The Paradox of Scaling

The very strategies that fuel the early growth of a B2B company become barriers to growth at scale. To take your company to the next level, make these five shifts.

Forget the S-shaped growth curve. In reality, the growth of most companies looks more like a series of steps, where punctuated growth spurts are followed by abrupt periods of stall. Over the years, I’ve observed this pattern of spurts and stalls while advising mid-market companies, in particular. They’re especially prevalent among Business-to-Business (B2B) companies, whose distribution channels, branding methods and partnering strategies present unique challenges when it comes to growth and scaling.

 In my experience, a common stall point occurs when a company transitions from its early growth stage to growth-at-scale. This may happen at different levels of revenue and headcount, but the symptom is usually the same; growth that once came easily becomes harder to find and the company suddenly finds that it has to scrounge and scramble to sustain the pace of growth.

 Paradoxically, the causes that underlie this symptom are usually the very actions that fueled the company’s early growth. Many of the strategies and tactics that support a firm’s initial success — including its customer mix, go-to-market strategy, sales processes and the like — later become barriers to scale. To continue on its growth trajectory, B2B companies must reverse or discard these strategies and tactics.

 Consider the process of launching a space shuttle. A spacecraft relies on the thrust of solid rocket boosters to escape the gravitational pull of the Earth. But once it reaches escape velocity, those boosters must be jettisoned or else they inhibit the ascent of the rocket into outer space.

 So it is with companies. In this article, I’ll explain several key shifts that companies must make to effectively scale, while offering guidance on how to foresee and prepare for stall points. Stalling is not inevitable; in fact, if you proactively sense and respond by making these shifts, you can position yourself better for growth at scale. 

 The Five Shifts in Scaling

Think about the key dimensions that define your business - Who your company targets as its customers and markets, how your company organizes its people, manages internal processes and generates revenue and where your company reaches its customers and partners. The five shifts apply to these dimensions. These shifts are illustrated in Exhibit 1. Let’s examine these shifts to understand what they mean for your company as it prepares to scale.

Exhibit 1: Five Shifts for Growth at Scale

1. Customer Selection: Opportunistic to Strategic

In the early stages of growth, your company needs to approach new customers with an opportunistic mindset. In this phase, no customer is a bad customer. No opportunity is too small. Bottom line, you need lots of new customers to generate revenue.

But there’s a more tactical reason to cast your net wide. Engaging with new customers enables you to probe and experiment with different segments, scenarios and markets. It helps you find your “sweet spot” by learning which customers respond best to your offering. Every new customer you sign on is validation of where your products or services are getting traction in the marketplace.

As your company grows, however, you need to rein in this opportunistic approach and become more strategic. Establish a framework on which to measure the value of every new customer, every new product and every new market. Stay focused and disciplined. Learn to say no to opportunities that seem lucrative but don’t fit within your strategy. To broaden your revenues, you must narrow your markets.

Consider the example of EXL Service (EXL), a New York City-based operations management and analytics company where I served on the Board of Directors for over a decade, during which the company grew from $100 million to over $600 million in revenues. When I joined the Board in 2005, EXL was very opportunistic in its choice of customers. With clients in insurance, banking, logistics and utilities, the company’s customer base was dispersed across a wide range of industries and sectors.

Over time, however, EXL observed that its value proposition was resonating particularly well in the insurance industry. Insurance companies were more comfortable with outsourcing customer-facing processes (e.g., claims and accounts) to third parties like EXL relative to, say, U.S.-based utility companies who had significant regulatory and political constraints in outsourcing. In addition, because these kinds of processes represented a significant percentage of the insurance companies’ operating costs, many firms were eager to find partners who could reduce those expenses.

So EXL chose insurance as its lead vertical, and it paid off. Today, the company is widely recognized as the go-to company for insurance process management. In 2015, when I left the board, almost 50 percent of EXL’s revenues came from the insurance industry. EXL is well-established as a leader in insurance business process management and counts many of the top insurance companies as its clients. More recently, EXL has taken the same focused approach to the health care industry and to the business of decision analytics. 

2. Routes to Market: From Ownership to Partnership

While your company is in the early-growth phase, you should be very hands-on with the business. Don’t outsource sales and business development. Try to control every aspect of the customer experience while building relationships with them. Early in the game, this “ownership” approach has a number of benefits. It makes your company more agile, allows you to learn about the end-to-end customer experience and gives you the knowledge to fine-tune your products and services. But this strategy will eventually run out of steam. At some point, you won’t have the bandwidth to do everything yourself.

