A Simpler Business Growth Model

Whilst preparing a client proposal recently I referenced an HBR paper on the stages of business growth (The Five Stages of Small Business Growth by Neil C. Churchill and Virginia L. Lewis link).

It’s rather old but remains, like all good management models, relevant today. It provides a useful tool for gaining insight into an individual business, its stage of development, strategy and challenges.

It also remains somewhat inaccessible to the owners of small businesses, who might see it as theoretical or even corporate. Their small businesses are not big enough to afford the shamens required to think about and apply these frameworks. From the practical, over-worked perspective of a business owner, the theories don’t look like their business. They must be talking about someone else.

That led me to wondering about what a model that they would find useful might look like. I came up with a three-stage model:

• Stage 1: The business owner does everything
• Stage 2: The business owner controls everything
• Stage 3: Employees control and do everything

In terms of employees, Stage 1 has of course only one; Stage 2 has anything up to, in my experience, fifty (although five to twenty is more typical) and Stage 3 is unlimited – it is a scalable business.

Research from the DBEIS in 2019 (link) suggests that 76% of businesses in the UK are in Stage 1; and fewer than 1% are in Stage 3.

To put it another way, fewer than 1% of businesses are scalable and almost all businesss that employ people have their growth limited, actually or potentially, to what the owner can directly control.

Now of course many business owners will be comfortable with their business as it is and distinctly uncomfortable with the idea of giving up control. But I know from my day job that many are not; instead they are frustrated at their apparent inability to grow their business past a certain point.

The model (let’s call it The Three-Stage Business Growth Model^©) won’t solve this problem but it does I hope make the solution pretty clear:

In scalable businesses , employees do and decide everything. To make a business scalable, achieving this must be the primary objective of the owner.

If you want to learn more about making your business scalable then register for one of these webinars

The Formula for Business

Quite a lot of my time is spent helping business owners develop their management team. In a small business, my client may have had limited management training and the potential managers even less – so they are coming from a long way back in terms of becoming capable and accountable managers.

The effort is worthwhile. Not only are the people concerned loyal and passionate about the product but it avoids the huge risk of hiring senior people from outside the company. Managers from larger businesses in particular can be fish out of water when they move to a more senior position in a smaller business, with disappointment on both sides the result.

This approach requires some simple and repeatable method to develop management skills that can be applied quickly to free up the business owner’s time (usually, the biggest constraint on growth). The approach I have developed uses business processes as “units of delegation”.

Each process to be delegated has a clear start point or trigger and a single output or result. It can be large (like Marketing) or small (like Invoicing). It will have a cost, an average lead or cycle time, a balance, stock or backlog, and defects. These concepts are easy to explain (or draw) and easy to measure. This makes them easy to delegate and monitor.

The point is, every process in every business can be described (and so managed) in exactly these terms. Using this approach doesn’t teach a manager how to manage one process – it teaches them how to manage any process.

In this way you gove them a formula for business.

Of course, the full set of management skills are far wider and deeper than this – but any useful concept, from motivation to return on investment, utilisation to margin, can be related to this simple model as and when required.

If you’d like to know more about applying this to your business then register for one of our events.

Successful Business Owners Are Political Animals

I have often heard business owners decry “the politics” they see as being inherent in bigger businesses. The implication is clear: smaller businesses are free of that kind of skullduggery and self-seeking.

The fact is that many business owners get stuck because they don’t understand that, past a certain size, they need to include political thinking in their growth plans.

Most owner-managed businesses get stuck once they have grown to between 5 and 25 employees. They reach the limit of what the owner can manage on his or her own. There are only so many employees, customers, sales and transactions that one person can deal with.

Think of it as reaching your plate-spinning capacity.

The unfortunate fact is that most businesses (over 99.5% according to the ONS) get stuck like this – even when the market opportunity for more growth is there. They reach this revenue ceiling and there they stay. It doesn’t matter what the owner does, how many hours they work, what fancy marketing they invest in. They have grown as big as they are going to grow.

Of course, a few do grow past this – they must, or all we would have is small businesses. This tiny fraction of business owners realise that continuing to grow requires them to manage their business differently.

Stuck businesses consist of the owner working long hours trying to decide and do everything plus some employees being given tasks and micro-managed. Scalable businesses are quite different. They consist of systems being operated by employees while the owner does very little.

One way to achieve this is to follow The Scaleup Formula©:

Standardised Processes x Accountable Employees x Routine Reviews = Scalable Business

Standardised processes have a clear start and end, a single measurable output or result and a single owner. They have a standard set of metrics covering inputs, output, backlog and defects. They are defined in such a way that the responsibility for results can be delegated.

