Episode 122: Effective Metrics with Lee Benson

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This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to The Wealth Ability Show, where we're always discovering how to make way more money and pay way less tax. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. Today, one of the biggest challenges in business is focus. How do we focus on the right numbers, on the right projects, on the right tasks? How do we know we're really focused on the right things instead of getting distracted because it's so easy to get distracted in business?

Today what we're going to do is we're going to focus on the one number. This is a great idea. I love having one number. Really, I'm a CPA, I have a tough time counting past five because I only have five fingers on one hand, so what we're going to do today is we've got the expert on this, Lee Benson, who wrote the book, Your Most Important Number: Increased Collaboration, Achieve Your Strategy, and Execute to Win. We're going to just walk through this and walk through that number. I think the fewer numbers we have to focus on the better, and I'm looking forward to this number. Lee, welcome to The WealthAbility Show.

Lee Benson:

Thank you. It's good to be here.

Tom Wheelwright:

If you would, just give us a little of your background. What is it that you do? Why would you come up and write this book?

Lee Benson:

Yeah, sure. I'm currently the CEO of a company called Execute to Win, or ETW, and this is my seventh business. I've started from scratch and I've got a pretty extensive experience in the aerospace industry and I've had exits from a few million dollars to hundreds of millions of dollars, so I've figured out what works, and maybe more importantly what doesn't work over time. I remember when I sold my aerospace business, I combined a couple of them into one, sold them to Textron Aviation in 2016. What worked for me to have just incredible 20% compounded annual growth on average for 15 years straight prior to selling and the positioning of the company to get a really amazing multiple won't work for everybody else, so I sat out on this journey of what will really work for 80% of teams, even when a star isn't in the room, and so I wrote the book Your Most Important Number, which is based on what I call the MIND methodology, which is most important number in drivers. That's why I put the book out there.

I would just say to kind of start out here, my businesses have had anywhere from a few employees to over 500 employees, and it's really cool to see what happens when teams are winning, self-esteem is growing because they're accomplishing amazing things, what happens to the community, the community of the folks that work in the company, their families, their extended communities going out, and so the main reason I'm doing this work is to improve workplace cultures in order to significantly strengthen the communities that we engage with.

Tom Wheelwright:

Interesting. When you talk about the most important number, how do you even start looking at that? I mean, to me, it's cash, right?

Lee Benson:

Sure, sure.

Tom Wheelwright:

Cash is the most important number. In fact, cash is really the number. I presume that cash is always important, but you talk about going about and finding your most important number, so how do you distinguish that? What do you mean by that?

Lee Benson:

Yeah, well, first I agree that you, cashflow, it's probably the only number that can't be gamed inside of an organization, so I think it's wildly important. But here's the way to think about the concept: Every organization, for-profit organization or a non-profit organization, has one number that says above all others you're winning or losing the game, and it drives the majority of the right behaviors. If you have a service-oriented business that's not very capital-intensive, that most important number is probably some version of what you call profit. Could be EBITDA, NOP, net profit, et cetera. If it's capital intensive cash flow is probably the most important number, and so the thinking here is that the entire senior team will pick a number, agree on it that does those two things that I just mentioned above all others. You're winning or losing, like going to a football game, you've got one score, but there's hundreds of other things you can measure to do better to improve your chances of winning the games, and it drives majority of the right behaviors.

Then as you start to cascade that out from there, every function within the organization, whether it be HR, sales, marketing, supply chain, et cetera, will have their own most important number that win improved will improve the next one up. Now, the beauty of this, when you implement it inside any type of organization is it just works way better than traditional goal setting, and it feels great to be on a team that says that's the number that says we're winning or losing, and then all the work we do to improve it, it's our work, we're coming up with it as a team, and we actually feel successful because the majority of the time we actually accomplish what we already want to accomplish, and then make it easy with a methodology that's completely different in so many ways than traditional goal-setting, which does not stand the test of time.

