How to Move a Company from Entrepreneurship to Professional Management and Growth
The Four Levels of Management Needed to Scale
By Bob Norton, Scaling Expert & CEO Coach
Moving a company from raw startup or early revenue into a rapid growth mode requires a completely different set of skills and systems. This “Stage 4” growth mode is very different in many ways and the transition to this stage is the most dangerous for companies because the stakes are higher and the skills are rare in managers. Many CEOs can become the limiting factor in the growth of their company if they are not aware of these issues and can therefore work at mitigating the risks of this transition. First let’s talk about the personality traits that apply and then the skills and systems needed.
Personality Traits Needed to Move to Stage Four.
The skills of entrepreneurship and professional management are inherently very different. In fact psychological research shows that there are four different “levels” that different people prefer to work at. These levels essentially map well to levels in a three level management organizational structure. Essentially these levels are as follows:
|Level||Description||Management Method They Need|
|1. Individual Contributor||Needs to see results every day not look forward to delayed gratification. Hands on. Often become tradesmen, contractors and other specialist that do but do not manage other people.||Micro Management|
|2. Supervisor or Manager||Has more foresight and ability to plan and manage people. Can work through other people and be good at it without being involved in all the details.||Management By Objective (MBO) , also know as Objectives and Key Results (OKR)|
|3. Executive Level||Long-term thinker and able to delay gratification and appreciate abstract achievements.||Management By Exception (MBE), this is mostly running by the numbers|
|4. Visionary and strategy planner||Most appropriate for CEO, board of directors and annual strategy and planning consultants.||Leadership by setting direction, providing coaching and resources needed to be successful|
Although all of us like to think that we could operate on all these levels the fact is the vast majority of people can not and will be really good at only one level, maybe two. Some people may be able to stretch across three but this is usually not optimum. Very rare individuals may do three well but almost no one can move across and enjoy working in all four levels. Understanding this about people, and yourself, is an important part of planning the transition to a growth company because a CEO must move from hands on work with product, customers and people to managing. Some CEOs start here with staff, others don’t. However to get to a serious growth company the CEO must be able to operate well on levels three and four which is not what they need to do as a raw startup. Some entrepreneurs can not make this transition because either they enjoy the hands on work or don’t know how to move on to the next level. They sometimes get their kicks, and are good at levels one and two where they can work with the customer, sales or product development. Being able to make this transition is critical to moving the company into true professional management.
Skills and Systems Needed To Move to Stage 4
So if you are prepared to work on the next levels, through other people, not doing everything yourself, what tools and skills do you need to do this? Well there are many natural limits on people that apply to management that must be understood. One limit has to do with people’s productivity in groups and is discussed in the book The Mythical Man-Month. The premise of this is that groups of people working together get less productive individually, and often less productive as a whole, as they exceed seven people. Why this happens is actually very easy to understand if you think about it. One major reason is that working in groups of people you have a certain amount of communications overhead. Each additional person added takes more time away from each of the others. So therefore if individuals spend about 15% of their time on communications and other overhead with each individual then when there are seven people in the group they could theoretically spend 7 X 15% or 105% of their time on just communications – leaving no more time for actual productive work. Hence it is easy to see how you can get diminishing returns with each person added to a group because that new person essentially eats up some slice of time from all the other members in the group. Of course, the actual numbers will vary some depending on the type of work but the principle still applies.
So therefore to run a larger company you need to understand and have a corporate structure that will also for this principle. You need to hone the communications overhead down to manageable levels to keep employee productivity up. This is most often done by specialization and forming different departments with managers. So now you can have up to seven departments reporting to one person with a manager who manages up to seven people each. This is a company that can reach about 50 people including the CEO (7 X 7 +1 = 50).
The basic skills of management take time and experience to develop as most are more art than science. They can also be “seen” and learned relatively easily compared to higher level executive skills (levels 3 and 4 in the personality model above) which are more abstract. These skills are taught in many courses and hence relatively easy to acquire as compared to executive skills and leadership skills which are very hard to teach. However, to go beyond this company size of around 50 people you need another totally different set of skills and systems to allow the CEO to measure, manage, lead, and interact with a much greater number of employees. I am going to call this skill set “executive” skills as compared to “management” skills and I have written extensively elsewhere to define the specific skills needed at each management level. Often these higher-level skills are hard to understand for people that do not possess them. Although it is possible, it is unlikely you can acquire executive skills without first acquiring good management skills. It is difficult to manage managers without understanding the skills they need to use – at least successfully.
So what systems are needed to support these executive skills which will require experience to hone? The primary systems that have evolved to manage a company with more than about 50 people well are the following:
|1. Budgets and related accounting reports||Financial planning and accounting for all sales, expenses, cash flow and profitability.|
|2. Dashboards||Measurement and improvement of key metrics that are very specific to your company’s operations.|
|3. Management by Objectives||A regular system of goals and reviews of those goals that allows required communications and yet limits the overhead of this to reasonable amounts between managers and departments.|
These systems properly implemented can be used to take a company from 50 employees and a few million dollars to at least $500 million in sales with many hundreds of employees. Although easy to list here these systems are not as easily implemented this is closer to art than science. Budgets and accounting are the easiest system to implement because they are practically required by accountants and well known. However, running your business by these numbers alone is like looking in the rearview mirror to drive your car; you will need much more. A major flaw of these numbers is they are designed by accountants, not to run a business, but to normalize and compare businesses and to tax them. Most accountants are good at doing postmortems and do not provide very valuable advice to get a new businesses established. This requires more than financial numbers, it requires vision, creativity and understanding of a market and how to meet a need in that market. These elements should be well established and understood before a company tries to scale with few exceptions.
Although some managers may have had experience with these systems before it is unlikely they have the right experience for this particular stage of growth unless they actually participated in this type of stage transition at another company before. It is generally best to bring in one or more executive level people with this company stage of development experience as part of this transition. Proper implementation and integration of all these systems requires some customization and training of your managers. This is a process that can take several monthly cycles and needs some coaching through the first cycles by people who have done it before. These are the tools you need but putting a paintbrush in your hand does not make you Picasso. So proceed with caution and get help and coaching from people who have been there and done that.
AirTight Management offers a Corporate 360 Evaluation to make evaluate and make recommendations and/or implement these systems properly in your company.
Bob Norton has been a CEO since 1989, grown 2 startups to over $100 million and trained and/or coached over 1,000 CEOs in 35 countries. He is also the creator of AirTight Management, The CEO Boot Camp and a thought leader in entrepreneurship and scaling expert. See http://www.AirTightGrowth.com