The Challenges of Growing Too Quickly

As we’ve seen independent creative marketing and digital firms experience rapid growth over this past year, David offers five factors that principals should consider in order to avoid growing for the wrong reasons and/or mismanaging that growth.

Sketchnote by Emily Mills

Transcript

Blair: David, our topic today is Managing High-growth Firms. I think this is probably a very timely topic we are recording at the end of March 2021. While there is still some economic strife in parts of the economy and parts of the world, the world we serve, independent creative marketing and digital firms, does not seem to be adversely affected. I think you correct me if I'm wrong, but like me, you're hearing lots of stories of rapid growth over the last year. Is that correct?

David: Yes. Is this your way of calling me out for my prediction that 20 or 25% of firms would close? Is this what you're getting at? Because if you are, just get it over with.

Blair: I forgot all about that. Thanks for bringing it up. Now that you've brought up your track record, I have every other prediction you've ever made right here. You've got a D minus

David: Yes, this is a half-hour show. We're not going to get to all of them. I see, oh my goodness, so much optimism out there. Part of it is just probably a contrast with 2020 where it wasn't just the bad, it was the uncertainty about the good or the bad. I see people, they're nervous about whether they should grow again, but the opportunity seems to be there. You're seeing the same kind of optimism?

Blair: Yes, absolutely. We had a planning meeting yesterday, and one of the team members put on the issues lists pandemic backlash, like an economic backlash to whatever's going on. The rest of us effectively laughed it off and said, no, we're riding the rocket ship.

David: My wife was on a trip. I went out to eat, and they had a special for date night. You could get two entrees for the price of one.

Blair: You ordered it.

David: Yes. I'd like you to meet my secret date here. I'd like to order two. That's how optimistic I felt recently. I'm on dates without other people.

[laughter]

Blair: That's perfect. Okay. Again, I think this is a timely topic. Managing high-growth firms, or specifically, the challenges of managing high-growth firms. Can you define high-growth for us to start?

David: Yes. I think it would have a lot to do with where you are on this cycle, and how many partners that are at the firm and all kinds of other things, probably, but we need some sort of a boundary, and the one I set is not related to economic measurements at all. The reason is because you could make some significant change at your firm, and your financial results could jump a lot, but there would be no additional management hassles at all. To me, management is almost always about people. I want to measure growth in terms of how it impacts the body count at your firm. Body count is probably not the right phrase here.

Blair: We can call it headcount.

David: Headcount. Yes. Thank you. You're always keeping me from stumbling on something here. 30% year over year. If you've got 10 people now and a year from now you've got 13 people, it's not like it's magic, like the fourth person in that equation would be a complete washout. I don't mean it like that. It's just a rule of thumb, about 30% year-over-year growth in headcount.

Blair: Okay. I've looked at your notes here. There's this big fundamental question that you start growing quickly. It appears to be a fundamental question that you have to face. What's the question, and how do you think about it?

David: The question, and this is what I wish people would ask because growth means so many things, good and bad, but the biggest thing it means is how your role will change. Are you open to what growth requires of you? Which means less doing and more managing, up until a certain point. Then above that level, it's just all management all the time.

As a smaller firm, which is where most of our listeners come from, it's really is about moving away from doing to managing. Nobody grows up and says, "I want to manage a firm like this." In fact, most of them don't even grow up and say, "I want to work at a firm like this," but nobody grows up and says, "I want to manage a firm like this." If you don't embrace the notion that growing means a different role for yourself, then you will inevitably leave some things undone that will make the firm's growth pretty painful for your team especially, but maybe for your clients as well.

Blair: I think it was one of the first things, maybe even the first thing I read from you before I even knew you. The line growth isn't good, period. Growth isn't bad, period. Then I forget what the third one was, but it was back to this idea of accepting the fact that your role has to change. If you're willing or desire for your role to change, then embrace growth, but the message is if you want to keep being that practitioner, if you want to keep doing the craft, then you only want to grow so much.

