Does Size Matter: Leading Smaller Businesses

Episode #150 Does Size Matter: Leading Smaller Businesses

As you can imagine, our listener base incorporates leaders from a massive range of different circumstances and experiences. Leaders in over 70 countries, in countless industries, leading at all levels, in organisations of all shapes and sizes.

Some of you are micro startup entrepreneurs, and some of you are CEOs and senior executives of some of the world’s largest corporations. That’s why not everyone gets the same things out of each episode. It’s obviously context dependent.

I’m going to attempt to bridge all of these worlds by addressing the issue of organisation size. I’m going to highlight some of the differences you’ll face in running a multi-billion dollar business, which I’ve done, to running a startup business, which I’m doing now.

Understanding the common elements, what’s valuable in each context and how to scale your approach to make it fit for purpose are incredibly valuable capabilities to have. You may be in one context today and find yourself in a completely different context within 12 months. We never know what’s around the corner.

• I’m going to start today with a brief discussion on why size matters.

• I’ll then talk about the key concept of fitness for purpose.

• I’ll finish with some tips for ensuring that you have the right level of governance, control, and oversight for the size of business that you’re working in right now.

Why does size matter?

It basically comes down to three key differentiators. Size drives three things, and although they seem obvious, it’s worth going over them.

1) Availability of resources

The first is availability of resources. You can achieve a lot in big companies by virtue of the fact that you have vast resources to draw upon. Sometimes you can solve a problem simply by throwing money at it. If you’re under resourced for a particular project you wish to undertake, you can quickly build a team from thin air and dedicate that team to the task at hand. You can pay for expert advice as, and when you need it. For example, if a lawsuit is brought against your company by a supplier, you just go out to market and get a team of expert lawyers who you can throw the keys to, and they’ll advise you on the best course of action and they’ll even act on your behalf in all matters pertaining to that litigation.

Money solves a lot of problems. You also get a lot of options. For example, managing your talent. If someone requires development in a certain area, you can give them experience and development internally. They don’t have to go to a different company to get a wide variety of experiences. These options simply aren’t available to small businesses.

Then, there’s diversification. In the large company often when one market or economy or product is in a trough, you have other sources of income that are not geared to those same forces, which can fill the gaps nicely.

So what are the pros and cons of a big business in terms of availability of resources?

Well the pros are, you can get a lot done in a large organisation because it can be so easily resourced. You do get economies of scale. For example, you can combine all IT functions into a single team that services the whole company, and that can deliver massive savings. They can purchase at scale and in bulk. They can combine resources and hold skills and capabilities internally that wouldn’t be fully utilised if each business unit went out to hire their own. The options are many.

But what are the cons? There’s a huge amount of waste and inefficiency because there’s generally less scrutiny put on buying decisions of all types and at all levels. People tend to be less resourceful. They have narrower scopes and they rely on experts in each field. For example, in big companies there’s normally an HR department to defer to on everything people related. A legal department to push all legal advice to and so forth. People become reliant upon the broader organisational support functions in order to get shit done. In smaller organisations, there is no such luxury. However, people are generally more resourceful. They have to be to achieve their outcomes. Efficiencies are greater. You have no choice, but to live with what has to be done when it has to be done. And you don’t have the slack time that bigger companies do, as things move between different corporate departments.

2) Complexity of operations and structure

Clearly, larger organisations have much more complex structures. They’re often geographically dispersed with multiple locations and complex reporting structures. For example, a sales executive for a US multinational based in Sydney, could report directly to the local CEO for bread and rations, but have another reporting line into the Regional Sales VP in Singapore, and yet another global product executive in Chicago reporting to three people effectively.

This makes it much more difficult to assign single point accountabilities. So how do you get one head to pat one ass to kick, when you have multiple people assigning accountabilities to multiple people in different physical locations? It’s much harder to manage. It also means there are many more hoops to jump through, and quite often, the decision makers are a long way removed from the nuts and bolts of the business.

But small businesses have the advantage of simple structures and reporting lines, which helps with a lot of things. Let’s just take a few examples from my current business, Your CEO Mentor.

For a start, decision-making speed is optimised. There’s nothing to hold us back. There’s no red tape. We have a discussion. We understand the risks, the issues, the assumptions. We run scenarios sometimes, but we basically know what that risk reward analysis is and we make a decision straight away. There’s no mucking around. Emma’s the CEO. I know I can go to her at any time and get a decision made really, really quickly and likewise, when it comes to content, she comes to me and the same thing. We are very agile when shifts are needed. So likewise, if an ad campaign we’re running isn’t working, we just pull it and change tack on the same day. There are no hoops to jump through. There are no postmortems. There are no recriminations. It’s just “okay, that wasn’t what we expected to happen. Let’s learn and move and shift.” Accountabilities are crystal clear.

