How Do You Measure the Value of Implementing EOS? (Part 2)
You may remember in Part 1 of this series, EOS (Entrepreneurial Operating System) is a business management and leadership framework developed by Gino Wickman and discussed in his best-selling book Traction (2012). It has been implemented in tens of thousands of companies, from small startups to companies with tens, hundreds,
or thousands of employees. As a comprehensive system, EOS addresses the six key components common to every business.
Companies implementing EOS examine their vision, structure, and every person in every role. They work to measure the business and set targets. They optimize fundamental processes and use new methods to interact with peers and the people who work for them. Companies learn to handle challenges and seize new opportunities along the way.
Change is hard and expensive. Especially today, as we face the challenges of our public health crisis and its impact on the economy and our companies, we must be prudent with our investments. We must measure the return on those investments and the time spent implementing them. In this post, we will continue to examine the value of EOS and how it affects three things:
· Operational Benefits
· The Valuation of the Business
Your company is unique. Each of you will find different answers to the value proposition of EOS. It is not for everyone. Some companies will find a return of tens or hundreds of times their investment. Others should not implement EOS at all.
So the question is: How will you measure the value of implementing EOS?
Remember as we said in Part One, “Risk” is a pass/fail test. Most businesses fail. Over 50% in the first five years, and 70% in the first ten years. EOS may improve your opportunity to succeed.
How you and your team run the day-to-day of your business starts with people. We discussed the cost of not having the right people or putting them in the right seats.
We talked about creating accountability from the leadership team to the worker on the shop floor or your front-line all of which is driven by Vision: a 10 Year Target, a 3 Year Plan, a1 Year Picture, and 90-day goals called “Rocks” where the progress is reviewed regularly.
We talked about the value of establishing measurables, like the scorecard of 5 to 15 numbers reviewed weekly, that give you the pulse of the business, alerts the team when you are off track, and shows trends that tell you what needs to be changed.
Now let’s go deeper:
Some of the greatest opportunities for value creation start with Operations. Once operational benefits are in place, we’ll take a brief look at the ultimate goal – how EOS can change the payoff; the valuation of your business.
We start our businesses for a variety of reasons: Making a difference for our customers, providing livelihoods for our employees and their families, returning profit year after year for the owners and investors, and lastly creating long term value in the company for sale or transition to the next generation, our employees, or an outside investor.
How professional EOS implementors benefit your business?
The bulk of what we do is operations. It is the delivery of the promises we make with every sale; it is what we get paid for. Performance in operations shows up in efficiency, providing our products and services cost-effectively and improving our Cost of Goods Sold (COGS) metrics.
Another driving factor of operations is speed. Can we improve the production line with automation? Can our people build a product faster? Can we get our product to our customers faster? Can we begin a service engagement sooner thereby increasing our financial impact? Where can we bill for increased revenue during an engagement? It is important to note that the yearly impact on revenue is not just the first month of revenue, it is the last month – sometimes 4x the starting month in that fiscal year.
Let’s not forget quality. We have already discussed the impact of quality on a healthy culture. But the impact of quality on operations goes much further. It is measuring and improving the defect rate, returns, product acceptance, longer and larger customer relationships, visibility in your industry with awards and market share, and even better relations with suppliers and partners.
Every company has core processes that should be documented, optimized, and followed. There are HR processes to onboard, manage, recognize, develop, and transition every employee. There are manufacturing processes, monthly and yearly financial processes, sales processes including how to onboard and serve customers, and perhaps other key processes in your organization. EOS takes a 20/80 approach to the key processes in your organization. That means focusing on the critical 20% of processes and then documenting and optimizing the 80% high points of each.
There are other strong process tools and frameworks. Six Sigma, Lean, Agile, Kanban Malcolm Baldrige, to name a few. Given the nature of your business and industry segment, each of these tools could offer significant benefits. EOS may even help decide which to choose and when to implement it. The value of EOS shows up as a top-down approach, delivering immediate benefits and a methodology to ensure that the processes are followed by all.
