Interview, Real Business, United Kingdom - Wed October 5, 2011

Is there a perfect size for a business?

The ideal company has six employees, says Carphone Warehouse founder Charles Dunstone. Is he right? We talk to business owners about overheads, operating models and whether size really does matter.

People start companies for all manner of reasons. They might want to build a groovier networking site, or a faster microchip. Others may seek to export crude oil, or bake a tastier lemon soufflé.

But sooner or later, all successful business owners reach a tipping point. One day, they wake and realise that the little startup they founded with seed capital has sprouted and grown tall. They may find they employ dozens, even thousands of people who they barely know – and may not particularly like.

Charles Dunstone’s moment of clarity came in 2009 in the wake of the financial crisis. Carphone Warehouse, the mobile phone retailer he founded 20 years previously, was struggling through falling sales on one side, and stubbornly high staffing costs on the other.

Dunstone made the difficult and unpopular decision to axe 500 jobs, or a third of all non-customer-facing positions. That saved a lot of cash in the short-term. But, Dunstone insists, it did much more than that: “We did it because we thought we’d save money, and we did,” he said at the Investec/Real Business Entrepreneurs’ Summitearlier this year.

“But actually,” he noted, “the most amazing thing was that the business worked much better without those 500 people. You can achieve more with fewer people.”
In fact, Dunstone, one of Britain’s more successful entrepreneurs of recent years, reckons that the perfect company contains no more than six employees. After that, he believes, there is too much distraction.

Is he right? Is there a “magic” size for a company? Can a firm operate with low (or no) overheads and virtually no staff? Or does a skinny operating model and cost base cause more headaches in the long-run? Should a firm hire permanent or temporary staff – or a sprinkling of both?

For Ted Littlechild, co-founder of Electro-Flow Controls (EFC), an Aberdeen-based firm that services the offshore oil sector, Dunstone’s basic thinking is nonsense: “There is no doubt that big companies can do more than small ones. They can finance jobs and take on more people. You can have low overheads if you’re a website, or a middleman, or an ebusiness. I can see that. But the idea of six people doing what BP can is nonsense.”

Littlechild believes that companies grow in sudden spurts, requiring them to pile on new layers of staff after reaching a certain size or scale. “Once you reach 120 people, you might need two full-time human resource staffers, and then four, to make it a proper department.”

There is, of course, no one-size-fits-all strategy that suits every business. But it’s notable that the number of people in a typical pre-industrial village – 130 – matches the number of “friends” added by the average Facebook user. Robin Dunbar, a professor of evolutionary anthropology at Oxford University, has claimed that the human brain can remember no more than 150 meaningful relationships.

Roughly the same thing happens with companies. They reach the point where scale either forces them to become more efficient and well-managed, or unwieldy, bureaucratic and increasingly directionless. Littlechild at EFC says when a company reaches 50 or 60 people, you start seeing faces around you that you just don’t recognise (though he adds that this is “partly due to age and a poor memory”). EFC currently employs 70 full-time staff and posted revenues of £11m in 2010.

Kate Feeney, a director at corporate consultancy Just Add Water believes this is the tipping point where most entrepreneurs tend to exit their creations. “At first, entrepreneurs love what they have made. Once upon a time, they owned these buzzy, vibrant, creative companies; now, all of a sudden, they are being forced to sit down and talk with employment lawyers. That’s when the fun tends to go.”

Dunstone’s thinking chimes with that of others, too. George Yule, executive chairman of offshore energy specialist Romar International (see case study here) believes that no single person can directly oversee more than four or five people. “More than that and your efficiency and effectiveness becomes diluted, to the point where you can’t manage as well,” he says.

Yule has sought, wherever possible, to hire on a temporary basis in the wake of the recent recession – 20 per cent of Romar’s positions are temporary or outsourced. “Really, the only person in the world you can be sure about is yourself,” he says. “You can never know everything about a new employee, whether they’re the MD or the janitor.”

For Errol Damelin, founder of short-term lender Wonga.com, which employs 100 people, finding the right balance between permanent and temporary staff is a constant and careful balancing act. “There’s not necessarily a right or wrong answer for any given business,” he says. “From experience, freelance and outsourced solutions can help maintain flexibility and keep staffing costs down for an early-stage startup. But, especially when incentivised with equity, permanent staff bring more passion, dedication and drive.”

