In a previous post I discussed the 4 Parts of a Function and why it's useful to see your company as a compilation of functions rather than jobs.  If you haven't read that one, it will make more sense to do it before you continue reading. I'll wait.

This time I want to examine what it looks like to see your entire company through the lens of functions.

When companies start out, they look like this. This one guy performs all the functions a company needs done.

But when companies scale they don't look like this ...

Here's a short post to let you know about this video I did called How to Think Like a CEO. 

It's a webinar hosted by a couple of my clients - Jo Ann Koontz & Marina Parkin who run a mashup of a law firm and a CPA firm. Two services every growing company needs.

 Here's the money shot from the video:

Stage One is run by a hands-on, head-down leader.

These people do all the heavy lifting themselves, and when they hire people, it's to assist them in getting things done. Dealing with employees typically frustrates them. These folks spend most of their time building their product and selling it. They usually can't get away from work for any length of time without things falling apart. Because of that it's often said these people own a job not a business.

Much of the owner's work is directly dealing with customers - either sales or production or both. Even when a crew does a lot of the production work (like in a small construction firm) it's still the owner who's the team leader and interface with the customer.

Business owners like this typically use check book accounting. That's where they look at their checkbook to see how well they're doing and if there's enough money at the end of the week, they can go out for dinner. They use a CPA for taxes only and a lawyer for nothing unless they get sued.

These companies stay pretty small - usually less than 10 people. And the earnings of the owner can provide a decent living (maybe 100k or sometimes even 200K) although in specialized industries like medicine the amount is higher. However there's not much wealth inside the company. As a result, these companies are often run by the founders (or the founder's children). But the companies can't be sold for much money because all the real value walks out the door when the owner leaves.

The second stage is run by someone who is hands-off, head-down.

Owners like this are good at delegating and have hired managers. As a result these companies can grow quite large and provide a lot of wealth for the owners, especially while they're working. Their take home (a mix of salary and profits) can be over $250K - often into the millions.

These folks spend time building the company, not the product. Less of the customer-facing work is done by the owner than in a stage-one company. Though owners often keep responsibility for a few significant relationships - with key customers or vendors. These companies have professional accounting systems and reporting. They usually have outside advisors they have close relationships with.

At the early stage two companies, the owner's motivation is often to work less and get more time away from work. But as these companies grown in size and in quality of their processes, the owners get that time. At that point, it's not uncommon for the owners to spend time on other endeavors - charity, politics, hobbies, travel, or even unrelated business, while still maintaining ownership and working in this one.

These business generate more profit than the owners need to live on and the excess is usually taken out of the company. This has two ramifications. One is the majority of the owner's wealth has often been generated outside the company. Therefore the company, while it can be sold for more than a stage-one firm, is not worth as much as a comparable stage-three company.

Stage three companies need a hands-off, head-up owner.

This type of owner has built a company like the second type, but doesn't take as much out of it as possible. Their take-home may be high but they limit it and put the rest into growing their firm. They've hired not just managers, but directors and may have employees with P&L responsibility in different parts of the organization.

By "organization" I mean they not only grow their company, but they are in a position to buy other companies sometimes in adjacent (or even unrelated) industries and run them under the same top management. Their strategic relationships are within their industry not necessarily within their company. As a result, they become power houses regionally, nationally or even globally.

These folks function like CEO's of public companies. They take advantage of sophisticated financing options available to companies at this level. While their personal wealth may be diversified, they have also created substantial wealth inside the companies which can be realized when the company is sold or passed on to future generations. These folks spend their time expanding their empires and building their brand.

Where do you want to play?

These distinctions come from a book by John H. Brown called Exit Planning: The Definitive Guide though I have embellished them based on my experience working with business owners. I highly recommend the book for anyone who is not planning on owning their company forever. And like Brown, I mean no judgment here. It's not that any of these three types of business owners is better than the others. They are just different, make different choices, and those choices have ramifications. You can run your company any (legal) way you like. I just suggest you make your choices consciously knowing the consequences of your decisions.

