Thursday, June 5, 2008

Keeping the Flock Together.

Keeping the flock together

Our company started in a modest way in December 2005 in Pune. We manufacture industrial valves and accessories for automation. The company was started by me and a US company as a 50:50 joint venture, with the objective of supplying our products to the US company. Our revenue for 2006-2007 was 10 crore, 90% of which was from exports. We made a loss of Rs 20 lakh.

Our revenue targets for the year to March 2008 is Rs 18 crore (Rs 12 crore in exports and the balance from domestic sales). All the current key functional heads and me have worked together in the previous company and they all decided to throw in their lot with me by joining me at the same salaries. Meanwhile, salaries in our industry has almost doubled over the last two years. I need to decide whether to hike salaries of my present team to match the industry levels.

I need your advice on how to match the current short-term goals of profits versus long-term goals of developing the company’s human resource assets. My long-term goals are to reach Rs 50 crore revenues by 2010. My salary bill was Rs 70 lakh, when revenue reached Rs 10 crore. It would rise to Rs 1.6 crore at a revenue of Rs 18 crore, if I increase salaries in line with market trends and hire more staff. Should I focus on building the team now or try to meet the short-term objective of profitability?

Wow! Yours is a successful startup! Congratulations on passing so many milestones in such a short time. You went from zero to Rs 10 crore in a little over a year and are looking to grow to Rs 18 crore in year 2 — that is spectacular growth. You are diversifying your client base from 90% exports to 66% exports and 33% domestic — that is a wise decision at a time when the US economy is showing signs of flagging! You have managed to keep your senior team together so far — and it was an important thing to do in the start-up stage because it lets you worry about the right things — your product, your markets.

One of the most important skills for a successful entrepreneur to learn is how to sift through the many questions that arise and make sure you are asking and answering the right ones. It appears that you believe the heart of the issue is whether you should focus on trying to keep/build your team or try to meet short-term profit objectives. I submit to you that this is not the right question for you to be asking at this stage of your growth, though you clearly have to address the situation you describe.

RAJAN SRIKANTH President, Asia, Mercer Human Resource Consulting

I have in this column described a “stages of growth” model for startups. Stage One is all about innovation and creating/establishing that killer product. Stage Two is all about market penetration and creating a broad footprint. Stage Three marks the graduation from a startup to a viable business and is characterised by what I call the 3Ps — professionalising, introduction of process, and profit extraction. The needs of managing a startup through each of these stages differ. The challenge is that the entrepreneur tries to manage with an approach, or operate with a organisation that may be right for one stage, when the business circumstances suggest he or she should be in another stage.

I believe your company has just entered Stage Two. You are looking to diversify your markets and gain a strong domestic footprint. The primary goal for a successful startup at this stage is to firmly establish itself in all of its target markets and create reliable and rapidly growing revenue streams. Profit, while it is nice to have, is rarely the best thing to focus on in a Stage Two company. So, I would first suggest that you take the consideration of shortterm profitability off the table — if you can afford to do so, of course. Besides, for a one-year old company to have only made a 2% loss on a turnover of Rs 10 crore suggests that you may already be running a very tight ship. The relevant question then becomes whether you are not spending enough to support your spectacular growth, and on what you could/should be spending more.

Which brings us to the second part of your question — about keeping/building your team and whether you should pay them more or risk losing them. Here too, I think the question to ask is different. The key to success in a Stage Two startup is typically building a sales culture by hiring market developers and salespersons, and getting more sophisticated in terms of measuring and rewarding sales performance. The first question I would ask then is how your current team measures up against your business need for quickly growing a domestic market for your product and possibly exploring other export markets; where there are critical gaps to fill, and where there are key players in key positions that must be retained. The second question I would then ask for each of these “must hire” or “must retain” positions/players is what it will take to attract or retain them. Our research shows that while compensation plays an important role, it rarely is the reason people either stay or leave a company. Opportunities for career advancement and development is an important driver in attracting and retaining talent. Clearly, it appears that your team moved with you from the previous company not because you gave them great raises, but because they saw a terrific opportunity for career advancement. Now, that does not mean you can continue to pay less when the competitors have doubled compensation, but it does mean that you should practice what I would call “HR for the unit of one”. What I mean by that is you should seek to understand for each of your key players — what really makes them tick, who would require an increase in salary to stay, who can be inspired to even higher levels by adding a variable pay component contingent on performance, who would pledge their loyalty in exchange for a challenging assignment in a new market/role or being given an opportunity to learn new skills, and who would become part of the solution rather than a part of the problem if you invited them into your decision making.

There are no easy answers to the situation you fa ce, but I hope I have been able to point you the right questions to ask. In seeking answers to these questions, I have no doubt you will not only lay the foundation for your continued spectacular success, but also develop a deeper understanding of what makes startups and the people who work in them really tick.

Article Resource:
The article appeared in The Economic Times, Mumbai in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

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