009: How the Topgrading System Prevented Million Dollar Hiring Disasters.

Hello and welcome to the Scaling Up Business show. I'm your host, Bill Gallagher, a certified business growth coach with Gazelles International. All right, we're welcoming to the show today. Rich Manders. He's the co founder of I Automation and certified Gazelles growth coach as well. Rich is going to be talking to us today about critical people decisions and sharing his story of serially entrepreneur success. Welcome, Rich.

Thank you. Thank you. Nice to be here. How are you doing today, Bill?

It's beautiful here today. Where are you now?

I am in Cambridge, Massachusetts. I just finished a bike ride, actually. It's a beautiful day out and got my work done and got out and did a ride.

Fantastic. All right, well, and I'm in our office in the Bay Area in Northern California where it's beautiful and sunny today. So we're going to talk about people today. Of course, I've known you for some time personally and we work together as Gazelle's coaches. Right. I'm anxious and looking forward to hearing your story in your words and what's going on. So from the notes before the show, it looks like everything started for you when you attended a workshop on top grading. Tell us about that.

Yeah, so we, I had started a business in 98. The. The last business that I had started from scratch besides a coaching business. And one of the struggles that we were having in that business was attracting and keeping the best possible people we could get. And I was at an event where somebody mentioned to me, you should look into top grading. So I went and looked it up on the Internet. Ended up signing up for a top grading class out in Chicago to become certified in top grading. I think it was two or three days at the time. Yeah. Went out to Chicago, got trained by the Smart family. So it's Brad, and I'm trying to remember his son's name.

Jeff.

Jeff, that's correct. And came back all jacked up about using that system to hire people. And honestly, it probably made us millions of dollars those few days that were spent there learning to essentially replace the haphazard process that we had been using in our business, which was like most people, based on how much you like the person and how well you get along, how frictionless it is and not really on whether or not they have the right goods to do the job in terms of attitude, core values and skill set.

So step back for a second. So you're in this workshop, you hear about top grading, you're intrigued, you're engaged, and something starts that leads to millions of dollars in business results. For you. But take us back then to the company you started and what it was like before the shift, before the transformation. How had you been struggling? How were things going?

Yeah, so the key struggles were we had a number of people that were just very difficult to manage. They took a lot of time, a lot of energy to get them to do the things that they wanted to do. They weren't self motivated and in many cases their values were out of whack with ours. And so how many people were you.

How big was the company at that time?

We were probably about 15, 20 people somewhere in that range.

And how many years into it were you?

That was probably year three or four of the business. So this would have been the early 2000s. Yeah. And we were really hitting a wall where we knew that if we didn't get better at hiring people, because one of the challenges for our business, it was a technical business, we were an engineering firm that sold into people who build machines. And so it took a really long time to train people. There was a lot of product knowledge you needed to have, even in customer service, to be able to work with the clients. And we were then throwing that money away every time we made a bad hire. For someone who was in the field working with clients directly, that was often from the time we hired them till they were profitable was typically greater than two years. And so you also didn't really find out if they had the right skill set for those two years because while they're in training, it's pretty easy and once you're out in the field, it's not. And so we imagine, and we were hiring engineers out of school at that time for 60 or $70,000 and that we would then spend, you know, twice that amount because it would take two years to get them up to speed before we realized that they were the wrong person. So it was somewhere between and then when you add benefits and the time it takes for the rest of the staff to train them and the recruiting costs and getting them in place in the company and equipped with all the right equipment, it was probably close to a quarter million dollars per person we were spending till we saw started to get that return on investment back.

So on engineering staff, you're a 15 to 20 person company. Couple three years into it.

You have.

An engineering service and you're hiring people that it takes two years and roughly $250,000 to know whether or not it's going to work out.

Correct.

And so that's high stakes.

