The NEW Business Model for Success with Balance
“We don’t like their sound, and guitar music is on the way out.” – Decca Records
(Decca Records comment in 1962 on the future of The Beatles.)
A jack of all trades is a master of none, but oftentimes better than a master of one.
Guess what?
Employment and economic growth are no longer related, also, don’t expect the media or any politician to tell you that. Time to reprogram your RAS…again.
I’m sometimes accused of being anti-employee and anti-human-resources. In my regular career, however, I never had an HR director suggest ways to increase profit or improve efficiency with less people. All I’ve heard was hire, hire, hire; then build systems to keep the hires content.
Before long every entrepreneur will face the dilemma of employing people versus using less costly and more efficient technology. Web 3.0 and A.I. are already democratizing financial systems and communication systems. A smart entrepreneur observes these trends and adapts accordingly. There is nothing clever about hiring many people too soon when so many perfectly good alternatives are available at a fraction of the cost
In my regular career I worked with some exceptionally talented HR professionals, but they all came to the companies with a mentality of recruitment. Every time an issue came up the immediate response was to hire someone to handle it. That is how the old industrial model worked. Of course, as soon as a company hits difficult conditions those recruits are the first to be thrown overboard. Rarely have I seen HR professionals throw themselves overboard.
The average ratio in corporate America is said to be one HR professional for every 100 employees, and that includes companies of all sizes. In smaller companies, the ratio is much higher because the HR function has become so technical. In 2021, Bloomberg reported that ratios were up 40% in the last 10 years.
My challenge, even with that quite modest ratio, is that I have worked for companies with as few as 60 employees that had an HR department of 6.
Some focused entirely on recruitment, others entirely on benefits, and one or two tortured employees and management with endless performance reviews.
**Notice how I slipped into using the phrase employees AND management. The moment I started to recall my corporate career (shivers down my spine) I fell into the ‘us and them’ mentality of a hierarchical structure. Today, I propose a hub model (I’ll explained as we go) where there is no ‘us and them’ allowed. We are peers. The communication is not top-down but horizontal, peer-to-peer. This is a communication style and mentality that requires constant reminders, even for myself. **
All of the hours sat under incandescent lighting in a meeting room while grappling with HR systems sucked the life out of me. Not long after being held captive in a room while a management consultant spread photographs of vermin in front of a group of employees and asked, ‘which animal would best reflect our company culture?’, I left the corporate world for good. To this day, I don’t know which animal got the most votes. A year later, the company was purchased for a fraction of its value.
I call this nonsense, ‘the internal whirlpool ,’ as it sucks all the company’s energy down into internal issues when it should have been focused externally, on customers. When I occasionally visit other companies today that are still structured in a hierarchical way, I see much the same thing happening. Managers who spend all of November and December doing nothing but performance reviews and appraisals, while the phone calls from disappointed customers go unanswered.
The challenge for startup entrepreneurs is that this traditional approach often follows one, and the temptation to hire employees is indoctrinated. Hiring employees, however, sucks up startup cash like a sponge.
It’s no one’s fault. No one is to blame for the way they have been trained. There are, however, more efficient and less costly ways of structuring a startup.
Keep in mind that at the startup phase, cash-flow is king. Cash-flow is not cash available but the way cash flows in and out of the business. (see later activity when we focus on this) Each direction of cash flow has its own complex system and they rarely match up. Spending too much cash at the start is one of the biggest causes of startup failures.
In many cases the culprit is hiring too many people, too soon.
Here’s an example:
A CEO friend of mine who read Three Simple Steps, as well as an early draft of Secrets to a Successful Startup, spoke to me at length about this topic before starting his first company. Despite my advice, he immediately hired sales executives, product development, and finance. As well as an assistant to manage his in-box! He rented an office space downtown and invested hard-earned savings in fancy branding, including a company sign to brighten the outside wall.
**Don’t waste time and money on branding at the start. Wait for at least a year until you figure out what your company and market really is from the customer’s view. Save that vital money so you don’t end up having to redo branding when you realize you got it wrong. We’ll also get into this later.**
My CEO friend then hired a team of full-time software engineers to make a prototype. He was quickly overwhelmed with personnel issues. At the start, new employees are usually excited by the prospect of being part of a new company, but they can become quickly disenchanted for a myriad of reasons. Before long they complain about work conditions, pay rises, benefits, etc. As CEO, one can’t simply ignore them and this became my friend’s experience. This is how he spent his fourteen hour days.
