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The challenges of scaling-up

By TBM Team

13 March 2018

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The Business Magazine combined with leading law firm Irwin Mitchell to host this roundtable of experienced business leaders at The Vineyard Hotel & Spa at Stockcross near Newbury.

Journalist John Burbedge reports the highlights.

Time to take a serious look at your business abilities

Good scale-up timing was crucial agreed Simon Telling and John Scholes. “We’ve all seen businesses that scaled earlier than they should – they hadn’t got their proposition right, didn’t have enough customers lining up to sell to, couldn’t say ‘No’ to the wrong sort of clients, and could only keep going by generating revenue.”

Telling: “It’s all about timing: having the confidence of knowing you are completely in control of your current business activities, have the management capacity to deal with the concerns scaling-up may bring, notably people issues, and won’t get easily distracted from your core business work by such problems.”

Successful scale-ups generally required a bigger management team with broader abilities.

“Without the right procedures, the people to execute them or the ability to acquire companies and absorb different cultures, then things can quickly go wrong,” Scholes highlighted.

Scaling-up had to be for understood business reasons, a strategic objective, and companies needed to be ready to achieve their goals – talented people and management processes were key, noted Sukhi Gidar. Potential risks, internal and external also needed to be recognised and evaluated.

Establishing the right management team to undertake a scale-up could be a major challenge for entrepreneurial founders having selected friends or technical experts to help found the business, said John Riddick. “These are not always the people to move the business on alone because they won’t view it dispassionately.” Bringing in professional expertise to assist with management disciplines such as accountancy, marketing or finance, can support the founders as they are also passionate but perhaps more impartial.

Scholes: “Often the biggest problem is the founder who just hangs on, not realising that they are at the limit of their abilities. Getting founder change can be really tricky.”

Buying out shareholders can be a problem too, noted David McLeman, as David Griffiths and Peter Francis highlighted the delays and difficulties of redeploying or letting go loyal employees who may have been school chums or friends, but won’t be going to the next business phase.

“You have to get the right people driving the scaling – an experienced sales or ops director for instance. That first release, letting go of the reins of revenue is probably the toughest challenge,” said Francis. “You have to associate value with people. If they’re taking a seat at the table they should have a valuable reason for being there.”

Is scale-up the right answer? Are you ready?

Although not recommended, an ego-tripping founder looking to exit the business on a high might be one driver of scaling, suggested Scholes.

John Taylor highlighted the talent battle as a scale-up driver: “In our sector we (RSM) have to keep growing to attract and retain talent at a level that can support our partner-led accountancy services and client relationships.”

Scholes said merging company processes and operational models was often challenging, but highlighted: “It’s the cultures that you must understand first and foremost. Get that wrong and often things don’t work afterwards.” He also mentioned the ‘buy and build’ scaling option whereby accumulated acquisitions are left alone to ‘do their thing’.

Sarah Phillips highlighted ambition thresholds. Scale-up enthusiasm and business focus can change over the years, particularly when re-assessing personal priorities – retirement, health, family succession and inheritance – linked back into the business.

“Business strategies get deployed day-to-day by real people, but a shared strategy is important to bind and inspire employees,” added Jeremy Hill, referring to Kleinwort Hambro’s belief in sanity checking whether companies and investments have value, momentum and sentiment driving them.

Lawyer Sarah Cardew mentioned the need to ensure “one’s house is in order”, ready to scale-up or for key shareholders to exit. “Too often there are tax matters, payroll or HR issues. When focusing on strategic scaling-up it is very easy to lose sight of the basic business requirements.”

Scale-up businesses can quickly outgrow their existing professional services providers, she added, so having a capable third-party support network on board is important as you scale.

Riddick revealed his litmus test for scale-up success. “When you visit you can ‘smell’ that the staff all understand where they are going, their direction of travel. Sometimes, management is moving so quickly that staff are terrified, unsettled, wondering what’s happening next. You have to take your staff with you on the scale-up journey.”

Growing too fast ... into the red zone

Acquiring too many companies can bring “a monumental amount of escalation of people and client issues,” said Francis. “Companies often try to expand their ‘successful’ growth to disguise those issues, and then they are really in the red zone.”

“Before you know it you can scale too much,” Gidar warned, having once scaled-up with the wrong management team, just as the UK’s banking crisis and care sector changes compounded to produce “an absolute nightmare.”

McLeman stated alignment with an ongoing strategic direction and purpose was necessary, particularly in larger workforces. “If you try to micro-manage, you can’t scale.” Maintain focus, keep on track, or you can end up at an unexpected destination, he advised.

