Scaling Up Your Business

From Richard Lowe at Hewlett Rand

• Scale-ups are dubbed “powerhouses of productivity”. Scalability refers to a company’s capacity to grow and cope with increased output while, simultaneously, keeping costs more or less at the same level.?
• This article seeks to provide some helpful pointers to help you scale your business.

?The phrase “scaling up” or “scaling” a business has become a staple in business circles in the past few years. Some use it as a synonym for growing a business; others have adopted a more restricted and technical definition when applying the term. In a nutshell, scalability refers to a company’s capacity to grow and cope with increased output while, simultaneously, keeping costs more or less at the same level. The UK’s?ScaleUp Institute?bases its definition of a “scale-up” on that of the Organisation for Economic Co-operation and Development: it is a high-growth business whose number of employees and/or turnover increases by more than 20% per annum over a three-year period, with no fewer than ten employees at the beginning of the period.

Scale-ups are dubbed “powerhouses of productivity”. For example, in the UK, scale-ups propel the growth engine of its economy. As of 2020, there were 33,955 scale-ups with a total turnover of over GBP1.2 trillion and over 3 million people in employment. Despite constituting less than 10% of SMEs in the UK, scale-ups contributed to 50% of the total turnover output by SMEs. This pattern is not a unique phenomenon exclusive to the UK, although the distinct segmentation and the label “scale-ups” are not so readily applied to high-growth companies elsewhere.?

What are the benefits of scaling up?

Higher output without a jump in costs

An important benefit is neatly encapsulated in the difference between simple growth and scaling-up. Growth is often conceived in linear terms: an addition of resources (i.e. capital, people, technology) leads to a proportional rise in output or revenue. Scaling-up, on the other hand, means achieving output or revenue growth without needing to input more resources, such as hiring an extra employee to cope with rising demand. In the ideal scenario, such growth should increasingly outpace costs. It is closely tied to the concept of economies of scale, where the average cost per unit falls as the number of units produced increases.

More attractive to investors

Besides reaping the benefits of economies of scale, scale-ups generally represent a more attractive investment proposition. According to a study conducted by?McKinsey?in 2020, “real value” lies in being able to scale new businesses. Venture capitalists are indeed the ultimate arbiters of precisely this value. Referring to an analysis of data on US venture capital investments, the report states that two-thirds of value generation takes place when a business scales up to significantly increase market penetration. This is reflected in the fact that 63% of the USD135 billion invested by US venture capital firms in 2018 was used to help thriving start-ups achieve scale-up.?

Is there a right time to scale up?

While there is no one-size-fits-all answer to this question, an overriding piece of advice would be to ensure that you have adequate resources at your disposal to underpin the scaling-up. Subjecting your systems and processes to rigorous stress testing on a regular basis can help you home in on any previously unidentified cracks and mitigate risk – before things get tough. In particular, the elasticity of organisational systems and processes needs to be carefully assessed to ensure that they can be scaled without causing a spike in costs. The increase in revenue should outpace that in costs, coupled with a stable profit margin.

Here are a few relevant questions to consider:

• What are the implications of a turnover rise for your operations and availability of resources (i.e. finances, people, inventory and space).
• Is your cashflow healthy enough to handle the delay between incurring costs and receiving payment?
• Is there sufficient demand for your product or service?
• Are all your processes running more or less like clockwork with minimal hiccups?
• Is your operating model fit for purpose?
• Do you have the right team with the right set of skills?
• Do you have the right strategic alliances and partnerships in place?
• Which digital competencies and new technologies do you need to acquire to support your scaling-up ambitions?

?Setting a clear strategy is a must

Competitive as it may be, the business scene is always abuzz with wide-eyed start-ups eager to try their hand at entrepreneurship, but the harsh reality is that many of them end up falling by the wayside, with a staggering?80% failing to reach full scale-up. Why? One of the main reasons is the lack of a well-defined, solid strategy to help steer the business in the right direction. A sound strategy should act as a roadmap consisting of choices and commitments that enable a company to maintain its competitiveness in the marketplace. It shows how a company plans to use its resources and capabilities to scale up and, more importantly, to create, provide and capture value.

Put a fresh spin on your business model

Many aspiring scale-ups fail to adapt their business models accordingly. A common pitfall is not going through enough rounds of iterations when a company is trying to come up with a successful, on-the-mark offering. With everchanging customer demands, it is vital to ensure that the product or service on offer exactly fits customer needs – like a key to a lock. While it does not necessarily have to be an innovative or disruptive offer, the value proposition must be regarded as being integral to solving a customer problem.