Product, Company, Brand

It's only a bit of an over simplification to say that in stage one company owners build product, in stage two they build the company and in stage three they build the brand. A good living can be generated from stage one, but it takes stage two or three to build real wealth. When you build with a long view toward the future, each stage forms the foundation for the next. You build products in stage one in such a way that it's easy for others to produce them as you transition to building the organization. You build the organization in stage two with the idea that it will lay the foundation for you to acquire others or grow to become a well-known brand in your industry, region, or sphere of influence.

I've spent 25 years working with business owners helping them scale their organizations. The change is not linear or abrupt - though it can happen quickly. You may be solid stage two in some aspects but still have some systems which operate at a stage one level. There are lessons from all three levels that can be applied no matter where you are now and wherever you want to be.

The key is working on your business not just in it. We've all heard that before but most people don't know how to translate that into action. That's where my direct work with clients comes it - we develop action plans to work on your business. What I do first is assess which level each of your systems is operating at. Then we map those against the your specific goals, and devise a plan for progress. Email me at John@CEOBootCamp.com to see if I have open slots and if one might be right for you

Even if you’re not a parent, you can imagine that what a toddler needs from Mom or Dad is vastly different from what a teenager needs (I said needs not wants). And that changes again as the child leaves home and starts their adult life. (They do leave home don’t they?)

In a similar way, what a company needs from their CEO changes as the company grows. This is particularly shocking when a company grows out of stage one and into stage two. I say shocking because it often comes a quite a surprise to business owners. If you aren’t prepared that change can be very frustrating.

Don’t let that shock keep your
company small (unless that’s your goal).

Of course the kids are going to grow up no matter what you do. Not so with a company. They can stay in stage one forever. I’ve worked with companies a few years past startup and companies over 50 years old. The changes in the role of CEO follow a similar pattern.

Change in Focus – from product to company

The biggest change is the shift in focus. You focus on building the company not the product. Of course the product still has to be built – just not by you. Your main job is now to build the company.

Changes in Schedule & Activities

If you always do what you’ve always done,
you’ll always get what you’ve always got.

That change in focus results in you doing different things when you show up for work. That change can be stated simply as doing more of some things and less of others. This feels strange at first. But keep it up.

Do More

• More Thinking You can’t shoot from the hip anymore. You need time to think and plan.
• Spend More Time Hiring – this one’s a shocker. But you can’t build an organization without good people and you can’t just go down to the store to find them.
• Spend more time communicating. A leader leads by communication you must constantly share why decisions were made and how people’s actions contribute to the vision.
• Delegate More – delegation is not abdication. It’s a skill you have to learn.
• More Meetings – really! Meetings are a manager’s secret weapon. But most people don’t know how to use it.

Do Less

• Less building product. Teach others how to do it better than you.
• Have a To Don’t List. Actually list the things you won’t do anymore.
• Less Sales work. Develop a team and turn your key customer relationships over to them.

Changes in Thinking

You’ll see money differently. You’ll see money is a tool to get something – not as a resource to hoard. In other words, don’t always be so cheap. I know, being cheap got you where you are. But it won’t get you further down the road. I’m not saying be wasteful. Amazon was famous for using doors on saw horses as desks even after they could afford real desks. But they kept spending on what would enhance the customer’s experience. You’ll have to spend more on some salaries to get good people. You’ll spend more on tools, training, and support to make your people more productive. You’ll spend on consultants and advisors in ways you never did. You’ll learn to see these outlays as investments, not expenses. Then you’ll demand a return on those investments.

You’ll look at problems differently. At stage one, problems are only obstacles to be fixed as soon as possible. Still true. But as you build the company you’ll also see them as learning opportunities. You’ll learn to dig into the root cause and prevent them from happening again – and you’ll teach your people to do that. Bill Gates has said it’s the role of the CEO to find problems when they’re small. The “Toyota Way” (which became Lean Manufacturing) says the same thing. One of their concepts is “No Problems? That’s a Problem!”

You’ll see  yourself as a leader. Your vision for where the company is headed will expand beyond ending the quarter with cash in the bank. You’ll describe that vision in detail and express it to your employees again and again showing how their work helps make that vision a reality.