I have a rule.
Employees = longer work hours.
Vendors = hours spent relaxing in a hammock.
The finance guy had very little to do during working hours, the balance sheet was all loss and there was no sign of profit (typical in a startup). He wasn’t about to say, ‘no’, to his high salary and share options. So, he spent most of his days searching online for other jobs, his fellow employees were upset observing this. My CEO friend got wind of this, but didn’t know how to handle it. He had never fired anyone before. Firing people can be really stressful.
The software engineers became two cliques that did not see eye to eye in project meetings. The CEO had to play arbitrator, though to my observation, it looked like a teacher herding four-year-olds in a playground. The lone salesman took orders from every customer he could talk to, even though the engineers didn’t know how to build what the customer had ordered.
For new entrepreneurs things can spiral out of control quickly. A startup can be like fireworks, exploding and setting off fires everywhere. The entrepreneur needs to be able to concentrate on the fire extinguisher, not disgruntled and expensive workers.
This all sounds negative, well, it is. Unfortunately, it is also all too common.
My aim here is not to put you off, instead, it’s to point out a better strategy. To get there, I need you to feel what it’s like doing it the traditional way.
My CEO friend then brought in an HR management consultant who kept all the staff in a meeting room for two days while they did a ten-step employee empowerment program. It was a costly waste of time. This further disgruntled employees and convinced them that the CEO didn’t know what he was doing – which was true. Then he decided to hire a full-time HR expert to keep them all ‘playing happily in the sandbox’ (his phrase). The new HR director unraveled the previous system, introducing their own.
Much later when I asked my friend how he spent his workdays, he sighed and admitted it was all meetings. Update meetings, HR issue meetings, drive-by meetings with staff coming into his office complaining about other staff. Some of his staff were asking for pay rises, others threatening to leave and take the know-how with them.
His first experience as an entrepreneur was not what he hoped it would be. He was stressed, working long hours and his family were not happy about it. He was worried that his wife would leave him, since he was so obsessed with the company that he missed anniversaries, dinner dates, his kids school events, ignored the in-laws on their visits, etc.
He asked me how I had coped with the stress in my two companies.
My answer was something like this:
‘What stress? I deliberately set about not hiring people to avoid exactly the experience you’re having. I told you to hire contractors and vendors who know what they’re doing. I was able to focus on growing my businesses, taking time out to have new ideas and solutions. I knew if I hired even one person, I’d spend all my time sorting out personnel issues, which was how my regular career was.’
But,’ he said, ‘It’s good to hire people, good for the economy and the community.’
‘So, let Amazon hire them. Bezos did not start out by hiring people. He started out selling books from his garage. His friend’s mother who let him use her garage made them coffee and became one of the earliest shareholders. She is worth a fortune now just for being kind and encouraging. When you start out you have to focus on survival first. Hiring people is the surest way to lose the plot of growth. If you bought a house you wouldn’t start by hiring a full-time handy-person to live in the garage, just in case something needed fixing. You’d probably try to fix things yourself first, only calling in a handy-person if and when it was needed and for a fixed price. Why start a business differently?’
Whether he listened or not I cannot say, but a year later he had burned through $5 million in investor funds and his hair was grey. We’re still friends and there is a happy ending. It required more investment to survive. That means more equity ownership dilution (see later activity). Now, he is thriving and the company is making an impact. As he grew, he did switch from hiring employees and worked with vendors instead. His finance support is a vendor working on an hourly rate, as needed. Everything else is outsourced (see later activity). His executive team consists of him only.
Most importantly, he is smiling again and his family forgave him. Although, they like to tease him about his early days of obsession.
Take home message: For every new startup an established one fails. In fact, 82% of them fail because of cash flow management issues. One of the biggest drains on cash reserves in the formative years is the hiring of employees and employee-support-mechanisms required by law and culture. When you consider the structure of your company, it is imperative to find less expensive and less time-consuming strategies than simply hiring people. At least at the beginning.
Guilt-free, non-hiring.
