What's The Right Size For Your Company?

I was at a cocktail party the other night, and business came up in conversation. I'm passionate about what I do and about entrepreneurship in general, so it's no wonder that in a few minutes a circle of people had formed around me. An alarm went off in my head, as I realized it had degenerated from a cocktail party to a small surprise entrepreneurship talk. I went on a soliloquy for a few minutes, rambling about outsourcing, virtual assistants and digital marketing. It was only then that the most hateful question was posed to me, and right there in front of everyone I stood, feeling like the naked king. It happened when the owner of a construction company played the role of the snob who asked me: “great, but how many full-time employees do you have?” The answer is simple: I had 3 guys working for me last year, but this year I went back to only 2. One of them handles most office work, shipping and logistics for physical products, all customer support, and some SEO article writing. The second is more of a tech writer. He handles web design, is the webmaster for my publishing network and does quite a bit of writing. Between the two of them, I have my entire business covered. Last year I tried breaking up a few functions between a third employee to get more output. Work output did grow, but instead of an increase, what I saw was a decrease in gross income. Therefore, it made no sense to keep the third guy. Now he still works with us as needed. However, as I stood there in front of all those regular business owners, I knew what “two employees” would mean. It would give them the perfect excuse to ignore everything I said, and then they could snob me behind my back. My actual response – if you're wondering what to do in such a situation – was to gently smile back and say: “oh my, I apologize so much for taking over the party with my petty talk!” There is a right size I think the main point of this whole story is to make it clear that most people are snobs, and also that they equate bigger with better. The American Dream might be the main culprit in this case. A dream of affluence, it gives the impression that more employees immediately imply a more successful company, meaning, a more competent owner and so on and so forth. This is a huge misunderstanding. The number of full-time employees is a metric. And there are, quite literally, as many metrics as you want for any particular kind of business. You might want to maximize gross income, or you might want to minimize your personal work hours. Maximize the quantity of clients you can serve, or minimize unhappy clients. Each of these formulations will lead to entirely distinct strategies. Take your pick, but know that it will deeply affect how you run your business, and what results you get from it. Personally, I recommend you to maximize profit, because that's what gave me the best results. You see, trying to navigate all these metrics creates what is called in management school a “rugged landscape”. Instead of having a simple landscape with just one point of peak performance, you end up in a landscape that has many local peaks. The process of choosing a single metric simplifies the landscape as much as possible. And you can then experiment – like I did – until you find your sweet spot. I guess what bothered me about that cocktail party was that it was obvious that what people call common knowledge or common sense was just plain wrong, at least when applied to my business. In that respect, it would be silly of me to try and compete in number of employees with regular brick-an-mortar businesses. My two full-time guys from Bangladesh make me more money than all the 30 or so guys that engineer has working for him. One thing I had to ask myself was: am I doing this to project status and be looked upon by others as an “important person to be reckoned with”? Do I derive my sense of self-worth from the number of employees I can afford? Am I willing to sacrifice my own well-being, my principles and my money to get accolades? For some people, the answer might as well be a resounding “yes”. Not for me, though. My point is that these are real questions that I struggled with for a while. It's never easy to break away from herd thinking. Carefully choose your metrics Hipmunk is a very cool startup that serves as good example of smart use of metrics. They will let you sort flights not only by price – seems to be everyone's main concern theses days – but also by agony. I'll bet they just made this up on a lazy Tuesday afternoon, when the CFO was too busy handling some crisis in the bank. Agony is a mix of price, layover time and other factors. How cool is that? The guys at Hipmunk detected something that mattered to consumers, and made it into a metric. Reason why I bring this up is that you might as well have to do that for your business. Generally speaking the easier something is to measure, the less relevant it is. Hard metrics like profit can be a good place to start, but then you want to extend on them. A small disclaimer: the following advice is based on my personal experiences. It may make you rich, or it may cause the sun to freeze over and Arnold Schwarzenegger to go back to movie-making. Continue reading at your own discretion. I found that happy customers become ambassadors for your brand and company, and that a few extra touches before delivery can make the difference between a satisfied customer and an enthusiastic spokesperson for your services. Thus, one way to measure success is by how much business I get from the referrals. Another big epiphany was when I decided to focus solely on profit. It hit me when I realized that the larger sums of money were circulating at the top 2% of the market. From then on, instead of dealing with dozens of low-paying customers, I gradually moved to higher price tags and fewer clients at a time. This lead to both happier clients and ever more referrals. At this point, expenditure in outbound marketing isn't even necessary anymore. The bread and butter of our business are referrals from happy customers, or happy customers themselves hiring us again. I think this is due to the scarcity of great services. Actual good stuff is always hard to find, no matter the market, no matter the product. And I also think it's super cool that I've come to this conclusion by focusing primarily on profit. It's all about monitoring your metric while making small, incremental changes to the size of your company. With a small business like mine, this was accomplished by spending a few weeks trying a different number of hours per employee, increasing and decreasing the amount of outsourcer workload, and many other small tweaks. I didn't find the best combo until three months later. Experiment and Iterate This is where the going gets tough and muddy. You probably already have your business processes all in place, and your company is pretty much set in its ways. However comfortable and proven they are, the unknown and unexplored spaces around your current ways are where you must go if you want to up your game. There is some risk and investment involved, but a few tips from experienced experimenters can guide you through the rocky road. So, the first point is: keep taking the same actions, and you'll keep getting the same results. Unless you're seriously considering changes to the core of your business, all this talk will remain in the realm of wishful thinking and daydreaming. Once again, beware that experimenting will most likely force you to break away from herd thinking. On the one hand, this is good, because it means you're not competing with a crowd anymore. On the other hand, you probably won't have a large shiny number of employees to brag about at cocktail parties. You will only have the business of your dreams. The second point is that companies tend to gravitate towards given sizes. You're either going to hone in on the size of your current line of business, or you're gonna do a quantum jump to a nearby belt of companies. If you do, don't panic. You have accomplished that most don't even dream of: you've found a new line of business. If this happens, stick to both for a while, knowing that you'll probably want to jump boat at some point. Maybe your new line of business is more profitable and less competitive than the other. Maybe your old line of business is still the best place to be, even with the competition.