Francis: “It’s a management discipline to stay on point. It only takes a CEO constantly coming up with great ideas, and soon 50 IT developers can all be coding something different.”

Riddick: “Growth can provide opportunities but choosing the right opportunities to invest in – buying similar ‘comfort zone’ companies or interesting ‘left-field’ businesses – was often a second phase management challenge. You don’t want to scale-up the business and lose the core of what it was good at and known for.”

Bob Atkinson agreed, exampling his company that faced that challenge and achieved success by focusing on being a proven specialist provider gaining recognition and an industry reputation that attracts big clients. “You can’t take over the world while turning over around £2 million, but you can be best in the world in what you do.”

Scholes: “A £5m business that is ‘exactly something’ is more valuable than a £10m ‘bit of this, a bit of that’ company because not all buyers want all the bits.”

Big companies don’t build by growth, but by buying attractive businesses, Taylor agreed.

Griffiths exampled FISCAL Technologies, as an ‘exactly something’ company. “Our little 50-person British company is really laser-focused on doing something in one specific area and we outperform everybody else including all the huge global companies.”

Atkinson: “The big guys are the generic sector backbones, but you are a ‘best of breed’ model.”

Playing to one’s strengths was important, said Hill. “There are very few true entrepreneurs. You may be a leader, have a good business mind, but having a good team around you to give that sanity check is key.”

Is suitable funding for scale-ups available?

Taylor: “One of the biggest sources of investment at the moment is coming from US PE houses.”

Griffiths: “We get approached by around 100 US PE companies, but only about two UK firms. The problem is they only want to invest in big £10m or £20m chunks, which isn’t what we are looking for. There are lots more funding options nowadays but there is still a £1m to 5m investment-funding gap.

Telling agreed that the arrival of alternative financing through crowdfunding, peer-to-peer lending etc had enhanced the market. “There’s diversity and more funding roads to go down, but the difficulty often lies in how much control managements of earlier stage companies are willing to give up to gain financing.”

Francis accepted that businesses often didn’t want “the issue of having someone around the boardroom table who wants to be involved, doesn’t have the time to do so, and disturbs the capacity to take the right direction.” With mainstream bank debt also usually linked to restrictive covenants “appropriate funding in chunks of around £5m” remained tricky, he confirmed. “And the question is always: Do we need this funding risk to get us to the next level of growth?”

Taylor mentioned asset-backed lenders such as Shawbrook and Leumi, and private banks who were generally less prescriptive. “The greatest failing some entrepreneurs make is to give too much away too early – not necessarily in control, but in the later value of shares.”

Private banker Hill responded that “access to the right kind of private deal is often highly desirable” but such access was available, albeit often through personal networks rather than professional advice, due to “private banks seeking to manage the risks exposed to clients.” The most backable qualities, he added, were confidence, proven track record and some ‘skin in the game’ capital from the applicant.

“Are there any business angels out there?” queried David Murray.

Hill: “Yes, but it is knowing how to find them and understanding their risk appetite. There is a lot of private money often seeking returns, perceived to be in excess of what property or standard investments can deliver.”

Warm introductions and a ‘dating site’ required?

Scholes said the key was effective matchmaking between funders and applicants. “It won’t work if you have a technology entrepreneur pitching to a roomful of people who don’t understand the words.”

Griffiths suggested an online communication platform for funding, similar to dating sites, would help.

Scholes said such networks and platforms already existed in America, often focused around universities (eg MIT, Stanford). “Things are now happening the UK; that communication is getting better.”

Telling highlighted the human factor. “A lot of the investment goes through people that funders know and trust.” The role of the business-savvy middleman was becoming increasingly important in arranging ‘warm introductions’.

Perhaps less ‘cold’ than traditional high networth angel groups, several UK universities now have informed funding networks associated with them, Riddick acknowledged. He highlighted SetSquared Partnership, the successful southern universities collaboration. “It’s useful because it’s a ‘club’ with human interaction.”

Atkinson noted the irony that most teenagers now use online relationship platforms and networks, yet ‘offline’ human interaction was the funding answer.

Do product or service-based businesses scale best?

“Key decision-makers should work on their business not in it, stated Taylor. “In a service-based business that’s much tougher to do because you are probably the ‘product’. You would imagine that scaling a product-based business is easier, but you are still probably implicit within the client relationships that create your product sales, so find yourself working in the business.”

