Do you really want to scale your business to grow?

planning meeting
What is the right number of employees for a viable business?

Bruce Johnson has published a provocative post: “If your business is not scalable, it’s not a real business” in which he asserts the foundational concept that if your skill/work is essential for the business, “you have an incorporated career (or another way to put it would be ?you have a job?).

He continues:

There is nothing fundamentally wrong with having an incorporated career/job. If you?re an accountant and you want to do accounting work, great. If you?re a plumber and you want to do plumbing work, great. If you?re an artist and you want to create art, great. If you?re a lawyer and you want to do lawyerly work, great. If you?re a computer programmer and you want to do programming, great.

But doing work is not the same thing as owning or leading a real business. Nor is it what you probably signed up for when you decided to start your business (i.e. few people start businesses thinking, ?I can?t wait to start a job that will overwhelm and constrain me in ways I can?t even imagine.?).

This is a huge issue. And it?s one of the main reasons why so many small businesses stall or fail or stay small.

What we often forget is that a business is not about self-expression or about making enough money to pay the bills. A business is an entity separate from the person who created it that exists to solve a problem for a specific group of people.

In other words, just because a state or a city/town awards someone a license that states they?re a business does not in fact mean that entity is a real business (as I would define a business).

Johnson’s observations reflect other consultants who use phrases like “you need to work on, rather than in, your business” and he suggests that the problem with stressed and unhappy business owners arises when they forget this fact.

I’m a bit torn, however, in how much to buy into this concept because of interesting issues regarding optimal business size/scale for individual productivity. I wish I could find the documentation to support this research that a consultant showed me some years ago, but it revealed an intriguing curve in productivity/revenue per employee — and the magic number turns out to be three and the stability plateau occurs when the enterprise has about 10 employees.

In other words, your yield/productivity per employee increases until you reach three workers/employees, and then declines until it stabilizes at 10 employees.

When you think about it, this curve make sense. If your business has three employees, you can truly optimize productivity, by combining specialization with effective diversity in your work. You have little management overhead and your (hopefully) carefully or self-selected team works in harmony.

As you add more employees, things start breaking down. There’s duplication of effort, interpersonal friction, administrative overhead, and you are less likely to find high performance stars in a group of four or five or six than three.

At 10, things level out — because you by then can build systems/processes and structure to prevent things from becoming even less efficient. If you are profitable at the productivity per employee for 10 workers, you have achieved a truly scalable business. Systems work at this level because you can build even more effective specialization and the team is large enough for all of the heavy lifting.

Our business, for example, has four full-time employees (including me). We have an additional two closely connected contractors (they fulfill the legal definition of “independent contractor” because they use their own tools and equipment, work from their own homes and most importantly serve other clients as independent contractors as well.) Taking the staff as a whole, there are some broad specializations but there is an incredible amount of skill sharing and extension. As an example, our highly efficient office administrator has become the company’s bookkeeper — handling, among other challenges, the specialized accounts management for four corporations, including separate U.S. and Canadian businesses.

Besides editing and writing and overseeing the overall business, I’ve evolved to be the enterprise’s internal IT consultant and webmaster.

Could we add staff and delegate, and “scale” the work to allow the organization to grow? Well, yes, but it would be a difficult process because of the inherent lower productivity per person as the enterprise grows until it reaches the 10-employee level. Sales would have to scale even faster than our internal structure, and that is hardly the easiest goal to achieve unless you have an exceptionally profitable and in-demand service. It is kind of like pushing a rock uphill, where the effort gets harder and harder until you reach the next tipping point.

So, I don’t have problems with advice like Bruce Johnson’s. ?However, I think management consultants will be able to help businesses experiencing stress solve their problems if they’ve reached that 10-employee level and haven’t set up proper systems/delegation processes and owner responsibilities. If your team has reached three or four employees, and you are wondering why it is so hard to grow, (and you’ve observed the business management books about delegation and efficiency), then you might look more closely at the employee/productivity ratio, and realize that your optimal size may indeed be smaller than the business growth pundits would suggest.

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