CHAPTER TWO

WHEN (and WHY) EMPLOYEE SIZE MATTERS
A Different Way of Measuring the Five Stages

In the last chapter we looked at the five stages of entrepreneurial growth. I posited that there are unique problems, challenges and opportunities an entrepreneur will face at each ot these stages.

I delineated those stages by revenue because rising revenues create significant changes and because most entrepreneurs and would-be entrepreneurs think of business growth in terms of revenues.

In my experience, revenue growth has a direct and substantial impact on sales and marketing opportunities, product development challenges, operational and fulfillment problems, and regulatory issues, to name a few.

But another metric, the number of employees and/or decision makers a business has – can be more relevant in understanding other business opportunity, challenges and problems, such as hiring and firing practices, wage and incentive protocols, labor issues, corporate communications, centralization, and other management issues.

There are good reasons for that.

In The Tipping Point, Malcolm Gladwell wrote about anthropological and social studies tribal and group development dynamics. talks about how communication is affected by the size of the community. Seventy thousand years ago, these studies found when tribes got bigger than 30 individuals, they tended to split into two, but the two could live and work in harmony together until the group size exceeded 150.

After that, the intimacy between tribes broke down considerably. The reason for this, anthropologists have suggested, is about communication. With a tribe of 30 people or fewer, the leader can give his time and attention to everyone. He can communicate what he wants to communicate and intervene on an individual basis with anyone that strays too far from the tribal goals.

From 30 to 150 people, it is no longer possible for any one person to give close attention to every person in the larger group, but the leader can still exert significant influence over the larger group by giving his attention to the sub-leaders of each of the tribes of 30, which were generally people he chose.

But once the group exceeds 150 people – or five tribes of 30 – control is much more difficult to exert because it’s unlikely at that point that he has personally appointed and groomed the next tier of leaders. They respond to their mentors, who are three steps removed from him.

In Sapiens, Yuval Harrari tackles the same subject, suggesting that this control and communication problem was resolved by myths – stories that could be passed along from one tribe to another, stories that conveyed the core beliefs of the larger group.

And then there are several contemporary studies on business communication that conclude that the optimal number of employees any executive can effectively manage is six or seven.

When I first read about those studies, I doubted the conclusions. I felt sure I was already managing many more people than that. But when I measured what I was able to do – in terms of real influence – in my day-to-day working life, I discovered that six or seven direct reports was about all I could manage.

From this I developed a theory that dovetailed well with these business and anthropological studies. My theory is based on attention and influence – this idea that there is a limit to how many people any one person can know and influence.

It goes like this: In starting a business the founder hires a handful of people – usually seven or fewer – to help him get the business off the ground. There are seldom strict job descriptions or formal titles at that point. Everyone is expected to do whatever he or she is asked to do.

Working with this family, he gradually figures out the strengths and weaknesses of each member. Eventually some sort of division of labor takes place. He puts one person charge of marketing, another in charge of sales, another in charge of research and development, another in charge of production, another in charge of customer service, and so on.

Because he has hired and trained and gotten to know each of these people individually, he has no need to “manage” them in any formal way. They “get” him. They grock his desires, concerns, and peccadillos. They understand his “vision,” if he has one.

Each of these individuals may be different from one another. One may be fastidious. Another a quick thinker. One may be charismatic. Another shy. These characteristics don’t cause problems because each of the seven understands the founder and each can apply his individual strengths to further the company’s agendas.

Now the business gets bigger. And each of these seven people end up running these little operational units they’ve been given. The marketing guy hires an SEO expert and a direct response whizz. The sales gal hires six hungry salespeople. The guy in charge of customer service hires 12 employees to handle the growing volume of sales.

The communication between the leader and his immediate team is still as close as it ever was. But now you have another, say, 30 employees at this second tier.

None of these second-tier people report directly to the founder. But they bump into him at the coffee machine, and they meet with him when he sits in on one of their group meetings. And every so often they hear a little speech from him presented to the company as a whole.

They direct contact, in terms of back-and-forth discussions, is less than that of the second-tier employees, but it is still quite good. They see him regularly, understand him well and just as important, he (the founder) feels the same way about them.

They know him. He knows them. His influence – in terms of communicating his ideas, ambitions, and concerns – is easily and quickly communicated.

