Don't let the pursuit of ROI put you on a downward spiral to stagnation
Don't let the pursuit of ROI put you on a downward spiral to stagnation
My argument why focusing too much on capping (or cutting) employee size might be your long term doom
Imagine you are an exec who has been told recently that if he or she doesn’t make effective use of their resources (i.e. cash), someone else will be given this opportunity.
If you are like most humans, you panic, and you go back to your ROI metrics, and dive into what you can do to get most return (revenue) for your investment (cash burned). If you are like in most scale ups, the most of the cash burned is for employee salaries. Hence you focus on the revenue per employee metric.
Now, because in start up world a Quarter can be too long, what do you do? The Numerator in the equation will take long(er) to raise. To do so, you and the execs would have to develop and employ a point of view on the world, what needs customers have and will have, how to capture the business opportunities around those, what channels to use, what skills to add to the company etc. A rejigging of what you are doing might mean a complete overhaul of your business. In other words, if you are given a simple equation, and the numerator would take months to act on, and possibly more until you see the results, you will feel in a pickle.
The denominator though, seems much easier. Just cap the number of employees. Or if you are in an unfortunate position, start cutting “fat” (while hoping the rest of your workforce still feels like “valuable employees”). You go back to your spread sheets, muster a VC-induced benchmark on ROI=Revenue/Employee, and consider your job done. But is it?
There are two problems that I see:
The ROI average benchmark hides a lot of valuable information - what I mean is, it is generic. There is this study floating around the internet, and gets thrown around in every single WhatsApp group I have inquired (that’s more than 5 of them). Advocates say ‘it has a sample of 1500, it must be robust'.’ And while a sample size is important, the issue with the way the data is presented (I’m unsure if it is collected in the appropriate manner) is it doesn’t take into account various GTM models - would you have the same GTM force if you are PLG as if you were Sales led? Would you have the same amount of employees if you were based in North America vs Europe vs APAC? The answer is No. A Sales-led motion requires a… sales force; beef that up if you are Enterprise. If you are PLG those sales people would not be needed.
It is a defensive strategy eating at your growth - a strategy to keep you small, maybe better, but at the cost of momentum. Cutting or capping the employee size doesn’t often result in a fundamental improvement of the business. It buys time. While in the short term numbers look good “on paper”, the longer term effects of a hard employee cap, achieves this: slows momentum, burns out the rest of your people, and potentially has you leaving money on the table.
Don’t get me wrong. This is not an argument for “growth at all costs” and “blitzscaling.” A short glance at my CV would show you my experience in such environments. I have developed skepticism of said approaches’ potential for success in the current economic environment. But I do believe there is a goldilocks zone for growth in a smart way. How?
I have three tricks up my sleeve.
Accurate Guardrails: For starters, yes, have an absolute maximum employee size in mind that is agreed with the Board. Anything you do should not exceed this.
Make sure that this number is based on benchmarks relevant to your industry, business model, and GTM approach.1
Then make this max number dependent on hitting revenue targets. Design a tiered approach, where, as you hit monthly and quarterly targets, you unlock potential for new key hires.
Make the ROI denominator flexible, and responsible.
Customer-first approach (duh!): The second part directly tackles the issue of increasing the ROI numerator. You can use the Journey Management framework to help you be truly customer centric, to help you identify the customer insights scattered across segments, and markets. Using the framework and a thoughtful discussion about the customers, channels, competitors, advantages, business model, markets of the next 2-3 years should set you on the right course.
Develop what is needed by your customers, not what the VP of Product wants.Internal Customer-first Ops: To be “smarter” about how you operate in the first place, apply the same framework for your internal operations as well. I did a walk through of our Quote to Cash process, available for rewatch here, and a description of how to effectively develop initiatives. You will force yourself to look with fresh eyes at your internal systems.
Develop systems with shortest time to value.
My father used to say “If you feel like you don’t have enough money, don’t go thinking about what to save on; go think up ways to make more money.” He is an innovator, and he doesn’t even know it.
End of the day, if you panic, remember to slow down to speed up. The way I think about it is Denominator-led ROI initiatives are defensive, and akin to accounting exercises. Nominator-led ROI initiatives build and transform businesses capturing long term leadership. What would you do? The choice is yours.
My advice is to find a benchmark that has at least 100 companies, for the industry sector and GTM motion you are going for. Now that’s more valuable than a whole scale up average. If you are struggling for benchmarks, ping me, I have a few studies.