Most business systems claim to help you scale, but what if they are quietly holding you back?

In this episode of Executive Connect, Michael Erath, Founder and CEO of Next Level Growth, joins host Melissa Aarskaug to share how losing everything taught him the real difference between building a company that grows fast and building one that grows right.

After scaling his family business from 8 million dollars to 45 million dollars, surviving embezzlement and the Great Recession, and rebuilding a new company that landed on the Inc 5000, Michael discovered that elite organizations do not rely on rigid systems. They design operating frameworks that fit their people, their purpose, and their market.

Today, Michael and his team of former CEOs, presidents, and owners at Next Level Growth help leadership teams implement the principles behind the Five Obsessions of Elite Organizations so they can scale with clarity instead of chaos.

If you are tired of generic playbooks and want a business that actually runs like one, this conversation will show you how to scale smarter, not harder.

Chapters:
00:00 Why most operating systems fail to scale
01:00 Michael’s journey from 8 million dollars to 45 million dollars
06:00 Betrayal, fraud, and rebuilding without bankruptcy
08:40 Discovering and adapting EOS, Scaling Up, and other systems
10:30 From rigid systems to principles based leadership
13:25 The Five Obsessions of Elite Organizations
17:20 How elite teams execute growth differently
23:40 Why fast growth without a plan creates chaos
26:20 The snow globe analogy for leadership perspective
28:00 How clients doubled profit faster than revenue
31:30 Profit per human capital dollar explained
33:00 Custom frameworks versus one size fits all systems
36:10 Scaling through acquisition without losing culture
37:40 Systemizing your business by design instead of default
39:00 The Elite Organizations assessment and AI support
40:40 Where to connect with Michael Erath

Michael

(0:00) One of the things I really quickly came to believe is that most business coaches and most business operating systems, what they have to offer is highly prescriptive, and that’s really how they scale. (0:14) So if you think about a coaching business or entity like EOS, they’ve scaled almost a thousand implementers worldwide. (0:22) And it’s a good system as a starting place, but it’s not great.

(0:27) It doesn’t scale beyond a certain level. (0:29) It’s too homogenous.

Melissa

(0:30) I think most businesses operating systems, well, they’re built for average companies and that’s the real problem. (0:38) Today’s guest on the Executive Connect podcast, Michael Erath has built it all, lost it all and built something even better. (0:47) He didn’t just adopt EOS, he hacked it.

(0:51) He stacked elite systems for scaling up top grading and his time at YPO to create a custom business operating framework that took him from rock bottom to the ink 500. (1:05) Now he’s here to talk to you and help others do the same. (1:09) If you’re tired of generic playbooks and ready to build a business that actually runs like one, you’ll want to take notes.

(1:17) Welcome, Michael.

Michael

(1:19) Thank you. (1:19) I appreciate it. (1:20) Looking forward to it.

Melissa

(1:21) Now let’s go back to 2009 when everything fell apart. (1:26) What was hitting rock bottom? (1:30) What happened?

(1:30) Talk to me about the story and what did it teach you about leadership?

Michael

(1:34) Yeah, I’ll start with kind of the lesson that came out of it is summarizing a quote that I use in my third book that just came out by a gentleman named Paul Batalden that every system is perfectly designed to get the results it gets. (1:49) If you want a better result, you need a better system. (1:52) And so what happened with me, I was the second generation in a family manufacturing business.

(1:58) We had our manufacturing facilities in Virginia, sales offices in North Carolina. (2:03) We were in the hardwood timber industry. (2:05) We manufactured hardwood veneer.

(2:07) And one of the challenges is I took over and the market was shifting from most of our customers being domestic manufacturers in the 80s and 90s to offshoring and most of the furniture companies going to Asia with their production. (2:22) We had to reinvent ourselves as a bit of an export business, but I was able to scale that business from 8 to 45 million. (2:30) Grew to about, we had a little over 200 employees.

(2:32) And one of the things that I did as part of that scaling was I wanted to vertically integrate because in our industry, sourcing the raw material was very challenging and very competitive. (2:43) So I knew if I could get closer to the raw material resource, we would have a competitive advantage. (2:48) So I brought on a partner, set up a subsidiary company and his background was in timber merchandising.

(2:55) So we started sourcing our hardwood logs, not from sawmills, but actually buying standing timber and merchandising everything we didn’t want to produce, keeping the best logs for ourselves. (3:07) And that worked really well. (3:08) Um, we ended up with sales offices on six continents and the business was growing, growing quite rapidly.