David: Yes, it's exactly right. That perspective is difficult to maintain in this business world. You even think about we're known as-- the US anyway is known as the land of opportunity. It seems like opportunity is good. Why would we say that? You look at fast-growing unicorn firms. It's not profit, it's not anything, but the fact that they're growing, we get to the point where we worship that, or you even have phrases like, "If you're not growing, then you're dying." That's not true. That is just not true, but that is the way we perceive the way business works.

It seems like we are stepping back from an ideal situation if we say, "Nop, I understand what growth means, and I don't want it." I think, again, growth is not bad at all. Growth can be really good, but it just needs to be managed well. What we're talking about, I guess we could do an episode on how do you manage things if you aren't growing, but this is about, all right, you have the opportunity to grow a lot, how should you think about that? How to avoid growing for the wrong reasons or mismanaging that growth?

Blair: Again, you're using the term growth to talk about headcount. There's a fundamental underlying principle in a capitalist economy, even a mixed economy, that growth is a requirement. We don't actually have an economic model that would serve us in an economy that isn't growing. There's lots of discussion these days around economists and others about the fact that we're manufacturing growth through various means, including monetary means.

Actually, it was the first thing I heard that stuck with me in my first economics class, was this idea that growth is a requirement. Growth is required for an economy. I thought, "That's unsustainable." I thought that for decades, that's unsustainable. Then, in the last few years, I've got my head around the fact that I think it actually is sustainable.

David: Think about our system of paying people, too. If somebody isn't making more two years from now than they are now, they feel like something is really wrong with them in the marketplace, right?

Blair: Yes. I remember, a few years ago, listening to an episode of The Soul of Enterprise, Ron Baker and Ed Kless's podcast. Ed Kless made the point, people listening to this podcast in 100 years, they will be grappling with the global issue of how do you create economic success in a world where the population is declining? That's interesting. Some of these macroeconomic issues we're bringing back to the firm, we see this requirement to keep growing headcount

We've talked about this before in an episode recently. I forget what we called it, but I wrote an article called The Complex Battle for Margin, on which that episode was based. This idea that you are pursuing economic growth, and in particular, bottom-line growth, but what you inadvertently end up doing is driving headcount growth and top-line without affecting your margins. That's a different issue, but this is a complex subject, this idea of growth, but let's bring it back to what we're talking about here. When you're growing your headcount at 30% or more, it creates a whole bunch of people challenges. Let's walk through those challenges. Where do you want to start?

David: Yes. Another way to phrase it is, if you can figure out how to manage these five things here today, growth will be less painful. It will be more intentional. I keep thinking of two books at the opposite ends of this spectrum here. You have Company of One by Paul Jarvis, which I think is brilliant. Then you have One Billion Americans, I don't think that's the title, but the Matthew Yglesias book, and how that impacts our views on immigration and all of that. The truth isn't one place. The truth is at many different points on that spectrum based on what matters to you.

These are some ways to manage. If you are predisposed to growth, if you can think about your growth opportunities through these five lenses, you're less likely to make a mistake. That first one is funding. I don't have any moral or ethical problems with debt, but debt really is-- It's leverage. We call it a leverage. It works as a lever. It magnifies the potential for good and it also magnifies the potential for evil, so to speak, if there's failure.

Fast-growing firms, one of the things that I asked them to do is to grow as fast as they can funded by cash, not because there's an ethical problem with debt, but because cash acts as a natural speed governor in a situation. You feel like you really need to grow because this is an unusual opportunity. 2021 is coming, but that means you need certain people. You can't afford to hire people right now. Instead of stopping right there and saying, A, is this growth too fast, or B, why don't I have that money to grow? Instead, you just paper over that and it enables you to ignore that situation which should be solved in another way.

In a high-growth firm, a natural break is to use cash instead of leverage. That's a perspective that some of you won't share but it's one that I do believe in.

Blair: Then you can take these high-growth firms and you can put them into two different buckets or two different ends of the spectrum based on when they get paid. If you've got really favorable terms, like somebody hires you or buys a training program from us, they pay in advance or at least the bulk of it in advance. Then, if those are your standard payment terms, funding is less likely to be an impediment to growth. If you get paid later and you've got to deal with bad debt, et cetera, you might need to fund growth. You're saying, whatever you do, don't incur debt to fund growth.