When Steve Jobs rejoined Apple he spent 20% of his time talking to potential hires and recruitment candidates. “He reasoned that the way to scale the business wasn’t around him – and Apple is the ultimate product business.”

Atkinson felt product-based business scale-ups could be less risky because projected revenues were more certain, though based on tighter profit margins. Production contracts tended to be longer and tied into process and supply-chain networks, whereas service-based workbooks and projects could be postponed or changed virtually at the client’s whim.

McLeman felt the difference was not stark since service businesses could also create products. His service-based company Ancoris had developed a SaaS product and spun it into a HR business now maturing rapidly with good scale-up opportunities. “In service-based businesses, hiring the right people is the thing that limits your ability to scale, plus, you are constantly debating revenue versus utilisation.”

Scaling up through a franchise model

“It’s not an easy option. You have to have something really proven to take to market, something in an exact form that has resonance and value. And, don’t try to franchise it too soon.” Telling advised.

Scholes: “With any channel play, you need an absolutely crystal clear proposition to get the channel interested, so they can sell it directly to customers.”

Riddick: “It will kill your brand if you get it wrong.”

Hill: “Picking the right buyable brand to scale is vital.”

Can your business operate with direct and indirect sales models? queried Francis: Segregation or ‘Chinese walls’ can be divisive in more ways than one.

McLeman suggested hybrid models seldom worked successfully long-term. Buying and selling often involves personal relationships and segmentation of customer-bases gets complicated by brand and regional marketing activities.

Scale-up ... but not as we know it now

Taylor saw the millennial mindset as another scaling issue. “We don’t understand that generation. Our ‘People buy from people’ maxim is not perhaps how their generation will buy. We’re saying they’ll learn the value of human interaction. I’m not convinced they will. At the moment we are creating environments for them to work among us; things might be very different in the future.”

Scale-up will have a different definition for future generations, agreed Francis.

The gig economy with its zero-hours contracts, flexible and remote working, co-working and serviced offices scenario, might make scale-up movements of people and locations easier, suggested Murray. Probably only for small sub-20 staff businesses was the Roundtable consensus.

21st century scaling might be very different, Hill agreed. “What is a service today may be ‘App-ified’ or productised in the next 10 years. In macro-scaling terms that will be reductive to growth, possibly GDP.”

McLeman didn’t believe digitisation would reduce economic growth. Technological advancements remove friction, increase velocity and create commercial opportunities.

Gidar recalled a forecast that two-thirds of the top Nasdaq companies in 10 years time have not yet been formed.

Telling: “If things can be digitised, the younger generation will take that approach. We can’t necessarily change that view, but we can help them recognise what things have historically been done best by humans.”

Cardew noted that millennial ‘careers’ were already different, featuring blocks of two to three-year work experiences, rather than long-term company loyalties. Flexible and remote working was also reducing workplace camaraderie – all issues for scale-up.

McLeman agreed, exampling his own company’s workspace design changes and ‘in-office’ attractions for staff to help maintain workplace camaraderie and culture.

Taylor: “In-office camaraderie may be what we think is needed, but not millennials. My daughter has a great friendship group, but her ‘camaraderie’ is all online.”

McLeman suggested the issue wasn’t black and white. Workplace cultures in the north or south, Thames Valley or Solent were not necessarily the same and often had a successful mix of camaraderie opportunities.

The willingness of businesses to change, particularly their workplace environments, was crucial, noted Gidar: “We don’t think now, the way that the future generations will. We are making changes now that will become obsolete.”

Adopting different communication channels within the business, notably digital and social media, was also important, stated Atkinson. “Businesses need to constantly evolve.”

But, recognising what suits your business model and client base was also key, Phillips added. Change could have disruptive internal and external implications.

Is the current climate right for scaling?

Hill: “It has to be, doesn’t it, with macro-issues now facing the UK?

Scholes, Atkinson and McLeman all stated that regardless of economic climate, the first question was still: ‘Why do we want to scale-up?’ There had to be an objective, key business reasons, opportunities good enough for taking on the market risks of change, capital investment and potentially disrupting one’s workforce.

It was easy to get sucked into the passion, the ego-trip of scale-up, warned Atkinson. Avoid hasty decisions, sleep on the facts, and view them in the cold light of morning.

As head of a fast-growing business McLeman admitted he was now considering slower growth but achievement of more profit.

“Less can be more”, commented Gidar, while Riddick advised an early start on strategic planning for any key future events.

Every decision made now will impact the future profit of a business, noted Francis.