Moss Adams released their 2006 Advisory study, you can find the summary of the study here. In short it says that although margins are decreasing the financial statements are looking good. What I really like is the section that talks about how a firm tends to grow and that adding more head count decreases productivity per head.

It has been my experience that this is the case in all lines of business. Most startups I see go through a few phases, the “my company” phase, the “team environment” phase and the “cost containment” phase.

The my company phase is the best time to work at any company, you are surrounded by a few highly motivated individuals. Typically, no one is making a whole lot of money, they are there to work and they believe in the owners vision. Everyone feels like it’s my company, this place would fall apart if I were not here.

The team environment phase is when the company is making enough money to start hiring more staff. Usually, you see the headcount go over 10 at this point. The controls on who gets hired are loose because no one really has the time to hire correctly. Salaries for new hires sometimes pass the “my company” staff.

Then the cost containment phase happens. The company is losing its margin and the answer is to cut costs. Cheaper health insurance, cheaper computers etc…

The cost containment phase is the critical phase for the company. It is the most difficult time to be in a company. It takes an entirely different skill set to get through than the my company or team environment phase. What usually occurs when this point is reached is that the people who were in on the “my company” phase got burnt out picking up the slack and extra work from the “team environment” phase.

Every small company does this and financial planning firms are no different. The politics thicken somewhere in the team environment phase and then in the cost containment phase they solidify. What happened? The bureaucrats arrived. These are the people who are always plotting and not necessarily for the company, they are trying to get a leg up for themselves.

To get through this phase and over the hump, the owner(s) has to give up control. Usually the company is just big enough that if the owner does not give up some control the process grinds to a halt.

What to do?

Empower your managers, they have to be able to effectively manage the staff underneath them. If people feel like they can just go over their managers head then you are undermining your managers.

Hold your managers accountable for their staff. If you don’t hold the managers accountable they won’t hold their staff accountable. You will probably have to do some gentle mentoring of your managers so they manage the same way you do.

Resist the urge to just cut costs. Instead look for ways to increase productivity. There are consultants who can come in and tell you how to squeeze more effort out your staff. I am not talking about rah-rah speeches to get the employees to work longer hours but people who can look at tasks and figure out a way to make them go faster, automation, functional task grouping etc…

Make sure your core staff still enjoys coming to work. If they are burnt out you need to give them some time to decompress. Make sure they are only working 60 or so hours a week.

Make sure the environment is fun to come to. This one is big, if the place is too serious or not comfortable then the staff will not want to be there.

Cut the politics. If you have people who are playing politics let them know it wont be tolerated, get rid of those people early. Usually you can spot these people pretty easy. Do not allow someone to get ahead by climbing over their co-workers.

By doing a few things and reading a lot of books you can grow the small firm past this point. Mostly, you have to be willing to change, the entrepreneur is what is needed to get a company off the ground; but the entrepreneur can kill a company if they don’t change as the company grows.