How To Scale A Business

I probably learn more from Fred Wilson's blog than any other source that I read regularly. However, a couple of days ago he blogged about an interview given by Mark Pincus in the New York Times this week.

Mark has built a number of successful web businesses, and like all entrepreneurs who turn start-ups into success stories he has learned that his ability to personally manage every employee only works while the company remains small. His threshold is somewhere between 50 and 150 people. A range that matches our own experience.

As Mark points out, you have to find ways to scale the organization, “to find some way to keep everybody going in productive directions when you’re not in the room.”

With this perspective, I could not agree more.

Mark’s solution is “to have everyone be the CEO of something.” An experience he illustrates with a description of his receptionist buying the company’s new phone system.

A practice that I would strongly suggest you avoid at all costs.

In running my own companies I have erred both by creating too rigid a hierarchy, and then by providing too few parameters. The first limits imagination and innovation. The second guarantees that either the individual or the organization will eventually fail through an absence of perspective. And experience.

I have learned to avoid both extremes.

Organizations, in my experience, do not manage themselves towards collective success. No matter how well-intentioned, talented or selfless its employees may be.

Instead, I believe scaling a business requires a management approach that has eight elements:

1. The ability to articulate why what the business does is important. An evangelical mission that gives your staff both a reason to build the company and a way to measure their progress - both critical to our species.

2. A clear understanding of the essential structural elements of the business. Pick from sales, customer service, financial management, operations, technology, manufacturing, and the process by which you make or provide the thing you sell. Sometimes one may blend with another (for instance, sales and customer service overlap significantly in some businesses). Defining your operational model creates not only scalability but also a way to measure what’s working and what’s not.

3. An emotional willingness to hand responsibility for the success of each area to others.

4. An appreciation of the skills needed to be successful. Nothing is more destructive than letting an enthusiastic staff member jump in the deep end, only to discover they don't know how to swim.

5. A definition of success for each area. And for the company as a whole. Supported by the awareness to redefine both as required by evidence and evolution.

6. An atmosphere that encourages those responsible for each area to use their initiative. And makes them accountable for their decisions.

7. The instinct to recognize talent and to empower it quickly, regardless of seniority or process. Putting your best people where they can have most impact is critical to creating a vibrant, innovative and effective organization.

8. An information management system that creates an early warning of problems in any area by highlighting bad news as well as good.

To go back to Mark's example, the receptionist buying the phone system in an organization of 50+ people is making a decision that can cost $200,000 in the short-term. And well over $1,000,000 over ten years. Getting it right requires understanding: telco politics and regulations; bandwidth; firewalls; data requirements and pricing analysis; packet-loss; financing alternatives; the tax impact of each alternative; the communication needs of every department; of other offices; the company's customer service philosophy (which is frequently defined for the first time at moments like this); the financial robustness of every manufacturer, vendor, installer and service providor; the pros and cons of maintenance and training plans, and the time to do all that. And answer the phones.

Creating a model in which your best people have wide-ranging responsibility and the opportunity to grow quickly is essential.

Which includes challenging them in ways that they might not instinctively choose for themselves.

But asking them to be micro CEOs is unfair to them.

And to the organization.

And both will fail.