(3:14) My partner and I became best friends. (3:16) Uh, I was a son’s Godfather. (3:18) We vacation together all the time and, and it got really, really close.

(3:23) And it was that closeness and that friendship that caused me to soften on really being rigorous about systems and structures and accountabilities and things like that. (3:35) And so I just, I took my eye off the ball on some things and gave him too much control in the unit that he was, or in the, in the, in the entity that he was the managing director of. (3:45) So in 2008, uh, it was November of 2008.

(3:49) I got a call from our CFO who had discovered that my partner not only had been embezzling and had taken over half a million dollars in about 18 months, but he was committing bank fraud within the entity that he was directing. (4:06) So this was, so November of 08, you’re just a couple of months into the housing market collapse. (4:12) Our industry being very dependent upon the housing market.

(4:15) Um, we, we were seeing significant revenue declines at that time. (4:21) Lots of companies in trouble were throwing the keys at the bank. (4:24) So I was faced with a situation where we needed to understand exactly what was going on.

(4:30) We brought in a, uh, retired FBI forensic accountant that was doing private investigation work. (4:36) He worked with my CFO for a couple of days, got several boxes of evidence together, and on the same day we went to the bank that we were working with. (4:45) And we went to the U S attorney’s office with what we had found.

(4:49) So the bank, both of the entities we had the manufacturing business and the trading company bank with the same lender to leverage that relationship. (4:56) So they immediately froze, froze all of the accounts on both sides, uh, on both companies. (5:01) So literally overnight we became illiquid.

(5:04) Um, the situation I was in on the manufacturing business, we had about a year earlier, a little over a year earlier, taken out a $6 million term note to invest in additional equipment, expand our factory at another production line, uh, because in 06, 07 things were booming pretty well. (5:22) And my father had passed and we had recently transacted my mother out of the business, but she was hung on the bank guarantee for that term note. (5:31) And so now I had a situation where my mother has, you know, her husband’s past, um, she has no equity in the business and she’s hung on a term note tied to the business.

(5:41) So I had to figure out a way to navigate this to not only protect my wife and I, but also to protect my mother. (5:48) And so I was able to negotiate with the special assets group to give me just enough liquidity to keep the business open and unwind it over time because at auction, they would have gotten nothing for it and had some very fortunate breaks, um, along the way. (6:03) It took about 18 months, but I was able to get the bank made whole, got the creditors made whole, and my wife and I essentially took the haircut and started another business on the heels of that through all that.

(6:13) It took about four years. (6:14) My partner was finally prosecuted. (6:16) He served two years in federal prison.

(6:18) My wife and I essentially lost everything and had to start over. (6:22) Um, but again, doing it outside of bankruptcy, we were able, we kept the equity in our house, which we cashed out and use that together with a $100,000 SBA loan to start a new business. (6:32) Um, and that was when I really decided I was going to go, go deep into how truly outstanding organizations systemize the way they do things, make sure they have accountability structures in place, performance metrics in place, you know, feedback loops with employees and just all of the things that in hindsight were not really buttoned up in the first business.

(6:55) And that’s what led to the second business, uh, which was the first business I got into being 5,000 with. (7:01) And then after about six years of that business, um, I decided I really was getting burned out on the industry. (7:08) And with what I had discovered around how I was systemizing the business and how successful that was, I decided I wanted to kind of take the second half of my career and spin that really building out a framework that I could use to teach other people how to do the same thing.

Melissa

(7:26) Wow. (7:26) What a story that is amazing. (7:30) First of all, thank you for sharing that second of all, what a bold decision and grit to pivot like that and start over.

(7:39) I want to switch gears a little bit, um, and talk about, you mentioned that cookie cutter systems like EOS can be a great start for people’s business for mid market companies that are trying to move fast. (7:55) Talk to me a little bit about these systems and how, how you can use them to scale a business.

Michael

(8:02) So yeah. (8:03) So when I, so when I was building the second business, I came across EOS, um, I’d read the book traction and from my prior experience, uh, people I’d met in YPO things I’d learned through my forum and other, other connections I had, um, I had been using top grading. (8:20) I had been using some tools from mastering the Rockefeller habits, which eventually became scaling up.

