The 5 Key Factors for Success when Scaling-Up
Boards of directors typically include business people outside your realm of endeavour who bring expertise in strategy, finance, technology or some other dimension that can expand your perspective on your specific marketplace.To some it may seem strange to focus on ‘scale-up’ at a time when many are wondering what the future holds and how Brexit may affect them. But as I spend most of each month working with business leaders across the North West, I find the majority of them are very focused on growth. Brexit may fill every minute of our news bulletins, but most business leaders I know and work with are forging ahead with their growth plans.
Some organisations are sustaining significant growth over time and are defined as ‘scale-up’ businesses. According to the Scale-up Institute, a ‘scale-up’ is an enterprise with average annual growth in employees or turnover greater than 20 per cent per annum over a three-year period, and with more than 10 employees at the beginning of the period.
20% growth per year over three or more years is pretty significant by any standards, especially in businesses that are already well established and so are beyond the initial start-up phase. Maybe that’s why figures quoted in a recent Vistage ‘Scale-up’ whitepaper show that fewer than 4% of all UK start-ups have 10 or more employees after 10 years in their business, suggesting that the majority of start-ups fail to scale – why is this?
I meet lots of business owners that started with a visionary flourish, only to stall after failing to add more customers because they haven’t innovated or got their marketing right. They lose their way, unable to see how to get to the next stage and become one of the ‘living dead’. These businesses are going nowhere, having lost their vision and the very reason for leading a fulfilling life at work.
Scale-up is an entirely different business environment, it’s more than just entering an accelerated growth phase. The difference with scale-ups is that the game changes so fast and often simultaneously in all these areas, when growth accelerates.
What are some of the secrets in achieving scale-up level growth rates? Vistage recently completed a research based study on this fundamental question and interviewed several different scale-up experts and business leaders within the Vistage community that are achieving very strong scale-up growth rates. Here’s the top 5 key areas that make or break a scale-up enterprise.
THE 5 KEY AREAS THAT WILL MAKE OR BREAK A SCALE-UP
At the beginning, the founder and the few employees know where the business is going. It’s small enough that everyone is involved. When the company hits scale-up level, these are the things that the company, and especially its leader, needs to do:
Recognise that the informal management style no longer works
Delegate, to recognise that the founder can’t do it all
Articulate a vision
Outline a cohesive strategy
Call on mentors and Non-Execs who have done it before to avoid ‘reinventing the wheel’
Maintain the culture, values and vision of the business
Find a way to keep in touch with customers even when you’re busy keeping the company on track.
All these things have one thing in common: they take time.
The founder needs space to think, develop the business purpose, and orchestrate the strategy and empower others to execute the plan.
Who do we need to recruit in three months?
When do we need to choose and order that new production line or add on the added functionality IT can provide?
When will I find time to go and talk to all our key customers to find out if we’re doing a great job for them?
If the founder isn’t able to delegate and step-back from the day-to-day minutiae, they will never have the time to think about the really big stuff. Scaling up was described earlier as “a determined effort to increase market share and profits.” That won’t happen without thought and planning.
There’s one more essential aspect of leadership stamina. Economist Roger Martin-Fagg says that many scale-ups fail, “because the founder didn’t realise how many sacrifices would be needed to keep the business going and lacks the energy and emotional resilience to keep bashing ahead in the face of problems. The process can also take a massive toll on your personal life. Failure isn’t usually about cash, it’s about the personality of the founder.”
So, scale-up starts or is enabled, when the business leader realises that they need to build a different, stronger leadership skill set.
If Boards use a “consent agenda” they can accept numerous self-evident updates without wasting valuable time. A consent agenda is a single agenda item that includes standard actions e.g. bank signature changes, informative correspondence, as well as general reports to the board that shouldn’t require dialogue e.g. a property and facilities renovations update, quarterly marketing /advertising plan, updates on any corporate investments’ performance. By accepting the consent agenda, the board completes many minor transactions at once, thereby leaving more time for one of the most important functions of governance: strategic thinking and planning. Using a consent agenda can save boards anywhere from a few minutes to a half hour.
In today’s fast-changing business environment, boards frequently struggle to assure that there is sufficient strategic focus to remain relevant and successful. Investing more of each meeting in strategy discussion simply improves a Board’s ability to provide the necessary focus and responsiveness in regards to strategic issues.
To paraphrase the old property adage, in scale-ups the three most important things are people, people, and people. Problems of diluting the culture and vision, the chances of bringing in the wrong people are multiplied as your hiring ramps up. Here’s what needs to happen to avoid this:
Add the right people/functions at the right time
Bring in specialists
Consider using outsourced/part time options initially
Get rid of the wrong people quickly
Develop staff to ensure they stay committed to the company
Planning ahead is relevant to all these areas. Companies need to think in terms of the organisation chart in two years and hire in time. They must not leave it until they desperately need someone to start looking for them. Thinking like that will also help to avoid lop-sided hiring where they recruit in a knee-jerk fashion in response to a problem in one area. For example, it’s pointless hiring more telesales unless staffing numbers in the warehouse also rise to deal with the increase in orders. The hiring process also runs throughout all this.
Hiring is so important that it shouldn’t be done just on the basis of a chat about someone’s CV. Best practice points to designing a proper recruitment process involving skills testing, scenario based questioning, and behavioural profiling. Spend the money to get specialist help here – you’ll be hiring so many people that it will pay for itself in the long term. And hiring the wrong person can cost more than just lost salary – you’ll be facing lost revenue as well as wasted recruitment and training time.
Companies that don’t get the IT basics right when the business is smaller struggle as it grows. Things that were minor problems start to escalate as the business grows. When you start dealing with hundreds, or thousands of orders, it gets much more complex and expensive errors become inevitable.
Bluntly, a massive increase in revenue can go from being a dream to a nightmare. On the administrative side, when a business gets to a size where the CEO can’t just walk around, talk to half a dozen people and get a sense of what’s happening in the business, then he or she needs data to run the business. Failure to put the appropriate management information systems in place means that senior management are flying blind.
Start-ups will need to explore different funding sources than those they tapped as a start-up. They will have exhausted the funding potential of the friends and family who put in the capital to get the start-up off the ground. The choice of debt (asset based loans, invoice financing) versus equity (Private Equity, Venture Capital) is about more than just the availability of funds. Equity funding has implications for control and culture while debt can put pressure on companies to compromise longer-term strategy to meet short-term repayment demands.
And scale-up affects company finances in ways that you might not expect. Rapid growth can put pressure on cash flow, not just because a business that is scaling quickly is consuming cash, but because as you grow the dynamics change. Put simply you are dealing with different customers and equipment suppliers. As you increase the volumes you order, you might be up against the credit limits of those suppliers and they may ask you to pay earlier than you expect. So,you need to understand how the business model changes as you go through scale-up.
While business leaders might intuitively recognise that many areas of the business change as the business booms, many fail to realise that this applies just as much to the sales function. It’s not just a case of adding more warm bodies to sign up more customers, as the ‘easy-wins’ will not be there when companies are seeking to increase revenues several-fold.
Managers will have to become familiar with concepts such as ‘content marketing’ and ’inbound advertising’ to educate customers rather than just selling to them. They need to think in terms of solving problems for customers, getting alongside them and understanding their goals and needs. That requires salespeople who are so much more than mere order-takers.