What Does Scaling Up Mean In Business?
What is the technical definition of scaling up, what does scaling up mean? There are some complex models to measure growth and thereby define a scaling up organisation. I think it is more useful though to have an absolute rate of growth for organisations above a particular size over a period of time. The OECD suggests that the absolute growth number is 20% year over year for three years and can come from growth in revenue or employee headcount. They also suggest a lower level of 10 employees. At £100,000 per head (the average for UK SMEs), this puts the lower limit of scale-ups at £1m in annual revenues. As of May 2019, Beauhurst (a data provider) is tracking 30,000 scaling up organisations in the UK.
20% annual revenue growth for 3 years. Minimum annual revenue of £1m
The Rule of 40
Verne Harnish author of Scaling Up: How a Few Companies Make It… and Why the Rest Don’t says that scale-ups should be looking for software like margins – 70% gross, 20% net. For these firms, the rule of 40 should also apply. This is a measure from the tech sector to identify small high growth firms showing elite performance and high valuations. The metric handily captures the core trade-off between investing in longer-term growth and short term profitability. It is calculated by simply determinating if the annual revenue growth rate plus profit margin are equal to 40 or greater. Typically the measure of profit used is earnings before interest, taxes, depreciation and amortisation (EBITDA). In some circumstances, free cash flow or net profit will be a more useful measure than EBITDA.
Rule of 40: (annual revenue growth rate) + (EBITDA) should be ≥ 40
There are four areas of focus for an organisation looking to scale up. These can be simply stated as strategy, execution, people and cash. A clear differentiated strategy not just aiming to be bigger or better than a competitor. Implementing a system for getting the strategy implemented that scales. Hiring and retaining the right people, building a people system that attracts and retains A-players. Growth sucks cash, so making sure you have enough. Pulling this strategic plan together and sharing with all employees on one page (OPSP) is a great start and creates alignment.
“Why do so many businesses fail? They run out of money.Nick Jenkins, Moonpig
It’s not a bad idea, it’s not bad management, they just run
out of money. I would have done that too in the first three
years if I hadn’t had a bit of cash set aside.
Scaling Up in the UK
To my mind, Scaling-Up means that entrepreneurs and business owners are a group that should be lauded and helped in scaling up to become even more successful, as the contribution to the UK economy is huge.
There is a huge interest in scale-ups in the UK. UK scale-ups employ approximately 3.4 million people and have more than £1.3 trillion in combined turnover. People are excited about scaling up meaning the UK even has its own unique research body, The ScaleUp Institute (SUI). The SUI is a private sector, not-for-profit organisation focused on collaborating with the private and public sectors to make a real and identifiable impact in helping UK high growth businesses to increase their growth and scale. The SUI spreads best practice through research and thought leadership.
Scale-ups are the engine drivers of local economies. They are twice as innovative as large firms, employ twice as many apprentices, are twice as likely to be operating in international markets, and, significantly, they create high quality jobs. On average, scale-ups are 42% more productive than their peers.Irene Graham, CEO of the ScaleUp Institute
As a leader, CEO or MD, what are the top 10 things that make the difference and have been shown to separate the few from the many? No company can perform better than its leadership team. Having a leadership team that meets regularly. The cadence in an organisation is set from the top down and those that succeed keep a fast tempo as size increases. No professional athlete succeeds without coaching and outside help is often found working with elite firms. No firm achieves great things without great people and talent is key. A-players don’t need to cost more but can deliver 10 x results for the same salary.
In the best firms, the team is engaged through a stong purpose and core values. This gives the company access to up to an extra 40% of effort – this is the turbo boost great leadership teams unlock. Often candour is present in the culture for these scaling firms. High-performance teams have high levels of constructive conflict, they can engage in difficult conversations and have developed psychological safety.
How you do one thing is how you do everything. This is never truer than how a company runs its meetings. One of the ways a leadership team casts its long shadow is how it runs meetings and how this habit is copied by the whole organisation. I challenge clients to come up with 10 ways to make meetings more productive. We devise rules around running length (25 minutes instead of 60), standing up whilst meeting, banning tech to prevent distraction, face-to-face wherever possible.
The origin of the meaning of scaling up or first use of the term scaleup in the context of a growing company is unknown. Previously these high growth firms had been known as gazelles.