From my time in manufacturing, I’ve had an immense respect for the art that old molders or machinists knew. While not necessarily knowing all the science behind it, they implicitly know or learned how things work.

You want to take that art, turn it into a process or document it, and eventually automate it.

The transformation from an 'art' style of management, characterized by reliance on individual experience or 'tribal knowledge,' to a more process-oriented approach, and finally to automation, is an essential journey that businesses must embark on.

There’s a step you can’t skip. To get the automation right, get your processes right. It’s cheaper to do and test before an automation buildout.

Art - The Incubation Phase

All businesses start with the 'art' phase. Here, personal skills, tacit knowledge, and experiences drive business operations. It is an essential stage where ideas are born, creativity thrives, and unique business models are developed. The downside, however, is that it's often hard to replicate or scale since the knowledge remains with specific individuals - it's what we often refer to as 'tribal knowledge.'

Process - The Structuring Phase

To scale effectively, businesses need to transition from the art phase to a process-driven phase. This shift involves capturing the 'tribal knowledge' that exists within people's heads and translating it into well-documented, standardized procedures. Processes create a uniform way of doing things, enabling businesses to replicate success, reduce errors, and scale operations.

In this phase, businesses need to prioritize what processes to formalize based on factors such as frequency of tasks, criticality to the business, and potential for error reduction. This prioritization ensures businesses can efficiently utilize resources to bring about the most impactful changes.

Automation - The Optimization Phase

Once processes are well established, the next step is to explore opportunities for automation. By automating repetitive tasks, businesses can significantly increase efficiency, eliminate human errors, and free up employees' time to focus on higher-value tasks that require critical thinking and creativity.

However, diving straight into automation without having solid processes in place can lead to chaos. Automation only magnifies what's already there - if there's an effective process, you get efficient results; if the process is flawed, the problems only get bigger. Therefore, process development is an essential piece before automation.

Striking the Right Balance

The journey from art to automation is not about completely discarding one phase for another. Rather, it's about finding the right balance.

While automation is crucial for scaling operations, the 'art' aspect should not be entirely dismissed. It nurtures innovation, critical thinking, and creativity, which are all essential in today's competitive business world.

Processes, on the other hand, bridge the gap between art and automation. They ensure knowledge is not lost when key personnel leave, standardize procedures, and provide the groundwork for automation.

And sometimes setting up the automation or process just takes too long. It’s a dream scenario to automate everything, but you have customers, employees, vendors, and more to take care of.

Business transformation from art to automation should be an active pursuit for all small businesses looking to scale. Remember, it's not an all-or-nothing approach - sometimes, processes are necessary before full automation, and the art phase has its value.

And remember, the old owner who might not have had all the processes down or the terminology, the art they learned, and earned, built their business.

Thanks to Everest Brady for his help, writing, and research in assembling this week’s newsletter.

This Week on Think Like an Owner

Our guest today is David Dodson. David is an investor, former CEO, professor at Stanford, and as of July 13th, 2023, an influential author having published his first book, The Manager’s Handbook. Alex read an advance copy ahead of the recording and was incredibly impressed with how strategic and tactical it was in showing you how to become a more productive leader.

The book examines the five essential managerial skills David has observed across some of the most ambitious CEOs he knows, and it’s written in a format designed for busy leaders who don’t have time for fluff. Given this show’s focus on ambitious CEOs and David’s wide reach across the CEO world, we can’t think of a better guest or topic for this show. Enjoy our conversation, and we highly recommend picking up a copy of The Manager’s Handbook.

When it comes to accounting, quality of earnings reports and financial due diligence, it is vital to have a partner that understands your business and what you are trying to accomplish. Jerry Zhou and his team at Hood & Strong in San Francisco have a specialty for search funds and lower middle market private equity with multiple podcast guests today trusting them with their partnership.

For advice and observations, this episodes Q&A features Jerry Zhou answering the question, “Expanding beyond the scope of a quality of earnings report and that scope of work, can you walk us through exposure analysis Hood and Strong would do and then some examples?” To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners, Jerry Zhou, at [email protected].

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Think Like an Owner is sponsored by:

Ravix Group - Ravix Group is a fraction CFO, outsourced accounting, and HR consulting firm serving small and large businesses alike. Whether you or someone you know is getting started, searching to buy a business, or building out an organization, Ravix will help on the journey. To learn more about Ravix Group, head to their website and tell them Think Like An Owner sent you.

Hood & Strong, LLP – Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and Employee benefits programs. If you are under LOI, please reach out to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to the CEO, August Felker, directly at [email protected].

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