Accountable employees are autonomous and take responsibility for the results of their processes.

Routine reviews develop management understanding and skills in employees whilst making the responsibility for results real to them.

Over time, The Scaleup Formula© builds a core of motivated and able employees around the owner. In fact, it has developing this core as its prime aim. It is a political process. These employees are fertile ground for improving planning and performance in the business, developing new leaders and eventually creating with the owner that shared purpose that drives great businesses.

If you’d like to know more about applying The Scaleup Formula© to your business then click here.

The Productivity Goalposts Just Moved

I was speaking to a business owner last week. He had had 50% of his staff on furlough but has managed to run at about 90% of revenue.  He was wondering what to do now that furlough is winding down.

His explanation for the higher productivity was that he “kept the A team at work”.

Now obviously each organisation is different, and the impact of Covid varies with industry.  But here are a couple of numbers:

• Output per hour worked in the UK was roughly 15% below the average for the rest of the G7 advanced economies in 2016 (Source:  International comparisons of UK productivity (ICP), first estimates: 2016 – ONS, October 2017)
• There were roughly 33m people in employment in April 2019 (Source: Employment in the UK: April 2019, ONS, April 2019)
• About 9.5m people were put on furlough in the UK (Source: Statista, Aug 2020)

So, passing lightly over the fact that some of this data isn’t very well date-matched, and that today’s working hours and patterns are complicated, we seemed to have about 5m too many employees for the GDP we produced going into covid.  This excludes any market-specific covid impact such as in retail, airlines or hospitality.

Now some inefficient or poorly-managed businesses will have been well positioned to take advantage of the pandemic and so will have thrived despite themselves.  Another group of businesses will learn nothing and, if they survive, will struggle on accepting low returns.  Some will have been productive and efficient already and will stay lean as they emerge.

But some, like the business owner above who asked me that (rhetorical) question will see this opportunity to shed “the B team” and continue to use automation and better organisation to sustain productivity.  It is much easier to get rid of staff when a) everyone else is doing it b) you can blame a virus c) you have suddenly been forced to be more productive with fewer staff in order to survive.

What is this job loss number going to be?  I don’t know but perhaps between 2m and 9m?  An enormous amount of individual grief that should worry us all as taxpayers and humans.

As a business advisor, however, I am more concerneed about those business owners who do not take this opportunity to achieve a step-change in productivity; who think that things will return to normal.  They won’t.  The productivity goalposts just moved.  As UK productivity starts to return to international levels, and more productive businesses start to hire again, you will be gobbled up by fitter competition.

If you’d like to learn how to increase the productivity of your business then perhaps you should investigate some of these training events.

 

More Sales Bol**cks

Growing a sales team is a challenge that every business must overcome if it is to progress past the level of sales that the founder can sustain. Unfortunately, this challenge proves too much for many businesses.

These businesses are marked by a succession of people with the title “salesperson” who arrive full of hope and leave some months later under a cloud having failed to deliver.

Two businesses that I work with have overcome this challenge however – and are growing fast. I thought it would be useful to try to learn from any similarities in their approach. They are in entirely different sectors – one selling software (transactional up to complex solutions sales) and the other a builders’ merchant (almost entirely transactional sales). Both sectors are highly competitive, which makes their performance even more impressive.

The things they have in common are:

• They are both run by people who did not found the business. One was brought in to take over as MD and the other progressed internally from a junior sales role.
• They both use internal telesales teams supported by field sales as their primary sales method.
• They both include a mix of account and new business sales in everyone’s target. The account element has a strong propensity to buy in each case – license renewals and essential materials respectively.
• They both hire people from outsde their industry and often people who do not have a sales background. One hired the chap who ran the sandwich van on the industrial estate where they are located.
• They both see the social and competitive elements of working in a sales team in a single room as being important.
• They both manage using numbers, and salespeople have clear targets linked to their remuneration.
• They are both willing to use the stick as well as the carrot to motivate salespeople; they are both quick to dismiss under-performers.
• They both have established and well-understood sales processes.
• They both have simple competitive strategies and they have processes and systems to deliver consistently on this.
• Marketing is a low priority in one business and moderately sophisticated in the other.

This is hardly a scientific analysis and I dare say it is riddled with my own assumptions and prejudices. However, my conclusion is that what is working for these guys today would have worked for them fifty years ago:

• Their competitive positioning is something that is easily understood by sales and customers
• They see sales as an engine, not some deep relationship with loyal customers
• They are organised and have efficient systems and processes
• They manage using numbers, targets and reviews
• They hire for attitude and quickly shed those who don’t work out

The problem is, achieveing this sales success is much harder work than blowing thousands on building social media followings or talking bollocks about “the new marketing”.

