I created this article series for companies running (or seriously contemplating running) EOS® Traction, Gino Wickman’s Entrepreneurial Operating System® for small-business owners. I run my company on it and found that, while EOS® is extremely effective for management and scaling, the core EOS® materials don’t provide the depth of guidance for the financial component so critical to small-business growth.
These posts are for entrepreneurs who want to polish and improve the implementation of EOS® in their companies by enhancing that financial lens. It can also help accounting and finance professionals be impactful leaders within their EOS® company.
Articles in this series can be found here.
One definition of insanity is doing the same thing over and over and expecting a different result. It’s something I see fairly often with the companies I work with. They struggle to recognize their repetitive cycles, especially the ones that are impeding their growth.
It’s hard to see the environment close to you. We instinctively look at the horizon instead. As a great mentor once told me, “The last thing a fish sees is the water.”
EOS® can be very helpful in identifying some of these repetitive cycles. With scorecards and metrics, you see when the numbers are not moving to where they need to be or that they’ve stagnated. Sometimes the problem is a vicious cycle you need to reroute. Sometimes it’s more of a purgatory cycle where you can’t get out of your own way. Regardless, you can’t seem to get to the next level with your business.
In “Traction”, Gino Wickman talks about “letting go of the vine”. This implies sharing management responsibilities and authority to move the company forward. However, how do you trust the process and get from one stage to the next?
How Do You Break the Cycle?
You need to create a lever inside the systemic cycle or flow of the business. You use that lever to disrupt the cycle.
One young law firm that I worked with found themselves in this position early on. The group of founders/partners had all left large, successful firms to focus on a particular type of client they all enjoyed working with. They had a strong reputation, a great client base and were finding strong early success in their firm. They were also working their tails off.
This success was a double-edged sword. The partners were willing to put in the sweat equity to get their firm off the ground. However, they knew that their working hours would not be sustainable. To accomplish their objectives, they needed to figure out how to grow and make more money. They also needed to better leverage their time.
Identifying the Cycle
Despite their success, the firm had not added anyone to the team. What it really boiled down to was that they were too busy. They made deals, billed like crazy and made the profit that they wanted to make. Profitability and cash flow were great, but they were getting stretched thin.
There were some occasional lulls in the action when a project wrapped up or a deal closed. The workload would then decline, but so would profitability. It would seem like the new reality. The partners would push the pause button on hiring that new associate. With this level of work, they believed they couldn’t afford to bring anyone on. Then they would get busy again and curse it all because they were working too hard. This cycle repeated itself over and over and it was a bit easier for me to see from the outside.
Finding the Lever
The partners had never developed a firm set of expectations and assumptions for the associate positions. As the CFO in the room, I spent some time walking them through the process of discussing and putting numbers to the position.
We agreed to a set of assumptions. A recruiter would probably cost $30,000, the base salary would be $150,000 and relocation $10,000. Benefits and bonuses would add another 25% to the base salary. Then we decided on one-time set-up costs including business cards, desk, and technology such as laptops and software licenses. This, we agreed, would cost about $7,000.
The next thing we had to figure out was the associate’s bill rate. For the associate position, we landed on a figure of $275 per hour. The last piece was to determine their utilization. How many billings could this person do as they ramp?
Recognizing the Trough
We came up with a few additional assumptions. Months one and two, we thought the person could be 10% billable, months three and four would be 30% billable. They could increase this to 60% in months five and six. By month seven, they could be 85% billable. Then we broke down our one-time costs and monthly costs. Based on these figures, the partners could expect a net loss in months one and two and would break even by months three and four.
Most of the investment in this new associate was upfront. This cash trough, basically the upfront investment and losses from the new associate’s low billing times, would cost them $76,000 and take until month eight to earn back. The associate would then generate a monthly profit of about $25,000 for the firm.
Pulling the Trigger
Once we had agreed to these numbers and assumptions, we put together an action plan to help them break the cycle. The firm hired a recruiter and got started. There would be some additional soft costs in terms of time for interviewing and training. However, they were committed.
This is the part that’s not easy, and sometimes you may have to go slow to go fast. That might be acquiring capital or investments. That may be hiring a head of revenue or training people. These are the challenges that businesses face in terms of putting these assumptions together.
The good news is that you can break the cycle.
The Five Steps to Breaking the Cycle
- Recognize the cycle that you’re currently stuck in.
What is the root cause of your lack of growth? This includes issues identification (I talk more about identifying issues in this post), but it is also simply understanding the root cause that is preventing your company from growing. Where do you keep banging your head against the wall? The more complex the environment, the more difficult the cycle is to diagnose.
- Identify the key lever.
You can make an impact in different areas of your business. However, you want to target the bottleneck or make improvements that will make the most significant difference. In a grocery store, for example, that might mean opening more cashier lines or changing the store design. It might also mean doing something different with your parking lot. What is the lever that can positively impact your business? In this example, it’s pretty straight forward, but it definitely gets more challenging the larger the operation.
- Acknowledge the trough.
Understand the investment required and look at alternatives. Ensure you can afford it. Know the return on this investment and its value to your company. One critical piece to this is that your full leadership team be in complete agreement in their L10 meeting about key assumptions regarding the investment and how “success” is defined. This is also challenging when there are three opportunities with three unique levers and all have a cost. Then there’s prioritization and comparing options.
This is exactly what we did with the law firm. We discussed alternatives such as hiring a part-time contract attorney to help out. However, we decided that would not help the firm in the long run. It was basically kicking the can down the road.
- Pull the trigger.
With your management team on board, this is the fourth crucial step in breaking the cycle. The team has to agree that this is the right move for your company. I’m not talking about management consensus, but there is an assumption agreement. You make the decision, and you move forward.
- Measure the outcome.
This was not going to be the last hire for this law firm. There were going to be more. When it comes time for the second hire, we can review our key execution from the first hire. What did we believe? What assumptions were right and what was wrong?
They can look back at the associate’s billing data from the past year and know for certain if they were ahead of or behind their plan. How does that inform their assumptions for associate number two? Certainly, assumptions can be significantly off, and you want to course-correct the next time you do it.
Break the Cycle
Let go of the vine. Break free of the impinging cycles in your business. Figure out where those cycles are holding your business hostage and find the lever that ensures more rapid growth and acceleration. With data in hand, you can take you and your organization to the next level.