It’s not just boom times when we see rapid growth in companies. Covid-19 is affecting many businesses negatively. Surprisingly, however, some companies are needing to scale faster than ever, and they must be aware of the breaking points. Evernote co-founder Phil Libin, said one of the best pieces of actionable advice he received is that companies break every time they triple in size. In an interview with Tim Ferris, he refers to this concept as The Rule of 3 and 10. Hiroshi Mikitani, founder of Japan’s largest online marketplace, Rakuten, gave Libin this sage advice. We’ll get to that a little later, but lets look at a sector that’s currently experiencing rapid growth.
The impact of Covid-19 on the Parcel Delivery Businesses
Parcel delivery companies are experiencing a fortuitous growth spurt during this pandemic. Brick and mortar retailers are shifting their business operations to an e-commerce model to counter Covid-19 operating restrictions. Homebound consumers have little choice but to shop on-line. The courier companies are benefitting in a big way, with many of them increasing capacity by three fold.
In a recent interview with Bobby Kerr, Des Travers, CEO of DPD, discusses the rapid growth of the parcel company. Travers said that DPD’s business has grown 70% in just six weeks [April – May 2020], and their model has shifted from 50% business to business deliveries, to 90% business to consumer. Apart from a significant growth in parcel volumes, there are other unforeseen benefits for couriers at this time. Roads are quieter (fewer accidents and lower insurance premiums), and city centres are avoided as most deliveries are now sent to the suburbs. With activities such as construction and taxi services dwindling during the lockdown, courier companies benefit from access to a readily available workforce.
Travers is quick to point out that while DPD has increased its business in recent weeks, his competitors are experiencing the same good fortune.
However, this rapid scale brings new challenges. Travers said that DPD has been inundated with job applications and they need to move quickly to get drivers hired, trained and productive, whether directly, or though their owner driver franchise model. DPD now needs to optimise for route planning and changes to package types. The the cosmetics parcel category, for example, has grown 300% in recent weeks. Volumes are up, packages are smaller, and there are more drivers on the road, leading to increased logistical complexity.
DPD is in a good space though. They foresaw changes in the sector with arrival of Brexit, and prepared for the transformation of their business operations. In 2016 DPD invested in their central hub technology, increasing sorting capacity from 7000 to 21000 parcels per hour, well able to handle the current surge.
DPD have been in business over 35 years, and I’m sure they are used to seasonal surges in their operations. Their franchise business allows them to scale quickly as well. So let’s look at the rule of 3 and 10, the impact it has on a businesses processes and structures, and what leads them to break.
The rule of 3 and 10
Well known Japanese CEO, Mikitani-san has grown his company, Rakuten, from a one-person operation to over 10,000 people. During that time, he observed how systems and processes broke every time the workforce tripled in size and called this the rule of 3 and 10 [multiples of three and powers of 10, rounded up]. Based on this rule, every process breaks, from payroll and decision making to daily tasks such as scheduling meetings. Companies experience various phases of growth and re-invention during their tenure. I’ll walk you through the first four phases of a typical company growing to 100 employees.
A new company founder is a jack-of-all-trades, developing products , selling them and even completing administrative work. The founder knows instinctively what needs to happen, and prioritises work accordingly. Not having enough time to develop products, sell and support them, the founder becomes overwhelmed. He hires two more people and implements necessary processes such as payroll and goal setting. His decisions now include determining how to delegate tasks which disrupts the status quo.
By phase two there are 10 employees on the payroll, and the founders’ workdays become filled with people management tasks. He hires an operations manager, implements written play-books; structures meetings and formalises project delivery. The team now works towards a common goal. Typically in this phase, employees have a startup mentality and they’re comfortable performing multiple roles to get a job done.
The company grows to 30 people and IT systems are creaking, which require new investments. Job roles become more specialised so moving employees into departmental structures such as sales, product development, and support has become necessary. Functional managers are hired to delegate task. New budget planning helps teams manage spend and the top level continues to make most financial decisions, resulting in process bottlenecks.
Now established, the workforce approaches 100. This is the next breakpoint in the rule of 3 and 10. Business operations span cities in different time zones. The business must segment it’s products to better support their customers growing needs. Outsourced services such as marketing and human resources management are moved in-house. In-depth training programs are needed for new hires. Management implements standardised performance and promotion structures. Unable to function at scale, early employees start pushing back on the new processes and may leave.
The business will continue to face organisational challenges as the workforce grows beyond 300 and even 1000 people.
In a rapid growth startup, the phases mentioned above happen quickly, and as Libin states “businesses can get into real trouble as they blow right through these tripling’s without even realising it”. His advice is that companies should be perpetually thinking about reinventing themselves ensuring that company culture remains aligned and their growth investments are timely.
So, much like what we’re seeing in the parcel delivery sector, a combination of luck and a massive shift in economic activity can force rapid scale, leaving many businesses unprepared.
So what’s the learning?
Businesses grow in cycles, so factor in the rule of 3 and 10 in your strategic plans. Be aware when workforces grow to 30, 100 or even 300 people, that systems will start to break. Foresee these milestones and make timely investments before the breaks start to happen.
Phil Libin moved on from Evernote. Recognising that his passion is in designing products, he did not want to steer the company through the next phase of growth. Since then, the popular note taking application has struggled. They have failed to release highly anticipated product changes. New CEO, Ian Small, has committed to fixing the core platforms. As an avid user of Evernote, I hope Small injects new energy into the company and that his effort prepares Evernote for growth.
DPD seem to have prepared well for scale, and have invested for growth. So how will the remaining parcel delivery companies fare? How will their businesses cope with the increase in volumes? Are they prepared for the inevitable breaks that will happen with scale?
Business models will shift again, after the Covid-19 lockdown eases, and the new normal will be a bigger e-commerce market place. The fittest courier companies will thrive.
If your business is approaching a growth milestone then book a discovery session with business transformation specialists, Saltwater Consulting. If you want to learn more about how the Covid-19 pandemic has benefitted home exercise company, Peloton, then read my post on The Economics of your Business