The strategy of differentiation is a core element of a strong foundation for what it takes to grow a business. This is what Ron Carucci learned through his own experiences with being a CEO. Ron is a business expert who specializes in working with leaders of organizations to greatly enhance their skills and help accelerate the growth of small companies. Ron says growing a business starts with understanding exactly what makes you unique, what, and why people are buying from you. It could be service, innovation, cost management, creativity, or anything that sets you apart that have attracted your customers and got your funders to talk to you that makes your product or your service so unique against an array of competitors.
The Strategy Of Differentiation with Ron Carucci
My guest is a business expert who started out like the rest of us, taking a job that kick-started his career, but before long, he grew restless and decided to find a more exciting and rewarding path, which led him to helping CEOs grow their company. Unlike many of the other guests on this show, he now specializes in working with leaders of organizations to greatly enhance their skill and he’s here to help us accelerate the growth of our own small companies. Welcome, Ron Carucci, to the show.
Mitch, thanks so much for having me. It’s great to be here.
I’m excited to have you because I know you got a lot of wisdom, but I also know that you got it the hard way, like most of us. If you wouldn’t mind, I’d like to spend a few minutes having you tell us a little bit about your journey.
Like many entrepreneurs and many agents of change who like to do the work I do, I began my career inside large companies, at the entry-level place of doing change work. That was a great benefit, anything that I could learn about organizations and how they work or don’t work. Over the earlier years, the first ten or fifteen years of my career, what I began to realize was if you want to affect important strategic change from within a company, it’s difficult. The ancient wisdom says you can’t be a prophet in your own land, and there’s some truth to that.
I began to realize that if I wanted to tell the truth and I wanted to have real impact and if I wanted people to be honest about what was happening in their organizations or their communities, in order to be able to realize the transformation, they said they aspire to, that I had to be a provocateur of that honesty. Sometimes politically, that’s difficult. Sometimes it’s on a level of skill or finesse that was beyond me for those years of my career. My children began to notice that I started on this wonderful collection of things called severance packages. They got excited because that meant more time with dad, but what it meant for me was, “What am I doing? There are too many brick prints in my forehead.”
In between those jobs I would work as a consultant. I would do project work or take on consulting work as an outsider while looking for another role. The pattern I was a little bit late to the party to pick up on was doing the work from the outside got me appreciated, respected, and paid well. Then I’d go back inside, it ended up being a little bit of a pay cut, and then once again began the struggle of the dance between telling the truth and being honest and getting leaders to self-examine what was happening around them at the detriment of being politic or being diplomatic, and begin the cycle all over again. After the third time, that say three times is a charm, I don’t know if that’s always true. I decided, “The world is giving me a message. The world is giving me a hint. I need to take that hint now and make the decision to stay.” If I’m going to express my deep love and passion for organizations, it’s going to have to be by not being part of one.
That’s some perspective and I understand where you’re coming from with that. As a collector of severance packages, it sunk in that after you realized what it takes to truly be or achieve what you were looking for. Elaborate a little bit more on that.
Most of us who study behavioral sciences or organizational psychology, we’re fascinated by systems, we’re fascinated by the intricacies. Much like a watchmaker, working up a watch and be in awe of the zillions of moving parts. We who look at organizational systems are in love with optimizing and synchronizing those things. Since I was a little kid, organizing human endeavor has been a passion for me. I was the one that wanted the kickball game organized and get the teams picked to get them fair and get all the equipment together and have a great kickball game. I organized all kinds of community events growing up. I love the idea that bringing together human beings and some common aspiration could achieve a result an individual could achieve, and I loved that reality.
When I look at systems throughout the lens of science, I know there are ways to optimize how all the hardware and the software of an organization and how you do that in a way that makes them work, but organizations by their nature are gravitating more toward dysfunction than function. They gravitate more toward fragmentation and cohesion. They gravitate toward myopia instead of bigger-picture thinking. I know I’ve got to be part of the process that exerts centripetal force on them to be able to operate at a more cohesive and integrated way, because that’s not natural for organizations.
When you are part of that organization, you can feel like a thorn in people’s flesh. You can feel like an irritant to leaders. One of the hardest parts of come with doing the consultant work we do is to recognize that you may have a perspective or an insight about a leader or your organization that may be profoundly important and truly spot on, but the organization or that leader may not be ready to hear that for another six months. You may have to blaze a trail and guide them to the place where they’re ready to understand what it is you’re seeing. Just because you see it, doesn’t mean you should always say it.
