Mission to Grow: A Small Business Guide to Cash, Compliance, and the War for Talent

MTG - EP 121 - Greg Crabtree
===

Greg: [00:00:00] What's your biggest challenge and you know a third of the room will say oh, I have a cash flow problem They know they learn this pretty quick So as soon as they say they've got a cash flow problem I start digging in and say you don't have a cash flow problem.

You got a profit problem Okay, cash is not your problem. If you get profitable cash will fix itself, you know Now we can always improve that and make it better.

Intro: Welcome to Mission to Grow, the small business guide to cash, compliance, and the war for talent. I'm your host, Mike Vannoy. Each week, we'll bring you experts in accounting, finance, human resources, benefits, employment law, and more. You'll learn ways to access capital through creative financing and tax strategies, tactical information you need to stay compliant with ever changing employment laws, and people strategies you need to win the war for talent.

Mission to Grow is sponsored by Asure. Asure helps more than 100, 000 businesses get access to capital. Stay compliant, and develop the talent they need to grow. Enjoy the show!

Mike: Understanding labor productivity. You know, [00:01:00] spend a lot of time in this show. You spend a lot of time watching the news and reading these days. Uh, you know, the war for talent is real. We've been up until very recently, sub 4 percent unemployment rate. Uh, this is not a mystery. It's not a pandemic. It's not presidential politics.

It's not wars. Those things obviously, uh, uh, in influence the short term, but based on birth rates of 30 and 40 years ago, we could accurately predict how many people were going to be in the workforce. It's not wars. And as the economy continues to lumpy grow, uh, there are more job openings than there are job seekers in the marketplace today that this war for talent is real and so.

Uh, we talk a lot about how to, uh, traditional HR topics, how to, how to get them, uh, you know, find the right people and stay compliant and train them. Uh, but I think sometimes we miss the biggie. It's, it's how to make your workforce more productive. I've got a great guest. Uh, he, he's written a couple of books on partially this topic.

Uh, really looking forward to today's conversation. [00:02:00] Uh, my guest today, an introduction here, uh, he's a speaker, entrepreneur, and a financial expert. He, his firm has been named the Inc 5, 000 fastest list. He's presented in over 15 countries, uh, frequent speaker to groups like EO, Scaling Up, Vistage, and Ace Tech.

Uh, he's a members, a member of the entrepreneurs organization EO for the last almost, uh, nine, 10 years. Uh, and he's author of, uh, Simple Numbers, Straight Talk, Big Profits. And Simple Numbers 2. 0 Rules for Smart Scaling. Really good books. Read both of them. Highly recommend. Uh, he's a partner at Carr Regseninger.

I'm a top 25 accounting and advisory firm. Welcome back to the show. Greg Craig, Greg, Greg Crabtree.

Greg: Yeah, thanks Mike. Appreciate it. Always happy to be here.

Mike: Yeah. Thank you. Um, okay. So no joke, folks, read, read the book. It's a refreshing look from a business owner's perspective, how to think about what I'd say is kind of counterintuitive to a lot of [00:03:00] traditional CPA bookkeeping, uh, advisory firm stuff you're going to get. And one of the big topic, uh, that Thomas Gregg talks about is this labor efficiency ratio.

So I think maybe before we talk about. Uh, how to get the most out of your, out of your labor. Can you just maybe orient folks, Greg, what is this LER, this labor efficiency ratio, and why is it so important that they understand it?

Greg: Well, I took a different approach. You know, when I joined the Entrepreneurs Organization, I started to see myself as an entrepreneur with the same problems as a business owner that did accounting and other consulting work at the time. I thought of myself as an entrepreneur rather than classifying myself as a CPA.

I always had a, an interest in why do some businesses succeed and other businesses fail, and, you know, and yeah, I mean, I, you know, I, I was pretty, pretty good as a number jockey. Uh, you know, I could run [00:04:00] calculations and early on in my career, you know, I was probably a little more heavier proponent of leverage and debt until I, I, you know, saw the errors of my ways and, and saw the, the danger that he put a lot of people in.

And, and so. When I joined EO, it put me on a journey to don't tell people what I think I know right then. I need to go study. I need to go look at things and say, you know, we had access to hundreds of businesses data sets. And so it's like, well, maybe it's worthy of a refresh look. And I got, um, kind of early on in my EO career, I'd served on the EO Global Board from 06 to 09.

And when I was rolling off the global board, which is about 12 weeks a year of board service. I mean, it's kind of a unique organization that you, I mean, they have long board meetings all over the world, you know? And so I was away from the business a decent amount of time. And rather than put that time back in the business, I started developing my ideas around a [00:05:00] book of the things that I'd been percolating on.

And fortunately, we, we had started a program called the accelerator program to help businesses get over that million dollar revenue threshold. Okay. And I taught about 15 of those, uh, money day sessions that summer and perfected kind of my message because it was as much of a laboratory as anything. Uh, I had some ideas to put on them, but I also had to say them in a way that's non accounting to get feedback.

Was I connecting? And, and so after those 15 presentations, I really felt like I hadn't nailed down, you know, a couple of simple rules of first and foremost, clear distortions. I, I got to be looking at economic truth. And typically the biggest distortion for your audience of privately held businesses is the owner not taking a market based wage.

So that, that's a topic in and of itself, but that that's stage one. Now we're looking at truth. And once you pay yourself a market based wage. [00:06:00] Then it is, hmm, is, is there a flaw in traditional financial presentation? And I, I don't really remember the DNA of what led me to this, but the thing that we figured out was, well, I say that I had a, a, a forum mate in my EO forum that had a construction business, and he wanted to always tell us about him being a 20 million construction business, but I had a hold of his data.

And once I took his revenue minus his materials and his subs and got down to gross margin, he, he was a two and a half million dollar services business, which was the reason why I had three employees, you know, and could do 20 million top line, but it really wasn't 20 million. He was a two and a half million dollar business

Mike: Because most of this money was going out to subs, but he was counting that top line as revenue.