It was super high stakes. And we had a Number of misfires, probably by then, we had made probably four or five bad MIS hires. So for a company that's that small and starting up, it was staggering. And I didn't even really realize it until I had gone to the program and they had a little worksheet where you went through the cost of a MIS hire. Right. And I was like, oh, my God, we really have to do this and take it to heart. Yeah. So that was the first phase of the program, was me learning it and being the last person who interviewed the folks that we were looking to hire. And it was maybe 100,000 if it was a customer service position, for example. But as we grew and once we started doing this, we started getting really good people. And what we found was the people that we hired through this program were roughly two to three times more productive than the ones that we were, than our past track record. And I thought I was pretty good at hiring, but I was not, clearly, because the track record was pretty bad. And by employing the system now, we got. We started to grow really quickly, and we started hiring faster. And then the next phase of the program was to get the rest of our managers trained on top grading. So we would send out anybody who was management level to the top grading class to get. Go through the program and get certified on using the program in our company. So all in all, there's probably been, I don't know, more than a dozen people we put through that program. Probably more than that now.

So what was it like after you made that? How did it begin to develop? So you go to this workshop, your eyes are open, you begin to see something, you take on your training, you start to put people through the whole thing. How did it progress?

Well, the first challenge when I came back from this program was that this. It takes a really long time to go through the top grading process relative to I meet you, I interview you, I like you, Bill, you're a nice guy, we get along. We can talk about sports teams and have some common interests, maybe bicycle riding or whatever. Yeah. And I go, good, you got the job. I like Bill. Yeah. And now I hire you, and then you fail. Right. That's a bad outcome. Where with this process, it would take roughly somewhere between one full day to two full days of time to put you through the process. And so the first thing that everybody came as a pushback was it, this just takes too much time. We don't have time to interview somebody for half a day or a full day and check their references and do all the other Pieces, create scorecards for the jobs and all of that that were in the system. But I just had to keep pushing back and saying, but wait a minute. If you lost a quarter million dollars of the company's money by making a bad decision in any other way, for example, making a customer go away or making a terrible mistake on invoicing or any of those things, what would you do to a person who did that in your business? Bill?

Well, I'd probably fire them. Probably fire, they'd be on or change their job or something. Pretty significant, right.

So we were regularly making these decisions to hire people that were costing us 100,000 to $250,000. So in light of that, a couple of days investment is nothing.

Right. It does sound like the age old adage about you don't have time to do it right the first time so you could do it later.

Right, exactly, exactly. That was perfectly the answer. So that we learned a lot through that process and doing that really took it to the next level specifically. There were a number of times where we went through this process and they look great even in the beginning parts of the process. So we brought them in for an interview.

Tell us about a couple of specifics or whatever. You can hold the name out or whatever. Yeah, paint a picture for us.

We were looking to hire a sales manager. So we had grown by this time. We were probably close to 100 people, maybe a little bit more. And we really needed to bring in the next level talent, someone who had experience with a. You know, at that time we were probably 50 or 60 million in revenue. We had about 20 to 25 people out on the street as salespeople. And the current folks who were managing sales were overwhelmed and they had never managed at this size business. So they were, we needed to really bring in someone who could help us take this, you know, really systematize and grow the business. So we went out on a search, put ads in different locations, hired a executive recruiting firm. You know, we, we did the whole splash everywhere to go out and find this very important role. A very expensive role.

Yeah, key person.

Very key person. And critical to our success. If they were wrong, we would be in gigantic trouble. Yeah. And we brought this, we flew this person in and we went through the process and they were the answer to our dreams. This gentleman was, answered every question perfectly, had a great story for all the things that we talked about. I had one other person, my, my, my co founder in the business who I wanted him to meet. And so we're in the process of we buy a ticket for him to fly and meet the co founder where he was. And we rotated and in the top grading process there's this thing called torque. And put it simply, torque stands for threat of reference check. And so what you do is while you're interviewing the person, if they say, well I worked at General Electric from this time to this time and this is what I accomplished while I was there and so on, you start to ask specific questions about, so tell me about your boss, what was he like or her like? Tell me what kinds of things they would say about you. Could they tell us a story about you of a time that you did something, you know, really excellent? What would they say about what you needed to work on? Tell me about the people who worked for you. And same series of questions, repeating that over and over again. And what happens is you build up this list and each time you ask that question you say, so that person who worked for you, you know, Joe, tell me, you know, where's Joe now? Is Joe still working there? Do you know where Joe is? And you write down Joe's name. So at the end of the interview you've done this probably 10 to 15 times depending on how long the person's career is of gathering these names that were not the names that they put down as a reference, but are people who they brought up when they were telling the stories about their experiences in their different roles. So at the end of the interview you say, okay, my next step is I'm going to call, you know, Joe and Bill and Mike and Mary and so on that you know, these names that you gave me and I'd like for you to, you know, arrange for me to have those conversations with those people because I'd like to get a little bit of a well rounded view of you and that threat of reference check. You can tell almost immediately if they were lying, right? Because they immediately recoil and go, oh well, I don't know where that person is. And they, you can just see the fear in their eyes that you got them.