For more on sales and other techniques for scaling your business register for one of our webinars

Let Go Of The Tools

One of my clients had a revelation during our last meeting. I’m not sure if it was a welcome one or not.

He has been struggling to find time to make some of the changes he needs to make. At the start of this meeting he confessed that he’d made little progress because he had spent 90% of his time working on projects (even though he employs two project managers to run these).

When I asked why that was he replied to the effect that a) his employees made mistakes, b) he would do a better job than them and c) he enjoyed doing this technical work.

Setting that to one side for a moment, we talked about ways he might reduce his own workload in the short term – he tells me he is working sixty-hour weeks. Part of this conversation touched on sub-contracting and my client said how attracted he was to using third-parties who worked to a fixed-price and “didn’t need motivating.” We also discussed one of his PMs who is resistant to change and not performing well.

In terms of making his business systemised and scalable he felt he needed to “get over this busy period and then I can set some time aside for this.”

I was not surprised by our conversation. At some point during this systemisation process every client starts to realise that a systemised, scalable business is a state of mind. It isn’t something that is bolted-on, or a one-off project. Owners of scalable, systemised businesses understand that systemisationn never ends but is moved forward every day in dozens of little improvements. They see themselves as someone who spends their time designing, building and improving a business, not doing technical stuff, or even sales stuff.

Above all, they understand that it is their role to develop others. The understand that the only way to grow a business sustainably is by growing the employees.

The country needs highly-skilled and independent professionals who enjoy and take pride in technical work – and make a good living doing this. However, sometimes these people are so successful they find themselves employing others and running a business. The resulting mismatch between their role ansd what they enjoy leads to frustration, unhappiness and sixty-hour weeks – unless they can change their mindset and let go of the tools.

More on this and other management issues at https://www.nickbettes.co.uk

Gotta love numbers

My client is planning to move workshop to accommodate his growing business. He was trying to work out what he needed to do to cover the additional rent.

He has always managed profitability and cash flow pretty well using spreadsheets but he was struggling to produce something that told him what he needed to know to make decisions about the proposed move.

He says he doesn’t understand “accounting” and, like many business owners, his only experience of financial reports is the annual return produced by his accountant. I’ll leave you to guess how thoroughly he goes into that document.

We talked through the reasoning process his plan needed to support; rent (and so costs) up by x (this required a brief discussion on fixed costs).

Employees up by y (this required a brief discussion on fixed vs variable costs). Revenue up by z – this required a brief discussion about productivity, gross margin and sales capacity. What would his net profit be under a range of different capacities and turnovers.

At the end of this discussion I was able to introduce him to his profit and loss statement – until now a baffling and irrelevant tool of the accountant – and show how it is an essential business planning tool – in fact, one we had just used.

I have hopes of building on this lightbulb moment and moving on to his balance sheet and cash flow statement.

If you are a business owner of anything but the smallest business you need to understand financial reports. To do that, you need to work through them each month.

If you want to understand more about using finance to run a better business then take a look at www.nickbettes.co.uk

Managing in difficult times

Running a business in difficult economic times is tough.  Here are a few things you might like to think about:

First thing is a budget and cash flow forecast that shows how you get through the next 12 months – in particular, making some conservative assumptions, do you have enough cash at the start to execute the plan, pay yourself, pay the bills and grow without ever running out?

Next is a clear marketing plan. You know that people buy what you sell but you need to make sure you invest enough and take an organised and active approach to marketing in order to achieve the plan.

Finally, your sales process. Many small businesses can be lackadaisical when it comes to manning the phone, turning proposals around quickly, following them up and so on. Make sure you follow a consistent, managed and speedy sales process so nothing escapes.

By the way, effective marketing and sales require a CRM. There is no excuse for even the smallest business not to have one today – they are cheap and easy to use.

If you'd like some support and advice as you navigate these tricky times then you can get those things here.

Management Teams and Evil Plots

Why Should Business Owners Develop an Effective Management Team?

As an SME grows it becomes more difficult for the owner to control and decide everything in the way they used to.  They start to become the main constraint onfurther growth.

Sensible business owners address this issue by delegating more.  They introduce a more formal structure with reporting lines and clearer accountabilities.  A layer of management starts to form –possibly even people other than the owner with the title “director”.  The organisation moves through the difficult transition from everyone reporting to the owner to something more hierarchical.

The owner introduces regular meetings where those people who report direct to her review business performance.  This is a big step forward, although at this stage the scope will usually be limited to short-term operational matters.