 That’s when you need to change gears. Transition from “owning” the entire route to market to leveraging partners who can help you scale your access to customers and markets – an approach that I call scaling through OPC (Other People’s Customers).

 Intuit, for example, used OPC to scale its accounting software for small businesses, QuickBooks. To reach new customers in the small-business market, Intuit focused on developing relationships with people and organizations that already had direct access to these customers: namely, accountants, accounting firms and professional accounting organizations. Once Intuit had earned the loyalty of these “key influencers,” they in turn encouraged their small-business clientele to adopt the QuickBooks product.

 As a result, QuickBooks now consistently controls 75-90 percent of the market of small businesses that use an accounting program (In FY2015, its total paying customers were 2,276,000). That market dominance has also helped Intuit get its newest product, QuickBooks Online, into customers’ hands faster. Less than one year since its launch, the online product has 1,075,000 subscribers.

A partnership between Microsoft and Dropbox serves as another example. Thanks to partnership that Dropbox forged with Microsoft Office, Dropbox users can now edit Microsoft Word, PowerPoint and Excel files directly from their web browser. They can also access all of their Dropbox files directly from Office Online without leaving the site. This partnership gives Dropbox much broader visibility and access to new customers, in addition to receiving a branding boost through its association with the tech giant.

 A word of caution: Several companies I’ve advised have learned that if you outsource product development too early, you will lose the agility and level of quality that comes with doing it yourself. So don’t work with partners or give product development to external vendors too early in the process. Dropbox waited until it had a strong customer base before it teamed up with Microsoft.

 To find the right partners, ask yourself - who can reach the customers you want to reach? Can you access those customers by partnering with these gatekeepers? Who will give you the maximum reach? Whose customer bases match well with the customers you want to target? 

 3. Demand Generation: From Relationships to Brands

As a company, how do you get your first customers? Often, and particularly in the B2B space, customers come through people you already know. Relationships give people the confidence to take a bet on your product or service, even if they know nothing about your company. Your Rolodex can be a great tool for building your customer base.

But this strategy doesn’t work long term. There are only so many people in your network and so many relationships to leverage. To reach new customers and get them interested in your products or services, you need to contain the equity of your relationships and transfer it to a brand.

A brand serves as a proxy for a relationship. It opens doors to new customers and markets. It gets you into the consideration set for a larger group of customers. It gives you a shot at winning new business without having any personal ties to the client. With an established brand, your company can reach a larger market and build new relationships while your strategic account managers look after existing relationships. Not only does this enable your company to scale its customers, but it will lower your customer acquisition costs.

Once you’ve taken the trust that people have with your company and migrated it to a brand, invest in marketing communications to expand your reach. This will serve as “air cover” for your company while your sales force is busy working as the “ground troops.” But don’t spend your marketing dollars too early; otherwise, you won’t reach or built trust with enough customers, and that money will just go to waste.

For EXL, personal relationships helped build the business for 12 years, as clients enjoyed the high senior-management touch. But because that approach wasn’t sustainable or capable of scaling the company, EXL invested in a formal marketing program four years ago, hiring a highly seasoned team of professionals. One of the first goals was to build EXL’s brand with industry analysts at research firms such a Gartner, Everest Group, NelsonHall and Hfs Research, which publish annual rankings and reports about companies in the technology and business process outsourcing space. Those rankings and reports heavily influence the buyer community, and EXL was hardly even dabbling in it before.

Since responding to RFIs from these firms, EXL has increased the number of rankings it appears in (35 compared to 15 a decade ago), elevated its reputation as a market leader and increased its sales pipeline.

In addition, the marketing team launched an initiative focused on publishing thought leadership papers penned by EXL’s top leaders. The goal was simple: To strengthen the company’s reputation as “big thinkers or deep thinkers” in the market, thereby distinguishing itself from its competitors, whose capabilities were similar in nature. These thought leadership assets are now downloaded from the company’s website three times more than info sheets, case studies and brochures combined. Investing in low-cost social ads (i.e., $1,000 ads) has also amplified this visibility, generating 80,000 impressions for one thought leadership paper.

4. Operations: From People to Process

Early on, your company’s greatest asset is its people. For instance, you need great sales people and account managers to gain traction in the marketplace, win new business and deliver exceptional service to customers so they keep coming back. Great people will fuel your company’s growth.

However, that approach doesn’t scale. As your customers and accounts grow, it will become increasingly difficult to for you to monitor, coordinate and prioritize them without putting a process into place. You also run the risk of losing the knowledge and expertise of your key people if any of them decide to leave the company. At some point, you must stop relying on the heroic acts of your people and start instituting processes that enable and support them. 