Greg: That's, that's right. And, and tons of businesses do this. And it's not that it's wrong, [00:07:00] but it led me down this path of starting to study. And once, once we made the gross margin discovery, the next discovery was just hit us in the face like a, you know, like the fish that they throw at Fulton's fish market in Seattle.

You know, it's like, it just hits you in the face of going, dang it. It's gross margin compared to all labor. Now, I don't care what kind of labor it is. I don't care if it's direct labor. I don't care if it's your labor is the CEO down to the floor sweeper. They all count labor's labor. And once we cleared that distortion of revenue being such a fake number, and in most cases, it's like, duh.

And, and I'll tell you, I mean, I wish it was more complex because I could charge people more for it. You know, but. It really is pretty doggone simple. Now there's a lot of nuances to techniques and concepts of how do you improve it and all that. I mean, so we're not going to run out of something to do anytime [00:08:00] soon, but the math is just so painfully simple and it's, it is so painfully hard to teach people just how simple it is.

And, and it's like they keep wanting to add to it. They would, I want to, I want to include, no, no, no, don't, don't, it doesn't matter. You know, 90 percent of the businesses in the U S will hit their profit target. If they get 2 a gross margin for every dollar of labor, no, no more complex than that,

Mike: The first time I read it, uh, the first time you said it, I'm like, okay, that's a benchmark, but I imagine this bell curve that, that 2. the middle, but lots of stuff out here in the outliers and I

Greg: and it ain't a bell, it's not a bell curve, it's a tower. And so what it does, it runs along going not profitable, not profitable, not profitable. And you get to 1. 9, and it shoots up, and you get to a 2, you get to a 2. 1, and then anybody that's above that 2. 1, [00:09:00] for those that, that 90 percent that meet that criteria, I mean, you start burning your people up.

You are what we call running hot. I mean, so yes, a high labor efficiency ratio is great mathematically, but it's also a warning sign of saying, I say, I've got an Audi SQ5 that fortunately has a little feature in it that you can set a maximum speed warning. And, and it is very, very good because the car is so smooth and accelerates so fast that I hit that speed warning a lot more often than I should because I don't feel like I'm going that fast.

But you need these kinds of metrics to give your eyes the, the target to look at and measure how it's moving. And now we'll give this the one disclaimer on the high side if you're a distributor or if you're a retail business you need a 2. 5 and there's one other one that you need a 2. 5. If you're a union shop [00:10:00] you need a 2.

5. But other than that, Most everybody's a two. Now, there's a few businesses that if you're a staffing business, we don't count the staffing labor that you're running payroll on because you really don't manage those people. They may technically be your employee, but you don't manage, you know, so you really look at the margin after that and compare it to your management labor of your recruiters and processors and you meet the standard there.

You know, but, but other than that, I mean, this is just an, an, an, and the thing is, I just did an event in Dubai, uh, last week. It's the same number for businesses in Dubai. I mean, I had the whole room doing exercise, and it's like everybody keeps going back to that two number.

Mike: Just, just to make it real for folks, Greg, could, could you just go through a couple of the actual use cases? So let, so let's say you're a retailer, distributor, how do you get to this 2. 4 and 5? I know it's stupid

Greg: so, [00:11:00] so, so the idea, if you're a distributor, you know, the idea, you're doing a hundred million dollars in, in product, you're doing at 10 percent margin. So, distributors, high volume transactions, low margin, typically you're just a facilitator of big chunks of transactions. So you've got ten million dollars of gross margin.

Well, essentially I can afford to have two and a half million, uh, ten divided by two and a half. What does that work out to? Um, I can afford to have labor, um, you know, in that three and a half million range. Uh, you know, so, so essentially it gives you your cap of what you can spend, and then what I have to do is the business owner. It's just like I'm, I'm running, uh, managing a, um, uh, NFL franchise. How much do I spend on offense? How much do I spend on defense? You know, and, and so, I gotta spend some money on direct labor, and I gotta spend some money on management labor. But I've got a constraint. I've got a cap [00:12:00] that I've gotta fit it in.

Because You know, I mean, people come to us all the time thinking, Oh, my facilities cost are too high. Oh, we're spending too much on paperclips. And it's like, no, you're not. Oh, this is fine. Almost every, we've rarely seen a business that had a cost problem other than the productivity of their labor. And so, and, and so by knowing what that metric is, and this is, this is an immediate health diagnostic on the total number, because these businesses that I did a workshop for in Dubai, I mean, I had them put in their numbers in the structure, And I went around business to business and I said, okay, you know, you're at 1.

8. Guess what? That means you're below your profit target. And you know, we got, and sure enough, you know, once you calculate the profit, I said, now you got two choices. When I'm below, I can either cut labor or I can tell myself that we're going to grow into it. You know, [00:13:00] we, we, we call the,

Mike: in the room for some of those conversations sometimes other companies sometimes my own that's

Greg: yeah, we, we, we call growing, growing into your labor is stage one of denial. Uh, yeah.

Mike: Yeah,

Greg: typically you need to do a little bit above, but, but there again, you could, it could be that. You know, when you sold enough. So I'll give you a real life example. So I'm doing this class up in Connecticut last year in September.

And this marketing firm, you know, was there and trying to grow her business. She was struggling. And I said, listen, let me just simplify it. How much are you going to spend in labor for the month of October? Now we're, we're middle of September, you know, within a gnat's eyelash, how much you're going to spend in labor next month, she said, 50, 000. Do you, you need to bill? 100, 000 of service revenue, which is after you've paid for subs. So if you use any freelancers, they don't count. So you got to, whatever you bill minus your freelancers, that's [00:14:00] your pure services revenue that you need compared to your total labor of 50, 000. Have you sold enough?

She said, yes. Can your people produce that much in a month? She says, yes. Well, we're still finishing up projects we've already been paid for that are getting in the way of new work. And I said, that's a problem. And I said, and you're not going to like the solution, but there is only one solution. It's called, get your team together and say, listen, team, here's the performance standard.

This, this will, and I validated with our numbers. It absolutely put her at the right profit number. She gets to the two to one, so no mystery. So here's the performance standard. For the next 30 days, we got to pull double duty. I only need you to do it for 30 days, but we have to get caught up and have a full month of active production in one month, and then we'll be stable from there.

