Transitioning From an Entrepreneurship to a Professionally Managed Firm

Transitioning From an Entrepreneurship to a Professionally Managed Firm

By Doug Brown

Editor’s Note:This is the first installment of an ongoing series surrounding what it takes to move from a relatively small micro-business to a more robust, larger organization. Each article will explore a different aspect of this journey.

Starting with the most basic premise, entrepreneurs typically face the initial challenges surrounding creating a new venture from scratch or building up a recent acquisition. Their ability to recognize and act on the marketplace’s needs will help determine growth rates at every step of the business’s lifespan.

When they are successful in the dance of meeting and matching the market’s needs and customer base, the business begins its positive movement along the growth curve. Almost every step up the revenue ladder brings additional challenges. You can hear the questions that people ask themselves: “Do we have enough people, space, equipment and working capital to get through this period while stretched so thin? Am I calling it too close? What should I do first? What can we do to get the production and productivity levels up to meet the needs of the business?” Hectic describes the feeling on most days and frenetic more times than someone cares to admit.

What are the common symptoms that accompany this phase of growth? There is precious little time spent on thinking and very little planning usually occurs. Despite this obvious flaw, every time they experience a positive feeling (adrenaline or euphoria), this wrong behavior gets reinforced.

What has been described by Eric Flamholtz, Ph.D., a UCLA professor, as “organizational growing pains” can be articulated as follows:

  • People feel there are not enough hours in the day
  • People spend too much time “putting out fires”
  • Many people aren’t aware of what others are doing
  • People lack an understanding of the firm’s ultimate goals
  • There are not enough good managers
  • People feel that “I have to do it myself if I want it done correctly”
  • Most people feel that the firm’s meetings are a waste of time
  • Plans seldom are made and even more seldom followed up, so things often don’t get done
  • Some people feel insecure about their place in the firm
  • The firm has continued to grow in sales but not to the same extent in profits

The chief executive officer or founder must recognize that these symptoms indicate underlying problems that will only worsen unless met head-on. A transformation (or metamorphosis) is necessary. The business must evolve from its traditional freewheeling, anything goes, random behavior patterns that scream “we’ll figure it out as we go along” to a more organized, disciplined and thoughtful approach. The movement from being reactionary to proactive must take place.

This next phase requires carefully defining position descriptions and job responsibilities. Minimize job overlaps. Increase accountability within goals, measures, and standards of performance. Invest both time and money to go from only on-the-job training to a more formalized approach to people development as a precursor to installing rewards and recognition programs, performance appraisals and more formal staff and management development processes. Look at the business from a dollars and cents point of view. Require the creation, adoption and management of a budget to ensure the right things get appropriately funded while the wrong things get weeded out. There must be reports available to show progress or lack thereof. Annual profitability measures become a target to be achieved rather than just a by-product of “I guess we guessed right, and this is what is left over.”

For an entrepreneur, this can be a particularly trying time. Some of the very traits that helped spur the organization in its early days can lead to its faltering or demise. Looking at some typical characteristics, most entrepreneurs:

  • Will have either a sales or technical background
  • Know the industry well
  • Want to have things done their way
  • May be more intelligent than many of the staff they tend to hire
  • May be more likely to trust their own instincts versus taking the time to seek out the research or the numbers
  • Attract subordinates who begin to rely on their boss’s bravado and confidence that they are all-knowing
  • Are likely to be “do-ers” rather than managers
  • Are likely to be self-taught readers versus undergoing a lot of formalized ongoing training.

The next big challenge for entrepreneurs

Many entrepreneurs are likely to abhor any trappings of what they view as restrictive corporate behavior. Therefore, they don’t like to schedule staff meetings, be accountable for their time organization or have to operate within a budget. It is easy for them to fall into the trap, thinking, “So far, we have gotten along just fine without these things.”

At this stage of the firm’s growth and development, the very nature of the firm itself probably has changed. Over time, it has begun its transition into this larger enterprise. Now the management team has to change along with it. Fortunately for those reading this article, pathways have already been selected and tried by other leaders and owners. They have taken one of the following actions:

  1. Doing nothing and hoping for the best.
  2. Undergoing personal and professional growth. Taking it on as a challenge to develop the attitudes, skills, knowledge and positive behavioral changes needed to continue to lead the organization effectively.
  3. Resigning and bringing in a professional manager to run the organization.
  4. Moving up to the role of chairman, as Steven Jobs and Bill Gates did, and allowing the professional managers to run the day-to-day while staying somewhat involved.
  5. Selling out and starting another firm back at the entrepreneurial level.
  6. Merging or being acquired by another firm with the additional infrastructure in place.

Research bears out that many founders and entrepreneurs have an extraordinarily difficult time giving up control of their business. In many cases, they have poured their life’s work into building that business, and it is as much a part of them as is their right arm and hand.

Owners face the challenge of even considering that someone else may be able to run their organization as well as they can or improve performance levels. As a result, they hold on with all their strength. Their organization ultimately becomes a victim of the “potted-plant syndrome.” That is where the size of the pot determines how far the plant can grow before it becomes root-bound and stunted. In the worst cases in nature, the plant strangles itself and dies prematurely. I have observed that the leaders’ self-imagery and self-concept will only let the firm grow so big or grow so fast in the business world. Whenever they are so afraid of losing control, they fail to act on the opportunities of a lifetime. Or they fail to pull the trigger promptly. When this occurs, their firm is almost guaranteed not to be awarded or accepted for the contract or policy. This fear of success plays out in leaders’ minds as, “We are not worthy to receive this level of recognition or success on such a large scale, and therefore we will blow this opportunity to prove to others that we aren’t really that good.” If you have ever heard of someone who is typically very reliable missing a deadline on a game-changing opportunity, keep this lesson in mind.

Others attempt to undergo this transformation by acquiring the appropriate skills and attitudes—but never really get it for any number of reasons.

Some owners will go through the motion of bringing in managers and leaders from the outside and then stand around and watch as they suffer and fail miserably. My observations of leaders have witnessed several common tactics exhibited. The founders unconsciously don’t want to be “shown up” by the others they have brought in. That might make them seem to have been wrong (or less effective) in the past; they behave in specific ways. For example, they conveniently forget to tell the new manager about a critical deadline or a particular way of handling a long-term customer’s unique requests. In the end, they get chastised and embarrassed. They may also undermine their new manager’s authority when dealing with some long-term employees. Even though they had told the new manager, they wanted something to be taken care of or fixed.

They don’t give them all the information needed to do the whole job up front. When this happens, the new manager cannot finish the task without coming back to ask the owner for their help- making them appear less effective or competent. Others have described it as creating managerial eunuchs.

Eventually, they tell their staff: “However reluctant I am to get involved here, I better do it because I need to save you guys.” It is a form of the “Messiah complex” played out live and in living color.

Whatever the form of transition to be undertaken, it is paramount that all recognize that the organization has changed since the early days and can’t go back without severe consequences.

In the following installments, we will explore the predictable stages of organizational growth and the developmental items and tactics to address in each phase. For example, future articles will cover:

  • The six critical organizational development tasks
  • The four different stages of growth
  • Determining and assessing the usual growing pains
  • Planning the transitions that leaders must successfully execute

Watch for the next installment.