SOPs can reduce the need for owner involvement and increase a company’s valuation at the time of sale.
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Every business — large or small, online or offline — relies on processes. These can be simple or complex, but most businesses boast a mixture of both.
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In the early stages of a venture, the responsibility, and the requisite knowledge, for carrying out mission-critical processes (both straightforward and complicated) often lie with the founder or a small team. And while this small scale may be inevitable at the outset of a venture, it can quickly become a handicap as the business grows.
Unless processes are documented step by step, not only does a drop in workflow efficiency result, but training may not be scalable and staff may take valuable institutional knowledge with them if they leave the organization.
These are the some of the factors behind the Society for Human Resource’s finding that the cost of replacing an employee is equivalent to six to nine months of that position’s salary. Similarly, if the know-how required to perform a vital function rests with an individual or small team, replicating that process successfully may become more and more difficult as a business grows.
Standard operating procedures (SOPs) are a widely accepted and implemented method for documenting the steps required to perform vital business functions. Consider, for example, the tenets of the Iinternational Organization for Standardization (ISO).
The ISO, as part of its global Quality Management Standard (ISO 9001:2015), requires a company to maintain documented information “to support the operation of processes.”
In fact, having SOPs helps ensure that business processes can be replicated at scale because those procedures break down even the most complex processes into incremental steps that are easily followed. Let’s explore how implementing SOPs could make your business run more smoothly, as well as increase its value.
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Keep it simple.
While the approach for documenting SOPs will vary by business, one rule of thumb is to keep them as simple as possible. Even the most complex processes can be broken down into a series of steps. Once you start an SOP effort, it is crucial that you keep the end-user in mind. Use language and a format that is readily understood and easy to follow. Here are three commonly used formats for doing that:
The simple checklist: As I’ve previously explored, the humble checklist has enormous power to transform your business by making processes more replicable and efficient. For documenting SOPs, checklists work best with processes that have ten steps or fewer and don’t require much decision-making.
The hierarchical checklist: Atul Gawande’s The Checklist Manifesto lays out how, for more complex processes, the route an individual needs to take may require some decision-making and clarification, or “substeps.” This is where the hierarchical checklist can work well. For example:
Main step 1
Here, the main steps are completed in order, with substeps elaborating on the incremental actions required to complete the main step successfully.
The flowchart: For complex processes that are dependent on decision-making and have a variety of outcomes, I have found that flowcharts often offer the best solution for creating effective SOPs. Creately is a useful tool that provides a free workflow flowchart template designed with multiple options and outcomes in mind, to help get you started.
Gather knowledge from your team.
It should go without saying that a comprehensive knowledge of the process being documented is a prerequisite for creating an effective SOP. One way businesses respond is to have an individual who performs the task on a regular basis draft the SOP himself (or herself).
Guidance can be given in terms of layout and formatting to maintain consistency across the organization. Alternatively, if one person or a team is tasked with writing SOPs, this person should interview those who regularly perform each given process to ensure that every step is documented accurately.
Once a draft SOP is done, a team member who is unfamiliar with the task should attempt to complete it successfully using only the SOP for guidance.
If this person is unable do this, determine why. Are there steps missing, even though the steps are simple or seemingly self-evident? Do certain steps require further illumination? Gathering feedback from users unfamiliar with each process being documented is vital to creating useful and successful SOPs.
Take advantage of software tools.
Not surprisingly, a myriad of software solutions exist, designed to aid in the systemization of processes and development of SOPs. These include Process Street, Sweet Process and Confluence, among others. Such tools can streamline the SOP process and help ensure that the procedures created follow a similar methodology across an organization.
These tools also offer a central repository where multiple team members can have access to SOPs and revise them as necessary.
En route, don’t hesitate to include visual information in your SOPs. For processes that take place on a computer, screenshots are highly effective. Video can also be a powerful tool. (Thermopylae Institute has reported that the human brain processes images 60,000 times faster than it does text.)
Loom is a powerful free tool that allows you to create video of your actions on the computer, as well as via your webcam, and can record audio at the same time. This makes creating video SOPs quick and easy. According to Loom’s product page, video increases information retention by 54 percent, so don’t underestimate video’s potential when it comes to choosing the most effective format for your SOP.
Benefit from SOPs’ positive impact on valuation.
Not only can effective SOPs streamline the operational efficiency of a business; they can also increase its value. When determining the value of a digital business, hundreds of data points are considered by the M&A advisor.
Broadly speaking, they boil down to three categories: transferability, scalability and sustainability. Having SOPs in place can have a positive impact on all three.
Thoroughly documenting the processes that power the business — particularly if it is owner-operated — makes the company more easily transferable to a new owner. Having step-by-step guidelines for vital processes makes it easier to bring on new employees or freelancers to help a business achieve scale. And reducing dependence on the owner or any individual employee has a beneficial effect on sustainability.
In short, SOPs can reduce the need for owner involvement. When we advise on the sale of hundreds of digital businesses, we typically find that “passive income” is often an essential selling point: Operations that require 20 hours or less per week of an owner’s time regularly fetch a premium valuation.
Thoroughly documenting the processes that power your business through the effective use of SOPs will not only help streamline your operations but can have a positive impact on how much your company is worth.
Using simple checklists, hierarchical checklists or flowcharts, and employing the software tools suggested above, means that you can document your company’s vital processes and make them replicable.
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In this way, you’ll be making a wise investment in the future of your business by putting its operations within reach of a potential buyer.