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Getting Bigger and Better: Managing the TOP 10 Risk Factors for Growing Companies

Written by: Lee Colan

Article Overview: The framework for addressing the 10 Risk Factors is the Organizational Backbone. The vertebrae of this backbone are a company’s Strategies, Systems and Skills: Strategies set the direction and provide context for the business and its employees. Systems reinforce strategies. They are broadly defined as ‘the way that work gets done’. Skills enable effective execution of systems and adaptability to new systems. Most growing companies find that their Organizational backbone is misaligned – a natural result of high-growth.

Getting Bigger and Better: Managing the TOP 10 Risk Factors for Growing Companies

The framework for addressing the 10 Risk Factors is the Organizational Backbone. The vertebrae of this backbone are a company’s Strategies, Systems and Skills:

Strategies set the direction and provide context for the business and its employees.
Systems reinforce strategies. They are broadly defined as ‘the way that work gets done’.
Skills enable effective execution of systems and adaptability to new systems.

Most growing companies find that their Organizational backbone is misaligned – a natural result of high-growth.

Assess the alignment of your Organizational Backbone by taking a quick, on-line Organizational Check-up:
http://www.thelgroup.com/p_What/checkup.asp

The 10 Risk Factors apply to growing companies in varying degrees. Generally, the risk factors are MORE prevalent in younger companies with higher growth rates. Risk Factors are LESS prevalent in mature companies with lower growth rates.

The 10 Risk Factors are not inherently bad for your business; the key is proactively managing them. They are all interrelated as with any complex system, such as your company.

Here is a description of the TOP 10 Risk Factors and some tips for managing each of them.

RISK FACTOR #10: Betting Against the Law
Companies tend to take little risk with Operations compliance due to agency oversight, customer demands and ethical responsibility. Growing companies typically take much greater risk with Employee-related compliance such as:

- 401k deposit requirements
- Equitable pay and stock option practices
- Fair selection/promotion practices
- Wage and hour laws.

Although compliance in these Employee-related areas also has government oversight, it does not possess the same urgency as Operations compliance. Therefore, Employee-related compliance typically gets put on the back burner during periods of growth.

Managing #10:
Prioritize areas with greatest legal exposure and highest resource demand. Consider outsourcing, automating or at least streamlining activities associated with these areas. More and more companies are outsourcing areas that require any compliance with outside governing bodies (e.g., health benefits, savings plans, recruitment). Outsourcing is not necessarily a less expensive option but it does:

- reduce liability
- improve focus of resources on your core competencies (what you do best)
- capture otherwise missed opportunities.



RISK FACTOR #9: Underdeveloped Operational Infrastructure
This is the most common risk factor we see. Most growing companies are so focused on their ability to produce NOW, they spend little effort on building the operational infrastructure to sustain their growth over time. We define infrastructure as Systems, the second vertebrae on the Organizational backbone. Systems include:

- Work procedures
- Communication channels
- Decision-making
- Information processing
- Planning
- Performance management
- Rules and policies
- Goals and measures
- Rewards and recognition
- Staffing and selection
- Training and development.

Many senior executives mistakenly equate ‘infrastructure’ with ‘overhead’. We are referring to the operational infrastructure required to go effectively to market, care for customers, generate revenue and sustain competitiveness.

Managing #9:
As an acid test, think of your business as a franchise that you sell. To what extent have you built operational infrastructure that transcends your employees and management team? Streamline your manual work processes before you tinker with your technical systems. “We need a new computer system” is an easy crutch, but it results in many companies simply automating their own inefficiencies.

Creating the appropriate level of operational infrastructure will enable you to work ON your business rather than IN your business. This will help you address a common frustration we hear from our client CEOs. Winston Churchill said, “For the first 25 yrs. of my life I wanted freedom. For the next 25 yrs. I wanted order. For the next 25 yrs. I realized that order is freedom”. The appropriate amount of infrastructure can free you up to work on your business rather than in your business


RISK FACTOR #8: Declining Product and Service Quality
This risk factor is generally a direct result of not managing Risk Factor #9. It is a result of prolonged lack of attention to operational infrastructure, but its negative impact on a business is immediate. In a nutshell, customer needs get obscured by growth needs.

Managing #8:
Break the “growth for growth’s sake” paradigm (a la the dotcom mentality):

Shift your business model and employees’ focus to Profitable growth.
Educate your employee that it is 5 times more expensive to acquire a new customer than it is to sell more to an existing customer.

Refocus on your customers’ needs and related processes to meet those needs. It is a real paradox that with all of the “Customer is King” corporate propaganda, so many companies can still lose sight of their customers.

