Sunday, July 19, 2009

Confusion

In early June, I had lunch with the CFO and COO of a mid-sized company that has been experiencing 20% Y/Y top-line revenue growth for the past few years. While waiting for our lunch to arrive, I commented that they must be quite happy with the growth they've experienced in these "tough economic times." (They can't be too tough if companies are still able to experience growth rates like this, eh?)

The COO replied that he was quite happy but that the growth had come at a cost: he is too busy dealing with the current business that they have. As a result, so he is unable to get some longer-term goals accomplished. One of these goals is to write a Standard Operating Procedure manual that would explicitly state the means by which the business operates; the manner by which sales translates into dollars; the method by which paper travels from start to finish.

"You mean you don't have your processes documented currently?" I asked.

"No," he replied. "In fact, some employees use this as justification for their lack of personal accountability. And that is upsetting."

Upsetting indeed. One of the largest reasons for companies failing after growing to a company-specific point is the lack of recognition of one fact: processes are established to ensure that continued growth of the company does not affect its ability to service its customers.

More clearly put, processes exist for two reasons.

1. They define how the company should operate today.

2. They account for future growth, so when that growth happens the company is already operating in a manner that can allowed it to continue to enjoy success.

The net effect of the first item is that, when processes are poorly defined or are not defined at all, the company operates in a less efficient manner; the quality of the output is not predictable and can possibly waver below normally accepted thresholds; and ultimately the company ends up assuming the burden of unnecessary risk. This could have far reaching effects, since not only could this materially affect the bottom line but some industries have to abide by government regulations where incarceration is the penalty for not following them.

To see why the second item is important, consider another example.

There once existed (note the use of past tense) a company that had a good sales process defined. But as the company grew, existing customers started dropping because the Account Managers were ignoring them to pursue new sales opportunities. (No post-sales account management roles or responsibilities had been established.)

Because the Professional Services division was ad hoc in nature, when customers balked at the price of the deal the Account Managers immediately reduced the number of days for Service Delivery that were sold, which resulted in poor implementations. (There was no formal methodology for delivering the product that was sold so the sales teams could not appreciate the importance of this aspect of the sale.)

Finally, there were no good provisions for training new Account Managers so that they could start producing as quickly as possible. (This one is less obvious. When the company was smaller, it enjoyed top-line Y/Y revenue growth of 70%+. However, as the company grew accordingly the ability for it to scale was mortally hampered by the lack of good training for the new hires. Instead, they were put into a one week class, sometimes with no prior exposure to the product, and then were expected to meet a USD$2mm annual quota.)

As you can imagine, the company eventually faultered and, after the sales organization missed their annual quota by nearly 40%, ultimately ceased to exist.

The point that I have hopefully made is that, even though there is an investment of time and effort to understand and document the correct way that your business should operate now and in the next 1-2 years, the payoff is significant. Not only will you be able to operate at increased capacities due to the elimination of inefficiencies, but you will also have happier customers because the fruits of the labors of your business will be better as a result.

1 comment:

  1. I wish I could identify the name of that company

    ReplyDelete