Interview with Verne Harnish – Scaling Up Your Business

What’s the first thing you would do when scaling up?

Is it building the right team? Or having the right strategy? Perhaps raising cash for growth?

For most business owners, scaling up a business can be challenging. This is why we have Verne Harnish on board with us to dive deep into the 4 critical areas of scaling up a business.

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Named as one of the “Top 10 Minds in Small Business” by Fortune Small Business, Verne is best known for his books, Rockerfeller Habits and his most recent bestseller, Scaling Up.

In this interview, he shows business leaders how to get your organization moving in sync to create something significant and to enjoy the ride.

Books/Resources mentioned during interview:

Interview Transcript

Alright! Welcome everybody! Today we are also extremely fortunate to have one of the top business leaders around the world his name is Verne Harnish. He has written a couple of bestselling books around the world.

One of them is The Rockefeller Habits, I’m sure many of you have read before. Recently he has published his second of third book which titled Scaling Up and it is already highly endorsed bestselling around the world. Welcome Verne to the show!

Verne: Thanks a million for hosting me. I really appreciate it.

SeedIn: First thing first, maybe let’s do a quick introduction of yourself, your back story and how you become known as the growth guy.

Verne: I came from a family of entrepreneurs, my grandmother & my grandfather had their own small businesses. My dad with his partner launch a very rapid growing company called hyroelectronics back in the 60’s or 70’s. My dad and I launch a company when I was 15 years old and I’ve been there basically for 33 years since 1982. Helping out entrepreneurs and then I’m the founder of EO (entrepreneurs’ organization) we’ve got about 12,000 members now around the world.

So, it’s truly a wide passion of mine to help.

SeedIn: You mentioned that the LinkedIn co-founder Reid Hoffman mentioned that first scale advantage beats the first mover advantage. Why is scaling up so important?

Verne: The challenges here in the 21st century, anyone and anywhere because of the internet can compete with anyone. So if you don’t walk up on a very narrow part of the market, every place on the world you’ve got to be worried that your biggest competitors will be 12 times owns away. Think about it, you know Thomas Edison was not the inventor of the light bulb but he was the one who commercialized it and scaled it up before he got the credit.

SeedIn: That’s an amazing example. Now, there’s a common saying, how you build a business from 0 to 1 million top lying level per year is very different from building a business from 1 million to 5 million , 5 million to 10 etc. Let’s go down to the details, Why is that so? Why is business building from 0 to 1 and 1 to 5 so different?

Verne: Well, It’s simply complexity. You know when you first start out you may have one product, a few employees, a few customers and the complexity is low. Now, you add people to your accounting function, add customers, add vocation, add product lines. The complexity goes up exponential and you literally begin to lose control and you’re got fill in the market place.

There’re different things that you got to do with different faces of the business and reality is a lot of entrepreneurs can’t make the transition. One of the biggest is letting go. What entrepreneurs are great at is they’ve got this ego, this belief that they can do great things but at some point they get in their own way. If they can’t trust others to do as well or better or find people who can help them do things better or well as they can, they’re going to get stuck.

SeedIn: They never want to let go. Even for my case, I’m going to hire GM at the beginning I would always felt that he is not doing as good, numbers are not doing as well. So you mentioned on the flip side “let go”. But, the thing is, if numbers don’t look good, what can I do?

Verne: I think the part of the problem is, we have a tendency to hire people like us. It’s what human beings do. The reality is you need to hire people that are the opposite of you. I rather you to hire somebody who’s absolutely brilliant in this one thing that you really need to get done.

They got to pass 3 test. 1st you got the culture fit, 2nd did they wow you, can they do that piece better than you and 3rd do they really not need manage because you don’t have the time to do that for the first initial hires that you bring in.

SeedIn: These 3 very good points to look over when looking to hire people. This is very useful. Now, in some of your other interviews them you mentioned, if there’s one thing that people could take away from reading your book/ latest book (Scaling Up). It is to get a coach.

Realistically, most business owners today do not believe in having a coach. Why is that? And how can they have a perspective shift?

Verne: There are two thing. It then comes back to the biggest barrier in Scaling up which is ego. You need ego to get started but it’s the very thing that’s going to get in your way. Now, the other limiting barrier is money.

People think that coaches are expensive but we are big fans of Martial Goal Smith idea that all of us need a peer coach and Jim Collins’ idea that the councils simply says this if you are a lone entrepreneur you need to find at least 1 friend. My peer coach is my dear friend who was with me yesterday, Sebastian Rousey runs his own company here locally. We meet once a week, plus we email each other every day to hold each other accountable to what our goals are. Yu just need somebody to talk to.

That’s what Bill Campbell who was Steve Jobs coach all those years up to the very ends did.

SeedIn: All of them also think like okay we talked about lone entrepreneurs, what about entrepreneurs with fellow partners? Some people may also think that this apply very well to local community of business owners in Singapore. They’ll think that their husband or their wife can be their so call coach. What do you have to say about that?

