Why Glass is Brittle – and Why Many Growth Businesses Suddenly Snap
How businesses become brittle and although they may be shinny and beautiful they snap easily
Growth business are the ideal!
The entrepreneur has managed to get the enterprise off the ground, it is making sales and probably making profit. If shareholders are involved, then they are happy, customers are rolling in, suppliers are making money, staff are doing well and getting promoted (or over promoted).
Well done, Mr or Ms Entrepreneur.
Now the army of consultants and advisers will arrive. You’ll want to keep the fast growth so you’ll pay recruitment consultants rather than use your personal network to hire staff.
Every new opportunity will encourage you to hire, and so long as the business growth continues you might not worry too much about the profit, after all, you’ll soon sell the business or alternatively you can always slow growth and run the enterprise for profit later on.
And so in this phase of growth, the business starts to pick up bad habits – little habits – but bad ones nevertheless. A good example is how businesses get rid of under-performing staff, that is they make them redundant under the excuse of a spurious restructure and pay them off. This is the ideal solution because they go quickly, without fuss, and it only costs a couple of months of wages.
But the precedent is bad. Now all staff will know that if they want to get paid redundancy they only have to turn in bad performance. Worse, the hard working staff will begin to realise that poor performance is being rewarded.
Of course, tackling a member of staff for under-performance is emotionally tough on the managers and will slow your businesses rate of growth due to distraction, but is it the right thing to do.
However, for a miriad of valid reasons, high growth businesses and entrepreneurs rarely do the right thing – they nearly always tend to do the ‘fast thing’.
This creates little bad habits – and they turn out later to become major problems. They turn out to be a curse.
And a curse is not something that affects the business right away, so the business can continue its upward projection in blissful ignorance. But a curse is something that will harm the business at some future event.
Perhaps in a couple of years when the key market takes a knock and business growth evaporates, then in this new environment of defensive business strategy, lazy or under performing staff will know that their best course of action will be to ‘hang onto their job’. That is, don’t do anything that allows you to get easily fired.
You will then have a situation where bad habits come back to curse the enterprise perhaps one or five years after you, the entrepreneur, allowed the habit to creep in.
There are many bad habits that a business can pick up. They include not having regular performance reviews (because they are hard work), or not taking up references when hiring, or not getting a selection of 3 people to a final interview before selecting, or not carrying out the personality profile because you need that person to start right away.
They might be not paying suppliers ontime or always quibbling over their bill (even though it is correct).
These are just some of the bad habits which will lead successful strong businesses of today to become the cursed businesses of tomorrow.
The curse is nearly always the result of nervousness and hurry (not malicious intent). Nervousness about taking the right course of action – for the outcome it might bring (eg. your number one candidate fails a test and so you have to begin the recruitment process all over again), and hurry….
….the business is growing so fast that there is never time to do things properly.
So, a business can become brittle as the result of how it is managed (be it how under-performance is managed, how recruitment is handle or wage increases are dealt with). But in addition to the risk of poor implementation, there are other ways in which a business can become brittle; which are as a result of, the business model or the business sector.
We’ll look at these in more detail, but first, here is the business parable of Why Glass is Brittle – and Why Many Growth Business Suddenly Snap.
This is the story of how Phoenician merchants discovered glass and how glass was cursed with brittleness.
Why Glass is Brittle – and Why Many Growth
Businesses Suddenly Snap
The Phoenician merchant ship laden with blocks of soap sought an evening landing as it traveled through the ancient Mediterranean.
Easily beached on a sandy shore the merchants began to prepare their evening meal, to carry their larder and to build their fire. But on a beach as broad and easy to land upon as they had found, there were neither stones nor timber to build up the fire and on which to place their copper cooking pots.
Now traveling all day with a cargo of soap had given our merchant brothers a slightly sweat aroma.
And the sand that lay silent at their feet noted the distinctive smell.
The merchants had dug a hole in the sand and brought their kindle wood from the ship and placed it inside. As they began to light the fire, one merchant brother noted a strange hissing noise.
Now, our brother was used to the hissing sound of slightly damp wood catching alight but this was a different hiss. Less of a whistle and more of a voice.
As this time the merchant began looking again for blocks of wood or stone on which to place the cooking pots and make the evening meal.
