Clockwork: Design Your Business to Run Itself

by Mike Michalowicz

  With the bumpers piling up, Kevin looked at the thing they were waiting for, to be welded. That was the bottleneck. He noticed that the distinct blue light that welding torches put off very rarely fired. Then he simply observed. He noticed that the welders went to the stockpile, carried over the parts, put them in a jig, spot-welded them to hold the parts in position, and then, and only then, fired up the welding torch to weld it all together. Then they cleaned off the parts, moved them to the completed section, and started the process all over again. All in all, the welders were spending about 10 percent of their time actually welding. So the blue lights flickering only happened—you guessed it again—10 percent of the time.

  The Primary Job of the welders is to weld. And it was clear, from the lack of blue lights, that their Primary Job was not being prioritized. In fact, they were doing their Primary Job only—you guessed it again—10 percent of the time.

  To fix the problem, Kevin simply hired a few teenagers to serve as assemblers. Their job was to move parts and get them ready for the welders. The assemblers would carry the parts to the welder and put them in the jig. The assemblers would then move out any finished parts to the completed section. As the assemblers were doing this, the welder would do the spot welds and then fire up the welding torch and get to work. Blue lights flashing. The assemblers, after moving the completed parts, would walk back to the parts waiting to be welded, where they would assemble the parts in the jig (which had casters on it) and wheel the bumper components to the welder. By this time, the welder had just finished welding the other bumper. The assemblers would put the new jig in position and wheel out the completed bumper. The welder would start welding again, blue lights flashing. A lot.

  With this fix, bumpers now started to go through the former bottleneck at lightning speed. The pile of parts was depleted within days, and parts rarely ever piled up again. And the entire business was able to output bumpers faster than ever. The magic wasn’t just in the solution, but in the metric. It was really simple—if Kevin saw blue lights flashing constantly, that meant the bottleneck was flowing. But if the lights stopped for any period of time, or flashed much less often, that indicated a problem.

  Kevin, and subsequently the owner of the factory, had a ridiculously simple and yet wildly effective metric: Are the blue lights flashing? You should aim to make your metrics as simple as possible, too. You want to measure if business is flowing well. That’s it. When it’s not, the job of the metric is to simply notify you that there is a problem. And if there is a problem, your job, chess master, is to investigate and fix. Blue lights flashing? All is good. Don’t see the blue lights much? That is a signal for you to look for the problem.

  Think about your own car’s dashboard. As you’re driving, you have various gauges you check to make sure everything is A-OK. In one two-second glance, you can tell if you’re driving too fast, if your engine is overheating, or if you’re running low on gas. These are all simple indicators of a problem, and that action is required.

  If you’re going too fast, you take your foot off the accelerator. If your engine is overheating, you can pull over and check your coolant levels. (Or if, like me, you are relatively clueless about cars, you pull over and jump out thinking your engine is on fire . . . then get roadside assistance to tell you it was just steam. True story.) If you’re running low on gas, you can fill up at the next stop. Without the instruments on your dashboard, you might get pulled over for speeding, watch your engine smoke (for real), or find yourself stranded in the middle of nowhere.

  The same is true in business. A dashboard with metrics will show you how critical aspects of your business are doing. Then, if something is out of whack, you can quickly check on the health of your business and make tweaks if necessary. When all of your dashboard metrics are indicating all is well, you can focus on the future of your business and not worry about the day-to-day operation. That’s a beautiful thing, because this is when you’re making money on autopilot. Yes, that’s a real thing. I’m not talking about the “passive income” so many late-night infomercials promise. I’m talking about running the business you love while spending a mere fraction of the time you currently spend doing the work in the business, bringing in more cash than you ever truly thought possible, and loving every minute of it.

  ATTRACT, CONVERT, DELIVER, AND COLLECT

  Every year, my friends Selena Soo and Chris Winfield (remember him? the former productivity guy?) host eight or nine dinners in New York for a mix of authors, speakers, and experts. Selena and Chris are the ultimate connectors, and their dinner events have quickly become heralded as the who’s who of the entrepreneurial educator space. For me, this is the equivalent of the Oscars, just without the requirement of black tie and a lot fewer duck face pictures.

  You can’t just go to the dinner; you have to be invited. My first invite, two winters back, I threw the “play hard to get” protocol out the window and accepted the invite within milliseconds. Four weeks later, I was making my trek into New York. Dinner kicked off with Selena and Chris showing appreciation for us, their guests. As I took a sip of the incredibly smooth cabernet, I scanned the room of fifteen or so guests. I recognized most of the faces and you would have, too (one of the rules is that the attendee list remains confidential and attendees are revealed only with the hosts’ direct permission). “Holy smokes, that’s so-and-so from that such-and-such new show,” I thought. “Wow, that is the editor of the number one magazine for entrepreneurs.” And right across from me was the fabled master of business streamlining . . . Adrienne Dorison.

