Verne Harnish, founder of the world-renowned Entrepreneurs’ Organization (EO) and CEO of Scaling Up, a global executive education/ coaching company, has spent the past three decades helping companies scale up. Credentials?
- 15-year chair/instructor at EO’s “Birthing of Giants” CEO development program (held at MIT)
- Authored best-seller, Mastering the Rockefeller Habits (published in 2002 and translated into 9 languages)
- Authored Scaling Up: How a Few Companies Make It and the Rest Don’t (published in 2014 and winner of 8 major international book awards)
- Grew Entrepreneurs’ Organization (EO) to over 14,000 members worldwide
- Chairs annual ScaleUp Summits (in collaboration with Bloomberg) and grew Scaling Up to over 180 partners on six continents)
Verne, citing John D. Rockefeller’s biography, Titan, believes that hyperfocus is critical to business success. He gave the example of Arnie Malham, a longstanding EO member, who wanted to be a marketing/ advertising agency. Focus? Advertising and marketing for law firms. More focus? Personal injury law firms –Intense focus? Personal injury law firms in NFL cities, large cities with the sophistication of billboarding and radio. Hyperfocus? To work for one personal injury law firm per NFL city, making a simple promise: “I’m going to make you No. 1 in that market.” Then, provide a 100% solution.
In this interview, Verne talks about the four numbers it takes to grow a company: revenue, gross margin, profit, and cash – each significant at a different growth stage.
- From startup to that first million dollars, the most important number is revenue. It’s not about fixing the logo or the website, Verne says, just “Sell like hell,” and then when you get to a million, fix those other things.
- From a million to $10 million, the most important thing is cash . . . because growing 10x will take a lot of cash. The cash model, the timing of incoming and outgoing cash, has to work.
- From $8 or $10 million to $40 million, gross margins are critical. As companies start adding middle management and infrastructure, costs will increase, and gross margins will start to slip.
- When a company is at the $30-40 million level, the most important number is profit consistency, because that is what the market expects.
At the organizational level, Verne claims there is one routine that will drive things further faster than any other – daily meetings to ensure organizational alignment on the task that needs to be done that day.
Verne invests privately in a number of scale-ups and is a member of the International Brotherhood of Magicians – so business-wise, or recreationally . . . he spends a lot of time doing “magic.” He available on his company’s website at Scalingup.com, on the company’s new media site at Scaleups.com, and by email is firstname.lastname@example.org.
ROB: Welcome to the Marketing Agency Leadership Podcast. I have the distinct privilege today of being joined by Verne Harnish. Verne is the founder of EO, the Entrepreneurs’ Organization, and is the owner of Scaling Up, which used to be known as Gazelles. You may have heard of it. Welcome to the podcast, Verne.
VERNE: Good to be here, Rob.
ROB: We’ve had many, many EO members who credit EO to part of their entrepreneurial success on this podcast, because we are talking to marketing agency owners, and lots of entrepreneurs start that kind of business. But for those who don’t know you, what’s a quick walkthrough? What is Scaling Up? How has that become the brand that you’re running behind now?
VERNE: When I launched EO, we needed an executive program at a university, so I ended up partnering with MIT and we launched this program called Birthing of Giants with Inc. and Inc. Magazine and MIT. We had like 800 applicants for that first class, and I ran it for 15 years.
Many of those early graduates – Brad Feld, who co-founded Techstars – Brad went and launched the Boston EO chapter, then went on to Colorado, launched the Colorado EO chapter. Karen Behnke, who now owns Juice Beauty with Gwyneth Paltrow, went out and launched the San Francisco chapter.
It was that program that caused me to put together the curriculum for Scale-Up. There’s a lot of information about startups, and I have an MBA, which is supposed to be useful for large companies, but there wasn’t anything, Rob, about scale-ups.
I developed it over the first 10 years of running the program and published then my first book, Mastering the Rockefeller Habits, in 2002, and then just updated it because now gazelles, fast-growing companies, are called scale-ups. So, we pivoted and I wrote a book called Scaling Up because that was one of two words I want to own in the marketplace.
ROB: Yeah, you mentioned that in your talk. We can start touching on that talk. Definitely, Scaling Up has taken on a life of its own. I think it’s much more approachable than this – “Rockefeller habits? What’s that?” Scaling up, that’s aspirational. That’s something that an entrepreneur wants in their business. But you probably didn’t know that you wanted to claim that name when you wrote the first book.
VERNE: I didn’t. What I wanted to do is I’d read the book Titan, which is the biography about John D. Rockefeller, and I saw, wow, he was the wealthiest guy in history. What were some of the fundamental habits or routines he put in place that made that happen? He was very, very disciplined.