Starting a Successful Startup requires a completely different mentality because if you’re like most people you have been indoctrinated to think hire, hire, hire! You might think doing so is not just good for the economy but a noble thing for society.
Guess what. It’s neither.
Here is an example of this perpetuated mind-set coming from a management consultant writing for a leading entrepreneurship magazine:
‘The stability of the economy rests on the ability to maintain a low unemployment rate and provide a safe, secure workplace… *******, author of “*******,” explains that the employment rate and economic growth are linked. This is because employment contributes to economic growth: Workers produce valuable goods and services, and in turn receive a wage which they can spend on buying the goods produced. High employment means a greater number of goods can be produced as well.’
This is the common belief throughout western culture, a belief constantly reinforced by media and politicians. It is, however, not factually true.
The idea that employment and economic growth are linked is based on a long-held law called, Okun’s Law, from the early 1960s. In its most basic form, Okun’s Law investigates the statistical relationship between a country’s employment rate and the growth rate of its economy. The economic research arm of the Federal Reserve Bank of St. Louis explains that, ‘Okun’s Law is intended to tell us how much of a country’s GDP may be lost when the unemployment rate is above its natural rate.’ It goes on to explain that, ‘the logic behind Okun’s law is simple. Output depends on the amount of labor used in the production process, so there is a positive relationship between output and employment. Total employment equals the labor force minus the unemployed, so there is a negative relationship between output and unemployment.’
Okun’s Law, created by Yale professor and economist Arthur Okun, published this subject when robotics, artificial intelligence, the Internet, and big data were not even imagined. It was a time when automation seemed a long way off.
Our business environment is far different to the one that existed in the early 1960s. This was the decade I was born into. It was a world of coal mines, labor-intensive farming and production lines; mass production was in its infancy.
Hypothetically, today, we could all be unemployed, an army of robots could drastically increase production and the economy would grow exponentially. We would all live rich lives if the profits were shared. A big ‘if’ on that one, of course.
Okun’s Law did not hold up during the financial crisis of 2008. Bernanke defensively speculated that, “the apparent failure of Okun’s Law could reflect, in part, statistical noise.” Those in power want you to believe that hiring people equates to growth and progress even when the law doesn’t hold and indeed the evidence suggests the opposite is true. People don’t want to be unemployed, so they vote out politicians when the ratio of unemployment rises. This is why you won’t hear the media tell the truth.
However, Janet Yellen, Chair of the Federal Reserve 2014-2018 finally revealed she is on the path to realizing it is, ‘none other than the Fed’s own actions that have broken the economic “virtuous cycle.” Okun’s Law – the bedrock behind the Fed’s flawed philosophy of assuming more debt, equates to more GDP, which equates to more jobs; is no longer relevant in the broken, “New Normal.”
So what?
So, you are no longer compelled to hire. It relieves you of guilt if you build a multi-million-dollar global company and never hire anyone. I have built seven companies with zero employees, not even have an assistant. You can ignore the media and political propaganda.
To suggest not to hire anyone is, of course, a little naïve. There are certain ventures like healthcare that still need full-time employees from the start, but even then, knowing alternatives are possible in various functions like finance, distribution, marketing, etc. should reduce the urge to hire too many employees too soon.
Other businesses might start out frugally with the hub model, but then hire employees when cash flow permits and the need is evident.
The Benefits of Being a Jack-of-all-Trades
If you accept that it makes financial sense to avoid hiring employees straight away; how do you become the Jack of all trades? A master of none?
Today, that phrase is used as a criticism, meaning a person of superficial skills. The complete saying was originally, “A jack of all trades is a master of none, but oftentimes better than a master of one.”
Formerly intended as a compliment, the phrase means that a person is a generalist rather than a specialist. Versatile and adept at many things. That’s exactly what I suggest you become, because it aids adaptability. Let others use it sarcastically, you know the true meaning.
The owner of a successful startup is versatile and adept in all the business functions and better than someone who is master of just one function.
Imagine you just entered your home office.
Right then, you are CEO ready to direct your day.
If your first task is to find a company to make your product, you are now vice president of manufacturing and quality assurance.
Later in the day if you need to talk to a vendor about product branding, you are now vice president of marketing.
