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.
Are you, your department, or your company failing to grow? Or is your company growing so fast that your team is struggling to keep up? You can’t accelerate anymore, and the system is running at capacity. In EOS®, this is known as “hitting the ceiling.”
I’ve never really liked the ceiling analogy, though. With a ceiling, it seems like you’re forced to break through, but you have no idea what’s next. I prefer a step analogy; with a staircase, you can see where you’re headed.
Building step functions with your core processes is a critical part of creating the staircase to growth.
“Is That Where You Want To Go?”
At AVL, we have encountered several step function challenges, most recently with onboarding new clients and onboarding new talent to the team. The latter required members of our existing team to schedule and attend interviews while others had to do the technical work of putting people on our payroll. Then there was the work with acclimatizing our new people and spending time to get them up to speed.
As we continued to grow, we had more clients coming on board every month, and people continually added to our team. It became challenging for us to use the same processes and the same team to onboard that we used when we started.
So, we created several systems and automated a few processes. We recorded videos and built tools. Essentially, we created the step functions that allowed us to keep growing.
I was in a meeting the other day, and someone made what might have seemed like a great offer: “If we work together, can you handle it if I bring you 100 clients?”
“No, I can’t handle that,” I replied. “We are not ready, and we’re not designed for that.”
The next question she asked me in the meeting was, “Do you want to? Is that where you want to go?”
It’s a question that many companies have to ask themselves regularly.
The Step Function
The answer for many companies is yes. They want to be able to go from 10 new customers a month to 100. However, there’s an entirely different system and structure required to accomplish this.
It is what EOS® refers to as “breaking through the ceiling” and what I think of as a step function. It’s building in the steps that allow your company to move upward in terms of growth and continue to build velocity. However, identifying those steps can be challenging.
We are all familiar with financial debt. In the technical world, there is technical debt which is the debt incurred when you postpone upgrading your core systems or delay addressing technical issues. It can be fixed, but as you delay, you will accrue the cost of “interest expense” because the wait typically means it takes longer and costs more to upgrade and address.
It’s relatively easy to identify and fix financial debt. It’s numerical, and it’s easy to see. However, in the operational world, it’s more of a challenge. Is the answer a marketing resource or a young junior developer? Or is it bringing in some other sort of talent, tool or system? Where is the right lever or step for your business?
Operational debt can include technical debt, but it also includes the debt we carry when we fail to codify our core processes or get the right people in the right seats.
We need to identify where our operational debt is and focus first on the low-hanging fruit. That’s the operational debt that is easy to identify or resolve. This is what EOS® helps you accomplish by linking (and aligning) your one-year goals to 90-day goals to weekly goals.
The Core Processes
One of the first things that I look at with the businesses I advise is their core processes. AVL, for example, has 15 core processes. To build steps, we look to our one- to three-year goals on each of these core processes.
For example, if we intend to go from 500 to 4,000 invoices per month in the next year, what changes are required in what core areas? What will the level of activity be on that process once we reach our three-year goal? Do we need more billing resources? A larger accounting team? An ERP system?
Then we take into consideration the speed of fixing the problem, the cost and complexity. Making a change might have a tremendous upside for the company, but it might also involve high cost and complexity.
The CFO helps inform the decision by putting assumptions to your steps.
Assumptions and Results
EOS® provides an opportunity through the CFO’s financial analysis and your team’s operational analysis to gather what you believe to be true about potential steps. For example, what are your assumptions about bringing on a junior developer, marketing help or a new system? What do you believe is going to happen as a result of adding these?
The CFO can help you narrow your focus to a few key assumptions. Then they ensure that you have the data to track those assumptions.
Making assumptions that you can’t measure is not helpful for future decision making. It is valuable to learn if your assumptions were correct.
In terms of organizational learning on the step function, you need to realize this is not going to be the last time you add this step. In many companies, you will hire a second salesperson (or a third or fourth).
If we don’t write it down, how do we learn the next time we do it? What assumptions did we get right? How long does it take a sales rep to get up to speed? How long does it take for a marketing program to really show itself in terms of capturing the market or in terms of activity? What kind of impact did that have? How do these assumptions aid us in terms of what decisions we want to make going forward?
That’s the way I like to think about operational debt and resolving that debt as a step function. It’s trying to understand where in the organization you are paying the highest interest and how can you eliminate it more quickly.
Part of that is ensuring you put processes in place and that you measure, evaluate and record the assumptions you made in building those step functions.
Systemizing and automating can serve as step functions, and so can standardization. I call this the “32 flavors of ice cream” problem. If you sell 32 flavors rather than just one, you have more complexity.
As an example, we see this with massive variety of customer contracts at some of our clients. They struggle with managing all of their contracts because every single one is different, which created significant operational challenges around performance, scalability, and cost. In some businesses, this is the nature of the beast, but for many, it seems quite possible to have four flavors rather than 32.
So, how do we do it our way so that there aren’t these divergent processes and practices slowing us down?
For example, if you promised a client a special discount after two years of service, you have both a unique contract and the added issue of having to put in place unique tracking to accomplish it. You will hit capacity that much sooner.
Every time you add these things in, even though there are good business reasons to do them sometimes, you slow your velocity. You make it harder for your business to climb.
Instead of customizing everyone’s contract, could we do four different models or four separate contracts? Our organization can then become very good at four things. You’ll face fewer step function challenges because you’ve removed them through standardization.
By focusing on your operational debt, and creating steps from systemizing, automating and standardizing, you will eliminate ceilings. Your business will continue to climb and build velocity.