As he searched around the beach and found nothing but more sand and more dunes, he heard the hissing sound again. But this time, he dismissed it as the wind, for his legs were accustomed to the movements of the sea and walking on soft sand on firm ground felt unnatural to him and in this alien environment he was out of sorts and muddled headed.
He returned to his fire having found no props for his pots and so began to build small mounds of sand in the fire in the hope that he could at least begin to warm the food.
This time, the hiss was sharper and the sandy voice spoke more clearly in a tongue he could understand.
“Merchant, merchant”, said the sand of the beach, “lay your soap with its sweat aroma on me and I will cook your food”. For the sand desired to smell sweat. He desired to be free of the acrid salt and ancient reek of dead fish.
Turning around the merchant shouted ‘who’s there’ afraid that he may be attacked. But as he as able to see clearly up the beach and down the beach for many miles, he turned again and asked ‘who’s there?’
“Look down” lisped the sand of the beach, “look down at me, I am all around you”.
Again, fearing an attack the merchant drew his broad bladed dagger.
“Do not fear”, continued the sandy of the beach, “I am harmless. But I do trade….”
Now the Phoenician was a great trader and used to negotiating in all circumstances, and so he lowered the point of his dagger and looked at the sand of the beach without seeing anyone at all.
Blindly, our merchant brother spoke to the wind and the sea “what is it that you wish to trade”.
“Look down, look down said the sand of the beach, I am all around you, I am each and every grain on which you stand and I am as far as you can see, but I would trade with you”.
“But what do you wish to trade”, replied the merchant.
“I will cook your meal for you and I will provide a place for your fire if you will share your soap with me. Lay down your soap in your fire upon my sand and let me inhale the sweat aroma”.
“But my soap is soft,” objected the Phoenician, “and I must travel tomorrow to the city state to sell it. If I place it in the fire on your sand, I will destroy it”.
“Hmmm, yes, this is true”, thought the sand of the beach, who oh so greatly desired to acquire the sweat aroma.
“Bring your soap to the beach” declared the sand of the beach after some thought, “I have a proposal to make you.”
So the merchant called to his brother to bring the hard blocks of soap to the beach. He placed them on the sand, just a little way from the fire.
“Here is our soap and our wares, what would you offer me in return”? He asked.
The sand of the beach began to hum a sweat song of victory. “Hmm, your soap is special”, he said
“Yes”, agreed the merchant, “it has traveled far and is prized for its softness and of course the sweat aroma”.
“Then place it in your fire and I shall direct the fire to warm your copper pots and cook your meal”.
“But how do I know that you will not melt or stain my prized merchandise”?
“I will make you a promise”, said the sand of the beach, “if I melt or damage your precious soap I will share my secret worth twice your soap and stronger than your puny dagger. I will give you something that will enable your merchant brothers to navigate the oceans in times to come and for you to stay warm in your sunlight houses”.
“I will give you all this”, the sand of the beach continued, “if you would just place your soap in the fire and put your pots upon it”.
“But”, continued the sand of the beach, “you must place and leave the soap until morning. You must not pack up before the sun is fully risen in the sky, for it you do I will curse the secret that I am bartering with you”.
At this the merchant, now tired and hungry, but also curious and inquisitive, called his brothers and together they placed the blocks of hard soap on the sand and in the fire.
“There”, said the merchant, “now sand of the beach”, for now he realised who was speaking or at least hissing, “I have placed the soap where you ask, now cook our food and keep your bargain.”
“Yes, yes”, said the sand of the beach, “yes”, he said again as his inhaled and absorbed the warmed and sweat aroma from the warning blocks of soap, “yes, yes” he repeated and it is true that he never thought to break his bargain, but the joy and the ecstasy of that melting sweet smell was overpowering.
And although the sand of the beach was overcome with ecstasy, he did allow the merchants food to be cooked and the Phoenicians eat a great supper.
“Sand of the beach”, said the Phoenician, “we have eaten our supper and now we wish to retrieve our soap”.
“NO”, screeched the sand of the beach, ”no, you promised to leave the soap her until the sun was fully risen. You must not take the soap”.
“But”, continued the merchant, “the soap is softening and nearly melting, if we remove it now all will be well and you will have kept your bargain….”
“NO, you can not, I must keep this soap, I must”.
