A Primer for Businesses Developing their Understanding of Culture Scalability and Employee Retention
“A good Employee Value Proposition (EVP) can help businesses retain and attract staff. Perks like healthcare, work-life balance, remote working flexibility, or clear paths for career progression can all work to keep employees happy and productive and going the extra mile as if they were in a smaller team.”
Scalability refers to an organization’s ability to meet increased demand while remaining profitable and efficient.1 The concept is often confused with growth; however, they describe two different processes.2
Growth occurs when a business adds resources at the same rate as adding revenue. For example, a company wins a new client. In response, they hire new employees to meet the increased demand. While their income has grown, so too have their payroll and other costs. With that, the company has grown in size, but its margins haven’t improved.
In contrast, a company that scales adds more revenues but at a quicker velocity than they add resources. Increased demand is met with increased efficiency — and, therefore, increased profits.
While scaling is preferable, scalability is not easy to achieve. As a company tries to scale, it faces a number of challenges. One of the most significant problems is that, while you can successfully scale outputs, processes, and the work itself, you simply cannot scale people.
People cannot be commodified in that way.
Scalability and why people don’t scale
Let’s use an example. Some friends began a startup in college. They work tirelessly on the product. Along their journey, they’ve added a few brilliant hires to their team that really believe in the company’s mission and are some of the best candidates in their field.
They build a steady user base, and their impressive margins attract VC funding. However, now they need to maintain this voltage as they add new customers.
The startup can add new outputs through aggressive market expansion—for example, more sales, outreach, marketing, and advertisement. However, when it comes to hiring new staff, they run into an issue.
Even with a large budget, they can’t find staff with the same knowledge, experience, passion, and expertise as their founding staff. Their initial rate of scalability was based on the brilliance of their people, and they can’t maintain that velocity as they add new faces.
This scenario is a common problem that affects many startups and newer businesses.
How attempting to scale can reduce efficiency
There are lots of potential pitfalls with scaling. An over-reliance on specific people is one of the most significant. Even the most gifted and hardworking employee can only do so much. As their workload increases, revenues can too, but only up to a point.3
Once a key worker hits total capacity, new resources are required. However, simply adding more resources doesn’t guarantee your business will operate with the same efficiency.
Diseconomies of Scale
Most people will be familiar with economies of scale. As companies grow, their production becomes more efficient as they can spread costs over a larger amount of people and goods.4
Scaling results in a lower production cost for goods or services. For example, a manufacturer can benefit from bargaining power when buying materials in more significant amounts. Additionally, they may invest in machinery that lowers the cost per unit through efficiency or reduced labor costs.
However, economies of scale have a limit. There are some situations where as production volume increases, so too do costs.
Factors that influence diseconomies of scale
Diseconomies of scale can occur for a wide variety of reasons. However, each reason is typically grounded in the difficulties that arise from managing a larger workforce.5
Coordination difficulties
As an organization adds resources, effective coordination becomes more difficult. In many ways, small businesses are easier to manage. As a business grows in size, it becomes more complex and challenging to coordinate.6
Different teams can have contrasting goals and ideas about what the company is. Additionally, they may become motivated by individual interests. Coordinating each team or department around common KPIs or goals can prove difficult in larger organizations.
Increased management
As a business expands, it needs to hire more people at a management level to supervise operations and delegate work. Poor recruitment or a lack of strategy can easily lead to top-heavy, bloated organizations with layers of management that add to costs without driving revenue.
As CEOs distribute power to management, the Principal-Agent Problem can occur. This scenario can lead to inefficient decisions that harm company revenues.7
Motivation
While not always the case, working at larger organizations can hurt some employees’ productivity.8 Often, smaller firms offer a more personal experience with more interaction with management and owners. This situation can create a higher level of accountability that drives employees to work to their full potential.
Larger firms can feel more impersonal. Additionally, contributions to revenue can feel more abstract, leading to lower fulfillment and meaningfulness.
A lack of innovation
Many companies that experience swift and sudden growth opt to “ride the wave.” Without small, incremental improvements, or innovation, market share can be eroded. When businesses expand to a particular side, managers can be reluctant to implement minor changes that may not have an easily measurable effect.
However, a lack of improvements or innovation can cause a steady drag on productivity and efficiency.
Scalability and how to combat diseconomies of scale
There are several techniques that can combat diseconomies of scale.
Separate offices, departments, or teams
Managing a large workforce is a big challenge. One of the most common solutions for combating diseconomies of scale is breaking the business into more manageable locations, departments, or teams.
While this approach isn’t a sure-fire path to success, it can be an efficient way to replicate the models that led to expansion in the first place.
Establish models that you can replicate
Any business model that heavily relies on a brilliant team or individual is vulnerable. If your competitive advantage is an employee, your business is not scalable. At any given time, your best workers can leave to join another company, or even start their own business, applying what they’ve learned at your company along the way.
Establishing solid models and processes will allow your company to expand without reducing efficiency. You can facilitate these models through investment in equipment, staff training, or clear and effective management structures.
It is important to leverage the creativity, buy-in perspectives, and harness internal motivations that enable processes that will grow (scale), and as you elevate your workforce – while continuing to automate lesser tasks.
Become employee-focused
As we mentioned above, as businesses grow, they can lose their close-knit, personal feel. Employees can feel isolated or less in tune with the company’s mission. This process can lead to a lack of motivation and even loyalty.
Businesses that want to expand must bridge these gaps. Several solutions can help employees feel valued and part of the team. Compensation is a powerful motivator. However, modern employees want more.9
A good Employee Value Proposition (EVP) can help businesses retain and attract staff. Perks like healthcare, work-life balance, remote working flexibility, or clear paths for career progression can all work to keep employees happy and productive and going the extra mile as if they were in a smaller team.10
Company culture can ultimately shape the means of success within a business.
Even though employees cannot be scaled, the importance of quality employees, who are equally vested in the success of their workplace, cannot be understated. With the present labor shortages, it is vital that employers give employees reason to commit to a workplace.11
Resources
- https://corporatefinanceinstitute.com/resources/knowledge/strategy/scalability/
- https://journals.aau.dk/index.php/JOBM/article/view/2235
- https://review.firstround.com/The-Dos-and-Donts-of-Rapid-Scaling-for-Startups
- https://www.journals.uchicago.edu/doi/abs/10.1086/466541
- https://corporatefinanceinstitute.com/resources/knowledge/economics/diseconomies-of-scale/
- https://hbr.org/1998/05/evolution-and-revolution-as-organizations-grow
- https://www.intelligenteconomist.com/principal-agent-problem/
- https://hbr.org/2019/03/4-reasons-good-employees-lose-their-motivation
- https://www.forbes.com/sites/forbescoachescouncil/2022/01/25/10-ways-to-keep-employees-motivated-at-a-large-business/?sh=6439010e1f35
- https://www.gartner.com/en/human-resources/insights/employee-engagement-performance/employee-value-proposition
- https://www.uschamber.com/workforce/understanding-americas-labor-shortage-the-most-impacted-industries