For me, I was taking my own advice. I bolted on Inc. and MIT’s brands to YEO; that really helped us scale. I wanted to bolt on a well-known brand to me, which wasn’t my name. I thought Rockefeller had a better name. And I really thought maybe the Rockefellers would come after me, which wouldn’t be bad publicity. But look, I’ve been talking positive about John D., and honoring him. I know Mark Rockefeller, the fourth generation, and the like.
So, it’s been a great brand. But out of respect for them – because Mark decided to launch a consulting firm, get back into the business – I said, all right, I’ll begin to pivot away from it. But we have to be careful. That’s why it’s Scaling Up: Rockefeller Habits 2.0, and then eventually that’ll go away and it will become Scaling Up. It’s just a rebranding.
ROB: Yeah, I think it’s a great rebranding, and it’s amazing what we learn along the journey. You probably know from where you stand in EO, there are a lot of marketing and services type firms in EO, and I think that’s probably a bit of a blessing and a curse. You might know better than I do.
You have this relatively high-price-point services business that’s also more scalable than a law firm – which I think probably means that a lot of these firms get a little bit out over their skis. They can get behind further in process versus revenue than a lot of other firms. What have you seen from your vantage point with marketing services firms, agencies, and where they’re getting held up on scaling up?
VERNE: That’s why I brought up CJ Advertising. Arnie Malham is a longstanding EO member.
ROB: We’ll have to get that one in the show notes, because that was a great example.
VERNE: Yeah, because Arnie, like we said, he wanted to be a marketing and advertising agency, but the key is not focus – hyper-focus. As I shared in there, he said, “I’m just going to do advertising and marketing for law firms. No, personal injury law firms. No, only personal injury law firms in NFL cities, cities large enough with an NFL franchise, so they’re going to have the sophistication of billboarding and radio and all of that. No, even further. I’m only going to do work for one personal injury law firm per NFL city.” And then he made them a very simple promise: “I’m going to make you No. 1 in that market.”
And he did. With that kind of hyper-focus, in many cases law firms came to him, begging that they be chosen, making a case why they’re the ones in their city that he should choose. He was as picky about the customer as the customer was about the agency.
Now, what I didn’t share in the room, and this is key point number two, is the reason folks don’t scale – and this is a Geoffrey Moore Crossing the Chasm, who was an understudy of Regis McKenna – you have to provide a 100% solution.
What he did is he said, “All right, I’m going to get you the billboard, I’m going to get you the phone number, but I’m also going to set up a call center and I’m going to answer the phones for you, and I’m going to do the intake and separate the wheat from the chaff, and I’m going to take the best opportunities and feed them to you, ad not waste time feeding you the bad opportunities. We’ll send that to the competition.”
ROB: Did he plan that on Day 1, or was that a discovered adjacency once he got into that specialty?
VERNE: You know what, I need to ask him that question. I know it wasn’t. But very quickly, if you want to follow, as I suggested, the easy path, the thing that was really frustrating him is all of his efforts were driving leads to his clients, but they were mucking it up because they’re lawyers. They’re not folks specializing in answering the phone and sorting out the opportunities.
By the way, he then ended up scaling that business to service all kinds of law firms, so when he sold last year, he had three things to sell: he had the agency, which he sold; he then sold the call center; and then he sold the building he was in – which, being in Nashville, the price of real estate’s gone through the roof. He had a triple hit game last year.
ROB: I think you dialed in on – we actually asked some of our Atlanta EO members – they were very excited to know that we’d be talking to you on this podcast, and they had some questions. I asked some of the marketing agency owners, and you’re kind of dialing in on one of their questions. They said, “Is it better to have a lot of smaller clients or a few bigger clients?” I think people get a little scared around that. I think you probably have tipped your hand a little bit. It sounds like you’re probably also a fan of Peter Thiel’s sense of being a monopoly.
VERNE: Yeah, we always want to have a monopoly. But it’s okay if it’s a bunch of small companies. John Ratliff, who I shared, the YPO guy with Appletree, John had 10,000 small businesses as clients because they really needed his help. They were in some cases hungrier, easier to deal with, than if you’re trying to deal with the really big companies where there was a lot more competition as well.
So, this isn’t about a few customers or a lot of customers; it is about hyper-focus. If you said, “Hey, I want to be the primo to the small two- or three-person restaurant” – there’s millions of those. You can be the king, queen, and godfather of mom n’ pop restaurants. That’s okay. So, it’s not number of customers, but it’s around industry and service hyper-focus.
ROB: So, it’s not necessarily big or small; it’s where you can focus, where you can have that monopoly, and what aligns with you and who you are. Perfect.
VERNE: Honestly, we could make a ton more money if I worked with large companies. We have a lot of really big companies that are fans of Scaling Up.
ROB: Yeah, two-day workshops at who knows what price.
