McKinsey published an article in August last year titled “How to get your operating model back on track”. So, I’d like to summarize their findings first in the context of the lower middle market. I’ll then share a practical version of an Operating Model that we’ve used effectively that might help get you back on track.
Implementing the right Operating Model for you is the Holy Grail!
First the McKinsey takeaways:
- Initiatives that have vague aspirations like AI- first or customer centricity are doomed. Instead state operational metrics that define success.
- Make goals simple, visible and decision-guiding.
- Leaders must be seen to manage these metrics.
- Changing the operating model without addressing changes to structures, processes, roles and governance will not work.
- Align teams to objectives.
- Design end to end accountability.
- Manage organizational politics to prevent pulling the company back into silos
- Let value potential drive budgets.
- Culture and leadership are the hardest – posters and speeches don’t change behavior. Incentives, promotions, and leadership choices do.
- Top-down ownership is essential. Can’t be a side project.
These are all reasonable observations, but lower middle market leadership needs a more practical operating model that captures the essence of these points and avoids failure.
A Better Operating model
As the owner/CEO of a lower middle market company (Revenue <$150m) we understand that scaling a business is hard. And everyone has a solution. Articles, blog posts, Private Equity models, Entrepreneurs’ Operating System (EOS) and more. LinkedIn is packed with the latest and greatest tricks of the trade.
At TPP the partners have been involved in over 50 businesses in leadership roles successfully scaling to deliver attractive sustainable businesses (and of course saleable businesses when the time is right). We’ve worked across many sectors and business models including software, manufacturing, and services. We’ve touched a plethora of niches – die bonding machines, camera assembly and test systems, consumer magazines, IT recruitment, student travel, Lotus Notes application tools, material testing systems, IVF practices, Money Management firms, HR & Payroll Services, marketing agencies, FMCG, aerospace speciality manufacturing, specialized label printers, acoustic office systems. And that’s just a sample.
In our experience there are three pillars to success. It’s really quite simple. Strategy, Execution and Governance.
But here is the secret sauce that makes it successful – it must be a continuous symbiotic relationship between all three. This is deceptively important. Identifying your positioning is clearly the guiding light to build your strategy. You need to know who you are, why you can win and that the market has a need that you can satisfy. Executing that strategy with care and precision will lead to success, but only if you are measuring, governing, incentivizing and constantly correcting what works.
Below we have shared in one place how our system works. It is conceptually quite simple but in practice it requires the care and attention to detail, that few companies are able to pull off. We find it’s not a lack of courage or a lack of work rate, but a lack of focus on the right stuff. Within our framework we have developed practical tools for every stage. In the coming months we will be sharing some of our tools that you can use to develop your version of our model.
Everything starts with strategy. What’s your unique positioning? How can you win in the marketplace? Of course, the story you tell needs to resonate, it needs to connect. There’s no point in being unique and no one wants to buy your service. Positioning needs to spell out how you will transform lives.
But of course, as we know it’s all about execution. The little secret we’ve leaned over the years – adding the right level of governance for the size of company in question. It is so easy to suffocate a sub $50m company with long winded processes and KPIs. The model needs to respect “pace and space”. The key is to build systems that are sustainable with the current team as it grows. Execution needs to be rigorously aligned to the strategic objectives and the weaknesses identified in the strategic phase. The governance model keeps it real. Business is a contact sport and what gets measured gets done. Playbooks are only useful if they work. They need constantly tweaking to stay relevant. Every activity your team performs should sit comfortably within the three pillars of Strategy, Execution and Governance and the interplay between them. Simplify the noise.
This is the summary version:
Guidance Notes & Operator Tips – Strategy
We would suggest as you consider this model that it must start with Strategy. Wherever you are on your path to success, we recommend standing back and considering some key questions surrounding your direction and your priorities. To clarify, these are the questions we dig into followed by the tools we recommend.
QUESTIONS
- What is your reason to exist?
- How can you define and dominate your sector?
- Is your story resonating with customers, employees, investors?
- What is your competitive moat?
- What do you do better than anyone else?
- Where is the pain in your marketplace?
- Where is the market going?
- What are the strategies of serial acquirers?
- Does your product roadmap reflect market needs?
- How does dependency hinder your business?
- Is your business dependent on the owner, legacy products, key customers, the cycles of specific sectors?
- Do you have a succession plan for senior management?
- Is your talent being developed?
- Is your pricing policy economically viable?
- Do you understand product and service profitability?
- Is your governance model really measuring the right stuff?
- Are you measuring your performance relative to your competitors? Growth, profits, value propositions need to be compared with the competition?
- Are all major processes documented with accountability in place? Every process from finance through marketing and sales needs a repeatable playbook.
- Are you assessing risk and developing mitigation strategies?
- Is your balance sheet fit for scaling?
To find answers to these questions we deploy 4 main tools but the first 3 are key. Otherwise, you are planning blindfold.
STRATEGY The main tools within the strategy pillar that deliver the greatest success include:
- A brand and positioning review assessing where you really stand in the market including customer interviews.
- An M&A landscape analysis, assessing who is buying what and why.
- The Saleability Test. Look at your business through the lens of a buyer. Assess the 15 criteria that a buyer cherishes. This uncovers value leakage and helps define the weaknesses that are killing you and your operational priorities. We can predict the likelihood of a successful exit.
- These tools feed nicely into a Strategic Planning Process which generates a strategic plan and blueprint that drives execution and sets up the right level of governance.
By deploying these tools, you will emerge with a new compelling purpose to what you are doing. The whole company will be motivated by your purpose.
Guidance Notes & Operator Tips – Execution
Because you are clear in your strategic direction, how you can win and weaknesses that must be addressed, you are 70% ahead of most private companies!
- You can now decide which type of growth takes priority – organic or M&A?
- You can decide which projects will add the greatest value.
- You have a clear list of priorities to execute your vision.
- You can deploy and manage your talent aligned to your objectives.
- Projects have purpose.
But you will still fail unless you add the third ingredient to the Operating model – Governance.
Guidance Notes & Operator Tips – Governance
Governance is often confused with execution. For example, the management of talent is an execution challenge. The defining of roles and incentives is a governance challenge. Don’t confuse them.
Governance is where you document your playbooks across all your processes.
Governance sets out the cadence and objectives of meeting, KPIs and reporting structures.
Governance is set up to spot risks and activate actions.
What gets measured gets done!
And finally, it is essential that these three pillars work in alignment. Information and data must transfer back and forth. Execution is not working? Maybe the strategy is flawed (Strategy). Maybe the incentives are wrong (Governance). Business is a contact sport. It requires constant monitoring for success or failure.
Designing the best Operating Model for your business is a choice but it must be simple and effective, and it rests on clarity of strategy, impeccable execution and constant measurement of results.
Always available for a chat at Ian@TPPBoston.com. Current strategic focus – Private company owners looking to scale to enterprise values > $50m within the next 2 years. We work alongside management to deploy our tools, recreate a stronger brand and a set of operational actions to transform your margins, and address all of your value leakage areas to build a safer, transferable business.
