The Wheels Coming off the Bus

Posted on December 30, 2010

What could ever be wrong with a strong, growing top line? What would be wrong with running a lean company? The answer: Too much work to do and not enough people or resources to execute it well.

There comes a tipping point, when an organization goes from hectic, busy and rushed, to being overwhelmed, chaotic and hopeless. When the wheels fully separate from the bus. It’s not pretty. The ugliness usually includes employees yelling and screaming; angry customers, vendors cutting off supply, resignations without notice, hostility in the workplace, and much worse. Perhaps you’ve seen this in your organization.

As I reflect on all the different companies I’ve seen where the pace of business exceed the capability to execute, a number of causes and mitigations come to mind.

An Overbearing Sales Culture. I recall one company that had been founded and grown by a salesman. He was passionate and knew how to ring the bell, but as his company grew, he undervalued and underpaid his finance and operational executives. As a result, he could only hire weak managers in those roles. The CEO often shared his frustration, “What is so difficult about getting the product out?” Eventually the company overspent, had deeply embedded problems in their infrastructure, and collapsed.

Somebody on the C level team has to love operations. It takes a special breed that thrives on efficiency; on delivering tangible results every day. They probably won’t love sales, or strategy, or marketing. But they’ll fight hard to keep the operation bullet proof. They’ll take joy in having 99.99% accuracy and on time delivery. More than likely they’ll be a “pain in the conference room” when the prospect for a huge new sales opportunity pops up, since they’ll be fighting to ensure that the company can deliver. But their perspective and voice is critical.

Outgrowing your Infrastructure. Little companies add infrastructure in small chunks and can react fairly quickly. But the bigger the organization gets, the longer it takes to build internal systems and the greater the number of people and processes that must be trained/changed to utilize them. I hear some operations “jocks” talk about “changing the wheels on the car while it’s moving” with bravado, but this is risky and should be avoided whenever possible. Without doubt, building infrastructure takes resources away from new product investment and customer facing new features and benefits. When things are running well it’s easy to ignore infrastructure needs in favor of growing the top line faster.

When you bring in new infrastructure, you should not only identify its ability to handle your short term expected load, but also its maximum load capacity, and the lead time you’ll need to safely replace it as you grow. This is true for ERP systems, facilities, equipment and all processes. If you’re already late, consider outsourcing the business function. In many cases, outsourcing requires less short term investment, and their systems can be quickly modified to fit into your organization’s needs. An added benefit might be that you’re less distracted from your core competency.

Outgrowing the Ops Team. Sadly, many high growth companies outgrow their teams. It may not be the fault of employees, who are swamped by the day to day and can’t find the time to learn on their own. But the best thing for their career advancement is often to work for someone you hire who has “been there & done that”, so they can get the on-the-job training they deserve. Likewise, a growing business should always be looking for leaders who have very relevant prior experience doing something in a similar scale. So if you’re growing your firm from the 250M revenue level to the 500M, find some executive that has done that already, perhaps just once. They’ll be interested enough to do it a second time, and your organization will be the beneficiary. If your current team is not an ideal team to lead your firm through the next three years, it’s time to bring in the firepower and experience your future deserves.

Growing with Excessive Concentration. One of the reasons some CEOs hesitate to spend on infrastructure is that their growth is overly-dependent on one, or a few big customers. I have to agree that committing to fixed expenses and a big cash spend is very scary when your sales are too concentrated. Of course, having the wheels come off your bus can be a quick way to lose that big, key customer.

The obvious (but very difficult) solution is to sell more to other customers. Also try and secure contractual arrangements that limit your risk of an abrupt departure of big customers, or negotiate for them to pay for the key fixed cost elements of the infrastructure that their volume requires. Think also about outsourcing or using pay-as-you-go options, even if more expensive in total, as that shifts the risk to others.