(8:24) Um, by burn harness. (8:27) And when I read traction, it made a lot of sense because it felt like somebody finally got their arms around kind of a holistic approach. (8:34) But there were a number of tools within the EOS toolbox that I felt like were either not a good fit for me or a little bit weaker than other tools that I had used in the past.

(8:46) So I did kind of a hybrid self implementation of EOS and I focused more on not the system itself, but on what’s the intent behind this tool. (8:58) What’s it trying to accomplish? (9:00) And if I have a different tool that I think can do that better, I’m going to use the other tool.

(9:05) Um, so that was really, really successful because I ended up with a business operating system that was really custom tailored to my organization, um, and our culture and our industry. (9:16) And so when I, when I exited in 2015 and transitioned into, into (9:21) the business coaching and working as a business guide, I first started (9:24) out with EOS, uh, because that was familiar and that was a pretty easy (9:28) path in, but one of the things I really quickly came to believe is (9:32) that most business coaches and most business operating systems, what (9:37) they have to offer is highly prescriptive and that’s really how they scale. (9:42) So if you think about, about a coaching business or entity like EOS, they’ve scaled almost a thousand implementers worldwide. (9:51) Um, and it’s a, it’s a good system to, you know, as a starting place, but it’s not great.

(9:56) It doesn’t, it doesn’t scale beyond a certain level. (9:59) It’s too homogenous. (10:01) I think when you try to create one system with a finite toolbox of like 20 tools in it that can apply across every industry and all these different things, it’s just, it’s, it’s, um, it just kind of lowers the actual standard to make it that homogenous.

(10:18) And so what I really focused on as we were pivoting and I was building out next level growth and after leaving EOS is rather than focusing on a prescriptive system that by default puts primacy on the system over the user. (10:34) And that’s one of the biggest complaints I hear from people using EOS is they often feel like they’re being kind of force fit into a predefined system. (10:42) I decided to build something that’s principles based and by, by evolving (10:47) from a systems based to a principles based approach that creates more (10:51) freedom and flexibility because what you’re focused on is executing each of (10:57) these principles to a very high standard, but you have the flexibility to build, (11:02) create, or leverage whatever tools you think are the right tools for your (11:06) organization to help you excel in that principle. (11:09) And that’s what the five obsessions of elite organizations are all about.

Melissa

(11:13) I want to get in that. (11:15) I brought my book with me. (11:16) Um, I want to get into that, but talk to me a little bit about, for those that don’t understand EOS versus what you’re talking about, give me like a quick snippet of what the differences are.

Michael

(11:31) So within EOS and people that have worked with an implementer have often heard them talk about purity to the system. (11:38) And so EOS has, I think they’ve added a couple of tools, but, but for, I don’t know, 15 plus years, there were 20 tools and those 20 tools were what they used to help entrepreneurs and their leadership teams begin to systemize the business in a way to get more control. (11:58) Um, and there’s kind of a tagline that we used in EOS, um, that it will help you get more of what you want out of your business.

(12:05) And that’s true. (12:06) It will do that. (12:07) It will help you get control of some of the chaos.

(12:10) It’ll help you get alignment. (12:11) It’ll help you start beginning to scale, but I don’t believe that unless you’re really, really disciplined and you’re willing to be really creative and experiment within that model, it’s not enough to build an elite organization that can scale into the hundreds of thousands, I’m sorry, the hundreds of millions of dollars of, of revenue and beyond. (12:35) Um, that’s where I think you need a flexible framework that can evolve with you as you grow.

(12:41) Um, which may mean tools that worked for you when you had 40 employees and we’re doing 10 million in revenue, those same tools may not work for you at 200 million in revenue and a thousand employees, right? (12:53) And so if the system is not designed to evolve with you, then at some point it no longer serves you. (12:59) And that’s, that’s where a lot of these systems like EOS, because they’re so homogenous, it makes it, it makes it very difficult for them to scale.

Melissa

(13:10) And I love that you said that because I think that’s the key when you start a business, everybody’s running, reacting, responding versus really putting Paul, you know, plans in place to execute the way you need to execute. (13:25) So I love that you brought that up. (13:27) I want to talk about the framework behind your latest book, the five obsessions of elite organizations.

(13:35) What makes the obsessions so different from the usual list of priorities? (13:42) Is it people, is it culture? (13:45) Talk to me a little bit about that.

Michael

(13:47) So when you think about principles versus tools of a system, if, if I show up to teach you a system, we’re focused on this thing, right? (13:58) And it’s already pre-designed. (13:59) If instead we focus on principles, we’re focused almost on an ideal that we need to be excellent at.