Now, the sand of the beach meant to say that he must keep the soap until the morning, as agreed, but the merchants heard it differently and suddenly foresaw all their precious cargo melting in the sandy furnace.
The brothers now stood up, ready to leap in to action to save what ever soap they could. The sand of the beach saw their preparedness and shifted to grasp and hold onto the softest already melting soap.
What happened next is now an infamous tale. But who moved first, no one will know, perhaps even, they moved together.
For the brothers grabbed at the soap near the edge of the fire and the sand of the beach sought to smother the slightly melted soap blocks near the centre.
In fact, both parties broke their promises. For the sand of the beach consumed and melted many soap blocks, absorbing the sweet aromas.
And the merchant brothers pulled what soap from the fire that they could and carried it back to the ship before the night was ended, where they stayed until morning.
And so it came that the sand of the beach revealed his ancient and carefully kept secret of glass – as tough as nails and as strong as steel made from sand and nitrate fashioned in a furnace.
And the merchants profited greatly both from the glass left on the beach in the morning to replace their lost soap but more so from the knowledge of formation.
For now these merchant brother knew how to create objects of light and beauty, to create vessels to preserve and transport foods and important cargos. They now had the means, though their Roman ancestors better exploited the knowledge, to insulate drafty homes without cutting out the light.
And for many uses glass was the toughest and clearly the best material.
But, the merchants had removed their goods too soon and had broken their agreement. So, when the secret of glass was passed to man, it was passed with a curse.
And that curse is that glass is brittle, glass will not bend and glass will shatter.
Merchants for many years have attempted to solve this curse with hardened glass, glass fibers that are stronger than steal, but never have they truly overcome it.
For glass is hard, it is tough and highly versatile. But it breaks too easily.
And whilst glass could have become the great material in all building and all transport, it was wood that was used to create the first airplane then followed by aluminum.
It was wood and brick that built the homes we live in and whilst we may see glass on great skyscrapers, it is still built on a back bone of steel.
For steel, like wood which it replaced, is immensely strong and highly flexible. Of course, glass is stronger in many cases, but the curse of brittleness means it remains an adornment to our lives – something we place on the outside of our building or cars.
At the core of any construction lies a flexible material – a material than can bend, adapt, absorb shocks, be bent out of and bent back into shape.
And business is no different. At the core of any great business is a flexibility to bend without breaking.
Rapid growth is often a sign of a business built in a hurry. And rather as the Phoencians were in a hurry to snatch back their blocks of soap, so many enterprises built in a rush end up becoming brittle.
This might be because bad habits were allowed to develop, as we discussed above. Or it might be because the business model is immature and brittle and has not had time to mature and strengthen. It might even be because the market in which the business operates is one which enjoys rapid growth and just as rapid falls in demand.
The point in this business parable is, however, that whilst many businesses are strong and tough and versatile too, if they can not bend then they will break sooner or later or worse, simply shatter.
As entrepreneurs and investors we tend to admire the fast growing businesses – because we can measure growth in revenues easily, but we fail to understand how flexible or robust the business really is.
So a great business, perhaps a fast growing one, might be shinny and new and brave and bold, but is it cursed? Does it suffer from the curse of being too brittle?
Any business when growing fast looks shinny and exciting, but you don’t discover how brittle a business really is until the business starts to slow down.
A business which is growing often attracts consultants and advisors whose role is to appluad the entrepreneurs and encourage them to keep going (as it feeds their business too) rather than challenge the management strategy. Therefore bad habits or a weak business model are overlooked and the entrepreneur and investors forget to question what they are doing.
Brittleness can also apply to a whole sector. Take the recruitment sector for instance; this generates lots of very fast growing businesses in good times and many insolvencies in bad times. Businesses which grow from a couple of partners to £5 or £15 million pound turn over in a few years are common in recruitment.
In good times, recruitment companies make a great deal of money and always appear in the Top 100 fastest growing business magazine lists.
But, come the recession or a switch from employment growth to unemployment and the recruitment business can shrink just as fast.
Only, on the way down the fast growing business is not only shedding sales and staff, but many of the staff have to become accustomed to expensive lifestyles and getting used to earning far less than before is a painful readjustment.
Anything that is painful for staff will take a lot of time and will be resisted. Therefore, there is a risk that some recruitment businesses are cursed with brittleness twice – once for the sector and again, because of the growth of bad habits.