Yeah, I think we've all been to that, that interview where, well like every interview, the vast majority of them all start out at the place where they're a self starting communicator, team worker. And their, their major shortcoming is that they, they lack balance, they just work too hard.

Right, right, exactly. So this guy had great stories, I mean, and, and he did not flinch when I asked for those names. Now it just so happened that two of the names that, that of his career because he was in Our industry. I knew these people. One was my competitor. Kind of interesting. So I was. I was almost ready to just ditch the whole reference check thing. He knows people. I know he was awesome. He had great stories. But I had this nagging feeling in the back of my head that I shouldn't shortcut the process because anytime I have, I've paid for it. So I took a. I blocked off about a half day in my calendar, and I started calling these folks. And the story that I got terrified me. What terrified?

What did you hear?

So remember I told you one of the people were my competitor, right? So I call up this competitor, and I'll never forget, I'm sitting outside at a conference, making these phone calls. It was a beautiful day. And I say, so I'm considering hiring, you know, so and so for this job. And I was just calling because he said he's worked with you in the past, and I wanted to get a sense of what it's like to work with him. Dead silence. On the other side of the line, we're friendly competitors. We would have lunch once or twice a year. Dead silence. I say, you are still there? He said, yeah. He goes, I have this policy that if I can't say something nice, I don't say anything at all. And I said, all right, Dan, you know, come on, lay it on me. Because that's not, you know, you can't just tell me that and then hang up the phone.

I'd say, you got lucky there with that one.

And he goes, the guy's a freight train. He makes everybody cry. That's around him. He's a bully. He pushes people. And, you know, our value system was, you know, to be collaborative. We were, you know, we had a team selling process. This guy would have blown up our company 11 Ways to Sunday. Okay, so what was the cost of that? Well, I spent an entire day with him, and plus the rest of our team spent collectively about another two man days, right? With people doing tandem interviews and all the things that are on there. Plus, then I spent a half a day calling the references. So altogether, we lost maybe 10, $20,000 worth of time going through this process. When you factor in, you know, overhead and the cost, cost of payroll and all that other people involved. But what did we avoid? This guy would have cost us millions of dollars. We would have lost if we would have lost a number of our key salespeople. We would have potentially lost relationships with vendors because that was what happened with this guy. And I only found this stuff out by doing the Rep. By going through and calling these people. I think the funny part was he really believed that he had a version of himself that he told us that was just. He believed it, but it wasn't true at all. And so as I started going through, that was the first call I made was this guy who didn't want to say anything bad. Then there was a next one, which was a lady who worked for him. And she's like, oh, I wouldn't hire him. And I said, well, why? And. And on and on it went. And so it was 100%, this guy's going to be poison. Yeah, but we would. We. I almost skipped that step because you.

Actually check the references, not just the ones he provided.

I don't even call the ones they provide because of course they're checked out. Right. I want. I want the ones that I get by digging for those stories.

I did once have somebody give me a reference that they hadn't checked with the person.

Oh, really?

The person just said they had no reason not to tell me legally. Like, oh, that person's a freak show. And. But I'm like, wow, they must be pretty bad if they didn't even bother to know how they would roll up. Right?

That's really bad.

Yeah.

The other thing that's really interesting with the top grading process is so a lot of people go, well, isn't it illegal for people to give you a bad reference? And wouldn't it be hard to pry out of the people that work with a person when you're calling them for references? Any real information? Because most companies have policies that all we do is confirm or deny employment.

Right.

