The Ceiling of Complexity

Businesses do not grow in a smooth line. They grow in steps, and between the steps there are long flat stretches where the owner works harder than ever and nothing much moves. Those flat stretches are not bad luck and they are usually not the market. They are ceilings, and every one of them is built out of the way the business is currently run.

What got you to where you are is precisely what stops you going further. That is not a paradox. It is arithmetic.

What the model says

Every business runs on a set of arrangements: who decides what, how work gets allocated, how information travels, how quality is checked, how cash is watched. Those arrangements have a capacity. Below it, they cope. Above it, they fail, and they fail in several places at once.

Complexity is the reason. Add one person to a team of four and you have added a person. You have also added six new relationships, another set of holiday and sickness, another opinion in every discussion, another judgement call being made when you are not in the room. Complexity does not rise in line with size, it rises faster than size. At some point the informal arrangements that worked beautifully at eight people simply cannot carry twenty.

In practice the ceilings tend to arrive at similar places. Somewhere around six to ten people, because every decision still comes back to the owner. Somewhere around twenty five to forty, because there are now more people than the owner can manage directly and there is no middle layer. Then again further up, when the business is too big to be run on instinct and there is no data anybody trusts.

The numbers vary by trade. The pattern does not.

What it feels like from the inside

This is the part worth recognising early, because the symptoms are consistent and they all arrive together.

Quotes go out late. Margin slips without anybody being able to say exactly where. Two or three jobs overrun at once. Your best people start asking questions that sound like complaints. You are working longer than you were a year ago and the bank balance does not reflect it. You are in every meeting because nothing is decided without you, and you are the reason nothing is decided without you.

The dangerous part is that all of this looks like a people problem or an effort problem. It is neither. It is a structure problem wearing a people problem's clothes, and it will not respond to either sacking somebody or working weekends.

A worked example

The figures below are illustrative arithmetic, not a client. Take a shopfitting contractor with an owner, an estimator, an office administrator and eight fitters. Last year: turnover £1.15m, gross margin 34 per cent, net profit £128,000. A good, tidy business.

This year the owner wins more work. Turnover goes to £1.40m, up 22 per cent. Three more fitters are taken on. Here is what happens to the profit:

• Gross margin falls from 34 per cent to 27 per cent, because two jobs were priced in a hurry and one ran nine days over. That is roughly £98,000 of gross profit lost against last year's rate.
• Overheads rise by £46,000: the extra fitters, a second van, more insurance, an agency temp for six weeks in the office.
• Net profit lands at £94,000. Turnover up 22 per cent, profit down 27 per cent.

Nothing in that list is a scandal. The estimator was pricing eleven jobs a month instead of seven and made two mistakes. The owner was on site three days a week and was not checking the job costs. Nobody knew a job was overrunning until it had overrun, because the only place that information existed was in a fitter's head.

That is a ceiling. The business did not fail to grow. It grew straight into the limits of how it was being run, and the extra turnover made the failure larger rather than smaller. Every additional pound of revenue was passed through a system that had stopped working.

How to apply it this week

1. Plot your own steps. Turnover, headcount and net profit for the last five years, on one page. If turnover has climbed and net profit has not, you are sitting under a ceiling right now and the date it started will be obvious.
2. Count the decisions that came to you yesterday. Write down every one. If more than five or six needed you, and most of them could have been answered by somebody else with a rule to follow, ceiling one is your ceiling.
3. Name the number nobody can produce. Ask for job-level or client-level gross margin for last month. If it takes more than a day to get, that is your data ceiling, and every decision you make until it is fixed is a guess dressed up.
4. Give away one whole decision, with a boundary. Not a task. A decision, with a written limit: who can approve a quote up to a stated value, or authorise overtime, or accept a variation. One decision, one person, in writing, this week.
5. Put a rhythm in the diary before you put people in the building. A short weekly numbers meeting and a monthly review beat a new hire in nearly every case, because the meeting is what shows you which hire you actually need.
6. Simplify something before you scale it. Fewer products, fewer variants, fewer exceptions. Most owners try to break a ceiling by adding. The faster route is usually removing the thing that generates the complexity in the first place.

The mistake most owners make

They treat the ceiling as a resourcing problem and add people. It is the most natural response and it makes things worse, because headcount is one of the main sources of the complexity that broke the business in the first place. Eleven people badly organised produce less than eight well organised, and cost considerably more.

The second mistake is treating it as an effort problem. The owner works longer, holds more of it personally, and becomes even more central. That buys perhaps six months and raises the wall.

The third is waiting for a calm quarter to sort the structure out. There is no calm quarter under a ceiling. The rebuilding has to be done while the work is still going out of the door, which is why it needs to be small, specific and started now rather than large, ideal and started never.

The questions to sit with

• Out of 10, how much of last week could have happened exactly as it did if you had been unreachable?
• What broke first the last time this business grew quickly? What did you actually change afterwards, if anything?
• If you had to run the business at twice the size with the same number of hours from you, what would have to be true?
• Which of your current problems would be solved by more people, and which would only be made bigger by them?

This is the backbone of the 6 Steps and the Systems & Scale work. The point of both is the same: stop trying to carry the business through the ceiling and start rebuilding the thing that is holding it down.