Despite the fact that in smaller organisations, there are a much broader set of accountabilities for each individual, there’s a lot more ground for them to cover. There’s also a lot less confusion in who’s doing what. It’s really, really easy to see in a small business.

3) Clarity of objectives

The smaller the organisation, the easier to paint the picture. There’s no excuses if you’re in one of these. Larger companies suffer from dilution of messages as they go through the layers. As a CEO, you might be absolutely crystal clear in your head about the purpose, the strategy, the tactics, and the operating plans that you’re trying to execute on.

But even if you go just one layer away, down to the executive team, you’ll find that they don’t understand it with quite the same level of clarity that you do. So they can’t communicate it quite the same way.

Multiply this through each layer in a six or seven layer organisation, and by the time it gets to the ground floor, you can have completely different messages than what you would ideally like to tell if you were down there yourself as the CEO. But you can’t do that, so larger organisations struggle with this clarity of objectives thing because the communication from different leaders can sometimes give a completely different result.

There’s been times when I’ve been down talking to workers on the front line, and when they fed back to me, the answers to questions I’ve asked around what they think is important, it’s completely anathema to what I think should be important from my view as CEO. So you get this misinterpretation and dilution of messaging on the way down.

I’ve heard more than one CEO become frustrated with the inability of leaders at lower levels to understand the strategy. They’ll say, “It’s really clear. What don’t they understand?”

Maybe it’s really clear to the CEO, but if your people don’t understand it, whose fault is that and whose problem is it to fix? It’s always got to start at the top. The holy grail of leadership is to have this really connected messaging from top to bottom. It’s clear what the purpose of the organisation is. The strategy through which that purpose is going to be realised. The tactical plans and operating plans that are actually going to make it come to life as you execute on a day-to-day basis. But for the people in the organisation, they just want to know how does what I do fit into the big picture? And what do I need to do today, on this shift, to be successful?

Fitness for purpose

This is a concept that you’ll probably crash into in one way or another. If you’re running a smaller business, and it’s growing, you have to think about when the right time is to scale up and put additional governance in place.

If you’re from a large corporate world and you take on a role in a smaller business, what should you do then? The level of creativity required in a smaller business is much higher than in a large business, with no offence intended to those of you in large corporates, of course I’ve been there too.

I remember the first time I went down scale. At the time, I was Chief Information Officer of an ASX 50 listed company, and it had multi-billion dollar revenues, global operations, thousands of employees. Now MIM is no more, but 20 years ago, it was Australia’s seventh largest exporter.

Going from there, to a boutique insurance company that was about $150 million in revenues, with maybe a few hundred staff, was a very different experience. It had all of the structure of a major corporate, but there were a few really significant differences.

Every decision had governance, but there were less zero’s attached to the outcome. There were less rules, less procedures and less bureaucracy. Decision-making was pretty lean, and executive accountabilities were absolutely crystal clear. We had the same major food groups in terms of governance and compliance, but much less rigmarole to go through.

It did lead me to develop an expression that I still use today:

Any idiot can manage with a blank check. It takes almost no talent to have unlimited resources and to get some outcomes. But when you are resource constrained, it takes real talent to manage well.

From the smaller insurance company, I did go back upscale and worked in large businesses again, of course eventually running CS Energy.

But fast forward 15 years from that experience, and I’m now setting up Your CEO Mentor with Emma. This is the classic micro startup. It was just us. A man, a woman, and a dog in a garage. Coming from running a multi-billion dollar asset intensive business to a company of two. As with my small insurer experience, I learned what and how to adapt. What’s important, and how do we make sure we have the right checks and balances?

I’m going to give you a couple of examples of making the disciplines of larger companies work in smaller companies of any size. And it’s all about the expression fit for purpose.

Example 1: Working out how to invest the business’s money.

There are certain things that have to be done to ensure any investment is sensible, and that it’s likely to pay off. If you’re making a hundred million dollar investment into a physical asset, you need to have that pretty buttoned down, because there are lots of moving parts. It’s likely that you’ll need multidisciplinary input from technical, commercial, legal and operations people, for example.

A business case will be produced and that’s perhaps 50 pages or more. I’ve seen business cases that are over 300 pages. That has to be analysed and assessed to ensure that it’s robust and adequately addresses the risk of such a large investment. A business case like that has to cover six main areas. I did an episode on this a little while: Episode 126: Selling Your Proposal.

The business case needs to look at strategic fit. How and where does this fit into the overall strategy? The financial benefits. What financial outcomes can we expect and in what timeframes? Non-financial benefits. What are the non quantifiable benefits that we expect to get from the project? Any assumptions. What are the key assumptions? And do we understand the value swings if those actually aren’t correct? What scenarios have we run to satisfy ourselves that we understand the limits of those assumptions. How about risk? I always like to know the answer to one very simple question. If this all goes horribly wrong, what’s the worst outcome we could experience? And then of course, there’s going to be raft of supporting and technical data to justify which options were considered and why the proposed auction was chosen.

