Keep Your System Simple

It’s important to not overcomplicate your system of goals and rewards.  In one of my early ventures, I created a chart that had eighteen different targets to hit and a simple “REWARD” written across the top.   My employees were unclear as to what the priorities were and what the reward would be.  I have found it’s best to have three or four target goals to hit, with a very specific reward at the end.  The goals we typically fail to achieve are the ones that are complex and unclear.

Employees should also feel free to devise their own systems (within reason, of course).  My son and his friends came up with their own motivating reward.  They had a Burger King crown they kept in the office.  They were all highly competitive, and they would have contests to see which one could create the most web links on a given day.  The winner then got to wear the crown.  The reward didn’t cost me anything, and it was fun to see these seventeen-year-old boys engage in an all-out push to optimize their web sites, just for the reward of wearing a paper crown. 

One of the benefits of having a team set its own goals and rewards is that the members learn to govern their own behavior.  That way I don’t have to micromanage my teams.  

Avoid the Entitlement Mentality

When I was managing Mitsubishi Electric, I was still young and not completely financially stable myself.  I had an awesome killer team that was also young and hungry.  I began the practice of taking them out to lunch every Friday.  I would pay for their lunch myself because I didn’t feel the company should have that expense.  This was my personal way of showing my appreciation.  A few months into this, I ended up in a tough stretch where I was traveling almost nonstop.  As a result, there were a few Fridays where we didn’t make it to lunch.  Soon, there was muttering and complaining.  Morale dropped.  These employees had become so accustomed to going to lunch each Friday that they felt they were entitled to this perk.  What started as a good intention led to my being the bad guy because I did not consistently provide them with their expected lunch.

I had a similar experience with my crew of teenagers.  I would stock the fridge with food and soda pops so they could grab something to eat after they finished school and before they started to work.  A few times we got so busy I failed to replenish the quickly consumed food items.  Almost immediately, some of the boys started murmuring, “I can’t believe it, there aren’t any burritos or Hot Pockets in the fridge.”  If I have erred, it is because sometimes I have rewarded too quickly or too often.

Allow For Some Flexibility

Situations change, and sometimes you need to change with them.  I’ve lived through shifts in markets where even though my team gave an incredible effort, they fell a bit short of the original goal.  In those situations I still gave the reward so the team didn’t lose steam.  However, be careful not to reward when the reward is not merited.

I employ a group of mothers who work for me from their homes.  They are motivated and hard working.  I told them once that if they had ten consecutive days of making $500 in profit, I would give each of them a large bonus.  These women worked their hearts out.  At the end of the period, I saw that while they were only clearing $300 to $400 on the weekdays, on the weekend their profits were $800 to $1,000.  Even though they did not have the ten consecutive days, on an average they were well over the target I had set.  I told them that in this instance, average really does count for something, and they earned their reward.

Eating Our Own Cooking

In our current test business, Curtis and I received a request from a client that wanted to place a large order for high end, specialty products.  We went to the manufacturer of these products and were able to open an account.  However, when it came time to sign the contract with the vendor, it contained language prohibiting our operating a business model that was identical to our business model.  The order we were trying to fill was worth a large sum of money.  And the likelihood of the vendor ever figuring out we were in violation of the contract was minimal.  In our zeal to land this account, Curtis and I conveniently forgot to pay close attention to this clause in the contract.  However, Koral, who is one of my trusted gatekeepers, reminded us that signing the contract would run counter to our values.  As lucrative as this deal would have been to our company, we passed on the order.  It just seemed that if we were going to lose sleep, it would be better to lose it over the loss of revenue rather than the violation of our code of conduct.

In a previous business Curtis and I founded, we did not follow our own guardrails.  We had put a financial guardrail in place stating that we would always keep a $100,000, three-month buffer in place to protect us if the business took a downturn.  We also agreed that if things went south, we would reduce expenses, rather than dip into our reserve, in order to maintain a positive cash flow.

After several years of mind-blowing success, the business did suffer a downturn.  It wasn’t long before we saw ourselves dipping below the $100,000 threshold.  At the time we had a team we felt loyal to, and we did not want to have to cut back.  So we lowered our threshold to $50,000.  In making that decision, we broke our rule and crashed through our guardrail.  But we felt justified in doing so because of our previous success.  Before we knew it, we had crashed through the guardrail again and spent that last $50,000.  At this point, instead of cutting our losses, we decided to create another business plan.  Unfortunately, our team was not a good match for our new venture.  Ultimately, with no cash left, we had to lay off the entire team we had been trying to protect.  We also had to terminate what had been a very productive partnership and part ways.

We would have all been so much better off if we had reduced our expenses and stayed within that first guardrail.  Yes, we would have had to lay off one or two employees or cut back on expenses in some other way.  As painful as that sounds, it would have been so much better than having to kill the whole business.  We could have saved our most valuable employees and avoided a lot of pain and heartache. 