You’ll think of your company differently. An org chart of a large corporation has boxes with titles in them – not just people’s names. The people will move, inhabiting different boxes as their careers develop. The boxes don’t change much – each is a function that must be performed for the company to operate. In stage one companies, those functions are almost entirely designed around people’s unique mix of skills, strengths and weaknesses. This limits growth because when you need to promote Jennifer, you can’t find someone to perform her functions exactly the way she did. Separating functions from people is one of the key things you’ll learn in my Virtual CEO Boot Camp. And it’s a big difference between stage one and stage two companies.

You’ll seek to turn wisdom and experience into process. And you’ll focus on process not just results. McDonalds hires teenagers, retirees, and people whose first language is not English and still turns out consistent product at every location. Did you know that they don’t allow those employees to determine whether the ketchup goes on the burger before the pickle or the pickle goes first? Why? They’ve determined what they need for a consistent “mouth feel” and they teach their managers this at Hamburger U. Yes it’s a real training location – seven around the world actually. The point is you can’t depend on the heroic effort of individuals to get the job done if you want to scale your company.

Changes in Your Business Model

All of these changes affect your cost structure and hence your business model. The business model is how you make money. As your cost structure changes, you often need to change your price, your product offerings, and your market. I learned this from a conversation with a VP of a web development company with about 100 employees. He told me when they were small they could build a website for $5,000. Now they couldn’t touch one for less than 20 grand. But it turns out, their current customers would be scared to death to have their website done by a company that could be profitable at only $5K. They’d know that they’d be lacking in critical abilities and 24/7 support.

So as you upgrade and expand your organization, you must be aware of how it affects your business model and you must adapt your market and your customer base in sync with your internal growth.

Often this means you’ll need to learn to speak the language of finance, and depend on a CFO who’s expert in that language.

Want to Scale Faster?

I’ve spent 25 years working with business owners helping them scale their organizations. The change is not linear or abrupt – though it can happen quickly. You may be solid stage two in some aspects but still have some lingering bits of stage one holding you back. However there are lessons that can be applied no matter where you are now and wherever you want to be. The key is working on your business not just in it. We’ve all heard that before but most people don’t know how to translate that into action.

That’s where I can help. I work as a coach to individual business owners, and to business organizations both for-profit and non-profit. Reach out if you’d like to see if this is right for you or your organization.

If you run a company of under 100 employees, and especially if you’re the founder, you’re really good at some of the key skills. Maybe you’re the best sales person. Maybe you have a long term relationship with a certain vendor. Perhaps you’re the guy who can fix that machine when it goes wonky. All of these are useful and need to be done. But they aren’t CEO functions. That’s one reason you’re not functioning as a CEO full time.

Another reason is that CEO work is important, but rarely urgent. But our days are filled with urgent tasks (which may also be important). So we never get to the point of being able to spend time on the important things that aren’t urgent.

The final reason is there’s no training (besides OJT) for being a CEO of a small to medium sized company. It’s not like running a Fortune 500 company – there’s MBA school for that. That’s why I’ve put my Virtual CEO Boot Camp online. But I digress.

Here’s the Good News

Your company doesn’t need you to function full time as CEO. All those other things you’re good at need to be done. But your company does need you to function as CEO more than zero. That’s why I recommend you start with two hours a week. Here’s how.

• Block off a chunk of time. Same time every week is best.
• Be in a place where you won’t be disturbed.
• Use that time for working on your business.

Simple? Yes but not easy. I had a client tell me what kept her from doing this was her need to please. She felt like if she took time for this she’d be ignoring the folks who are constantly reaching out to her for advice or opportunities. Of course, once she realized that this was what was standing in her way, it was easy to see how unproductive that need to please could be. That gave her the power to ignore those folks for just a couple hours a week. And it made a difference.

Other clients have felt like they don’t know what to do in that time CEO time. This is pretty common. We’ve all heard we should be working on our business – not in it. But we often don’t know how to turn that adage into action. That’s actually the reason I put my Virtual CEO Boot Camp online. It’s full of action items you can do in your CEO time.