And the magic of this process, that in the interviewing process, you now have this name and you have a story that he told you or she told you about the relationship with this name. And so you'll call somebody at a big company. So I'll just use General. In this particular case, General Electric and Federal Express were two places that I had to call that this person worked at. And of course, they gave the corporate answer right away, which is I can only confirm or deny that so. And so worked here from this date to this day. Oh, that's awesome. Thank you very much. That checked off my box, by the way. He told me a story about a time when you guys had this situation that happened, and this is what he did, and this is what you said, and so on. That puts a crack in the door that they go, oh, it's okay to talk.

Yeah.

And they do, I would say, 7 out of 10 crack with the story and tell me the truth.

Right. Because you go, you go through the formality, you pass something and then something starts to leak out.

Correct. Because now there's a story and they can't help but comment on the story. And oh, by the way, this guy told his story of like this heroic measure that he had done when he was working at FedEx. And when I called the reference, the guy's like, he didn't do that. Somebody else did.

Yes, that's a brilliant tell. So let's we. I think you share a story of some mistakes or painful problems that we've all faced at different points. And. And it sounds like you really dodged the bullet, bullet on that one that time. And it became really clear to you in the process. But what was the upside? What did you create of this? How did you grow the company? Where did you get to? What was that like? Give us a picture of that.

So I would say that when we started the process, like I said, we were maybe 20 people and I don't know, somewhere between 5 and 10 million in revenue. And we used that model to scale the business up to about 80 million in revenue before I left the business. And that happened over a period of about six years.

Yeah.

So it was really a form of rocket fuel for our business. We were, you know, we were growing, but again, we were shooting ourselves in the foot regularly. By making bad hires. Yeah. And by focusing on that and. And a handful of other things that we did that were very helpful for the people that we already had, we were able to really grow the company quickly and get really good people. But as I mentioned earlier, they tend to be somewhere between two and three times the performance of the average when you get really good people.

Right.

And so over time, we just kept upgrading and upgrading and upgrading and we put in structures for the existing staff where there were scorecards and regular reviews of how they were doing. And so people who were under performers self selected out over time, but in a good way. Right. That they saw that they were not able to keep up with the job.

Right.

And it wasn't always their fault. Sometimes they're just the right person for a company between 5 and 10 million. For example, our sales manager was the right person between 10 and 20, but not the right person between 15, 30 and 50.

So $80 million. How many people?

About 160.

Yeah. Over what time period?

Well, we started in 98 and I would say that was like 2013 was the 80 million mark when I left the business.

So quite a great Growth and let you retire at 50, multiple Ironman, multiple triathlons. You have a great quality of life. I know. Well, from having traveled and biked with.

You, it's been fun.

Yeah. So the top grading, just to recap for our listeners, is a discipline for developing an a player culture that rose out of the work at ge, renowned for its more than anything else, its development of management talent. Right. So it's their process that came out with the smarts. And the original book is Top Grading. We tend to recommend the book who written and updated by his son. And of course there's all levels of certification and that kind of thing available in it. The Gazelle's coaches in our group train our companies on the basics of top grading, which include things like building a clear picture with scorecards of what you need in the job and then building a funnel a lot of applicants in the top end that give you a lot to choose from and then very small, systematically and objectively using your review of their history, your deep interviewing techniques and more to get down to a highly predictable set of finalists from which to choose.

Right, Correct. And I would say that the second half of the equation that you mentioned, which was the scorecarding process is the second most important thing. So the top grading focuses in on identifying the characteristics of people who perform well from the people that you already have and then employing that across the entire company, which is a very difficult and painful process at first, but clears the decks pretty quickly of challenges is the next most important thing, is that everyone imagine playing a sport and not having a scoreboard, imagine going to school and not getting a report card. It just doesn't make any sense. Right. So why wouldn't you have a scorecard for your business and for your role?

All right, so in the show notes in a follow up we'll have links to your website to Top Grading, to who and to the resources that we mentioned during the show. So there'll be all that, your bio and all that kind of thing as a follow up for our listeners listeners to look right in and let's go to then a couple of questions then just to balance out the things I like to ask folks in our interviews, I'd love to hear three moments in your business. The toughest, the moment of greatest pride and the funniest moment for you. So just whatever springs to mind that you think would be great to share. So what do you think was your toughest moment in business?