Our blunder led to Curtis and me parting ways for almost four years.  Now we are working together again and building a successful business.  And we’re hoping we will have the good sense not to forget our need to stay within the guardrails we’ve established. 

Summary

As you are traveling toward your beacon in the fog, you will need guardrails to keep you from heading over a cliff or wandering out into the weeds.  For each of your zigs, you should establish a financial number, an allocation of time, a duration of time, and a financial target to control the resources and energy you are going to put into that particular zig.  You then need to create a list of the other guardrails that will keep you out of the weeds.  Finally, remember the need to establish a network of trusted associates who will keep you from heading out of bounds network or drifting toward the edge of a cliff.  These guardrails will grow out of and be aligned with the values you defined in Chapter 3.  They will then have the power to keep you on target as you zigzag toward your beacon in the fog.

I control the finances of my business

I have learned the hard way that every time that I do not keep my finger on the pulse on the finances of my company, it goes into the weeds.  Once, I returned from a vacation in Nepal to find that my partner had obligated us to a bunch of expenses without our having the income to pay for them.  To cover his commitments, he basically sold off our inventory in a fire sale.  He was so proud that he had sold so much product; but he did not bother to look at the bottom line, and we took a huge loss on the items he sold.  He seemed to have forgotten that sales don’t really count for much if they don’t actually make a profit. 

I really do not love doing the finances, but I have learned that no one else is going to manage my money the way I manage it.  I always pay my bills on time, and I always know exactly how much is in my bank account.  I simply do not spend money I do not have, and if I’m not keeping track of my finances I know I could find myself in a position that would force me outside of my guardrails. 

I will not make personal guarantees on things that I have no control over

Years ago, I was hired as a young CEO of a small startup company.  I did not have ownership, but I was eager to impress the owners and show that I was in the game.  The company needed a batch of new computers for the employees.  I thought I was demonstrating my commitment by volunteering to sign for the lease on these new computers.  So, I signed a personal guarantee that obligated me to a three-year lease.  Needless to say, the business collapsed along with the rest of the Internet bubble.  Here I was without a job, and I had to pay $800 each month toward these computers.  I brought them home and lined them up in my basement.  They had absolutely no value to me, other than my kids learned great computer skills.  I did fulfill my obligation, but I vowed never to sign a personal guarantee on something over which I do not have complete control.

I protect my personal network

One of my guardrails is that I will protect my personal network.  I’ve been offered countless opportunities to get involved in businesses that would have been dependent on tapping into my networks of family and close personal friends.  At times, I would have been looking to them for capital.  At other times, I would have been using them as my primary pool to market to.  For me personally, I’m very protective of my family and friends because I know that they will be very hard to replace if a business goes south.  And, as I consider whether to involve them, I examine the situation by asking a simple question, “What’s the worst that could happen?”

I stay focused on my values

I try to always ensure that my business life conforms to my personal beliefs and values.  Obviously, I will not do anything that is illegal or unethical.  For some, that line may be a bit fuzzy, but my guardrail is whether I would ever have to justify or rationalize my actions to my wife or my children (or my mother!). 

Sometimes, my decisions are made by the simple measure of whether an opportunity feels right to me.  Not long ago, I was approached about doing business with an individual who was manufacturing and selling diet products.  The opportunity seemed promising, so I went home and told my wife about it.  Given her experience as a registered nurse, she examined the product and then told me why she felt it was not safe and why she felt this venture wasn’t something I should have my name associated with.  The product was perfectly legal.  But it was not something my wife believed in, so I did not pursue the opportunity.

Out-of-Bounds Worksheet

List the people who will be your out of bounds network:

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List the out of bounds markers in your life:

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List four or five things of how you will know when you are out of bounds. Is it a gut feeling, panic, scarcity mindset, etc:

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List the things that you consider to be completely out of bounds in your life:

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Identify exactly where you will change your direction on each zig and zag:

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Have a direct conversation with each member of your out of bounds network. Make sure they clearly understand what your out of bounds markers are and what their responsibility is to keep you within those bounds.

The following are brief elaborations on the rules I have set for myself—the reasons behind each guardrail.  Again, remember that your circumstances and needs are different from mine, just as each ski slope is different.  The key is that you need to define what guardrails you need in your life.

I will not risk my family’s financial stability

Before I took the plunge into full-time entrepreneurship, my wife and I had paid off our home. This was a huge milestone for us, and it provided us with some sense of security as I undertook pursuits that involved a much higher degree of risk.  I have committed that I will not jeopardize my home because I do not want to take risks with my family’s financial security. 

I keep my teams small

Whether I’ve been working for an organization or running a small business, I have always preferred to keep my teams small.  I know myself well enough to know that this is where I excel.  I have found that if I keep my teams under fifteen employees, then I can know the needs, interests, and desires of each person.  I can get to know what motivates them so I can push the right buttons to keep each person going.  I have run much larger teams, but keeping them small results in the highest output for the amount of input I can give. 

