What Should You Do In Your Startup That Will Not Scale?

One of the biggest debates we had early on was whether to buy an ERP (Enterprise Resource Planning) system to scale our manufacturing. I’ll never forget it because it set off a chain of events that changed our company forever.

Here’s the story…

Two of my cofounders, “Ken” and “Randy”, came into my office about three months after we got funded. They had an urgent topic they wanted to discuss with me.

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“We need to get an ERP system,” Randy said. “We’ve got products coming out in six months and we need to be prepared to scale.”

An ERP system was something I really didn’t want to spend money on, but I told Ken and Randy to research our options. Randy, who ran operations, said he would get back to me in two weeks.

Two weeks later, on queue, Randy and Ken scheduled a meeting to present their findings to me. The presentation was a classic “Rabbit out of the hat” pitch.

Randy went through his pitch:

  • Oracle was deemed “too expensive”, and…

Randy was getting really fired up. He looked at me and said, “The only solution we can use to scale manufacturing is Company X’s!”

I asked a bunch of questions around why we couldn’t just scale manufacturing using QuickBooks and Excel. I said, “I know we can’t scale with QuickBooks and Excel, but why won’t it work at the beginning?”

“QuickBooks and Excel is buggy!”

“Buggy isn’t an explanation. Why won’t it work?”

Randy didn’t have an answer. He kept coming back to “They’re buggy!” But Randy did have a threat for me…

“I don’t know if I could run and scale manufacturing if we use QuickBooks and Excel.” In other words, “I might quit if you don’t do what I want.”

I was unmoved.

I ended the meeting by saying, “We’re going to go with QuickBooks and Excel unless you can give me quantitative reasons why we shouldn’t.”

Randy scheduled a second meeting two weeks later. There was remarkably little data added to the discussion.

Randy’s argument remained stuck on, “But QuickBooks and Excel is buggy!”

One of the disappointing things you may run into when you are building your company is key team members putting their own selfish self interests ahead of the company’s interest.

Sometimes the requests for systems you don’t yet need are teachable moments that give you the ability to explain when and how you should spend money. And other times you realize that you have a cofounder who is obviously acting in his or her best interest (“wouldn’t it be cool to have an expensive ERP system”) instead of what is in the company’s best interest.

The ERP decision to scale manufacturing was one many issues that were making it clear that Randy was selfishly putting his own wants ahead of the company’s best interest. I fired Randy about one month later (that’s another story…).

I promoted Dave to run and scale manufacturing, and Dave did a great job. And, big surprise, Dave made QuickBooks and Excel work.

Dave and I knew we were not as efficient using the combination of QuickBooks and Excel instead of a true ERP system. In fact QuickBooks Bill of Materials system was the exact inverse of what we needed to manufacture Analog ICs.

Key Learning #1: You may have to make your non-scalable solution fit like a square peg into a round hole.

Dave worked with Tina, our controller and QuickBooks expert, to solve the “reverse BOM” problem of making Analog ICs. Dave and Tina developed a workaround that we could get to work.

It was going to take more of Dave’s time than if we had an ideal ERP system. However, Dave wasn’t fully loaded when we started shipping product, so using more of his time was the right trade off.

Key Learning #2: Determine the crossover point to a more scalable solution.

There’s a point in time where your non-scalable original system will outweigh its usefulness. Here’s the way Dave and I thought about it.

Dave and I had a running dialogue where we kept looking at the cost of Dave’s time plus the cost of the QuickBooks versus the amount of time Dave estimated he would save with a more robust ERP system plus the cost of implementing the new ERP system.

We had this talk every Quarter. Sales kept rising, and Dave kept raising the crossover point to switch to a true ERP system. We (Dave in reality) ran manufacturing using QuickBooks and Excel for the next four years.

And did QuickBooks and Excel’s supposedly ‘buggy’ nature affect our on-time delivery performance? Of course it didn’t.

Conclusion: Using non-scalable systems when you start is the right way to go.

There are a lot of good reasons not to spend money early on expensive systems you likely don’t need:

A. You save the money.

Cash management is the only thing you have complete control over as CEO. And the money you save now might be the difference between your company surviving or shutting down. And…

B. You learn what you really need in a more complex (and expensive) system.

You learn exactly what you need when you build your own system. You learn what features are important, and you learn what features you can live without.

So you know exactly what you need when it’s time to make the switch. And…

C. You’ll learn your non-scalable actions and systems will scale.

That’s the crazy thing. We were shipping millions of dollars worth of product, and our non-scalable combination of QuickBooks and Excel worked quite well.

We saved a ton of money that could be used for other things just by disciplined and smart. And you can do the same thing.

So what non-scalable actions are you going to take with your business?

For more, read: What Are The 17 Biggest Surprises When You Founded Your Company?

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I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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