Verne: I think we need multiple advisers. So, I mean in the company we had board of advisers, these are experts in some areas that we are expanding to. I have a peer coach that cost me nothing. I recommend that not be your spouse because often some of the issue maybe issues that is happening at home.

That will get in the way of business or vice versa. I think it is also important to have what Jim Collins call a council. The more brains you can get the support and help to figure out what it is you need or decide to do. The better the decisions you’re going to make and that’s more important.

SeedIn: How much do you spend for a month basis on coaches for your business?

Verne: I’ve never paid my advisory board members any more than gift certificates to their spouse’s favorite restaurant. I don’t ask them to go to courtly meetings and a lot of that stuffs but I got an issue right now that I put an email request in a Hermann Simon of dear friend advisor and I need like 15 minutes of his time. And I need that maybe for 4 to 5 times a year. All those advisers want to do know is you got to do something about what it is that they’ve just suggested.

I got an adviser since I started ace back in 1983, Arthur Liberty of Venture Magazine, Arthur just been there to support the things that I’m wanting to do. A peer coach cost me nothing except we alternately buy each other coffee each week. Start with a peer coach and expand from there.

SeedIn: Wonderful great tip! I also heard that you also hired a coach for strategy, this is something we’ll speak about later in part of what you wrote in scaling up because there are four areas to scale (strategy, execution, people and cash). When not to hire coach for strategy? Talk to me a little bit of that like process and how you found a proper coach.

Verne: Then we think it make sense almost from the beginning for business owners to spend a little bit of money. It’ll cost you from a thousand to three thousand a month to kind of get started. The reason is you are too close to it yourself. First, I don’t want to lead strategy sessions, I want to participate, I wat to be a participant.

By having there an outsider. We don’t even use our coaching partners for that. We want a true outsider. First of all we got true perspective from what we were all seen. That’s what’s critical. Plus we learned a lot from these coaches that we bring in from outside.

SeedIn: Is that coach strategy one gazelle’s train at all?

Verne: Last session we are actually with vice chairperson of Neilsen. This guy knows more about strategy, helping some of the major companies in the world. To get his perspective was powerful. Next we’re bringing in one of the partners from Jack Stacks organization the great game of business.

They have a high involvement planning process that mirrors ours but they’ve got additional components we don’t. We want to integrate those so a great way for us to earn it is to go to the process ourselves. And again they’ve got a great outside perspective that we might not. Those are some of the advantages that we found from these outsiders.

SeedIn: Verne you also mentioned in one of your past interviews, there are also 3 main barriers that prevents entrepreneurs from scaling up. Number 1 development of leadership, number 2 processes and 3rd marketing. Which one of those three which you notice is the biggest barrier through experience coaching other businesses?

Verne: It’s actually the reverse order depending on what stage and growth you are. You’re trying to go from start up to a million, it is marketing. Well, your number 1 job is to get customers. You need to get sales, marketing is not going to be too critical the rest of your life.

We need to consider the number 1 functional weakness in growth companies because you need marketing more than just to get new customers, you need it to get/attract employees, your talent, to attract advisor, to attract advisor board members, attract attention by the media. So, having a good marketing function just one hour a week, focus on marketing is important.

SeedIn: What do you mean specifically in marketing? Because it’s a big word and a lot of things to do in marketing by itself.

Verne: Marketing is different from sales. It’s Regis McKenna who taught Steve Jobs’ marketing, Intel, Genentech and he taught me marketing back in the early 80s when I was building Ace. I took this piece of paper out and I said “okay, I want to build this student entrepreneurship organization called Ace.” I wrote down president Regan at that time.

I want to get him behind my student movement. I want to get Steve Jobs, I want to get Michael Bell, I want to get the owner of venture magazine, I want to get the owner of ink magazine. In 36 months we were global. I took the first group of your entrepreneurs to mainland China in 1986 just 3 years later we helped open up Japan, we took a group what was Soviet Union at that time and we got president Regan to agree to come to our big event in LA where we honored Steve Jobs, who just been fired from apple and there I had on table Michael Bell and many other hot young entrepreneurs.

Who covered it? Ink magazine and we’re getting full page ads at venture magazine. My wish list turned into key supporters within 36 months. So, take a piece of paper write down at least the top 5 people that I would love to get behind my venture. I want everyone to go out and search for Ogilvy’s 4 Es of marketing.

They got a power point that you can download and work for an hour every week. You do those two things and you will really scale up the business fast.

SeedIn: Once you grow into a 1 million level you’re looking for the next phase of growth. What do you do next?

Verne: Now, you got to work on process. You start to get function. You got your sales team, marketing, you got accounting and operations but work really falls across those in terms of process. The average revenue per employee in small companies by a hundred thousand Singaporean dollars, US dollars is crazy compared to cross currencies.

Large companies are two and a half times on average better than getting a dollar per employee than small companies because big companies have better process. You reached the point where you don’t know everyone’s names anymore. This is where you got to grow more leaders. Everyone in the company needs to be a leader.

You got to build a company whose hundred are making good or better decisions than you. You got to build a company of leaders.