Now the company grows again and some of these third-tier employees are promoted to junior management positions as the size and the complexity of the individual departments gets bigger. The marketing department, for example, might break into three divisions: SEO, direct response, and “onboarding” or backend. Sales might be split into outbound and inbound, or prospects and buyers. Customer service might be broken into one group that deals with routine service issues and another that responds to more serious issues regarding product quality.

At this point the business has a population of 100 or 200 employees grouped into a half dozen departments, which are each subdivided in some way. These new hirees – these fourth-tier employees – will no longer have the same access to the guy on top that the first and second tier employees have. They will only occasionally bump into him at the office and when they do, he probably won’t know who they are. What they hear from him or about him will have passed through three gaps.

Now remember what I said in the beginning: that these first-tier employees may be very different in terms of personality, perspectives, and goals than the founder. In fact, this is quite common because founders tend to be strong willed and demanding. Dominant personalities generally attract submissive ones. To survive and prosper as a first-tier employee you have to embrace the founder’s goals and accept his style of leadership. But that doesn’t mean that you have to use the same style of leadership when dealing with your employees, in the third tier.

And the same is true for the third-tier employees that get promoted to management positions: they may have different desires, goals, and expectations than their second-tier bosses have. So when they hire and manage fourth-tier employees there is a good possibility that the core beliefs, ambitions, and interests of the founder – i.e. the “company culture” – will be conveyed to those fourth-tier employees.

And then, of course, once the business has five tiers of management that culture at the top can be all but gone.

For these new employees, the founder is a corporate ghost – someone they’ve heard of and may have seen once or twice – but they are no more connected to him or her than they are to a TV personality.

As you have noticed, in discussing the issue of employee population, my focus has been on proximity: how far away from the person of the founder each new level of employee is.

And my theory is that when it comes to hiring and firing practices, wage and incentive protocols, labor issues, corporate communications, centralization and other management issues, proximity to the founder matters.

THE FIRST TIER

The entrepreneur should have no communication or management problems with his first-tier employees. They are usually people he has known for years and, if not, they have been vetted by him personally. He knows what their capabilities are. He knows something about their work habits and personalities. And presumably he’s made it very clear that their jobs are to do whatever needs doing and are expected to work like crazy to make the business work.

And these people, this core team, they know the founder. They understand his goals and ambitions. They are familiar with his way of getting things done. They recognize that to be successful in this start-up business they must adjust their ideas, expectations and work habits to jibe with those of the founder.

Because of the nature of startups – the great demands put on every member of the core team – there is really no reason to worry for the founder to worry about communication and management issues. The founder leads the way – in whatever way and in whatever direction she feels is right. The first-tier employees follow.

This isn’t to say that a founder can’t make mistakes with her first-tier team. She can overestimate someone’s competence, or underestimate another’s disagreeableness. She can discover that someone that is very good at sales is very bad at managing salespeople. She can hire a friend or family member – almost always a bad idea.

But these are not communication and management problems. They are hiring problems. And hiring problems can be solved easily at this first-tier stage. The solution is to fire the problem person. Don’t hesitate. You won’t gain anything by handing out second chances. Trust you instinct. Vacate the seat. The rest of the core team will appreciate it and you will too when you see what a hugely posititve impact a better person will have on your business.

THE SECOND TIER

The core start-up team – you and your first-tier employees – is usually all you need to figure out your optimum selling strategy (OSS), break the million-dollar sales barrier and get the business into its second stage of development.

It can take years to get to this level, but once you get there – once you get into stage two – growth usually comes hard and fast for several years. Most of the businesses I’ve worked with see growth rates in stage two of 50% to 100% a year for three to five years. It’s an exciting time. It’s a fun time. But it’s crazy busy.

And because it’s crazy busy, you and your core team will be hiring new people crazily fast. Many of these employees will be clerical employees–data input people, bookkeepers, shipping clerks, etc. – to deal with the influx of new business. Some will certainly be customer service people. And some will be junior executives, assisting your core people in the core business tasks: marketing, sales, product development, customer retention, etc.

It’s not uncommon for a stage two business to see its employee population quadruple or quintuple in less than a year due to the rate of growth that is so common at this stage. That’s a lot a growth for a small business and a great strain on everyone’s time.

Consider the math: Let’s say you set a reasonable goal of interviewing three job applicants for each person you hire. And let’s say you plan to spend a total of two hours (solo and with other members of your core team) in the hiring process. To hire 50 people in one year you need to interview 150. Interviewing 150 people in a year means spending two hours three times a week (say Monday, Wednesday and Friday) interviewing people.

