As your business grows, your profit margins increase automatically – it’s a pervasive myth that could not be farther from reality. In most cases, your margins will shrink alongside business expansion for a variety of reasons. It takes a conscious and proactive approach to combat cost increases and reap the rewards of your growth.

Here’s a real-world example. A few years ago, we had a client who believed that a project designed to examine their SG&A costs wasn’t necessary. They thought that because they had grown significantly in the past five years, they were naturally leaner. So instead, they focused on projects they felt drove continued growth and efficiency. When we stepped in, we conducted some quick analysis. The results were stark – the costs they thought were fixed had grown at precisely the same or a higher rate than their revenue. They were in disbelief, but numbers don’t lie.

How could this be?

Does Your Business Have a Problem?

Determining whether you have an opportunity to scale your business efficiently is not a difficult task. At a basic level, you can use a simple equation: consider the costs you believe to be fixed or mostly fixed and calculate if they are rising at a higher or lower rate than your revenue or volume. If they are rising at a lower rate, the opportunity to scale is there. However, if they are rising at a higher rate, your business has a problem.

Costs rising at a higher rate than revenue brings challenges and complexity to the table. First, you need to determine whether costs are growing more than they need to. For example, if revenue has risen 50 percent in the past five years, but your fixed costs have gone up 25 percent, is that acceptable and sustainable? While you might not come up with a definitive answer, you can leverage this insight to identify opportunities.

For each area of opportunity, you’ll need to dig into both the data and circumstances to pinpoint the root cause of the cost increase. The causes will often be myriad and might include:

• Supplier or vendor price increases
• Mismanagement
• Broken processes
• Outdated systems that can’t cope with your current size

When you understand why things happened the way that they did, you can shift your focus to two objectives:

1. First, implement changes to get the company back on track.
2. Second, implement governance to ensure the company doesn’t fall off track again.

Building a business that scales efficiently demands investment into systems and processes that cater to a higher volume than you currently have. The challenge lies in finding balance along the spectrum, from doing the bare minimum to keep the wheels moving (which generally involves throwing labor at the problem, resulting in the highest cost) to overengineering a solution for a company 20X your size. You need to decide where along that spectrum your solution should reside.

Another difficulty is pulling resources away from growth activities. Building and implementing the right, future-proof systems require executive bandwidth, and companies amid a growth phase rarely want to take their foot off the accelerator. It can feel counterintuitive to have an entire department take a three to six-month breather to optimize their systems when doing so means slowing growth. However, you need to think bigger. There is nothing more frustrating than growing your company 30-plus percent only to have zero extra profit or profit margin to show for it. Take the time to lay down the tracks so the train can run faster.

Where Are Inefficiencies Hiding?

The causes of inefficient scaling can hide in many places. Below are a few we see time and time again in our consulting work.

Throwing More People at More Volume

The easiest thing to do when you are experiencing rapid growth is to repeat what you’ve always done. And when your processes and systems aren’t built for scale, that means hiring more people to do the extra work. You’ll likely see your efficiency drop when you bring in new people. This is because you have less experienced people in your workforce, and your old systems are bursting at the seams, unable to cope with the current volume.

Budgeting for Bloat

Carefully examine your budgeting process. Sometimes, the method used to budget costs results in allocating more dollars than needed. The client we mentioned at the beginning of this article is a prime example. Their marketing spend had kept pace with their revenue growth, and we noticed the growth was almost in lockstep. When we dug into how marketing was budgeted, we found that the budget model used a fixed percentage of revenue for the marketing budget. It’s no easy task to become more efficient with marketing spend when the increase is baked in.

Forgetting to Trim the Bushes

Throughout the life of a business, issues arise, and solutions are developed – accounting paying invoices, delivery teams creating manifests, and quality issues leading to more testing and reporting, as examples. And most of the time, these solutions are the right fit for the business. They solve a problem in the moment. But over time, businesses evolve. Many, if not all, of the solutions implemented along the journey are now embedded into company processes. Perhaps 80 percent are still appropriate. But there is likely 20 percent that needs to be revised. Some solutions can be eliminated altogether, and others will need adjusting, particularly those that were overengineered from the outset. Some will need updating to meet the needs of current and future volume, and some are the product of a past manager’s nuanced way of doing things and are no longer relevant.

Like the bushes in your yard, solutions to problems will grow over time. But, left to their own devices without periodic trimming, they can run away from their intended purpose and do more harm than good.

Overengineering Solutions

Avoid overengineering as you update processes or design new solutions to a problem. An overengineered solution is more expensive, slower to build, and will result in more internal resistance. In short, they take more time than they’re worth. Instead, take a more agile approach to problem-solving.

Poorly Executing Digital Transformation

For many of our mid-market clients, their core IT systems are the root cause of their scaling problems. They are running on 20- or 30-year-old home-grown operations, programs that severely limit their ability to become more efficient and restrict their access to new systems and technologies they could otherwise plug into.

For example, we had a client that ran a large call center on their own home-grown phone system and CRM. The key to unlocking optimal efficiency relied on tools their system simply did not have but were standard in modern CRM systems for call centers.

Often, the challenge comes down to the people making decisions. IT is not always run by an industry expert qualified to recommend suitable systems. CFOs might think they are apt to be the CIO/CTO, so the CEO fails to get the informed guidance needed to make beneficial system investments.

Do You Have the Right Team?

The bigger a company grows, the more complex the solutions and processes are needed to maintain current efficiency – let alone achieve more efficiency. You need more than new and updated systems to solve these growth issues. You need the right team. You need executives who can identify when problems arise and uncover the very best solution, particularly in instances where the best solution is completely unlike past solutions.

Don’t get stuck fighting the last war. Sometimes, an improvement in the executive talent tasked with keeping the company on its growth trajectory is essential to a company’s scaling needs. And often, the team that was perfect for getting you to $50M is not the same team that’ll be perfect for getting you to $500M.

Are You Prepared to Scale?

If you want to dig deeper into the root causes of your business’s scaling inefficiencies, let’s talk. Get in touch with our team at info@maven-associates.com or by visiting our Contact page.