It is possible to run a company with ultra-lean overheads. Amanda Zuydervelt, founder of Stylebible.com (see case study here), has managed it, as have a million web-based startups, though costs to lawyers, financial advisers, technology specialists and even public relations consultants will always mount up. No company can maintain a cost base of zero for long.

And to be sure, certain types of companies seem to lend themselves to the lean-and-mean business model. Animation specialist Pixar is often cited as an example here. So, too, is smoothie giant Innocent Drinks.

Ultimately, though, there is no perfect formula in the business world. Companies grow to suit the current market and internal aspirations. A British oil firm would be hard-pushed to add an international presence without placing new feet on the ground, from engineers to government lobbyists.

Retail banks, weighed down by compliance procedures, tend to remain plodding and cumbersome, as do most blue-chip corporations, which, in order to grow, need scale – and that, again, means adding headcount.

It seems Dunstone’s reflections on Carphone Warehouse, while superficially sagacious, are hollow in meaning. Could this most highly driven of entrepreneurs have become Britain’s first digital billionaire, creating Europe’s largest independent mobile phone group, without employing an awful lot of people? Probably not.

Nor is it easy to answer that “permanent versus temporary” debate. Most individuals, says Just Add Water’s Feeney, seek certainty. Full-time employment is, she believes, an “important safety net for people”.

In short, there is no perfect size, no panacea, no defining set of ingredients. Companies cut their cloth according to economic conditions – growing in order to bake more cakes, drill more oil wells, or, in Dunstone’s case, sell more phones. Would Carphone Warehouse re-employ those 500 sacked staffers if it led directly to an upsurge in profits? You bet it would.

Box-out 1: Low overhead, or big headache?

Amanda Zuydervelt is a very modern entrepreneur. Her firm, Stylebible.com, could not have existed even a decade ago. Web-based, using a sprawling network of contributors (38 and rising), and a smattering of coders and programmers (the latter usually outsourced), Zuydervelt keeps costs tighter than a drum.

But as great as it sounds, the “low-to-no overhead” business model does have a
few downsides.

Zuydervelt founded Stylebible.com – a luxury online “black-book”, helping people of means find shops, hotels, restaurants and spas in 12 cities from Beijing to Las Vegas – four years ago, using £10,000 of her own savings.

For Zuydervelt, a trained programmer (who featured on series two of Dragons’ Den), building the website was the easy part. But she still needed help. Specific programming jobs crop up all the time: adding or “bolting-on” sections to the website; updating servers. When her own time is squeezed, Zuydervelt turns to resources such as vWorker to hire piece-work programmers, most based on the Indian subcontinent. That eats into her cash pile – Zuydervelt has commissioned over 200 such programming projects since Stylebible.com was founded, and pays one programmer a monthly retainer of £1,225.

And then there are the hidden costs: “Hosting causes the most trouble. One of our servers recently got corrupted and I found my hosting partner hadn’t been backing up the site. It then took two weeks to move everything to a new hosting site,” she says. “Legal and accounting costs pile up, too.”

Box-out 2: How to keep overheads in check? Outsource

George Yule is a stalwart of Britain’s fast-growing offshore oil and gas sector, an industry prone to sudden and unpredictable reversals of fortune.

Between 2006 and 2010, Yule headed a major independent oil-field services firm. Over the course of four years, annual revenues – boosted by a series of takeovers – jumped from £5.1m to £45m, with staffing numbers rising from 45 to 87.

Following a brief sabbatical, he was appointed executive chairman of another Aberdeen-based energy firm, Romar International, which extracts metals from oil pumped from seabeds around the world. Yule hopes to turn Romar into a £10m-a-year firm by 2015, from £2.5m last year.

Yet the turbulent events of recent years have radically altered his thinking about who to hire – and when.

After the pain of the financial crisis, the oil industry is booming again, with per-barrel prices at well over $100. But Yule and others in the industry are wary about hiring in great numbers again. “The recession allowed us to have a hard, critical look at our company, and to ask if we really wanted to take on more permanent people,” says Yule, who currently employs ten people.

Here, Yule follows some basic tenets. First, he aims to get as much as possible out of existing staff. He notes: “I would far rather have too few people working at 100 per cent than a larger number working at 90 per cent.”

Yet wherever possible, he seeks to outsource work. IT and human resources services have both been outsourced at Romar, as has quality assurance.

As the company expands overseas, Romar acknowledges that he’ll need to bring in more staff – but he’ll do it on a temporary or agency basis where possible: “If economic conditions change, you need to be able to make swift, effective decisions – and temporary staff allow you to do that.”

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