The Scalable Company

Software designers are always worried about the scalability of their programs. That is “how easily can the package be expanded if the number of users or transactions were to triple or quadruple?” Businesses do the same thing, although usually not by design. If a process gets to be a problem, then it is redesigned at that time in order to more efficiently handle expected future volumes. The current recession however shows that there is also a need to contract at times, which got me to thinking about what a “Scalable Company” might look like.

Actually, a few minutes thought will give you an ‘ah ha’ moment in which you realize that a Scalable Company is simply one that management, when given the option of a variable vs. a fixed cost, they always elect the variable. These companies avoid operational leverage like the plague and as a result there bottom line isn’t as good when sales are booming, but they have a much easier time adjusting to slow years since their fixed cost “nut” is small. Once I realized this, it was an easy start to producing a list of characteristics that would belong to a Scalable Company:

• Low inventories – pays more for shipping less than idea volumes, i.e. LTL, and foregoes many volume discounts.


• Salaries - negotiates lower base salaries coupled with a profit sharing plan for employees with salary plans. This makes their wages behave a little more like commissioned people. Wherever practical, commission plans are offered over straight salary.


• Pension plans elect to use profit sharing rather than safe-harbor options for company matches.


• Building rental agreements have a fixed, below market share, component and a percentage of sales.


• Long-term debts are structured to keep the payments low while allowing rapid pay-down in good times.


• Rental equipment is preferred to ownership.


• Business processes are highly automated so that can continue to function even if the number of people using them decline.


• Fringe benefits are few and do not include complex qualified plans.


• Advertising and other agreements always allow for an adjustment downward in volume allowing the business to elect to forgo discounts during the agreement period if their needs decrease.

Is the Scalable Company a good idea? Well maybe, after all there are a lot of businesses currently paying the price for not being able to contract as consumer demand declined. However, there is always the danger of preparing to fight the last war rather than the one that will actually happen. That said, once the recovery has happened and we have a few good years behind us, you might want to prepare for the next down-turn by making your business more scalable.