Simple As Possible... And No Simpler
Post XI of the [ALIGNED] series: a blog series to help entrepreneurs find alignment in their work and life.
By Mike Brcic, Chief Explorer, Wayfinders
This is post 11 of the [ALIGNED] series, with tips, tools and wisdom to help you build an Aligned Company (resilient, self-managing, and purpose-driven) and Aligned Life (lived in line with your values, purpose and ideals).
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Toronto, spring 2017
[the events below took place in my previous company, Sacred Rides. I sold that company in Feb. 2019 to focus on Wayfinders, after spending many months building out the systems and structures that allowed me to step almost completely out of the day-to-day; those structures and systems are the heart of this [ALIGNED] series]
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By the spring of 2017 I was well on my way to losing my hair.
Running my business had become extremely stressful. I had spent most of my time over the previous 6 months focusing on cash flow issues and blaming them for my stress, and as we slowly emerged from our offseason and money began to flow back into the company’s bank account, I expected my stress levels to taper off.
They did no such thing.
Over the coming months a picture started to emerge: a picture of complexity that manifested itself in a constant need for my guidance and decision-making. That complexity created for me an environment of constant attention, frequent adjustment, and sustained anxiety.
This was also around the time I was doing an audit of the company financials and revisiting our financial model; the deeper I dove the more I realized that our operating model was one of the key contributors to our complexity issue.
Our operations - the method by which our trips get delivered to customers - had developed into 3 distinct models.
company-operated
About a third of our destinations were run on a company-operated model: local guides ultimately ran the trips, but we took on all of the operations and logistics of the trips. This included booking hotels, hiring and scheduling guides, reserving rental bikes, sourcing restaurants and other suppliers, and many other responsibilities.
Ostensibly these destinations led to higher margins, but as I reviewed our the financials for these trips a different picture emerged: trips in these destinations had wild cost and profit variability. Budgets were set for each trip and each departure, but they were rarely adhered to - different departures for the same trip, with the same number of customers, might have gross margins that differed by as much as 20%!
Part of the reason was that running a weeklong, or longer, mountain bike trip involves a lot of moving parts (the aforementioned hotels, guides, meals, and other suppliers all need to be booked in advance and communicated with regularly), and doing this for multiple locations was both complex and complicated.
Making this happen smoothly involves a s@#$load of logistics.
For instance, one of our Utah trips - an 11-day affair - involved 5 different hotels. Each of these popular hotels had to be contacted at least a year in advance of the trip start date to reserve the rooms; then a deposit had to be made to secure the rooms; then final payments needed to be made and any unnecessary rooms cancelled. Each of these milestones came with different timelines, depending on the hotel.
The previous fall I’d received a phone call from our driver in Utah, politely letting me know that we’d been paying for empty hotel rooms for the duration of the entire trip. With hotels reserved for 12 people and the trip only running with 5 paying customers plus 2 guides, we’d been paying for rooms that no one had bothered to cancel.
Needless to say we took a big financial hit on that trip.
subcontractors
Another third of our trips were run on a subcontractor model, whereby we found reputable local operators and contracted them to run trips for us, including all of the logistics and operations. This had been a viable model ever since my first foray out of Canada back in 2006 when we launched our Peru adventures.
I’d hired a fantastic local named Wayo and his company Inkas Adventures, and he had delivered beautifully ever since, with highly-rated trips and, more importantly, reasonably-priced (i.e. what he charged us) trips that we could earn healthy margins on.
We’d repeated this model in several other destinations. It offered the advantage of rapid scale (once we found an operator we were comfortable working with it was relatively quick to set up a new trip and get it up on our website; first contact to first paying customers could be as little as 3 months), and ease of operation (they handled all of the logistics and operations and we just paid them one lump sum before the trip, then they paid for everything).
The downsides of this model were that the margins were, with the exception of Peru, generally lower - the operator needed to make their own profit - and we had less branding control. Although we required the local operators to wear our company jerseys and other branded gear, inevitably customers would find out we were hiring a local company to fulfill the trip delivery.
Although the model was simple and had significant advantages, I didn’t feel like it was a viable model for continued scale: if we kept scaling like this, I felt, we would become nothing more than a travel agent, connecting customers with local operators around the world. It didn’t feel like there was much room for the Sacred Rides brand in this model.
Franchising
Our third model was something we launched in 2011 as a means of addressing the deficiencies with the two above-mentioned models. Called 'Live The Dream’, it was essentially a franchise model.
Because of the complexities and liabilities of franchising, we shied away from any franchise language and called it a ‘partnership’ model, but at its heart it was very similar to a franchise model: franchisees would complete an application on our website, and then if we determined it was a good fit they would pay an upfront franchise fee. We would then develop itineraries together and they would then get posted on the Sacred Rides website. All of the revenue would then get disbursed to the franchisee, minus a 10% ‘royalty rate’ fee to Sacred Rides. They would also pay a small annual marketing fee.
