I think there are around six of you who reliably read these long-form essays.  If you add that to the eight or nine who subscribe to my podcast (two of whom are my parents…), it’s safe to say that I cater to a very, uh… “niche audience.”

That notwithstanding, many of you have either read my writing or heard me say that I’m not very optimistic about the near-term economic horizon.  That’s not a commentary on President Trump or anything politically oriented in any way, but rather a realization that we’ve been on an historic run of over a decade-and-a-half of practically unabated economic expansion (save for a temporary pause due to a global pandemic).  No one who entered the working world after 2010 has experienced anything remotely close to an economic downturn.

“Half Cycles” don’t continue forever.

I, for one, am happy about what I think is an oncoming period of uncertainty.

Wait…WHAT?!

It’s human nature to want things to be easy.  We’re basically wired that way through millennia.  Notice I said “millennia” – not millennials…

We all love it when every patient accepts the treatment we propose. We love it when every business is flush with cash and the answer to every question is “yes.”  We love it when we can confidently afford our mortgage and take the family on a trip.  We love it when we can sleep soundly at night.

We don’t love it when every employee is disappointed with a double-digit raise.  We don’t love it when everything seemingly costs more than it did last week.  We don’t love it when we (or our team) create our own mistakes due to lack of attention or urgency.

“Truths that Travel”

Here’s a hard truth to leadership: it’s incredibly challenging to create above average results in a business when a rising tide is lifting all boats around you.  And it’s all but impossible to instill urgency when times are easy.

True leadership is tested and earned during times of trial.  And real, authentic leaders look forward to times of hardship or uncertainty because they know that it’s actually easier for them to make a difference when they can create a rallying cry that demands urgency, focus, and…execution.

So, is yours an execution business?

We’d all like to think so, wouldn’t we?  But what is “an execution business?”

Execution of what?  How do we assess it?  How do we judge it?  And how do we even think about it?

How do we become more confident as business leaders to become a more effective executive and build a business that executes regularly? Let me be clear:

You don’t get paid for your ideas.

You don’t get paid for your grand strategy.

You do get paid to execute; to deliver results.

Simplicity creates clarity.  Simplicity creates speed.

I had several key opportunities to learn from the wisdom of some great people during my tenure at Patterson Dental Supply. I ran three different businesses for Patterson over a 15-year career and was the beneficiary of a tremendous amount of opportunities to interact with people who became mentors to me.

I also had the opportunity to really learn about enterprise-level business leadership from some people who were great at the roles they occupied, but were also really generous about their willingness to share their wisdom with me at an early stage (when I was multiple rungs below the seat that they occupied).  I will always be incredibly grateful for the words of wisdom and experience that the people in V.P. and C-Suite seats shared with me when I was a 32 year-old “nobody” in the company.

Humility, patience and self-awareness are all underrated superpowers.  I know that now…and have experienced the opposite.

These were people that had every right to be arrogant, condescending, and aloof. Most of them were the opposite.  And that’s one of the great traits about Patterson during most of the years that I was there. The corporate officers were accessible, willing to share, and would talk to you as a fellow colleague, not look down their nose at you or be condescending in any way. I felt like I could ask questions or interact with them as friends and colleagues, and they would always be willing to share something that I could learn from. And I tried to soak that up as frequently as I possibly could.  Do you have the same relationship with your team?

One of the corporate officers I admired most was a guy named Steve Armstrong, the CFO of the company – arguably one of the most difficult jobs of any publicly traded company. Steve was great at understanding how operations and the financial strategy of the company played out in a customer-facing way.

A lot of times people tend to look at CFOs from a bean counter and regulatory compliance perspective. Steve was great at all of that, but his greatest gift was his ability to relate to what was happening in the field and to take a genuine interest in it. I asked Steve about our strategy as a company and how that was going to play out, and he made a comment that I have always remembered because it is really important to businesses at all levels. Steve said, “the fundamental key to execution is to distill competitive strategy to its essence in order to make it easily executed at the lowest level.”

Let me say that again.

The fundamental key to execution is to distill competitive strategy to its essence in order to make it easily executed at the lowest level.

We can have the greatest strategy or greatest vision, and we can think that’s where we make a difference as business leaders.

It’s not.

The best business leaders are able to take that strategy and break it down into its essence to make it more easily executed at the lowest level between their team and their customers.

Defining “Lowest Levels”

For me at Patterson, the lowest level was the branch level that I was responsible for delivering through the execution of the sales tactics with the sales team; the technical service tactics with the service department team; and the operations tactics with the operations and fulfillment team.

My main focus was to take the corporate strategy, distill it, break it down and make it so that the people I worked with on a daily basis understood its most bare essence in order to be executed at a field level.  The reason I’ll never forget Steve’s advice was because all of us as business owners are bright, motivated individuals, and we want to create the greatest, most complicated strategy possible, but none of it matters if it can’t be executed by the people we’re asking to carry it out.