RISK FACTOR #7: Inability to Capture Key Data
This risk factor results in inefficient data collection, slow decision-making and poor performance management (all the way from Corporate results to Individual production). When companies do not manage this risk factor they rely on what we call “Gut Feel Management” – a scary scenario when it comes to financial projections.

Managing #7:
Keep measurement simple (we believe in keeping everything simple!). Identify and focus on your company’s key success factors and corresponding measures. Remember, what gets measured gets done. Then, integrate your systems (after you have streamlined your manual processes) to capture the data you need.

RISK FACTOR #6: The “Diligence” in Due Diligence is Missing
A majority of mergers/acquisitions do not meet performance expectations, and it starts at the very beginning in the due diligence phase. This risk factor warrants a separate Report itself. For more, see our Indigestion vs. Integration report on Merger Integration.

Managing #6:
Create a due diligence process (it can be boiled down to checklists) and team, then stick to them. The team can be used as an effective developmental assignment, but ensure there is reasonable continuity on the team.

Assess people/cultural match issues - this is the biggest reason for what we call post-merger indigestion.

RISK FACTOR #5: Planning Horizon is Too Short
Think of the inscription on your car’s side view mirror, “Objects in the mirror are closer than they appear”. We tell our clients to ‘flip their mirrors forward’ when planning for growth – the future is closer than it appears.

Although strategic planning horizons have been shortened significantly over the past 10 years, it is still smart business to plan for at least the next two years.

Managing #5:
Institute disciplined and detailed planning processes. The trick is translating broad strategy into specific, measurable actions (i.e., the devil is in the details).

The common approach to hiring for key positions is to recruit from companies of comparable size. However, these employees are soon exploring new territory along with everyone else as the company grows. We suggest “over hiring” for key positions so these employees can help drive your employees toward your company’s vision because they have been there before.

RISK FACTOR #4: Loyalty to Employees Who Got Us Here
This is also a very common risk factor and probably the toughest one to address. Frequently, the needs of a growing business surpass the skills of certain employees that helped build the business. This forces tough decisions in order to sustain the company’s growth.

Managing #4:
Acknowledge past contributions while setting new performance expectations based on current business needs.
Design people systems to reinforce these new expectations:

- Selection
- Rewards
- Development
- Communication.

RISK FACTOR #3: Organizational Focus is Blurred
The profile of the successful entrepreneur feeds right into this risk factor. His mantra is, “Where’s the next deal?” More deals, products and suppliers create greater organizational complexity. Complexity requires overhead. Overhead results in expense. In fact, a recent German study found that the most profitable companies sold fewer products, had fewer customers and fewer suppliers.

Managing #3:
Keep it SIMPLE! Focus on what you do better than anyone else.

Apply the 80/20 Principle: 80% of the output is generated by 20% of the parts. This means that the most profitable 1/5 of your company (sales force, products, regions or whatever slice you want to take) is 16 times more profitable than the remaining 4/5. Make sure that this less profitable 4/5 is meeting a business need or eliminate it.

RISK FACTOR #2: Management’s Capabilities Fit Yesterday’s Requirements
This is related to Risk Factor #4, but much more tricky because there tends to be more ego, sweat equity and real equity involved. In most cases, once a CEO makes some of these tough personnel decisions about his team, he tells us that he should have done it 1 to 2 years earlier.

Managing #2:
Identify and plan for your company’s leadership needs for the next 3+ years. Create a clear, realistic and manageable exit strategy well in advance, and develop your bench strength in the meantime. Do not hesitate to make necessary management changes (we know, easier said than done).

RISK FACTOR #1: Sense of Invincibility
We call this the Titanic Syndrome. Pride and a sense of invincibility drive the most dangerous form of complacency (e.g., General Custer, Pearl Harbor, General Motors and Japanese imports, IBM). Since high revenue growth forgives many sins, fundamental problems are often lurking somewhere between the top line (revenues) and the bottom line (profits).

Managing #1:
Formalize an environmental scanning process as a reality check. Environmental scanning is broader than a competitive analysis because it looks beyond your industry. Of course, within your industry, you should also keep your eye on the leading (not lagging) indicators. Leading indicators are reliable predictors of what will happen in your business 3, 6 or 12 months from now. We also help clients fight the ‘expense expansion theory” (expenses increase proportionately with revenues) with a continuous focus on process, cost and efficiency.

Effectively managing these 10 Risk Factors will help your business grow bigger AND better.

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Article Tags: adaptability, agency oversight, alignment, backbone, complex system, customer demands, ethical responsibility, government oversight, legal exposure, mature companies, natural result, promotion practices, resource demand, risk factor, risk factors, stock option, urgency, vertebrae, wage and hour, wage and hour laws



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