In 2010, I decided to sell my first company. Our financial numbers were very attractive to five suitors. Each prospective purchaser assigned a due diligence team to make sure the numbers were sound and the business on a solid foundation. Together that meant 70 full-time employees performed due-diligence at the same time on a startup with no employees. It was like a TV comedy.
The due-diligence teams were all made up of mid-level managers. Their main concern was not whether my company was a good investment, rather, how they could best impress their bosses. With that attitude they arrived with a negative attitude of constantly looking for faults or reasons to not do the deal.
Because I was the jack of all trades, the initial impression was of a-one-man-show and I could tell it unnerved them. I heard the phrase, ‘cowboy,’ being used. They could’t understand the business model as their mentalities only accepted the traditional structure as possible. That was a hierarchy with executives, vice-presidents, and directors. They could not conceive of one person doing everything and achieving a NET profit of 75% on annual sales of over $15 million.
Fortunately, I am good at impressions and accents. When they called asking to speak to my head of sales or director of manufacturing, I pretended to be a receptionist with a deep south accent. I asked the caller to hold while I put him or her through to the appropriate department. I’d paused, tapped my desk as if pressing a triage phone connection, and a few seconds later spoke again, but in a Bostonian accent. ‘Hello, this is Bob McGraw VP of manufacturing, how can I help you?’
Since I only work a 5-hour workday, the callers would more often go to voicemail. Inadvertently, this made me appear very busy, in demand, and also gave me the time to recall which accent I had used with which caller before replying to the message.
As part of the final acquisition contract, I was required to make myself available for a six-month transition period. My unique Hub model meant the company pretty much ran itself. I never received a single phone call during that period. All the vendors in Hub model had to do was change the name and address on the invoices.
At a trade show two years after the sale, I met the company’s new CEO. He boasted that they now had 28 full-time employees. Sales were up 20% and NET profits were down to 35%. When we discussed the difference in the business model and results his response was, ‘You just got lucky. It should never have worked. You got away with it.’
Well, I’ve ‘gotten away with it’ a few times more since that conversation.
There are many things you can do to arm yourself with sufficient knowledge to run a business without the need to hire a team of functional leaders. We live in a marvellous age in which technology, transport, and communication mean you don’t have to work your way through every department to get knowledge. If you’re young and don’t plan to start a company for a few years, you might like to consider it where you work now.
The more cross-function education you can get, the greater will be your entrepreneurial self-confidence, the less you will feel the urge to hire someone too soon. The cash benefit is obvious, and you will also be able to make quicker, more intuitive decisions when hierarchies and groups are in place. That is critical in the early phase of the start-up roller-coaster ride! This knowledge also helps in your choice and hiring of vendors and contractors.
Adopting a Hub model offers many advantages to a Successful Startup:
• Customers have a right to expect the same quality of service from every function of your business as they would from an established multinational firm. They are under no obligation to show empathy simply because you are a startup, no business can excuse poor levels of service because they are new or small. Outsourcing functions to expert-providers means the customer immediately experiences the same high-level of service as they do with a large, established one. Satisfied customers always return and refer others. Dissatisfied customers rarely return and are quite vocal about it. As CEO, you are looking for an established vendor with a positive track record. Check references, then use your intuition.
• Outsource providers adopt your company name when they interact with customers, you always give the impression to customers and clients of being a bigger company. I’ve used one outsource vendor that services over a hundred and fifty businesses ranging in size. My company was a modest revenue generator for them. Regardless, when any customer called the dedicated phone number provided by the vendor, they would hear the correct company name and were treated to the same quality as the multi-national company.
• Outsource contracts allow you the flexibility to add on or cut back services and volume according to demand, which helps cash-flow management. When cash-flow is turbulent, being able to pull in the reins of certain functions or put projects on hold, is tremendously helpful in managing money. As CEO, you are looking for a vendor that understands the turbulence of a start-up, one that offers flexibility in terms and fees matched to volume.
• Outsource providers are experts in performing their functions. Which means you need to spend less time keeping up with industry standards. In a regular career, most people have to attend training and updates to keep their functional knowledge up to speed. Virtual staff can do all that for you.