  That night I hung on every word she said about how she made lumberyards more efficient by addressing the countless bottlenecks, such as changing the way trees are loaded in the hauling truck to make them unload faster. How buffer yards helped deliver a constant feed of lumber and prevented truckers from skipping deliveries because of long lines. And how to deal with politics and ego that can slow a lumberyard down to a snail’s pace. All these improvements have a small impact. But none of them were necessarily the QBR, by my understanding.

  I explained to Adrienne what I had learned about the QBR and gave her my explanation of the impact. She got it and agreed. And as serendipity would have it, she had studied bees for years. Meaning she really understood the importance of the QBR.

  “All businesses have bottlenecks, Mike. These are necessary parts of a business that must all be operating with excellence, otherwise the business will suffer. All parts of the business are important to different degrees. In order to deliver its product or service to clients, the essential parts of the business must all work. The most critical of those are the bottlenecks—the areas where production is necessary but slower than what is feeding it. And of all essential parts of the business, the grandfather of them all is the QBR. It is the tide that lifts all boats, so to speak. All the elements of a business can be broken into four quadrants, and the QBR therefore can only exist in one of those four spots: leads or sales or deliverables or cash flow.”

  “So?” I asked Adrienne. “What is the QBR for lumberyards?”

  Adrienne looked at me and stretched her neck to the side as she squinted one eye. You know that look, when someone is surprised you asked the question, since you should know the answer. Then she responded, “You tell me.”

  I had stumped myself. I paused, thought, and then responded, “Well, it depends, doesn’t it?”

  “That’s right,” she said.

  I continued. “Of course! The QBR is self-determined. Just like your business, just like my business, just like any business, the industry doesn’t determine the QBR. The leader of the business determines what the QBR is. The leader picks what the business will make its stance on. Therefore, the lumberyards you worked with can choose. In fact, they need to choose.”

  I was on a roll now. “One lumberyard may bank its success on the speed of the operation. They want to make lumber, fast. And in that case, the QBR is what
makes the operation move the fastest. Just like a beehive’s QBR is to hatch new bees from eggs. And that is why the Queen Bee is revered, since she makes the eggs.”

  “Bingo!” said Adrienne. “If the lumberyard declares speed of production as the QBR, they then look on what part of the business operation most influences the speed of production and which people are serving that role. And, so you know, that is what most lumberyards choose as their QBR. Then they usually find that the crane operation is the QBR. If the crane that unloads trucks and puts the wood into the cutting and debarking machines is moving optimally, the business flows, and if not, the business slows.”

  “Exactly!” I said, excitedly and a little too loudly for the kind of restaurant we were at. “And that means the crane operator is the one serving the QBR. He, just like a doctor, needs to be protected and served.”

  “You got it, Mike. And don’t forget that is just one choice of QBRs. A lumberyard may determine that they will be world famous for their quality of wood. Speed becomes secondary to selection in this case. So the QBR is now identifying the best wood raw materials. The crane operator is still a relevant employee, of course, but they are not serving the QBR. The lumber quality control manager is. They are serving the QBR.”

  Adrienne was on fire! “But a lumberyard’s QBR is not restricted to a deliverable,” she continued. “It could also be in the attraction of prospects, or converting them into clients. In fact, one lumber company I worked with put the QBR in the conversion. They built a staff of experts, including engineers, who, during the sales process, guided prospects on making the best value-based decisions and gave this guidance to a degree that far surpassed that of any of their competitors. Cheap wood may save the customer money but fail to serve its intended project and end up having to be replaced with more expensive materials. So while they turned around projects the fastest, and always had the best grade of wood, it was the fact that customers trusted them entirely that contributed to their soaring sales.”

  Adrienne explained that lumberyards aren’t unique, in that every business determines its QBR. And the QBR always sits within one of four quadrants: leads, sales, deliverables, or cash flow. I prefer to think of these aspects of business in terms of things we do, and so I modified them a bit, though the meaning is the same: Attract, Convert, Deliver, Collect (ACDC). (Recall that I first mentioned ACDC in chapter five.)

  Adrienne and I talked the night away and I learned that every business has these four quadrants, and whenever a business is experiencing inefficiencies, it is going to be that the QBR is not being properly protected or served, or there is a bottleneck in the ACDC.

  Adrienne’s insight blew my mind. Let me break down what I learned for you:

  Attract. Every business needs to attract prospects, or leads, which are inquiries into your product or service. Leads feed your sales. No leads and your sales will dry up, because you have no one to sell to.

  Convert. The responsibility of sales is to convert a lead into a paying customer. You may have all the leads in the world, but if you can’t convert them into sales, your business is going under.

  Deliverables. Deliverables are the processes and services necessary to properly deliver on what you sold the customer. If you don’t deliver on what the customer buys, they will seek a way out . . . sometimes canceling their order, sometimes seeking a refund, possibly spreading the word about how you stink. Can’t deliver? You can’t stay in business.

