The Theory of Constraints (& How It Earned Me $2.4M)

what is going on guys Nick here in this video I'm going to show you how to do operations at a seven fig agency this is part of a wider series that I'm doing on how I operate seven figure agencies and how a lot of the people that I know that are successful and that even go from seven to eight figures do it that sounds good to you and strap in and let's get into it okay so first things first I have a ton of people ask me on a daily basis yo Nick uh this is where my company's at this is how much money we're doing what would you do to take us to the next level and so every single time that I get a question like this my first thought is um let's use a theory of constraints the theory of constraints if you guys aren't familiar is a system that was developed by a really smart guy his name is Eli Gold rat uh like 20 or 30 or even 40 years ago and the way that this whole thing worked is it was applied to um factories and like power plants and you know assembly line type businesses way back in the day that were doing some type of manufacturing and that sort of deal and so there are all of these like super highle Concepts about how to correctly optimize your factory and your assembly line for massive and most successful throughput and what's interesting is a lot of people slept on that book for like internet business they didn't really think that they would apply and so what I've done really over the last couple years is I've just been applying the same Factory idea of process optimization whatnot to internet businesses to massive success and I earnestly believe this is probably like one of my own major advantages over most other companies uh and so I'm just going to give away that Advantage right here so I definitely encourage you if this is the first time you're watching this to like look into the theory of constraints there's a fantastic book on this called the goal uh which is like a third party sort of thing third party uh it's like a third person sort of like fiction book that talks about like this Factory owner this Factory manager and the things that he did to improve his throughput um but you know I'm going to give you a brief little summary right now and that should probably be enough to at least hold you guys over the way that the theory of constraints works is you need to conceptualize your entire business as a pipeline from start to finish and so this right here is what I would consider an average business this is your pipeline so I just got this fancy new tablet and I kind of want to try it out so let's choose a color here um the very first step in any business is basically your intake and your intake there you go your intake is usually lead acquisition right you're normally acquiring leads if you're an e-commerce business you're acquiring customers uh you know if you're like an info product business you're acquiring students right the first step is always going to be the intake and basically the way that this whole uh this whole business pipeline works is um your money your Revenue that was absolutely terrible your revenue is basically just how fast um stuff can go from the intake of your pipeline to the completion end of your pipeline and so okay let's say let's pretend that this right here that's a terrible color is lead acquisition for an agency what would your intake be in that case well that's probably like your ad campaigns that's like your referral campaigns it's like your SEO that's uh I don't know like your upw workk jobs whatever the hell you want to call it but basically you have all these sources that are pumping leads and you know kind of raw material into this pipeline um maybe step one might be like uh I don't know like onboarding so now you know your leads are at this step where uh you know in order to take them from leads and turn them into clients you need to have some type of onboarding process third step or I guess step two in this diagram uh let's just call this uh fulfillment so this might be like I don't know if you're in an agency and let's say you're doing graphic design this would be your team's ability to actually turn around the graphics uh fourth might be um I don't know let's just do like Payment Processing and this is a hypothetical example in reality you probably don't want to wait all the way till the end to do your payments but I'm just trying to make this as simple as possible and at the end we have some type of completion okay great so now that we mapped out the business from start to finish um we got raw materials raw leads coming in we have some type of transformative process occurring where we onboard them and turn them into clients we have a fulfillment process in the center which is where you actually deliver the stuff you have payments and then you have completion the important part about the theory of constraints and the reason why it's called the theory of constraints is because in a closed pipeline the fastest that the fluid in the pipeline will ever go is entirely determined by the width of the narrowest part of that pipeline so that can be a lot to unpack so taking a step back basically the narrowest part of the pipeline is the rate limiting step it's the fastest that anything will ever go it's the bottleneck for a reason it's the constraint of the whole system so if we zoom out a little bit uh what would be the constraint in this system well obviously if we just like try and judge the width of this intake is pretty big