This is something that you’re observing as you’re moving inside of corporations from one to the other. I assume that this is something that occurred to you and then you build upon it as you’ve had these different corporate jobs until you went out on your own. Is that right?
It occurred to me by the fact that I wasn’t doing it. I was younger, I was in my twenties. I was naïve. I thought, “Look at this great idea. Surely people want to hear it,” or, “This is a problem. We should talk about this because it got to be fixed. We should put it on the table and address it,” and not realizing that that’s not quite how organizations worked.
No, they don’t and they have this other nasty set of people called the Board of Directors. They spoil everything. All they try to do is stop great entrepreneurs from innovating and moving quickly. They want reports and they want P&Ls and stuff like that.
I know you have CEOs who don’t want to talk to them, who see them as the enemy. Sometimes, otherwise would be great boards of directors become soured by the fact that they are kept at arm’s length. Or in the earlier parts of the organizational life when they’re in the start-up or start up to grow up mode, they’re overly involved and they’re not playing on appropriate strategic level as a set of trustees and advisors. They have their sleeves rolled up and they’re too deep, so they’re creating compression on the organization. A lot of times, boards are well-intended. They’re handed their dysfunction and their politicization by the leaders that they’re trying to govern.
I had that experience when I sold my software company to Sage. All of a sudden, I was now a part presenting to the Board of Directors. The CEO of the US division was quite political, and relatively so. He needed to keep me in line so that I said what needed to be said and nothing more. I also found that by not building that relationship directly with the board members, it was a detriment to me later on in the relationship.
Managing a board is a science by itself, but we’re all here today and we’re all entrepreneurs and we basically are running small businesses, and the only cabinet that we seem to have as the kitchen cabinet. We need some help with that. Where would you recommend that we start? It sounds like if we’re talking entrepreneurs, maybe the best advice would be to find someone who could be a mentor. Find someone who you can get great advice from and then find a way to stay accountable. Would you agree with that?
Many entrepreneurs who love to bootstrap or do things on their own are having an allergy to help. Then once you get your first Series A money or your MVP money, sometimes your funders help you become allergic to help because they think you should do it yourself or they think they can provide the help. In my experience with the early-journeyed organizations as they’re moving from being embryos to maturing, the three greatest detriments I see that cost startups to fail are one, many entrepreneurs believe that it’s too soon to do strategy work. It’s too soon to actually begin to shape the identity of the organization.
When I ask for a strategy, I get the counterfeits, I get the mission statement, I get the value statements, I get the business plan financially, I get the EBIDTA goals. I get shown the customer segmentation. If there’s even one of those, that’s rare. I get shown sales quotas. When I ask, “Tell me who you are, tell me who you’re competing against, tell me why customers that you’re trying to attract will choose you over others. Tell me what are the things that you’re trying to become better at than anybody else that you’ve got to stick to, to stay differentiated as you grow.” No sale. It’s dead silence. They’ve not done the work to chalk the field and to identify the swim lanes they are going to be in. Whatever the salespeople are selling, that’s the strategy. Whatever will bring money in the door, that’s the strategy.
Naturally, by having a diffuse identity usually under the excuse of, “It’s too early to know yet. We have to test it and refine as we go,” which is nothing more than the typical entrepreneurial baloney that you don’t want to be disappointed enough to say no. No is the hardest word for any entrepreneur to say, which leads to the second problem, and that’s scalability. If you don’t know who you are, I can’t tell you how to scale. People confuse growth with scaling. They think the top line is growing, that means we’re scaling. Usually, if we examine the P&L even semi-closely, what we’re seeing is that you’re growing costs at the same rate you’re growing revenue. You’re not scaling, you’re standardizing. You’re not building processes and efficiencies that allow you to grow without having to add costs.
The minute you say things like standardization or processes or how you keep competitive work separated from necessary work, entrepreneurs bristle. The idea of imposing discipline, the idea of opposing repeatability, the idea of creating governance structures apart from your decision making makes them bristle. Because they begin to realize that they have to separate themselves and their own identity from the identity of the organization that they’re building. That’s difficult. Usually, you see they go from 30 bodies to 100 bodies or 100 bodies to 200 bodies and it’s mayhem. You walk in and people are running around and working at a feverish pitch. People say, “Isn’t this exciting? This is the energy of a startup.” I’m like, “No, it’s actually chaos and people are suffering.”