What most people find is that even two hours a week of CEO time is incredibly powerful. And by paying attention to the important-but-not-urgent stuff, we can actually decrease the number of urgent fire drills that demand our time. Try it for a month and see what happens.

Listen Here

A mission is the reason that a company exists. It doesn’t have to be worthy of a nobel prize. “We make the best damn pizza in town!” is an acceptable mission. The problem comes when companies try to encapsulate their mission into a statement. And the problem gets compounded when they hire consultants to help them do it. I say this as a consultant.

I was recently in a grocery store in California — using the bathroom actually. The bathrooms were located upstairs in the employee area so I got to photograph a poster with their mission statement on it. I’ve blocked out their name because I didn’t ask for permission to use it. I took the picture because it represents the worst example of a mission statement: something everyone can agree on but has no defining characteristics. It says nothing about the company, what it does, or really why it exists. The only worse ones maybe HERE.

The funny part was, as soon as I got downstairs there was another poster right by a table of stuff for sale. The poster did a much better job of defining this company’s mission.

See what I mean? Now you know a whole lot more about the company and why it exists.

Two More Things about Mission

Thing One

As CEO, you probably know why your company exists. You have a vision for where the company can go and what it can do. The definition of leadership is to inspire people to follow you. The thing that all leaders have in common is they do this by telling people where they’re going. Share your vision. Explain your mission. Over and over and over again. Explain how it informs your decisions. Spotlight others who do a good job of working to achieve the mission. Just don’t stick it on the wall next to the bathroom.

Thing Two

Your company’s mission (or reason to exist) needs to be adapted and adopted for each department so everyone knows how their job fits into the big picture. In the second poster, it’s easy to see how the buyers or even the stockers fit into this store’s mission. But what about the janitors, the IT department, or the people who do payroll? As a leader, be sure everyone knows how important their work is to supporting the over-all mission. That’s critical.

[This post also appeared on Medium.  Thanks to Sebastiaan Shepers of Bannerconnect for reminding me about adapting the mission to every department.]

The first question (always – about almost anything) to ask is why do it at all? Presumably you’ll enjoy a vacation for personal reasons. Your business should be in service to your life, not the other way round. But there are business reasons to take a break. They include rejuvenating your energy, getting a new perspective, and detaching to let your non-conscious mind work on stuff.

Another business reason is that the prep you do might just change how the company works even after you return.

How?

Step 1 – Replace Yourself.

Too many entrepreneurs I know think things will go to hell if they leave. And too many are right. So the first step is to figure out what you do that can’t wait while you’re gone, and train someone else to do those tasks. I said train someone, not just dump the responsibility on them. Most of the time, you only have to do this with tasks that are non-CEO tasks: stuff you’d hire someone else to do if the company were 3 or 4 times the size it is now.

CEO Tasks can usually wait till you get back, because they tend to be non-urgent (though very important). So this becomes a good opportunity to take stock of the many hats you wear and get some people cross-trained. If they do a good enough job, you might have them continue to do it after you get back – and free yourself to do more CEO related activities. Who knows, they might even do a better job than you. And that’s a good thing.

When you get back – don’t just jump into the same old routine. Maybe someone who took over some of the outputs you were responsible for should continue doing so. This will ratchet up your company.

Step 2 – Communication While You’re Away

If you need to check in regularly (and sometimes you do) set specific times that you’ll be calling in. Tell people who you want to talk with, in which order, and what you want them to be prepared with.

Decide what can’t wait. Winston Churchill was famous for taking naps, and he told people not to interrupt him unless it was an emergency. But then he was clear to define what he considered an emergency (the building being on fire or the armed invasion of the British Isles). I suspect your definition will be different. I usually say don’t call unless there’s fire or blood. But whatever your criteria are, be sure to let people know in detail when to interrupt you and when not to. This exercise might be something you can carry on after your return.

Step 3 – What to Tell Your Family

Before you leave, tell your family (presuming you’re vacationing with them) when you’ll be checking in with work so they can plan when you won’t be available. Then STICK TO YOUR PLAN!. Don’t tell them you’ll be on a call from 10-11 and have it stretch out till 11:10 or 11:15. Better to under promise and over deliver. Also let them know ahead of time that there might be an emergency, so they don’t feel betrayed if one comes up. If it does, explain what happened and why it was so urgent. It’s been said that vacationing with young kids is a trip, not a vacation. Your Mileage May Vary.

