everyone within the organization. But back to your key question. The other thing is, you gotta be clear what accountability means. It doesn’t mean that you’re the boss that you know at all, that you make all the decisions. It’s the person who has the ability to count the account-ability. And so Laura in our company has the accountability for cash. She literally counts my cash and I get a report every single week that projects out where we’re at and where we’re going to be over the next three months. But, she has very little authority over cash.

Verne: So let’s not confuse accountability for authority. You don’t have to give up your authority just because you’ve assigned accountability to somebody else. And then we’ve got this word responsibility. Who’s got the ability to respond? I want everyone, everyone on my team is very aware of our cash situation at any particular point. And I want all of them – I actually had a teammate call me this morning saying, “Hey Verne, I just want you to be aware of a contractual item that I think is going to negatively impact our cash situation, our cashflow.” And I love the fact that Missy was bringing that to my attention and that she cares as much about my cash as I care about it. So I have authority. Laura has accountability and everyone on my team has [a] responsibility, and we really want to delineate that language within our own organizations.

Chris: Crystal clear. I love the distinction between that. I’m going to share that a lot. So thank you. So the next thing you said is about who owns this. You said it should be your head of operations, the COO,  in the early days. Is it the entrepreneur or how does this change as the company grows? Does it ever shift into an HR function? People operations? How does it shift?

Verne: You know, I think the first hiring decision an entrepreneur makes is their number two. It could just be an executive assistant, but you need somebody who can get your life organized unless that’s you. But most entrepreneurs need that second person. For me, I had recruited this amazing woman when I first launched ACE, Association of Collegiate Entrepreneurs, named Dee and she had worked at a major bell company, Bell telephone company.

Verne: And she came on campus, and she got us organized. We ran as if we were 100x the size that we were. I never could’ve scaled globally in 36 months if Dee had not been there to organize us and me. So you need that person kind of at the very beginning.

Chris: So your first couple of hires, a lot of the companies I talk to hire people that are kind of jack of all trades. They help with a lot of things. And then as you grow, you’re hiring a bit more specialists and more people that are in their lane. Do you see that as a challenge for companies where they’ve gotten their early employees that are very generalists and their later employees that are specialists?

Verne: Yeah, for sure. And I think you stated it well, Marcus Buckingham said, you know, “Good leaders play checkers, great leaders played chess.”

Verne: And so in the early, those jack of all trades are a whole bunch of checker pieces and as quick as you can, you want to get to idiot savant, you know, absolutely brilliant at one thing and probably suck at everything else. And you as an entrepreneur got to be careful that you’re not hiring a bunch of people in your own vision. You need an interesting, strange A-team. If you remember the old TV show, The A-Team and you couldn’t have had a weirder bunch than that. And so I love this book called Change to Strange a by Daniel Cable out of London Business School. And it really emphasizes two points. If, let’s get back and really anchor this people and process thing. To win big, that is, have great margins, have lower marketing costs and higher operating net. You’ve got to be different.

Verne: Everyone talks about it, but look, if you’re not different than you’re going to get commoditized. Now what does different mean? It means if you’re pricing the same as everyone else in your industry, you can’t say you’re different, right? If you’re hiring the same people as everyone else in your industry is, how can you claim to be different? And if your processes run the same as your competition, then you’re not different. And so you need to hire different people. You need to price different and your processes, how you go about the business needs to be different if you really want to have brand margin and lower marketing costs.

Chris: Now one thing I’ve noticed with “A” players, and we have a bunch of them, all of them I would say, is they come in, and they do a phenomenal job at what they’re doing, but they’re motivated to keep growing in the business as well. So when you’ve got someone that does something really well and wants to be promoted or wants to take on new challenges, how do you make sure that the person coming in behind them does things just as well?

Verne: Well, but remember, that’s the job of the person you’re going to promote. Part of what allows them to get promoted is they have already filled for you. And if they haven’t backfilled for you, then they can’t move up.

