Why do nearly 50% of startups fail? Can growing a business too fast be a detriment? In this episode of The ROI Podcast, Brent Tilson, who's the founder of Tilson HR and a published Forbes author, discusses the common pitfalls of a growing organization while offering advice from his book Go Slow To Grow Fast.
Shane: What is going on ROI Podcast listeners! We have got a great show for you today and the topic is about scalability: How do you scale the business, do it responsibly, and avoid the trap of sliding off the rails into the red... We have a Kelley School of Business alum, and most recently, author, Brent Tilson, who was one of the very few whose book has been published by Forbes... Let's get into this value-packed episode!
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Shane: Alright, alright, welcome back to the ROI Podcast presented by the Indiana University Kelley School of Business on the IUPUI Campus in downtown Indianapolis. I'm one of your hosts, Shane Simmons and the associate dean of academic programs, Phil Powell, is here with me. Phil, how are you?
Phil: Shane, I'm doing wonderful and I cannot wait to share with our listeners these insights from Brent Tilson. He has written a marvelous book with great insights that enables very profitable and efficient business.
Shane: Brent Tilson is the founder and CEO of Tilson HR in Greenwood, which is on the south side of Indianapolis.
Brent: I’m doing wonderful, another great day in Indiana!
Phil: Brent is what you could call a CEO to CEOs. His company, Tilson HR...
Brent: We’ve been in business now for 23 years
Phil: Has been helping businesses for more than 20 years focusing on business efficiency and performance improvement... And in his new book and in this interview – he's pulling back the curtain and reveals how business can overcome the pains of growth while avoiding the common pitfalls that have eliminated organizations...
Brent: That’s correct, Go Slow to Grow Fast, the title of my book sums it all up. At one point, my business was the highest-growing company in the country back in the 2000’s, followed up the next year even faster - I was living it. I was also working with businesses that were having the same success! 5:08 As I worked with them, what I realized was that all of them had these predictable growth cycles - I was trying to work with my fellow CEOs to help them anticipate and understand how to help them grow their business. There’s a traditional S-curve Life Cycle for businesses that many entrepreneurs and CEOs all recognize, and I was looking at that [thinking] how do I help companies not go to what I call “The Drama Zone."
Shane: Let's talk about the drama zone... What is that?
Phil: The drama zone is when the business may stop seeing, or even lose the growth they were once seeing. Think of dips in revenue or human capital.
Brent: Many companies spin out of control in the drama zone and end up going out of business or reverting back to prior business models, trying to salvage themselves and live.
Phil: Brent says one problem many CEOs struggle with is the fact they spend too much time working on tasks that could be delegated – which is costing the company real revenue... And can lead to the drama zone we just talked about.
Brent: Owners should be working on their business, not in it – that’s a very common saying in business today. It’s easy to say, hard to do, because just the day-in, day-out volume and speed of business makes it very difficult for leaders to truly step back and recognize what’s important and not – I call it “materiality”.
Brent: For CEOs and leaders, when it comes to working on your business, you have to look at something that’s in front of you and determine if it’s material to the impact of your business – if it is, you need to focus on it; if it’s immaterial on a day-in, day-out, someone else needs to be working in the business on those matters. They’re important, but are they material?
Phil: Now, let's go back to the S-Curve for a moment... In that S curve, you have ups and downs – as we've mentioned... At the bottom of that curve, you usually have an entrepreneur who has a few employees, and the executive is still doing a lot of the work... But when growth hits and the acceleration moves in full force – you have problems that will arise...
Brent: All of a sudden, they have success in the business and they’re growing – they quickly find out that their infrastructure isn’t designed to even handle the sales and record them in their accounting system. They don’t have the production and distribution because they quickly out-scaled what they could possibly do, so then they’re scrambling to be able to meet those needs. If they grow too fast, then they’re trying to hire people as fast as they can, so what ends up happening is they start cutting corners and paying people under the table or whatever it takes to keep the company alive. One day, they wake up, and they’ve hit this inflection point – an order doesn’t get made, an employee makes a mistake, the IRS knocks on the door - something happens where the company realizes they don’t have the infrastructure to support the sales, and they quickly start to spiral and try to figure out how to salvage themselves.
Shane: That's when you have a mess on your hands?
Phil: Exactly. That growth may seem like a great thing – but in reality, if there aren't processes in place to handle that growth – you can have real problems you have to fight through.
Brent: Statistically, 50% of startups go out of business in the first few years, and if you go and look at all the stats that exist, you’ll find that that’s very hard to get past the first five years. I would propose and suggest that the reason why a lot of companies fail is that they don’t have the scalability - they get into that problem, start to have success, and they don’t plan for the future.
Phil: So first and foremost, fast growth isn't always great for the business – and that's assuming you don't have the proper systems are in place. But what are those systems? What do they look like?
