Are you post start-up and sub-10 million in revenue? If so, a fascinating and important study was recently released that provides information essential for the future growth of your business.
Gallup and an organization called Truespace performed a study of almost 2500 businesses. They were from different industries, of different sizes, of different years in business, and with owners of different races and genders. They made some fascinating discoveries, the first of which is that none of the variables I just mentioned had any material bearing on performance. But they did find some common factors that did. (To see the full 43 page report, click here. )
I found the information both interesting and important for its implications at a societal level as well as from the perspective of the individual business owner. While start-ups and large public corporations suck up most of the commentary, they aren’t the most significant drivers of employment growth. Businesses that have survived several years and grow to between 20 and 500 people have a more sustained positive effect on job creation.
There are roughly 2 million post-startup businesses with revenue under $10 million. If just an additional 10% of them achieved 10% annual sales growth, they would add about 17 million jobs in North America. Therefor, as a social project, it seems obvious that we all win when small businesses improve and move towards mid-market.
At the individual level, what I’ve observed is that, when a business achieves sufficient scale a reliable leadership team is in place, defined processes exist and clear markets are targeted, the owner has greater flexibility to achieve lifestyle objectives or other ambitions. But the challenge is how to get into that mid-market range.
Firms that finally reach the $2 million mark but are growing at less than 20% per year fall out of favour with investors; they are frequently too small for professional services support; and they lack the necessary attention to attract top talent. At the same time, having reached a level of financial comfort after years of struggle, many entrepreneurs are loath to risk it to grow more.
Contrary to popular mythology, most entrepreneurs are, in fact, not risk takers. Instead, they are optimists. When they start the business, they just cannot conceive of it not working. As a result, they aren’t fully cognizant of the risks. When running a business turns out to be harder than they anticipated, many are more likely to hunker down at a comfortable level than they are to pursue continued growth. But that is only because that next level of growth looks harder and riskier from that position than it really needs to be.
The Gallup study points the way to hitting that next level of growth.
They studied the 2500 companies, some of which exceeded 10% growth and some of which generated less. It was in an effort to determine what variables accounted for the difference. They found 4 conditions for success, each of which had multiple components. From these 4 conditions, they derived 9 particularly impactful elements.
The first and most significant condition, which I’ve seen to be true over and over again, is that of Alignment. During start up, folks tend to play “catch as catch can”, chasing revenues anywhere they can find them. But what do those who enjoy consistent ongoing growth do? They align their time, team and money to focus on clearly defined markets or segments where they can scale, in the context of a clear plan for achieving major milestones.
This requires a compelling and distinct point of view, which might involve unique offer or a clear unique value proposition. The final part of this alignment is agreement among the owners that finding, selecting and developing talent is one of their core strategies, where the target market values that talent and what they offer.
The next most significant condition is what they call Endurance. This is where employees (and other stakeholders) can and are willing to endure the journey. This is a function of 2 drivers: Compensation and Engagement. Compensation isn’t just wages and salaries, but includes benefits, wellness and non-monetary compensation. Engagement is the outcome of a psychological/emotional connection to the company.
The most critical factor for this is credibility of the company’s prospects for success in the minds of the employees. In other words, do they view the leadership team as pragmatic and capable of meeting forecasts or objectives? The second factor is meaningful recognition. The most successful businesses use 3 or more different types of recognition.
The third condition is Discipline. In other words, can the business scale; does revenue climb at an escalating rate as resources are incrementally added? This means improving efficiencies, looking past short-term operational concerns and building capacity for continual improvement.
The keys to this are tracking relevant KPI’s (Key Performance Indicators), defining performance metrics for employees that are aligned with incentives, and the formalization of rules and expectations (e.g. harassment policies, data security protocols). Interestingly, one of the most predictive elements is the extent to which the company has regularly scheduled performance reviews. In my experience, those who are not breaking through to mid market level do reviews only once per year, with the excuse that “we’re too busy.”
The final condition is what the authors of the study called Predictability, by which they mean the extent to which decision-makers are continuously learning. The key drivers are: management of the company’s sales pipeline, including both new leads and cultivating loyalty to create repeat customers, use of financial data to set and communicate performance objectives and having a culture of honesty, grounded in use of facts and data. In my experience, most small business owners under-use their financial data, whereas successful mid-market owners relay on it.
There is clearly a lot there to think about. So, the study went one step further to break down the top 9 drivers across the various conditions in terms of their statistical significance in driving growth. You can use this as a checklist for yourself. Ask how you’re doing in each of these areas:
1. A clear plan for milestones (From Alignment) This is the reason I start off all my clients with a strategic planning exercise.
2. Attracting and developing talent (From Alignment) Articulating and developing a high performance culture supported by a strong set of recruiting, onboarding and performance management systems are what I find encourages this.
3. Credibility of leadership (From Endurance) Too often, staff working for entrepreneurs dread the “idea of the moment”; the new idea, process, initiative the owner comes up with this month that will just die like all the others. It undermines credibility. Again, in my experience, having a realistic strategic plan along with a system for accountable execution flips this around quickly.
4. Point of view (From Alignment) I find that most small businesses don’t have clarity on their unique value and therefore risk being seen as just like everyone else. Working on clarity of markets and the value you provide creates distinction
5. Oversight (From Discipline) This is traditionally thought of as a board of advisors or an auditor. In practice, it can be any outsider who creates accountability for you.
6. Health Focused Benefits (From Endurance) If the health and wellness of people are promoted and, more importantly, valued, you create higher loyalty and productivity
7. Leads (From Predictability) It is remarkable how many entrepreneurs rely only on referrals or on just one or two marketing tactics with little or no system for measuring and testing.
8. Compensation (From Endurance) This is down at number 8 because it is table stakes. It won’t necessarily drive performance, but if it is inadequate it will certainly undermine it. Don’t be cheap with great talent.
9. Renewals or Repeat Business (From Predictability) This means having an intentionally designed set of offerings or steps in the customer experience that builds relationship and encourages customer loyalty. I find that designing the customer journey often follows quickly on the heels of creating the Unique Selling proposition.
So, how are you doing on these drivers? I know it can be daunting. However, data doesn’t lie. If you want to move from small business to mid-market, this is your checklist.
Use it wisely.