EXL went through this transition with its sales strategy. Years ago, the company trained its inside sales team — staffed by callers based overseas — to produce sales leads by contacting lists of potential buyers. That team was largely left to its own devices until a few years ago, when the company started to take a closer look at their performance and processes. The company realized that the offshore team was negatively impacting ROI because they weren’t using best practices in lead generation, such as drip campaigns or prepared messages for a target audience. By implementing a new set of processes, the team went from producing 10 percent of EXL’s marketing-originated pipeline to over 50 percent.

 Sometimes, processes don’t grow as fast as companies do, and that leads to breakdowns. It’s important to be proactive at building your process muscle. Invest in processes for people management, product management, project management, financial management and so on. Apply similar thinking to hiring and recruiting; establish appraisal methods and protocols for talent development for the purposes of fairness and equity.

 5. Organization: From Fiefdoms to Federation

When a company gets started, its structure is usually quite simple. With only a few offerings and small number of employees, most companies are organized along three different dimensions: products, geographies and vertical markets. Leaders of product teams focus on product development and product marketing. Geographical leads focus on growing sales and profits in their country or subsidiary while leaders of vertical markets focus on building industry-specific solutions and maximizing share within targeted vertical markets.

Initially, this focus and specialization is optimal; it allows a company to develop customer experience, product expertise and market expertise to compete effectively. However, over time, targeted expertise can promote “fiefdoms” within a company, where leaders are focused on maximizing results within their own silo. This compromises the overall performance of the company, leads to a lack of coordination across groups, lowers sales efficiencies and creates a fragmented customer experience.

To get past this organizational problem, company companies need to connect their fiefdoms into a “federation” of loosely connected units across products, geographies and vertical markets. Aligning activities across silos leads to better outcomes for all concerned.

Consider the example of Bahwan CyberTek (BCT), an IT services and platforms company that I have advised for more than 10 years. A global provider of software products and solutions, the company is divided into product teams (who build solutions for clients) and sales teams (who deliver projects to clients). Each team separately manages its own profitability.

Years ago, BCT’s sales team was in the midst of negotiating a major project with a large client. The client demanded a 10 percent price cut on the project, so the sales lead approached the product lead for help. But the product lead resisted, arguing that he had his own profitability numbers to protect. The two teams were at an impasse until BCT’s CEO intervened and asked them to put their heads together and see how they could respond to the client’s request. After looking over the client’s requirements together, the teams realized that they could shave costs in several areas, as the client didn’t need all the features, services and support built into the project’s cost structure. By stripping off these extras, the product team was able to bring down its cost in a way that protected its margins. BCT won the project, and it turned out to be lucrative.

To move towards a federated model, company companies can employ three strategies: joint incentives, joint planning and joint accountability. Joint incentives involve creating incentives that reward the overall performance of the company in addition to rewarding the performance of the silo. With this strategy, employees are motivated to engage in cross-silo collaboration because they only win when their colleagues do. You can achieve this by linking product sales incentives to geographical sales incentives and vice versa. Joint planning involves putting people together to sign up for sales targets, whether organized by segment, geography or product. These kinds of meetings can promote empathy across teams and silos. Finally, joint accountability involves making all silos responsible for customer success and customer satisfaction. This reduces the tendency to “pass the buck” on accountability.

The idea here is to take the targeted expertise within each silo and connect it across the organization, enabling the entire business to scale strategically.

Managing the Transitions

As your company embarks on these shifts, keep these finer points in mind.

Know when to throw the switch. Don’t wait until your company hits a stall point to take action. Be proactive in watching for the warning signs that your company is nearing the zenith of early growth, and then start the process of transitioning. For guidance on how to spot these warning signs and when to initiate change, review the diagnostic questions in Exhibit 2.

Understand that transitions are a journey. In practice, the shift from one strategy to another is not as extreme as these illustrations might suggest. Shifting involves a transition period and your company will always operate a hybrid model for some time and to some degree. For example, after your company has shifted from “Opportunistic to Strategic,” it should still explore new opportunities to acquire customers while retaining a strategic focus on its target markets. Similarly, after your company shifts from “People to Process,” you may want to mobilize a team to incubate a startup while simultaneously upholding processes at the company headquarters. This is more about blending tactics than exchanging the old for the new.