(14:08) And so what we focus on, and I spent a lot of time researching this, whether you look at great sports organizations that have really been a dynasty, you look at great businesses, you look at great business leaders, what I’ve come to believe is that there are five key principles that every elite organization truly obsesses about and obsesses a strong word. (14:30) And I use that because I think the best of the best look at these things as true obsessions. (14:35) And the first is great people.

(14:37) It’s filling the organization with great people. (14:40) And a lot of, a lot of people I talk to kind of roll their eyes and say, yeah, you know, I’ve, since 2001, when Good to Great came out, everybody talks about right people, right seats, but, but tell me how you actually do it. (14:50) Right.

(14:50) So we’ve got the blueprints for how to do that. (14:53) And if you follow the approach and you customize the tools so that they work best for you and your organization, you will with discipline and consistency fill your organization with great people that you would enthusiastically rehire. (15:08) If you had it to do over again, the second obsession is what we call an inspiring purpose.

(15:14) And the idea here is not only an inspiring purpose that draws people to you from a marketing perspective, but it’s also about internal marketing. (15:23) And ensuring that you have articulated your purpose and your meaning as an organization internally, in a way that those great people can form an emotional attachment to what it is that you do and why you do it. (15:37) Because if somebody shows up and comes to work for you and they fit your core values, they have the skills and the desire to perform to a high level, they’ll be a very good employee.

(15:45) But if you can capture them emotionally and help them emotionally connect the dots between what they do and what the outcome of that, what the what the greater vision for that is, they’ll always bring more creativity, passion, and energy to the work that they do and be more successful. (16:02) The third then is taking those great people who are aligned and motivated by an inspiring purpose and equipping them with optimized playbooks. (16:10) I think of great sports teams, right?

(16:11) It’s the it’s the teams that have very well thought out plays and execute those plays to a very high standard. (16:21) Those are the teams that consistently win, right? (16:24) And you take any two sports teams, take American football to two of the top professional teams going, going against each other.

(16:31) It’s usually the team that fails to execute their plays as well, which is the team that loses, right? (16:38) And so why don’t we do that in our organizations? (16:41) We don’t look at things that way, you know, we don’t look at when the sales team is handed a new lead.

(16:46) What’s the play that we run? (16:48) And what ends up happening is if you have 20 people on your sales team, my guess is they do it 20 different ways with 20 different varying levels of success because it’s just kind of chaotic. (16:58) And so my guess is just about every organization, there is an optimal process to walk somebody through to help convert them from a prospect to a client.

(17:09) We just don’t actually systemize it very well. (17:11) And if we have systemized it, we don’t hold people accountable to stay on script and to follow the playbook and to run the play the way it’s designed. (17:20) So we spend a lot of time really helping people understand.

(17:23) And that’s really a big part of the systemization of businesses. (17:26) The fourth obsession is a culture of performance. (17:29) And when we talk about a culture of performance, some people feel like their initial thought is, is it’s a punitive thing.

(17:35) And the way I look at a culture of performance is, first of all, if you want to be elite, you have to have a culture performance. (17:41) You cannot accept mediocrity and be elite. (17:44) But a culture performance is one where expectations are really, really clear.

(17:49) And that’s in both directions, not just from the boss to the employee, but the employee letting the boss know what their expectations and needs are as well. (17:57) It’s a two way street, but then it’s also having a feedback loop and a cadence of communication where you’re evaluating one another, you’re providing feedback. (18:08) And for people who are failing to meet expectations in any given area of their role, they’re put into a system that’s designed to coach them up if they’re coachable, but that will also coach them out if they’re not.

(18:23) And so by really having a systematic approach to how we coach and develop people and how we expunge people who just either aren’t coachable or simply are in the wrong role, maybe they get moved into a different role, having a strong system through which you drive a culture performance is crucial. (18:40) And then the fifth and final is growing profits and cashflow. (18:43) And this is one, this is probably the biggest pet peeve I have with the entire world of coaching and the BS that people feed entrepreneurs.

(18:51) I hear all the time people say that profit and cash is a byproduct. (18:55) If you get everything else right, the profit will come. (18:58) And honestly, I think that’s BS.