Our Salesman said Yes. Salesmen are genetically inclined to say yes. That means that without management, boundaries and processes, they may set customer expectations incorrectly, or accept work that causes unnecessary complexity and can lead toward massive operational problems.

What we sell and what we promise must be closely integrated with our operational ability to deliver it in a timely, cost effective fashion. I’m not saying that operations should have the last word either. Sometimes it takes complex, difficult work in operations to give the salespeople something they can sell! But the rules of the road must be well defined; There needs to be process around service level agreements, customization, pricing, and other key elements. Salesmen should have the authority to make promises that follow along with those agreements, but nothing more unless they check cross functionally first.

Shared Resources. Sometimes operations and sales share resources. Specific situations include customer service teams that get drafted into sales or fulfillment roles; support teams that can get pulled into product development/engineering teams; and engineering teams that get split between new product development versus infrastructure development tasks. Flexibility is great in normal times, but when the pressure comes on, setting priorities and adjusting them on the fly gets very difficult.

I’m not a big fan of shared resources except in very small companies, or on rare, or in project based cases. It may be more work in hiring and finding talent, but the clarity of having two different people in two different roles with clear reporting structures is very helpful, and is much better than having two people both shared. Separate the resources before crunch time, and you’ll avoid stress and strain when the pace quickens.

Too Much Complexity. In slower times, we try and find differentiators to grow sales, and so we often try tricky, complex offerings that we are capable of doing and others are not. Some sell, some don’t. But they generally leave behind a few “legacy” customers, and a web of complex processes and functions that often bog operations down.

Try simplifying. If overall volumes are mounting and capacity is nearing its limits, it’s good to end some complex programs, even if it means losing some top line. The gains in operations may far outweigh the decline, leaving you with the ability to tackle easier work that has better margins. Simplifying can also mean offering less options or less customization and it may not hurt the top line at all. Ask your team what the hard parts of their jobs are. Look at all the recently introduced products/services and dig into those that are least successful. Don’t focus on how much you’ll save—it can be hard to calculate. Instead hack out complexity everywhere that is not making a big contribution to sales and growth.

Can’t Afford Infrastructure. Some organizations find themselves with a rapidly growing top line and not enough free cash flow to spend on building infrastructure in a timely fashion. I immediately worry that they are pricing too low, which is a triple barreled problem. First, they attract more volume than their offering deserves, putting burden on the company to deliver. Second, they attract the most price sensitive customers, who come (and will leave) for the price. Third, while they may have a gross margin/contribution margin on each sale, it’s not big enough to really sustain the business over the long term. Borrowing money for infrastructure in this case only delays the pain.

Raising prices is a powerful way to increase cash flow and profits. Many have been afraid to do so through the downturn of 2008/9. But it is much better to have a healthier but smaller business than one that can never sustain itself and its market position over time.

Missing Metrics. Sometimes a surge in volume is a complete surprise; a sudden event. But many times the problems that can separate the wheels from the bus creep up over the long term, unnoticed; quality degrades a little bit; delivery takes a little longer, the IT system hiccups grow increasingly frequent. The only antidote is to have a balanced set of metrics in place that are monitored monthly, and reviewed carefully. By balanced, I mean balanced between financial measures, customer measures, efficiency measures, and learning/knowledge measures.

Taking monthly readings, and comparing them against last year, the budget and the forecast forces us to notice small shifts in the wrong direction and to take action. This sounds easy, but when the pace of business starts quickening, the first impulse is to “cancel meetings” and run harder. This is usually a big mistake. Monitoring metrics, even when there’s no time, is a high priority task. Reacting to slippage before it becomes catastrophic is critical.

Since you have had the time to read this far, I doubt the wheels have come off your bus. But the fact that you’re interested enough to read this to its end makes it likely that you’re feeling vibrations that make you worried about an impending wreck. Become a mechanic NOW (or hire a few) so that you can allow your company to race forward without worry about seeing your bus scraping along the pavement and coming to a painful stop.