In the EOS standard meeting, where the leadership team meets every week, a small percentage of the time is spent in review: What are the numbers this week? What is the status of our Quarterly goals? Did your leaders do what they said they would do? Is there news or situations everyone should be aware of? All that takes about 20 minutes of a 90-minute meeting. In that weekly leadership meeting, at least one hour is spent harnessing the leadership team's expertise and perspective to identify, discuss, and solve significant problems or opportunities. How do we measure that?
Admittedly, it’s challenging but always enlightening. The leaders rate the meeting every week to recognize and improve its quality. However, the dollar payoff shows up in issues addressed and subsequently solved.
What could that mean to your organization?
Excellent examples may be found at:
Harvard Business Review, How Operational Innovation Can Transform Your Company
The ultimate payoff and value of any change you make in your business is how it impacts the value of your company. As Tom Bronson here at Mastery Partners often reminds us,
“Everyone will have a transition event.” The question he points out so well is “Will it be on your terms?”
The measurable impact on a company valuation of EOS is less about the tools like the Scorecard or Rocks and more about developing the leadership team to run the business. If you are the most important person in your company, you will never receive the multiple of revenue or EBITDA that you want. It is too dependent on you.
Contrast that with the fully implemented EOS organization – firing on all 6 cylinders of our core competences. A compelling vision shared by all, including customers and partners; the right people in the right seats; a business run on real data, not swayed by emotion; a company and leadership team that elevates the issues of operations, sales and finance; optimizes processes and procedures; fulfills promises made to customers; and is accountable to the company, investors, and each other.
The transition of our business occurs in different ways. Sometimes it is a strategic buyer who is buying for geographic presence or a new product line. Or they may be buying your customer base and the chance to secure market share. One thing is certain, the stronger your company, the more bargaining power you have.
The same principle applies to financial buyers. Perhaps the EOS process has given you clarity on your target market. You know what makes you unique, what opportunities will present themselves in 3 years or 10 years. The financial buyer may provide access to capital to make that next step, put you in the major leagues, or make you a target for a larger acquisition.
Or perhaps your transition is to a family member or an ESOP. In many ways, there is more at stake. Families have been torn apart in these scenarios. Again, the answer EOS may help provide is making this a highly functioning team instead of the reliance on a single individual or two.
This is where Tom and Mastery Partners comes into the picture. They know how to put companies on the right path to any transition event. And when EOS might help.
Informative links on increasing the valuation of your business:
EOS is a well-defined process with time-tested principles. There are no secrets. The books have all the principles and show you how you might implement them in your organization. The basic tools are available from EOS Worldwide or on our website.
Why then do you use an outside implementor?
We had an interesting conversation on LinkedIn this week:
"Great teams do not hold back with one another, they are unafraid to air their dirty laundry. They admit their mistakes, their weaknesses, and their concerns without fear of reprisal.” Patrick M. Lencioni, The Five Dysfunctions of a Team. This is part of the reason that EOS is so powerful for leadership teams and part of our role as facilitators. Since we are not part of the company, we can see and get issues on the table without being the “boss.” Even leaders that are not “command and control” have the danger of their words being heard with the weight of authority.
Implementors that license the intellectual property and provide it to your teams bring three other major benefits. The first is obvious. It’s not our first EOS rodeo. We know how EOS has been implemented with other leadership teams; what has worked and where other teams have had difficulty.
The second is more counterintuitive. Our value is often that we don’t know your business as well as you do. How can that be helpful? Because familiarity brings blindness. Implementing yourself, your team might look at long-standing issues as unsolvable. You could miss the breakthrough idea, the new metric that could give instant insight into the pulse of your business.
Finally, there is a weight, an elevated importance, to the process. Because you have named it, hired a professional, committed to a schedule, and established expectations there is a much better chance of success.
Success is what EOS is all about. I hope this has given you some ideas on how to measure that success.
ABOUT JIM BREWER: Jim Brewer - principal at Brewer Leadership - which is a consulting practice that helps business leaders thrive by coaching the principles of accountability toward tangible goals, alignment around values, and corporate culture enhancement. Jim is a Vistage Chair and is also an implementation coach for EOS - The Entrepreneurial Operating System. You can connect with Jim by visiting his website:brewerleadership.com