Which then leads to the third problem, which is leadability. You have not scaled sufficiently, so now you have to layer over. You don’t have leadership muscle that’s ready to take on broader responsibility and broader patches of the organization to be on you, and so it’s you leading everybody. When something breaks or there’s been a crisis or your funders are screaming, they’re going to force you out. They force leadership under you, they put in their own operational machinery below you, and now you’re learning about people who’ve been with you from the beginning who now resent that. They’re trying to instill some organizational discipline to get the mayhem under control, which is typically a peanut butter approach to financial operations or some other operations and failing to ignore the original question of strategy, which means your competitive work, the work that you do that you put a dollar in and that always comes in the door, should be based on your strategy of differentiation.
That work’s going to be protected from the necessary work, that 70% of the work that you do to keep the lights on. The minute you mix those workup by having the same people do them by having them next to each other, the effect is that it dilutes the competitive work because the gravitational pull of what has to be done every day always wins over the importance of work that has to be done for tomorrow. By not having a clear identity, by not letting identity drive scalability, by not having leadability, so many entrepreneurs inadvertently preside over their own demise and it’s often so unnecessary.
It happens a lot and we see that all the time. When I work with small companies and presidents and CEOs who are so excited about their mission, they forget the part about making money. I was on the phone the other day with the young man who is scaling quickly but can barely pay himself. Why? Because his expenses are increasing at a higher rate than his revenue, and he’s struggling. He’s always looking at the future and saying, “Yes, but we got these big new promotions coming up and that should fix the problem,” but ultimately you named the problem. It’s the strategy of differentiation and not understanding what makes you money, what makes you different, in my opinion, what doesn’t need to be spent in order to build a company.
Getting to invest is one thing. That’s harder. I have a tech start-up startup client in Silicon Valley. They’re willing to make some investments, but they’re cheap about it because it’s not always their money so I have some respect for that, but what to invest in? Most of them go on hiring sprees and start getting bodies in the door without doing any good selection of work, without understanding what it means, without understanding what it is they need people to do. Because they’re hemorrhaging capacity, so they come in, man an oar, and start rowing. For about twelve minutes, that frenetic excitement feels great, it’s exciting. It’s like, “We’re at the beginning of the brink of the next Google, or the next Uber.” Then after about twelve minutes, it’s exhausting and confusing and going to work isn’t fun anymore. You can hear the seams of the organization ripping. You can feel the capacity stretched beyond what’s possible, and it’s sad. It does not have to go that way.
That’s clearly a lack of leadership. Everything you’ve talked about is a lack of experience and a lack of leadership. For our audience, we need to give them some direction here. Ron Carucci is an experienced business consultant and a coach to CEOs, and he’s telling us what happens and what you could expect if you don’t get control of your organization. Ron, tell us how to do that.
The first thing I’m going to have you do, you and your leaders that lead with you, I’m going to force you into the work of asking. If you don’t know the answer to this, you need to go ask your customers, “What are the three or four differentiators that you want to be, that you want to set you apart, whether you think they do now or not? Is it service? Is it innovation? Is it cost? Is it cost management? Is it creativity? Is it white-glove service?? What are the things that have set you apart, that have attracted customers to you, that have attracted funders to you, that makes your product or your service so unique that against an array of competitors?”There is a certain segment of people that would choose you, and because of that clarity there is a certain set of people that will not use you and you wouldn’t want to choose you?
That is much more difficult to do than it sounds, to both get clear on what they are and then to find a way to articulate them in a couple of words. I’m going to ask you what are the capabilities, what are the things you have to be good at? Not competencies, but capabilities, that you have to be able to go as an organization to execute in order to deliver those differentiators? Do you have to be good at talent management? Do you have to be good at customer responsiveness? Do you have to be good at customer segmentation and consumer research? Do you have to be good at operational efficiency and execution? I could go on, but the point is, do you know, not the twenty, not the ten, but the three or four muscles you got to disproportionately invest in to get major returns and sustain that distinction?
