Why and When to Hire the Next Employee

By:  Bob De Contreras

“Maintaining a 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. 

 If businesses 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 stair steps. 

 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 loss.

 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: 

1.   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.

2.   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.

3.   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.

4.   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.

5.   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 knowledge.

6.   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: 

1. 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.

2. 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.

3. Defer payments.  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.

4. 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.

5. Use contractors.  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.

6. Slow pay expenses.  Stretch accounts payable to their maximum allowed limit.  At a minimum your accounts receivable days must be less than your accounts payable days.

7. 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: 

1. 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.

2. Pre-paid royalties.  Enter strategic partnerships where the partner provides money up front as pre-paid royalties.

3. 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.

4. Up-front payments.  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.

5. Performance contract.  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 quota.

6. 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 growth. 

Why and When to Hire the Next Employee
Case Study

By: Bob De Contreras

Situation One:

 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 knife. 

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 considerations.

Situation Two:

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 help you.

Brought to you by:                                                         [BACK]

            Bob De Contreras                                                  
            Rich Kramarik