I avoid venture capital to start or grow a business

I have a good friend who had the courage to become an entrepreneur fifteen years ago.  He and his family came close to living on wheat and water so he could create his business.  He maxed out credit cards and used whatever he had to become successful.  And, indeed, he did become successful and profitable.  He and his business partner then decided to grow the company even bigger, and they were able to raise a couple million dollars in venture capital.  They continued to work hard and became even more successful.  They were the rave of all of the business magazines in our area.  They won awards and were highly regarded.  However, bit-by-bit, as financial challenges hit, they sought out more venture capital.  But each time, they also signed away a bit more of their lives; to where the venture capitalists had diluted the ownership of a company they had sacrificed so much to build.  Now my friend is at a point where he has minimal ownership in the company, and yet he is contractually obligated to run it for the venture capitalists.  Of course, the venture capitalists demand that he put in the same amount of work and energy as when he started the company.  After years of hard work, he still never gets to spend the time with his family that he was hoping this business would allow.  He is now middle aged, and he is burned out.  If he would have stayed on his initial course and built his business a little more slowly, he could have zigged and zagged his way to permanent success.  He now either has to start all over or continue to work in a company he no longer controls.  There are times and places for venture capital but not as frequently as people think, and it is not my desired funding method.

Weeds are diversions, inefficiencies, and even short-term successes that distract you from the course you have set for yourself.  Weeds can be either negative or positive forces.  They may take the form of being stuck with a large team you just can’t find a way to keep motivated.  They might involve becoming so mesmerized with the profitability you’ve achieved that you forget to move on to your next step.  Your personal weeds might have to do with a tendency to continually react to everyone else’s demands instead of moving toward your goal.

Just as important as establishing the values that will serve as your road map is your need to set up the guardrails that will keep you out of the weeds.  The guardrails you’ll need to keep you out of the weeds are very personal and will differ according to your circumstances and objectives. Everyone should have guardrails in place for the various parts of each zig and zag so that you are always in control of your financial number, your allocation of time, your duration of time, and your financial target.  Your other guardrails will be determined by factors such as your tolerance for risk, your family’s tolerance for risk, your value system, and what portion of your personal network you are willing to expose to your endeavor. 

I’m going to share some of my guardrails, but remember that these are my rules, not yours.  I share them only to illustrate how important it is to give careful, specific thought to your guardrails, rather than attempting to put them in place when you’re in the middle of heading over the cliff:

·                     I will not jeopardize the financial stability of my home or family.  I am not going to mortgage my house for my business.

·                     I like to keep my teams small (under fifteen people).

·                     I will be very careful in taking venture capital.  I want to retain ownership in my companies.

·                     I must control the finances of my business.  

·                     I will not sign personal guarantees on a business I do not personally control. 

·                     I will protect my personal network. 

·                     I will not get involved in a business that goes against my personal moral values. 

·                     I will not do anything illegal or unethical.

·                     I will not work with people I do not enjoy.  Whether it is a customer, a vendor, or an employee, life is too short to work with miserable people.

My list is actually longer, but these are a few examples of my guardrails.  If I find myself getting near the edge on any of these, my wife, my business partner, or my executive admin each knows me well enough to tell me I am starting to cross the line.  And I expect them to not stand by silently.

The guardrails you create must be closely aligned with the values you set in chapter 3.  You need to have people in your life who will tell you out when you are out of bounds.  I have a good friend who was a successful and well-known college basketball coach until he got embroiled in some politics and lost his job.  We were talking not long after that, and he shared what I consider to be a very profound insight.  He said, “Rich, when I was winning championships, everyone laughed at my jokes.  Now they only laugh when my jokes are actually funny.”  You need someone in your inner circle who knows you and who you trust to tell you if your jokes are funny or not. 

 Alex Mendozian is a teleseminar trainer.  We had discussed the possibility of working on a project together.  Before we began, he called me and said, “Rich, I have some good news and some bad news.  I’d really like to work with you.  That is the good news.  The bad news is before I do, I need to have an intervention in your life.”  I pushed back, thinking, “What is he talking about?  I don’t have a drinking or a drug problem!”  He continued, “Yes, you need an intervention!”  He then got my wife and his executive assistant on the phone and explained he was having this intervention because I had to quit saying “Yes” to everyone and everything.  Warren Buffet once said, “The difference between successful people and really successful people is that very successful people say ‘no’ to almost everything.”

Sometimes, in your zeal to reach your beacon in the fog, everything seems possible.  It’s a time when you’re generating a lot of ideas.  It’s a time when, out of necessity, you need to fire, fire, fire, and then aim.  I refer to this part of zig number 1 as the time I have to weave gold out of straw.  During this time I may not have a lot of resources, and I may find myself holding things together with duct tape and bailing wire. As I’m trying to get something to work that will generate cash, I find myself saying, “Yes, yes, yes, no; …yes, yes, yes, maybe.”

Once I get to the next zag, I have to create systematic and organized processes so I can hire employees and teach them how to make the business work.  During this time, I find myself saying “No” about half the time.  Part of that involves learning the discipline of delegating and letting others do the work for me. 