And [00:15:00] that, that's your only choice or otherwise you're just going to be chasing your tail, you know, month after month and always be behind.

Mike: think it'd be tell me if I'm thinking about this right as an entrepreneur It'd be easy to think. Oh, this is just a short term. This is just a cash flow problem This isn't a profit problem, but really but it's a problem that never goes away right

Greg: I can't tell you. I mean, every time somebody comes up and says, I mean, I, like in these classes I'll do, we'll go around and, and, and ask the room, okay, what's your, What's your biggest challenge and you know a third of the room will say oh, I have a cash flow problem They know they learn this pretty quick So as soon as they say they've got a cash flow problem I start digging in and say you don't have a cash flow problem.

You got a profit problem Okay, cash is not your problem. If you get profitable cash will fix itself, you know Now we can always improve that and make it better.

Mike: Your cash problem is the result of your profit problem. Yeah.

Greg: is it absolutely and and the thing is [00:16:00] This is the amazing thing that I've noticed over years of doing this. Remember I said, clearing distortions was step one in our process. Well, the reason for that is you will emotionally defend getting a paycheck every two weeks more so vigorously than you will defend bottom line profit. hundred percent. People are wimpy on defending their profit line until they kind of build that gnarly entrepreneurial muscle, you know, that defends it. And, and so part of the reason is if I can get you to pay yourself a market wage, at least I know that we can bank on that piece and then grow you into some backbone to defend profit.

But the way you defend profit is managing labor efficiency. I mean, it's just as simple as that. And, and for most businesses, I mean, it's a, It's a fairly straightforward thing. And, and so whenever you're [00:17:00] not at your, the two LER, we go into the three P's. Okay. Well, if you're not at your LER, here's the three P's you got to ask yourself.

The first question you should ask yourself in today's environment, especially. Have I defended the value of my team by price? The first P is pricing. I, gotta be bold. I've got to defend the value of my people, but I can't exceed market either. So I got to know market. And so that's one. The second one is do I have the right processes in place?

I mean, have I given them a playbook? I've designed plays, I've designed, I've given them tools that they need. All of that's there. And, and is that, is anything there hindering people from getting work out the door? And then the last piece is, do I have the right people? And, you know, you, you, you said this in your [00:18:00] opening that I thought was, was pretty spot on.

Yes, we're in a very constrained labor market for the foreseeable future. It's just not going to be anything different. And whereas when we had a growing economy that was growing at a far more rapid rate than the government reported. Um, when you look at, if you can measure in my belief, now, once again, I'm just a chicken farmer from Alabama.

So take this with a grain of salt, but from the data I've looked at from our clients, I think from the year 2000 to the year 2019 was the highest growth, true output years of the U S economy in a 20 year period that we've ever seen. I think hands down, we blew it away, but we blew it away for one reason.

My generation. I'm at the tail end of the baby boomers and that baby boomer generation, that was their swan song of pro not only because it takes two kernels for economic activity, [00:19:00] I got to have a producer and I got to have a consumer.

Mike: that's exactly right.

Greg: And, and those baby boomers rode that 20 year period from 2000 to 2019, like it was a runaway train.

And our data shows before COVID hit, we dropped dramatically in our models in 2019. We dropped from an average 20, 20 plus percent growth rate. For 17 and 18 and 2019, it dropped to 8%. And this, is before, there's not really much inflation at all during those periods. So that, was just pure activity.

And so the labor problem wasn't caused by covid. Yes, we did lose a million or so active workforce. I mean, that's not insignificant, you know, but, for the most part, it's the baby boomers. It was their time to retire. I mean, all of my peers have retired. I'm, I, like what I do and I don't plan to retire.

Uh, I mean, I, I, I'd go nuts if I did. But I'm, I'm the exception to the rule. And, and so these next generations are going to act differently. In matter of [00:20:00] fact, I mean, uh, I don't know if you've touched on this in your podcast or not. There was an article in wall street journal last week, talking about a disproportionate number of firings of Gen Z's.

Because in their first year of work, because they're awful, they don't, they don't know how to work. And the few, there's a few that do that had to work their way through school or something like that. Those are the gems. I mean, when you, when you catch somebody that worked their way through school, you know, love on that person, that's a, that's a go getter.

But the vast majority of them

Mike: Dana White, the, the, the UFC guy, he is gotta talks about teaching his kids. He is like kids. If you have just this much amount of savage in you, you're gonna, you're gonna dominate for,

Greg: absolutely.

Mike: yeah.

Greg: so it leads to this. I will say that I said this earlier talking to somebody. The year, if you take the year 2020, 21, 22, 23, I think those four [00:21:00] years are the examples of the four worst years in labor productivity of pure output for the dollars spent that we've ever had in the U. S.

economy. I mean, the labor productivity sucked during that time frame. Now, a lot of people got away with it in 21 and 22 because they could inflate their way through it. But it, it hid the true productivity problem. And so one of the things that we're feeling right now in some of the downturn of business performance is the fact that the market is pushing back on saying.

Well, you know, when things were scarce, I get that, you know, you charged me a lot and gave me a really crappy service, but I don't think I like that anymore. And I, you know, is there another, people are starting to look for another option. And, and, and it's like you were saying about Dana White's comment.

Absolutely. Any reasonable amount of service stands out like a sore thumb right now. [00:22:00] It's so uncommon to actually get good service anywhere, you know, these days. And which for me is painful because I mean, you know, my team doesn't always give the service that I want them to give. And, and that hurts me.

And it's like, you know, when we were, we have, we have to double down our efforts to really bring these people along and teach them. Not only the technical concepts of what they need to know, but I got to teach them what good service actually looks like,

Mike: Greg, I'm gonna put a fork in our opening topic and know, 'cause I wanna move on to, uh, a, a couple other nuances here. I've talked to you a few times and this, this, this two to one ratio. This isn't a, this isn't a unique thing at this point in time. There's just something, and you, and you talked about how, how the.