VERNE: Oh, and the consulting contracts, they’re millions of dollars. But they think they own you, and they drive you crazy. I got my start working with these agencies and others, and it drove me nuts. So it’s a really missional thing that I work with in markets.
ROB: From a habits perspective with – this changes due to the life of a business, but are there any common habits you think of when someone’s joining an agency, when they’re running the services business, that they should be thinking about on a daily basis? What’s the cycle of habit that’s going to get them to the next level?
VERNE: I’m telling you, it’s that daily stand-up around their various client projects that I shared, that Mike Maddock adapted for his advertising agency out of Chicago. Look, all your clients, when they’re dealing with a professional service firm, whether it’s mine in consulting or marketing and advertising, they worry that you’re not doing anything on any particular day on their work or their project or initiative.
When they saw that Mike was reviewing – it’s a little bit like that opening video in LA Law or Hill Street Blues where there’s that daily stand-up or a meeting where let’s see what’s on the docket today and let’s get all aligned. That will drive things further faster than any other routine you can put into place.
ROB: That makes a lot of sense, and that’s something I’ve noticed with our local EO chapter in Atlanta. We have learning days each quarter, and each quarter we go through one of these four pillars from Scaling Up. So, you have people in cash and strategy and execution. I find the book is almost like a fractal. At a high level, there’s one big habit you should put in right now, and then you come back to it in a year and it’s nuanced and it’s different, and there’s something fresh that you’re ready for.
VERNE: They say you can’t cross the same river twice because it’s always moving. If you’re growing a company, you’re a different company tomorrow than you are today, and that’s why there’s people who’ve heard me talk five times or ten times, and they swear, “Verne, you’ve got all new stuff.” No, you’re just at a new place, and you’re now ready for the different stuff I talk about.
ROB: That daily stand-up, I like that you bring that in, because there are so many different processes, so many different tools within the system, but it can be a little bit overwhelming if you actually take it as a prescription rather than a tool. If you say, “do all these things,” you’re going to lose your mind. And your team’s going to lose their mind.
VERNE: Yeah. That’s why at the very end of the book, I have a three-page chapter called “Next Steps.” It’s like, here, the next 5 things you’re going to do, in this order. Because you can only eat the elephant one bite at a time. We’ve got 10 Rockefeller habits, and our recommendation? You pick one every 90 days to install, so you don’t overwhelm yourself and your team.
But the daily huddle is a great one to start with because it gives you tremendous leverage and time. John Ratliff, again, wouldn’t have thought to run his 650-employee call center business without every employee in some daily stand-up. And the rule was every minute in the stand-up saved 10 minutes. His typical stand-up was 9 or 10 minutes; that was saving everybody 90 to 100 minutes. That’s an hour and a half you’re getting back for a 10-minute investment. That pays dividends.
ROB: It’s interesting, because you see this – at least from my perspective, being from a software background – the stand-up thing comes in the door a lot through the software world. Now you see it even going all the way out to – Netflix just had this documentary – the Obamas were behind this American Factory documentary, and they were in a glass factory in Ohio, having a stand-up. The Americans are thinking it’s a little odd, but it’s really coming in all over the world.
VERNE: It is. What’s frustrated me is a couple of our main competitors, who just copied my stuff – I’m like, if you’re going to copy my stuff, copy it all. They’re out minimalizing the importance of a daily huddle because it seems hard initially. They want to be seen as just being able to be easy to implement. But there’s a case where you’re leaving money and time on the table, massive amounts, if you don’t do this.
ROB: Right. Even a well-structured weekly sit-down leadership meeting is resisted. It is intimidating, because you do have to lead and you do have to be in charge, and you have to be structured, if that’s not your disposition. But a little structure is good for anyone.
VERNE: But that’s why I think it’s always good to get that right number: two. We’ve been talking about that from the beginning, early days, back in ’91, that most entrepreneurs need a Tim Cook. Steve Jobs had Tim Cook, and if you can find your Tim Cook – mine was Joanne – then you can just toss things over and it gets done, that’s really useful.
So maybe it isn’t for the entrepreneur. In a lot of the dailies, it’s the rest of the team. Many times the entrepreneur themselves misses it because they’re out in the marketplace, driving strategy. Everyone else needs to drive execution.
ROB: And for people who don’t know, EO is quite a global organization, and I think that plays into a lot of conversations. But in the U.S., at least, it’s typically – is every chapter in here on the threshold for full EO membership a million dollars a year in revenue, is that or is that set by chapter or by state?
VERNE: No, it’s a million dollars globally.
ROB: Is it? I’d heard that some chapters were significantly higher than that in some places, but that’s amazing.
VERNE: Oh, maybe they are. We have 14,000 members now. I don’t know them all anymore, and we have a lot of chapters.
