One of the “newest” buzz terms --- a buzz term I hear a lot lately --- is “Scalability.”

Simply, scalability means, “Can we ‘up-size’ this product, service, business as we grow?”

If you walk the halls of any MBA school, you’ll hear the phrase, “Yeah, but does it scale?” Or, “Let’s see what happens when we scale it up.”

It’s an important question. Let me give you an example.

Perhaps two decades ago, I was involved in the sale and implementation of an MRP (Manufacturing Resources Planning) system at the H.J. Heinz Company here in Pittsburgh.

My mind blurs, but I think the plant we automated was in Muscatine, Iowa. They made all sorts of products, mostly condiments.

Whenever this plant experimented with a new consumer good (relish, mustard, horseradish sauce) they would first concoct the recipe for that good just as would a housewife preparing for a Thanksgiving dinner. That is, they would mix up a small batch of the relevant ingredients and then give those ingredients to a sample of consumers for taste testing.

Not real complex. The product that “won” was almost always the product whose ingredients tasted the best.

The problem occurred, however, whenever they increased the ratios of measured ingredients from “tea spoons” to “barrels.” You’d be surprised how a recipe can break down simply by increasing the overall quantity of its ingredients.

So goes it with companies. Just like food products, companies also don’t always “taste the same” when you scale them up.

Businesses, of course, are made up of models and processes. There are revenue models and there are production models. And within these --- especially production --- there are many, many processes.

But in all of these and many other cases, it is axiomatic: models don’t always scale up.

There are many reasons why this is so. First, I give you the “Heinz Factor” --- just discussed. Sometimes ingredients that mix really well in low volumes just don’t “like each other” when the quantity increases.

You see this a lot when start-ups take off. All of a sudden, the people who spent evenings and weekends struggling to build something are subordinated to “professional managers” who see the world through “nine-to-five” glasses.

But there are many other reasons why organizations “fail to scale”. Here are some of them:

• Distribution-related – Again, a company’s distribution methodology is itself a model. Years ago, I owned a company called Primo Magazine. Primo was a magazine targeted to persons of Italian-American descent.

  We started Primo in Pittsburgh. At that market level, distribution was a snap. I remember personally driving hundreds of copies of each month’s issue to a place in the Strip District (basically, this is a part of Pittsburgh where consumers can enjoy outdoor shopping and pick fresh produce and vegetables) where I would simply leave them for consumers to pick up.

  Once we grew, however, we had to begin mailing copies at the detestable rate of about $1.50/each.

  All of a sudden, what was a “non-expense” became one of our largest expenses – postage.




• Marketing – Here, I’ll give you the example of Pittsburgh Business Radio*, our current endeavor. When we began PBR, we relied on word of mouth to garner new listeners. This was easy because the product was good and its listener base was concentrated in and around Allegheny County. Our listeners – entrepreneurs – soon began talking to one another. It wasn’t long before we had a significant number of listeners. In essence, we benefited from the lowest-cost method of marketing – word of mouth.

  But as PBR goes national, this model will have to change.

  As will the cost.

  For example, when PBR was just regional, listener-oriented marketing costs were less than one-tenth of one percent of all revenues. But to promote nationally, this number can, and likely will, jump to anywhere from three to five percent of our revenues.

  Can we afford this? Stay tuned. The one thing we do know is that our model will change.




• Cash Flow – A third example of scaling up is its effect on cash flow. A company that sells to just a handful of “friendly” customers can easily pick up the phone and ask those customers if they can pay “right away.” Sometimes a start-up can even get its customers to pay up-front.

  But when a business grows, customers aren’t so friendly. In fact, many of them will make an art out of delaying payments to you. You had better prepare for this.

Scaling, Scaling – II

So far, I’ve spoken only of scaling the business model. But what about the individual? Is he/she subject to the “laws of scalability” as well?

The answer is a resounding “Yes.”

My ex-business partner, and whenever interviewing a high-level prospective associate, would always say, “But what’s he/she good to?”

This was his code for the all-important question, “Can this guy ‘play’ in a twenty-million-dollar business, or does he ‘crap out’ when the numbers are closer to five-million?”

It’s an important question. Particularly if you are looking at executive-level people.

Because a company that’s headed for twenty-million dollars in revenues will just not do well with a bunch of players whose “ceilings” are somewhere closer to five, or even ten-million.

Believe it or not, different people are often necessary as organizations get bigger. I can’t explain this, but I’ve seen it my whole life.

There are a lot of reasons why people just cannot scale. Included among these reasons: lack of high-level experience, lack of technical familiarity, and my favorite --- inability to manage large groups of extremely polished people.

I’ve said it a million times, “Great salespeople are born and not made while great managers are made and not born.” In my opinion, it takes at least a decade to learn how to effectively manage managers.

And when a company grows, this is a necessary skill. If you were to say to the founder or a CEO, “How many managers do you have?”, he or she would laugh in your face. For start-up founders know better than anyone, “Managers are overhead.”

But the final point of this article is perhaps the most important point. And I hope that you’ll pay extra attention to what I’m about to say.

The fact of the matter is that true entrepreneurs are, and by definition, patently unable to run a steady-state business.

Yes, that’s what I said, unable.

I’m convinced of this. I’ve seen it too many times. Once a business reaches the point where its day-to-day is a series of definable and repeatable processes and steps, the entrepreneur is ready for the loony bin.

This is because entrepreneurs need complex (and new) problems to solve. All the time. The last thing an entrepreneur wants or needs in his or her life is “routine.”

And yet “routine” is the state that all businesses aspire to. It’s that magical place where costs are low and efficiency is high. Succinctly stated, it is the place of high profitability.

This conundrum must be addressed, and unless our entrepreneur grows and changes (it seems like this only happens in about 10% of all cases) he or she is going to need what I call a “brake person.”

In other words, a professional manager.

This is not only appealing to the entrepreneur, it is necessary if he or she plans on maintaining any sense of sanity.

Your business is always in one of three states: it is growing, it is stuck in neutral, or it is shrinking. These last two states aren’t good.

If the first state is your objective, start thinking “scale” and all that “scaling” implies, right now.

You’ll be glad you did.