Why and When to Hire the Next Employee
By: Bob De Contreras
successful business is hard enough; growing a business is sometimes
impossible.” I heard this from one of our clients recently. The problem with
managing or driving growth is the cost or investment needed.
grew linearly or even exponentially you could make small investments to drive
and fund growth. The problem is that businesses more often than not grow in
This means that a significant investment in cash, people and/or
other resources is needed at recurring, short periods of time (the lift in the
stair). This is then followed by a longer period of time where the business can
avoid the investments and retain earnings (the run of the stair) to pay for the
next investment requirement. For example you typically can’t add a part of a
person; you have to add a full person. For a professional position that could
mean 50 to 100 thousand dollars of additional expense per year. For some 2 to 5
million dollar revenue companies that can be the difference between profit and
As you look at
investment, one of your most important tasks is insuring you have sufficient
human resources. As CEO or business owner, it's your job to make sure you have
sufficient resources and the right people to get the job done – to keep your
company running smoothly. Now let's say your business is growing and you're
sensing you need to hire a new employee. How can you really be sure the time is
right to bring in additional resources? Here are some typical clues:
Your employees are working a lot of overtime.
They are working the proverbial 50 – 60 hour work
week. They're letting you know by complaining that they have too much to do.
Your task is to determine if they're legitimate complaints. Get your employees
to validate their concerns. Look at attendance, utilization and productivity
indicators to validate their claims. If utilization or productivity is down,
then you could reorganize and restructure roles and responsibilities to better
deal with the workflow. Or you may need to bite the bullet and release a poor
performer and rehire another employee.
If only your employees had the time.
Employees claim they want to take on more tasks or spend additional time on
current ones that will fuel company growth – but they just don’t have the time
to do it.
Increased demand trend.
The demand curve for your products or services is increasing, and you identify
that it is a durable trend, not just a short term trend.
No available resources for a new task.
You see an opportunity for growth and expansion in your industry or related
industries, and decide that now's the time to take a calculated risk to expand.
But current employees aren't able to assume additional responsibilities.
New skills or knowledge needed.
You determine that your employee's existing job skills and knowledge are fine
for your company's current level of productivity, but to expand, you'll need
either increased skills and knowledge or a new and different set of skills and
Revenue is at or above target.
You project the revenue trend to continue. You are able to fund
the next growth spurt in your business.
After reviewing your business by taking
into consideration the six points above what do you do next? What are your
options for “making it happen?” For the start-up company:
Find free space.
Early on you need to use your cash to complete the proof of
concept and start operations. There is no company structure at this point.
Save money by finding free space at a university or use cheap incubator
space or work out of your home.
Buy used equipment.
Don’t buy anything new. “Beg, borrow or steal” what you need
in used form. Seek equipment through donations or grants. Only get what
you need, not what you would like to have.
Find ways to pay for people and things with deferred
payments. “Employ” new staff by giving ownership in the company, not
salary. However, Stock options are diminishing in use today.
CFO, COO, CTO not needed.
Don’t hire expensive “overhead” before you need or can afford
it. Use contractors (a variable cost – not fixed cost). Prioritize your
employee needs. You most likely will need a sales executive before other
executive positions so you can drive revenues up. Unfortunately, I seldom
see this priority in start-ups.
Balance your staffing with a mix of employees and
contractors. Employ a mix of full time and part time employees. This
strategy will allow you to minimize your need for capital and control
expenses by using a pay as you go methodology for human resources.
Slow pay expenses.
Stretch accounts payable to their maximum allowed limit. At
a minimum your accounts receivable days must be less than your accounts
When revenue is flowing.
When customers are signed and revenues are flowing don’t open
the flood gates of spending. Go slow and transition into low cost
facilities, upgrade equipment, pay deferred payments, convert contractors to
full time employees and hire appropriate management all from your
prioritized plan. But, go slow.
For the more mature company:
Continue pay-as-you-go strategies.
The best rule-of-thumb is to generate the revenue
before you take on the expense. There are some exceptions where you can
quickly pick off some low hanging fruit to generate immediate cash to fund
additional resources that help you realize long term gains. However,
whenever you spend before you earn you should weigh the decision carefully.
Enter strategic partnerships where the partner provides money
up front as pre-paid royalties.
Buy now, pay later.
The second best rule-of-thumb is to utilize resources that
are buy now, pay later. This could include commission only sales
representatives or employees willing to work for equity.