• In your previous job you might have spent a considerable amount of time managing and coaching less experienced staff. With outsourcing to experienced vendors, you can focus more on business growth. However, it’s important for you to assess the knowledge level of the people who will represent your company. Investigate the rate of staff turnover and level of satisfaction among the vendor’s employees. During the selection process, I always take a guided tour of the vendor facility. There are plenty of opportunities to talk one-on-one with the employees and ascertain what they think of the company. Staff turnover can be one of the biggest issues with this model. Look out for that.
• You don’t have to create operating procedures from scratch, simply edit the existing vendor templates.
• Vendors already have all the systems and infrastructure to manage staff like human resources. This way, you don’t have to spend your own cash, energy, or time on them.
• Vendors typically offer a menu of services so you can cherry-pick what you want, when you need it. You can start with the basics, then add and upgrade as you grow.
One time I worked as VP Commercial Development for a small company based in Minnesota. I lived in California and traveled to the corporate office once a month. It was clear from the outset that many of the staff were inexperienceda. Unfortunately, they didn’t realize just how much. This can be an issue in small (<500 employees according to SBA) companies especially one in which all the staff except me were born and bred in the same state.
Although technically it matters not, I was surprised to find I was working with a few people who had never seen a mountain or an ocean. That refelected in their industry experience. All they knew was how things were done in Minnesota and in the past. Their industry, however, was dominated by progressive, ground-breaking companies in Washington DC, Boston, San Diego and San Francisco where I knew things were being done far differently. Trying to raise their levels of not just performance but awareness of the latest trends and technology was exhausting. They resisted every reasonable suggestion for improvement and progress.
I was given a small budget and used it to hire seven regional business managers from the biggest cities in the US where our main customers were located. No one from MN. It did not go down well. But very soon the benefits showed in terms of the influence on the home office. People realized they needed to step up. The new people were energetic and sharp. In comparison, the MN people appeared almost asleep or on anti-depressants.
Somehow, we muddled through on a tight budget to get to the point where we were ready to launch a product. I was happy with the sales team, but the support teams for sales in the MN office felt to me like they were stuck in the past. I could not trust them to execute the plan effectively. Instead, I sought out vendors that could act as a bolt-on. Each vendor, based in the progressive cities, specialized in a function and didn’t as much blink between signing the contract and performing the work. I hardly needed to do anything. They executed effortlessly.
It worked beautifully. That is how I learned the benefit of the Hub model.
The old guard became disgruntled, and I never got a Christmas card from any of them. They were out of touch and it was not their fault. Their way of life was changing and they couldn’t handle it. They would have held an ice fishing festival if I had failed and got the sack.
I got that. But the company was heading over a cliff and something had to change.
At executive level everyone was dancing because the good sales results saved the company. Two years later the company sold to Jazz Pharmaceuticals for $124 million. No one at that company ever kept in touch or returned an email message.
The measure of freedom is to be independent of the GOOD opinion of others. As entrepreneurs our job is to do the right thing. One can make life hard for oneself by managing employees or easy for oneself by hiring vendors who need no supervision at all.
Homework time:
We’ve discussed how the new industrial revolution offers you the opportunity to return to a, ‘hamlet lifestyle,’ by working from home in a pseudo village-centric model. The way of life before the machine disrupted everything.
By also changing your mindset from a traditional business structure to a fully outsourced one, it means you can work from anywhere. You are now a master, instead of slave.
‘Knowledge digested becomes wisdom.’ I’ll keep repeating this.
Your homework, head somewhere quiet where you can think about all we’ve covered. That doesn’t mean puzzle over it. Rather, sit and consider what employee and workspace habits have been indoctrinated in you. Did you know Okun’s law was now defunct?
Imagine what mentality, management style, and structure would be the most fun for you. If you’re already a successful entrepreneur, consider areas that could be run as efficiently with vendors rather than employees. How much time would that free up for you? Oh, just imagine the release of all that stress caused by managing employees. Imagine no more performance assessments!
Consider what meetings you currently call that, behind your back, your staff think are more for your ego than for any real purpose. Empower them to make their own decisions about whether or not to attend.
Resources
In this VLS-E sub-group training for the startup we discuss the topic of whether boards of directors and advisors are needed. I describe two stories that have formed my opinion on this topic.
A few words about no employees.