Getting to the third zig demonstrates that I have achieved success by reaching cash creating an organization that is working.  Now I need to scale it.  This is a much more controlled phase of the process because I do not want to destroy what I have just created.  I finally have all of the gears meshing, and I now need to figure out how to scale the business so it will generate income independent of my direct involvement.  During this period, I find myself needing to say “No” far more often. 

Another guardrail you need to put in place is identifying and empowering those people in your life who will help you say “No” and who will let you know when you are heading out of bounds.  For me, those people include my wife and my executive assistant, both of whom are excellent at letting me know when I am crossing the lines I’ve established.  My children will sometimes even tell me when I am out of line—and I’ve learned to listen.  My business partner is another person I make sure I listen to.  Unfortunately, it’s rare that your subordinates will point out when you’re heading toward danger.  Some see things quite clearly, but many are either making sure they look good in your eyes, or they are afraid of your reaction.  If one speaks up, listen, unless it feels like they’re stoking your ego. 

As you zigzag down that mountain toward your goal, you need to realize there are hazards on either side of the ski run.  Ski resorts groom and prepare the areas intended for skiers; however, experienced skiers know that just beyond the groomed runs are trees, rocks, potential avalanches, cliffs, and other dangers that may cause injury or even death.  The same is true in business and life.  If we’re smart, we establish boundaries and guardrails to keep us away from perils and on the groomed slopes that lead to our goals.

Some people think zigzagging is easy or a lazy person’s game.  The reality is it requires great discipline and control.  Any skier will tell you that traversing a steep mountain requires a strong back and legs, quick reflexes, and agility, while heading straight down is far less taxing.  That is, until you crash and burn. 

To avoid disaster, you’re going to want to create boundaries and set guardrails, which will keep you headed in the direction of your goal—and away from your own personal train wreck.

Keeping Your Zigzags under Control 

When you are beginning to head toward your beacon in the fog, you want to concentrate on three zigs and zags at a time.  That will keep you focused and under control. To help you with that, think in terms of devoting 65 percent of your time and resources on zig number 1 (driving to profitability), with 25 percent spent on planning and preparing for zag number 2 (adding resources and processes once you get to cash).  The final 10 percent of your time and resources should be spent planning how you want to scale your undertaking in zig number 3 (creating scale).  If you’re looking beyond three zigs, life gets too complex.

Once you have hit zig number 1 and your business is profitable, you need to turn and head toward zig number 2.  It’s easy, once you have cash coming in, to think you can skip making the turn.  But if you just stay in zig number 1, you may miss out on the dreams and goals defined as your true beacon in the fog.  (And remember cash alone is not a beacon worth pursuing.)

Once you are profitable, you should shift and spend about 65 percent of your time and energy on zag number 2, with 25 percent of your time spent on planning and preparing for zig number 3.  Again, if you do not make this next turn, you may find yourself with a lot of resources, but never hitting that big goal.  The last 10 percent of your time and efforts can then go toward setting another series of zigs that will help you get even closer to your beacon in the fog. 

Some people think zigzagging is easy or a lazy person’s game.  The reality is it requires great discipline and control.  Any skier will tell you that traversing a steep mountain requires a strong back and legs, quick reflexes, and agility, while heading straight down is far less taxing.  That is, until you crash and burn.

To avoid disaster, you’re going to want to create boundaries and set guardrails, which will keep you headed in the direction of your goal—and away from your own personal train wreck.

When I am planning new ideas for my business or for my life I like to use a tool I created called The Decision Matrix.  It helps me decide which ideas or options fit into my value plan.  This decision matrix can be used for any kind of decision you need to make in your life.  I have used it to help me decide which jobs I should take, where I would like to live, and, yes, what businesses and scale ideas I should pursue.  I love to use this model to appease the left hemisphere of my brain, which is the logical side.  It does not always tell me exactly which option that I want to take, but it does help me weed out the options that are best not to take.  It is really straightforward and simple.  Here is how it works:

Across the top of the paper, spreadsheet or whiteboard, I compose a list of the top ten or fifteen (maximum) things that are important to me for the particular decision I am trying to make.  For example, in a business some of the things I might want that business to do would include making me a lot of money, flexibility of lifestyle, giving back to society, or international travel.  If I were making a decision on where to buy a new home, I may list across the top things like location, quality of schools, safety, friendliness of neighbors, quality of the construction, yard for the dog, a good view, etc.

Once I have made my list across the top of the things that are most important to me in this decision, then I rate them in order of priority as to how important they are to me.  The most important item would have a rating of 2.  The next item would be ranked a 1.9, then 1.8, all the way down to the least important item.

In the business example, I may give “flexibility of  lifestyle” a 1.8 rating and the “international travel,” which I love but which may not be as important to me as my lifestyle, a 1.5 rating.  If I were moving to a new house, I would rate the quality of schools a 2, where I might rate the view I desire a 1.2.