(19:00) If you don’t, if one, if you treat profit and cash as a byproduct, that’s all it will be. (19:04) And if you don’t take an intentional approach to thinking about what’s our pricing strategy, why do we price the way we do and is that really optimal? (19:14) Are we quick to give discounts and do we understand the degree to which that cannibalizes gross profit dollars if we don’t significantly increase volume as a result of the discount?

(19:24) When’s the last time you looked at your cash conversion cycles and did anything intentional to improve those? (19:29) And so there are so many things around profit and cashflow that I think we kind of just turn a blind eye to. (19:36) And sometimes it’s a, it’s a function of ignorance and ignorance is not a bad word.

(19:40) It’s just a lack of knowledge of something. (19:42) I think oftentimes, especially people who were technicians who start their own business, you know, there were technicians in their field, now they’ve got their own business. (19:50) They never really learned financial literacy.

(19:53) And so that’s an area that seems complicated and complex and they tend to ignore it. (19:58) But if you believe in your purpose, your profit and cashflow is the fuel that you put in the engine to achieve your purpose on a bigger and grander scale. (20:05) So why would you treat it as a byproduct?

(20:08) And it’s the oxygen that you need to survive. (20:11) So those, those are the five principles and the five obsessions of elite organizations that are breakdown in the book. (20:18) And the book was written to really give you a blueprint of things you can start doing to immediately begin to impact these five different areas of your business based on some best practices, tools and concepts that we, we teach our clients.

(20:34) But at the end of the day, I think any organization that obsesses about great people, an inspiring purpose, optimized playbooks, a cultural performance and profit and cash flow will be a significantly better organization for it. (20:50) And the fact that the tools that you use to do that, we work, we’re very systems agnostic at next level growth in our company. (20:58) So we don’t care what the source of the tool is.

(21:02) Some of them are tools that we’ve created. (21:04) Some we give credit to whoever wrote about the tool and put it in a book and it’s now in the public domain. (21:11) But, you know, some people prefer tools from scaling up or maybe something that one of our clients actually created and figured out that they gave us permission to share.

(21:20) So there’s just a, we’ve curated over a hundred tools. (21:24) Now, nobody uses all of them, but to provide variety based on different companies, unique industries and unique cultures and circumstances.

Melissa

(21:35) That was great. (21:36) There’s so much to unpack there. (21:38) I love all of it.

(21:39) I agree. (21:39) I, as you were saying, I’m thinking, I’m like, what organization can I think of that’s doing all these things? (21:45) I’m kind of running through my head.

(21:47) They’re either getting one of the things correct, but not all of the things. (21:50) And I love kind of what you being a sales person in an engineering body, one of the things I would agree a lot of times people go straight to here’s the lead and they run it however they run it. (22:03) And then they drop to the bottom to get the client.

(22:07) But often people don’t realize when they’re selling clients talk to each other, right? (22:13) So if you sell one client, this price and one client, that price, it’s going to create chaos. (22:20) And then you’re driving down your margin when you just communication, collaboration, you know, understanding the playbook, as you mentioned, I think that’s really key and treating the organization.

(22:34) Like I love the analogy as well with sports. (22:37) As an athlete, the teams that beat us were often the ones that had practiced the play over and over and over and over and over. (22:46) And every time the play came up, they just swung and they knew when all of us could have been better conditioned in better shape, stronger players, but they knew how to play the play.

(22:59) So I, all of that was so great. (23:02) Uh, I want to talk to, you know, everybody right now is trying to scale to grow, to be more profitable. (23:10) And I think when you scale really, really fast without a plan, that’s when chaos happens.

(23:18) So talk to me a little bit about what does elite leadership teams do differently when it comes to execution in an organization that’s trying to grow revenue.

Michael

(23:31) I think one of the things that’s important is as you, as opportunities arise to help an organization scale, really elite teams will, without wasting time, they’ll spend a little bit of time really understanding and analyzing those opportunities. (23:51) And so we, one of the things that in, in, uh, in one of my earlier businesses I did is I figured out how to understand Jim Collins flywheel concept and basically built out what our flywheel was in the business. (24:07) And as part of that, I think every flywheel, if you, if you think about that concept and Jim Collins talks about your business as a flywheel, where there are a handful of kind of key components within the business that one leads to the other.

(24:21) And if we do this well, we cannot help but do this next thing. (24:25) And if we do that well, we can’t help but this next thing to happen. (24:30) And so the flywheel really needs to drive what he refers to as profit per X.