I have seen some very high value business cases that were hundreds of pages long, not answer those questions sufficiently. I’ve also seen five to ten page business cases address these key questions beautifully. So size doesn’t matter in this regard.

The fitness for purpose principle is simply this; find out what the key things are that you need to know to make a sensible decision and make sure that they are addressed. The relative size of the investment determines the amount of detail and rigour required. For example, a $1 million decision, in a multi-billion dollar company, is virtually immaterial and it can be made at a relatively low level in the organisation. But if Emma and I were going to make a $1 million decision in our business, we would want a significant level of detail and rigour in a business case to justify a proportional bet of that size. As I say, I don’t care if a business case comes to me on the back of a beer coaster, as long as I can see the big questions addressed and answered sensibly.

Example 2: Hiring

In large organisations they have whole teams of people to read resumes, schedule interviews, run psych and aptitude testing processes, conduct referee interviews, and so forth. The tendency for a small business owner would be to say, “I don’t need to do all of that because we’re only small and don’t have the resources of those bigger companies”.

But to me, this is actually wrong thinking. In a small business, it’s even more critical that every hire you make counts. In a large organisation, hiring the wrong person is expensive, but it’s rarely fatal. That’s why for my experience in large corporates I see that hiring is one of those things that absolutely has to be replicated in a micro business with all the disciplines that are used in larger businesses.

In Your CEO Mentor with our hires, we put all candidates through our standard screening process. We start with the resume and the application, of course. For those who get through that first gate, we then ask them to make a video talking about their experience, because all of our roles have a customer facing element to them so we want to see how people present. We then, for those people who pass that test, have at least one interview, sometimes more.

For someone who looks good to that point, we put them through rigorous aptitude and psych testing. Anything that we find in all of those processes that might be of a concern we incorporate into our referee checks.

We do this lean and we do it fast, but we know which things are important and we scale them for suitability to our business. That’s fit for purpose.

bringING the right level of oversight and control to our business depending on its size

Here’s a rule of thumb, it’s a lot easier to come down in scale than it is to go up. It’s much easier to discard things than it is to build them.

Going up, it’s hard to know what you don’t know. And to make good judgement calls on the right level of structure to put around your business growth is really tricky. If you understand the value that comes from process control and governance, you can then determine a fit for purpose version for your business.

Having been in big business gives you that perspective. So let me try and unpack this a little for those of you who haven’t had the benefit of having worked at a senior level in the large business.

The most important thing to understand is this one question: What do I think is most important to put in place to support our growth, and how do I do that in a way that makes sense for the business?

I get a lot of founders asking me the question: when do I know what the right time is to build my own departments internally like finance and HR and so forth?

My view is only when you see real cracks appearing in the foundations of your business, should you start to build out that infrastructure. As soon as you start to build internal capability, your cost structure and business model changes. And every well-meaning support executive is going to try to add value by growing their remit.

You hire one HR person and you’ll look over 12 months later and there’s three of them. I don’t know how they multiply. They just do. Delay this phenomenon for as long as possible.

There’s one major rule of thumb here: work out what you need to do to grow profitably. Work out what support you think that might require, and if you’re going to add any cost at all, make sure it delivers a direct contribution to the bottom line. If it doesn’t, don’t fall for it.

It’s true that you have to build out your cost base in order to support increases in revenue. But do this sensibly and understand what your key thresholds and barriers to growth are. If you get that right, everything else will follow.

How do you make sure you have sufficient oversight and governance?

You can buy a lot of governance from outsource providers. We use these liberally at Your CEO Mentor. We’ve got awesome accountants, incredible financial and legal advisors, specialists in everything from SEO and digital advertising to creative design and production. When do we pull these things in house? How do we know when the right time is to scale our business internally for growth? In my view, there are two clear situations.

1) Where it’s something that’s core to our business, that we can no longer manage without additional resources.

That’s why we’ve just recently hired our new customer success manager, Kelilah who starts with us in a couple of weeks time.

2) Where we have something that we think we can take advantage of economies of scale if our requirement grows sufficiently. At the moment we only need about 20% of an HR person and Em and I are both very HR literate. But there will come a time when it makes sense to bring that in-house and have a specialist resource inside the company. And we’ll do that at the latest possible opportunity.

When all is said and done, there are some crucial functions in any business that need to be managed. Knowing what they are and finding the fit for purpose way of covering them off is key to everything.

Think carefully about the things you need to control. What is at their essence? How do you provide appropriate oversight without introducing inappropriate overhead?

Scaling is hard enough, so keep your eye on the main game. Revenue minus cost equals profit. It doesn’t really have to be much harder than that!