Appropriate Management Controls for Small Business

For those that read this blog regularly or who have spoken with me at one of the various networking events that I regularly participate in you know that my passion is in creating growth through value innovation, but I have had a couple of conversations in the past week with colleagues in other businesses about management controls so I thought I’d share my thoughts on specifically management controls and small business and how this can help your business save time and money.

One of my pet peeves (and one of the main reasons I haven’t spent a lot of time in larger more bureaucratic organizations) is process for the sake of process, and I truly believe that management controls used poorly constitute exactly this problem.  One of the most innovation stifling innovations is the standard operating procedure, specifically if it implemented before there is a specific need for control or before an organization has grown to a size that would justify requiring that level of control.

When speaking with one colleague he demonstrated for me some of the tools he uses to identify the types of management controls that need to be implemented in a business he is auditing in order to improve the bottom line – to create profits.  In his demonstration, he quickly looked across the financial statements from the past four years within a business and identified that labour as a percentage of revenue had doubled in the past four years – a sign to him that labour costs were out of control and that some form of monitoring was necessary in order to improve profits and cut waste.

While I can’t argue with the fact that a doubling in labour costs in proportion to revenues over four years certainly seems extreme, and the business in question was actually quite a large business that probably could stand to have a few processes, procedures, and controls introduced to improve profits, it did make me think about at what stage these types of controls become appropriate within a business.

Small businesses by necessity operate in a different way than big business.  Entrepreneurs typically have more hands-on control over the day-to-day operation of the business and there is very little of the detailed operations numbers that doesn’t bubble up fairly quickly when things are going wrong (or sideways).  For that reason, the types of controls that might be necessary in an organization with 500 employees and twelve tiers of heirarchy don’t make the same sense in a 50 person organization with three tiers of heirarchy.

I have seen small businesses introduce significant structure, process, and controls around their business operations at an early stage in their development and the result is consistently the same – stifled innovation, slower growth, and increased employee turnover.  The reasons seem obvious to me, but apparently it may not be as obvious to those Entrepreneurs who decide to implement these systems before their time.

1. Process Inhibits Innovation
   The people who are drawn to work in small companies with an Entrepreneurial culture and heritage tend to be creative people who are looking for an opportunity to make an impact in the success of the business.  It is much easier to see your own impact when you are working in a 50 person company than when you are surrounded by 499 of your friends.  Introducing too much structure and process within this type of a culture drowns those creative people by forcing them to do things the same way every time.  Notwithstanding requirements under ISO or specific industry requirements (such as in an aerospace manufacturing plant) that require specific standards of quality and production, allowing your employees some flexibility (and encouraging them to take some calculated risks) in the manner in which they complete their work and then encouraging them to share their successes with their peers will ultimately improve the value of your product or service to your clients – and improve your position in the market at the same time.
2. Process Creates Waste
   While it might seem odd that I consider process to be wasteful, a process introduced without a driving factor or problem simply creates overhead on the process itself.  Forcing employees to execute steps in a prescribed manner within a process that has never shown signs of requiring support will simply slow the process as employees complete their checklists rather than moving on to the next task.
3. Process Reduces Value
   In one company that I looked at they had addressed an issue with the time it took to respond to client work requests by introducing a complex process that defined the specific tasks and timelines required to bring work into the system.  The original issue was that work was falling through the cracks because there was no process, but while the process that was introduced did ensure that all requests did get a response, the key performance indicators that constituted acceptable response times within the process were so long that the value of the response to the client was ultimately diminished.  If they had addressed the issue by introducing a much more relaxed and open process but with higher standards of value creation, they would likely have been able to address the initial issue without reducing the value of their offering in the process.
4. Process Creates Overhead
   Consider the case of a small software company that delivered simple technical solutions to small business clients through a group of technical professional services delivery professionals.  Due to the complexity of some of the clients’ environments, the installation of the software solution was structured and processized to ensure consistent delivery quality regardless of the environment.  While that might seem like an appropriate solution, the real issue stemmed from a product limitation that forced the professional services team to increase their overhead in delivery to compensate for the lack of configuration in the product.  The problem was solved, but delivery costs soared (which were passed on to the client), ultimately hurting the competitiveness of the solution in the marketplace.  If the root cause of the problems was sought out at the beginning rather than trying to solve the problem with a process/control, the company would have been in a much better competitive position and would not have bee seeing declining market share.

Process in itself is not bad.  Management controls in themselves are not bad.  It is just important to understand that there is a place and time for everything and in small business you have to think long and hard about the problem you are trying to solve before you jump straight into ‘controls’ for the sake of controls.

Some tips to help you avoid implementing controls to solve problems that can be better solved in other ways:

1. Do a Root Cause Analysis – EVERY TIME
   If you find a significant issue – such as the doubling of effort cost as a percentage of revenue – sit down and determine what is causing that increased cause before you dive right into solving it with a control.  Perhaps union wages have gone up, benefits costs have risen, quality control was poor before but has now been brought up to acceptable levels, or any number of other things have happened which affect the cost of labour within an organization.  Before you introduce a control hoping that you will magically bring your labour costs back in line with their level four years ago it might be better to determine the root cause of the increase – it might turn out to be a good thing.
2. Ask Your Clients
   In any customer facing issue that you are having, before you run off and spend a bunch of money developing a new process to solve the problem reach out and talk with your clients to get their perspective.  This may require asking some questions that you might not really want to know the answer to, but until you know what is really important to your clients how can you be sure that the process you are implementing will not ultimately decrease the value of your offering in their minds.  It might turn out that what you perceive to be a major issue is actually a minor annoyance to your client and they might even have a quick and easy suggestion to solve the problem without creating overhead within your organization.
3. Ask Your Staff
   Your staff are usually much closer to the issues than you are and what might appear to be a major issue when you look at the macro level (or use financial reporting to identify issues) might actually be a symptom of a completely different issue when you get down to the 10 foot level.  Talk with your staff and encourage them to brainstorm on the problem itself as well as the solutions to the problem – you might be very surprised to find that the problem can be solved quickly, at very little cost, and with significantly more impact than you ever could have imagined when you were standing at 50,000 feet.

I’d love to hear your thoughts on controls and process within a small business environment.  If you’ve spent your life in a big business, perhaps you have some differing thoughts on the topic and can demonstrate some key value that I’m missing in my own view of the subject.  Feel free to share in the comments section below.

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