Growth Can Hide Bad Management

One of the more dangerous things that can happen to a business is growth.

That might sound like a strange thing to say, particularly when most CEOs, boards, investors and founders spend a significant amount of their time trying to create it. Growth brings new customers, more revenue, more employees, greater market presence and, hopefully, greater enterprise value. It is usually one of the clearest signs that a business is moving in the right direction.

The problem is that revenue growth can make a business appear healthier than it really is.

I have seen businesses growing quickly while the underlying economics were getting worse. I have seen organisations adding people faster than they were developing the systems and management capability needed to support them. I have seen good people working incredibly hard to compensate for poor processes, disconnected systems and unclear accountability, while the business continued to report strong revenue growth.

From the outside, those businesses looked successful. Inside, they were becoming increasingly difficult to manage, with problems building beneath the surface until the whole business became a powder keg waiting to explode.

This is one of the things I have become much more conscious of throughout my career. Growth does not fix poor management. In many cases, it hides it for a while and then makes it considerably harder to deal with.

Growth without profit is a dangerous trap

One of the biggest traps is chasing revenue or customer volume while ignoring what is happening at the bottom line.

I have seen businesses become very focused on turnover because it is an easy number to celebrate. The sales team is hitting targets, customer numbers are increasing and the organisation is getting bigger, so everyone assumes the business must be getting healthier.

But if the margin on that growth is poor, the opposite can be happening.

Every new customer still has to be serviced. Every new employee needs to be paid. Technology costs increase, management overhead increases and operational complexity increases. Depending on the business, you may also have to fund inventory, wages or other costs well before you receive payment from the customer.

You can therefore have a business that is growing rapidly while becoming increasingly short of cash. That is a dangerous position to be in because the growth itself can create the financial pressure. More sales do not automatically create more wealth. If the economics are wrong, more sales can simply create more work, more costs and more cash tied up in the business. This is where I think the difference between revenue growth and healthy growth becomes really important.

A business doing $50 million in revenue with poor margins and weak cash conversion may be in a much more difficult position than a business doing $20 million with strong margins, good cash flow and a clear path to scale.

The bigger number looks better in a presentation. The second business may actually be much healthier.

The illusion of progress

There is something psychologically powerful about growth.

A bigger team feels like progress. More customers feels like progress. More offices, more technology, more activity and more revenue all create the impression that the business is moving forward. But activity is not the same as value creation.

I have seen organisations where people were incredibly busy, but very little of that activity was actually improving the economics of the business. Teams were dealing with operational problems, managers were constantly firefighting and people were working longer hours simply to keep up with the volume of work.

The business was busy. It was not necessarily healthy.

That distinction matters because growth can create a form of busy work where everyone is focused on keeping up with the next customer, the next contract or the next month rather than stepping back and asking whether the business is actually becoming more profitable and more valuable.

At some point, somebody has to ask the uncomfortable question: are we building a better business or are we simply becoming a bigger one?

Expenses can scale faster than revenue

The other problem with growth is that the costs do not always behave in the way you expect.

You win more work, so you need more people. More people require more management. More customers require more technology. More locations require more infrastructure. More activity creates more administration and more complexity. Before long, the business has added a significant amount of overhead simply to support the revenue that has been generated. This is particularly dangerous when the leadership team is looking at revenue growth without understanding the marginal cost of that growth.

I have seen businesses take on work because it added revenue, only to discover later that the cost of delivering it consumed most of the margin. The sales result looked good, but the business was actually making itself more difficult to manage without creating much additional value.

Sometimes the right decision is to say no to the revenue. That can be a difficult conversation for a sales-driven organisation, but if the economics do not work, selling more of the same thing is not necessarily a strategy.

Cash flow is where growth can really hurt

Profitability and cash flow are obviously connected, but they are not the same thing. A growing business can report a profit and still find itself under significant cash pressure if it has to fund the growth before customers pay. You may need to employ people before the revenue arrives. You may need to invest in systems and infrastructure. You may have working capital tied up in the business while waiting for customers to pay. The faster the business grows, the more money it may need to fund that growth.

This is why I have always believed CEOs need to understand the cash consequences of their growth strategy, not simply the revenue and profit forecasts. There is nothing particularly impressive about doubling revenue if you have to put the business under enormous financial pressure to achieve it.