Once I have my values of what I desire listed across the top and weighted in order of priority, then I list down the left side all of the options I am considering.  If I am thinking of ideas that would scale my business, I would list all of those down the left side.  If I were purchasing a house I would list all of the different property options down that left side.  If I were deciding which job opportunity I wanted to pursue or which college to attend, whatever it is I am deciding I list the options down the left side.

After my chart is complete, I ignore the weight factor of those important items and I fill in the blanks. I just go through really quickly and assess to the best of my judgment how my idea or decision would rank with my important item. I use a score of 1 to 10, with 10 being the highest.  After I have filled out the chart, then I simply take the score of the idea to the important item and multiply it by the weighted factor of that idea.  I then sum all of the important items together for a score of each idea.

If there are several people involved, then I have each person do their own weight factor.  We add up the weight factors and then use that number to score the spreadsheet.  Together we decide the score between 1 -10 of how well that idea would fit our needs.  If my wife wants a good view and I want a shorter commute to work, we would weigh those items differently.

I like to do this exercise when I am relaxed and calm.  It takes about an hour or so, but it is a really precise and fun way to sort out my ideas.  Oftentimes, I’ll get the top four of five scoring ideas.  These scores are not the only factors in my decisions, but they do usually tell me which of the options are not the ones that I want to pursue.  It helps me to hone in a little bit to where I want to take my next zig or zag.

Decision Matrix

Eating Our Own Cooking

We are currently trying to figure out the scale phase in our Froghair business. When we initially defined our three zigs and zags, we defined our scale as making three sales into our direct channel each day.  As we progressed, we hit profitability and were able to add resources, but we realized that our plan for scaling business was not viable. So, we had to adjust our strategy and go after a second option.  This time our plan was to sell items to large companies to use as their corporate gifts.  This has had some success, but we are still exploring other options.  Specifically, we are looking at generating Internet leads in our area of the market.  Almost everyday we’re using the zig zag principle because it gives us the flexibility to adjust and change course within the boundaries that we have set.  As we’ve seen obstacles, we’ve skied around them.  And we’ve been prepared to do so because we know they’re going to come.  My experience has taught me there is a much higher probability of success when you use this principle.

Summary

      Zig number 3 involvesa major shift in mindset.  You are no longer working in your business; you are working on your business.  Your are becoming deliberate and you have structures in place.  You’ve survived the determination phase.  You’ve survived the discipline phase.  Now you can leverage yourself, leverage the value of the market you’re in, and start to really see some success.

Zig number 3 requires yet another shift in mindset.  In Zig number 1 you are doing everything, and you are working hard.  In zag number 2, you become the head cheerleader, and you are defining processes.  Zig number 3 requires deliberate planning.  It is very cerebral. It is the academic part.  It’s a shift that is hard for many people to go through.  Working hard and working cerebral don’t always go well together unless you consciously acknowledge these two forces and plan the expenditure of your energy accordingly. 

As you shift to your cerebral effort, you are standing back from the minutia, analyzing it, and determining what little levers you could flip that would have significant impact.  In other words, you’re deliberately thinking, “If I do such and such to the business, then we can accomplish this.”  Up until now, your efforts have been all about action.  Now you’re looking for ways to maximize the work being done, and for ways to shift your work to others.

One of my recent ventures involved building an email list of several thousand subscribers.  That’s not a huge number, but for this particular niche we had amassed a sizeable database.  We had gone about building this list in a hundred or more different ways.  We tried one thing, and if it failed, we tried another.  We worked fast and we worked hard, which meant we didn’t always refine our efforts to the point of perfection.  In fact, in many cases we settled for “good enough.”  This is what my friend meant when he said he was “Striving for mediocrity.”

After we had built our email database to what we determined was our critical mass, we set about to craft the pitch that had always been our endgame.  We had one chance—an email blast that, if people responded, would bring us the success we had been building toward.

At this point, our strategy shifted from action to considerable thought.  “Good enough” no longer was.  Whereas early on we had thrown together things that took literally minutes, we now spent hours and hours on this one pitch, running our final effort through layers of strategic review and approval.

I can’t tell you exactly where you’ll need to expend your cerebral capital.  What I can do is encourage you to carve out time to step back, get away, and do the thinking that will identify where you can focus, refine, add resources, create processes, and move toward the scale that will create value whether you’re in the office or enjoying the fruits of your efforts.

I can also tell you this.  I have had very little success getting to a scale component when I’m in a crisis or in a reactionary mode.  I’m great at solving problems, but I am lousy at coming up with new ideas when I am in that task-oriented, problem-solving mindset.  Find time to get away to a relaxed, calm atmosphere when you’re generating ideas for how to scale your business.  I have had enough ideas come while I am on the golf course to justify my green fees for the next ten or twenty years.

