The price of running a small business

Published 21 May 2019

If you are running a business – micro or small, medium or large – or if you are looking for work, read on; otherwise, this isn’t for you and there are better things you could be doing with your time.

If you are running a business and you are serious about it, it has to be within your behavioural framework and your physical constitution constantly to be ready for battle.

You are in a battle for engagement with your clients, for utility from the business you are building, and you are in a flat-out freaking war for talent.

In relative terms the first two in this trio of conflict are easy to address, and largely algorithmic. The third one, which is about finding and developing talent, isn’t. It’s hard, unfair, dishonest and, all things considered, as slippery a thing to measure as ever existed.

Every person running a business knows growth is asymmetric. Every person who has actually though about anything actually knows that pretty much everything is asymmetric, but let’s get back to the war for talent.

If business were symmetrical, every time you added an asset, a human, a physical process or a computing system then you could bet on a quantum of growth. But you can’t. It turns out not all humans are equal in their abilities, and some systems are just a waste of time. I am not going to get distracted here by the idea of business disciplines, because that’s a 2000-word, Sunday-morning, post-surf-and-espresso rant for another time.

The worst-kept secret in business is that not everyone at your office produces the same output. This isn’t news, it’s something that’s pretty well known. It’s called Price’s Law,named after English physicist Derek Price. Look him up, he’s absolutely worth it: a double PhD and a quizzical and intellectual view of the world. I tend to love him for his thinking, his wit, his gentle Jewish approach to atheism and his accidental discoveries. But see for yourself and form your own opinion. I’ve got copies of his books, Little Science Big Science and Science Since Babylon. Read them, they’re worth it. Give me a bell and I’ll lend you my copies – they are PDFs so I’ll have to email them you.

Here’s Price’s Law in a nutshell: The square root of the number of people in your organisation do about half of all the work. That’s it. That’s how small and how big idea that is at the same time.

Let’s start playing with the maths. If you work in a 100-person business, 10 of them do about half of all the work. If you work a million-person business, 1000 do all the work.

Imagine this. You come with me to the SCG on New Year’s Day to watch the test against New Zealand. I’ve got five tickets and only four are spoken for so there’s a slot going if you are interested, and the great sporting cathedral is full. There are 46,000 people in the house.

The square root of 46,000 is, give or take a soul, 215 people. If all of the people in the stadium were working for you, you could remove four NSW Government bus-loads of the right people from the crowd – essentially an unnoticeable number in crowd that big – and produce the same economic outcome as the 45,000-odd that are left.

OK, so as a business owner that’s pretty scary, but you want to know what’s even scarier? Let’s say the next week you and I, because we are cricket tragics, go the MCG to watch Pakistan play Australia in a one-day match (only two tickets this time, sorry; and they are both spoken for) and the ground is full – there are 90,000 people there.

You’ve guessed the answer already, because we all did year-seven maths: the square root of 90,000 is 300. In a stadium almost twice the capacity, you only need one more busload of the right people to produce the same amount of work as the remaining 89,700 people.

You can’t ignore Price’s Law, and that’s a pain in the neck if you want your business to be great. But just increasing the number of the people in your organisation is a sloppy predictor of growth. So the goal surely has to be to raise the average capacity of the same number people that are already working in your organisation. That’s a much better predictor of growth.

How do we do that? Hire? Fire? Train? What is the most cost-effective? Well, the answer is complicated. We try and turn everything into a science, and it seems to suggest that a combination of hiring well and firing fast, and a constant investment in training, is the answer.

But what’s the right mix of those three things? Well no one really knows, but the data suggests it’s hiring well. Because we want to be better at things, though, we try and turn hiring and firing into a kind of bubble-sort problem. If you are interested in understanding this better, read Algorithms To Live By, by Brian Christian and Tom Griffiths, and pay particular attention to the secretary problem. I can’t lend you this book; I downloaded it from iTunes and listened to it. It’s not wonderful but it’s worth it.

But as I always say: the problem contains the solution. If you are now sitting down on a Wednesday morning, coffee in hand, starting to do the work for the June strategy offsite, you are going to be focused on growth. You are going to be focused on better systems, better reporting and of course better people.

The bastard fact of all of this is that the data suggests the best spend of money is on better people, and people change is hard. But being good at it is going to be a core driver of success.

The other bastard fact is that at the moment in financial services, to quote Obi Wan Kenobi, there is a disturbance in the force, and that means there are a lot of people around looking for work. They might be unemployed, they might be in-work, but they are unhappy and they are looking.

How, then, do you tell who’s good and who’s bad? The short answer is that experience is the best teacher – that’s why we employ people we’ve worked with before. The long answer is that the best way is testing, and that’s complicated and confrontational.

So, here’s the challenge. The system of financial services, in particular retail financial services, is now in chaos – legislative chaos, investment chaos and operational chaos. The people who work in financial services are disturbed, and they’re moving around and if you are interested in growth this is a great time to grab some people and get on with it while the big dogs are biting their own tails.

This is the time for you to decide – and here I’m quoting Game of Thrones – whether chaos is a pit or a ladder. Me? I’m glad you asked. I’m betting it’s a ladder.

1. The slipperiest things ever created is called BAM (because it’s made out of boron, aluminium and magnesium) it was discovered in America in 1999. I started reading about it while I was writing this and lost a very pleasant hour at a website called Interesting Engineering. For pity’s sake don’t go there – it’s a data heaven and a complete time thief.

Andrew Inwood

Founder and Principal
Andrew Inwood is the founder and principal of CoreData and has more than 30 years’ experience in the Australian financial services industry.