No Man’s Land
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I’ve written in the past about the Black Holes of business. I first heard of the concept in Greg Crabtree’s excellent Simple Numbers, Straight Talk, Big Profits book when I was going through one. It’s a stage every company experiences when it roughly doubles its revenue. As companies get larger, the challenges that the owner needs to overcome change. Over the last two or so years, I’ve changed how I’ve thought about these times and thanks to a book recommended by Steven K N Wilkinson on his excellent Pitchfork Papers Substack called No Man’s Land by Doug Tatum
, I’ve found an excellent resource that articulates what I’ve learned. In this piece, I’m going to focus on the $10m Black Hole or No Man’s Land and how it is different from the previous ones at $1m and $5m. Here’s a not so quick over view of the first two Black Holes if you don’t want to read my earlier piece:
At $1m
As owners approach $1m, I often seem them get stuck. The demands of the business are starting to outstrip their ability to respond. At $300k or $500k, they were doing most of the work and could cover the back office with some part time help, gum, and toothpicks. Now that owner needs to hire a full-time person to cover many of the back office functions and 1-2 people to help with delivery of the product or service.
What I find is that owners don’t know which function should get the bulk of their time. S/he also is in a delicate dance about when to hire in full-time people and into which roles. It’s tough to go from being relatively free with just a few 1099s helping you out to being responsible for people’s livelihoods. You used to be able to skip a payroll to yourself if things turned down but now you have got to make payroll every two weeks or people get mad.
When I coach these owners I usually recommend one thing. You need to sell more. You can hire people for the back office functions and for delivery but you have almost no chance of hiring a good sales person
. Look at what you do everyday and then hire someone to do everything that isn’t sales-related or core customer care and then hire an admin. You are going to need to ween your time gobbling client off of you and onto a new person or trust someone else with the bank password (with appropriate controls of course).At $5m
If the owner sells more and starts delegating back office and delivery responsibility, s/he starts approaching the $3-5m zone. This is the Black Hole Greg named in his book. It’s at this point that the owner needs to hire someone who can manage largely independently of the owner. At this stage my company brought in an Operations Manager to manage all of our back office. We also started putting in more senior client managers who could take care of our customers day-to-day without owner involvement.
Management hires are tough. You’ll usually put the wrong person in place. I know I did. Then you’ve got to get them out and try again. There’s no easy solution to these issues but it’s the way it goes. That’s why lots of companies never get to this level.
At $10m
As you approach $10m, you have to get senior managers for every major function of your company or be well on your way to a full management team. This is where I’ve changed my opinion most over the last few years as I’ve navigated this time myself. This is where No Man’s Land comes in.
Although the book isn’t explicitly about a certain revenue level, I immediately recognized it as the solution to the growing pains I’d been experiencing for several years. Here’s how Tatum describes No Man’s Land:
As a distinct piece of geography, No Man’s Land looks more or less the same to all who pass through it. In particular, the set of business problems confronting a company’s leadership in No Man’s Land include the following:
The firm has difficulty fulfilling the customer promises it has to make in order to keep growing.
Business decisions become increasingly complex and beyond the capacity of existing leadership to handle intuitively.
The firm lacks a sense of how it is making money and what its future profitability picture will look like.
The capital markets are closed, and the firm has difficulty obtaining the financing it needs.
The firm’s leadership feels stuck and stagnant.
Reporting systems no longer provide meaningful information about the business.
I didn’t resonate with every bullet. For example, capital has never been a problem for us but it was about 85% right for my situation
. For several years, I’d found my professional services company stagnant at around that $10m level. Tatum’s book is about companies growing quickly and we had been that for many years but it had stalled. We had increasing numbers of customer service issues and we didn’t have the excuse of rapid growth taking our eye off the ball.In fact, I think we were experiencing what they call “technical debt” in the software industry from previous rapid growth. Quick and poorly made decisions, wrong hires, immature processes, etc. compounded over time and it finally caught up with us. We had increasing numbers of customer service issues, more staff turn over than usual, and I was pretty tired. The path forward was unclear and where it was clear it seemed distant.