Chris: I love that. So we, we say get your business out of your brain, it kind of applies to everyone that whatever you know, whatever you do well, you’ve got to be able to teach someone else how to do, for you to grow.

Verne: It’s one of the reasons why Atlassian has done so well. It went public 4.2 billion out 32 billion just, you know, less than four years later. It’s because they built a set of technologies that mainly tech companies use, which give you a common knowledge base. I think every company has got to create its own internal Wikipedia so that because right now if I have any kind of illness, the first place I go is Dr. Google. And the first thing that pops up on doctor Google is typical, you know, web MD or Wikipedia responses, you need to create the similar common knowledge database within your own organization so that if somebody leaves, they don’t take all of this corporate, you know, inside information with them.

Chris: Absolutely. Of course. I’m a huge fan of that comment with Trainual. So how do you actually practically transfer knowledge in a business? You know, a lot of the people we talk to, they understand the importance. They read the books, they go to the workshops and the seminars, but then they go back to the office and they don’t do it.

Verne: That’s why I think you need a coach. No one’s ever achieved peak performance without a coach. I think all of a sudden, because of McKinsey’s comment, overnight training has gotten popular. We have to have smart talent and the book, Trillion Dollar Coach, which is really about Bill Campbell and his coaching of intelligence [at] Entech and all the companies in Silicon Valley. Overnight, having a coach has become hot and sexy. But anyone who works out knows if they have a trainer, they’re going to get further faster. And at a minimum, every one of us can have what Marshall Goldsmith calls a peer coach. And the research is really clear, we will do more for our peers than our boss, we will listen more to our peers than we will our boss. And so it’s important for you to identify just one other peer – for me it’s Sebastian Ross – and you decide what you’re gonna do more of, less of, or different every day, and then you report out every day to that person. We all need this accountability partner holding our feet to our fire if we’re going to make sure we execute on the things that we learned.

Chris: Yeah, I love that. And it could be a text thread with your friend. It could be someone in the organization, a Slack channel. I’ve got all those things going. So I am a big fan. Okay. So, so we talked earlier about you know, process as it touches marketing. Clearly, it touches the operations of the business, really process touches everything. And so how do you prioritize for your operations leader, where to start, which processes do you nail down first?

Verne: Yeah. So you identify the 4 to 9 processes, and then as the late Dr. Deming said, you can really only work on one at a time, otherwise, you end up with what’s called sub-optimization.

Verne: So how do you choose it? Well we come back to our quarterly theme, you look at the business and you say kind of an Eli Gold Rad, the Goal Fashion, what is the most immediate next constraint to us Scaling Up? It doesn’t mean problem. We’re not fixated on problems. The biggest constraint might be an opportunity that you’re not taking advantage of. But I like this technical term constraint, and then when you choose that constraint, like when my business got in trouble right after 9/11 my constraint was my gross margin. I was running at 42% I needed to get it to 55% and I said that’s going to be my critical number. The thing I’m going to focus on next. Then what you do is you say which of the four to nine processes do I really need to design or redesign, pack or unpack, clean out that’s going to most help me improve whatever that constraint is. And because the knee bone connects to the thigh bone, by unpacking any one process, you are going to touch the others because everything is interrelated within the business. But the key is to identify the constraint, which key process most impacts that constraint. And then that’s the process redesign. And if you can focus on cleaning up, and I, I, let me give you an analogy. I see processes Chris, like hallway closets or garages, you know, they get jumped up and you have a choice. You can either build a bigger closet or a bigger garage or you can go clean it out. And whenever you go in there, clean it out, you find out man, half the clothes, half the stuff in here, I don’t need anymore. You can give it to somebody who could benefit more than you.

Verne: And so that’s the same with the process. Once a quarter you pick one process, you clean it out like your hallway closet or garage. And so if you have four to nine processes, you’re going to get to each process every year or two. And you better revisit it, because again, like your hallway or closet, it could be clean, but a year later it’s jumped back up.

