All enterprises face scaling issues throughout their growth history. It is an inevitable phenomenon. In simple terms, the organization’s debt to equity ratio, or cost to income ratio begins to accelerate. For example, a company may bring in 5 dollars for every 1 dollar spent – a 5-to-1 ratio – during the early days, but then the ratio drops significantly to – 2-to-1 – during the rapid growth, maturity or new business line phases. In this example, the company would be underperforming at 2-to-1, efficient at 3-to-1 and performing very well at 4-to-1.
Corporations must know where to look for problems when scaling or growing.
Usual Suspects
Several areas of an organization are usually affected during these business phases which directly or indirectly relate to the inefficiencies created. These include sales, operations and data systems to name a few. Because these departments usually make up a disproportionate percentage of the generated revenue and accrued expenses by the organization as a whole, small increases in waste overtime can lead to the erosion of large sums of capital, talent and market share.
Many of the problems associated with scale are obvious. Hiring and training new employees would be one. Implementing new systems and tools are also inherently inefficient. And, the larger an organization gets, the harder new sales become. This is because in the beginning, corporations tend to capture the “low hanging fruit” customers first. Then they slowly make their way to the other end of the spectrum where the cost of acquiring new customers increase. For non-profits, this may represent the initial donors that seek them out to make a donation versus donors that require a lot more convincing; thus, more cost. The same is true for talent acquisition. It is of course easier to hire 100 talented individuals and train them one-on-one than it is to hire and train 100,000 with the same effectiveness.
The little things that hold the company together sometimes seem to evaporate over time.
Sustainable Knowledge
Knowledge that includes areas of expertise, intellectual property and employee know-how also contribute to waste created from scaling and being a large corporation.
The early days of a company – 1st 10 years are so – consist of a relatively small team of founders and early employees that are typically experts in their respective areas. They’re able to train, supervise and deploy new employees with ease. This is easy to understand if you visualize a mentor, mentee scenario. Imparting knowledge on one person is by its very nature efficient and leads to quicker success more often than not, but imparting knowledge on 50 people at one time has been a nightmare for many.
Moreover, as the company grows, there is the issue of training more people at the same time effectively. Then you have to deal with the issue of employee poaching. Early employees have experienced a lot of success, and rightfully so, they will be highly sought after to replicate that same success with another company. Compounding knowledge drain is the new strain on knowledge transfer. Because the company now has less people that know how to successfully operate it and more people that need that knowledge, the resulting knowledge transfer is drastically slowed, adding inefficiencies that were not there before.
The waste accumulated over time does not have to be permanent.
The Fix
Since we have established the reality of the scaling phenomenon and the real consequences, how do we fix it?
The first thing we must do, and most great companies do is implement effective workflow processes and procedures.
Next, we have to make sure the workflow is in alignment with core corporate objectives. Then we will have to implement a system that ties it all together. Finally, we need a predictable way of capturing our efficiency gains, so that we are moving our most valued assets back to a positive direction.
Scaling issues are not always avoidable and it doesn’t do any good to look back and blame the past. Large corporations are inefficient for all kinds of reasons including: scaling to fast to stay ahead of competition, high frequency turnover in leadership and complacency from outsized success. In any case, the phenomenon is real and it exists in most large companies. The good news is the problems associated with being large can be undone and the associated gains could result in increased revenue, savings, and market share and overall company growth.