Zig number 3 requires yet another shift in mindset.  In Zig number 1 you are doing everything, and you are working hard.  In zag number 2, you become the head cheerleader, and you are defining processes.  Zig number 3 requires deliberate planning.  It is very cerebral. It is the academic part.  It’s a shift that is hard for many people to go through.  Working hard and working cerebral don’t always go well together unless you consciously acknowledge these two forces and plan the expenditure of your energy accordingly. 

As you shift to your cerebral effort, you are standing back from the minutia, analyzing it, and determining what little levers you could flip that would have significant impact.  In other words, you’re deliberately thinking, “If I do such and such to the business, then we can accomplish this.”  Up until now, your efforts have been all about action.  Now you’re looking for ways to maximize the work being done, and for ways to shift your work to others.

One of my recent ventures involved building an email list of several thousand subscribers.  That’s not a huge number, but for this particular niche we had amassed a sizeable database.  We had gone about building this list in a hundred or more different ways.  We tried one thing, and if it failed, we tried another.  We worked fast and we worked hard, which meant we didn’t always refine our efforts to the point of perfection.  In fact, in many cases we settled for “good enough.”  This is what my friend meant when he said he was “Striving for mediocrity.”

After we had built our email database to what we determined was our critical mass, we set about to craft the pitch that had always been our endgame.  We had one chance—an email blast that, if people responded, would bring us the success we had been building toward.

At this point, our strategy shifted from action to considerable thought.  “Good enough” no longer was.  Whereas early on we had thrown together things that took literally minutes, we now spent hours and hours on this one pitch, running our final effort through layers of strategic review and approval.

I can’t tell you exactly where you’ll need to expend your cerebral capital.  What I can do is encourage you to carve out time to step back, get away, and do the thinking that will identify where you can focus, refine, add resources, create processes, and move toward the scale that will create value whether you’re in the office or enjoying the fruits of your efforts.

I can also tell you this.  I have had very little success getting to a scale component when I’m in a crisis or in a reactionary mode.  I’m great at solving problems, but I am lousy at coming up with new ideas when I am in that task-oriented, problem-solving mindset.  Find time to get away to a relaxed, calm atmosphere when you’re generating ideas for how to scale your business.  I have had enough ideas come while I am on the golf course to justify my green fees for the next ten or twenty years.

 I do have some businesses that do not fit into these last two categories but have been very stable businesses that have scaled well.  My wife and I started purchasing rental properties many years ago.  We bought our first fourplex at a fire sale after the owners went bankrupt.  We put enough money down that the cash started flowing from the moment we bought it.  As we obtained more cash, we paid off this property.  Through trial and error, we have been through the learning curve to know how to manage these rentals.  With the money we made from that first rental, we bought another rental property.  We added resources by hiring a repairman and other people to help manage the properties.  We hired our sons to work on these rentals, as this was a great way to teach them how to work hard. (I’d hire my daughters, but we don’t have any.)  One by one, we purchased rental properties that got us to cash, paid them off, and then purchased more.  The great thing about these properties is that they are income-producing assets.  Even as the housing market took a nosedive, our rentals remained full.  Those people who no longer qualified for mortgages needed places to live and were happy to live in our rentals. 

      When my partners and I started CastleWave, we first got our initial SEO contracts to drive us to profitability, and then we hired the engineers we needed to build our resources. Then it was time to add scale.  The scale component in CastleWave was our link-building component—the ability to get other authoritative web sites to direct traffic to the sites for which we were consulting.  Our expertise in this area was our number-one value asset.  We put together a pragmatic system—aset of processes and approaches that were bundles—that we could then have our employees replicate and follow, allowing my partners and me to focus on other issues. 

      If done properly, scale allows you to develop a system and train other people in how to use that system. Put together an entire system and process using all your rules of engagement, and then flip the switch and start cranking out the cookies.  A cookie-cutter system is what will get you to scale.

      Microsoft Windows is a great example of scale.  How many times did Microsoft build Windows?  Yes, Bill Gates and company have released updates and improvements (well, most of the time), but they really only built the program once!  And they have been able to sell it millions and millions of times over.  Virtually every PC sold has Microsoft Windows already installed, and Microsoft gets a royalty each time a person opens their box.  Now that is scale—and the reason why Bill Gates is one of the richest men in the world!

I have developed four rules I follow whenever I create a business.  There are times I violate them, but I do so deliberately.  Keep in mind that these are my rules that fit into my skill set and values.  You will need to look at your own situation and determine the rules that work for you. 

Rule # 1 – Ride a Wave:  I like businesses that are on a wave.  Just like a surfer who gets in front of a wave and rides it to the shore, I want the environment to be right before I get on a wave in my business or my life.  If the wave is big enough, then just being in its vicinity will generate enough power to propel you toward your destination.  But if you catch that wave wrong, life can come crashing down around you.  The key is to get on and off the wave at the right time.  September 12, 2001, would have been a terrible time to start an airline.  This same day would have been the perfect time to start an anti-terrorist airline security business.  Purchasing a row of new condos in 2006, when housing prices were at a point where experts were beginning to see they were unsustainable, would have been a bad move.  Purchasing those same condos after the housing bubble burst and prices were slashed in half would have been the right time to add scale.  You need to assess your environment and pick the right waves to ride.