Prepare to rinse and repeat. Undergoing these shifts is not a one-time event. Each time your company’s revenues grow tenfold, you may need to revisit this equation and initiate a new course of action. In addition, it’s likely that your company will live through multiple categories of shifts rather than a select few. In Exhibit 3, Fieldglass founder Jai Shekhawat — who was my student at Kellogg more than 20 years ago — describes how his company experienced all the shifts while growing from a small startup to a company valued at over $1 billion over a 15-year period.

The key message - what brought you here will not take you where you want to go in your growth journey. In fact, the very strategies that are essential to your early growth become a millstone around your neck as you seek to scale. By understanding the paradox of scaling and being proactive in making the five shifts, you can better position yourself for your own scaling success.

*****

Exhibit 2: Signals to Watch in Making Strategic Shifts

Exhibit 3: Living the Scaling Paradox: The Journey of Fieldglass

Fieldglass founder Jai Shekhawat recounts how his company underwent the five shifts and became the world’s largest VMS provider

By Jai Shekhawat (as told to Mohanbir Sawhney)

Here’s how I think about the scaling paradox: The seeds of your future destruction are being sown by you today. Or, to put it slightly differently, the very things that make you successful today will destroy you tomorrow.

 As the founder of Fieldglass, I’ve seen this play out firsthand. Growing my company from a startup into a global organization wouldn’t have been possible without changing our business strategy at various “break points” along the journey.

 It started with our first customers. When I founded the company in 1999, I wasn’t exactly sure who our customers were or what specific problems we wanted to solve in relation to managing a flexible workforce. Were we a big-company solution or small-company solution? Did we fit into a particular marketplace? Where did the problem of workplace management start and stop?

With these questions still unanswered, we approached new customers opportunistically, and ended up with a series of bad deals — one with a small hospital, another with a consulting firm and another with a procurement marketplace. That’s when I decided that the problem we wanted to solve belonged to a large organization. We had to get strategic and go after that target customer, which meant succeeding quickly or failing fast.

It took a year and a half, but we closed a deal with Verizon, followed by AIG, GlaxoSmithKline, Johnson & Johnson and Allstate. Everything flowed downstream from there. Focusing on a target customer gave us the direction to design everything from our help desk to legal contracts, pricing and marketing materials. All of our customers had similar problems, and they all wanted us to bend into a similarly shaped pretzel.

We made the mistake of forming partnerships right away, however. Right off the bat, I tried to outsource product development with a local firm. We should have focused on owning the team that was building it, because we didn’t exactly know the contours of the problem. Within two months, I discovered that the firm was doing something completely different than what we needed. I brought the product development back in house, and decided that I’ll never outsource anything that I don’t know how to do myself. Later, we formed a very controlled partnership for offshore development. We also partnered with staffing firms after deciding that we were a technology company, not a company running the technology operations. And following the acquisition by SAP, we have a partner that provides access to new big-house accounts and has helped us reduced our sell cycle a lot.

Making the shift from people to process was crucial to our sales growth. Initially, it was me and a couple of other guys selling everything. Then we got to a point where I was able to remove myself from the deal. Once we figured out our sales process, it became repeatable. It took us six years to close our first 40 customers. Then, in the seventh year, we closed 40 customers, and from there it grew to 50 or 60 a year. Last year, we did 80. This year, we’ll do 120.

Our brand was part of that, too. Our brand identity is that we are a high integrity, highly reliable, trustworthy place that will not let our customers fail. But we didn’t arrive at this brand through some marketing slogan; it came from the behavior of our people. We’re solid people. We’re not flashy, but we’re there for our customers. If we screw up, we confess and apologize and get to work. Now, we are literally in every RFP because we are by far the largest vendor management system in the world. Our revenue retention rate is better than 99 percent.

The move from fiefdoms to federation is as much a mindset as it is structural. The natural tendency is to act like a fiefdom. You have to prevent that state from ossifying. For us, the customer is central to our federation. My thesis is that you have to make boundaries porous, which means that everyone in our firm is expected and encouraged to connect with relevant people at the customer site. What ends up happening is deep relationships are built. An idea exchange takes place. People get really creative.

One of the ways we compensated our people is to create a win when the company wins. When the Madison-Dearborn transaction took place, I took $16 million off the top of the deal and distributed it across the board. We also accelerated all option vesting. So we had fairly new people in London, for instance, who got a ￡40,000 bonus check, completely unexpected. When the SAP transaction took place, I took another $18 million of the top and did the same thing. I don’t want to cross the finish line by myself. I want the whole team to be there with me.

Jai Shekhawat founded Fieldglass in 1999 and served as its CEO until August 2015. In early 2015, Fieldglass was acquired by SAP for $1 billion.