07.31.17

Before Your Company’s Wheels Fall Off

Todd Schrock, Advisor with The CEO Advantage

How to Overcome the Unique Challenges of Emerging Businesses (20-100 Employees)  Article #5 in the series

Is revenue growth always good?

“Is your company so small you have to do everything for yourself? Wait until you’re so big that you can’t. That’s worse.”

—Michael Bloomberg, when his multi-billion-dollar company was in its adolescence. (1)

Understanding Growth

What is normal growth? Most emerging company CEO’s do not realize just how super-charged their growth is. “7-8 % per year is higher than average,” (2) while “businesses under $5 million in revenues averaged 7.8 % growth in 2015.” (3)

Since companies in this 20-100 employee stage often grow much faster, a few helpful definitions include:

  • FAST – Exceed 20% annual growth, and you are a fast-growth company. (Do this for 5 straight years and you are likely among the top 1% of growth companies).
  • EXPLOSIVE – At around 50%, your growth is explosive. Growth experts talk about the “extreme difficulty” in managing a company at this level of growth.
  • HYPER – annual growth of 2X, 10X, and more is hyper-growth. Most often it will be technology and digital companies that hit and repeat at these levels.

Companies also experience problems when they stagnate or decline. So why is growth, especially fast growth, a problem as well?

Because of the even faster growth of complexity. Companies of this size are often unprepared. It is also commonly believed that achieving bigger growth goals will solve most problems, more like in the early days.

Why Growth Leads to Increasing Rates of Complexity

When a small entrepreneurial company starts to succeed in the market, they grow. And when they grow, they need help. So, naturally, they hire (or contract with) more people to handle today’s and tomorrow’s growth.

But when your business grows, complexity naturally grows as well. And this complexity does not grow in a straight line! Rather, it grows at a much faster, almost exponential, pace, because of the additional people. People are not interchangeable parts of a machine.

As seasoned CEOs and project leaders know, (4) people and team productivity naturally goes down in the short term, the more people that are added. This is for a very simple reason, adding people almost exponentially increases the number of critical pathways for communication and coordination.

This creates multiplying complexities simply from adding another person. To illustrate, as Verne Harnish does in Scaling Up:

  • Add one person to the first person of a team or company. There are now pathways of communication and coordination that must be designed, learned and made productive.
  • Add a third person. There are now pathways of communication and coordination of work.
  • Add a fourth, and there are now 10 pathways (even without regard for sub-groups and multi-step processes).

This increase in internal complexity (due only to adding people) is further “layered up” by the increase of each location, each system, and each spreadsheet and database tool.

Traffic Jam: Wheels Start Falling Off…and Problems Ripple through the Company.

This illustration explains why there is a sales-growth-multiplies-complexity problem. Sales grow. People are hired. Complexity grows even faster than sales or people. Eventually, a crisis is triggered.

It is no wonder that there comes a point when you add just one more employee, the 25th or 55th or 95th employee, where it feels like important wheels have started popping off, creating a cascade of second-order effects and crises. These ripple effects will hit everyone else in the company, just like a highway traffic jam, regardless of whether they can see what is the underlying cause: revenue growth.

How Can You Successfully Fight the Multiplying Complexities of Growth?

Learn the lessons from other fast growth companies: quickly spin up simple proven methods to tame this complexity. Scalable infrastructure, especially the “soft infrastructure” of simple processes, simple systems, simple policies. In other words, simple forms of organizational order—and only where needed for your company right now.

Simplified, but effective, processes are your key to creating the necessary alignment between all the people and all the moving pieces, in the everyday whirlwind of customer demands, vendor disappointments, operational crises and employee difficulties.

But Can’t Entrepreneurs Grow Their Way Out of These Difficulties Too?

Howard Schultz, Founder-CEO of Starbucks, is often the go-to quote for the myth of CEO as the high-adrenaline entrepreneur whose vision and positivity is enough to clear every hurdle.

Way back in the early days of 1994, Starbucks experienced such severe growing pains that Howard’s CFO introduced him to a business stage consultant. They then implemented the necessary processes to solve these multiplying complexities. It prepared Starbucks for greatly accelerated growth rates and profit.

Here is what Howard said about those times, in his first book, Pour Your Heart Into It:

“When companies fail, it’s almost always because they don’t invest in the people, the systems, and the processes they need.”

Later, when Entrepreneur asked him, “How can an entrepreneur make a successful transition from the small, original business to one that needs professional managers?”

“The ability to recognize limitations in yourself is what determines whether you have a great idea that can become a great business…Entrepreneurs are bold thinkers, but they’re usually not detail-oriented. You need the self-esteem to hire people who are smarter than you and give them the autonomy to manage their own areas.…Management has to leave its ego at the door as the company grows. You have to hire people who have experience at the level that is your goal. And you have to get these people and put disciplines in place well before you need them, because you can’t play catch-up when you’re growing very fast.”

Questions for CEO Reflection

  • How fast is your company growing? Is it sustainable from a financial, organizational, and talent/experience perspective?
  • How well is your company fighting the complexity from your most recent growth?
  • What is needed from you and your leadership team to lead the fight against this increasing complexity?

CEO Rhythms Forum

If your company is in Northeast Indiana, consider expanding your circle of informal advisors by joining your CEO/Owner peers and me in a CEO Rhythms Forum, a new opportunity for those with the unique challenge of owning or running businesses of 20-100 employees.

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