Market forces, because you talked, you said price processing people, right? So once you, once you've committed to profit and I'm, I've been [00:23:00] so guilty of this since, and so maybe coming out of like a private equity kind of a mindset, it's like, okay, we're going to, we're going to grow into this expense structure.

And it's, you can do, you can do, you can create a spreadsheet that that might be true. And if you're really, really, really, really bad ass and a little bit of luck, that's, that's technically possible, but I think there's a lot more failures than there are successes in that plan.

Greg: Absolutely.

Mike: Yeah. But, but what is it about market forces that keep this two to one ratio true over, over time?

Greg: The interesting thing is costs have a tendency to stay in relative performance to each other. So the first thing is when you look at your P& L in the various buckets and you'll look at facilities costs, you'll look at your general overhead operating costs and those things, every line item. That you pay for something that's not a labor has labor in it. [00:24:00] When you, if you really deconstruct what labor makes up 55 to 60 percent of every dollar transacted, if you find it all the way back to its original source. I mean, even if you're in the mining business, that stuff doesn't get out of the ground by itself. It takes labor and it takes labor all along the value chain, you know, to, deal with it.

And so once you understand that labor is this minimum 50 to a maximum, 60% of probably every dollar of value that goes through the system, then you start to realize, oh, okay, well that's why they always stay relative to each other. And so the, comment, you know that when we were talking before, the target LER is a two for 90% of the businesses right now.

Now we've, we've had significant. Technology and productivity increases in the last 20 years. LAR, 20 years ago, was a 2. What was it 40 years ago? It was a 2. [00:25:00] Because, every time, and we're seeing this now, we've got some clients who are ahead of the curve with some technology integration and AI that's giving them a temporary advantage or going offshore with, you know, something. As soon as the rest of the market adopts those same concepts, competitive pricing begins, and it pushes you back to the statistical norm of what profitability looks like. Because, here's the thing Mike, when we pick up a new client, it takes us 10 minutes to identify their weakness in profitability, because it's just not rocket science.

And, and then it becomes more of an analysis of going. Okay, what are your trends? Are you trending downward in productivity? Are you trending upward in productivity? Now we can go next level labor productivity and measure direct labor [00:26:00] versus management labor. We can, for bigger companies that even have greater divisions of labor, we can even slice those up deeper depending on how good your data is. But for most 5 million and under businesses, we don't even have to get into the segment details. We just look at it in the overall and say, listen, here's where you're headed. And here's, if you, if I accept your gross margin as the market has given it to you, here's what your labor should have been, or here's the labor that you're committed to.

Here's what they got to go produce to. And I basically create two brackets of, Here's your cut equation, here's your grow equation. But both get you to profitability, which is the most likely. And here, here's my problem with all of the growth people. Now, I, I'm not against grow. But there's a reason why the subtitle of the second book said, Rules for Smart Scaling.

There's a lot of dumb [00:27:00] scaling going on. I mean, we have had people come to us that showed a 5 million increase in revenue and a decrease in gross margin. And it's like, why did you do that? I mean, well, I'm more of a, no, you're not any, any investor worth their salt. Does not look at the top line. They look at margin, if you're a strip sale and they look at EBITDA and really EBIT, if you're a, a, a operating unit being purchased as a whole. And it's like, they're not stupid. Um, they don't know how to run businesses for the most part. Um, and, and I think we're going to see a lot of that, you know, kind of play out here over the next year or two is, I mean, there are tons of bad private equity deals sitting out there right now, and it's going to be a buyer's market.

As those PE funds shed underperforming segments of their business and kind of [00:28:00] restructure to get out of it. So there's going to be some deals finally for a long, we've not seen a long time.

Mike: And a lot of those funds maturing, they're going to have to roll those assets off. So that's a, that's a whole

Greg: Well, the only thing, the one thing to watch out for is if private equity, so remember two years, a year ago, two years ago, the SPACs, S P A C's came out, the Special Purpose Acquisition Companies is what an S PAC stands for. Those are basically a public company with no, they've raised money and they're publicly traded, but they hadn't figured out what to buy yet.

And those, those were really a little bit ahead of their time, but I think you will see them eventually show up to take out the private equity businesses that need to turn over their portfolio to get that second bite of the apple. And the only way to get that second bite of the apple is to sell to a publicly traded business more than likely. one, there's still a significant shortage of publicly traded companies. There's, there's, there's far more [00:29:00] demand for public investment than we actually have companies to invest in.

Mike: No, that's, that's a hundred percent right. Um, I want to talk about overstaffing and maybe I, maybe I combine a couple of topics together here. Like I just know, I know seeing it in family members, my own personal experience there, even if you, even if you're. Even if you're running a fairly tight ship and you're and you do have discipline to profit first, you don't think you're just going to grow, into it.

when you're a million dollar company, you know, maybe you got five employees, maybe you got 10 employees, depending on your business. There are just plateaus that you just bump up against where you don't have enough money. To keep margin to hire that 11th person because you break your model and you're also dying because you work in your face off [00:30:00] and maybe your people.

So sometimes there's a hours in the day issue. Sometimes there's a, yeah, I can't afford to pay overtime. Sometimes it's a skill issue. I don't know that I don't have the people to get to the next level. What's your coaching for folks to break through these plateaus without overstaffing?

Greg: So step one is go pull out the first book and read the chapter on the black hole. So, black holes are real. The black hole is between 1 million and 5 million in revenue. And the reason why it exists is because Once you get to a million, you do, you have exactly that thing that you just said. You have to hire people before they can be fully utilized.

So I am, I'm already putting strain on the business by hiring somebody that is not going to produce enough to truly cover them when they're, when they're fully utilized. And, and so the tricky part, and so I've really focused a light on the deepest [00:31:00] darkest moment of the black hole. Is it 3 million? I mean, I will tell you, I mean, this has just been fascinating to watch businesses run up to that 3 million mark.

And the greatest resistance is between that two and a half to three million mark. And then you're just stuck in the cesspool if you kind of hang right above three million and you just, you just can't get enough energy to pull out of it and get to that four and five million. But if you ever get to that four and five million, it's like, oh my goodness, oh, life is just so much better.