ROB: I think I’d heard something like Hong Kong or something, they had a very high threshold of annual revenue for the business for membership.
VERNE: Yeah, that would make sense.
ROB: It was something that made everybody’s eyes roll back in their heads. Holy cow! When you think of it, a lot of business owners aspire to that billion dollar mark and there are scaling challenges you have to solve there. Where do you see people getting stuck from that $1 million to $10 million mark if they’re running a services . . . a marketing firm, that sort of thing?
VERNE: One of the things I early on shared at the MIT program is you’ve got four numbers: revenue, gross margin, profit, and cash. Even though all four are important, they kick in at a different time.
From zero to a million, the number one that’s most important is actually revenue. You just want to sell like hell. But people spend way too much time getting the website right and the name right and the business cards. They want to do everything but just get out there and sell. No, you need to sell to get to a million. Then you can start worrying about updating the logo, updating the website, and all this other stuff.
From a million to $10 million, it is cash, because growth sucks cash. You’re going to 10x the business now, and it’s going to be a long time before you ever 10x it again. You’ve got to go from 10 to 100. So you’ve got to get your cash model figured out.
I know when Sam Goodner was scaling his Microsoft solution provider, it was killing him as he was paying his people twice a month, but customers were only paying him once a month. So, he had to start collecting from his customers twice a month, and most of them had no problem with it. It fixed his cash problem right away. You’ve got to get your cash act together.
Then from $10 million – let’s say $8 million to $40 million – it’s gross margin. What happens is, it begins to slip. You’re adding middle management, you’re adding infrastructure. You’re adding a lot of costs you didn’t need early on.
And then, profit has always been important, but once you hit about $30-40 million, it’s consistency in profitability, which is what the market’s looking for. So all four matter, but they kick in at different stages.
ROB: What should we be looking forward to from you, from Scaling Up, or just emerging broad business opportunities that you’re excited about?
VERNE: We’re focused on – our next theme is long-form video. It’s always been long-form – long-form letter. Even the old ads that you’d see in Wall Street Journal selling gold coins or whatever, they were packed with copy. The research is clear: the long-form letter, marketing page – and we think it’s now long-form video.
I’m working on a TV show with Bloomberg International. It’s been greenlighted at the very global top. Now we’re looking for the $350,000 sponsor, so if anybody out there wants to partner with Bloomberg on a show about scale-up – it’s called Breakaway.
Then, we’re going to be doing a four-part – what will be like a Netflix series, like what Tony Robbins did with I’m Not Your Guru or Brené Brown did with her show, or that cookbook. What is it? Salt, fat, acid – she then did a show on each one of those four. We’ve got people, strategy, execution, and cash. So, we’re going to do the same.
We think that long-form video – nobody wants to be sold; they want to be educated – is what’s really going to 10x our brand and visibility around the globe. So that’s what we’re focused on in 2020.
ROB: I think that ties a nice theme right back to the marketer for the law firms. People are scared about going deep. People might be scared of going in deep with Gazelles and saying, how much of that training are you going to do, and how do you differentiate?
But by being specific, you find these unlimited adjacent opportunities. That’s the point of the law firm. Yes, they can help with the ads and they can help with all the ads, and they can help with the phones, and there’s probably a very deep river of adjacent opportunities. Seems like that’s what you’re also evolving, how you’re evolving Scaling Up.
VERNE: We are, because we realize that the customer wants the 100% solution. We have the learning, the coaching, and a technology platform, and now an exiting business. We help the entrepreneurs exit, as we did CJ Advertising and his companies. Because that last decision entrepreneurs make – because it’s their first time to ever do it, they usually get slayed in the marketplace. It’s like a first-time golfer going up against Arnold Palmer or Rory McIlroy, let alone the local pro at the country club. Who you’re going to sell to has done this a thousand times.
ROB: And knows the court like the back of their hand.
VERNE: And who you going to sell to has done this a thousand times. Literally, the world rips entrepreneurs off on that final decision, and we want to stop that. We want a full service offering to what is our niche, which are these growth companies.
ROB: Verne, when people want to find you and find Scaling Up, where should they look?
VERNE: Scalingup.com, and my email is email@example.com. And we have the new media site, Scaleups.com.
ROB: Perfect. Great domain. Great name.
ROB: That’s great. Thank you, Verne. It’s been great.
VERNE: All right, you got it, Rob. Thanks.
ROB: Thank you for listening. The Marketing Agency Leadership Podcast is presented by Converge. Converge helps digital marketing agencies and brands automate their reporting so they can be more profitable, accurate, and responsive. To learn more about how Converge can automate your marketing reporting, email firstname.lastname@example.org, or visit us on the web at convergehq.com.