David: Right. You and I have talked a lot about constraints, and I've learned a lot about constraints from you, especially when we did that first event together around IP. I think lack of cash is a constraint that we shouldn't relieve the pressure from unnecessarily. Just embrace the constraint and figure out how to work around it without borrowing money.

Blair: I was just listening to Drew McLellan's podcast the other day, Building a Better Agency, and he made this offhand comment I'd never considered before. I thought of you. This is in your wheelhouse. He said, "You shouldn't have too much cash in the business. Because you have too much cash in the business, you make lazy decisions." You defer the difficult decisions around personnel, et cetera.

It had never occurred to me before that the idea that you had too much cash-- A lot of businesses out there are stripping cash out of the business and moving to another entity. Then if they need it, they'd lend it back. I think that was Drew's idea. That's how you should do it. It's okay to put a little bit of a cash constraint on the operating business knowing that you can always lend it back.

David: I think that's very smart advice. I think I've heard that from him in another context, and it really just resonated.

Blair: All right. Challenge number one when it comes to managing high-growth firms is funding. Again, we're defining high-growth as an increase in headcount above 30% per year. There's this fundamental issue you have to address around growth. Do you want your role to change? If you're growing this fast, you are certainly moving into a management position and getting out of the doing business. We've got five challenges you're walking us through. The first one is funding. The second one is loosened hiring standards. You're hiring so quickly. It's like any warm body will do. Is that the issue?

David: Right. You drop from LinkedIn to Craigslist to hire people. We beat up people pretty freely when we see something we think ought to be different, but this is an area where I think our industry does a really job in hiring people. I think, in general, I see very few hiring mistakes. They know what questions to ask. They know what to expect of new people. They know how to involve others in the decision. It's really pretty good.

What happens in a situation where you're growing quickly, you need fresh bodies. This system that you've perfected, slowly over time, which might involve multiple interviews. If it's an account person, you have the client talk with them first. There might be different testing, background checks, whatever it is, and you just compress those a little bit. You loosen your hiring standards because you don't have the time to be thorough, and because of that, a bad hire slips through.

This isn't nearly as big or catastrophic as messing up the funding thing, but I do see it happen. Inevitably, when you make a bad hire that needs to be reversed, it comes from loosened hiring standards. It's not that you don't know how to hire good people.

You either know-how or you don't. It's more about following those processes because you feel like you have the relaxed time or you have three days to think about something instead of having to decide tomorrow on a candidate because something else is coming up.

Blair: I have to share this with a friend of mine. She's the HR person for a tech company that's growing really, really fast. She's in charge of increasing the body count or the headcount. The CEO still insists on interviewing every hire. She was quite frustrated with that because they can't keep up to the growth. There's this dance. I'm thinking of the episode we did on tension. Some tensions need to be resolved. Probably this one won't be. There's this dance between keeping the quality high and keeping the growth there. I guess you're saying, you don't want one to dominate the other.

David: If there's a constraint that you need to hire people quickly, then, yes, re-examine the process, but don't compromise. Follow your instincts. It's your instincts that are so finely honed from your own experience and from networking with your peers all the time. Follow your instincts.

Blair: I have to say I was a little surprised to hear you say that you thought we in this industry in the creative professions are pretty good at hiring. I don't know why that surprised me.

David: You don't see that.

Blair: I haven't thought too deeply about it. I don't know. I'm not involved in hiring decisions anymore. I used to advise firms on hiring business development people, and sometimes we offer some advice to that on that subject, but that's a difficult position across the board. I think that one's always difficult, but the other ones I hadn't thought about it.

David: I think overall, the industry is really good at it. Partly culture is so important to people and they're usually aligned around certain north stars and they're smaller firms. There's this phrase that a firm in the UK came up with, I forget what the firm's name is, but they call it the quit and stay employee. You can't have that happen at a firm that's really small. They can't hide. I think they're good at it.

Blair: All right. Number three on your list of challenges to manage in a high-growth firm is compressed orientation. Do you mean the orientation of new people?

