Over the past 20 years, I have observed 10 recurring risks for growing business and have helped clients address them. Understanding how these risks apply to your business and proactively managing them will help you sustain growth.
These first five risks apply to growth businesses in varying degrees. Generally, the risk factors are more prevalent in younger companies with higher growth rates and less prevalent in mature companies with lower growth rates.
#1: Betting Against the Law
Companies tend to take little risk with operations compliance due to agency oversight, customer demands, and ethical responsibility. Growing companies typically take much greater risk with employee-related compliance such as:
- 401k deposit requirements
- Equitable pay and stock option practices
- Fair selection/promotion practices
- Wage and hour laws
Although compliance in these employee-related areas also has government oversight, it does not possess the same urgency as operations compliance. That's why employee-related compliance typically gets put on the back burner during periods of growth.
Managing Risk #1
Prioritize areas with the greatest legal exposure and the highest resource demand. Consider outsourcing, automating, or at least streamlining activities associated with these areas. More and more companies are outsourcing areas that require any compliance with outside governing bodies (e.g., health benefits, savings plans, recruitment). Outsourcing is not necessarily a less expensive option but it does:
- Reduce liability
- Improve focus of resources on your core competencies (what you do best)
- Capture otherwise missed opportunities.
#2: Underdeveloped Operational Infrastructure
This is the most common risk factor we see. Most growing companies are so focused on their ability to produce now that they spend little effort on building the operational infrastructure to sustain their growth over time. We define infrastructure as "systems," the second vertebrae on the organizational backbone. Systems include:
- Work procedures
- Communication channels
- Information processing
- Performance management
- Rules and policies
- Goals and measures
- Rewards and recognition
- Staffing and selection
- Training and development.
Many senior executives mistakenly equate "infrastructure" with "overhead." We are referring to the operational infrastructure required to go effectively to market, care for customers, generate revenue, and sustain competitiveness.
Managing Risk #2:
As an acid test, think of your business as a franchise that you sell. To what extent have you built an operational infrastructure that transcends your employees and management team? Streamline your manual work processes before you tinker with your technical systems. "We need a new computer system" is an easy crutch, but it results in many companies simply automating their own inefficiencies.
Creating the appropriate level of operational infrastructure will enable you to work on your business rather than in your business. This will help you address a common frustration we hear from our client CEOs. Winston Churchill said, "For the first 25 years of my life I wanted freedom. For the next 25 years I wanted order. For the next 25 years I realized that order is freedom." The appropriate amount of infrastructure can free you up to work on your business rather than in your business.
#3: Declining Product and Service Quality
This risk factor is generally a direct result of not managing Risk Factor #9. It is a result of prolonged lack of attention to operational infrastructure, but its negative impact on a business is immediate. In a nutshell, customer needs get obscured by growth needs.
Managing Risk #3:
Break the "growth for growth’s sake" paradigm. Shift your business model and employees’ focus to profitable growth.
- Educate your employee that it is five times more expensive to acquire a new customer than it is to sell more to an existing customer.
- Refocus on your customers’ needs and related processes to meet those needs. It is a real paradox that with all of the "Customer is King" corporate propaganda, so many companies can still lose sight of their customers.
#4: Inability to Capture Key Data
This risk factor results in inefficient data collection, slow decision-making, and poor performance management (all the way from corporate results to individual production). When companies do not manage this risk factor, they rely on what we call "Gut Feel Management"--a scary scenario when it comes to financial projections.
Managing Risk #4:
Keep measurement simple. Identify and focus on your company’s key success factors and corresponding measures. Remember: What gets measured gets done. Then integrate your systems (after you have streamlined your manual processes) to capture the data you need.
#5: The "Diligence" in Due Diligence is Missing
A majority of mergers/acquisitions do not meet performance expectations, and it starts at the very beginning of the due diligence phase.
Managing Risk #5:
Create a due diligence process (it can be boiled down to checklists) and team, then stick to them. The team can be used as an effective developmental assignment--but do ensure that there's reasonable continuity on the team. Assess people/cultural match issues--this is the biggest reason for what we call post-merger indigestion.
Look for my next column for the next 5 risks.