The toughest moment was after 9 11. We had a pretty bad downturn in the Business. The business got cut by about half and the phone stopped ringing. So we had no new things coming in the door. It was very scary. And then throw on top of it that we got hit with a lawsuit. Yeah. And we lost the lawsuit and had to essentially pay a fine. That was more money than I had. Yeah. Altogether. And everything I owned. Yeah. And I had to make a tough call which was to either file for bankruptcy and throw in the towel and I'd get to keep the money that I had in a 401k and the equity in my house and such, or scrape up the money, refinance my house, empty the 401k and borrow money from friends and family to make up the rest. About $350,000 at the time and send the check in and then hope that the business comes back. Right. And because of the way that we worked and the, and that we had a lot of suppliers that counted on us and that we owed money to as well and so on filing for bankruptcy, really, when we got down to looking at it, my partner and I was not an option. We had to try and fight our way out. And if we went down in flames trying, then that was, that was, that. But that was tough call. Yeah. And we did it. And interestingly enough, it was almost like magic that the day we did it, after much anxiety and much ringing of our hands and such was the phone started ringing and the economy started picking up. And in fact, the marketplace changed because before when we were calling on customers, they were basically going, we're so busy shipping machines, we don't have time to talk to you. It doesn't matter that what you have is better, faster, cheaper, more reliable, etc. And after 9 11, they had laid off a lot of their staff and didn't want to bring them on as full time employees anymore. They were scared after what happened. And so we were in just the right place at the right time. We had saved all of our engineers and, you know, got rid of the non essential staff. And now we had these people who were in very high demand. And that was really when the rocket took off of our business. And that was right around the same time that we really dug into the top grading because we had seen the outcomes that we were getting.

Sounds like that. That also led right into your proudest moment.

Yeah, you know, there's a, there's a bunch of proudest moments. So it's a little tough to pin it down. Probably when we, we sold a majority stake to a private equity firm. So we went through an auction. And to have someone value your business very highly. Yeah. Is validation that you have a great business model. It wasn't just the, you know, you got a big check, but it was also that they were really betting on us. Right. To take the business to the next level.

It's validating.

We ended up staying with them for another six and a half years, growing that business. So that was. So the. It wasn't just a moment, but it was that validation that our business strategy and our model and. And we were backable. Yeah. Very intelligent, smart people who helped us then grow our business in the areas that we didn't know. We were two engineers who started a business because we saw opportunity. But what happened was that we. We were learning as we were going on how to be great business people. And when we got to the point where it was doing acquisitions and being a business that was in the. At the $100 million market mark, we didn't really know how to run a business like that. And so we needed outside help to get there.

So how about to close the show? Any. Anything that was a funny moment or.

Well, one of the things that we did in our company that was people got a big kick out of was themes. So we would do a. In our business, we did trimesters, not quarters. Yeah. But we would do a theme every. That was an annual theme, and then each quarter would be a different thing. And one year we did. The theme was called dive Deeper. And the. So the concept was get into our existing accounts and instead of just hitting them with one product or two product, go wide. You know, grow our market share inside of our customers. So that was the theme for the year. And the way we broke up the prizes was the first trimester was going to be getting to know you. So we would go and visit all our clients and capture how much market share we had there. And where were the areas of opportunity? The second quarter was do the. Do the dive. You know, so basically go and find the things about that client that we could solve and propose to them. And then the third phase was, you know, so that was like. We call that snorkeling. And then the third phase was scoop was basically the deep dive, and that was winning the orders. And so when we came out to. When we came to announce the theme, we would have our annual meeting. The two of us came out in scuba, you know, full scuba gear. And I don't know if you've ever walked around with a scuba tank on your. On your back, but it is not around an office yeah, so I fell over, so.

Oh, you fell over?

I fell over. Nobody saw it because it was before I came out the door, but.

Oh, you should. Should go back and do it again.

Yeah.

So we can all see it.

That was before I got scuba certified, so I had no idea what I was doing. And.

Ill fated things. Too bad you didn't do that in front of 120 people, even.

Yeah, that would have been funny.

All right, well, thanks so much for taking the time and sharing your story and experience and wisdom with us. As always, we'll have all of the links and notes in the show. Notes. Thanks again, Rich. See you soon.

Thanks. Take care, Bill.

All right.

Bye. Bye.