David: Exactly. This was an interesting thing to explore for me several years ago. I happened to be at an event that I was doing that had a lot of multiple partners from the same firm there. Just as an experiment, and I don't not even know what prompted it, I said, "All right, take out a slip of paper. We have one assumption here that you've hired a good person. There's no hiring mistake here and it's not an intern. This is somebody that should be contributing. How long should it take for that person to begin contributing at 100%? Write that down in number of weeks or months."

The answers that I got from different partners at the same firm were wildly different. I thought that was really interesting. I never really did anything with it. Some people said two weeks, other people said probably six months. I don't even know what my perspective on that is. I just thought it was pretty interesting. When you have a lot of work to be done and you need a capable body, what you'll tend to do is throw them behind enemy lines instead of running them through the orientation process.

Now, if you don't do things any differently than anybody else, then it doesn't matter that much. As long as they know how to track their time if you're still doing that at your firm, then they'll be fine. If you have certain standards of customer service or different research methodologies or different QC, QA testing of any software product you're developing or whatever that is, you're going to tend to skip over that stuff, and there will be--

Again, it's not so much what happens if you skip it, it's more that this is a signal that you're going too quickly if you're throwing people who didn't go through basic training behind enemy lines and expecting them to be successful. It's not like their lack of success will hurt you that much, it's just that that's a signal that you're growing too quickly if you compress the orientation.

Blair: Do you have any advice for people on how to grow quickly without compressing the orientation?

David: I think it's just an institutional decision you make. To me, this is one of those things that's so painful to talk about because it's so interconnected. If you're running a firm that has a good business management structure to it, you can afford to begin looking for an employee and jump on that option when you find them even if you're not quite ready. You can always hire in anticipation if you're running a really roll one firm. It's just all tied together on that front, I think.

Blair: It's interesting. We've got a new team member, 80 days in. She's more concerned about delivering value in the short term than we are, but it was an advanced hire. Now in another area, we're looking at a reactionary hire and that person will be thrown to the wolves, here you go. I'll give them one of my favorite lines which I got from one of our former coaches, which is, knowledge transfer is the responsibility of the apprentice. Good luck.

[laughter]

David: Here. You point the gun this way and this is how you release your parachute. Pull on this cord, not this cord. All right, see you in a month.

Blair: Number four on your list of five challenges in managing a high-growth firm is cultural assimilation. Man, that has got to be hard today.

David: Oh, yes. Remote.

Blair: Yes.

David: We have no idea yet what the long-term implications, good or bad, are of moving in this direction that we have. I'm excited to find out about it. I think we'll probably adapt to whatever comes up, but this cultural assimilation thing, there's a certain rate at which a culture can attract the right people and repel the wrong people. You can only ask so much of a-- It's almost like an immune system really. Your culture should kick out the people who are going to cause a problem that you missed in the hiring process. That's because people are constantly interacting with each other and they share this cohesive culture, this cohesive outlook.

If a kidney senses poison, it's going to handle it in a certain way, but you overwhelm a kidney with poison, then it's going to fail. This cultural assimilation thing, I haven't done any research on it, it's just something that I've seen over and over again. You have to give the culture the right amount of time to absorb people and to learn from them and also to have them learn from you. Every time your organization adds somebody, it changes in some way. Change cannot stick unless it's at a manageable pace.

There's something about cultural assimilation. All you can do is hire the right person. Then they're getting essentially a learner's permit, the opportunity to learn in your organization, and everybody else is as big a part of that as you are in making that hiring decision. Cultural assimilation needs to happen at a certain pace, or it doesn't happen well. Then you have individual people who are over there in the corner whose agendas haven't been assimilated or aligned, and they don't understand the cultural undercurrents and so on. It just becomes this looser organization that's a little bit more broken up and inefficient and is tripping over signals that don't even need to be sent to each other.

Blair: In March 2021, most people were still working from home. I think when we're through this, the vaccination programs are moving quickly now, but when we're through this, there's this understanding that there's going to be a lot of work from home. I think there's going to be a lot of this like cultural assimilation work from home backlash where it's like, okay, people, we need to get together to understand who we are and re-cement our culture.