Rule #2  – Transaction Businesses:  I like businesses that sit in the middle of a transaction.  A well-known example is credit card companies, which make 2-5 percent every time one of us slides our credit card through a reader.  None of us give what we’re paying a thought (and if you think we’re not paying, think again).  Merchants are happy to pass along the fee because the convenience brings more people to their business.  Customers love the convenience of not having to carry cash or write a check, so they willingly pay their annual fee (and high interest rates) as well.  Positioning yourself in the middle of a transaction puts you in a great place to make money.

Rule #3 – Own the Customer:  I like to own the customer.  I don’t like being in a business where I can’t look into the eyeballs of the customer and resolve the issue.  I like to be in the middle of the transaction, but I do not like being sandwiched between brokers.

During the rise in the housing market, I was riding a great wave with a company called Mortgage Saver 101.  We had an awesome web site that generated leads of people looking to obtain mortgages.  The company was riding a wave and was a transactional and a digital business.  The only problem was that we did not sell our leads directly to the banks or the people who were coming to refinance their loans.  We sold our leads to a broker who would then sell them to multiple vendors.  Many times the broker would come back to us and say he did not like some of our leads.  We would ask what he didn’t like and he would simply say, “It wasn’t a quality lead.”  Without being able to talk to the bank or the customer, we were left to guess at what they really wanted.  This left us very vulnerable, giving all of the power to the broker.  If there was a problem, we had no way to solve it.  On the other hand, credit card companies are good examples of being able to own the customer.  The credit card company can communicate directly with the merchant that is selling the product or the customer that has signed up for the credit card.  They own the customer.  They can manage the relationship on both sides of the transaction.

      Rule #4 – I Like Digital Assets:  This is my very personal preference, but I love digital assets.  I really do not like retail.  Why?  Because I stink at retail.  I don’t have enough discipline and I am not patient enough to succeed in retail.  It doesn’t scale as well for me.  I know many other people who have been highly successful in retail, but it is just not my preference.  Once I make a website or an application, I have made it once and as many people as want to come will fit into that store.  That’s the primary reason I like digital assets. 

 One way would be to bring another dentist into his practice so he could take Fridays off to work on creating his new product.  He could then join forces with other local practices to build a channel or infrastructure to test and promote his new product.  When that has proven successful, he could create an online presence.  When we talked about his options, my friend was amazed that he could take control of his own destiny and move from the constrained “I’m going to spend the rest of my life drilling teeth” mindset to the “I can actually pursue my beacon in the fog” mindset.

      While others see limitations, I see examples of scale all around me.  I found one while attending a retreat being run by a well-known chiropractor.  This man is clearly an exceptionally talented chiropractor who had become very profitable in his practice.  He then added resources and staff and was able to add several additional offices to his practice.  Then he made the big leap to scale.  He compiled his own set of processes that worked in his business, including the equipment he used, the supplements he recommended, and the processes that made him successful.  He put all of this together into a system he could sell to other chiropractors.  This man is now distinctly known for his training programs among chiropractors throughout the United States.  With his training program, he helps other chiropractors—and then profits when they tell their associates about what he’s done for them. But he has no direct involvement in their day-to-day businesses.  This is scale.

      My oldest son seems to have gotten some of my genes, which led to him getting involved in my web businesses several years ago.  (He was one of my original nerdy kids who helped me move CastleWave forward.)  After I sold CastleWave, he wanted to start his own business.  He worked hard to follow the principles and processes he learned at CastleWave and ended up building a scalable web business of his own.  His is now in Japan for two years working as an unpaid service volunteer, and he has a business that is still making money for him.  While he is gone, his seventeen-year-old brother is the CEO of the company.  He also hired his younger brother and several other smart and energized teenagers to keep his business going—and growing.  They have the same values in place.  They have their beacon in the fog set and are fueled with the passion of youth.  As I write this, my son has been gone for thirteen months, and he has a resource and an asset that will fund the remainder of his college when he returns.  That is the power of scale.

The third zig is about adding scale to your undertaking. After getting to cash and then adding resources and processes, you need to add scale to get your product or services to the masses. In simple terms, scale is something that can be published or duplicated or sold over and over again.  Think about the music industry as an example.  There are amazingly talented studio musicians who get hired to play for top recording artists.  They come into the studio, lay down their tracks, get a check for an awful lot of money, and then go onto their next gig.  They live a good life, making more than most of us.  The trouble is, their check is a one-time payment.  On the other hand, the artist who writes and records the song gets a royalty every time the song is downloaded, sold at Wal-Mart, or played on the radio.  Through scaling their talents and business strategies, recording artists gets lots and lots of checks for an awful lot of money—and live a great life!