That’s a lot of time you don’t have because you (and your core team) are so busy managing the chaos caused by this accelerated period of growth.

So that’s the problem in going from a handful of first-tier employees to a business that has 40 to 60 employees: you won’t have enough time to properly interview them.

You might consider doing what many founders do to solve this problem: delegate the hiring of the new second-tier employees to members of your core team. You might, for example, ask the person that is doing most of the marketing to hire the new marketing employees, and the person that is closing the sales to hire the new salespeople, and the person that is holding things together to hire the clerks.

And if you do this, you will feel good about it because you will have saved yourself a ton of time that you were able to spend on more urgent tasks.

But later on, it won’t seem like such a good idea. In fact, you will almost certainly come to regret it. What will happen is that this second tier of employees will turn out to be a motley crew. A few of them will be superstars and you will notice them right away. A few of them will seem like bad apples to you, but when you speak to the core team member that hired them, you’ll be given a reason why you’re wrong. Most of them you won’t notice at all. They will be faces you pass in the hallway.

That’s not good.

It’s very important to be involved in the hiring and training of second-tier employees. It’s not something you should trust to anyone else. What you want in a second-tier employee is not someone that has the right education and experience to do a specific job. You want people that can rise beyond the job they were hired to do. You want people that want to rise to the top, people that are not afraid of working hard, that enjoy solving problems, and would love to become leaders in your company later on.

In short, you want hire superstars during this period of growth. And the reason you want superstars is that these people will eventually become the backbone of your business – the 50 or 60 people that will eventually head up your departments and divisions when you have a thousand people working for you.

It’s been my experience that many superstar first-tier employees are reluctant to hire superstars to work for them. I’m not sure why that it. In some cases it may be insecurity. In other cases it might be that they feel more comfortable delegating work to people that are not going to challenge it.

You don’t want that to happen. To ensure the strongest growth for your business you have to make sure that this group of second-tier employees are first-rate. And the only way you can assure yourself of that is to take part in the hiring process.

You don’t have to spend two hours on each candidate. Fifteen minutes may be enough. But spend time on every candidate. Don’t make the common mistake of telling your people: send me the final two choices. Superstars sometimes come off as brash or overly confident in job interviews. You don’t want to miss out on hiring one because one of your core team members was uncomfortable with his/her personality.

So you need to be involved in the hiring of second-tier employees. But you need to participate in their training. You can leave the technical training to their immediate bosses, but you need to pay attention to more important matters – work ethic, values and core beliefs.

You need to be in charge of letting these second-tier people know what is expected of them. I’m not referring to the sort of thing you’d have on a job description. I’m referring to the fact that as an entrepreneur you expect them to share your willingness to say yes to every challenge, to say no to every doubt, and to work as hard and as long as it takes to get the work done.

These core issues can’t be manufactured from human resources or corporate communications. If you want a business of smart, responsible, hardworking employees, you have to demand it from your core team and from the first-tier employees as well.

If you do demand it then they will demand it. And, as I said, these 50 odd people will be running your billion-dollar business one day.,

THE THIRD TIER

For most solid entrepreneurial businesses, an employee base of 40 to 60 employees is enough to break through the $10 million barrier.

Your first-tier employees have been around you, 10 or 12 hours a day, five or six days a week, for years. They know you. You know them.

Your second-tier employees don’t have the same access to you as the first-tier employees do, but because you took part in hiring and training them, they understand what you want. They would notice if they were asked to do something that contradicted your mission.

If they are smart (and they should be if you hired them right) they will tailor their work to accommodate your goals. If their bosses disagree with bits and pieces of what you say, they will accommodate them while recognizing that their ultimate interest lies in pleasing you. Thus, your first-tier and second-tier employees can be considered your core team for growing your business.

Your third-tier employees, however good, should not be seen as part of the core team. Individuals can earn their way in, but these employees are simply too far removed from you to be expected to always understand and pursue your primary interests.

As your employee base grows behind the core 40 to 60, your responsibilities will grow and change. You will no longer have the time to spend interviewing, training, and getting to know all these new people. You will allow your second- and third-tier employees to do all that.

Consequently, you will know very little about your third-tier employees. You won’t know much about their personalities. You won’t know which ones are smart or ambitious or cunning. You won’t even know much about their work habits, except the few that always arrive earlier and leave later than you do.