I’m going to ask you who’s doing the work. Whether you have 10 people or 100 people, what is the work that goes into delivering those capabilities? You got to pay the bills, you’ve got to hire people, you have to respond to customer complaints, you have to do your social media marketing and you have to do whatever it is you do to keep the business moving. What is the necessary work? We have people divide up their work into three categories. What is the competitive work? That’s the work you put a dollar in all that comes in the door. What’s the competitive enabling work? What’s the work that immediately sits under that work to support it, and then what’s the necessary work? Those should increase in size. Your competitive work should be the smallest amount of work, your competitive enabling the next size, and then the 70%, 60% of work should be necessary.
Give us some examples of the type of work you’re talking about.
If you tell me that innovation is a differentiator for you, the uniqueness of your product, then I’m going to look for R&D a capability. I’m going to look for market research as a capability. I’m going to look for understanding and reading patterns among your consumer segments. That means the work that I have to separate is your R&D work. I have to separate your marketing work. Sales may be a competitive enabling body of work because your salespeople are out there in the marketplace getting data. Your HR, your finance, your operational logistics, necessarily work. It doesn’t do anything to necessarily contribute directly to your competitive differentiation. I have to organize that work from maximum efficiency. I have to organize competitive work from maximum effectiveness. I got to spend the most money there. I have to have the most talented people there. I have to have more people there.
I’ve got to make sure my technologies and processes and scalability come from the efficiencies I get out of the necessary work and maybe even some of the competitive enabling work. I can put together how I configure all those assets, those people, those processes, and those capabilities in a way that maximizes how I can grow in scale. I have to design governance. I have to decide what people get to this, make what decisions, with what resources, and design that not all roads lead to me. Because if me and my team are making all the decisions, then some people below me are going to be frustrated and feel like they don’t want to be here. All the organization design work can then follow in a healthy, logical way the blueprint that I set out to chalk to field of where I want to play.
Most of us, as entrepreneurs, particularly those in our first or second venture, we start out by having that great idea. We then build it whatever that it is, and then we launch it and we start to attract some customers. In my world, what I then do is I tend to optimize. When I launch a new product, the first thing that happens is I study exactly how the people who I’m looking to attract are finding me and I start to cut off the channels that are least effective and start reinvesting in the channels that are most effective. Whatever work on the back-end is required, I then look for tools, optimization tools, whether it’s software or processes to decrease the amount of physical activity and increase the amount of automation for delivery. Finally, I try to identify the human element, the part that makes this special and identified to my own ‘why’. That’s the part that I spend a lot of my time getting behind.
It’s going to have some logical order and process to it, but all investment decisions, all hiring decisions, or all organizational configuration decisions and all of how you shape your leadership have got to be driven by clearly articulated strategy. Too often, entrepreneurs spend too many years not understanding the difference between what they believe they’re selling and what they know their customers are buying. Too often, I’m selling a great product, but you’re buying convenience or you’re buying it because it’s cheap. It’s cheaper than somebody else’s. You’re paying for a different value than I believe I’m selling, and so I keep myself out of sync with the growing market. I begin to take on revenue and customers for which I have no right to take on and I have no idea why they’re coming. I keep my machinery amped up to meet demand. They’re trying to sustain capacity to meet demand when in fact, they have no idea what demand actually mean.
The strategy of differentiations starts with understanding exactly what makes you unique and why people are buying from you. Is that right?
Absolutely right. Sometimes I’ll grant an entrepreneur in their first year, maybe the second year, room to figure that out. Sometimes you don’t quite know, but that doesn’t mean you have to chalk any field. You can begin to chalk your field a little wider with an expressed intent of learning what the answer to the question is. By year three, if you haven’t got reliable answers that can get you at year seven, you haven’t done your work.
If you’re talking about getting to year three, truthfully, for a lot of the audience, that would be a dream to get to year three. On the other hand, what you’re saying can be applied in month one and quarter one, and not need to wait to year three. What you’re saying is a core element of a strong strategy and foundation for what it takes to grow a business. I’d like to go back to the strategy of differentiation. What is it that you are doing that your customers are noticing and willing to open their wallet to buy that maybe you don’t quite understand? The time and research spent in understanding that is where you see, Ron Carucci, the highest value. Is that correct?