The owner is still the custodian of the organisation’s vision.  She still makes all the important decisions pretty much unaided. The other attendees are reluctant to challenge the owner or each other.  They understand and accept responsibility for their own areas to a greater or lesser degree but feel little involvement in setting or achieving the wider organisation’s long-term objectives.  They may be ill-equipped to contribute to strategic thinking, owing their position to functional experience and having had little invested in their development as managers.

By delegating functional, operational tasks the owner has freed up her time and is no longer a short-term constraint, with insufficient time to control people or do things.  However, she is still a constraint on sustainable, long-term growth, being the only person who sees the big picture, or able to think and plan strategically.

The business once again starts to plateau and stress to build.  The owner starts to realise that although the business is better organised and more scalable than it was, its resilience and value to anyone else is severely limited by the reliance on her to sustain and drive it forward.

To move beyond this, to become scalable, the organisation must develop an effective management team – one that runs the business.  Doing this will

• Improve business results by improving business strategy.  As with most things, involving different perspectives and informed discussion will almost always result in better decisions and more buy-in
• Make the business more scalable and productive by underpinning delegation and strengthening accountability
• Reduce reliance and stress on the owner so making the business more resilient
• Make the business more valuable.  Depending on the nature of the transaction, potential acquirers put a high value on the quality and performance of the management team – after all, the owner won’t be there any more

What Does a Management Team Do?

In functional terms, the management team:

• Creates the organisation’s vision
• Defines the most effective strategy to achieve this
• Sets priorities for resources and actions (the plan)
• Reviews performance against plan
• Decides and assigns actions to keep the organisation on track

Creating the Vision

No organisation can perform well without a common vision,whether that is to win the league, put a man on the moon or achieve a sales target.  It follows that a great deal of the management team’s time is spent in discussing the vision, whether that is articulating it in the first place or validating it against real-world results.

Defining Strategy

A vision can only become shared and compelling if there is a credible means to bring it about – a strategy. The formal strategy may exist as a document or a slide deck but the real strategy is a shared mental model of the organisation and its market; a model that exists in the minds of the management team.  This shared set of beliefs about causes and effects emerges not only from formal strategic reviews but also from hundreds of discussions about results good and bad.

Creating the Plan

A long-term strategy requires a plan to make it happen.  A plan requires decisions about priorities and resources.  It sets objectives and completion dates.  It assigns responsibility and co-ordinates activities across the growing business so that marketing, sales and operations budgets and targets match the required financial outcome.

Reviewing Performance

Reviewing performance against what was expected to happen serves two purposes.  Firstly, it identifies where action is required to correct things.  Secondly, it ratifies (or challenges) the vision, strategy and plan created by the management team – the shared mental model.

Taking Corrective Action

The loop is closed by the team deciding what action is required and assigning responsibility and resource to this.  Sometimes the action will lie in a single part of the business, sometimes there will be a choice of actions and sometimes multiple actions must be co-ordinated.

In practice, in an experienced team, these five tasks are not discrete and sequential but iterative and combined.  However, when you are starting to develop your team (and at regular intervals when you have established things) you should set time aside to work on the first three.  Otherwise the danger is that the team slips back into a purely operational focus.

What Makes a Management Team Effective?

A management team is an open-ended, dynamic process rather than a result.  To start with, team members may only feel able to contribute to conversations about their own area– or they may be inexperienced even in that. They may be reluctant to ask questions about other aspects of the business for fear of looking stupid or offending other members.  They may be more concerned with avoiding blame than understanding causes.

Over time, the best teams will start to demonstrate the following behaviours:

Members Are Competent Withing Their Own Functions

Trust underpins teams. Members must know that their colleagues will deliver.  This doesn’t mean that mistakes don’t happen, or that results are never impacted by external factors, or that team members must all be brilliant leaders in their field. It does mean that persistent incompetence or laziness in an individual must be dealt with if the team is to believe in itself.

Members Are Emotionally Intelligent

Trust underpins teams. Members must have the emotional intelligence to empathise with their colleagues, to challenge constructively and to accept challenge without feeling threatened.  They must be supportive of colleagues.  Destructive behaviours or a lack of respect will destroy trust.

Members Think in Terms of the Whole Organisation Not Just Their Own Function

Members accept responsibility for the overall organisational performance not just that of their own function.  This means that they must build up an understanding of the other areas of the business by asking questions of and,when appropriate, constructively challenging, their colleagues.  It means that they must welcome questions and challenge from others on their own functional areas in return.