Shane: I'm assuming you have to have metrics?
Phil: Yes, metrics are necessary – but Brent says too many times organizations will rely on the financial statements – and view them as black and white – when in reality – there's often a hidden story...
Brent: The reality is the financial statements don’t tell the whole story, they just tell part of it, because if I were to take two identical financial statements and lay them side-by-side, one may have an amazing operation that can scale, succeed, and double in size, while the other one has never invested in their infrastructure. The other metrics for us to measure are those things that aren’t measured by financial statements - it could be employee turnover, which maybe indicates a moral problem, maybe it’s a loss of clients! So they’re adding a business on the top line, but they’re going just as fast out the back. It’s [about] measuring these things that are a non-financial statement that help businesses understand how effective they are at running their business. I propose that effectiveness is as important - or more important - to measure, than just bottom line Return On Investment and profitability.
Phil: Measuring things that aren't on the financial statement is critical... Culture, moral, these are things that can't be quantified on a piece of paper... But let's move to employees effectiveness... How do you measure that? Brent has a very simple way to look at it, which has helped companies hit all new levels. It's called Revenue Per Employee.
Brent: To me, Revenue Per Employee, measures the ultimate effectiveness of an organization because everything contributes at the end of her day into generating Revenue Per Employee. First, let’s think about a software company, one of the highest Revenue Per Employee industries - you can write the software, get it to a certain level, maintain it, sell it as a software where there are very low infrastructure costs other than the programming, and you can maximize very high levels of Revenue Per Employee. Thus, why technology firms trade at such high multiples, how they raise such high levels of value, because they maximize Revenue Per Employee, where a law firm, engineering firm, or professional services firm, at best, is 100-125,000. By industry, companies can measure themselves against and compare where they stand up to their competition - the Revenue Per Employee is such a critical measure because everything contributes to that. If I’m losing clients and my turnover of clients is bad, that’s going to drive revenue down per employee because I’m having to replace it just as fast as it’s going out the door. If I can make my employees more effective, they’re able to do more with less, and they’re just better performing, then that means they can take on more capacity, adding more Revenue Per Employee on the top line. If you unpack and look at all the variables that affect Revenue Per Employee, you start to find out where all the leaks are in the organization – you start to find out where those issues are, that normally wouldn’t surface, that impact Revenue Per Employee.
Phil: There's always an inflection point... And what do you do? Hire more people at a really fast pace?
Shane: But if you do that, there's so much time and costs into training, getting the team up to speed – having this mass hiring's in a short period of time can be risky, right?
Phil: Exactly – and that's when outsourcing can become your ally.
Brent: I think companies, as they look at their lifecycle and they’re making these strategies on how to run their business and to maximize driving zones, minimize drama zones, the key is to look at the organization and find what are the most important things that drive value. If you double in your size and you’re outsourcing, let’s say, IT, your IT provider then is able to meet your needs, because they have all the professional expertise when you need it, as you need it, to help you scale. The same thing with the Human Resources side, if you outsource the HR infrastructure, and you have professionals that meet all the needs and can anticipate and look around corners, then your drama zones can be greatly minimized. Every company will always have a little bit, you can’t be a perfectly 45-degree growth line - how do you maximize the driving zones, and if you take out the friction and do that through outsourcing, those non-critical, market differentiating things from your organization, then you can minimize and maximize.
Phil: At the end of the day, it's all about minimizing your chances of hitting those danger zones... and having the systems and processes in place to handle growth... We've just scratched the surface in the podcast interview... In Brent's book, Go Slow To Grow Fast, you'll hear a fable drawn from Brent's work with hundreds of businesses over the years – which Brent creates a case study that will walk you along this business journey...
Brent: I’m very excited to roll out my book, Go Slow To Grow Fast – it encapsulates and expands on the topics that we’ve talked about in this podcast. I would encourage the listener to pick up a copy, available on Amazon, and it will help the reader and take them through a fable based on my many years working with businesses. Those who have read alongside with me as I’ve written the book have said they can see themselves in these characters, so I think the reader will find themselves pulled into the book, able to start to understand and give themselves a path for the future, and what to anticipate as they step into a CEO role. It might be one of those tools that you have on your shelf that you pull out over the years and say, “These are the things we’re experiencing today, let’s talk about them and plan for the future because we’ve got to go slow to grow fast”.
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Shane: Go Slow To Grow Fast... Brent Tilson's book will be out on June 4th -- you can get your copy on Amazon... And that's going to be a wrap for this episode of The ROI Podcast. We'd like to thank Brent Tilson for sharing his lifelong business experiences with us and really pulling back the curtain on real issues companies face, and how to tackle those issues. Be sure to subscribe to the ROI Podcast and leave us a review. And we'll be right back here next week with another episode for you!