Selective Scalability

Quick Summary: As you grow, focus on investing in your core competence and outsource everything else.

Abstract:

After the funding hurdle has been overcome, the need to invest in scalable operations becomes the center of attention.  Whether it is finishing the product, ramping up revenue, or developing an order fulfillment and customer service organization, the demands for time and money can be overwhelming. Methodically prioritizing and developing both long-term and short-term stopgap strategies is a key to scaling success.

With funding in place, the entrepreneur typically breathes a sigh of relief and immediately starts to plan to spend the money, probably consistent with the use-of-funds discussion held with the investors.  Unfortunately, all of a sudden, dozens of other spending demands appear.  Each of these demands can be rationalized as being required for the company to be successful.  This dilemma never disappears.  It is faced by the senior staff of the largest, most successful corporations as well as the smallest startups. There is no question that all of the functional elements of the company need to be addressed, but when, in what order, and to what degree?  For an entrepreneur who is in business alone or with a small staff, the issue centers on what to scale now and what can wait.  To address the scalability issue, one approach is to step back and systematically prioritize activities after considering all of the elements that need to be addressed.

The success equation for all companies, whether large or small, or offering products or services, is the same.  All must address a common set of variables in the success equation.  Some of the variables are:

  • Product or service development
  • Advertising
  • Marketing
  • Sales
  • Order fulfillment
  • Finance
  • Manufacturing
  • Customer service
  • Human resources

The only difference is the amount of resources that must be applied to each variable at any given point in time.   The quantizing of each effort becomes the coefficients of the variables.  For example, some companies may need to have an unusually large effort focused on finishing a product, while others may need large efforts in building a sales channel or automating their order fulfillment process.  Rarely will any one of the variables require no effort, or in terms of the success equation, have a zero coefficient.  On the other hand, if a company attempts to place maximum effort on all activities at the same time, they will quickly run out of their time or financial resources and may end up with good progress made on all activities, but the success equation remains unsolved.  Assigning five items as the number one priority really means that the company has five number five priorities and no number one through four priorities.  The predictable result will be that a considerable amount of effort will be expended with very limited results.

Rather than reacting to the urgent need for resources that surface on any given day, a more effective method to allocate resources is to first prioritize each area in terms of what is required to take the company to the next level. Then develop a concentrated effort to address the high priority item(s) while simultaneously developing deferment or temporary “get by” strategies for the rest.  Allocating resources for the high priority item is usually a very straightforward process; you know what needs to be done and how to do it.  Simultaneously, developing deferment strategies for the other areas is not as easy.  Often, this will involve instituting “throwaway” efforts or suboptimum use of time or resources.  It is natural to want to do the best job possible for any undertaking.  Consciously deciding to do less-than-perfect is not easy.  Contrary to the popular quality notion that it is required to strive for perfection, an attitude of “good enough is good enough for now” needs to be adopted.  Below are a few examples of activities that may be good enough for now.

As an overall strategy, focus your efforts on the company’s key differentiator in the marketplace and consider alternative or delayed methods of scaling all other activities.

  • Use an outside, part-time financial analyst to track all financial transactions.  A part-time, experienced bookkeeper using a standard tool such as QuickBooks should suit your needs for quite some time.  The key to this approach is the use of a standard product (not Excel or a shoe box for receipts) that can accommodate the company as it grows, and the workload increases to the point that an in-house person can be justified.  Fractional, highly experienced CFOs can also be retained.
  • Scale customer service only when you have a large enough number of customers that cannot be handled by one or two people in a timely manner.  Only after you actually have customers will you truly understand what issues they face and what you need to do to respond to them.  The personal touch of one or two people will impress your initial customers while simultaneously helping you to learn what tools to use when you need to automate the process.
  • The use of Excel™ is a perfectly acceptable initial tool for sales forecasting, CRM, and defect tracking.  As the business grows, specific tools can be incrementally added for each activity.  Other than saving money and implementation time, this stopgap approach allows the company to gain an understanding of what specific information (ex. Data fields) should be included in the large-scale tools when they are implemented. 
  • Marketing, advertising, website development, and public relations are critically important to most companies, but probably do not require fulltime attention during the early stages of a company.  Similar to financial services, many companies and individuals are available that can do this work on a part-time, contractual basis.   
  • Offshore software development can be quite cost-effective, but it comes with a price penalty.  For offshore software development, the results are almost binary - either it is very successful, or it is a disaster.  The outcome has little to do with the group retained to do the actual coding work.  The one factor that determines the success or failure is the state-side project manager that provides clear and detailed direction and monitors the development team’s progress on an almost continuous basis.  Without detailed specifications, testing regimens, and deliverable milestones, the development effort WILL go off track.  If you do not have a person that can perform these tasks on your staff, stick with local developers and plan on long, regular meetings every few days.
  • Offshore manufacturing can also be quite cost-effective when high volumes are reached with a stable product.  The low product cost available through offshoring can look very attractive.  However, when considering the total overall cost including transportation, inventory, and support, those high margins can quickly disappear.  Also, if the product is “almost right” or latent defects appear, the scrap or re-work costs can overwhelm any projected savings.  Many startups focus on low product costs when, in fact, their fixed costs below the gross margin line usually dwarf product costs.  Using a domestic manufacturer that has optimized their operation for new and low volume run products can be far and away more economical and allow more responsiveness to required changes.
  • As is covered in detail in the articles on sales in this series, costs can be minimized by starting out offering products in areas that you can sell, fulfill, and service locally.  Last minute air travel to serve customers is very expensive and can quickly consume all margin dollars.
  • Establishing, maintaining, and monitoring human resource compliance requirements for employees can be time-consuming but is absolutely necessary.  This is an area in which economies of scale can yield significant rewards.  The company should consider contracting with a Professional Employer Organization (PEO).  Employees become “co-employees” to your company and the PEO.  The PEO can also handle all related payroll activities, help with recruiting, and employee retention programs.  They can negotiate large-group medical insurance rates, other insurance, and many other employee benefits while helping to ensure that your company is in compliance with all federal, state, and local laws.  The savings in time, cost, and full-service employee benefits make the PEO alternative well worth the investigation effort.

There are many other areas that can yield significant cost savings and accommodate the required scaling demands that will naturally materialize.  As one final example, assuming an existing facilities lease may provide the initially required space, a more permanent location can be deferred until the actual demand is realized. 

 

Article Number : 3.040401   

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