Scalable Revenue: Repeatedly Sold by Other

Quick Summary: After initial orders are received, scaling may require significant changes.

Abstract:

To the entrepreneur or new company, receiving a large order or a large number of orders in a short period of time may seem to be a major indicator of success.  However, that success can quickly mask the seeds of failure if careful thought has not previously been given to the need to scale operations to meet increased demand.

Scalable Revenue is the second of the three categories of revenue.  Referenceable Revenue is the first category and Profitable Revenue is the third. Both are discussed in other articles in this series.  Scalable Revenue can be summarized as revenue obtained, fulfilled, and supported through the efforts of others. Quite often the entrepreneur or CEO can make initial sales perhaps with custom commitments, “hand-built” products, or configured services.  These types of sales do not require any repeatable, volume processes and can be very misleading about the viability of the business.  Being able to scale the distribution, order fulfillment, and support for high volume activities is critical to the long-term success of a business.

This is a case in which “more of the same” activities will not yield “more of the same” results.  A quick test to determine if any activity or process is scalable is to conduct an “add-a-zero” analysis.  It is simple.  All one has to do is examine each activity and forecast a volume increase in that activity by an order of magnitude.  For example, if you create two custom proposals a day, how will you create twenty a day?  Or, if you custom configure one system per day, how will you custom configure ten per day?  Probably, the most commonly occurring example involves the CEO making a sale.  If the CEO is involved in five sales, how will they become involved in fifty during the same time period?

Another common scaling issue occurs when a small successful company begins to distribute or support their products through a third party.  The lack of scalable, well-documented processes becomes quickly apparent.  The demands of the new sales team who are excited, but not intimately familiar with the new offering can quickly result in their disappointment.  This could be due to the lack of simultaneous support for a number of members of the new distribution partner.

The common trap that new companies fall into is to incrementally expand and just keep working faster and harder as volumes slowly build.  The age-old boiling frog analogy illustrates this point.  It is said that if you drop a frog into boiling water, it will quickly jump out.  If, on the other hand, you place a frog in warm water and slowly raise the temperature, you can boil it to death.  Although there is some debate regarding the truth of the frog analogy, there is no debate that many companies slowly boil to death!

The other extreme can be equally problematic - building large-scale processes too early.  Once these processes are implemented with large levels of inventory on hand and lots of people in place, it is hard to retrench. New requirements from new customers that are not compatible with the implemented processes can easily be rationalized away with statements such as, “That is not the way we operate” or “The customer doesn’t understand”.  Although it seems to be a waste of time and energy, implementing interim processes, while trying to understand the actual high-volume requirements, usually saves a considerable amount of time and effort.  For example, tracking inventory, orders, and manufacturing with an Excel ™ spreadsheet in the early days is probably a better approach than building and populating a full-blown MRP system.  Excel can also be used to track a few dozen sales leads or proposals long before a full-featured sales/CRM system is required.  Consciously acknowledging that you do not know what you do not know can prevent a significant amount of wasted effort.

Scaling operations is not an all or nothing proposition.  Some activities by some groups will need to scale earlier than others.  Attempting to make a flash cut and turn on multiple new systems at the same time will (not may) result in confusion and errors and will be counterproductive to increased capacity.  Also, attempting to cover all contingencies is equally problematic.  Plan to handle exceptions as exceptions.  After some experience is obtained, it will probably be necessary to adjust the operation to accommodate both “normal” and exceptional situations more effectively.  A good example of what not to scale early is customer service.  Personal relationships and handling of issues from early customers will help build reference accounts and provide invaluable feedback about latent defects or required tweaks to the offering.  Outsourcing this activity or relying on automated systems during these early days will mask this important “feeling” feedback that can have significant impacts.

As the company becomes more successful, more scaling will be required.  An excellent method to predict what and when scaling will be required is to find the limits of all elements in the organization.  This is easily done by repeating the add-a-zero analysis.  This time add two zeros!  On the surface, this may seem to be a totally unrealistic exercise.  However, think of the websites that have failed under heavy traffic and some companies that have failed miserably with unanticipated “overnight” successes.  Fast revenue ramps do happen and represent a double-edged sword.  Unanticipated surges in revenue can generate unforecasted additional cash while the lack of an adequate fulfillment system can generate unforecasted customer ill-will.  The results of the add-two-zeros exercise may not require any immediate action, but at least it will allow you to anticipate the issues while you still have time to react.

Other than not being able to adequately fund the company in its early stages, the inability to scale operations is probably the next biggest reason that new companies fail.  Even well-established companies can fail because of this issue.  Not being able to finance production or inventory to fulfill orders or serve customers can easily cause companies to fall victim to their own success.  Planning actions before actual scaling IS required.

 

Article Number : 3.040204   

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