Keep your profits rising along with your revenue
Editor’s note: This is the fourth article in a series on delivering on your growth strategy through operating model optimization. For additional insights, read the three previous articles in the series: “Enhance your operating model to drive value creation,” “5 steps to create a path toward profitable growth,” and “Build the engine that supercharges your growth strategy.”
Understanding the importance of building scalability and sustainability into an operating model requires recognizing that revenue growth isn’t always good for business.
This might seem counterintuitive at first, as some thought leaders have stated that companies need growth the way living beings need oxygen.
But companies put their long-term future at risk when they rapidly grow their revenue without building the appropriate infrastructure through their operating model to support growth that is profitable.
“Especially in the mid-market, companies struggle with growth because they have operating models that are not scalable, and the level of investment required for success has been put off in the interest of achieving hyper growth,” said Grant Thornton Business Consulting Principal Jonathan Eaton. “The creativity that launched a great business concept also needs to be applied to building and continuing to evolve an operating model that enables the business to hit the next gear and consistently deliver profitable growth.”
An operating model that’s built to scale up with the right capabilities around people, processes, technology and risk helps companies keep their promises to customers — even as their number of customers might grow exponentially. A scalable operating model enables a company to:
- Continue making deliveries on time, even as the quantity of deliveries doubles or triples.
- Add the necessary people to keep filling fast-increasing orders — maintaining productivity and controlling labor costs rather than paying overtime to exhausted existing employees.
- Pursue technology transformation that makes operations more efficient and delivers data-driven insights that lead to strategic improvements that increase profits.
- Appropriately manage risks as they change while the company scales up.
“Growing your operating model builds trust with your various stakeholders — investors, customers, employees, regulators — that you’re in business for the long haul,” said Grant Thornton Risk Advisory Services Principal Erin Lentz. “Sustainability and scalability help a business withstand economic and regulatory fluctuations, new competition and other external pressures to continue growing, evolving, innovating and finding new efficiencies that benefit all those stakeholders.”
This trust strengthens a brand in a way that can lead to continuing profitable growth.
Getting started
Building scalability and sustainability into your operating model begins with a commitment from senior leadership, in alignment with the board, on the strategy that will build this continuity into the business.
“You need to have alignment and funding to make this a successful effort,” Lentz said.
Cascading the plan down through the organization with an effective communication effort helps employees understand the vision and why organizational changes will be important.
“You need to help employees understand why you are doing this and how it supports the growth and objectives of the company,” Eaton said. “People will buy into a vision if they understand the reasons behind it along with how it affects them and why their contributions are meaningful.”
Buy-in is easier to achieve when employees have input into the changes ahead. In some industries, leaders conduct Kaizen events — meetings where employees share ideas for process improvement, discuss pros and cons, and ultimately build consensus.
Third-party perspectives can also help with both objective analysis of processes and a broad-based understanding of best practices in an industry. This context, combined with funding and buy-in, provides the foundation for addressing the people, process, technology and risk needs to build resilience into the operating model.
Align people strategies with business goals
Making an operating model fit for sustainable growth can improve employee engagement, as people are often enthusiastic about being part of a successful, growing organization.
Although process improvements and technology upgrades can assist in achieving profitable growth without adding people, growing companies often do need to build staffing capabilities into their operating models to support increasing volume. Staffing priorities to support scalability include:
- Maintaining a strong talent pipeline: Recruiting practices should be ready to attract the necessary volume of people with needed skills. Meanwhile, succession plans should be in place to plan for future needs and changes, identify internal candidates, and provide growth opportunity.
- Promoting continuous learning: Roles often change when a company is growing, so it’s important for companies to help employees develop skills needed to support profitable growth. Mentorship programs and knowledge-sharing efforts also support learning and leadership development.
- Enabling change management: Employees’ excitement over an organization’s growth often is accompanied by anxiety over changes that might occur. Regular, transparent communication can help ease concerns, and involving employees in changing processes can give them an empowering sense of ownership.
- Improving HR processes and technology: A review of current HR services and their processes, with an eye on governance and automation, can help HR improve its own processes. Understanding the key HR KPIs to measure and using HR data analytics can help HR leaders ensure HR is meeting the needs of the business and conducting effective workforce planning and development. Benchmarking processes and technology with industry peers can help determine the maturity of HR capabilities and identify gaps that need to be filled.
Process optimization starts with the core
Any discussion about making processes scalable and sustainable starts with understanding which processes are core and central to the business.
“Those are the processes that are an essential part of the value chain and must function well for success,” Eaton said. “If they break or experience disruption, they have the potential to hurt revenue or profitability and also damage brand reputation and customer trust. All processes are important, but some are a lot more important than others.”
These core processes that are part of the value chain should get the most attention in the pursuit of scalability and sustainability. This starts with a leadership team that embraces a spirit of continuous improvement and fosters a culture of collaboration and openness to ideas about how to improve processes.
“It’s amazing to me to see how often our clients have employees with great ideas, and the leadership doesn’t even know about them,” Eaton said. “They’re unaware of how smart people are about their business and how creative they can be with simple things that can improve execution.”
Leaders at other companies, meanwhile, often fail to update their processes because they’ve become accustomed to operating in a certain way. They’re consumed by day-to-day responsibilities, and they don’t take a step back to think about how processes could be improved.
Good leaders need to make a constant effort to educate themselves on emerging technology and techniques that will make their processes more effective. Proven strategies for building resilience into processes include:
- Regularly conducting critical evaluations of processes. Benchmarking processes against industry standards helps ensure that best practices are being implemented.
- Deploying data mining technology. Analyzing process data can help leadership discover bottlenecks and discover where they need to invest in process improvement.