According to?MIT Sloan Management Review, the first method adopted by world-renowned companies to achieve scalability is through adding new distribution channels. The right channels enable the company to deliver its value proposition at the right time and to the right customer. By mispositioning your offering through an ill-judged product–channel combination, you may risk diluting your brand value – with your product or service falling into the hands of the wrong customer.

Invest in technology

The second method to achieve scalability is “freeing the business from traditional capacity constraints”. It is practically impossible to scale up by taking a strictly hands-on, manual approach. With the helping hand of cutting-edge technology, it is nowadays far easier to build a scalable model, allowing companies to transcend the usual capacity limitations imposed by the finite availability of resources and to further leverage the benefits of economies of scale.

To maximise the utility of all available resources, employees, in particular, cannot be bogged down in manual drudgery. This can lead to burnout that will not only hurt your employees but also your business, especially at a time when your attention cannot afford to be diverted elsewhere. Processes will, therefore, need to be automated as much as possible to enlarge the scale of production, as well as to increase product quality and delivery efficiency without the need for additional input. Redirecting human efforts to focus on high-end work, such as strategy formulation, building customer relationships and tasks requiring the application of cerebral skills, allows companies to give full play to their employees’ value-adding contribution to scaling-up endeavours. Where labour-intensive work cannot be automated for one reason or another, it is advisable to outsource such functions to professional third-party providers.

Invest in your people

Company growth goes hand in hand with talent development. Employees will need to be equipped with appropriate skills to help your business bring the scale-up to fruition. According to?the Scaleup Annual Review 2022?published by the ScaleUp Institute, addressing the skills gaps is a top-of-mind priority for most scale-ups in the UK, with 80% of them reporting difficulties in hiring the right personnel with specific skills or for specific roles. It is no wonder, then, why 62% of scale-ups cited access to talent as one of the top barriers to further growth.

The most sought-after skills by scale-ups are people management, resilience and flexibility, judgment and decision-making, cognitive flexibility, and emotional intelligence. To address this skills and talent gap, 8 in 10 scale-ups are investing more in training and reskilling – as well as in elevating the “employee experience”, which, besides boosting talent engagement, involves offering non-financial rewards, such as memberships, discounts and other non-pecuniary benefits.

Having a robust talent development mechanism in place, leadership competencies at scale, and a founder CEO and top team working in alignment constitute several of?the foundational pillars?of a successful scale-up. In the early stage of the scale-up journey, a mindset shift should occur – from “expert” to “people” leader and from “technical” to “adaptive” leadership. Key roles within the organisation need to be identified and the talent engine increasingly refined. In the progressing stage, a “deep bench of talent” should be fostered and the founder CEO’s distinct leadership persona passed on to teams. At the height of the scale-up journey, metrics for performance management as well as for diversity, equality and inclusion should undergo a reassessment. In addition, the emphasis on leading the organisation becomes more pronounced than that on leading teams.?

Build the right alliances

It is necessary to adopt a scale-up mentality to all aspects of the business, including in its approach to building and extending partnerships. While it may seem counterintuitive at first glance, it is not uncommon for competitors to become partners or even customers. In fact, it is a method by which a company can achieve scalability. By the same token, customers and partners can assume varied roles in the ecosystem, too. For example, small biotech companies partner up with pharmaceutical giants to commercialise their products, and small software companies leverage the platforms of big software and IT services providers to market and distribute their products. As with any partnership in whatever context, it is a relationship requiring time and effort to cultivate and maintain. It is also worth sounding a note of caution against being caught up in unwise alliances, which may do more harm than good to your brand. Therefore, make sure to conduct proper due diligence beforehand, and carefully consider the ways in which the partnership will add value to your business.

What Hewlett Rand can do to help your scale up

Hewlett Rand’s mission is to develop talent for lasting change and we have developed a bespoke top team training programme for scale-ups called ‘Dragonfly Academy’. Our programme builds leadership capabilities for sustainable growth, using a blended approach of facilitation, skills training and coaching tailored to meet the needs of your top team and business. Interested in learning more? We offer a one hour no obligation exploratory meeting to discuss our approach and how we can help your top team to scale up.

Article produced in partnership with CW CPA.

#scaleup #leadership #teamdevelopment #training #highperformance #SkillsToScale #SkillsToGrow