Tom Wheelwright:

Let me ask you, if we can, let's take one of my businesses, which is a simple one, it's a CPA firm. Okay, so we have clients, we have revenue, we have tax returns, we have consulting. Let's dissect this. If you're looking at a CPA firm's business, what would you expect to be the most important number?

Lee Benson:

Well, you are a for-profit business.

Tom Wheelwright:

Correct.

Lee Benson:

So, it'll be whatever you call profit, most likely. I wouldn't imagine that your business is capital-intensive, it's service.

Tom Wheelwright:

Correct.

Lee Benson:

Right?

Tom Wheelwright:

It's employee-intensive.

Lee Benson:

Employee-intensive, right, so you've got these costs, but they're not a lot of costs sitting on a shelf. Is it net profit, is it EBITDA? I mean, how do you-

Tom Wheelwright:

It would be net profit, mm-hmm.

Lee Benson:

… Okay, so net profit would be your most important number. Then if I were just to break it out, there's tax work that you do, and there's consulting work that you do. Not totally sure what goes into the second bucket, but I would think for each of those functions, gross profit would probably be their most important numbers for those particular verticals.

Then everything that we do around that will be driving for improvements in gross profit, you improve those, that improves net profit at the top. One great example that would be in there for service-based businesses like yourself would be the pricing policy as a driver. Most important number is gross margin. What are the things that we can leverage to improve gross profit? Pricing policy is one of those that's often missed by most. A pricing policy that I love for virtually every organization out there would be to charge the highest possible price while being the best-value alternative and encouraging future business. It's easy to say, very difficult to do. If the marketable bear a thousand bucks, if we charge $1,001, we won't get it anything less, we're leaving it on the table. How do you determine what that is and if in a position to gouge somebody because you just happen to be there? You never want to overcharge. That's the last part of the pricing policy, encourage future business, because they'll tell 10 friends, and that'll be a real problem.

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Right, so I mean, how do you go through and analyze that? I presume you do this in your book, is to analyze, okay, here's starting really big picture, right, net profit. Then you're gaining a little smaller, “Okay, now gross profit on my, for example, gross profit on my consulting, gross profit on my tax returns.” Then we go down below that. Now, you're looking at pricing. How do you do that whole analysis?

Lee Benson:

Yeah, when you look at the structure of an organization, so the organizational, I would say functions or departments that are in there, each one of those would be a team and a small company might be a team of one. However, in your case, I'm not sure how many employees you have it, in your case, the senior team members could all be sort of brainstorming on what the most important numbers should be for each of the functions. I'm assuming you do marketing. I mean, this is part of it here, which is a great approach. I think you're making a pretty big difference in the world, by the way, by sharing this knowledge, so I really appreciate it.

Then each team would come up with that most important number and then they would come up with a meaningful work that they can leverage in an evergreen way to continually improve that most important number. If I was running your consulting business, I would be looking at leveraging our pricing policy so I fully understand it, I would be looking at leveraging technology, I would look at client experience, retention, and a number of other things, and just continually improve how we leverage those categories of work, which we're calling “drivers” in this MIND methodology to improve gross margin, which is going to improve net profit at the top.

Yeah, I don't know how you would answer this, but it's kind of interesting, when we work with senior teams and we work with hundreds of companies, and we ask them, “What's the one number that above all others says you're winning or losing the game?”, if you took all of your families' retirement monies and threw it in there so they have this amazing retirement someday from an investment standpoint, what would the number be that tells you that you're getting a great return on that investment, and the one that will drive the majority of the right behaviors? But when I ask guess what percentage of these senior teams out of the gate have agreed on what that most important number is?

Tom Wheelwright:

I'm just guessing, I would guess very few.

Lee Benson:

It's very few and it's surprising and it's eye-opening, it's very enlightening, and wow, does it create better alignment, decision-making, and even accountability.