The problem with changing bad habits is that as the economic behaviouralists say, every 1$ lost has the emotional cost of 2$s gained.
The warning here means that it is twice as hard, emotionally, to shed costs as it is to gain them. It is a little bit like gaining weight. And the easiest way to keep fit and slim is to not put the weight on in the first place.
So why is it harder for a company to shrink by 1$ than to grow by 1$?
Everyone wants to work in a successful growing company; few want to work in a shrinking lower wage company.
And there lies the problem. The curse of glass – that of being brittle – can be sector specific, such as recruitment, but is also often a result of rapid expansion in any business sector. If a business grows very quickly, it becomes brittle, it becomes cursed if it allows wages to rise too quickly, but the curse is hidden and not discovered until the growth ends.
If the alternative is slower growth – and yet the business retains its flexibility – then that is a better solution.
Here’s what tends to happen to Growth Busineses
As a business grows so staff wage expectations grow too. These wages tend to reach a maximum of expectation at the top of the growth curve – just before the downward trend.
This growing wage demand usually means that the profit margins in the business are shrinking as the top of the business cycle is reached and therefore the curse of becoming a brittle business is at its greatest.
Remember, every time you give a pay rise to someone who has a right to redundancy you not only increase your monthly costs but you increase your future liabilities. If you increase an employee’s salary by £1,000 per month, who has worked for you for 4 years and is over 40, you increase your redundancy liabilities by £1,500.
So what does an entrepreneur do to prevent the business becoming brittle? May be there is not much, in which case he would be wise to sell the business quickly and pass the problem on.
Alternatively, a business that plans to go through the top of the cycle and down again must ensure that it is absolutely flexible.
And that means it must shed expensive staff and do away with any fixed salaries. Which will be hugely expensive if you have rewarded your long term staff with big pay rises. And yes, this is why most business don’t do this.
Instead, the entrepreneur must ensure that his business remains flexible and does not become brittle slowly over time. And that means he must be reducing and removing the employee salaries which carry redundancy rights as the business reaches the peak of the cycle.
This is what is required to avoid the curse of glass – a brittle business that breaks when stuck. And, like the Phoenicians in our story who were staring at all their precious soap cargo dissolving in front of them, it is very hard or nearly impossible to do the right thing at this critical moment of decision making. So let’s deal with the key objections ahead of time and explain how to set up your business in the right way from day one.
But what if key staff leave?
Okay, a major objection to only taking on freelance and contractor staff would be that all your best people would be more likely to leave and all your business knowledge would go with it – to which the answer is may be.
It is true that the people with the greatest wage expectations would leave – true.
However, by cutting the space at the top of your organisation, you are creating more space for new younger talent to come in.
This is your opportunity to not only offer great prospects to young energetic people but also to shift them onto a contract or commission basis.
The advantage of this is that should you need to shed staff then you can do so with minimum costs.
Should your sales fall off a cliff – as they can do in any sales driven business – then you have the flexibility to adapt.
Another way to add flexibility to your business – so that it can ride out the storm – is to set aside 3 months of wages and costs. Keep this in the bank. If you costs go up – so your cash reserves need to go up too.
However, this is the critical part, most entrepreneurs forget about the growing redundancy liabilities that they are accruing with staff.
At a minimum, you will have 1 months notice to all staff (once past 6 months) and therefore, your cash reserve is in fact only really two months of costs.
Once your average employee length of contract reaches 4 years – typical of a business that is 6 years old and perhaps at the top of its current growth cycle – then your liabilities are now 2 months.
This means that you think you have 3 months cash in reserve – but in fact you only have 1. Why only one? Simple, as soon as you mention the word redundancy everyone who is due redundancy stops work and reaches for their calculator.
Therefore, although you might expect them to carry on working to save the company – their minds will shift, understandable enough, to working out what they are owed and finding another job.
The problem is, that you are paying them to find another job with your rapidly depleting resources.
So, if you want to survive the slow down – which will impact on all businesses sooner or later – you must be able to change the attitude of staff when the going gets tough. There is one easy way to do this and that is never hire employees.
Take on freelancers who work from home or your office. Hire people on a contract basis. Give staff a 6 month contract with one weeks renewal either way at the end ongoing. Find a way, anyway, to give your staff the comfort that they need (it usually works if you pay them slightly higher wages or commission) but never allow a hidden liability to grow in your company.