  Collect. If the customer doesn’t deliver on their promise to pay you, you are in trouble. If you don’t collect the money for the work you do or can’t keep the money (because the customer takes it back or you blow it), you are out of business.

  THE ACDC MODEL

  These are the core four functions of every business. You must do them all well. And as we get on to playing the famous game all good business leaders play, “bottleneck whack-a-mole,” you will constantly evaluate and fix all the things big and small within these four areas, just like Adrienne did for the lumberyard. Almost all businesses follow the ACDC predictable path of sustainability, in the same sequence. First, you must generate interest in your offering (Attract leads). Then, for the people interested, you must convince them to buy from you (Convert leads to sales). Once they are a customer, you must Deliver on your promise. At some point during the process, you must take money from them for the work you do (Collect).

  However, there are a few unique cases. For example, some businesses do work “on spec,” in which the deliverable is completed before the prospect becomes a customer. In this case, the flow would be ADCC.

  Collecting cash can be seen a little bit as a wild card. You, for example, may collect it before you even start the work (the deliverable). But even if you have collected the money before you did the work, it is not really yours until after you deliver on your promise to your client. If you don’t, the customer may request their money back. You know, by suing you. This is why I put the categories in this sequence and why you need at least one metric for each category. This is how you can see the flow of clients through your business.

  Let me show you my own dashboard for Profit First Professionals.

  ATTRACT. Your metric for attracting leads may be how many people have completed a specific action. For an online training program, it could be how many people are giving their email address to you in exchange for your free giveaway. For a B2B (business to business), it could be how many people ask for a proposal. For Profit First Professionals (PFP), it’s how many people have filled out our initial application form on our website. If we get three people a day completing that form, that translates to a little more than one thousand applications a year (three leads a day times 365 days). When they fill it out and submit it, we acknowledge it as a lead. When fewer people are filling out a form, that triggers a question. The metric doesn’t say that our form isn’t working, but that could be the issue. It tells us that we have some kind of issue, because fewer people are filling out the form. This triggers us to investigate and resolve the problem. Just as when your check engine light comes on, you know that you need to get a diagnostic. It could be nothing big (a loose wire) or it could be big (a busted transmission). When we see our metric fall short of our expectation of three per day, our question is, “Why aren’t more people filling out our form?” The answer could be because our website is down, or because people are calling us instead, or we have an issue with the QBR (the messenger of Profit First) and nothing is trickling out on the other side, which means we need to find and fix a bottleneck.

  CONVERT. Our metric for converting leads into sales is the number of people who join us as new members within three months of originating as a lead. It’s a simple percentage: We want a 33 percent conversion rate, which will bring in approximately 360 new members a year. That being said, not all prospects are made the same (you know what I am talking about). Some leads are ideal, some are total tire kickers, others are too early in their business to be a fit, and so on. Some qualitative discussions that come up during our quarterly meetings are how to message better, how to bring in better qualified leads, and how to sell better so we can more quickly separate out the ideal fits from the misfits. The metrics are simply dashboard indicators of performance, but we (and you should) dig in deeper to make even more impactful decisions. The way this metric works, we know that if we talk to one hundred people during a month, and only ten become members (10 percent instead of 33 percent), something may be askew. Likewise, if eighty become members (as glorious as that sounds), something else may be askew. The metric simply tells you whether something is different than expected. When that happens, you need to investigate.* Well outside our 33 percent conversion? We ask ourselves, “What’s going on with sales?” Did we introduce a new pricing structure that didn’t work? Did we hire a new sales team member? Is the quality of leads changing? We also look back up the chain. Before conversions is
leads, so if we have a red flag with conversions, we ask, “Do we have a slowdown in the leads metric, too?” If so, the problem is likely leads and we investigate there first.

  DELIVER. Do you deliver on what the customer expects (or better)? For some businesses, the best indicator of nailing the deliverables is that customers come back again and again (retention). Another is when customers rave about the experience, therefore enabling marketing by word of mouth. Maybe, if you have lower standards, it is the lack of complaints. For example, think of a rest stop on a highway. Surely it has happened, but I think that people rarely post “I just took the most glorious whiz at the most remarkable rest stop ever” or “You have just got to see these urinal cakes. Out. Of. This. World!” If people have anything to say about a rest stop, it’s usually a complaint. So the fewer complaints, the better.

  At PFP, our deliverables are measured by completed milestones. One of those milestones is certification. This is because I know that once a person gets certified in Profit First, they have completed a sequence of training through PFP and have been adequately trained to pass that test. I know that if people get the certificate, they have mastered the process in their business and are ready to serve clients. Our metric is how many people have completed their certification within six months of signing up. We want that metric to be 97 percent. While we would love to have 100 percent as our metric, that is not realistic (unforeseen circumstances do happen, such as life events). And aiming for 100 percent means that we would be in a constant red flag situation. Oh, no, we are not at 100 percent again, what happened? Since it is unachievable, we will never get there, which means we will begin to ignore it.