Another way to get at it, if you start to do it that way, is simply answer this question: Who should not come to you? Who should you be saying no to? If somebody came and said, “I want to buy what you have,” if you were honest, what would be the reason you would say, “You’re the wrong customer for us. You’re not who should be paying for this.” If you don’t know who you’re saying no to, you have no strategy. There’s got to be some segment of customers. I get that we’re talking about your first thousand clients, but if you can tell me about your first thousand client journey, then I should know about the first five thousand you said no to.
If you can’t tell me that or you struggle to tell me that or the idea saying no to somebody who’s got their wallet open and waving money or credit card in your face, then just know you can say all the yes you want, but you’ll get an invoice eventually. You could be presiding over your own demise and causing people needless pain in your organization. You may take all that cash now, but later on, there’ll be Peter Piper moment where you said yes to way too many people, and now there’s so many things, you’re nothing.
I’m going to relate this back to some of the mistakes I made in my past. One of those mistakes and the people I should have been saying no to were the low-end customers. Without a lot of confidence in an early business, we charged too little because we were afraid to get what we were worth. As a result, we attract a lot of low-end customers who later became a big burden to us as we scaled our product upward. There’s a great example of who you should say no to. Would you agree to that?
Unless that’s who you’re serving. You make a price efficiency at play where you’re trying to serve the masses, at scale, at mass and that’s what you want to serve. You’ve done a work to develop a product or an offering that is scalable in efficiency. You’ve found ways to take cost out of the process, and you can serve the masses. That’s who you’re serving, so great. Then a high-end customer, who’s going to have way different expectations, way different desires, way different levels of involvement, is probably not for you. Not at that phase. It could be that at some point you’re going to have your good, better, best set of customer segments and offerings that match it and you got your organization built to get your efficiencies on the back end and your differentiation and a product of service end, and that’s great. To think you can do all that from the beginning is bullish.
From the standpoint of the entrepreneur and from the standpoint of a person who is in the process of building and starting that first company, would you say that the idea behind this market research or understanding the differentiators first is the most important part of what they’re doing, or do you feel as if the product should be the most important part of what you’re doing first?
Chicken, egg, chicken, egg. That’s the debate I’m having with my client in Silicon Valley. Until you can get to MVP, you have to work on the product for sure, and you hope that you got the funding to do that. The reality is the smart entrepreneur will figure out how to stave off some of hours and stave off some capacity to do both because of what you’re learning about the product as it forms, as it finishes, as it refines, and the offering that goes with that product, if you’re selling cloud storage but the customer for you might be buying what they might be buying is convenient access, if your client doesn’t know how to use it, they have access but they don’t know what to do with it when they access it or they’re not using all of what they’re storing in an efficient way, then you become a locker room.
Do you have your folks out there on the street paying attention to who would be willing to pay for what? Maybe all somebody wants is a locker room, but there are a lot of other people who would love to have access to the cloud but love to do something with it so when they go on to access whatever’s in there, it’s packaged, it’s analyzed, it’s thoughtful, it has insights to it, it has something else besides that, and if somebody paying attention to that. The problem is if you do that too much in serial fashion versus parallel fashion, you could find yourself a little bit behind the market.
I’ll tell you an example of this that happened to me and that is partially a great illustration of what you said. I built a course many years ago to help coaches and as part of that course I used to include a set of legal documents, which I paid thousands of dollars to have developed for this course. It turns out that a certain percentage of my customers didn’t care at all about the course but bought it anyway to get the legal docs. Here I was spending six months developing course material when a third of my customers had no interest in it at all. All they wanted was the templates that we sold which saved them a fortune going to their own attorney. If I would have figured that out upfront, I would’ve known that a little sooner, I could’ve probably done a better job at both creating the course and making more money.
It’s a perfect example of you selling something they’re not buying. You could’ve said, “Do you just want the documents? Download here and pay. Do you want the forms and how to use them? Different issue.”
It’s not funny in a funny sense, but it’s paradoxical, the mistakes that we make when we are learning and when we’re growing. That’s part of why you’re here. It’s to help all of us better understand the strategy of differentiation, understand the differentiators that set us apart, and understand who we should be saying no to when we build a business. So far for me, this has been valuable. Let me ask you another question about the types of people that should study your material. Would you say that those have not yet begun to business or those are already involved in the process of building a business?
