|Midsized companies can't afford operational glitches|
Many midsized companies dream of joining the Fortune 500 someday or of becoming the next General Electric, Microsoft, or Amazon. But they don’t think nearly enough about operational meltdowns – technological glitches and other problems that can put them out of business. As a result, most are singularly unprepared to deal with them.
This lack of adaptability is not a problem in most small companies. They are usually quick to recognize operational problems and deal with them before they become disasters. If they don’t, they could go out of business overnight. Take Instagram, the San Francisco-based social media company. In October 2010, when its founders launched their website to the world, 25,000 web viewers overwhelmed the site. Instagram’s founders called their Stanford University friends, and the entire group worked 24 hours around the clock to keep the servers from crashing, transferring their traffic to Amazon’s servers. A month later, the site could handle a million simultaneous users. Instagram dodged an operational meltdown that could have rendered the start-up dead on arrival.
Operational meltdowns at midsized companies can take much longer to notice and resolve. Firms in this segment have many more “moving parts” than start-up companies – systems connected to other systems, more layers of management through which bad news in the field must travel, etc. Unlike much larger companies, midsized firms usually lack deep operational and technological talent who can quickly recognize, understand, and resolve huge systems glitches. All these factors underline the point: Midsized companies are often the most likely to be brought down by operational meltdowns.
From my research, consulting experience, and more than 20 years in various industries, I have found four signs that signal when an operational meltdown is probable in a midsized company:
An overbearing sales culture. In midsized companies, no order is ever too unreasonable to fulfill. But this creates havoc for their production and distribution functions. They don’t have the budgets of Fortune 500 companies, which can customize products and delivery for each customer who requests special treatment. Here’s what happened at a midsized company that was founded and led by a salesman. As his firm grew, he undervalued and underpaid the executives who ran the supply chain and finance departments. That, of course, meant he did not have highly competent executives running these functions. That led to a high number of errant shipments and to customers not paying their invoices according to the terms of payment, often because they weren’t getting the correct shipments on time. Meanwhile, his cherished salespeople said yes to just about every customer demand (following the CEO’s credo), which exacerbated the erroneous shipments problem. Customers delayed payment for months, which eventually helped force the firm into bankruptcy. To counterbalance an overbearing sales culture, midsized firms need an executive who loves operations, heart and soul, and hates risk and sloppiness. The CEO must shift the culture toward one that prizes execution just as much as sales.
An outdated IT or physical infrastructure. Midsized companies are often starved for capital to renew their infrastructure. Capital investments typically focus on items that move the top line: R&D funding, sales force automation systems, and the like. Certainly, operational and IT infrastructure spending does drain the bottom line, but if a midsized firm doesn’t make the right investments when they are necessary, the top line eventually erodes. The best midsized companies avoid this by shifting their annual budgeting cycle to quarterly or semiannually. The shorter time frame forces functional heads to predict their short-term needs and gives them a better chance of filling them. Equally important, such companies gently deny customer requests to which their operations can’t respond. Dave’s Killer Bread is a case in point. As a $3 million baker in Milwaukie, OR, the firm had already outgrown the capacity of its 15,000-square-foot bakery by 2006. Then Costco came knocking on Dave’s doors to supply its warehouse clubs, but Dave’s had to turn the giant retailer down. It couldn’t handle Costco’s demand without a huge investment in a new bakery. Later that year, Dave’s got $2.1 million in financing for a new 50,000-square-foot bakery, which opened in 2008. After waiting patiently, Costco became a customer, and by 2011, Dave’s sales rocketed to $50 million.
A shortage of key skills. The inability to find, develop, and keep key people during periods of rapid growth triggers many an operational breakdown. The skills that midsized companies need today – which weren’t necessary when they began life – expand rapidly, requiring subject matter experts in niches that small firms don’t need and big firms already have in place. Imagine a firm with 120 people at the beginning of the year that needs to design positions, hire, and onboard 80 new people in one year. Most firms with 120 people don’t have much of an HR function in place. Bringing in many people with critical new skills is too difficult to manage for the average functional head in a midsized company. The best midsized companies delegate recruitment and training to the HR function (which may need to be built up), which allows functional heads to focus on their daily activities.
An overreliance on a few big customers. The CEOs of midsized firms are often reluctant to commit major funding to any operational or IT infrastructure item that isn’t immediately necessary to keep their key customers’ business. But if accounting, manufacturing, and distribution systems are woefully inadequate, the shortcomings catch up to the company at some point – particularly if it lands one more big customer. Although it feels risky (and it is), building operations infrastructure can be a key differentiator. Midsized firms often lack up-to-date infrastructure and small firms usually don’t have it. It increases the likelihood of keeping big customers and qualifying for many more of them. Ultimately, the best way to reduce customer concentration is to get several other large customers.
Midsized companies which successfully avoid operational meltdowns make it their practice to divert money and attention away from activities focused on the top line (especially sales and marketing) and toward operations that deliver on the promises made to existing customers: production, distribution, customer service, and IT. Such companies as Dave’s Killer Bread resist the urge to say “yes” to new business that will severely tax the existing infrastructure, no matter how big the top-line potential.