step one's pretty big step two looks pretty narrow step three looks pretty big and then completion also looks pretty big uh this area here step two which in our case would be the Fulfillment of this hypothetical business that would be the bottleneck and so when you know I'm doing um cons Consulting for you know a variety of different business types let's say like an e-commerce business or something like that and they raise their growth issues to me or something about how they can't grow what I'll do is I'll ask them questions and then build out pipeline just like this for their own business with all the steps from start to finish uh and then I'll identify what the constraint is or what the bottleneck is in the business and then once I know that that's step one uh we have two options like let's say we know that fulfillment is the bottleneck in a business right we can get like I don't know let's say we can get 10 leaves or 10 customers a day we can technically onboard like 20 of them if we so wanted um but we can only fulfill five of them let's say we could process 20 payments and then let's say there's some final completion thing where we can do 10 well the rate limiting step of this business is that five uh fulfilled orders or five fulfilled projects right so we got kind of two options here number one is we can reduce the flow of the rest of the pipeline if I learn how this pen works we can reduce the flow of the rest of the pipeline to accommodate the um most bottleneck or most uh constrained step so that would mean maybe we cut our Le gen and half maybe we let go of like 3/4 of our onboarding staff maybe we let go of 3/4 of our payment staff right what this does is this helps you improve margin and so you're basically just trying to um limit the flow of everything so that it matches that constraint to cut costs Upfront for advertising cost for fulfillment cost for Staffing whatever and this can be really beneficial if you're like a really big company and you're just like doing way too much at the intake step or you have like a million onboarding employees or some [ __ ] like that right uh this is what you typically call in the business like the reduction of bloat um and you know your margins can go up like 20 30 40% which is nice you make more profit but a lot of the time you know I'm not dealing with businesses that make like 30 or 40 or $50 million I'm dealing with businesses that make you know like a million dollars a year or two or five or whatever and the major problem at that level is isn't reducing everything except for the constraint it's increasing the width of that constraint or basically like DEC constraining the constraint and so what that might look like in practice is identify the thinnest bottleneck which in this case would be fulfillment and then do a deep dive into fulfillment to determine what is it that is preventing us from being able to fulfill more projects do we need to hire more people do we need a more effective project management system do we need to like rethink what it is that we're doing from the get-go maybe our product is just inherently difficult to fulfill maybe we can take a step back and try selling a different product right many different ways to attack that in our hypothetical example here with my super shitty writing everywhere um we had 10 initially uh onboarding was 20 the bottleneck was five well now let's say we hypothetically make this just a little bit wider and I'm just going to try really stupidly and make this is kind of fun actually if you guys have never like drawn anything on a tab I highly encourage you to um what we'll do is we'll try our hardest and let's say we manag to grow this step of the pipeline so that instead of just you know being able to accommodate five we can now accommodate 10 if you think about it from an Roi perspective the fact that we just took this five oh that's not good and turn it into a 10 represents a two times improvement in our bottom line which is pretty cool um which means that we've essentially just grown the business by 200% we're going to have grown profits by approximately 200% uh and this is you know going to be one of the highest Roi ways to impact this particular business contrast that with like the reduction for instance uh you know in order to reduce um expenditures in such a way that you would improve your total gross profit or your total profit remaining at the end of the term you usually have to do a lot more and so you know increasing is usually the move if your business is small and then reducing really big you know like eight nine figure company that sort of deal okay so that was a ton of kind of academic [ __ ] material that I'm just throwing at you simply because I wanted you to understand what uh the mindset is behind you know operating a seven figure agency as well as you know in my work today where I'm Consulting with seven and eight figure companies and attempting to process optimize and improve their bottlenecks what you basically do is you'll do everything that I just talked about you'll widen one of the constraints and then you'll find another constraint and then widen that and then your entire job is just going from one constraint to the next biggest constraint to the third fourth so on and so forth just until everything is as wide as humanly possible there's as much lead volume and project volume flowing through the queue and the second that that's done your business is now you know operating like a welled

know you know operating like a welled machine and that's the reason why they call you know pipelines um you know it's just like the simplest and easiest way to model a business now how have I actually applied this at my own seven figure agency um and why uh you know why am I even recommending you do this in the first place um I was operating a Content writing company for a very long time called 1 second copy which is like you know we do books blogs magazine articles everything is fantastic uh from the outside in but when we were first growing the first few months were pretty rough and basically the way that you know I started this content agency was I uh tried to make it just like any other agency where there'd be like you know a consultation process where I try and figure out what it is about your business that we need to improve um you know I'd do like an onboarding process where I'd uh you know we'd create a big content calendar for you and we really go into like the nitty-gritty of what made good content we'd have like some very belabored fulfillment process uh