INC.: So you bank more cash than you might have otherwise. Have you turned down business in order to control growth?
BIRCH: Yes. We've said no to a lot of stuff that -- if we were just desperately hungry to grow -- we might have taken. That's been very conscious. And we've spent a lot of time thinking about which businesses we wanted to be in next, rather than stumbling into whatever opportunity happened to come along. I think it's been accepted as a strategy by everybody here.
INC.: Was that consensus reached fairly early in Cognetics's development?
BIRCH: Yes, at the very beginning. We were already analyzing the volatility of growth companies when we founded this one in 1983. And we said, "Let's not fall into this yo-yo pattern that other people are falling into." We didn't want to have to fire half the work force and bring them back and hire them again. It's very inefficient to do that. We decided to try to avoid extremes and still grow.
INC.: The peaks and valleys aren't inevitable then?
BIRCH: No. We've been able to avoid suffering any dips that would require a layoff and the negative effect that a layoff would deliver to corporate morale.
INC.: Have you ever chosen to operate understaffed?
BIRCH: Yes, we have. We've asked people to work very long hours for extended periods -- months -- so we wouldn't have to hire people and blow our savings. We knew that if we didn't work those hours the alternative was pain of another sort. Which poison do you want to take? We took the poison of extensive periods of being understaffed in order not to get caught out on the edge.
INC.: As you've explained it so far, your familiarity with the dangers of volatile growth has led you to rethink: one, the way you handle money; two, the kind and amount of business you accept; and three, the way you staff your company. Anything else?
BIRCH: Financing. We've been conservative in financing. Very little long-term debt, heavy reliance on equity financing and bootstrapping. We have consciously avoided financing that would put us in a vulnerable position.
We also have an elaborate financial control system that allows us to anticipate where we'll be in four to six months, based on a clear understanding of the relationships between when we will make a sale, when we will earn revenue for it -- which is not, for us, when we've made the sale but when we've done the work -- and when the cash is likely to flow as a result. We sit down and update all our estimates every week.
INC.: Are there ways in which this helps you that a more conventional accounting system wouldn't?
BIRCH: It gives us the ability to decide to do things -- buy equipment, hire people, rent more space, create new products, make investments -- with confidence that we aren't going to hit a wall six months out and lose it. And it leads to decisions that are commonly accepted by my management team. We all look at the same numbers, and we don't have battles over "I need more." It changes your whole management style; everybody becomes more cooperative.
INC.: Do all your employees have access to the information?
BIRCH: The entire management team does -- all the key players who are involved in making the numbers happen. Every Monday morning we go through all the numbers and come to a shared sense of what our most urgent problem is. And we allocate our resources in response to that. Is there a short-term cash crunch coming? Get out there and sell.
INC.: You've been describing very technical responses to what your research has told you to expect as a growth company -- ways you manage that are designed to avoid the trap of volatility. But I wonder, are there psychic and emotional benefits to understanding growth, too?
BIRCH: I think so. Absolutely. It's terribly comforting to know what's in store, to know what the normal growth experience is -- especially because it doesn't feel normal when you're going through it. It's soothing to have reasonable expectations.
INC.: It's the reasonable-expectations part I'm curious about. As a researcher you invented the notion of the late-bloomer company; you discovered that the great companies of today weren't born great and that often they languished for years. Does that at all shape your own expectations or the expectations of others at Cognetics? Certainly a lot of growth companies have problems when the elation and novelty of starting up wears off. You hear of their panic because of the fear that if they haven't made it big already -- jeez, we're three years old! -- they never will. They'll never be players.
BIRCH: A lot of companies get hung up that way. They get so anxious about their lack of growth that they start doing foolhardy things -- overleveraging, overcommitting to new business, overexpanding. They push growth to the furthest extreme they can find. That's exactly what kills them.
INC.: Does understanding the late-bloomer phenomenon change the sense of the future that you and your colleagues at Cognetics share? Does it make a difference?
BIRCH: An important one, I think. I remember vividly a meeting we had six months before we started the firm, in which we all sat down and said, "We all know the numbers. We know this is a 7-, 8-, perhaps even a 10-year thing before we have much to show for it. Are we prepared for that?"