Now, strangely, it is not the money that counts but the attitude. I experienced a sharp downturn in my business and those staff on a contractual basis – ie no redundancy notice – were focused on cash generation and saving the business – their jobs and monthly pay cheque depended on it.
Some staff with large redundancy packages also worked to save the business, but a small number of staff did not. And they were the rotten apples that spoilt the barrel.
It was as it we had built a tree – the upper half of flexible wood – but the lower trunk of cursed glass.
When the harsh economic winds began, we initially had significant flexibility and coped well and maintained a positive attitude with a determination to survive.
However, when the economic chill reached deeper, we found that suddenly our team was curse with brittleness.
This was such that a single employee requesting redundancy switched from the mindset of ‘how do we survive the economic storm’ to ‘how we I get out of here first with a maximum payment’.
Now, don’t just think that employees have redundancy rights. They have a lot more than that. At critical moments when your business is on a knife edge between survival and failure they have the option to begin a grievance procedure.
Now, the grievance claim may be valid or not, but you can be sure that someone who has not been doing their job well is the most likely candidate to bring such a claim as they know they may get fired without any redundancy.
Hence, it is your worst or laziest employees or perhaps those with the most cynical attitude that are most likely to demand their ‘rights’.
If their timing is good, they’ll begin this just as your business flirts with insolvency or perhaps this will simply follow the loss of a major order or client.
Now, what is the cost of a grievance procedure at this point? Perhaps only a few thousand pounds. But there are two problems.
Firstly, are you going to ‘pay off’ the lazy employee with the grievance whilst keeping your best staff focussed and motivated? Unfortunately not. If you do, then you only encourage the next grievance – so you must stand firm and follow through the procedure.
Let’s assume that there is no case for grievance. You still have to provide directors or senior managers for a series of meetings, write legal letters and probably engage Human Resources personnel at this critical stage.
Perhaps most importantly, this will sap your energy and distract you from the main issue – saving the business.
Your best staff will see that you are distracted and will allow themselves to be distracted too.
Hence, this situation, which happened to me, acts as the nail in the coffin. Therefore, if you have employees with tribunal and grievance procedure rights, then your business is carrying yet another hidden liability. Only this liability only comes to light when your business is under its greatest pressure.
This is why it is easy to say in good times that you must employ staff. I would dispute this, but if you insist I would agree – if you would keep the cash to make them redundant should the market BEGIN to turn sour.
I emphasis the word begin, because you must spend the money to make them redundant before it is too late. And therefore, you will be required to have an excellent insight and ability to forecast your own market segment. It may be that you have this talent, in which case, you’ll be fine.
If you find you don’t have this talent, then you would be wise not to take on permanent employees.
Look, this does not mean that you can not have an office or place of work. It does not mean you can’t provide or create team work amongst your team – it is simply that you must use a different contractual relationship from the employment contract. That is, if you wish to build a business free of the curse of glass – that breaks when a nasty economic or sector storm engulf it.
As mentioned, you may decide that you will sell before the next storm – that’s fine, just know that your strategy is a high risk one and you may be caught out without enough preparation. Or the storm may turn out to be a lost worse than you expect.
This is what happened in 2007. At the beginning of January 2007, the US subprime mortgage problem was well known and widely reported. It wasn’t until August 2007 that inter bank lending went wrong and it took until Lehman Bros collapsed in Sept 2008 for the world economy to collapse.
The problem is that whilst most business people saw the storm coming, no one predicted its depth or duration.
Those businesses that survived were either bailed out by the government, fortunate enough to be in a clam harbour or flexible enough to cope.
Those businesses that carried the curse of glass snapped right away. Many businesses have some flexibility but not enough and quickly gave into the inevitable.
Now the argument for not hiring people on permanent contracts is that might walk at any point. My experience is that they generally do walk when ever it suits them and this would include
a) they have been offered more money
b) they now control enough of your clients to set up in competition
So, employment contracts are written to protect the employer – to ensure that the employer has rights and the employee can not steal business secrets or take staff.
You can also write a contract that requires a member of staff to take garden leave – this means you pay him or her for 6 months whilst they don’t work.
