The Process Gap for Scale-up companies
It seems everyone is talking about Scale-up companies these days. The term has been around since at least 2013 (see for example this blog by Brad Feld). Two reasons why the term has become more popular are the publication of Verne Harnish’s 2014 book “Scaling Up”, and Sherry Coutu’s “The Scale-up Report on UK Economic Growth”, also published in 2014.
The scale-up report has a definition of what makes a high-growth company:
A ‘scale-up’ is an enterprise with average annual growth in employees or turnover greater than 20 per cent per annum, over a three-year period, and with more than 10 employees at the beginning of the period.
As you can see, it’s all about the rate of growth, and not whether companies are small or big.
There is a low success rate in going from start-up to scale-up. Sherry Coutu says: “…only a small group of start-ups achieve significant growth in revenues – just one per cent have sales of more than £1 million six years after they start“. Verne Harnish tells us only four per cent of US companies ever exceed $1 million in revenue. Geoffrey Moore uses a sports metaphor – if the first half of the ball game is starting up, then the second half is scaling up. And, as he says, half-time scores don’t matter to the final result.
What hinders becoming a scale-up? Coutu describes six gaps that have to be overcome. Her report is aimed at Government so some recommendations at gap-closing (the Evidence Gap, Export Gap and Infrastructure Gap for example) are quite macro-level. But other gaps are micro-level, likely to cause daily issues. The Skills Gap, for example, seeks to improve the ecosystem so scale-ups can find employees with the skills they need. and the Leadership Gap seeks to assist scale-ups building their leadership capability and getting the best out of their team.
Harnish thinks the gaps are overcome with a set of tools that cluster into four categories: People, Strategy, Execution, and Cash. For example, Strategy tools include the Strengths, Weaknesses, Trends (SWT) Worksheet and the One Page Strategic Plan (OPSP), Under People, the Function Accountability Chart (FACe) tool is used to ensure “right people, doing the right things, right”.
I think the gaps identified are valid, but I would add another: addressing the Process Gap.
Marc Andreesen wrote that “the life of any startup can be divided into two parts – before product/market fit and after product/market fit.” The scale-up company can be described as one successfully making the transition from BPMF to APMF. The key success factors are ‘unfair advantages’ and their prowess in execution, but they also fully understand the role of Processes to help them they make the transition. As a start-up, they had no or very simple processes. To become a scale-up, they need to remedy that.
When a company is in start-up mode, they can get away with no or sub-par processes. If other factors are still in their favour, they can survive this deficiency. If something is not working or turns out to have bad unexpected consequences, it can be fixed relatively quickly and cheaply. Experimenting with business models to generate more revenue is after all the main raison d’être of a start-up. Time, not money, is the main currency used for these experiments.
Scaled-up, the same broken processes can be expensive business mistakes. And, this time, the currency is cash.
Table 2.2 of the Scale-up report talks about common ‘growing pains’ experienced by scale-up companies. In the BPMF phase the main problems are hiring and culture change associated with company size (“I used to know everyone, but not any more”). In the APMF phase, scale-ups “typically need to introduce formal processes and staff with managerial and administrative experience in implementing these.” This can lead to a culture clash where the ‘old hands’ yearn for the informal ways that went before, and overcoming this problem requires good change management.
For the avoidance of doubt, I’m not referring to “process scale-up” as used in Pharma/Chemical engineering to refer to the scaling up of a manufacturing process from small-batch to full-scale production. My use is closer to the business process management (BPM) definition but even then, one could assume that basic processes such as billing, payroll, or invoice processing were implemented during the start-up phase. It can be true that scaling-up brings challenges to even basic processes, but I am more concerned with the challenges that get introduced as a consequence of scaling.
But what are the internal processes that are needed? The Scale-up report is vague on this, simply stating that “companies have specific requirements for capital, management, skills and organisational processes.” It’s true the processes needed for a B2B SaaS company may differ from those needed by a drug discovery company, but there is still a reasonably high level of commonality. Typically, the company starts with a Founder/CEO and some ‘makers’, whether they are chemists or software engineers. It soon becomes necessary to have extra people to look after the Sales and Marketing side. Then products get sold, and so Finance and Support are needed. One single product stream often becomes multiple products, so the need for efficiency of scale points to a need for QA, Product Managers, and Customer Success Managers. Hiring, talent retention and an increase in employee numbers brings the need for HR. If the number and variety of contracts requires it, there may also be a need for internal Legal.
Often, the triggers for introduction of Processes are external in origin. A scale-up company may come to rely less on ‘personal introduction’ sales and may start to respond to Tenders. At last, after all, they are able to comply with prohibitive rules such as “Bidder must demonstrate turnover of £1,000,000 and operation with a profit in one of the last three years.” The buyer’s Procurement office will want to see evidence of the bidder’s Business Management Systems – quality, safety, security, environmental, data protection, and more. Proof may be required, in the form of 3rd party certification. This is where e.g. ISO 9001 enters the story. Standards such as this are evidence that companies understand the operation of key processes and can confirm that the processes are carried out as planned. It used to be summarised as “say what you do and do what you say“, but in more recent versions you also have to prove it and use that evidence to improve it.
Here are some of the challenges that might keep the scale-up company management awake at night:
- What’s the most secure way to share confidential information with customers and suppliers?
- How do we keep track of customer and internal issues until they are resolved?
- We keep answering the same support questions, how can we be more efficient?
- We think customers are satisfied with us, but how do we know for sure?
- How do we know our products and services meet requirements defined by the customer?
- We start a lot of R&D work – how much is wasted on features that are never used?
- Should we rate each of our suppliers for the quality of their work?
- We have files stored everywhere! How can I find anything?
- A customer wants to return a defective product – how do we handle that?
- We’ve got distributed development teams, how do we help them collaborate?
- Are our IT systems secure? Could we lose data/information too easily?
- We have lots of new staff. Have they all been trained equally and adequately?
- How do I tell Engineering to start/stop/change work on a feature request?
Have I missed something obvious? Feel free to let me know via the comments.
These are high-level questions. There will also be scale-up issues in existing processes, for example, a customer evaluation sales step might become hindered by delays in NDA sign-off by Legal, which then delays rate of customer acquisition.
What you will find is that each company has a set of “process engines” that drive the individual parts of the company. Ideally, you’ld chain these engines together and they would provide the end-to-end operational needs of the business. There would be no gaps and no overlaps. Ideally.
I wish at this stage that I could refer you to the definitive ‘cookbook’ where you would find all the recipes for Process success needed to scale-up. Perhaps unsurprisingly, it does not exist (or, at least, I have not found it yet). But what I can at least promise is a follow-up post that will look at some ideas for doing so. More to come!
This post was written by Paul Walsh.