But here's the reason why. When you're at two million, you're a single cell amoeba as an entrepreneur. You're the head of the company, head of sales, head of marketing, head of operations. The first entrepreneurial mitosis where you split into a two cell entity is, as the owner, you have to either gravitate to marketing and sales or gravitate to operations and bring in somebody else of significant leadership skill.

They don't have to be an owner, [00:32:00] but they are a significant leader in the business to lead that other piece.

Mike: Yeah.

Greg: Just unquestionably, if you gravitate as the owner to operations, you'll get stuck. don't care if you like sales or not. There's nobody that can sell at that size, like the owner can. And so you've got to gravitate to hold on to marketing and sales until you cross the dark, the black hole and get to that 5 million, once you're kind of at the 5 million, you can then start to leverage other people do, you know, create kind of team selling.

A lot of it depends on what your sales and marketing profile is, you know, for your business,

Mike: And a lot of, a lot of B2Bs, you might get to one or 2 million based on Rolodex. Right. It's not, it's not just another management layer to do it, to perform a function. Now you got to sell to people who don't know you. It's yeah.

Greg: exactly. And so I was stuck in my practice. I didn't think I could [00:33:00] sell. I was not from Huntsville, Alabama. Uh, I I've done everything in the CPA practice from traditional to consulting. I I've done it all. And. Until I focused on hiring people to do the billable work and training them to do the billable work.

Which means teaching them to do things I do that nobody else at the time knew how to do. Um, And then I focused on, I focused on marketing. The part I didn't like, which this is how I got away with it. Mike Maxson is one of my partners that, um, you know, if somebody contacts me, um, you know, I'll be happy to interact with him, you know, shortly, but, but I'm very quickly, Hey, Mike will be in touch and he'll go through kind of, here's our offering and here's the pricing and.

You know, then we can kind of go from there. And so I, my greatest value in the new business, the chain is [00:34:00] the marketing value of it, creating awareness. And my worst value is the details of going back and forth, coordinating a call, talking about, you know, what we do and scoping it, pricing it. I mean, Mike's incredible at it.

I mean, you know, if you could just duplicate him, you'd be great. You know, and, and so, so I think a lot of it is people just don't look at getting through that, that zone. But here's a couple of things of how to get through that zone. Number one is you got two choices. I can staff up and basically. Push profitability down to minimum acceptable levels or even below and believe that I'm going to grow my way through it. That usually doesn't work because the problem is, is you're adding infrastructure at a guess rather than doing the more painful thing, but probably [00:35:00] the more appropriate thing of I only add it as I have to. And, and so, so what we recommend is you stretch the hell out of your people, run as fast, when you get to two and a half million, Your goal is to set your team down and say, listen, we got to run hard and run fast and get to 4 million and the clouds will start to part when we get to 4 million and we'll still have momentum to get to 5, but we got to stretch everybody and stretch every resource and it's a season to get through. I've almost, I can't remember a time that we got a client to four million that they ever gave ground back. But tons of people get to that three and a half and they got to give back to a two and a half and and they They just get stuck in purgatory.

Mike: And you get stuck there long enough. And

Greg: You question your sanity, you know

Mike: well, you do in the things that got you there, like [00:36:00] you, you may have been, you could have been a rocket ship zero to 2 million and plateauing growth to three. And then you sit there long enough, the things that got you to two, those products change, industries change, buyers change, new competitors come in, you could have lost your value prop.

Greg: Well, but the change is the operative word and so i'll give you my experience here So we had consistently grew as a practice. This was back when we were independent before we merged And we got stuck at 2. 7 million. So first year, first year ever in the history of the practice that we ever went backward or we ever, we didn't grow.

We stayed within a rounding error of the same number. So we said, okay, we got to change something. So we changed business coaches. We had a good, I mean, I still love the previous business coach we had, but it just wasn't resonating with the team. So we went to a new business coach. And all of a sudden we had our biggest growth.

Up until that time, we'd never grown [00:37:00] more than 150, 000 total annual revenue a year. So it'd been slow and steady, just like most boring accounts are, you know? And so, so we, our new coach, we grew 500, 000 that first year and went from 2. 7 to 3. 2. We get into the end of the year planning session with a team and the first thing they want to do is can we pause Growth until we catch up and I go no, did you not read the book?

I mean, this is after I wrote the first book and I mean the black hole is real. This is not the place to stop It's like that old country song of when you're going through hell keep on going You know, and it's like that is not where you pause. So the next year we grew 800, 000, got to 4 million. Next year we grew 600, 000, got to 4.

6. The next year we grew again to 5. 3 and that was when we merged.

Mike: yeah, yeah, yeah.

Greg: But there again, it took, so the [00:38:00] philosophy, and this is where LER comes into play to validate, is it working the way you intended? The idea was don't, um, And get everybody to work to their highest value. So most people, most valuable people, spend their time getting the least valuable people busy.

That doesn't accomplish the best outcome. Most of the time, I start at the top and say, I want my most valuable people who are the most doing the most valuable task, I don't want you to be busy. I want you to be working on the most valuable task. And then work your way down from there. The people that I can afford to be idle is the lowest cost person.

That person doesn't cost me as much as that expensive person that's idle.

Mike: Yeah. And ironically, it's easy to put your focus on that low cost, low performer, because it might just be so visible to you. Right.

Greg: is. And, but [00:39:00] you've also got to watch out for your high cost performers doing low value tasks and looking busy.

Mike: Yeah.

Greg: Busy doesn't get it. What did you do today that was, that was worth your pay?

Mike: Which, which comes back to the, to the, to the formula, the LER, it's what, what is your labor ratio, period, period.

Greg: Yeah. And, and so for billable practices. I mean, most billing systems will allow you to calculate. I mean, I, I mean, I, I know an individual LER for my team. I know my team LER. I, you know, we do, we do consulting, outsource bookkeeping and tax. I know the LER by team and by person and by client. I mean, it, it, there's not a mystery.

Now, now who caused it? I mean, that's subject to interpretation, you know, but is it the client's fault? Is it the person's fault? Is it, you know, the market's fault, you know, whatever. But at least I know the data and, and, [00:40:00] you know, where to put, you know, that, that, you know, extra effort in of saying, you know, what is it that I need to do?