(24:35) Um, you know, it’s, it’s kind of your economic engine. (24:37) It’s the one metric of profit per some denominator that really drives the economics of the business. (24:45) And so I think elite organizations understand their business model and they think of it, we, we encourage them to think of it as a flywheel and that flywheel also must drive your economic engine.

(24:58) It must drive that profit per X metric. (25:00) And so if we have a new opportunity, we’re going to scale. (25:04) We want to look at does this opportunity or this thing, does it accelerate our flywheel?

(25:10) Does it improve our profit per X ratio? (25:14) Is it neutral? (25:15) Does it actually slow it down?

(25:16) And so they can use that as a filter to make the right decisions. (25:20) But then also as they’re scaling, they’re very, very focused on how they systemize the ways that they scale. (25:28) And they’re constantly looking at those systems at various levels throughout their growth.

(25:33) Like I said earlier, every system is perfectly designed to get the results it gets. (25:37) So you may have some systems you put in place that need to be overhauled or modified at various levels of scale because what worked at a certain level becomes a hindrance at another, at another level of growth. (25:52) And so it’s really kind of, I like to use the analogy of thinking about your business as a snow globe and you’ve got to get outside of the snow globe on a regular basis and observe it from the outside looking in to see where some of those things are, because oftentimes companies that scale and have a lot of chaos are just too, too locked inside their own snow globe to truly see what’s going on.

(26:16) And that’s one of the perspectives you think about great coaches. (26:20) They’re on the sidelines observing from a different perspective, the game being played. (26:25) And that allows them to give feedback that the players can’t see because they’re in the game.

(26:31) And that’s super common. (26:32) And that’s why, you know, football teams have people sitting up in the, you know, in the booth on the third deck because they have a different perspective in the coaches on the field or on the sidelines. (26:41) And so are you, are you looking at your business the same way and trying to get all these different perspectives to help make the best decisions through various stages of growth?

Melissa

(26:53) Yeah, I love it. (26:54) I agree. (26:55) I think having independent views is really key to everything.

(26:59) I think that’s such a good nugget, no matter what it is, business, personal, professional. (27:05) That’s why coaching is such a key thing across all, all of our lives. (27:10) I want to talk a little bit about strategic leaveners, like we talked about a little bit.

(27:14) Revenue is everyone’s focused all the time every day, but I think profits that fund the purpose is also really key. (27:26) So can you walk us through the shifts that you talk about from the entity metrics to actual meaningful ones?

Michael

(27:34) So one of the stats that I’m really proud of at Next Level Growth. (27:38) We, last year we did a case study of financial results of companies that had been with us for at least five years. (27:48) And that’s one of the things that I think is interesting with a flexible and customizable framework that can evolve with businesses.

(27:56) We don’t, so first of all, we don’t do contracts with our clients. (28:00) We don’t get paid up front. (28:01) They can quit any time.

(28:03) They only pay us after they get value out of the time we spend together. (28:09) But we have lots of clients that have been with us over five years and continue to invest because they’re continuing to get that much value. (28:16) But one of the stats that came out of this case study I was really proud of is on average across 20 companies we looked at that have been with us for at least five years.

(28:26) The average revenue growth, the kegger they were growing at was basically doubling the business every three and a half years. (28:33) But they were doubling their dollars of net income every two and a half years. (28:39) So their profit was actually growing at a faster rate, significantly faster rate than their revenue.

(28:46) And that’s because of these obsessions and these focuses. (28:48) And like I mentioned, Profit Per Ex. (28:50) And you know, I hear sometimes people will talk about Profit Per Ex as something like Profit Per Employee.

(28:56) And I think that’s that’s an overly simplified metric because yes, as an industry standard, let’s say you have an HVAC business, there are probably some good standards for a number of employees and what a benchmark is for Profit Per Employee. (29:13) But if you really want to optimize that, different employees come at different costs and different employees and different roles bring different value to the business. (29:21) I would argue if you think your Profit Per Ex metric or that metric you want to drive improvement to as Profit Per Employee, consider looking at profit dollars per human capital dollar.

(29:35) Like the fully burned human capital cost. (29:37) And you mentioned, you know, an engineering background. (29:39) Everything’s a math problem to you, right?

(29:41) As an engineer. (29:42) So if if I were to look at a business, if we were to look at a business together and say, OK, let’s look at gross profit dollars or net profit dollars, whatever is the right of the two to look at relative to our fully burdened human capital dollars. (29:56) And what’s that ratio?

