Everybody wants their company to grow. And, to a certain degree, everybody knows that growth means scaling.
It can start out very simple. If you’re a one-person show and want to grow your business, you don’t have time to get all the additional work done yourself. So you hire somebody to help.
That’s just common sense. Two people can cover more ground than one.
The same goes for equipment. You buy more so you don’t have to go somewhere to subrent because the equipment’s already on hand.
It’s all about saving time. When you save time, you can do more jobs and earn more revenue, and your gross profit increases.
The problem with all this is that your net profit as a percentage of revenue will continue to decline as your company gets bigger. A company doing $1 million a year in business might have a 15% net profit. The same company doing $20 million a year might only have a 6% net profit.
That’s a lot more profit — because it’s a lot more revenue — but it’s not truly scaling.
If you grow your business with a scalable amount of overhead and resources, then your net profit should continually increase as you grow. This is intentional scaling.
Intentional scaling is growing revenue AND net profit at the same time. It’s a margin game.
True Scaling Is Not a Linear Process
The type of scaling many owners are familiar with is the idea that if they grow their business, they’ll have economies of scale built into their overhead.
In other words, they don’t need a larger building, or more bookkeepers, or another HR person because those resources will continue to work for a company that’s two or three times as large.
The problem is that this doesn’t bear out in practice. It may work as a one-time scaling maneuver that brings some short-term benefits. But it’s not sustainable, and it’s not intentional scaling because you haven’t fundamentally changed the way your business works.
Instead, we need to reframe scaling to apply to service businesses like ours.
We’re event people, selling services that use both inside and outside resources. What makes a business likes ours less scalable is having more inside resources than you actually need.
Most of the resources we put into our businesses are designed to save time and make things more expedient, but they aren’t designed to actually make more money.
Buying more equipment and hiring more employees seem like they will make you more efficient because those resources are on hand to move into the field. In the long term, though, this forces you to chase revenue to keep up with expenses.
It puts you into what I call a death spiral: selling empty revenue to pay for overhead so you can sell more revenue.
The problem is that you can’t sell more of what you want to because you’re too busy servicing your low-margin revenue. So you add more resources to make room for more revenue and get into a vicious, perpetual cycle.
Let’s say you do get a larger building, or you buy more equipment. Maybe you hire a full time HR person and a few more technicians. You’ve just taken on an ongoing cost for each of these before actually creating the revenue for them. Now you have to go find revenue because you have to pay for these things, when it should be the other way around.
Here’s the big takeaway: Many of the solutions we used to scale in the past are simply kicking the can down the road.
If you use them, you’re simply creating a problem for later. When later arrives, you create another problem for even later. Then, if revenue ever pauses or dips, you’re suddenly losing a lot of money, and you’re losing it quickly.
5 Steps to Intentional Scaling
If traditional ideas about scaling aren’t good long-term solutions for us, then what is?
Well, it’s not a single, linear process, like adding more equipment or staff. It’s an iterative loop, a series of steps that you go through again and again.
Step 1: Understand That Scalability Is a Top Priority
Scalability is essential for consistently profitable growth. This concept is the foundation for everything else. Grasp it, own it, and accept it.
Step 2: Keep Overhead Low
By keeping overhead low, your Cost of Goods Sold (COGS) is probably going to increase. That’s okay.
Be willing to accept a slightly lower margin on individual jobs in order to pay for outsourcing. It’s better than risking having to pay for resources when you’re not actually using them. That’s what drives profits down, and it’s the antithesis of scalability.
Look at how much of your overhead is dedicated to managing resources compared to what it would cost to outsource those same resources. This will show you the disparity in your cost basis.
Now here’s the secret: Save your overhead for acquiring and planning new business. (Learn more about how this works in my blog on the Post-Pandemic Operations Model.)
Step 3: Manage Capacity
Part of scaling your business intentionally is knowing when to say no.
Not all revenue is good revenue. You have to prioritize your assets, and that means saying no when a client or project isn’t a good fit.
Our industry has been overly focused on the top line for years, and what slips is the bottom line. In an intentionally scalable model, you focus on the bottom line in a repeatable performance mode.
Step 4: Turn Away Non-Ideal Work
On the surface, this sounds like the same idea as Step 3. But because the underlying mindset shift is different, it’s helpful to view them as separate things.
While managing capacity is prioritizing the use of your assets, turning away non-ideal work is a strategic shift to only taking on ideal work.
If your ideal work is increasing faster than your capacity, then you can increase your capacity. Just remember that in an intentionally scalable model, doubling capacity doesn’t mean doubling your equipment and technical staff. All you have to double is your procurement.
If you increase planning and procurement, you can double your capacity even with two people.
Step 5: Better Understand Job Costs (and, More Importantly, KPIs)
It’s always good to get a better grasp of job costs, but it’s even more important to improve your understanding of Key Performance Indicators (KPIs).
While you may find process or performance issues in the team on an individual job basis, it’s more important that you look at the blended KPIs across the entire business or segment of the business to make sure a group is performing well.
If they’re not performing well, then job costs are going to help you understand where the problem is.
Why the 5-Step Cycle Works
Following these five steps results in intentional scaling because:
- Understanding costs leads to more scalable pricing…
- Which teaches you to sell value instead of transactions…
- Which allows you to optimize delivery systems (operations)…
- Which reduces direct costs…
- Which allows you to go back and focus on the whole iterative cycle again.
That’s intentional scalability.
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