While the word ‘bureaucracy’ might conjure up visions of tangled red tape and onerous government regulations, it’s an essential element of SME scaling.

Bureaucracy in the context of scaling refers to the ‘operational infrastructure’ that accommodates business growth. It’s the layers of processes and procedures that make things more predictable, and increase the likelihood of SMEs overcoming problems and achieving desired outcomes.

The aim of bureaucracy

The objective of bureaucracy is not operational perfection, but to create the ability to operate in anticipation of likely challenges. For example, once an efficient bureaucracy is established, it helps prevent over-reliance on the experience and personalities of individual staff members to retain customers.

It’s true that bureaucracy can lead to operational inefficiency, especially in large corporations and government bodies. But the reason so many large organizations continue to function despite these inefficiencies is down to the processes and procedures that increase predictability and consistency.

It’s also the case that smaller entities tend to become more efficient once they establish operational bureaucracy. And without it, there is no pathway to serious growth.

Before SMEs can expand in a sustainable way, it’s essential to invest in operational infrastructure in order to maintain control and avoid potential chaos.

The risks of not establishing an efficient bureaucracy

Growing SMEs that fail to invest in bureaucracy risk:

  • Recreating the same problems over and over by applying quick-fix and band-aid solutions, as opposed to getting to the core of the problem and putting prevention strategies in place.
  • Excessive reliance on a concentrated talent pool of staff members who hold built-up knowledge in their heads and tend to over-service. We call this the ‘gourmet approach’ – a few superstars that can whip up a gourmet meal without a recipe.
  • Hiring new employees too quickly and putting them on a steep sink-or-swim learning curve when they have no ‘recipe’ to follow.
  • Reduction of customer lifetime value, and excessive customer churn. This is often compounded by the gourmet approach, where the business offers more and more ‘free dessert’ to retain the customer.
  • Lack of consistency in product and service quality, and higher gross profit margin volatility.
  • Diversion of key management time and energy into putting out spot-fires rather than working on creating return on investment.
  • A focus on tasks that generate revenue in the short term rather than designing company processes that enable the business to function at scale.
  • Potential damage to the reputation of the company.

So, what can SMEs do?

The main challenge faced by SMEs that want to scale up is striking a balance between the time and capital allocated to revenue-generating operations, and investment in building operational infrastructure.

SMEs need systemization for this, to prepare for all the repetitive and recurring internal business activities that lead to revenue generation and accessing economies of scale.

SMEs that want to scale up may benefit from professional help to find the best solutions and avoid potential pitfalls. To learn more, contact us.

 

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