- Outsourcing processes that are not core to the business. “Ask yourself whether there are specialty companies that can perform these processes better and support your growth aspirations without harming your intellectual property, your brand or your culture,” Eaton said.
Another option for scaling noncore processes is consolidating functions that unnecessarily exist separately throughout the business. A growing company often outgrows a model where separate (and perhaps inconsistent) processes exist in individual units or departments of the company. For example, centralizing management of procurement and HR processes at the company level can improve negotiating power and compliance.
Technology needs to growth with the business
Process improvements often go hand-in-hand with implementation of technology that improves efficiency and productivity.
Companies often fail to consider scalability and sustainability in their technology implementation because they are so focused on solving today’s problems that they don’t take time to look ahead toward the future.
“You want to implement products that can grow with you as you grow and expand,” said Grant Thornton Technology Modernization Principal Tony Dinola.
For example, if future global expansion is even on the radar for a domestic company, the technology it's implementing today should be able to manage multiple currencies, handle different tax jurisdictions and comply with multiple ledger reporting requirements.
Any technology that’s implemented by a growing company should also have the capacity for automation and artificial intelligence that will enable upscaling without requiring substantial headcount increases.
“Let’s say you double your revenue, for example,” Dinola said. “You’re also probably purchasing twice as much as you were purchasing before. You want to have an accounts payable department that can handle double the volume with limited or no workforce additions. Often, though, that’s not the case.”
Company leaders also need to consider a different set of technology needs when they expect to scale up through inorganic growth via mergers and acquisitions. These companies need to be prepared to bring different operating systems together. If they plan to buy companies with different areas of focus — for example, a manufacturer acquires a service company — they should have technology that can accommodate the different elements of the new business throughout the operations or have technology capabilities that can integrate effectively.
Meanwhile, successful growing companies in the current environment are finding ways to support their upscaling by moving their applications to the cloud. Legacy companies sometimes have technology functions whose primary focus is managing servers and hardware.
By moving to the cloud, companies pull IT employees away from managing hardware in a server closet and managing IT ticket requests. When IT is managed in the cloud, many of a company’s IT people work alongside the business to assist with innovating and supporting new ideas.
There’s a cost associated with this, as the green screen-based technology is already paid for, while modern cloud-based systems often require substantial recurring subscription fees. But when this funding frees up IT staff to perform more value-added work for the company, companies often find that the software expense helps them grow.
“Many times, moving to the cloud and improving your technology can increase the capacity of the individuals on your staff or allow them to be retrained for tasks that provide more value to the enterprise,” Dinola said.
Manage risks as they evolve
Most high-quality risk management frameworks are built to function effectively regardless of the size or scale of an organization. Any organization should have a documented risk management framework that considers the culture of managing risk, risk governance, risk appetite, and key risk management processes across the organization.
Companies, large and small, should regularly identify and rank their risks based on likelihood and impact. Leadership should identify owners for those risks as well as key risk indicators (KRIs) and key performance indicators (KPIs) to be monitored for an early warning that something is going off the rails.
With respect to risk and operating model sustainability, the following factors should be examined to ensure alignment with the company’s risk appetite:
- Metrics: KRIs and KPIs need to be designed to effectively measure the risks that an organization might face and its resilience related to those risks. These metrics need to be monitored regularly.
- Reporting: Sharing the right reports with management, the board and employees — along with developing effective risk escalation processes to raise awareness of current and emerging risks — helps people throughout the organization fulfill their roles in the growth process.
- HR initiatives: Risk management leaders need to make sure that staffing models; employee training programs; performance management and incentive compensation structures; and change management functions support the operating model so the organization’s people can facilitate profitable growth.
- Root cause analysis: When issues arise, leaders need to have processes designed to locate the source of their problems, learn from them, and apply them to their future growth initiatives.
- Controls: The controls in place — along with overall control effectiveness — should be periodically evaluated.
Through it all, over time, the risk management leaders need to regularly re-examine and re-prioritize risks, which will change as the company grows. Inevitably, KPIs will need to be updated as business conditions change.
For example, a manufacturer monitoring the ratio of widgets produced to employee overtime hours might need to adjust the targets for that metric if the company incorporates outsourced workers for some tasks or implements technology that enables employees to work more efficiently.
“As you evolve your operating model, you need to consistently make sure data inputs to feed your metrics are updated as needed to be consistent with your operating model, and that you’re developing new KRIs and KPIs as necessary,” Lentz said. “You need to routinely revisit your metrics to make sure they’re meaningful.”
Companies also need to make a consistent effort to check their inner and outer boundaries for what’s acceptable with their metrics and decide how often those results are measured and who needs to receive reporting on those metrics.
Aligned for profitability
When the essential elements of a company are aligned to support growth through the operating model, rising revenue should be accompanied by a corresponding increase in profitability.
“To truly get to that next level, your growth has to be profitable,” Eaton said. “When your operating model is built to scale up and has the right holistic capabilities around people, processes, technology and risk, you can succeed when you lean into growth. If the operating model is insufficient, your growth will stagnate, and that can eventually hurt your brand.”
Contacts:
Jonathan Eaton
Principal, Business Consulting
Grant Thornton Advisors LLC
Jonathan is a Principal in the Operations & Performance practice.
Charlotte, North Carolina
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Energy
- Retail & consumer brands
Service Experience
- Advisory
- Business Consulting
Angela Nalwa
Managing Director, Transaction Advisory Services
Grant Thornton Advisors LLC
Angela is a Managing Director in Grant Thornton’s Transaction Advisory practice with over 25 years of experience focused on Human Capital Strategy and the People aspects of Transactions.
San diego, California
Service Experience
- Transaction advisory
- Human Capital Services
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