Sometimes fast growth is bad for your business

How does it feel to purposely halt your company's growth for a full year? "Extremely painful," says Pearce Jones, president of Design Edge, a high-tech product-development company in Austin. Yet at the start of 1998, Jones and Design Edge gulped and slammed on the brakes, realizing it would hurt even more if they didn't slow down.

It wasn't an easy decision to make. Company metrics showed that every new employee led to $150,000 in increased revenues. Sales had grown from six digits to $6 million since 1993.

But margins were a lot smaller than the 30% that Design Edge was shooting for. Spinning off a prototyping facility had been costly. Also, Design Edge was carrying a lot of debt from the purchase of a building in 1995 and frequent outlays for engineering equipment (as technology changed and the employee total jumped from 11 to 50). Among the company's concerns was that the slimmer margins would cause its profit-sharing employees to bolt for other high-tech companies that offered stock options and lush benefits.

And so, in pursuit of better margins, Design Edge began its great growth freeze of 1998. The company intentionally ceased hiring, deactivated sales and marketing, rejected new business, quit offering new services, and catered almost exclusively to existing customers. Plans for adding 5 to 10 employees and a second office were postponed.

It felt awful, but the results were wonderful. Profits doubled in 1998, and not a single employee left town. Design Edge also began a DiMaggio-like streak of 19 consecutive profitable months, building its cash reserves and bolstering its standing with the bank. Three small-business loans were consolidated into one. "Since we were funded on debt, our balance sheet looks a lot better, especially in terms of long-term liability," says Jones.

The year off positioned Design Edge to grow more comfortably in 1999. Already the company has hired five new employees and opened a second office. And the fat profits have enabled Jones and the management team to sweeten its incentives program, tangibly rewarding all the employees who were responsible for much of the growth in the first place. "Many of them have been here five years," says Jones. "It was time to return to them the investment they'd made."