You know, the transition to that.

Mike: Okay. One of the things that you've talked about is benchmarking. So, you know, you just, you just talked about understanding your labor efficiency ratio in by departments, by client. You also said on a, on a per employee basis. So when I think per employee, I'm benchmarking productivity. What's, what's your guidance for business owners to benchmark productivity for their employees?

Greg: So typically what we want to say most, there's been very, very few businesses. that hasn't had an okay run at some point in time. So my easiest argument to win is to find a period of time where things were working. And then we dive in and say, okay, now what's, you hit your total LER target, which means you hit your profit target.

What did management labor and direct labor look like at [00:41:00] that point? And then to the extent that we can take direct labor and dive deeper and say, okay, well, what was. What was the best profile of a good customer relationship? What's the best LER profile for your range of team members? Because let's face it.

I mean, I get, I should get a higher multiplier off of a lower cost person. So the multiplier, you know, I'm, I may only make a 2. 5 all in, all in, you know, the, on a per hour basis, I might tell myself, Oh, I'm marking this up four times. No, no, no. LER is a harsh taskmaster. It's called, what did that person bill in total?

What did I pay them? And that includes their non billable time. And so what you find in the services world, you got tortoises and hares. You know, I got, I got the tortoises that are three yards in a cloud of dust. They don't look exciting, but they're busy every moment. And it's like, you can generally put out an okay result.

The hares are the [00:42:00] ones you got to watch out for. They work in high bursts of energy. Look great. They'll tell you about it and they'll end up interrupting everybody else who should be working, telling them about how good they are and what they just did. And, and that's them recharging to get ready, to make that other spurt and.

I can win with both of them, but both of them have issues that I need to help manage them. And sometimes I got to poke the tortoises a little bit to say, can you go just a little faster? Can we maybe not do unnecessary, because you work so slowly, let's only do the things that are absolutely necessary.

When you're working fast, you know, can I get you to quit interrupting other people who are busy working, telling them about how good you did on that last job? Uh, and like, can you, like, just, just leave the building and go take a break and recharge and then come back when you're ready to work again.

Mike: Great. How do you do it for like, some jobs are easy to, to, to, to track revenue, [00:43:00] salespeople, right? I mean, manufacturing and producing widgets. So productivity is easy. What about, Other, maybe back office, overhead, maybe it's customer, customer support where things are a little squishier. How, how, how do you bet?

Greg: I mean, you know, when you get to be larger, I mean, we cannot there's always think of it like this If once you get to size and I've got a an isolated amount of labor What is the numerator that I want to hold them accountable to and so sometimes I have to get creative Is it an ongoing number or is it like if it's sales?

I'm more interested in new sales not them processing recurring orders or those things So there's always a numerator. And so just think of it from the standpoint of what am I going to hold these people accountable to? And can I, can I access that data? And what is the rhythm that I can access that data on?

So I had a manufacturing client that I told them says, [00:44:00] Hey, you know, I don't, I don't care what you guys do. You got to sell 2 a gross margin every week. for every dollar of labor that week on payroll. That's it. Everything else works. And so I, for them, I could get it down to just that plain blazingly simple.

Now there's other things, other nuances, as you optimize the business and take it to its best possible performance. But the key is you got to lay those foundational principles of what total LER is. What does that translate into as a profit to gross margin target? And then, and then, Then looking at, then my, to whatever extent I can segment labor, what can, because those smaller segments, I'm just looking at those more like trends because you can't necessarily compare yourself to another business because they're running a different playbook.

They can even be in your same industry. They're totally ours the same, you know, so as we, we talk about the, you know, the strategy of [00:45:00] labor, I can go expensive direct labor, which means I got to skinny up my management labor to account for it. I can go inexpensive direct labor, which means I have to spend more money on management labor to overcome their deficiencies, or I can kind of have a balanced view.

I can win with all three strategies. Now the problem, though, comes in if I go expensive direct labor, I have nowhere to go. I'm bumping up against what we call the replacement zone in your career labor efficiency arc. And that's a very, very, very real

Mike: Find that.

Greg: So, in the second book, probably one of our favorite graphs that people ask for all the time is this arc that you look at of knowing Here's what you produce throughout your, your life cycle as an employee.

Here's what you're paid through that life cycle. And so in the beginning stages, we call that the training zone. You're paid more [00:46:00] than what you produce.

Mike: Mm

Greg: the point that they intersect, you go into the second zone, which we call the chasing zone. And the chasing zone means I'm producing more than I'm being paid and my pay should chase my performance, not the other way around.

If you ever get into performance chasing pay, you're dead, not going to work. And so, so pay will chase performance, but you ultimately get to the end of your career or, you know, it could be in the middle of your career too. It can happen anytime, but you get to where I'm, my wages have gone up and I just don't have that productivity engine left in me anymore.

And when that graph crosses again, that goes into the third zone, which we call the replacement zone.

Mike: God.

Greg: how much I like you, I can't make any money off of you.

Mike: Yeah.

Greg: You have to go.

Mike: And it's easy to judge our favorite sports teams and say, Hey, thanks for your service. You [00:47:00] are my favorite athlete. Uh, but five years later, you're not what you were, used to be. A lot more emotion involved in those conversations than a 20 year career at a company. Right.

Greg: It is. It is. Well, and Jack Welch, I mean, he had a lot of really good ideas on the HR side of, listen, if you've got a strong balance sheet, you can afford to be compassionate. When that person who's been a long time employee gets to that replacement zone, I mean, you give them a longer transition. You know, you might give them a couple of months to transition.

And we, and, So, um, Robert Glazer, uh, is a fellow EO member that's written a lot of good stuff on, on HR stuff and he has this, he calls it the mindful transition. And so we have deployed that successfully multiple times where we got somebody, we like them, they do good work, they just can't be profitable in our environment.

