Welcome to No Man's Land

What do you mean by "scalable"?
Able to make money at much higher volumes. A new customer promise is going to add new revenue but also add new costs. Those costs don't start slowing down until out in the future somewhere. That's when you can get into trouble. There's a critical decision you have to make early in the process: "If I keep the business at human scale, I can make money because part of the profits are for my own individual efforts. But if I make a series of promises that gets me out of human scale--which means that the business has to become good at what I was doing on my own--I'd better be certain there's a profit zone we can get to in the future."

Let's talk about making the business good at what you were doing on your own. I assume that's where management comes in.
Yes. The entrepreneur thinks, "Omigosh, I can't do all this. I have these customers asking me to do things, and I need an organization that can deliver." The problem is, you don't have the right people in your organization. You have the people who started out with you and whom you promoted, giving them titles because you couldn't pay them. Your senior accounting person is now your CFO. Your top salesperson is your vice president of sales. And trust me, those titles are very important compensation to people. But now you need people who know what to do before the big increase in sales because of their experience. They aren't learning on the job. Well, you can't get those people unless you can give them the top title, and somebody else already has it. That person has to be replaced.

If you're going to make the passage through no man's land, you can't afford the risk of having senior managers who have never been where you're going. The challenges you'll encounter are the most difficult in business--much more difficult than those faced by larger companies because you can't afford big mistakes. A couple of them will kill you, and they usually come in this part of the process, the people part.

So now you're faced with the absolutely most wrenching, emotionally draining, cruel decision that any person ever has to make. How do you tell people who believed in you when you started, who stayed with you when you didn't have any money to pay them, who did everything you asked--how do you tell them they're not capable of doing what the company needs? I mean, it's brutal.

Did you have to do this at Tatum?
Yes, I had to do it. With people who'd been with me at the beginning. It pains me to this day. And more than anything in the world I wish some of them were still in the organization--just not in the jobs that they had. We were able to move a few people. That's always the first thing you try, but it rarely works. People don't give up titles easily.

Are you still friends with them?
I'm on talking terms with all of them. How you do it is important. When I let people go, I immediately went to work to help find them jobs elsewhere. I felt my responsibility for their well-being didn't stop when I made the decision to replace them. But even if it worked out better for them, there are still scars there. Then again, whenever I talk to CEOs who have gone through this, they always say they waited too long to make the change, and there were always dramatic results when they did. That was true for me, too.

Doesn't every company have these problems, whether or not they go through no man's land? We hear constantly from readers who are struggling with such issues. It's just the Peter Principle, isn't it?
Maybe, but other companies aren't under the same pressure. Actually, that's one of the wonderful things about being a small giant: You don't have to let all those people go. If you stay at a certain scale, they'll have time to learn what they need to know. But if you're going through no man's land, you have to bring in new managers. If you don't, the market will kill you.

Here's what I don't get. If the company has been so dependent on the entrepreneur's instincts and intuition, how do you replace that? How do you transfer that to the organization as a whole? I mean, look what happened to Apple after Steve Jobs was forced out.
That's actually one function you probably can't transfer to the whole organization. It's important to preserve the entrepreneurial ability and get the company behind it. If you lose it, you're going to be busted every four or five years, when you need to come up with a new value proposition. I think of it in terms of messing things up and then cleaning up the mess. By messing things up, I mean making new promises to customers that keep you aligned with the market as it changes. Those promises mess up the organization because it doesn't yet know how to fulfill them, which is very frustrating for the operations people. But they need to remember that if the entrepreneur doesn't keep making those bets, the company will stop growing. You can't just make one big bet and expect everything to work after that. If you get rid of the entrepreneur, if you decide you don't need a messer-upper, only a cleaner-upper, you will die a slow death--like Apple before Jobs came back.

Then again, if the entrepreneur is so dominating that the organization can never clean things up, you will die a fiery death. That tension between messing up and cleaning up is something you'll find in every company that sustains its growth over a long period of time. It's the balance of the two that keeps the company growing.

So making this transition doesn't involve putting the entrepreneurs out to pasture or giving them some honorific role, like "keeper of the flame."
Absolutely not. The entrepreneur's skill set is still important, but you'll never get a chance to use it unless you systematize the core value proposition and let people clean up behind you, which some entrepreneurs have a hard time understanding. Your ability to see around corners and make the right bets is crucial to the process. So is your respect for a group of people who have to deliver on the promises, who keep the business in alignment and growing. And it doesn't stop. It's an ongoing cycle with a new transition every few years. But the first one--no man's land--is the most difficult. It almost kills you, because you've never faced that situation before, and also because you may not have access to the capital you need to get to the other side.

Which brings us to the fourth M: money.
That's when you really start feeling that you're too big to be small and too small to be big--because you're too big to be getting bank loans secured by your personal credit and too small to be eligible for private equity. I did a study of banks. I asked them to tell me confidentially why they'd lend to small companies and to large companies but not to companies in between. They said, "We can't make money on loans to those businesses. If your personal credit score is good, we'll lend you money all day long. It's highly efficient for us. But if you start asking us for more money than you can repay--because your business needs it--we now have to depend on the business, right? Well, you'd better be asking for a lot of money. Otherwise we can't earn a profit on what it will cost us to figure out whether your business can pay it back. We won't even start that process unless you need at least $5 million." That's the crux of the problem. You're going from being scored on your personal credit to being scored on the business.