Growth should improve the strength of the organisation, not make it more vulnerable to one bad month.

The economics have to work at the unit level

For me, one of the simplest tests is to understand the economics of each additional dollar of revenue.

• What does it actually contribute?

• What does it cost to acquire the customer, deliver the service, support the relationship and collect the cash?

• What happens to the gross profit when volume increases?

• Does productivity improve as you get bigger, or do you simply need more people to handle the additional work?

These questions are particularly important because small problems become very large problems when you scale them. If every new customer makes a healthy contribution, growth can be extremely powerful. If every new customer creates more work than value, then growth can become a trap.

That is why I believe gross profit and contribution need to grow alongside revenue. It sounds obvious, but businesses get themselves into trouble when the focus shifts towards the top line and the bottom line becomes something that is reviewed after the fact.

At BetterHR, we had to build the economics as well as the growth

At BetterHR, we grew revenue and gross profit significantly and ultimately increased enterprise value by more than 250%. What is sometimes missed when you look at an outcome like that is how much work went into changing the organisation underneath the growth. We rebuilt the technology platform, changed products and pricing, improved retention, developed new distribution partnerships and strengthened the leadership team. We were constantly looking at how to improve the quality of the revenue rather than simply increasing the volume. That distinction mattered.

There is a temptation when a business is growing to keep pushing the accelerator because the numbers look good. But there are times when you need to consolidate, improve the systems, protect the margin and strengthen the cash position before taking the next step.

I think of growth in cycles. You grow, you consolidate, you strengthen the organisation and the balance sheet, and then you grow again. Trying to stay at full speed all the time is not necessarily a sign of ambition. Sometimes it is simply a sign that the organisation has not stopped to catch its breath.

Zonda was another good example

When I joined Zonda Global and Zonda Care as Group CEO, I was appointed by private equity investors to lead a multi-entity portfolio across healthcare staffing, recruitment and NDIS services. There was significant opportunity, but there were also issues across commercial performance, operations, risk, compliance and accountability that needed to be addressed.

At Zonda Global, we took the business from losses to a 34% gross profit position while continuing to grow revenue. We also delivered the group's 12-month strategic and operational targets in half the planned timeframe. The important part for me was not simply the result. It was understanding what was driving the result. We had to look closely at pricing, customers, costs, productivity and the way the organisation was being managed. Revenue growth was important, but it was only one part of the picture. If we had simply focused on increasing volume without improving the underlying economics, the outcome would have been very different.

That experience reinforced something I have seen throughout my career. You cannot create sustainable value by chasing revenue at any cost.

Growth changes what the organisation needs from its leaders

One of the lessons I have learned throughout my career is that the management model that works at one stage of growth will often become a constraint at the next.

When a business is small, you can get away with a lot of things that become dangerous as the organisation gets larger. The CEO can know most of the important customers personally, decisions can be made informally, managers can solve problems without worrying too much about consistency and a small group of people can carry a surprising amount of institutional knowledge. As the business grows, those things start to break down.

You have more customers, more employees, more locations, more managers and more decisions being made every day. The CEO cannot be involved in everything, but often the organisation has not developed the leadership capability or systems required to operate without that involvement.

That is when you start seeing CEOs who are technically running a much larger business but spending most of their time dealing with the same operational issues they were dealing with when the business was half the size.

I have experienced this myself and it is one of the reasons I am very focused on building organisations that can operate effectively without everything having to come back to the CEO.

I saw this during the transformation at HIA

At the Housing Industry Association, where I was National General Manager Sales & Marketing, I led transformation across 23 offices. With that sort of national footprint, you quickly see how difficult it is to create consistency while still allowing individual teams and locations to operate effectively.

Different offices develop different ways of doing things. Information gets managed differently. Customers can have a different experience depending on who they deal with. Managers develop their own processes because they are trying to solve problems locally, and over time those local solutions become embedded in the way the organisation operates.

None of that necessarily stops revenue growth. In fact, you can continue growing for quite some time while these issues are developing underneath the surface. The challenge is that eventually the complexity catches up with you. The organisation becomes harder to manage, decisions take longer, people spend more time coordinating with each other and leaders become increasingly frustrated that the business does not seem to move as quickly as it once did. At that point, some leaders respond by adding another layer of management or introducing another system. Sometimes that is the right answer. Often it is simply adding another layer to an underlying problem that has not been properly understood.