And so we say, listen, Hey, we'll give you two months. So we're not overtly losing money, but you're holding a seat that we need better [00:48:00] utilization out of those dollars that we're paying you, and you're not going to get there. And we both agree to that. And so we'll, we'll give you 60 days to find, and as long as you're not disruptive, I mean, the moment something comes out of your mouth, that's disruptive to the team, you get to leave right then.

And, and we have, we've done this at least 10 times in transitioning people out and they're very appreciative and they stay friends to the firm and, you know, and send people to us even, you know, as clients because we treated them fairly. And the good news right now is. There's very few people that will go longer than 15 minutes before they find another job.

Mike: Yeah,

Greg: Because you're holding on to the wrong person. I need a wide receiver. I don't need a left tackle.

Mike: yeah, yeah,

Greg: And, and the two can't do each other's job.

Mike: right, right. I, and I've seen this in many companies where like your curve makes sense where, where, where you're starting to overpay for the productivity. [00:49:00] I haven't thought about it in that context, but sometimes if you, let's say things are rocking, you, you, you've got a, you've got a market that's growing, uh, you got a niche market that's growing, or you've got a product that you, you've got lightning in a bottle and you've got a three or a five or maybe a 10, but probably a three to five year window.

Where you have a competitive advantage and you really are growing. Sometimes you got really good human beings working for you that help get you from here to here and they're just don't have the skills to get you from here to

Greg: That is absolutely true.

Mike: Yeah. What's your guidance there? Cause cause maybe they still fit your, Their productivity outpaces what your pay is,

Greg: Yeah, but I mean, you know, I mean, I mean, there's a, there's a rare few that you can reassign to a different position. And we've had some success with that. Um, you know, but most of the time they just need to go on. I mean, you know, it's like, it's okay. I mean, there'll be fine. Um, I [00:50:00] mean, it's different. I mean, when I grew up in the seventies and eighties, I mean, we had 11 percent unemployment during recessions.

You felt bad, you felt emotionally bad to let somebody go because I mean, they're gonna be in the soup line. I mean, forget about unemployment. I mean, they, they, I mean, you got nothing. And, and so that's a little different. I mean, today,

Mike: that you're, you know what, you're right. I mean, and everything's changed, you know, expectations for time at a company and whatnot. But when you're putting somebody out at 3. 8 percent in unemployment, if they want to work, they're going to, they're going to have a

Greg: we're, we're, we're to the unemployable. I mean, I mean, I, I keep asking this question every talk I give all around the country, I even ask it in Dubai, do you personally know somebody's unemployed? And the answer is no. Occasionally I'll get somebody, oh, I know somebody. He says, okay, well tell me, what's their situation?

Oh, well, you know, he's this super high end, specialized, uh, uh, engineer in, uh, you know, some kind of, uh, [00:51:00] geologist or, you know, whatever. And he's like, Okay, you know,

Mike: or a series of life choices have led down a path.

Greg: oh yeah, absolutely. I mean, I guarantee you there is a long list in every city right now of dirty, smelly, unpleasant, hard jobs that pay really, really well. And if you're hungry, go to work. I grew up on a chicken farm, shoveling chicken manure. Listen, you know, if you can shovel chicken poop, you can do just about anything.

And, and it's like, Hey, if my family needs to be fed, I don't care what the job is. Get over it.

Mike: Maybe let's touch on one, one last thing and, and we're, we're about 50 minutes in. Um, you and I were chatting earlier about AI and hard to have a conversation about labor productivity, understand the LER and the in, in the, in, in the, in the 2.0 ratio. That, that makes [00:52:00] sense. And I know the punchline here, but what, what, give, give us your take on where, where, where does AI play into all this?

Greg: Well, I mean, where we've seen it the most used is in marketing firms, um, putting out more content doesn't necessarily mean it's better. So some are better at that than others. Uh, but you're definitely seeing a significant reduction in what freelancers used to do, both in ideation. Um, graphic, simple graphic design, things that just need to be popped out and, and doesn't, I don't need it to be super special.

I just need it to be unique and non, uh, nont trademark and any image will do kind of thing. And, and so, so I really think it, it's really affected that industry a lot. I worry that people are overproducing, soulless content, [00:53:00] however, uh, is. One of, one of the resources that we use for my speaker website, they've been producing more articles that they keep feeding it that like they'll eventually feed it this podcast, you know, to listen to.

And it incorporates what I'm saying into how it writes articles theoretically in my voice. And the, the first couple were rough and boy, the last couple is like, that's pretty good. And now, so I, you know, I mean, it'll, it'll get there, but here's the thing. It is more about, I don't remember, it might've been you that said this when we were talking this morning.

It's more about how good you are at managing AI is the labor efficiency value. Uh, the market is going to force you to use it because you just cannot keep up with what it can produce.

Mike: Yeah. I mean, my, my, my grandpa was a farmer. I want to say 140 acres, him and my dad and three [00:54:00] sisters grown up in the Dust Bowl of Nebraska. And you know, they worked seven hours a day, 15 hours a day to, to squeak out a living. You know, when I, when I grew up in the 80s, my dad had 5, 000 acres and a bunch of higher, a handful of hired men, but he had a bunch of big ass tractors.

Uh, it was, it was technology, right. That you can be more productive. And so A.

Greg: we, as we had a, we had a two row, uh, planter and, and cultivator. You know, you guys had, you know, 8, 10, 16 rows, probably what, you know, massively wide ones. Because all of our fields were probably 20 acres or less. I mean, you could barely turn around by the time you got one of those big rigs in there, and it just didn't make sense.

And the little patch farming, you know, where I grew up, but you get out to where the open fields in Nebraska and it's like, okay, I can turn that sucker on and it'd be like, uh, Clarkson's farm, you know, on the, on prime, which is a hilarious

Mike: Is, it's, it, it's, it's technology. [00:55:00] I mean, we don't think of attractors as being technology, but it, it was, it,

Greg: it is.

Mike: it, it was, I think AI is the same way. I think no question like somebody, like in marketing, it's obvious around things like content creation, but man, customer support that.

Greg: Here, here, here's the, here's my big prediction. And you fact check me two years from now if I'm right, but I don't think Google's going to make any money from paid search in 24 months. Because right now on this phone, I have two buttons on the face of the phone that are, are, uh, AI search bots that gives me discrete answers to a question.