For services that require hard goods, ask for money up front
to pay for your out-of-pocket expenses. Ask for milestone payments with 25%
paid before work starts, 60% spread in equal payments over the life of the
project and the final 15% due after project completion.
This is a compensation program that increases base salary
and/or bonuses in a direct correlation with performance (high performance
wins high pay, low performance wins low pay). For sales staff this is
implemented as higher percentage commission for attainment over 100% of
Hire decision based on workload.
Don’t hire the next employee until the current
staff is working at 125% to 135% utilization/productivity. At this level of
productivity you are able to cover the incremental cost of the next hire.
The only way you are going to be able to
grow retained earnings on the run of the growth steps so you can invest at the
climb of the stair is to have a plan. The plan must have your measures of go /
no-go on investment and hire decisions. Your plan, not your ego must drive your
Why and When to Hire the Next Employee
By: Bob De Contreras
One of our clients is in the public relations business. It
was a small firm with about nine top notch professionals who each had been top
level executives with the who’s who of big name PR firms. They service a client
list of fortune 500 companies in a couple of industry sectors.
The CEO had kept the firm small on purpose because of
industry experience of significant margin pressure as firms grow above the
number of nine professionals. About a year ago the CEO made the decision that
it was time to grow the company, expand into other industry segments, and hire
some younger (in experience and age) professionals.
The company had cash reserves, was taking on new clients
(growing revenues), and finding success in new market segments. The CEO had
hired some short term contractors to support growth into the new markets and
after landing the new clients then hired permanent employees with the skills and
knowledge required for the new market.
The growth scenario also precipitated formation of new
strategic alliances with other PR firms and service providers already familiar
with and active in the new markets. This led to referrals to more new clients
and a continued solid revenue growth.
Sounds like a great story so far. A CEO who, by-the-way,
planned the growth through sound research and involvement of the entire
professional team at the firm. A plan that was put together before the first
step of expansion took place. But, then it happened – the unexpected. The
thing that was in the back of everyone’s mind, but not considered in the growth
plan. With the mix of new talent and old talent, the mind sets of new employees
who wanted to exercise the different but successful process and programs from
their former firms, and the formation of teams where before everyone was an
individual contributor, what now surfaced was chaos. Productivity dropped,
error rates increased, tension was so thick you could cut it with the proverbial
The firm was now at a headcount of 25 professionals all
fully employed with a large backlog from the work coming in from the new market
segments. The CEO implemented training programs, team building programs,
reorganized the teams and the workflow. The CEO was buried with new work
settling disputes and dealing with customer sat issues. Some of the new
employees were released because they “just did not fit in.” New employees were
hired to replace them.
The message here is that it is not enough to just figure
out why and when to grow. The company needs to also consider organization,
communications, job descriptions, lines of responsibility, how to deal with new
ideas coming into the company with the new employees, and much more. The growth
plan must also include how the personality of the company is going to change and
how to deal with it. The growth plan must also consider the company cultural
changes that will be driven by new employees who bring new culture from their
old employer and different business sectors.
The bottom line here is don’t grow too fast. It takes time
to sort out all of these factors even if you considered them in your plan. Grow
slow because of financial considerations; grow slow because of human resource
This company is a national firm serving the retail
industry. It’s a services company that provides temporary staffing to set-up
retail store displays. This is a very successful company that has grown from
zero to over 5 million dollars in revenues in just two and a half years.
This is a totally human
capital intense business that in the beginning was made up of full time
employees. The employee base was scattered around the country and most of the
time had to travel (often by air) to the job. The employee headcount was in the
neighborhood of 400 employees about one year into operations. Operational costs
were killing profits to the point that for two years there were no profits.
The retail companies required
that the temporary employees be covered by workman’s compensation insurance. To
get the insurance the workers had to be employees of the company. This made it
impossible to use contract workers.
The fix was actually very
simple. The company kept the workforce as employees, but changed the
compensation plan so that they only got paid when they worked (sounds like
contractors to me). This way the company was able to get the worker’s
compensation insurance and cut cost to the level of contractors. The company
now has over 3,400 employees around the country who get paid only when they work
and travel costs have been almost eliminated because there are company employees
in just about every major city.
The bottom line here is that
there are always creative ways to solve growth problems by deferring or reducing
growth costs. If you need some help working on yours, Paladin is prepared to
Brought to you by:
Bob De Contreras
RTBA | Cary | Greensboro | Raleigh | Research Triangle Park | North Caroliina
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