then we have like a delivery process and then you know we try and resell and upsell as often as possible that business never made it past maybe1 or $15,000 a month the reason why is because if we go back to our theory of constraints graph um the intake might have been huge but the onboarding was like super thin uh the Fulfillment was super thin it was extremely difficult to accommodate all of the variables in you know like a Content writing business because you have like all these different niches and all these different requirements and some people do SEO this way and some people want other people use WordPress there's just so many freaking variables that essentially are pipeline you know if you could conceptualize it um okay I don't actually know how to do this I'm the type of guy that just says [ __ ] it I'm gonna buy a tablet for my YouTube videos and then doesn't spend even a minute trying to uh trying to figure out how to use it okay cool so you know ignore the white there but let's just pretend that you know our intake is really big and then our onboarding sucks or fulfillment sucks whatever our intake was probably like 20 or something and then everything else was like a one and so we were spending like 20 times the money that we probably should have been spending Upfront for you know 5% of the return which is just stupid so I asked myself how do I apply this to my own business and what I did was I looked at the onboarding and I asked myself okay first of all is this really necessary If all we're offering is content writing services do we really need to onboard somebody in the first place and the answer turned out to be no so if you recreate the business model or you know uh I changed the business model a little bit I massaged it and we were no longer like a company that did onboarding we became a company where you know you just pay us a set number of words per month and then you can slice a dice at however you want using the request form right so now no onboarding how about fulfillment for fulfillment I just looked at the way that we were currently managing projects which we usually hired like a very competent English native uh full stack writer and then I ask myself okay you know I'm having trouble finding these people is there any way that we can change the way that the deliverable is built AKA You Know the Way That the article or the ebook or whatever is written in such a way that we don't actually need to like have these super competent full stack writers be the bottleneck like is there any way to just change this and what I ended up doing was I separated writing an article into writing editing and QA and then I hired uh ESL writers for writing which allowed us to get way more first drafts through the gate uh and then I hired a few editors and some of those editors were also QA people and the benefit of this now is okay great like basically instead of um fulfillment being the bottleneck because we couldn't hire super competent or qualified uh writer editor full stack um you know talented people uh we had so many first drafts and then all we need to do is just hire more editors to like make it better and easier and more effective for us to turn these things around so this is a big word jumble at this point but I guess what I'm trying to say is you can apply this same approach that may seem academic initially to literally any business with outsized results you just need to have the time energy and I guess capability to just take a step back and try looking at it from an outside view I had the ability to do so with one second copy just because we hit a certain Revenue number and that Revenue number allowed me to be like okay cool like I don't need to just eat noodles all day for the rest of my life I can actually take a couple days off try and build the [ __ ] out and you know figure out the best way to move forward um but you know I understand that not a lot of people can do that and so in cases where you are fully dependent on that day-to-day revenue and maybe you're making a little bit less money and you're still wondering exactly how to get started um you can still use the theory of constraints um you just need to be a little bit more intelligent about where you're applying it you can't just like tear down your whole business and rebuild it in a day obviously you need to make smaller sort of iterations or nudges before you get to the point that you want to get to yeah and then I think that's it for the goal um yeah so process optimization and all that stuff super relevant super important um one little Nuance piece that I will say on that pipeline that I generated

that on that pipeline that I generated earlier um most businesses do not look like this and so don't think for a second that your business is like this without like actually considering it most businesses are like this most businesses have way too much capacity everywhere except for intake and so actually like they need to work on their lead gen first and that's sort of the whole deal um so you know if you're watching this and you're just getting started or whatever you don't really have like a big business career underneath you um I would say you know just from like a first principle sort of VI the vast majority of the time you're going to be suffering from uh a constraint with Leen and if you solve that a lot of the time everything else sort of solves so i' I'd always just look there first before I start you know trying to optimize my onboarding or fulfillment or whatever but when you get to the stage where your intake is just significantly bigger than anything else um that's when you can apply uh you know the theory of constraints methodology to really just [ __ ] change the game and make you a ton of money so I hope that makes sense uh I had a lot of fun drawing on a tablet for the first time on camera if you have any questions or anything that let me know and until then uh like comment subscribe do all that fun YouTube stuff and I'll catch you in the next video thanks so much