Should the organisation be struggling to achieve its goal then this is not “Marketing’s problem” or “Operations’ problem” – it is “our problem”.

Conversations Move Easily Between Operational and Strategic Perspectives

In weak teams, regular conversations are almost exclusively operational and short-term whilst strategic conversations are separate events.  The result is that strategy is detached from reality to the point of irrelevance and operational decisions are reactive and directionless.

In stronger teams, operational decisions are informed by strategy and strategy is continuously validated against reality.  This happens implicitly in many conversations throughout the team meetings and elsewhere.

There is a Shared Conceptual Model of the Business and its Strategy

The conversations described in the previous point serve to develop a mental model of the business – cause and effect, where it is going and how – that is shared by all team members. This makes decision-making, co-ordination and prioritisation much more efficient and robust.

The Leader Coaches, They Don’t Control

A leader who dominates the conversation, wins all the arguments and makes all the decisions will be leading a weak team.  This will be the case whether the behaviouris rooted in a psychological need to control, a lack of trust in others,impatience – or simply habit.

Leaders of effective teams see their primary role as developing others.  They are more likely to ask questions than make decisions. They recognise the need to invest time and coach others to understand issues and arrive at decisions.  They balance the need to achieve today’s results with the need to develop individuals and the team for the future.

A Model for Management Teams

Patrick Lencioni, in his book “The Five Dysfunctions of aTeam”, develops an elegant model that informs many of the points in this section:

He says that high-performance teams demonstrate

• Individual accountability based on
• Commitment to the goals of the team gained through
• Challenge and constructive conflict enabled by
• Trust between members

Developing an Effective Management Team

The way to create an effective management team is not to go fire-walking together, fun as that might be. It is to work together on running the business.  We have already looked at what, functionally,this means but to develop an effective team you must work on three things:

1. Managing the performance of the business to achieve the planned results
2. Developing the team, including a common goal, shared commitment to its achievement, a shared understanding of how this is tobe brought about, trust, open communication and accountability
3. Developing the commercial, managerial and leadership capabilities of the individual team members

(John Adair in his book “Effective Leadership” calls this balancing Task, Team and Individual)

For business owners, who are accustomed to make all the decisions and whose own money is at stake, changing to run their business this way is challenging.  It is also a challenge for employees, who are accustomed to the boss making all the decisions (it’s their business, after all).

This means that it won’t happen naturally.  You, the owner, need to take steps to make it happen.  Here are some suggestions:

Prepare the Ground

If you do not already run a regular review meeting with your direct reports or functional heads then set this up – monthly immediately after your accounts are completed is the best time. Get it in everyone’s diaries as a recurring meeting.

If it isn’t already the case, make sure that each part of the meeting uses numbers presented and explained by the person responsible.  If you do most of the talking now, start to reduce this.  Encourage others to talk more and come up with solutions by making sure you ask questions rather than give answers.

Raise Their Horizons

Introduce some longer-term items under any other business or as opportunities present – “What do we think the business is trying to achieve?”  or “What do we think we are good at?”.  Don’t terrify people by saying “Right, now we are going to discuss strategy”.

Return to, reinforce and build on the results of these discussions whenever you can.

Build Trust

Encourage constructive challenge – “Fred, what do you thinkabout Jane’s proposal?” or “I’d like you all to write down the pros and cons of the suggestion I’ve just made.”

Treat performance (good or bad) as an opportunity to improve– “8 is pretty good – what would need to happen to make that a 10?”.  Make sure everyone understands that targets are to promote discussion about performance improvement, not a stick to beat people with.  Make it clear that blame and excuses are Bad Things and unacceptable by calling them out – “Tom, how could you reframe that problem so it is something under your control?”.

Improve Individual Performance

Where necessary improve the contribution of members by providing individual training, feedback and coaching.

If someone is a technical wizard but has no aptitude or desire for leadership, management and teamwork then create them a role wherethey can deliver value and put someone more suitable in charge of their function.

If someone fails to respond to support and development within a reasonable time then don’t keep throwing good money after bad (or keep trying to put in what God left out) – remove them.  Any immediate pain and disruption will be worth it.

Summary

An effective management team is one that is running the business.  Without such a team, the owner becomes a constraint on growth and the business remains fragile.

An effective management team improves business performance, promotes accountability, makes a business scalable, reduces stress and dependence on the owner and makes the business more valuable.

Developing an effective management team is an open-ended process that requires explicit development of the team and the individuals whilst working together to improve business results.  Like Blackadder’s evil plots, effective management teams don’t just make themselves.

For more insights on developing your management team you might like to attend one of our upcoming events.