(29:58) And how can we make decisions as a business to incrementally improve that ratio over time so that we’re getting more net or gross profit dollars out of the fully burdened dollars we’re investing in human capital. (30:14) Right, because most organizations, if you’re going to buy a new software product or you’re going to buy a new piece of equipment, you may look at alternatives and do some general return on investment. (30:27) Calculations and forecasting to help you make a decision.

(30:30) But when it comes to people, which is often the largest line item expense in our businesses, we almost never look at that through a return on investment lens. (30:40) Right. (30:41) And so even in our great people chapter, the third chapter of the book, I break down a way that you can assign.

(30:47) We call it a most critical outcome that becomes a very black and white binary number that is measurable with a goal that each role in the organization can be assigned and that that number and what you’re measuring that goal should prove that you’re getting a reasonable or an acceptable return on investment for the fully burdened human capital cost of the person who is in that role.

Melissa

(31:19) Yeah, I think like you were saying originally about cost per employee, I think in services, I guess the question is, in services versus selling like HVAC, like you were mentioning, I do think it’s tough to use that metrics a lot of time, given the roles that different employees have and the size versus the software. (31:42) So I would agree. (31:43) I think it’s an interesting point.

(31:45) I want to shift a little bit to talk about competitive advantages and the mindset shift. (31:53) Executives, leaders, business owners actually need to make to move away from off-the-shelf systems and start building something truly that is theirs and that they own. (32:04) Is there talk to me about your business operating system strategies?

Michael

(32:09) I think it goes back to the customization. (32:13) And if you if you start with a focus on a business operating system, you’re focused on the system. (32:21) And that’s going to.

(32:23) That’s going to prevent or make it more difficult to elevate to thinking about customization. (32:31) If you focus first on the principles and how to truly excel in those principles. (32:38) You then begin to design a system.

(32:41) You end up with a business operating system, but you end up with one that is tailored by the leadership of the organization to fit that organization based on what you just mentioned, different types of businesses. (32:56) We’ve got. (32:57) We’ve got a three and a half million dollar a year wealth management firm that’s a client and we’ve got a large construction company doing over a billion dollars in annual revenue.

(33:11) Both of those use the exact same framework. (33:15) And if you look at the actual tools and systems they have in place, they are vastly different. (33:21) And that’s ideal because there is no way that you could anybody could convince me that if I show up and I got 20 tools and I’ve got a prescriptive one size fits all system that I could use that system to help a three and a half million dollar professional services company be truly elite and the exact same tools and the exact same system a billion dollar construction company be truly elite.

(33:47) There’s no way that can be true. (33:49) But if you elevate and focus on the principles and the intent behind those things and you align around those you can then build out best ways and best practices that work in that industry and for that company and that marketplace that that really will help them excel and be elite in those areas. (34:11) And I think that’s where it’s easy to get seduced into the system because it seems simple enough to OK, I can do that.

(34:19) It takes more determination. (34:21) It takes more consistent and consistency. (34:24) It takes more thought to really focus on the principles and how to be elite.

(34:29) But that’s why so few can do it. (34:31) Right. (34:31) That’s why if you take sports organizations, it’s interesting.

(34:35) You know, I think as a American football coach, Nick Saban is one that has created dynasties. (34:42) Phil Jackson in professional basketball. (34:44) Yes, Phil Jackson had Michael Jordan.

(34:47) He had Kobe at the Lakers. (34:48) But he went to two different organizations as a coach and won 11 national championships. (34:57) Right.

(34:57) And Michael Jordan played for other coaches and they were never able to actually win championships. (35:04) And so there was something in the way Phil Jackson approached things. (35:08) And it was very much based on principles and ideals that he got people to align around.

(35:16) And that that just allows for more creativity and more entrepreneurial energy than trying to to fit yourself into a predefined mold.

Melissa

(35:28) Yeah, I love that you said that. (35:29) I’m thinking about all these companies right now. (35:32) It seems to be heavy M&A activity.

(35:34) And, you know, you talked about tools, 20 tools. (35:37) It seems organizations now are using, you know, 50 tools or more tools. (35:43) And then they’re going through M&A.

(35:44) So they’re using this tool and that tool. (35:47) So how I guess the question is how for companies that aren’t using a tried and true system or program like we’re talking about, it’s same system, same system from construction to services for those companies that aren’t using systems and programs and are kind of going through M&A and they really don’t have a formal plan. (36:11) And they’re just trying to grow scale.