I love leaders who are open to learning at any point in their journey. Leaders who begin with a posture of, “I already know,” versus, “I don’t know, I’m probably not good, somebody get the clients from me.” My last book, Rising to Power, was about that rise to broader influence. It was a ten-year longitudinal study on why is it that we’ve known for twenty years that more than of those that take on broader roles of influence in life and in organizations fail in their first eighteen months. How do we stop that hemorrhaging? Any leader who’s looking to expand their scope of their influence in some form can learn a lot from the research in the book.
Organizationally, I would love for people to understand their organization design is a science. You would never have your CFO say, “Add it up in the back of a napkin for me and it write down what my profit is this month. That’d be great.” Why would you get a piece of paper and draw your organization on an org chart that way? You don’t want your financial analytics configured in some haphazard way. Why would you configure your entire organization that way? The work of thinking through not your org chart, your org chart has nothing to do with your organization. All your org chart does is tell me who reports to who. It’s a picture of a hierarchy. It tells me your vertical integration. It has zero to do with how things happen. Tell me how you then configure the work of your organization and your investments and your resources and your processes, tell me how you’re going to glue together something that you can actually scale.
Most leaders aren’t taught that. In MBA school, you get one org behavior systems thinking course, and that’s it, and entrepreneurs get none of it. We talk about scalability, but we don’t have to talk about what that means. If I asked a leader, “Tell me what’s repeatable right now,” they say, “We’re entrepreneurs.” Somehow that’s an excuse for no repeatability. Even if you have eight people or 800 people, it doesn’t matter. It is still a system of people. If you want to optimize their contribution, if you want them to all feel like their work matters, their fingerprint on your baby matters, then you’ve got to configure them in a way that actually ensures that. Don’t assume they’re going to come in the morning, sit down on a cubicle or their desk or in their big open workspace, and assume that’s all we’re going to work itself out. It’s foolish. Leaders who are either too naïve or too arrogant to assume that that work is beneath them, I worry for them. They’re probably not leaders who are going to want to learn much beyond what they already know.
Ron has been so kind to offer us a special gift for you. If you go to my site, you’ll be able to download his book called Leading Transformation. It’s an e-book and it’s available. As soon as you enter your information, you’ll have the book in your hands and you’ll be able to learn more about what Ron teaches when he’s with his clients. Ron, I have a couple of questions for you and I love these questions because it helps me make clear who I’m talking to, who my guests really are. It shows me the core of the individual in some ways. Here’s the first question. Who in all of space and time would you like to have one hour to enjoy a walk in the park, a quick lunch, or an intense conversation with?
Alvin Toffler. Unfortunately, he passed away a few years ago, but a brilliant futurist who could see patterns and could see trends in ways that were uncanny. Scientifically, he was interdisciplinary in terms of economics, social sciences, behavioral sciences, and sociology. He was a brain man. I would have so many questions about what he is seeing today that wouldn’t be part of a world he was in and what he would suspect is going to happen by 2030.
Alvin Toffler used to be someone who was in the news a lot. Anything that Alvin Toffler said was quoted in the national media and reported on as a prophesy because he was so good at what he did and was so smart. That’s a great choice. I love that thought. This is the grand finale, the change the world question. What is it that you are doing, or we’d like to do that truly has the potential to literally change the world?
I can provoke people to embrace their own agency as part of their communities or organizations. My last TED Talk was on this notion of power. So much of our research revealed that you least expected to find the typical abuses of power, the typical people indulging in self-interest. The vast majority of our research showed that the greatest abuse of power was the abandonment of it. People are too afraid to use it. What I would love to do is to wake up the world and say, “If you want to be part of a bigger story than just your own, you are, if you would show up to your own influence and use it that way.” We can provoke some of your own audience to think differently about their own agency in the world and how to use their power differently. Because if the world were to get out of their chair and assume that their voice mattered, assume that what they had to offer was a needed contribution, assume that the ideas they had had a place, we would have a different world.
What is the name of your Ted Talk?
As a leader yourself, I want to thank you for coming and showing us exactly some of the mechanics of leadership, some of the techniques that you use at the highest level to help smart CEOs and even beginning entrepreneurs craft their future in a way that will bring them both success and happiness. Ron, thank you so much for being with me. I enjoyed the conversation, and I can’t wait until the next time we speak.
The pleasure was mine. Thanks so much for having me.
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