Last week I was at the Inc. 500 Conference listening to Doug Tatum, CEO of Tatum LLC, an executive services consulting firm. He's also the author of No Man's Land, What to Do When Your Company is Too Big to be Small but Too Small to be Big.
I didn't really know what I was in for, because I haven't yet read his book, which was the basis of this session. Since there were over 200 people in the room, it seemed there was a lot of interest in what he had to say. Doug defined No Man's Land as "fatal" for many businesses. Let me see if I can illustrate his graph with words.
The left hand side of the line graph showed smaller companies having less than 25 employees, which was higher in relation to the area for No Man's Land. These companies are highly innovative and probably very productive.
But get much bigger, and you start to enter No Man's Land—the huge middle area of the graph that slumped down. This is where the millions of businesses that are trying to power through growth end up. According to his statistics, 350,000 U.S. businesses survive this downward slump and make it out of No Man's Land. These are typically companies that have more than 100 employees. In comparison, only 50,000 to 75,000 businesses make it beyond No Man's Land into the safe zone. However, these companies are responsible for 65 percents of America's jobs.
See how important small businesses are? It's pretty scary in my opinion; only one in 10 companies actually survive No Man's Land.
Doug then asked the room: Do your objectives fit better as a small giant or do you want to go through the transition of No Man's Land? It was a great question for all of us because depending on your objectives it's OK to go either way.
Let's look at Doug's 4 M's when entering No Man's Land: your market, management, model, and money.
Realign with Your Market & Customers
As a CEO early on you have your hands in everything. You have one hand in the operations and one hand on the customer. You can make promises you can deliver on. Because of this you are simple to do business with.
But as you grow, there's a physical limit to your ability to direct the operations of your business. So other people take your place in making promises to the customer. These people may not have the instincts or judgment you have, and you may end up with a misalignment between your company and your customers.
To get through this, Doug says you need to follow this rule: identify a value proposition that's unique to what you're good at. The business has to focus on your same strengths in order to re-create market alignment. Everyone has to be on the same page -- your page.
He has one important note about this strategy: It's ok to build a business around your personal talents, but you won't scale to 200 people that way.
You need to also ask yourself, Are there promises I made that looking back I shouldn't have? I know early on at VerticalResponse we took on some customers we probably shouldn't have. Over time they were asking us to do things for them that other customers would never benefit from. This trend had us focusing resources away from many customers and focusing on one, which wasn't the business we were growing into. It wasn't scalable at all. We had to let a few customers go. Did I choke because of the revenue loss? You bet, but these promises weren't scalable. When you're small you want to keep everyone happy, as you get bigger you just can't.
Hire Your Senior Management
Doug outlined the most terrifying emotional transition any entrepreneur can go through which is hiring their management team. If you want to enter No Man's Land, you can't have everyone on the management team learning how to build a large company. It's a very dangerous position to put yourself in.
Doug mentions that the some people in your inner circle will have to change. Not all of them will make the transition. He illustrated that loyalty was the ticket to your inner circle in the early stages. Those team members were there when you couldn't pay them. The truth is that you are going to need people who know more about building a business than they do. The new ticket to your inner circle needs to be performance, not loyalty.
I know VerticalResponse went through a stage where some of the people who got the company going and growing were at a point where they started to halt the growth of the company. I'm sure the employees at the time recognized it long before I did it, but we had to let them go to ensure that the company would maintain its growth and the shareholders would continue to be happy. It has been and continues to be one of the hardest parts of my job. It never gets easier.
Doug's final point on hiring? As you get bigger your number one job is picking who should & shouldn't be on the team.
Understand Your Model
Early on as a small giant you can be profitable and scale because you're efficient. As you scale you hit fixed costs and you need to make sure to add more infrastructure according to what you can afford. Ask yourself, Where are the profit zones in my industry?
He talked about high-growth companies and how even as a profitable company you could dip into the no-profit zone if you're not careful. A shocking thing he pointed out was that if you hire someone at $56K annually, the capital market equivalent would be borrowing $300K, or a seven- year 8 percent note!
Rule: Your value prop must be scalable!
At my company, we became profitable in 2005. We've maintained profitability while investing our profits back into the company to grow it. But it's not easy. This year we're at the point where we need to put more money than we ever have into infrastructure to scale our business. Luckily we recognized this early in the year so that we could budget for it.
Doug's point for this "M" was to watch your cash at all times. Even in a downturn, many businesses have an increase in cash. Why? You liquidate receivables. You are careful not to hire. You watch your bottom line. His point was that statistically you're more likely to go out of business in the upturn not the downturn.
Rule: It's all about reducing real and perceived risk of the company.
Adjust your business model for reality now. Generate your capital out of your business.
Doug hit a few nerves with me, that's for sure. He started off his session saying he would be our doom and gloom guy, and he proved it! But hey, that's OK. If we're not feeling what Doug is talking about, either we love being small giants, or he scared us into staying small giants! It's our own decision to go big or stay small. Thanks Doug!