But if you have the right instincts, you will feel the need to know them. And so, whenever they are mentioned by one of your core employees, you will ask about them. You will wonder what role they are playing. You will ask about their strengths and weaknesses. You will want to discover if they might be extraordinary in some way that can benefit the business. But you won’t be figuring this out by interacting with them. You will be getting your impressions from their managers. In other words, you will get your opinions of them second hand.

This is not good, but it’s pretty much unavoidable. Time is always in short supply. And as the leader of a growing business, you must give the lion’s share of your time to growing revenues and profits. That can only be done by working with your first-and second-tier employees that are involved in those efforts. The third-tier people are working outside of your domain.

Thus, you will know very little about your third-tier employees, but they will know – or think they know – a good deal about you. But what they know is based on seeing you from a distance, listening to you speak to the company as a whole, through your corporate memos or most powerfully, what their bosses say or imply about you.

The big difference between second-tier employees and third-tier employees is that the latter cannot see through their bosses to find out what you want. When these third-tier employees look through their bosses, they see your first-tier people, some of whom may harbor different ideas about running the business than you have.

To compensate for the distance between you and your third-tier employees, you will have to do certain things that may rub against your grain. For one thing, you will have to write memos directed to them, memos that explain changes that affect them, but more importantly, memos that explain and reinforce your ideas about what you want the business to become and how they can help.

Every four to six weeks you should give them a general update on where the business stands and what you are trying to do. Tell them why growth is important. Explain to them that growth brings chaos and that chaos creates problems that have to be solved. But the solutions to those problems can’t be procedures and processes that slow growth down. Solutions must flexible and temporary. To continue to grow, the business needs to experiment, and that means more problems and that’s fine. Try out new ideas. Fix them if they fail. And use that knowledge to come up with the next experiment or solution.

Don’t overdo the memo writing. You are the big picture person. Stick to the big picture, the big problems, and the big opportunities. There are some management consultants that recommend weekly or even daily communications. This, to me, is crazy. You have more important things to do than that. And they don’t want to hear from you that often.

So this sort of “corporate communication” will become necessary. It will be your primary vehicle for making sure all those people you don’t know well and rarely see have a good idea of what you want to do. But there is one more thing you can do with these third-tier employees that can be very helpful. Tell them that if they ever have any questions, your door is always open to them.

Don’t say, “questions or problems.” If they have problems they should go to their managers, your core team, first. But do make them feel like they have the privilege to drop by for a chat if they need some direction. Most won’t take advantage of it, but knowing that you are open to such contacts will make third-tier employees feel better towards you. And that’s important.

THE FOURTH TIER

It’s hard to draw a line between third-tier and fourth-tier employees. It can happen when the population is 150 or it can happen at 300. Or it can happen at 600. It depends on how the business is structured and what sorts of jobs all these additional people are hired to do.

But I do think there is a distinction between third-term employees and the next tier. And that distinction relates to this open-door policy – giving employees the feeling that you are able to talk with them any time they feel the need.

You will know when this happens. You will find yourself unwilling to say, “Drop by my office any time.” You may still want to say that to establish your good feelings towards these new hires, but your daily schedule will make shudder at even the thought of it.
When you get to this level, you have to change one of your tactics. You should continue to send out the occasional corporate memo. But in place of keeping your door open, you should begin taking a 15-minute stroll around your business every few days or once a week.

You can do it at first with one of your core employees who can introduce you, but there is an obvious downside to that: the unlikeliness of having a frank conversation. The best strolls will be those in which you talk to people you don’t know randomly and ask them what they are doing and see where the conversation leads. This isn’t an easy thing to do. At least it wasn’t for me. But I never took a stroll of this kind without learning something important about my business or coming upon an idea that could fix problems or add numbers to the bottom line.

THE FIFTH TIER

There comes a time when you have so many damn employees that writing memos and keeping your door open and making those strolls – all those things won’t work.

It may be when you have 400 or 500 employees. it will certainly happen when you have more than 1,000. At this stage the business will be so large (generally in the fourth stage) that you will hardly be meeting with or speaking to your core team of 50 or so anymore.

At this stage your business will be (should be) running itself. Most of the important work you have been doing for so many years – like figuring out how to grow sales and squeeze out profits – will be handled by a small team of division leaders. Your daily conversations will be with them and rarely with anyone else.

This is natural and inevitable. You don’t need to fight it, but you do need to know that because you are no longer in touch with 90% of what is going on in your business, dangers lurk.

That’s the end of Chapter 2 of Ready, Fire, Aim.

If you’d like more information about the book, including how to order it, click the button below.

Learn More