Business gets really fun for me when I can make money while I’m sleeping, or on vacation, or working on my next project.  I remember the first time this happened for me. I was laid up in bed for what I knew was going to be a few weeks, so I came up with a little business idea, threw together a web site, worked my search engine optimization magic, and went to bed.  I got up the next morning, brushed my teeth, checked the web site, and found I had made $37.50—while I had been asleep!  (That number got bigger as the days went on.)  Scale is what allows me to do that.

My colleagues and I often use the term, “Nail it, then scale it.”  What we mean is that during the first two zigs and zags, you’re really trying to figure out how to nail your business.  You’re figuring out the discipline, the effort, and the processes that will make it work.  In zig number1, you are figuring out how to get to profitability.  In zag number 2, you are adding resources.  In zig number 3, you need to figure out a model that you can replicate quickly and get your product out to the masses.  This is the “scaling it” part.

When I’ve talked or written about this concept, I’ve offended several members of my family because I summarize my ideas by stating, “I never want to be a doctor and certainly never a lawyer!”  My point is not to offend my brother, who is a very successful doctor.  My point was that doctors have to put on their literal rubber gloves and poke at some very tender places, and attorneys have to put on their figurative rubber gloves and poke in some dark places. Otherwise, neither one is making money.  I don’t want to do that.  I like making money beyond the time that I am physically and/or mentally working. 

There are alternatives most of us can pursue, though.  I have a good friend who is a dentist.  He’s told me several times about a really great product he wants to develop that would make it so much easier to fill cavities.  He has lamented that he just doesn’t have enough time to work on this because he is stuck drilling and filling teeth all day long.  He feels he has no options, but I’ve explained that the option is to zigzag.  He already has a business with a solid cash flow.  He just needs to add resources—and then scale. 

Eating Our Own Cooking

In our test business, we hit profitability one month ahead of schedule.  We then documented processes, which helped ensure that when we began hiring people, they would actually know what to do.  Shane, our college student that was so helpful in the beginning, graduated from college and was able to join us full time.  The next person we hired was Koral, my executive admin. I believe this hire is always the most important.  We vetted and screened hundreds of people before we found Koral.  She has been a perfect fit with our values, and she has brilliant skills.  She is now the gatekeeper of our values and does a screening of every person who enters our organization.  She makes sure that they are a valued fit.

To help document the process that made our company profitable, I identified twelve parts of our operations that needed to be managed in order for us to be successful.  I then stapled a piece of paper with one of these items written on it to a $20 bill and posted these around the office.  I told everyone that the first person who wrote up the process for that step got to keep the $20 bill.  We now have twelve documented processes, each with their own set of simple steps written out so that each new person who joins the business has a clear picture of what needs to be done to make our company work.

After hiring Koral and a few other key positions, my partner Curtis needed to hire a very important individual for our sales team.  At this point, we had created our values filter, and we had the skills test assembled to give to our future hires.  Curtis was thoughtful and pragmatic as he ran a large number of candidates through this process, even though we had an urgent need to fill this position. After screening all the candidates, one in particular stood out.  He was very talented and had the skills we needed.  He had passed all of our tests.  I told Curtis to just hire the guy, but Curtis slowed down just a little because he saw some red flags.

Some of the red flags had to do with this individual’s work history.  He had not had real consistency in his employment.  We figured we could overlook this because we knew he had dealt with some health problems.  Another red flag was that in our interviews, this man seemed to have more motion than momentum.  Even so, I was convinced this guy was a good hire, but Curtis was still concerned. After I kept prodding him, Curtis decided to extend the offer.  As Curtis and the man were talking on the phone, Curtis could hear the man’s wife in the background.  She was shouting things like “If you agree to accept this, make sure they let you work from home two days a week!” We hadn’t discussed that in the interviews, but Curtis thought it might work.  Then Curtis heard her say, “Make sure the health insurance kicks in immediately!”  That was fine because we offer a good health insurance package.  Then he heard her say, “Find out how many vacation days they’re giving you, and then ask for a week more.”  In a bad economy with a lot of competition for this position, there was no gratitude or excitement about the offer.  There was no dialogue about how he was going to add value to our company. It was all about take, take, take.  After four or five of these demands, Curtis paused and simply said, “I’m sorry, we’re not moving forward.” He knew our company’s values, and he knew we would not be adding a resource that fit.  Even though we really needed this position filled, Curtis went back to the drawing board and started all over.  Fortunately, we soon found a delightful woman named Chiaki who fit our needs perfectly.  She is aligned with our company values and has been the right hire for this job.

Summary

After you have hit profitability in zig number 1, zag number 2 is all about adding resources.  You are making the transition from working harder to working smarter.  You are going from determination to discipline.  You are going from being the butcher, the baker, and the candlestick maker to cheerleading a team and turning over control to others.  Remember that this will involve letting them make some mistakes and do things a little differently than you would.  But if you do this effectively, you are increasing your profitability, adding resources in to the system, and documenting the processes.

This is where the culture of your company will be defined.  It’s one of the most fun phases of your business and where stories will come that will define the life of your business – good and bad!  Your values will be tested for the first time, so hold strong.