Tom Wheelwright:

I see. Once you identify this most important number, how do you get people in line with that? I mean, because you're really setting up a funnel, right, so you really need a system to do this. I presume the next step is that you've got to set up some kind of system, make sure it happens because to me the ultimate goal is to be able to predict what's going to happen in the future, predict your profit, predict your gross profit, predict your net profit, predict your cash flow, you got to be able to predict it because if all of these things funnel into that net profit, if that's your number, then it should become very predictable.

Lee Benson:

Yes, it's an intentional operating methodology. There's lots of popular ones out there. It could be OKRs, could be 40x, could be EOS scaling up. There's a ton of really popular ones, all of them based on traditional goal-setting and all of them coming up with their own unique language, which is very confusing to teach everybody.

What I notice is if the senior leadership team backs off at all with most traditional operating systems, all the employees back off as well, and it doesn't happen. What's different about this, with every team having a most important number coming up with their own drivers to improve it, it actually catches fire on its own, and goes out in the company to create the most value. The goals that you have, let's say, it's net profit at the top, every decision, every action should be through the lens of improving that number. The goal is the forecast for that number over time, so you would develop a forecast for gross profit in the example here for the two primary revenue generation parts of your business that would feed into the top. Over time, the better you get at doing the work, the better you're going to be at forecasting going forward.

Tom Wheelwright:

‘Kay, so how do you then turn that into something that's scalable? Because to me, if you're looking at, you talked about selling up for a multiple, you want it to not be dependent on the owners, all those things that make it scalable, you want their pricing to be such that it's scalable. How does that interact with your systems and your most important number to get to a scalable situation?

Lee Benson:

Yeah, that's a great question. One of the things that I would say is that organizations will try to hire the best possible leaders they can, and they come in, if you get it right, they get really good results no matter what tools we give them to use. The test is when they leave, do the results fall by the wayside, or does it stand up? With an intentional operating system in this MIND methodology, once it stood up and it doesn't take very long, the superstar leaves, the results continue to improve over time, and the scalability is pretty easy.

We have clients ranging from four employees to 40,000 employees, and even though the bigger ones can be quite complex, every single team is the same. They have their unique most important number that says they're creating the most value and driving the majority of the right behaviors. You can just start putting this together like a giant LEGO set and everything is feeding up and it's feeding horizontally because cross-functional collaboration becomes quite easy when everybody has the same operating system, “Hey, what's your most important number? What are you doing to improve it? How can I help you? Can you come give us some ideas on how to improve ours?” That starts to just happen organically in this, so scaling it, it just works. It's simple, it's elegant, and I do believe that simplicity wins in that you make it too complex, you can't scale complexity.

Tom Wheelwright:

No, for sure. Going back to these other systems, and I'm most familiar with the EOS, for example.

Lee Benson:

Sure.

Tom Wheelwright:

You set your rocks, you set your goals, you set all that. You say in your book that doesn't really work. Why not?

Lee Benson:

Our view is, and this is what we observe, the majority of the operating systems make process more important than what is most important, and therein lies the challenge. Out of thousands and thousands of goals with lots of leaders in a lot of different organizations that I've had a chance to audit, less than 10% of those goals are thoughtful, meaningful goals that are really going to move the needle because most people don't really understand as you start cascading from the top of the organization out to the front lines how to really set those goals. They don't have the complete picture of the big picture and all of it, so it just becomes a process of rinse and repeat, “Hey, I created my two rocks,” or whatever it is. You approve it every quarter, I need to come up with something else.

It's way more effective and way more fun to say, “Hey, I'm part of a team and we're going after improving this one number with everything that we do,” and every time we come together to meet, we're getting alignment on all the work we can do to improve what's most important. We're making decisions on doing the right work in the right order at the right time. Out of a hundred things, maybe only four or five of those things will really make a difference, and then we really strengthen our culture of accountability by ensuring everybody's doing what they said they would do when they said they would actually do it. Process can't be more important than what is most important.

Tom Wheelwright:

I like it. Obviously, I'm a CPA, so I love numbers, and I like the idea that you're driving towards numbers, and then you're making the numbers more predictable. What else do we need to know? I'm just going to make it simple. What else do we need to know about this whole process? I mean, it does seem very simple, so what else do we need to know?