This was No Man’s Land. It was different from the Black Hole at $5m and now I felt the challenges all that much harder to overcome. This is what I recognized in Tatum’s book. The way though No Man’s Land is to overcome four challenges: market misalignment, business model misalignment, lack of adequate capital, and getting the right management in place.
Management
For me, the biggest issue was getting the management right. At $5m, bringing in anyone with a professional background and decent experience is bound to help but at $10m going to $20m plus, I needed people who knew what they were doing better than I did. I couldn’t promote someone to sales director (did that three times) and then have to teach them exactly how to do that job. In fact, I needed someone who had done that somewhere else to come and tell me how to do it. Tatum writes:
As Davidson’s experience demonstrates, professional managers are often essential to a firm’s successful navigation of No Man’s Land. In transitioning through growth, most firms simply don’t have the additional leadership experience they need to scale the business upward. As a result, the business stagnates—not just for lack of an understanding of where the business needs to go, but for a lack of the kind of expertise required to get it there.
Market Misalignment
The second issue we were experiencing was market misalignment. As we grew, the kinds of deals we needed to bid on to move the needle grew in size and scope. As the owner, I couldn’t be the lead on all these engagements and I didn’t have the knowledge or capacity to swoop in and save things when something went wrong anymore.
Of course, it’s one thing to be aligned, quite another to stay aligned. During the firm’s early stages, the entrepreneur instinctively manages development of the value proposition by deciding which promises to make to which customers, then changing the business incrementally to meet those promises. The right promises lead to development of the firm’s ultimate value proposition and to innovations that will continue to drive the company’s sales.
Now I, as the owner, needed to navigate a changing value proposition without the “dirt under your finger nails” knowledge I used to get in direct client delivery. I had to use different sources of data, read the market through other’s eyes, and find good people who gathered that knowledge and could communicate it to me.
I had to figure out how to hire people that could fulfill the promises we made to customers without me interviewing all of them. To be honest I wasn’t even that good at selecting people anymore when I did interview them. I had to start relying on others to help me judge the risks on different pieces of work we were looking at bidding and I had to stop green-lighting work that made no sense for us to do just because it sounded interesting.
Business Model Misalignment
Our final issue was business model misalignment. Tatum writes:
During the start-up phase, most entrepreneurs don’t construct formal models for their businesses. Rather, they understand the financial interrelationships of their businesses intuitively. They know whether they’re making money or not by the end of the month even before they get historical financial statements. Since they involve themselves intimately with both marketing and operations, they understand how their revenue relates to costs, and how costs relate to the promises they make to customers.
And then:
All of us want to have people around the organization who are as passionate as we are. Ultimately, though, you can’t build an organization on superhuman effort. Sustainable profits must be built on normal people doing normal things for normal compensation.
We didn’t have cost issues but we did have issues growing quality delivery once we ran out of the people who had been trained over time in our way of doing things by delivering side-by-side with more experienced managers. Once growth picks up, you realize how few people are around that can stand up a new piece of work. Soon there is no “next man up.” You then have to hire outside. Our hiring model had been based on bringing in bright but inexperienced young people to work under our core of experienced managers. We didn’t know how to change the hiring and oversight systems to bring in brand new managers and, at times, brand new teams.
In sum, Tatum had identified every issue my company was going through. It’s a very strange feeling when you suddenly realize that your individual problem is in fact a universal one. I had this same feeling when I found Greg’s book at $4m but the larger your company gets, the fewer books there are about your situation because fewer people make it there.
Ok, that is long enough for this blog. I’m going to expand a bit further in another blog on some of the steps we’ve taken to over come the issues Tatum identified.
As Greg Crabtree often says, “I’ve never met an employee who took terms.”
As Justin Roff Marsh often points out: there are some amazing sales people but they all make $2m a year and work at Oracle
This is an incredibly high hit rate.
Once you become a large or publicly traded company this is no longer true. Now you have the whole management consulting and business school industry focused on your issues but in between there’s not a lot.