Chris: So if you want to optimize your business, this is something you’re doing constantly. You’re constantly cleaning the closets. And a lot of people say they want a playbook for the business and they’ll make that their quarterly theme or their goal. This broad idea of we’re gonna make the playbook. And I think that’s probably biting off too much.

Verne: Well, but it can be the sales playbook. If you’re holding the for each of the processes. That’s just, I think another way to say process.

Chris: Right, right. Okay. So we’ve talked a lot about process, when should someone put some attention into this? Actually, let me ask this a different way. So we started things off by saying, so many companies never make it to that million dollar mark. You tell them about process, they read your book, they go to the workshops. I’m sure you’ve seen businesses resist this. What happens if they, if they don’t put the energy into this?

Verne: Well they, well look, they’re – companies were scaling way before I came along we just, and we have this like Rockefeller Habits checklist and I’ll bring it into a country like India where literally we have companies, they’re Philippines, other, the companies have been around, Chris, for 130 years, yet they have nothing checked on the checklist. They’re like, how did we survive without doing all this? And all that’s happening is they’ve just got a lot of drama where they’d been throwing bodies at the problem and it’s just costing them money and time. And so you don’t have to do any of this stuff and you can still scale. It’s just costing you excess money and time into the expense you’d like to save some of that. That’s why these tools become important and that’s why our first process we like to put in place in a company is a good communication rhythm, a good meeting rhythm.

Verne: Because the minute you get a second person involved in anything, anyone who’s in a relationship understands this. That fundamental challenge is communication and all it does is just multiply in complexity as you add people to the process. And so that’s what we are communication rhythm. Probably the second thing that we’re most known for next to the One-Page Strategic Plan or vision summary is this day, week, month, quarter annual meeting rhythm, that if you do it right, that right 10% of a typical leaders week span and the right meetings is going to save them 10x the amount of time and emails and messages and drama that they’re going to have to fix afterwards.

Chris: So hang on that for just one more second. So as we’ve grown, you know, we tripled our number of employees in the last six months even. And, and as we’re doing that, we went from everybody in the same room with our meetings to now having department meetings and stand-ups and weekly. So how does this evolve? How does the communication rhythm evolve as someone’s going through this growth process?

Verne: Well, first it does have to evolve. So, you know, one of our early clients scaled about 2,500 employees, 80 locations. And so at 8:45 AM Central Standard Time, all the employees in the field huddled up for 15-minutes and then 15 of those offices each reported to the five kind of regions. And that was from 9-9:15 and then those five leaders of those regions then dialed into the senior team back in Texas from 9:15 to 9:30 and so essentially that entire company that worked across the four time zones of the United States was able to get aligned over 45 minutes and the senior team knew where they needed to go fight fires and put their efforts over the next 24 hours. And that’s what drove them to a billion bucks.

Chris: Wow. So I think like everything else we’ve discussed, scaling is a game of iterations and evolution. And so, you know, we talked about, the growth tools. I highly recommend people go and check those out. We talked about having a coach and you’ve got an amazing organization for that. And again, EO, fantastic resource for growing businesses. So, Verne, I guess if people are looking to follow up with you or your programs, what’s the best place to send them?

Verne: Just go to scalingup.com the name of the book and you’re going to find all kinds of free resources there, up a barriers chapter that you can download for free. So you don’t even have to even buy the book. We’ve got all of our growth tools and I think 12 languages now, the books going into it, 16th language, so we can cut across all those different cultural barriers. And then if you’re a CEO, I really encourage you, I do this thing called a CEO Boot Camp and that usually is a place that a lot of CEOs start, or they come to our Scale Up Summits.

Chris: Fantastic. So whether you attend a Boot Camp, go to a summit, if you get a chance to see Verne speak, I’ve seen him speak a couple of times, he’s fantastic. Read the book. This is the guy. So thank you, Verne, so much for being here and for everything you’ve done to make business easier around the world.

Verne: You got it, Chris. Thank you. And thank you for taking the after chat, get this important education out to your world.

Chris: You got it. All right. Take care.

‍