Croft's Law

If I was going to put my name to something, of all the possible choices, I think it would be this…

“The bigger the company is, the less efficient it will be”

Of course there is a well established theory called “Economies of Scale”, which includes factors like buying power, sharing of resources, investing in bigger and better equipment etc.??But my experience of real life, over and over again, is that big companies are inefficient and annoying to deal with compared to small ones.

For example, getting paid for a training course.??The small company emails me to confirm the date and then after the course I email them an invoice and they pay me.??The large company sends me a contact beforehand with a purchase order number, and then I have to be onboarded as a supplier, and after the course the SAP system takes months to pay me, often after numerous emails and phone calls to various managers.??It’s always like this, and never the other way around.??Imagine this multiplied a hundredfold throughout every part of an organisation!

So Croft’s Law, based on no formal research, and probably refuted by academics, is “The bigger the company is, the less efficient it will be”.

Why would this be the case?

Here are 13 reasons!

1. More levels of management: given that you can’t really manage more than about ten people properly, when companies reach hundreds or even thousands of people you can’t avoid having multiple tiers of management.??This means you are paying more for these managers, especially as managers of managers have to be paid more. And you also, inevitably, get the second problem:?
2. Communication gets more garbled in bigger companies – we can’t help selectively changing the message before we pass it on, often unconsciously and sometimes with the best of intentions.??So by the time a message has come down from the CEO through several layers of managers to the people at the coal face it’s often quite different. Communication is ALWAYS an issue in large organisations.?
3. Coordinating everyone to go in exactly the same direction is never going to happen, so there have to be resource losses.??Different departments won’t be quite aligned, and the people in a department also won’t be quite aligned.??We’ll never all be pulling the exactly the same direction, and the bigger the company the more directions get pulled in.??In extreme cases you get silos and political wars, but even in a good company you’ll get problems of alignment. Production want big batches and long lead times, sales want short lead times and low prices, engineering want high quality and beautiful designs,??- it’s always going to be complicated, and will be worse if they aren’t sitting right next to each other but are in separate departments.
4. Big companies are more likely to tolerate the occasional really bad person. (Compared to startups where EVERY person really matters).??It’s amazing what people get away with in large government and in large private organisations.??All you need is a bad boss, perhaps with a bad bosses boss, and it gets very opaque.
5. People are further away from the money and further away from the customer.??This is a big one!??In big companies many people never meet a?customer, so why should they care about quality and delivery dates and costs???And most people in large organisations have no idea about?costs?– the costs of materials, labour, mistakes, time, rework, lost orders, handling complaints, the cost of meetings etc.??And they have no idea of?value: how profitable is a job, how important is a contract.??Sales know about value but not costs.??Purchasing know about costs but probably not value.??Nobody else knows anything.??But in small companies you feel the pain if you lose an order, you feel the pain every time you buy something, and you feel the joy when you sell or deliver something.??Everyone feels everything.??
6. Following on from the detachment from finance, there have to be systems to make sure people don’t waste money, and some of these inevitably get distorted.??For example, budgets which have to be spent by the end of the year or else you lose the money - rather than really thinking about what you spend. And situations where you can buy one thing but not another because they come from a different budget, or you have to use a useless supplier because they are the one that’s “on the system”.??Haven’t we all been there?
7. Systems get exponentially more complicated – a company that is ten times the size probably has systems that are twenty or fifty times more complicated.??And complicated leads to stupid.??So you end up with people saying “Sorry but it’s the system, I have to do it like this”.?The front line people are embarrassed by the clear ridiculousness of what they are having to do.??They KNOW it!??Systems in large companies are often set up for the benefit of the finance department, rather than the customer.??Sometimes they are designed to save money but the loss in effectiveness at the front line leads to lost sales that are much bigger than the cost savings.
8. One of the touted economies of scale is that you can negotiate more effectively with suppliers.??But in reality there will be fewer suppliers who are big enough to supply you, and they will be big and powerful to negotiate with – so you’re not better off at all.??Especially if the buying is done by a purchasing department who are not the final users of the item, so they don’t understand the technicalities of it, and don’t care about the quality of it.??Is that really more efficient???(A quick example, one of my customers, a HUGE cleaning company, saved money by buying thinner waste bags for their cleaners.??But the thinner bags were more prone to bursting, so the cleaners quite rightly double-bag everything, resulting in much higher costs, not lower.??Classic!)
9. Rivalry and politics are much more likely, in fact inevitable, in large organisations.???Once you don’t know everyone, and you don’t know what their real performance is like, so you are effectively interviewing them or judging them by how good they are at gaming the system, or by what other people (their allies or enemies?) say about them, you have the wrong reason for promotion and things will slide from there.??People will make decisions based on survival, security (e.g. take the safest option) or looking good, or their department looing good, rather than what’s best for the company.??People may even rise until they reach their level of incompetence, where they stay (or get promoted further to get rid of them!) and you don’t need many incompetent senior managers for the organisation to get badly dysfunctional.??
10. Another inevitable tendency in large organisations, which many people assume is a GOOD thing, is increased specialisation.??Instead of people doing their own buying, for example, you get a buyer, and then a buying department with buyers who only buy certain parts. Instead of doing their own HR you get an HR person and then you get an HR department with people who each only know about a small area of HR.??The same with IT, maintenance, engineering, sales, everything.??So then if there is any change (which is resisted in big companies for this and many of the above reasons) there will be problems: people don’t know how to cover for each other, or??you only need ? of a person and there’s wasted resource, they can't cover for each other when they are busy or away, but worst of all there’s no general understanding, nobody can see the big picture.??Does the left hand know what the right hand is doing?
11. Inertia: it’s harder to change anything in a big organisation, just like trying to change direction of a giant supertanker.??There are too many systems to change, and too many people whose interest is to keep things the same.??Once you have an empire, or specialist knowledge, you won’t want to let go of it – your actual livelihood is at stake!
12. The type of people who choose to work big companies are more likely to value stability, not getting in trouble, the security of having known systems and rules.??This type of person is less likely to be innovative and to question the way things are done and adapt to change.??Let alone to?drive?change.??
13. Finally, larger salaries are often being paid out in large organisations than would be paid by a small company for the same jobs.??Is this because pay is slightly out of control in larger companies???Are departments competing for the good people???Do they have to pay more to get people to work in a stifling environment???I’m not sure, but it does seem to be the case, so that’s yet another cost that larger companies have to carry.??

So why do large companies exist?

Maybe there are some things, like maybe building cars ….actually no not that, Ferrari and Ariel and Alpine do just fine, or…. er, …..well anyway there must be some things like smelting aluminium or something where you need big equipment to do it.??Yes, got one!??Supermarkets, they do have to be big, I think.

And there are some genuine examples of economies of scale, like maybe the parking and baggage handling at Heathrow airport, oh, no, sorry, bad example – but how about the increased efficiency of a big hospital, - OK maybe not that – but anyway, there must be?some?examples of economies of scale that ARE true, (although not as many as people might assume).?

And of course you can still make a profit, in fact more money in total, by being a big company, even if it’s less per person employed. Check out some real numbers: it’s easy to compare turnover per head between small and large companies, and the larger ones tend to have lower turnover per head, (and lower profit per head), but a higher TOTAL profit since they have more heads.??So the message is clear: if you want more profit: expand!??Even though you’ll be less efficient.?

So there you have it:??Croft’s Law: “The bigger the company is, the less efficient it will be”.

Do you agree? Or disagree?? Send me your stories in the comments!

Onwards and upwards

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