By requiring franchisees to work exclusively with Sacred Rides we were able to address the branding issues with the subcontractor model. By getting them to manage all of the operations and logistics of the trips we were addressing the complexity issue of the company-operated model. We were also generating decent revenue on the franchise fees, and, ostensibly, the franchisees would be motivated to get more business and do a lot of marketing for us.
The problem was that, now that the upfront franchise fees from our first franchisees had already been invested in our growth, there was very little revenue coming in from the franchisee trips - just the 10% royalty rate, and $2500/year per franchisee for their marketing fee. Put another way, our gross margin on these franchisee-operated trips was a meager 10%.
It was proving to be difficult to be profitable when 1/3 of our revenue was coming in at a 10% gross margin (to illustrate… had all of our destinations been franchisee-run, we would have had to increase revenue by 150% in order to earn enough gross profit to pay our operating expenses).
We didn’t have room to add more franchisees and bring on more franchise fees; we were having enough trouble as it was filling up departures, and some of the franchisees were getting frustrated that we weren’t bringing them more customers. Their contracts didn’t call for any sort of customer number guarantees, but nonetheless they were wanting more and I was getting frustrated at their repeated demands - we were already doing everything we could to generate sales.
No, not this kind of franchising
Another strike against the franchise model was the complexity of the arrangement. As per the agreement, we collected all of the revenue minus a 10% royalty rate. But we also had to factor in credit card fees and other discounts (had we not factored those in most of our franchisee-led departures would have barely broken even).
This meant that figuring out how much to pay franchisees for each departure was a constant headache. First we had to generate a sales report showing exactly how much was collected for each departure. Then we had to deduct 3% for credit card fees. Then we had to deduct any returning customer discounts (they get 5% off); then any group discounts; then any coupon codes that were used. And then, finally, we had to add any money collected for trip add-ons such as mountain bike rentals, extra nights in hotels before or after the trip, etc.
Not only did this have to all get calculated before we sent money to our franchisees, all of this accounting had to be then entered, line by line, in our accounting system. I was very detail-oriented back then and wanted to have a detailed breakdown of every departure and where the money went.
All of this amounted to one giant, complex headache and created hours of work for me with every franchise departure.
I realized that so much of my frustration was borne of the complexity of our operating model, especially with the company-operated and franchisee-operated destinations.
Something had to change.
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“Everything Should Be Made as Simple as Possible, But Not Simpler”
-A. Einstein
The complexity of these different operating models was pulling me, and the rest of the office staff, away from what we were good at and had a passion for, which was marketing and selling mountain bike adventures. I was great at telling stories and selling our passion for mountain biking and travel; operations and finance frustrated me and drained my energy.
I needed to simplify our operating model. Looking at how easy it was to work with our subcontractors, such as Wayo in Peru, I realized that we needed to move everyone to this model: one lump-sum payment, usually a month or two before each departure, and then they handle all of the payments and logistics on the ground.
First up was our company-operated locations. I reached out to all of our lead guides in these locations and asked them if they would be interested in taking a bigger role in the running of our trips in their destination. They would be responsible for all of the operations and logistics, including scheduling guides, booking hotels, renting vehicles and bikes, and all of the details that go into running a great trip - details that we’d previously taken care of.
In exchange we would give them a flat fee per departure for their extra work, plus a small commission for every person signed up.
For us in the head office it meant that instead of getting large envelopes stuffed with trip receipts, categorizing dozens and sometimes hundreds of transactions in Quickbooks, and trying to make sense of the mess enough to figure out if trips were profitable, we would just pay one sum, enter one line item in Quickbooks, and know well in advance exactly how much each trip would cost.
It took a bit of convincing, but eventually every one of our lead guides said yes to my proposal. Over the span of about 8 months, I managed to get every one of them to sign a contract with agreed-upon, set pricing for each departure. Gone was the extreme cost variability and uncertainty that was the hallmark of our company-operated trips, and gone were the bookkeeping nightmares that accompanied them.
With that job complete, I turned my attention to our franchisee-led destinations. This was going to be a harder sell: they had 5-year contracts that specified the terms of our agreement and the 10% royalty rate was set in that contract. Put another way, this meant that no matter what we priced our trips at, they would get 90% of that revenue (minus the credit card fees and discounts).
I had to address this; those franchisee-led trips were killing our margins and making it extremely difficult for us to be profitable. I didn’t see how we could survive as a company if 1/3 of our revenue was tied to a 10% gross margin. We could, of course, put all of our marketing and sales efforts behind trips that had higher margins, but that would make our franchisees even more upset about their customer numbers.
So I reached out to our franchisee partners and gave them the truth: that the company was in dire straits and changes needed to be made in order to help the company survive. One of those changes was getting rid of the 10% royalty rate restriction: we needed to be able to generate higher margins on these trips so that we could generate more gross profit in order to survive.
