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Saturday, July 3, 2010

Build…Borrow…Buy… An Optimal Growth Strategy

Mother Nature gives us the cobalt blue skies with white fluffy clouds to enjoy.  She also provides the variety of the four seasons and the consistency of their renewal cycle.  However, Mother Nature hates a vacuum and will seek to fill any occurrence.  In addition, she is constantly in motion – blowing wind, rotating earth, flowing rivers,  orbiting sub-particles in the atom – everything is in motion at all times.

In business, these same natural laws also apply, although observing them in action may not be as simple as with the wind and rivers.  Once established a business is always in a cycle of motion – it grows; it contracts; it replicates; it splits…it does pretty much anything but stand still.  Business can’t be motionless – except just prior to launch and as a placeholder in the history of failed organizations.

A popular axiom is a business must always grow.  In recent times, growth has been hard to achieve.  Leaders who have been successful in growing their organizations have had to navigate world competition, a world labor market for knowledge and administrative workers, changing market demands and a contracting domestic & world economy.  Whew!  What a collection of factors to juggle while trying to successfully lead an organization.

Let’s assume away all the things that can not be changed or influenced in a definitive way by an individual or single organization – this is most of the list in the preceding paragraph.  These factors can not be ignored of course, but the leader can not plan them away either – they are dynamic constants but are external to any plan – so we will assume they are not in play for this discussion.

How does an organization grow?  Traditionally, growth was by adding new employees and resources when needed, or in advance when positioning to get ahead of the curve.  This requires capital investment and committing to increased labor costs – affecting flexibility of the organization when agility is needed.  During expansionary times, the firm ‘grows into’ meeting the additional production needs.  Thus, the organization was building to create growth.

When I opened a new regional office, this was the way we developed additional capacity – building it by hiring and training new employees and transferring experienced staff to the office, and purchasing capital equipment to outfit the facility.  We launched the office and very quickly came up to full production.

As times changed, growth looked more like an accordion – the economy expands; the markets contract; new hiring; rounds of layoffs.  So leaders would borrow people and resources when needed through strategic alliances, joint ventures and use of contract employees and leased equipment. In volatile times this approach provides the flexibility to expand quickly when appropriate and contract quickly when circumstances change.  This flexibility through borrowing people and equipment does carry an extra cost – in most cases, the unit cost to ‘borrow’ is greater than the unit cost to ‘building’ - BUT…when flexing up and down the combined cost of alliances, contract labor and leased equipment will be less expensive overall than the carrying costs of under-productive employees and capital assets during a downturn.

My approach to launching a new service line included leasing experienced talent and using an external contractor with the required equipment and trained technical staff.  Doing so permitted immediate entry into a new market and mitigated the financial impact of substantial investment before expanded cash flow.  As the volume grew, we developed our own creative staff and obtained the technical equipment and hired technical staff with a comparable reduction of ‘borrowed’ staff and equipment.

The third leg of this stool is to buy growth through merger and acquisition.  There are many sound examples acquisitions and business combinations that have created an entity which is greater then the sum of its individual parts. The key to successful M&A activity is a vision, which clearly conveys how the combined organization will have superior results compared to the independent organizations operating in a loose confederation of equals, AND detailed comprehensive due diligence.  In practice, the implementation plan (who does what on the first day of the New Organization and the transition thereafter) is a critical element for the success in operating it.

Mergers and acquisitions are costly ventures – legal, management and staff time to document the existing organizations and to create the new one; focusing only on short-term activities which enhance immediate returns; the unknowns & uncertainties during the planning reduces productivity and cause key staff to investigate other employment opportunities.  That said, a well conceived and executed merger can leap-frog the organizations ahead by as much as a decade what they could accomplish pursuing only a ‘build’ approach.

As a key staff member in a merger, I experienced first-hand the intricacies of the preparatory stage, merger plan development, and the elaborate due diligence process.  This is an exhaustive and all-encompassing activity, during which we gained incredible knowledge of both our organization as well as the other organization.  With this information at hand, the detailed planning for a combined entity was far more comprehensive and innovative than merely combining the accounting & HR departments and acquiring some additional clients.  The experience gave me a keen understanding of the place for mergers in organizational growth.

So, how does this affect today’s leaders?  Successful organizations must retain flexibility and agility to meet the challenges of doing business in the existing world economy and world markets (we can no longer focus solely on the domestic market).  Leaders will judiciously use a combination of each of the three elements of growth … build – borrow – buy … to optimize  the size and capacity of the organization to meet the market demands and satisfy client needs.  Tending to the core products and services (always with an eye to improvement & production efficiency) is a given, but seeking to identify new or different client needs and develop effective ways to meet them should always be on the radar screen.  This final element of what is needed is really a primary focus of the successful leader, trusting the managerial staff for delivery of the core products and services.  And one of the more important tools at hand is what combination of the B-B-B will yield superior results satisfying the evolving needs of current and future clients and customers.   What a great time to be in the leader’s seat!

Do you agree?  What’s been your experience with managing growth in these economic times?
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