So you’ve launched your own design or software development company, and you’re starting to grow. That’s great news! But good growth won’t just happen. Just like a junior designer or developer starts with small projects and slowly builds her/his skills, a new business needs time to mature, test new ideas, and prepare itself, too.
How did you gain your desingers or developers skills that got you where you are today? With study, practice, and testing, I imagine. Business owners learn their trade the same way: by taking general business wisdom, applying it to their specific niche, and working diligently until they get it right.
If you want to grow in a sustainable, satisfying way, then you need to pay attention to how you’re growing, not just how much. After all, a bigger company isn’t necessarily a better one. Let’s look at four common pitfalls of growth in the software industry, and how to avoid them.
The wrong clients
As a business owner, you might assume you should serve everyone you can. Busy is good, right? In reality, taking on every client who’ll hire you is actually detrimental to your growth, and not strategic at all.
The more bad clients you try to serve, the less time you have to look for good clients. This is dangerous. It’s like feng shui: You have to move the bad ones out so the good ones can come in.
But what makes a good client? Your goals and expertise might give you more specific criteria, but all good clients share three traits:
- They understand your value and let you remain in control of the design process as the professional.
- They are enjoyable to work with.
- They are profitable.
Firing clients (further, keeping the wrong clients out of your company in the first place) is one thing that sets strategic business owners apart from those who struggle through growth. This is a little scary to implement, but letting the bad clients move on to another home will be one of the most important things you can do to grow your company—and not just because they take up time.
Whether your clients are good or bad, you can bet that they will send you more clients just like themselves. If you give discounts to one client, then new clients could show up at your door looking for discounts. On the flip side, if you are treating clients well, doing good work, and getting paid well for it, then new clients will show up expecting to pay for the privilege of working with you.
Growing with the wrong clients is unintentional growth, and it actually hurts your good clients, too. When you are loaded down with clients you can never please, you can’t give enough attention to the very clients that will appreciate your excellent service. And when a good client doesn’t understand why you can’t find time to return their calls, they will leave.
Hiring for hiring’s sake
You might think that staff growth is good, but size alone is no strategy. Hire employees to serve great clients, rather than taking clients in order to pay employees.
Growing to simply reach a size often puts you in the poor position of having to farm out busywork to unchallenged employees. Busywork blunts an employee’s passion and makes her wonder if she is doing anything of value—beyond bringing another dollar into your business, that is. It’s hard to get excited about work like that.
Bad clients and busywork lead to high employee turnover—because your best employees know they don’t have to put up with your poor decisions. And employee instability can, in turn, atrophy your client list. Give the employees some control over whom your company serves. For example, if you have a method of tracking all incoming new client requests, go over these with your team in a weekly meeting to flesh out who would be good for your company. Or, share your “good client” criteria with your team, ask for their input, and discuss whether everyone currently on your client roster fits the bill.
Including your team in these intimate parts of your company will make talented employees more passionate and happier. Happy clients will be the result!
Employees long for a business owner who manages growth strategically. One way to bless your employees and feed their passion for their work is to focus on a niche. This will in turn mean you must hire the right team to work on that niche. Niche work, as opposed to serving anyone anywhere, lets you hire the best designers or developers, who expect better work conditions, higher pay, and more creative freedoms—passionate professionals who want to work with only the best clients.
Growing too fast
Newer software companies often struggle to manage their tacit, undocumented knowledge—like where files are stored or how project handoffs happen. When your company is new, it’s challenging to maintain developed systems that can handle large amounts of growth in small periods of time. Along with nurturing great designers and developers, take time to develop internal systems like mature project management systems and wise account managers.
Every time you onboard a new customer, you will add to your tacit knowledge about your pricing and your customer experience processes. You need to be able to apply that knowledge to the next client you bring in. This is hard to do when you are growing too fast. If you are a new owner, fight to keep your growth slow. Once you have more mature systems, you can pick up your pace.
Once you reach a certain level of size, you also need more help to grow. This can be a surprise to many business owners. More specifically, once you reach somewhere around five to ten employees, non-owner leaders need to be identified to help you continue managing the work and the growth. Now your company needs to continue its growth, often without the owner controlling the full process. Your internal processes will be tested during this phase. As an company owner, you must transition out of technical work so you can be available to move into a role of leading and coaching your team as they take on new roles in helping the company grow.
Since you need to hire the best employees and can’t afford to let customer service slip while you do it, you’ll also find you need to hire new people just before you need them. But in order to hire early, you’ll need precious cash on hand to buy enough time to find the right clients to match your new hires. If you don’t have the cash reserves to get through this adjustment period, then you could be overburdened with a huge payroll and not enough of the right clients to pay it.
High-margin work frees you from stressing over the basic needs of the business—like worrying about making payroll, or paying contractors and vendors on time. A profit margin is the total amount your client paid you, less the specific salaries or contractors needed to produce the work, less the products or additional services you had to purchase to serve the client. Profit margin is different from gross revenue. Profit margin is a minimalistic view of how profitable each job is. Gross revenue, on the other hand, is the total income your company is making, before accounting for costs.
In the profit margin calculation, ignore insurance, rent, taxes, and all of the stuff you can’t do anything about. These expenses do not factor into the calculation of a profit margin, because you can’t control them. Just focus on the few controllable costs needed to perform that specific job for that specific client. Low-margin work means you are pricing your services too close to the costs you’ll have to bear in order to serve that client.
For example, if you price your services at $100,000, and your salaries and contractors cost you $80,000 and your miscellaneous costs (fonts, hosting, and stuff like that) are $5,000, then you are dealing with a small profit margin of $15,000. This is a 15 percent profit margin. Is that enough? That is something you must decide, but I can tell you from experience that the smart businesses are experiencing between 70 and 90 percent profit margins, and I would expect at least a 50 percent margin from our clients.
Margins matter. Low-margin work could have unintended consequences, like leaving you in debt to cover living costs and the owners’ salaries. This is very dangerous. Though it is a fearful thing to do at first, pricing your services high enough to fund profitable growth, and being committed to high-margin growth, will help your design company prosper.
Committing to only taking high-profit work also lets you offer attractive salaries, provide good workspaces and tools, and invest in employee education. In essence, you can’t build the world-class team you need without high profit margins.
Good growth can be yours
So maybe you’ve grown, but have you prospered? Not if you’ve allowed your company to be sidelined by the four growth pitfalls above. Growth doesn’t happen by default. It can only happen by a lot of hard work, and demands keeping your growth patterns in check every step of the way. Be watchful for the pitfalls and run the other way. Your clients, your team, and your profitability will thank you.