And I've just been intentionally choosing to use those first. And so far I have yet to have to go to a Google search to, after what I searched for on either ChatGPT or Claude is the other one I'm using at the moment that somebody [00:56:00] recommended. And so, I think this will be the fastest adoption of technology of using AI search parameters and more so even conversant.

Uh, you know, my generation, I'm not, I've never been a Siri, you know, person. I hate, hate talking back and forth to it. But, uh, but I probably will get there in, you know, in that.

Mike: I have no doubt you will. I mean,

Greg: but there again, why, why would anybody want to use a search engine that is influenced by paid sponsorship versus I want to do a pure search for what I want and then, and then, and if I can at least remotely describe what it is I'm, I'm trying to get answered, you know, why would I want it to be influenced by somebody spending more ad dollars?

Mike: well, you know, nine months ago I'm in Phoenix. Uh, and Phoenix is easy because it's a city laid out on a grid. So it's, it's, it's either easier than say San Francisco or Boston, but, uh, you know, you could [00:57:00] take Uber, you could take, maybe you could call a cab still, I didn't see any, but there's Ubers everywhere, but there's Waymo, there's driverless cars.

And I got to tell you, I took my first one just for the hell of

Greg: We did? Oh yeah. You're braver than I am.

Mike: What it was, I did it as a novelty. And then I realized the car's cleaner. The user experience from, from here was as good, if not better than an Uber. And it seamlessly transitioned to the big, beautiful screen in the vehicle.

And there was nobody to tip or have an awkward conversation. Cause I worried about how they are going to rate me. The, the user experience was amazing. And I'm sitting there doing this, what started out as a novelty. I'm like, what is it? 3. 1 million over the road truckers without college degrees in the U S. It's just take, it's a matter of time. It just seems so, so obvious. So it's like, okay, some people will be displaced, but just like farmers, were displaced by tractors. They go to other, [00:58:00] work. And I think the thing to fear is not are you gonna be replaced by ai? It's gonna be if you, especially if you're a business owner, it's your, you're not competing against ai.

You're competing against your competitor. And how much better at AI they are than you. That's what you're competing with.

Greg: Exactly. So there's an ad on the radio today when I was coming back to the office about Amazon jobs that they're willing to train you to be a robot repair person if you've been a picker of packages in their warehouse. So hey, if you've driven for Amazon, if you've done anything for Amazon, you're a current Amazon employee, We will train you to be one of our robot repair people in our automated warehouses, which are apparently are just marvels of technology.

Mike: Maybe the last thing I'll give you the final word, but when we're talking about AI, then it makes me think, okay, productivity for some has started. I do believe I'm a believer in AI. [00:59:00] Uh, I'm kind of deep in that ocean right now. It's going to be a game changer of employee productivity. What you said, you know, half hour ago, this two to 2.

1, 2. 5, 2. 0 ratio, your labor efficiency ratio, if you're using AI and your competitors using AI, you got the same pricing cost structures. I don't think, I don't think it changes a damn thing out of today's conversation. I'll give you, I'll give you the final.

Greg: I mean, I'll stand by that until the only thing that changes that is if we get into a crazy imbalance of excess labor, and even then it's still going to stay roughly to that number, but you have. You know, when labor is willing to work at a, you know, abnormally low rate, I just don't see the government allowing that to happen.

I mean, I think if we get into an [01:00:00] excess labor situation, which I don't even see how we get there given birth rates and all that kind of stuff. Um, on the other hand, You get into the one thing that spikes it on the other side is have supply chain disruptions and you see predatory pricing of things that don't make economic sense in a normal trade environment.

And that will create temporary distortions. But I think we always come back to the two. We always come back to the two. And I, I don't see how any of those other calls change, you know, otherwise, but you're absolutely right that, you know, the, the people, you know, people who harness AI and the people who also harness International labor, you know, our, our favorite spot has been the Philippines.

Uh, we've seen more success with clients getting labor out of the Philippines than any other place in the world. Um, you know, but, but you're, you're getting more productivity than the [01:01:00] comparable skill set of a U. S. worker. And you're paying a fourth, probably at least, you know, no more than a fourth of what you'd pay for that U.

S. person. But even those people, they're getting away with an extra performance at the moment, and I've warned all of them. Yeah, it's great right now, but as your competitors do exactly the same thing, The price will revert back to that competitive number,

Mike: Over the long haul, cost of living there is going to increase as their economy grows. Your competitors are going to do the same thing. It all comes back down that you have to profit first and you have to manage to this productivity ratio. So all the other HR things we talked about on this show, you know, you don't, you don't, you can't choose to intentionally break the law.

You got to follow the law. You got to be compliant, but you

Greg: Now, their labor rates are actually accelerating faster than ours at a rate. It's just a smaller number right now.

Mike: That's right. That's right. Greg, anything else you want to say in conclusion here?

Greg: I think we've given them a lot to chew on, so, [01:02:00] uh, so we'll

Mike: enjoy our conversations very much. Thanks. Thanks for

Greg: Yeah, a lot of fun. Anytime.

Mike: and thanks to everybody else for joining us. Uh, uh, highly recommend the books. The first one, Simple Numbers, Straight Talk, and I'll, I'll emphasize Greg's second book.

He said it, the title of the show is Mission to Grow. So, uh, the sub header rules for smart scaling. So there's ways to grow. Uh, and we want everybody to do it in as smart a way as possible. So thank you for letting us be part of your mission to grow. Thanks, Greg.

Outro: That's it for this episode of Mission to Grow. Thanks for joining us today. For show notes and more episodes, visit us at missiontogrow. com. If you found this content valuable, I invite you to share it with a friend and subscribe to the show. If you really want to help, I'd love it if you left a five star review on Apple Podcasts, YouTube, or wherever you listen.

Mission to Grow is sponsored by Asure. Asure helps more than 100, 000 businesses get access to capital, stay compliant, and [01:03:00] develop the talent they need to grow. To learn more about how Asure can help your business grow, visit AsureSoftware. com. Until next time.