(36:14) What would be your advice for them?

Michael

(36:17) I would imagine in almost all of those cases, if they’re growing through acquisition, they’re suffering much more chaos than they need to because of the lack of systems and structures. (36:33) And I think they are likely cannibalizing significant margin along the way as a result. (36:42) I mean, you think about when you acquire a new business and maybe you acquire to get into a new territory.

(36:48) You now have two cultures that if you haven’t really systemized your own culture and you don’t know how to evaluate their culture to see if there’s going to be a fit, you will end up having massive turnover, whether it’s from people leaving or from you having to terminate people because culturally they don’t mesh. (37:09) And so these are all things that are a little bit hard to measure. (37:13) And so we tend to avoid them.

(37:15) But they’re incredibly valuable when we get them right. (37:19) And without a focus on systems and how to systemize and structure your organization and one perhaps being acquired or merged with, I think you just you miss way too many opportunities. (37:33) And the whole first chapter of the book is about kind of why do I need to systemize my business?

(37:40) And the truth is every business already has an operating system. (37:44) It’s either been by default or by design. (37:47) And in most cases, it’s by it exists by default, but it’s the way that you go about doing the things that you do.

Melissa

(37:54) Yeah, so true. (37:56) So true. (37:56) So much great information, Michael.

(37:59) I appreciate you sharing any final thoughts or anything that we didn’t touch on that you want to leave with our listeners?

Michael

(38:07) You know, I think maybe just if people will really self-reflect on their business and what the potential is, kind of what their dream come true is for their business and their current state. (38:25) Really challenge if the way you’re doing things serves you as well as you need it to. (38:33) If you’re using a coach that’s great that you’re investing in that, is the coach meeting you where you are?

(38:40) Are they really taking the time to understand you and challenge you and challenge the way you think? (38:47) Are they are they pushing you to really be great? (38:51) Or are they just trying to get you to check the box on what it is that they have to to offer?

(38:58) Just really challenge all of those things. (39:00) And for people that are interested, there’s we have an assessment on our website. (39:04) It takes about seven minutes to get through the assessment.

(39:07) But it’s the elite organizations assessment and it’s ten questions around each of these five principles that just allow you to kind of get a feel for how well you’re doing in each of these areas and where the opportunities are to shore things up. (39:20) And then the book gives a lot of great guidance on that. (39:23) I’ve got an I call as a as a supplement or companion to the book to help with with some insights and guidance there.

(39:31) And our partners are happy to hop on calls with people who’ve taken the assessment and have questions and just would like a little bit of guidance.

Melissa

(39:39) That’s fantastic. (39:40) I appreciate that. (39:41) What’s the best way for our listeners to connect with you?

(39:44) Is it on that website, on social media? (39:48) Share share with us.

Michael

(39:49) Sure. (39:49) Yeah. (39:49) I mean, all of the above the quickest and easiest way to reach us is through the website.

(39:53) The website gives a breakdown of kind of what it looks like to work with us, how the approach works. (39:58) If you’re not ready to have a conversation yet and you just want to do some more exploring, the book is a great place to start. (40:05) It’s available in Audible as well as on Amazon.

(40:07) And it really gives a blueprint for how to do what we what we teach. (40:14) And as I mentioned, it comes where you can subscribe to an A.I. clone of myself that’s been trained on everything we teach, everything that’s in the book. (40:23) So if you have, I think the basic subscription is twenty dollars a month.

(40:28) And you can go in and have conversations with the clone voice text video asking specific questions about the tools and the framework and it will help you customize it to your organization. (40:44) So that’s another good way. (40:46) We’ve got a lot of great content on our YouTube channel.

(40:48) It’s just next level growth on YouTube. (40:52) And then there are downloadable resources for people that have read the book. (40:56) There are links in the book that you can use to get to downloadable resources you can have for free.

(41:00) So there’s a lot of great content in there to help people get started. (41:04) And for someone who’s not ready to have a conversation, it’s a really good starting place to help you decide if this is something you want to do on your own or it’s something you’d like some guidance with.

Melissa

(41:16) I love it. (41:17) This has been great. (41:19) I am anxious to read the book.

(41:21) I’m so glad you sent it to me. (41:23) Thank you. (41:24) Appreciate you sharing your time and your knowledge with our listeners today.

(41:29) That’s the Executive Connect podcast.