Good people can hide bad management for a long time

One of the biggest traps I have seen is assuming that because you have good people, you have a good organisation.

Good people can compensate for a lot of problems. They will work around broken systems, build their own spreadsheets, make calls after hours, chase information that should be readily available and find ways to keep customers happy despite processes that make their jobs unnecessarily difficult.

For a period of time, this can actually make the organisation look very healthy. The customers are being looked after, revenue continues to grow and problems are being solved. The cost is simply being carried by your best people.

Eventually, that becomes a problem. Those people burn out, become frustrated or leave, and the organisation then discovers that a lot of its capability was sitting in people's heads rather than in the systems and processes of the business.

I have seen this happen more than once, and it is one of the reasons I pay close attention to what people are having to do manually to keep an organisation functioning. If your best people are spending a significant amount of their time working around the business rather than working on the business, there is usually something underneath that needs attention.

Culture is often the first thing to deteriorate

The other area I watch closely during periods of rapid growth is culture. When an organisation is small, culture is largely created through proximity. People know the leadership team, they understand what is expected and there is usually a relatively direct relationship between behaviour and consequences.

As the organisation grows, that becomes harder to maintain. New people join who have no history with the organisation. Managers become responsible for larger teams. Communication becomes more complicated and decisions are increasingly made further away from the CEO.

This is where the gap between what leaders say and what people actually experience can start to appear. A company might say that accountability is important, but if poor performance is tolerated because someone is a big revenue producer, employees notice. A company might say that collaboration is important, but if leaders reward people for protecting their own budgets and teams, people notice that as well.

Culture is created by what leadership consistently rewards, accepts and ignores. That is why I think culture becomes particularly important during growth. You are not just adding revenue and employees. You are multiplying whatever behaviours already exist in the organisation.

If those behaviours are healthy, growth can strengthen the culture. If they are unhealthy, growth can make them much harder to fix.

So what should CEOs look at?

When I look at a growing business, I am interested in the revenue number, but I want to understand what sits behind it. Are margins improving or declining? Is gross profit growing at the same rate as revenue? Are customers staying longer or leaving sooner? Is productivity improving as the organisation gets bigger? Are managers developing people or simply becoming another layer between the CEO and the workforce? Are the systems capable of handling the next stage of growth? Is cash flow keeping pace with the growth? Are decisions becoming clearer and faster, or are they becoming slower and more complicated?

I also want to know what is happening to the people who are actually running the business. Are your best people still energised by the organisation or are they becoming frustrated by the amount of effort required to get things done? Are managers spending their time leading or firefighting? Are different parts of the organisation working together or have they started building their own little businesses inside the business?

And perhaps the most uncomfortable question for a CEO is whether the organisation could continue to perform if the CEO stepped away for three months. If everything would slow down, decisions would stop, customers would escalate issues and managers would start looking upwards for answers, then the business probably has more dependence on the CEO than it should.

That is not necessarily a reflection of a bad CEO. It is often a reflection of a business that has grown faster than its management infrastructure. The answer is to recognise it before the growth exposes it.

Growth should make the organisation stronger

I am not suggesting that growth is a problem. Growth is essential for most businesses and, when done properly, it creates opportunities for employees, customers, investors and the organisation itself. But I think CEOs need to be careful about assuming that growth automatically means the business is getting healthier.

The best growth strengthens the underlying organisation at the same time. It creates better leaders, better systems, stronger economics, clearer accountability and a culture that can survive the organisation becoming larger and more complex. It also creates a stronger balance sheet and better cash generation, because ultimately a business has to create economic value rather than simply generate activity.

That is what I think about when I talk about scale. Scale is not simply having more revenue or more employees. It is the ability to grow without the organisation becoming disproportionately harder to manage and without every additional dollar of revenue creating another dollar of complexity.

Sometimes the right decision is to slow down. Protect the margin. Improve the systems. Strengthen the leadership team. Get the cash position right. Consolidate what you have built and then take the next step when the numbers support it.

The question I would encourage every CEO and Board to ask is this:

What is our growth currently hiding?

Because sooner or later, growth stops hiding it. And when that happens, the real test of leadership is whether you built the organisation to handle it.

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