Capture Your Ideas

With your conscious mind focused away from work, your non-conscious will likely come up all kinds of ideas about your business (and other things). Most of them won’t be great but some will. (The way to have more great ideas is to have more lousy ones  – and more in general). Don’t judge them. Just figure out a way to capture them and get on with your vacation. I suggest recording them on your phone, or keeping a pencil and notepad handy at all times. Ideas strike while driving, in the shower, as you fall asleep, whenever. You want to be ready to capture them without interrupting your flow.  Then schedule some time to review them afterward. This review is a great use of your CEO time.

Plan While You’re In a Good Space

I got this idea from Denisse Montenegro who took her first vacation after a couple years of a very stressful business acquisition. The idea is the vacation environment destresses you and gives you a better foundation from which to make some positive changes in your life. She decided to get back into yoga after vacation, for example. I agree that it’s better to make those changes when you’re feeling good then when you’re stressed out. Just one more benefit of getting away.

So if the reason you’re spending money is to help move the company forward, there are 2 ways to do it. In my experience, business owners are really good at the first way – so good that it gets them into trouble when the second way should be used.

Here’s the first way – be cheap.

Let’s say you need a computer.

As I write this you can buy an old computer running Windows XP on eBay for around $100. Don’t laugh. I have a 22 year old company running on XP and we’ve bought a couple of these as backups because we know if we upgrade any part of our system (printer, operating system, custom database, QuickBooks etc.) We’ll have to upgrade it all and we don’t want to do that.

You can also buy a decent Windows 8 computer for between $300 to $500. Or you can go all out and spend over a thousand for the top of the line.

The way to buy a computer is to figure out what you need and see how little you can spend to get it. OK let’s call it being frugal not cheap. Cheap would be buying less than you need to save money – which usually costs you more in the long run. That’s why you don’t buy a delivery van that’s so cheap it will break all the time, but you don’t spend for fur lined seats either.

You get the point. Like I said, entrepreneurs are usually good at this kind of spending. Spend as little as possible to get what you need.

The other kind of spending is different.

Suppose you had a chance to buy $20 bills for fifteen bucks – and it was legit. How many would you buy? If you try to spend as little as possible in this situation, you’re crazy. You want to spend as much as you can. Mortgage your house, sell the car, cash in all your stocks; buy the twenties and then buy all your stuff back and pocket the extra money.

It’s a completely different mindset. “Of course it is”, you say, “because it’s fantasy”. Well sort of. Nobody is literally selling twenty dollar bills for $15. But the thing that makes a successful entrepreneur is that we can take what’s not valuable to someone else and make it valuable.

The trick is knowing when to be frugal, and when to spend money on the best. Why do super stars in movies and sports get so much money? Because they bring in many more dollars than they cost. You spend tens of millions more on a superstar and bring in hundreds of millions more. It’s a bargain. Ten to one – that’s even better than the 15 to 20 I was talking about before.

But you’re probably not in the movie business – or sports. I don’t think Mark Cuban reads my blog. But what about sales people? The best outperform the good (not the mediocre – the good) by way more than they cost. Same is true with computer programmers and others in creative work (yes programming can be creative). They can cost twice as much but generate ten times the productivity. It’s often true of consultants (something near and dear to my heart).  They key is finding the best, and being willing to spend for it because it will be like buying a twenty for fifteen.  

[UPDATE: This isn’t just true in “creative” fields. Costco and The Container Store are two retailers that pay more than minimum wage. Full time sales employees at The Container Store make close to $50K per year. Both companies feel this expense is a boost to the bottom line.]

 A good entrepreneur is adept at both kinds of spending – and knows when to use each.

Let me give you an example: Steve Jobs. He never made cheap stuff. He spent money on design, materials and function because he knew that’s what would allow him to sell at a premium. But when it came to components, he got what he needed at the best price he could.

Takeaway:

• When it’s time to spend money you need to know whether to be frugal or go all in.