SeedIn: You mentioned something about processes. What are some tools or things that you can get started with to aim down on better processes?

Verne: Well, you now are talking about the power of the daily huddle, which by the way is one of the fundamental scrum or lean. You know, nobody builds software without using an agile or scrum based kind of process. In fact we are going to host Jeff Sutherland who wrote a new book this year call Scrum how you get twice as much done in half the time. The heart of this is daily huddle.

Well, our Rockefeller habits really help companies get process in communication and place. So they get this kind of 3 times industry average profitability, twice the cash flow and as you and I discussing you ultimately get 10 times the valuation of the company than you have before.

SeedIn: Entrepreneurs also tend to forget while those things are important, there’s also the other part of equation that you wrote about extensively in your book Scaling Up, the 4 areas (strategy, people, execution and cash) now, let’s go a little bit more on these 4 areas. Why do these 4 things / methods so much compared to the other things?

Verne: Well you know we divided the book Scaling Up into those four sections. It is just a way to help business owners organize their thinking. We have you know stuffed within those four areas, those are the four big decisions. Who are the people you’re going to work with.

Oversee strategy and marketing strategy are big components of strategy. You know, if you don’t get that right you are going to waste a lot of your time over the 3 to 5 years. That’s why strategy is critical. You need the type of execution that you turn that revenue into profit.

If you ran out of cash, game over and we know that growth sucks cash.

SeedIn: You mentioned growth sucks cash. What can these business owners do to scale up and won’t be affected financially?

Verne: When I launch gazelle we worked from half million to million to two million going to 4 million and 8 million in 2002. 9/11 happened and we lost a million dollars in about 8 weeks. I was out, I was broke and I ran out of cash. Michael Bell took Dell from 0 to billion dollars and ran out of cash and the board fired almost everybody but Michael.

His first adult supervisor talked about scaling up. He said look here’s the thing that you need to pay attention to. It’s a little technical but it’s called the cash conversion cycle which is here’s the problem, you got to spend a dollar before you get it back. You got to figure out, how you get money sooner than later.

I got an entire year worth of payroll in the bank. If you got enough money in the bank to make payroll for the year, you going to sleep a lot easier and you’ll going to die a lot slower. That’s the kind of stuffs you need to focus on. Hire a person who can help you out in accounting.

To get you better numbers and make sure invoice is get up, the bills and the customers that you collected on.

SeedIn: It works very well when we attended your seminar as well as Allan Miltz seminar we often look at our cash/ bank accounts enough to know that we sustain the cash flow. Cash flow is really the one that kills business. It’s really important. And just an additional point, I think a lot of listeners are from B2B space.

To collect money upfront from clients. It takes a lot of balls to do that. I sked the same question with Allan Miltz, his counter point is if your clients don’t believe in paying you upfront, maybe you’ve got a problem explaining your value proposition. I think that’s an excellent point over there, what do you think?

Verne: I agree with that one. That’s why we had him basically write that chapter, one of the 3 chapters in the cash section of Scaling Up. There are these called deposits, you don’t need to pay upfront. But, ask for a bigger deposit 20% down.

We got law firms that saying, we’ll give you a break on per hour rate if you’ll buy a thousand hours in advanced. Amazon is never really profitable in their life but the reason that they can scale up is because they have what is called Amazon prime, you’ll pay 75 dollars upfront now in return you’ll get free shipping but that money upfront represents a lot of cash that amazon has been able to use in order to build their warehouses and buy their robots and scale up on customer’s cash. I’ll recommend a book, It’s called “The Customer Funded Business” it’s by a serial entrepreneur John Mullins and I encourage all entrepreneurs to read that.

SeedIn: Sure! Thanks a lot! To wrap up Verne, I think we covered a lot of things. You recommended few books, I think the biggest thing that listeners and business owners need to get started but of course check out Scaling Up. What are some things that you covered in the book? Maybe let’s just go through a little bit before we wrap-up this interview.

Verne: We got to set up one page tools or one page strategic plan that’ll be famous around the world, 40,000 companies use it to get their whole annual plan in a single sheet of paper. We got to call it the one page personal plan. By the way people can go to scalingup.com and there is this bonus chapter they can download on how to prepare and run a strategic planning session and it’s for free. It includes a sample one page strategic plan.

I’m the growth guy. It saves you hundreds of hours on email and other really bad stuffs that you do that waste time and then we got this practical tool to help you scale up your cash. Those are some of the practical things that fill the book Scaling Up. All those tools are free, people can go to scalingup.com and just download them by the thousands.

We got them in multiple languages. So we are really there to support companies to scale up.

SeedIn: Great! As the last point if people want to reach out to you, I believe that you will be doing workshops in Singapore. What’s the best way to get in touch?

Verne: Go to scalingup.com it’s easy to reach us through there. We got a great local partner there in Singapore. We got a lot local support right there in Singapore. They can drive over and get you on a phone call with the same time zone to lend you a hand.

SeedIn: Wonderful! Thanks a lot for your time Verne.

Verne: Thank you for the opportunity to kind of share these tools.

SeedIn: Thank you.