I can totally see that there's going to be a lot of company retreats. I was listening to a podcast. I don't remember who it was. It was probably on startups. Somebody was making the point when your startup, in particular, is growing really quickly, you need to add headcount quickly. You hire these senior people from other companies, and they often identify the other people in those companies that can come over too. You end up hiring people almost in bulk from other businesses. His point was, when you do that, you bring that culture over.

Like it or not, when you've just made this bulk hire from Google or whatever, the culture of your firm is now Google's culture. That's a really profound, somewhat horrifying idea, not taking anything away from Google.

David: When one of those senior people leaves, other people leave with that person too. They come as a group and they leave as a group.

Blair: Fifth item on your list of challenges in managing a high-growth firm, feeding the machine with junk food. I love that line. What do you mean? You're talking about the nature of the work.

David: If you have a commitment to growth, you understand the implications, you're fine with them, your role changes, everything looks great, but you have set a goal of growth. The temptation there is to lower your standards for clients and not just for employees on the team. This is especially true if you've defined your success as a firm with your team, as we're still growing, we're still doing well. When you aren't growing, then it looks like it's a problem that needs to be solved, and it's worth compromising on your standards for a good client in order to maintain that growth.

You see that happening now. When people look back over what happened in 2020, they didn't hit their growth goals, and so they're really loving the fact that they're hitting these things again and wanting to just ignore 2020 and what happened. I'll just say it this way. The principals listening to this podcast in this episode, they've demonstrated to me, I won't throw you into this, they've demonstrated to me that they cannot be trusted with opportunity.

One of the reasons why I want them to be more public and intentional about what kind of a prospect is a good fit for them is partly efficiency. I don't want them wasting time talking with people that would never be a great client, but it's mainly because I want a prospect to self-select themselves out of the running before the principal ever gets a chance to compromise. When the principal is chasing a particular growth goal, there is the opportunity to compromise.

Just shout out to a firm, a client of mine that does such a great job on their website, interruptdelivers.com. They are very specific about a right fit client is. I would guess that if a prospect slips through and knows they slipped through, they would call them out on it. This is just great. If you understand growth, you made a commitment to it, and you're approaching it the right way, make sure that you're growing with-- its good growth, its good revenue, and not bad revenue. Not something that you have to get rid of this client in nine months because you took them to meet your goal, not because you can build something really great on them. That's what I mean.

Blair: Yes. Creative people in particular have this bias towards growth when it comes to new business opportunities, and the bias is really just the excitement over the possibility of something new. You add on that decide you have a growth. I will just layer in a scenario where you've got somebody who thinks they need to get to X size because they have an eye on an exit.

You decide to force all of these compromises and then you an outside adviser or consultant you come in and you look at their client roster and what is it they do for all these clients and it's like, what? There are no commonalities here, there are a bunch of organizations you should not be doing business with. There's one to punch of being just fascinated by just everything that comes your way, and then having this growth goal, this idea that growth is the goal or growth is good.

David: We're not beating up on growth. It's exciting, it's great to see, but I also don't think any less of a firm that is a certain size because I worked for them and maybe they're growing revenue constantly at the same body count. That's just as remarkable a story in my mind but it's not going to make the Inc. 5000 list.

Blair: Well, in one of our more recent episodes, Performance Bands, we talked about this fee income per full-time equivalent employee, and I think you and I have talked about this for years where it's like if you want a matric that you want to grow, that's the one. You really wanted to touch your financial success from the headcount, that you want to grow that revenue per person rather than the headcount itself. Anything else that we didn't cover on this that you want to end on?

David: I'll just reiterate again, growth is not morally good or bad, it's just a choice. Let's just understand, make the right choice, and keep adapting. That's one of the things that motivate you and I both, is the notion of personal growth, and personal growth can happen regardless of headcount size, so just make careful decisions.

Blair: Can I just echo that? I think growth is a requirement, but what type of growth? Growth in headcount? Absolutely not. Growth in your own knowledge, in your own wisdom, and that should be reflected by the amount of money that you put in your pocket. It should have very little correlation to the body count or headcount.

David: Right. [chuckles]. Body count for me, headcount for you.

Blair: [chuckles] Thanks for this, David. This is great.

David: Thanks, Blair.