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One new franchise opens every eight minutes of each business day. Franchises account for $1 trillion in revenue – that’s over 50% of every retail dollar.
The following table illustrates that American franchises have an enviable rate of success compared to other American businesses. Franchisers provide their franchisees with three advantages that most entrepreneurs do not have: an established business system, a profitable plan and financing. Of these three advantages, the critical differentiator is the established business system, what we call a Business Operating System.
| New Businesses | Franchises | |
| % Successful after 1 yr. |
<50% |
95% |
| % Successful after 5 yrs. |
25% |
75% |
The news and our neighborhoods are filled with stories of companies going out of business or reducing their workforces significantly. However, I challenge you to think of a McDonalds, Blockbuster, Starbucks, Subway or any other franchise who has closed one of its locations in your neighborhood. So, what can we learn from the successes of the American franchise business?
Business Operating System
A Business Operating System (BOS) is your company’s unique way of doing things – how it operates, goes to market, produces and deals with its stakeholders. An effective BOS transcends the people who are doing and managing the work, and is more valuable as a result. A business that effectively operates without you is always more attractive to public and private sources of capital.
In order to create an effective BOS it is key to view your product as the business itself rather than the commodity/service you produce. This paradigm enables the leader to think of the business as a model for 100 others just like it. For example, McDonald’s commodity – hamburgers and fries – are not claimed to be the best. However, McDonald’s product – its business operating system – is undoubtedly one of the best. A quick profile of McDonald’s illustrates its astounding success:
- Established in 1952
- Over 14,000 locations
- $25 billion in revenues
- Per location:
- $2 million in revenues/location
- 17% pre-tax profits/location.
Although many companies spend the time and resources needed to create their BOS, they are disappointed with the results. This is because the components of a BOS are held together by The X Factor. The X Factor is the same thing that sets great companies apart from their competition. We are frequently asked, “What do Southwest Airlines and The Container Store do to achieve outstanding results and create such a great place to work?”
A closer inspection reveals that their success is less about incredibly innovative management practices and all about The X Factor – discipline. Great companies create and reinforce a rigorous discipline about the little things that affect their customers, employees and shareholders. They have instilled a discipline in their business (via a BOS) and reinforced discipline at a personal level (via their cultures). Personal and organizational discipline help breath life into your BOS and enable you to sustain it over time, making it the way you do business rather than just a set of hollow procedures.
Stick with It: Mastering The Art of Adherence is a powerful, practical book on this topic.
Components of Your Business Operating System
It is important to create each BOS component to be scalable, up or down, for future growth or contraction. The components are interrelated as with any living system. Therefore, the successful leaders address all components and understand how they affect each other.
A description of the five components is presented in priority order for effectively creating your BOS.
- Processes
- Systems
- Roles
- Skills
- Structure.
1. Processes
Underdeveloped work processes are the most common risk factor for growing companies, and are the first thing that will crater a company in tough economic conditions. In addition to traditional work processes, we include other processes like communication, decision-making and conflict resolution. It is easy to say, “We need a new system”. However, effective leaders have the discipline to resist the illusion that a new system will solve their problems. Streamline your manual processes before changing technical systems. Companies who jump into a new system typically automate their own inefficiencies. This is why Processes should be the first BOS component you create.
Effective processes are:
- Clear
- Replicable
- Documented
- Supported by tools
- Easily accessible.
2. Systems
This component addresses hard and soft systems including: technology, financial, marketing, operations and people. A hard people system is your payroll and human resources information system, whereas soft people systems include performance management, selection, compensation and development systems. Well-designed and applied systems create predictable customer and employee experiences and also enhance your operational efficiency.
Looking at the 80/20 Rule, the 20% of the most effective employees (who produce 80% of the results) inevitably use some kind of a system to enhance their effectiveness. A client recently had to let go of 70% of its sales force and found that the remaining 30% actually accounted for 90% of the company’s revenue. Sure enough, the remaining sales people were disciplined in using a system of prospecting, qualifying, proposing, presenting and closing business.
3. Roles
Defining clear roles is a big challenge that requires significant personal discipline. You should write a job description (even if a brief one) for all roles within your desired BOS. Remember to focus on the role itself, not the person. At the early stages of your BOS, one person may play multiple roles. By creating the roles first, you acknowledge this. As your company changes, predefined roles will enable you to make more effective decisions about which roles an employee should continue or discontinue doing and who you should add/delete from the payroll to effectively implement this change.
Resist jumping to the structure component when defining roles – again this requires personal discipline. This step is about defining the required roles to accomplish your company’s mission, not how those roles relate to each other.
4. Skills
Now that you have clear roles that your business requires, you can more precisely match the necessary skills to each role. Effective processes and systems will ensure the highest and best use of your talent. Your systems and processes should be created for the lowest common denominator so they are not people-dependent. This will free up your employees’ minds and time so they can focus on more creative, proactive ways to improve your business. It is common to see talented employees who are underemployed because they are using excess time trying to figure out how to get their work done.
When you fill your roles, it is important to match the role requirements with the employee’s skills and natural style. Ensuring a skills match has obvious benefits. Matching the role with the employee’s natural style is subtler but is often even more critical. This can be achieved via a simple style assessment and helps the employee be successful. We all can remember a time when we were in a role for which we were not ideally suited, resulting in greater stress and lower productivity than we (and the company) would prefer.
5. Structure
The key to an effective organizational structure is to design it before you need it – then grow into it. It takes great discipline for leaders to design the other four BOS components before they design their organizational structure. In fact, tinkering with structure is one of the great executive past-times. Unfortunately, this tinkering typically ignores the other, more substantial components.
Structure dictates process. That’s why we have outlined the sequence of BOS components in this order. If you create a structure first, your business process will be constrained by your structure and may not reflect the needs of your business and customers. Defining your processes and systems first, as we suggest, results in an organizational structure that supports the way you do business rather than constraining it.
Winston Churchill said, “For the first 25 years of my life I wanted freedom. For the next 25 years I wanted order. For the next 25 years I realized that order is freedom”. Your BOS will provide you and your business the order and freedom to work on your business rather than in it.
Although we suggest a particular sequence for creating your BOS, most companies have naturally created one or more of the five components. Since each component may be developed at different levels, it is helpful to prioritize the preparedness of each component.
Complete the following brief assessment to help you prioritize and get started on your BOS.
To begin, fill in the blank to the question below with your desired outcome (e.g., double our size in 3 years, shift our market focus, reduce our workforce by X%, deploy new business units, sell our business in 2 years, create a franchise). Then, rate each BOS component.
How well prepared is each BOS component to ______________________?
| Business Operating System Component | Not at all Prepared = 1 Well Prepared = 5 |
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| Processes – Manual methods used to perform work. | 1 | 2 | 3 | 4 | 5 | |
| Systems – Automated methods used to perform work. | 1 | 2 | 3 | 4 | 5 | |
| Skills – Complete set of knowledge and skills that employees use to perform work. | 1 | 2 | 3 | 4 | 5 | |
| Roles – Expectations for how an employee should use his/her skills to achieve results. | 1 | 2 | 3 | 4 | 5 | |
| Structure – How the different roles within your company interact to achieve results. | 1 | 2 | 3 | 4 | 5 | |
Now you are ready to develop those components that will result in the biggest improvement in your BOS. If your ratings are relatively equal amongst two or more components, defer to the sequence suggested above. If they are not, start with the component that is least prepared based on your rating. Remember that if your ratings are relatively equal begin with your Processes.
Best of luck as you take a significant step toward creating a thriving company!