For those of you who own multi-location groups or solo practices, that is your Hygiene and Operative teams as well as your Business Operations team. Each department plays a critical role in the execution of your strategy.

Execution businesses communicate strategy clearly to the people responsible for delivering on it. 

THE Revenue Equation for Every Business

Ultimately the equation for revenue comes down to the following: the number of prospective customers (opportunities) interested in possibly buying the widget multiplied by the conversion rate that do buy the widget multiplied by the dollar value of the widget.

Revenue Equation: Prospects (#) X Conversion Rate (%) X Price / Unit

I understand that all of you are building healthcare practices, but at the end of the day, you are responsible for generating sales revenue. If none of the patients consent to the treatment that you propose, you’ve got a whole lot of nothing.

An execution business will influence all three of these variables: opportunities; conversion rate; and dollar value.

Maximizing Constraints

Every business must take full advantage of its fixed capacity constraints – and in your world that means utilization rate. “Utilization Rate” is a measure of dollars of revenue per chair per hour. To arrive at your full potential capacity, calculate the following:

• the number of hours you’re open each day
• the number of days you’re open each week
• the number of weeks you’re open each year
• multiply them together and you get a total annual volume of hours of availability
• then take that number and multiply it by the number of treatment rooms you have to arrive at the total available capacity of the entire business for a given year

Capacity Equation: Hours / Day X Days / Week X Weeks / Year X # Chairs

When we divide our total revenue number for the year into that total number of available chair hours, we start to understand what utilization rate really is. In a general dentistry application, the number you’re shooting for is somewhere around $150 per chair per hour. This is about $50 to $100 higher for specialty practices.

An execution business is focused on the utilization rate in order to take full advantage of the fixed capacity constraints of the business itself.

Comparative Norms: Gaining Ground or Losing Ground?

“All revenue is not created equal.”  Or something like that…

We’ve covered the “marketing to sales” equation for Revenue as well as the utilization rate aspect of revenue, but there’s one more aspect to solve for: comparable to industry standard.  To be clear, we want to know that we’re growing our business at a faster rate than the industry norm.  Most analysts who follow the world of dentistry project the industry to grow between 3 and 4% on a compounded annual growth rate (CAGR) for the next three years.

That’s the industry overall, but we know that growth rates for solo practices are far below those of groups.  In other words, average is, well…average.  You should compare yourself against the standard you’re competing against – and that’s group practices, not solo practices.

Put another way, if you’re growing your business 3% or less per year, then you’re not keeping pace with the industry and you’re falling behind. You’re losing market share.

Execution businesses always grow faster than the average, which is probably closer to 7 to 8% – ideally 10 percent or more.

Turning Pro: Operating Leverage

One more financial metric that was drilled into me early on in my Patterson career was a concept called “Operating Leverage.”  Operating Leverage is growing Profit faster than sales.  It’s the hallmark of every well-run, efficient business and one you should strive to achieve.

Operating Leverage: Change in (%) EBITDA > Change in (%) Revenue

Candidly, throughout the years I have seen an alarming number of group practices flunk this test.  Worse yet, too many fail to understand the importance of it.  Don’t let this be you.  We don’t want to simply grow the revenue line in a company without being mindful of the bottom line. Too many incorrectly think that if they are just growing the top line, then the rest of the equation will take care of itself.

It will not.

And as a business owner, we cannot afford to simply focus on revenue generation. The old adage that “sales cover sins” will no longer work as we move into this next economic phase.  The mark of a great operator is the ability to grow profit faster than sales.

For example, if you’re growing revenue 10% per year and profit is growing at 2%, you’re living on borrowed time. There’s something either out of order with your cost structure or you’re having to hire more “warm bodies” to generate that level of growth, but you can only do that for so long.

On the other hand, if you’re growing revenue 10% and you’re growing profit 15% per year, then you are creating a progressively more profitable business. Growing profit faster than sales is the hallmark of a very efficient business.

Achieving operating leverage is also the hallmark of a business that executes to a high, high level.

Sailing into the Unknown

 My group is reading a book that’s been in my “Top 10” for almost two decades now, called “It’s Your Ship” by Mike Abrashoff, retired U.S. Navy Captain.  It’s an “oldie, but a goodie” for a reason as he dives deep into leading change, recreating culture and improving operational performance aboard the Navy Destroyer, the USS Benfold.  We’re reading it because I believe things are going to get harder before they get easier.  Maybe you should pick up a copy and read along with us.

This is “Part 1” of a two-part essay, so my challenge to you is to take a deeper dive into what I’ve shared thus far.  None of these concepts should be foreign or “new” to those of you who have followed my thought leadership for a while. I talk about all of them frequently, but I think they all take on a greater degree of urgency right here, right now.  My hope is that if I can convey that urgency to you, then maybe you can convey it to your teams.

There’ll be more coming in next week’s essay, but I need you to start by embracing Captain Abrashoff’s charge to take the helm.  It’s truly “your ship.”

And every Naval Officer loves a good cup of Joe.

Go grind some beans.