When you outgrow smaller rivals and must compete with big corporations for the first time, you're entering a tricky stage of growth called No Man's Land.
As cautionary tales go, Robert Schell's is a good one. Back in 1999, Schell owned Avico, a business in suburban Chicago that provided e-consulting services. Within a few weeks of finding out that the company had made the Inc. 500, Schell realized that he had expanded too fast and that the market for his services had cooled. He was forced to close down Avico. Even as he negotiated with creditors to avoid bankruptcy, however, Schell was laying the groundwork for a comeback company. That business, Prism Innovations, is No. 126 on this year's list.
Schell is thrilled to be back, but as someone who's experienced victory followed so quickly by agonizing defeat, he has a unique perspective on the achievement. "If a company doesn't have the right foundation, it can fall apart like a house of cards," he says.
Though that's a scary thought for anyone who's toiled hard to build an Inc. 500 company, it's one that must be faced. Yes, you've succeeded to a degree, so take a bow. But at the same time, beware: There's still danger ahead. The well-known business researcher David Birch notes that just one in three Inc. 500 companies is able to keep growing fast enough to make the list for two years running. The reason for the falloff is that they face far greater challenges than the average business. They're competing with bigger firms. They're stretching the capacities of their founders. And as Schell found out, they're burning cash like crazy.
Consultant Doug Tatum has his own name for this stage of company development. He calls it No Man's Land. The founder of Tatum Partners specializes in helping entrepreneurs survive heady growth spurts. Tatum, 47, spent the early part of his career as an accountant before serving as chief financial officer at several companies. He struck out on his own in 1993, and today his Atlanta-based firm has more than 425 partners who serve as CFOs and CIOs to many fast-growing companies.
After watching hundreds of these businesses evolve, Tatum began to recognize that no matter what industry his clients played in, most were facing the same set of challenges by virtue of their size. It was about seven years ago that Tatum began describing this time in a company's life cycle as No Man's Land. "Basically it describes a transition that every company has to go through between being too big to be small and too small to be big," Tatum says. "Once you get through No Man's Land, you end up reviving that growth again. But if your growth slows down, you're stuck."
Tatum regularly gives speeches on the concept, and he's published a booklet outlining the idea. "Like human adolescence, No Man's Land should be a place of self-discovery, acquired discipline, and positive but difficult transition," he writes. "Unfortunately, it often becomes an agonizing battle between the natural tendencies of a lonely entrepreneur and certain immutable forces of growth. The result is confusion, frustration, stagnation, and loss of employee morale, which, if prolonged, can lead to financial failure." Tatum goes on to describe four hurdles facing founders during this stage. Even as they celebrate their inclusion on the Inc. 500, many of the companies on the list are already facing them today.
1. The natural limits of the "We Try Harder" model
Whatever their industry, most small, growing businesses share similar beginnings. A founder and perhaps a partner or two scrape together funding, often using credit cards and home equity. They pay themselves below-market wages, work ridiculous hours, and convince a few early employees -- by using equity, charisma, or sheer force of will -- to do the same. Customers are thrilled with the service, and by word of mouth the business grows.
Sounds great, huh? It is, but only for so long. Tatum calls this scenario the "high performance, cheap labor" business model, and it's rarely scalable. As the firm grows, the laws of economics will start to kick in. Over time, managers will be forced to hire folks who aren't as dedicated as the owners and early employees. Whether it's the 10th employee or the 100th, eventually someone begins delivering -- gasp! -- $10 worth of effort for $10 in wages. To get better performance, you'll need to pay more, which means you'll need to raise prices or accept lower profits. That's when the model starts to fall apart. When Tatum hears a CEO say his success is based on "outstanding employees" or "working harder," he can't help but suspect there's nothing unique to the value proposition and that the company's model may not support long-term growth.
Companies also fail to scale if they're too dependent on the founder's talents, which may not be teachable to the rest of the staff. Tatum describes the owner of a $40 million business that buys and sells used airplane parts. The key to the business, the owner told him, is buying the right parts at good prices -- it's a skill that he'd grasped instinctively. But despite the founder's efforts to train his staff, so far his employees seem to lack his intuitive feel for spotting good deals. Unless something changes, that means it's a nice small business destined to never grow large. After all, no matter how hard he works, one man can only buy so many used airplane parts. The key to overcoming this first hurdle, Tatum says, is ruthless self-awareness. There's nothing wrong with businesses that have made it this far based on the innate talents of the founder or the overachieving service of a core group of employees. But only when firms are sure they've found a unique value proposition -- one that works just as well with 10 employees or 100 -- should they move forward.
2. Customers' needs and expectations grow along with you.
Last spring Glenn Burgess got a call from a longtime client. Burgess runs Burgess Construction Consultants in Dallas, No. 281 on last year's Inc. 500. The company does quality-control consulting for large homebuilders. The caller said, "Gosh, Glenn, you don't call, we don't have lunch -- I never see you anymore." The comments blind-sided Burgess. In the early days, he'd spent most of his time with customers, but with $6 million in sales and 85 employees, he now found himself stuck in the office, managing employees. The call revealed to him that customers, used to dealing directly with the CEO, were beginning to feel neglected.
It's one of the typical marketing challenges that companies encounter in No Man's Land, and it's not limited to customers who demand face time with the boss. It's also apparent when firms grow large enough that they begin to divide marketing from production. The employee who drummed up new business used to be the same person who did the work. Now a salesperson gets the contract signed, then hands it off to a production manager. That can lead to miscommunication, overpromising, and lots of customer dissatisfaction.
