Big Red Car here. Been slacking off a bit on my posts, sorry, y’all. I’ll get back on it now.
So The Boss is working with a number of brilliant CEOs who are wrestling with growth issues–how to grow the organization.
A great tool to manage growth in an orderly manner is the dollar weighted organization chart. The drill goes something like this.
When do you know to grow?
If you have a good handle on your Vision, Mission, Strategy, Tactics, Objectives, Values and Culture — you will come to a time when you can’t get everything done (Objectives) with your existing team. No big revelation here, right? You don’t need to be hit by a meteor to understand this notion, right?
Before you start deciding how and where to grow make an organization chart. There are two basic types of organization charts — one which lists functional areas and one which lists positions. The combination of these two is where most effective organization charts end up. Nothing wrong with that but know that the functions are as important as the positions themselves.
Functional view of things
Functions (leadership, management, operations, marketing, finance, technology, administration) will ultimately determine positions. It might be helpful to include even those functions which you outsource. As you grow, you may want to outsource bookkeeping until you get to a certain size. Make the functional view of things work for you. Tailor it to your organization.
Subdivide the functions to provide a bit of realistic granularity. In regard to operations, you will want it to reflect what actually happens like order entry, warehousing, fulfillment and administration. The more granularity you have the more fine tuned your decisions can become. The more detail you present and see, the more detailed and fine tuned your decisions can become.
When you match what is not getting done with the particular functional area you will know where you have to grow. Shipping lagging? You will want to look at fulfillment.
Position view of things
Once you have made a functional organization chart, then you can do essentially the same thing by putting in names to accomplish each function. This is a simple matching game. Match the Finance function with Chief Financial Officer. If you have combined functions (e.g. finance and human relations in the early stage of a company’s development) then an individual may have more than one position. This is perfectly fine and is normal.
As your organization grows, the functions essentially stay the same but the number of positions increase. In addition to the number of positions increasing, the focus of an individual position may become finer and more detailed. You may start out with a bookkeeper and grow into a controller and ultimately a Chief Financial Officer, a Controller and a Head of Accounting.
This is why you must marry the attainment of particular objectives with the growth of the company. It is the attainment of objectives in support of the company’s Tactics and Strategy which is really driving growth. If you are growing sales from $1,000,000 annually to $10,000,000 and you know the productivity level of individual salespersons then the simple math drives the size of the sales force.
CEOs have a tendency to make the growth decisions more complicated than they need to be.
One of the big problems in life is we often cannot afford what we know we need. Money and runway and cash are merciless handmaidens who cannot be ignored. As Peter Drucker used to say: “What we measure, we manage.” You have to measure the cost of your organization and every future change.
Once you have made your organization chart — likely a mix of function and position — then you should dollar weight it. Put the cost on each person or position and function. Determine the exact cost of compensation, benefits, short term incentives, long term incentives and any specialized costs such as travel expenses or other costs unique to that position. Don’t forget the employer’s portion of payroll taxes.
Calculate also the cost as a percentage of a given level of revenue. This will ultimately be a yardstick which will allow you to make good future decisions when you can begin to see economies of size assert themselves or the necessity to pre-invest in certain capabilities (it always takes new salespersons some time to come up to speed and hit their sales objectives as they learn the product).
How much does the marketing effort cost as a percentage of current and future revenue? If you add three people and target a certain level of revenue can you see the utility of knowing whether that is more than, less than or the same as your current ratio of marketing expense to gross revenue? It is a great planning tool to keep things in balance. Try it.
The dollar weighting is a continuous process and should be a combination of a spreadsheet and an organization chart. When the CTO comes in and says he needs three additional software engineers you will want to know how that impacts the cost structure of the company. Right?
This type of dollar weighted organization chart can also be a useful tool to determine the “cut line” the level within an organization at which equity based compensation is used or not used. It is also a useful tool to determine whether compensation for individual positions is at market levels.
Take a second to update your current organization chart. Do it by function and then by position. Then dollar weight it. If you get real ambitious make a set of graphs showing the cost of certain functions over time.