The reality of garden leave is that they get 6 months to rest up and gather their strength whilst accepting ‘personal’ phone calls from key clients.
Come 6 months and a day and they are ready to go for your business in a big way.
You’ve also allowed them 6 months to resent the fact that you forced them to sign a contract that was biased and unfair anyway, so by the time they are ready, they know that they were wronged and are ready to wreak revenge.
This, as you can see, is absolutely the worse case scenario.
Firstly you pay 6 months wages for no benefit for the company. This does not stop them speaking to clients – if the client calls as a friend – what will you do? Lastly, instead of parting company as amicable competitors, you motivate them with a sense of revenge that will mean they are more determined than when they worked for you and probably able to do more damage.
The mistake here is to think that your employment contract protects you – it does not – unless you are willing to pay lawyers a great deal of money to attempt to enforce it – all of which will distract you from your business.
No, don’t do this. I have done this and it is bad business.
Do not attempt to protect your business with employment contracts – they are rarely worth the paper they are written on and only serve to bind you into excessive payouts and foolish beliefs that you can protect what you built.
Far better to have your staff on a simple contractual basis – one week’s notice either way – and pay them more money due to better tax savings – than to bind them into contractual slavery.
Staff who are smart quickly come to resent the imposed slavery of a contract. I’ve always found that my best staff understand and appreciate grow up business relationships. Treating your staff as contractors is tantamount to treating them as partners.
You have a business which buys services from their business. You are an important client that they don’t want to lose. They experience working with other clients who treat them worse and they want to provide more services for you – you pay them well, you pay on time and you are fun and fair to work with.
Also, your contractors can decide their own holiday. Do they take 10 weeks a year or one? Their choice – you don’t have to create a one size fits all structure that suits no one.
I have always found that contractors take care of their work when they are away – because they want to make sure it is still there when they come back. Employees don’t do this. They walk out the door on day one of the holiday saying ‘your problem’.
This is not because employees are bad and contractors are good. No, it is that one is a child / parent relationship and the other is a relationship between two grown ups.
I know which I prefer.
And here is another thing, if you are an entrepreneur. Working with contracts means you don’t have to do the 9-5 Monday to Friday thing is you don’t want too. Most entrepreneurs hate, yes really hate, this organised hell. The last thing they want is to be tied down like this into a dull routine – so why do it to everyone else?
If you employ staff, you will have to fit into the Monday to Friday routine – its called leadership apparently. And it is mind numbing and destroys creativity and your love for creating business.
Instead, keep your team as contractors – as freelancers – let them come and go as they wish. Don’t tie them down – treat them like adults and they will respond too.
And, most likely, they will stay because they like the atmosphere – that is working in a grown up work place with other grown ups.
If they want to return to most other companies full of gossip and bitching at the water fountain, let them. If they are smart they won’t hang around long and hey, they may even come back to your business with more knowledge and new ideas.
And that is the last thing. The grown up contactor to company relationship allows your team to go away and allows them to come back.
It is good to get new ideas into a business. And at the same time, it is fearful to think your business knowledge and talent might walk at any minute.
The truth is that even with employment, you sense of security is false – you are no safer in reality.
With contractors, you do have a far greater chance that they will leave and, if you get your atmosphere and team work right, they’ll come back – perhaps with better ideas of how to work together next time.
But the ultimate reason is this. Your business will be cursed is burdened with fixed and rigid contracts that accrue ever increasing liabilities. Sooner or later your growth will stop or sag or collapse.
Your ability to survive the change in circumstances is directly related to the flexibility of your costs and staff.
If you staff costs are more than 50% of your business, then they are the biggest and most important cost. Make a decision now that you will never let that cost burden control you – but you will always control it – and that means you must never be more than a week away from saying good bye.
Replacement of talent cost
Okay, the biggest objection is the cost of replacing talent. Perhaps you have to train your people or they are hard to recruit?
Well, there are two things to say.
Firstly, whether employed or contractual, people leave if they are not wanted or valued. They stay where they are cared for – this does not change according to the piece of paper that sits in their bottom draw.
Secondly, it is critical to draw talent to your business. Therefore, you need to find a cost effective way to hire and source new talent. The internet and social networks provide that opportunity – and build this into your costs from day one. Ideally, locate yourself somewhere that is both attractive and affordable. If you do, people will want to come and work with you.