I asked our franchisees if they would agree to a model where they send me their desired pricing for each trip, and then give us the freedom to mark up each trip to a level where we could earn our needed margins.
These were some of the most difficult negotiations I ever led. We hadn’t done a great job of satisfying the franchisees by delivering them the business that they’d expected under the program, so I wasn’t reaching out to a group of happy partners - and now I was asking even more of them. I realized the difficulty with which my request was landing, but I had no option and stayed firm: if we didn’t make changes to our model there was a good chance the company wouldn’t survive and then we’d be giving them zero business.
Negotiating anything makes me sweat like a Crossfit addict. I hate it, but it’s a necessary skill to learn in business.
After many months of negotiations and difficult conversations and dozens of emails, I managed to come to agreement with all of our franchisees.
Moving forward, they would send us their pricing for each trip, and then we would mark up the trip to a customer price that would give us the margins we need (within reasonable constraint - they didn’t want us to price the trips out of the market).
Gone were the complicated calculations for each departure, and gone were the razor-thin margins that were killing our profitability.
With negotiations and arrangements complete with our franchisees, and all of our lead guides moved into a new ‘Ride Director’ role for their destinations, I developed a new, standardized one-year contract that all of our suppliers would now sign.
Although the contract process took another 4 months, in the end I managed to get all of our suppliers, except one, to sign the new, standardized contract.
It would be impossible to overstate the impact of these changes. They accomplished several things all at once:
They reduced the extreme cost variability of our company-run trips and gave us clear cost predictability (which is invaluable for cash flow and other modelling)
They increased our overall margins (because we no longer had 10% margins on franchisee trips)
The most significant impact was that it removed a huge source of complexity and stress from the business.
Collectively these changes reduced our operations and finance work by as much as 80%, and it allowed the team to focus on what they do best, which was storytelling, marketing and sales.
The process and the results emboldened me to seek other areas where complexity could be reduced.
Simplicity became our mantra, and the question I often asked was ‘can this be made simpler?’. When faced with a decision, I would encourage the team to ask, ‘does this reduce or increase the overall complexity of the business?’ and I urged and pushed them to always make decisions that reduced complexity, and to look at everything through the lens of simplicity.
I began to seek simplicity in every corner of the business. When reviewing our financials, I was struck by how needlessly complex they had become. In a quest for detail I had set up dozens of sub-accounts in our Quickbooks accounting software. We didn’t simply have a ‘marketing’ account: we had a dozen sub-accounts for marketing so we could track exactly how much we spent on the different types of marketing we did. We didn’t simply have an ‘Events’ sub-account for marketing: we even broke that up into 5 different events sub-accounts.
If you had printed out a full P&L statement back then - with all accounting categories expanded and given their own line - it would have filled almost 3 pages. There was a wholly unnecessary level of detail and complexity in our financials. Did I really need to know that we spent $1342 on a trade show in 2017?
There was so much information and I never bothered to review it with that level of detail anyway, so why were we tracking like this? It also added to our bookkeeping costs, because our bookkeeper had to constantly be asking me and the team which category expenses would fall under.
I ended up simplifying our financials so that we only had one page of the typical meta-categories for accounting.
With this new, simpler approach, I was able to move our bookkeeper from an hourly wage to a simple $750/month retainer. Not only did this save us thousands in bookkeeping costs every year, it gave us much more predictability on costs.
I applied this mantra to every aspect of the company and the results were remarkable.
For instance, I spent 2 days simplifying our Facebook advertising campaigns so that we just had 1 main traffic campaign and 1 main conversion campaign. Gone were the complicated funnels and in their place were a few ads for each destination, and an ad set for each destination. The ad sets could be turned on and off depending on the time of year and to ensure that we were advertising at the right time of year.
I showed our social media person how to turn ad sets on and off and with that, Facebook advertising was off my to-do list. (in case you’re wondering… this new approach actually converted much better than our previous complicated funnels).
These combined efforts and a move toward simplicity may very well have saved me a head of hair.
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PRESCRIPTION: SIMPLICITY
Make it your mission to reduce complexity in your business. Some complexity is needed in every business, but most is not. Complexity creates needless waste and inefficiency, which generally filters up to the CEO/founder(s) – staff don’t like dealing with complexity and when they’re confused they delegate it up to you.
Set aside 2 hours each week to reduce complexity in your business. Examine the various areas of your business to see if you can introduce more simplicity:
Operations
Marketing
Sales
Finance
Customer Service
For each of these areas, do a quick audit: ask yourself if your established ways of doing things in each of these areas can be simplified. Although attacking complexity may often seem daunting, each hour spent addressing complexity and inefficiencies in your business will typically net you many many more hours down the road.
Consistency is a wonderful hallmark of simplicity: if you have inconsistency in processes, or how products are handled or services are operated, or in any aspect of your business, that inconsistency will undoubtedly lead to complexity, which will probably lead to frustration. As you examine your business, look for inconsistencies and ask if consistency can be introduced into the system.