Lee Benson:

Yeah, it's simple, and it works for a few basic reasons. I think we have to help people do something they already want to do. Teams want to win. I've never met a team that didn't want to win. They need to feel successful, and they do because it works, and they are. We need to increase motivation. We do that because designed in the operating system, this MIND methodology, each team, all their team members come up with the work to improve what's most important, so it's their work, the buy-in and motivation is a lot higher.

Then we need to make it easy. You don't need technology to do this, but it is challenging to implement an intentional operating system using 15 or 20 different systems; I've got it in Word, I've got it in Excel, I've got it in Google Docs and Sheets, and all these other things. We actually created technology to support and mirror the MIND methodology to put everything in one spot and make it incredibly easy. This has been a pretty significant investment and journey for me and my team members at the organization to put this technology together. Makes it super easy to do.

Then ultimately, what are we trying to do? I believe we want to fully connect strategy to execution. Most companies would say, when you talk to the leaders, “We had a great strategy session, a lot of wonderful ideas, but a year later, we executed on a pretty small percentage of it.” We want to execute on all of it, maybe even do more, so we're connecting strategy to execution.

Then I think even more importantly is we're connecting culture to financial results. Culture, when most talk about it, I don't think they really understand what they're talking about. It's warm and fluffy and it's look good, feel good, sound good kind of stuff, but in the MIND methodology, the foundation of all cultures and every type of organization, for-profit and non-profit, comes from the core beliefs, the decisions, the practices, and culture of accountability. You look at those four things, they hold everything else up. You can have alignment tools, like a mission, a purpose of vision, behaviors, leadership traits, et cetera, but underneath all of that, practices, decisions, these are primarily the things that will hold up your culture, so we want to connect culture to financial decisions.

Tom Wheelwright:

I like it. When you are looking at that one number, whether it's a department number, or whether it's a company number, are you then setting targets, like on a quarterly basis, “This is the target we're looking for on that number”?

Lee Benson:

Yeah, they're forecasting it. If you're most important number is net profit at the top, what do you want it to be at the end of the year? Maybe you measure it monthly as you update year-to-date numbers, and then you're forecasting for the next year, and then all the other teams are doing the same thing. It's an interesting exercise, I think it's easiest at the top, but when you start getting to other functions, let's just say HR in a mid-size organization, what would the most important number be for HR? Almost all the leaders I talk to, they say, “Well, it would be employee engagement, or retention.” Okay, well, let's check that. If it's retention, let's say we kept everybody, what would happen? Three years later, you'd have 60 to 80% of your employees that aren't performing at the level you need them to, but your most important number you won on.

I think the most important number for HR and any organization should be the percent seats filled with capable people. Now, we're driving all the right behaviors. We look at a role, we've defined it, we have two to four max outcome-based responsibilities that are measurable they have to perform to, maybe a list of 30 activities they need to be good at doing in order to achieve those outcomes, and that's what we're taking performance snapshots, and measuring them against. You could get into finance, which I think cashflow is typically their best number, and then same thing with marketing, probably qualified leads depending on the business, sales, They all have that number, they all have their drivers, and it's pretty cool to watch all these pieces connect, especially in the larger organizations from the top to the bottom.

Tom Wheelwright:

No, I love it. The book is Your Most Important Number: Increase Collaboration, Achieve Your Strategy, and Execute to Win. I have your website as leejbenson.com. Is there anywhere else we could go to get more information?

Lee Benson:

That's my personal website, but for the book, go to yourmostimportantnumber.com. You can download a copy of the book or order a book through that website. You can also get other resources like playbooks around the MIND methodology. But go to yourmostimportantnumber.com and you'll get all that you need and reach out to us if you want any support.

Tom Wheelwright:

Awesome. Thank you very much, Lee. Just remember, when we do get focused and we become predictable in our numbers, we do find out our most important number and the drivers that get us there, we're always going to make way more money, and pay way less tax. Thanks, everyone. We'll see you next time.

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