“In order for any business to succeed, it must first become a system so that the business functions exactly the same way every time down to the last detail.” Rick Harshaw, Monopolize Your Marketplace
“Everything affects everything else in one way or another. Whether you are aware of that or not does not change the fact that this is what is happening. That’s why I say a business is a system. This systems perspective reminds… you to pay more attention to what you do, and [to] learn the right lessons from your experience.” John Woods, Work in Progress
In the Go Beyond Way, love, respect, trust, teamwork, and vision are principles that inform how systems are designed in businesses that operate at the highest levels of leadership, initiative, self-discipline, creativity, and customer-focus. This article applies the Go Beyond Way to Structural Capital, the third category of Value drivers identified by Chris Snider in his book Walking to Destiny: 11 Actions an Owner MUST Take to Rapidly Grow Value & Unlock Wealth and taught by the Exit Planning Institute (EPI).
What is Structural Capital?
“Structural capital is the business’s infrastructure. It comprises the systems and tools that augment the customer and human capital on which your company is built. It has two purposes. First, it takes what exists inside your brain and turns it into a transferable form. These are the best practices that can be purchased and repurposed. [Second, it connects] people to data, experts, and expertise – including bodies of knowledge – on a just-in-time basis. Structural capital captures the knowledge assets within your company, converting that mental process into company property and, therefore, makes it transferable. Knowledge assets include the people, processes, and technology, as well as intellectual property, that enable your team to do things that make them so special, allowing them to meet and exceed customer expectations, and enabling them to build and sustain these lasting and recurring relationships.” Chris Snider
Gino Wickman, in Traction: Get a Grip on Your Business, introduces the Entrepreneurial Operating System (EOS) as a way of organizing and prioritizing the decisions and actions required for running a successful business. Wickman identifies Process as one of the six key components of the EOS. He writes: “Your processes are your Way of doing business. Successful organizations see their Way clearly and they constantly refine it. Due to lack of knowledge, this secret ingredient in business is the most neglected of the Six Key Components. Most entrepreneurs don’t understand how powerful process can be, but when they apply it correctly, it works like magic, resulting in simplicity, scalability, efficiency, and profitability”
John Dini, in Your Exit Map: Navigating the Boomer Bust, states that the EOS “seems to work especially well in smaller companies that have never used an organized planning system.” An exit plan is, by its very nature, a strategic plan. Dini explains that a strategic planning system, such as EOS, is necessary to develop key performance indicators and tracking metrics to determine whether you are on course to achieve the new levels of profitability and value required by your exit plan. Other systems endorsed by CEPAs include Gazelles, outlined by Verne Harnish in Scaling Up, and the Value Builder System which grew out John Worrillow’s book Built to Sell.
The desired outcome of all these processes, procedures, technologies, and facilities is the empowerment of employees to exceed customer expectations, so those customers return again and again. To truly empower employees, business owners must strive for systems without bureaucracy. You want to rein in the chaos without killing the entrepreneurial spirit. According to Jim Collins in Good to Great, “The systems of your business should enable “freedom and responsibility within the framework of a highly developed system.” Collins explained, “…the purpose of bureaucracy is to compensate for incompetence and lack of discipline — a problem that largely goes away if you have the right people in the first place.” Bureaucracy is about control. It uses external discipline aimed at the lowest common denominator. It shrinks the incentive of people to dream, imagine, and contribute. Bureaucracy crushes the soul of a business. Accountability and alignment of activities with goals and a vision are important. But freedom is equally important.
Structural Capital must be designed to foster an environment where love and respect enable people to trust their leaders and each other. The leader/owner must cast a clear and compelling vision powerful enough to turn trust into teamwork. The result will be empowered self-disciplined people, engaging in disciplined thought and lively debate, and taking discipline, relentless action. Then the business will operate at or near best-in-class.
Documenting Your Way
According to Chris Snider, “Your knowledge needs to be documented and transferable, such that someone else can learn from you and apply it. Making this knowledge company property and ensures that when your talent walks out the door at night, the knowledge they house doesn’t walk out the door with them.” You might have the best processes and knowledge assets in the world; but if they are not documented and transferable, a potential buyer will not see them as adding significant value to the business – and they will not want to pay for them.
Gino Wickman explains, “You will not get your company to the next level by keeping your processes in your head and winging it as you go. Ask yourself: Have you documented the way you want everything done in your organization? Do your people know what process they are following and why? Are they all executing the required procedures uniformly? Are they skipping steps? By deciding what the process is and training everyone to follow it, you will enhance your troubleshooting abilities, reduce your errors, improve efficiency, and increase your bottom line.” What Wickman describes is the “highly developed system” identified by Collins, within which self-disciplined people exercise freedom and responsibility.
The first step in documenting your Way of business, is to identify your core processes. Wickman suggests a set of core processes that would work for most businesses: Human Resources, Marketing, Sales, Operations, Accounting, Customer-Retention. Make sure you identify all the processes that are critical to the success of your business. In a startup business, the entrepreneurs would document all the processes themselves. In a more mature company, such as one undertaking a value growth program with a view toward an Exit in the near future, the person accountable for a certain process takes charge of documenting it and keeping the documentation current. Document the 20 percent of each process that produces 80 percent of the results. Document at a high-level, don’t create a 500-page tome that nobody will read. Wickman recommends that all the processes and procedures be packaged together in one binder. If your business is called ABC Company, entitle the compilation “The ABC Company Way.” Your Way is now available for reference and training. It is also transferable, adding value to your business.
Documenting your Way of doing business “as is” should be one of the first de-risking projects listed in your Prioritized Action Plan, to be accomplished during the first 90-day sprint of your Exit Planning program. Your team will revisit process documentation later, when you begin to refine processes to create efficiencies that improve your bottom line.