The tripping point

Written by Greig Clark

To inspire confidence in your business acumen, it’s generally not good to be seen as “off your rocker.” But that’s where Jeff Lem was in the eyes of his business partner one day last summer, when Lem presented his plan for adding senior management talent to the staff of Q Data, the Toronto-based producer of data-collection technologies of which Lem is CEO: “I gotta tell ya, Greig — given the state of the economy, when my partner looked at the costs he thought I’d lost it.”

Jeff, who is one of the entrepreneurs I work with, had been facing the same problem that five of my seven clients have struggled with in the past 12 months: when and how to add outside executive talent to the payroll. This is a key fork in the road for a growing firm. The positions that usually arise first are VP of sales or CFO, although a VP of operations or R&D leader is sometimes needed. I have one client right now who needs all four.

Adding executive talent to your employee roster, especially for the first time, is a huge and sometimes fatal step for any small firm. But if you want to get big, you have to do it at some point. I’ve learned this by whipping around this inflection point a number of times in my own businesses and as an adviser to others.

So, how do you do it? There are three separate risks to consider: cost, hiring and letting go.

1) COST RISK: This risk holds back half of expansion decisions. For instance, bringing in a VP of sales with all the bonuses, expenses and associated costs can add up to $200,000. That might be 50% of your current earnings and it feels like it’s coming right out of your pocket. Ouch. Your only real options are:

a) Bite the bullet and just do it. After all, the “Ready! Fire! Aim!” approach was good enough to get you this far.

b) Delay. That’s probably not your style, but $200K still feels better in your pocket than does the mere chance you’ll get it many times over at an unknown point in the future.

c) Share the person and the cost. There are a lot of employment agencies that specialize in part-time executive help. At the Horatio Venture Fund, we used a “CFO for hire” for the early stages of all of our investments, and got huge value for the money. It is so nice to regularly get numbers you can trust, and from someone who will flag issues when they see them (and for as low as $3,000 a month). A part-time sales VP can bring you sales-management systems and skills. Incorporating such outside assistance can make a big difference.

d) Split the position. For instance, hire one person to be VP of Sales and CFO. I have seen it tried, but I have never seen it work. Sure, the numbers will look good on paper; but it’s cheating — and cheaters eventually get caught.

2) HIRING RISK: Years ago, I explained to one of my greatest mentors and business partners, well-known Calgary entrepreneur Jack MacKenzie, how the Horatio fund was going to add value by hiring professional CEOs to manage entrepreneurial growth firms when they outgrew their founders. “One in three, Greig. I’ll give you one in three” is how he pegged my odds of making the right hire. I (secretly) scoffed back then, but today I nod in agreement. The same ratio can apply when you try to fill any new executive position. “So, I could spend $200K on this new person and they might turn out to be a mistake, Greig?” There are a lot of ways to mitigate this risk, but I’ll have to save them for a future column.

3) I CAN’T LET GO! “Nobody can really handle sales or R&D or operations or financials like I can!” One of my client CEOs thinks this way, as do thousands of entrepreneurs out there. The problem is that it’s quite possibly true. I always remind myself of the words of former U.S. president Dwight Eisenhower, who said, “The secret of delegating is seeing a letter that is written not as well as you would have written it, but it gets the job done, and you let it go.” Can you do that? If not, the new hire will be a disaster for both of you. If delegation is the art of assigning a task with a prescribed outcome, review dates and a completion date, then the secret to letting go is to keep the tasks small and the review dates close together until trust is built on both sides. It’s all about finding the right balance, but you are likely to live out of your comfort zone for some time.

Sorry, I can’t sugar-coat it. Hiring your first outside executive is one of the toughest steps entrepreneurs must take. Do it right, and profitable growth can go to a whole new level. Do it wrong, and it can be one of those “damn near killed the company” mistakes. But as Gen. Douglas MacArthur said: “The worst decision in war is no decision.” And so it is here. Go big or go home.

P.S. Jeff Lem made his first big hire. And his employees have been asking why he didn’t do it sooner.

Originally appeared on PROFITguide.com