The 1st Barrier to Scaling

When 22 year old Ricardo Semler took over his Dad’s ship supply business, it was sinking.

For a long time, Semco was the poster child of a booming 1970’s Brazilian economy. At its height, they made $4M in revenue & had 90 employees.

But then the markets crashed and the hardest hit was the shipping industry. Given that 90% of their products were in shipping, Semco was in big trouble.

However, the young scion had a plan: diversify into adjacent industries

And so with Herculean effort & a grand vision, Ricardo started climbing the beanstalk.

He hired the best MBAs, invested in the latest technologies & traveled all over the world to lure new customers. But no matter how hard he worked or pushed his team, things didn’t get much better. They were growing at snail pace.

And worse, all those stressful late nights & 24-7 jet setting finally caught up to him.

One day when visiting a factory, he collapsed & was rushed to the emergency.

The Paradox of Growth

Out of 1.7 million small businesses with at least a $1M in revenue, only 1% get to $50M.

Good businesses don’t fail to scale because of bad strategies or lack of funding.

Often, they fail to grow leaders who delegate.

It’s not malicious. Every rising business becomes a victim of their own success. When an organization gets to about 100 employees, they start to create multiple levels of hierarchy to neatly divide responsibility & streamline work.

But all these barriers make people feel more disconnected from each other and less involved in the decision making. Worse, the information flow becomes scattered, guarded & sometimes, standstill.

Growth dilutes purpose.

Soon, leaders & employees feel less invested & less responsible for the goings-on in the rocket ship.

As Ricardo lay recovering, his new head of HR pointed this out to him.

“Look at your employees faces when they come in… they’re like the walking dead - fully checked out.”

“Ok… (sigh)… how do we motivate them?”

“Easy, get them to participate more... motivation will follow”

Ricardo squinted his eyes & then he smiled.

The next day he fired 60% of all the senior leaders in the company.

Step 1: Tear Down the Tower

The company Ricardo inherited from his father was a very top down bureaucratic command center. He realized he needed the complete opposite to accomplish his vision.

So he started by letting go of the old dogs from his Dad’s era, the ones who resisted his ideas & values. He went from 12 layers of management to 4.

He then broke them up into smaller business units based around their product or market focus. The employees in each unit were fully autonomous, meaning they were in charge of their own P&L and had their own marketing, finance & HR.

And here’s the kicker: 23% of each unit’s profit was shared with their own employees.

A 22 year old kid intuited the 1st rule of culture change:

Structure drives behavior.

If we want people to take more ownership of the company, bulldoze the palace HQ & give them their own fort to protect.

Step 2: Open Up the Books

Ricardo knew that to increase ownership, his people also needed all the right information.

So he opened the floodgates on their finances & operations. All of Semco’s data from balance sheets to executive pay to minutes from the board meeting was now available for anyone in the company to read.

But transparency without education is not worth much.

Most workers don’t know how to read a P&L.

So Ricardo set up monthly training sessions where they were taught to read balance sheets & cash flow statements.

Within a few months, every employee had a firm grasp on the company financials & knew where the inefficiencies were.

For example, at one of the townhalls, an employee questioned why the executives had to always stay in five star hotels.

“Wouldn’t it be possible to stay at four stars hotels once in a while? It’d save us a quarter of a percentage in our margins.”

At another one, someone pointed out how much they were spending on painting the factory every month. From then on, whenever a bunch of them had free time, they painted the factory themselves.

Step 3: Trust the Very Bottom

Ricardo believed that if employees were treated like adults, they would do the right thing.

He had them slowly exercise this muscle. For example, when new employee uniforms were coming out, instead of just placing an order, they asked everyone what colors they wanted.

Or when employees complained about the company cafeteria, HR asked them “Have you talked to the restaurant manager about your suggestions?”. They said they hadn’t so they went & suggested it, and then came back to HR again saying the restaurant manager was open to it. HR said, “Great, go ahead & work with them to make the changes.”

Within a few years, democratic decision making took over.

There were no supervisors overseeing what time employees were coming in or how much they were spending. Every worker set their own goal & every manager was picked by their own team.

And because each business unit was responsible for themselves, they set their own HR policies, revenue goals & quality standards. And then vigilantly monitored it because they had to live with the consequences of their choices.

Distributed decision-making may take more time, but its execution is faster & more lethal.

Why? Because the hardest part is already done:

Getting buy-in.

Conclusion

The more a company grows, the more we feel like we’re losing control.

And when we have more to lose, we only trust ourselves to do the job. What starts as a way to mitigate chaos soon mutates into a Big Brother culture of micromanaging with serious consequences.

Ricardo warns us

Giving up control was not easy for Ricardo & his team either. It took them many years to get it right.

But they did & it paid off in a big way.

In the following 2 decades, when other Brazilian companies were falling like flies, Semco went from 90 employees & a wobbly $4M revenue to becoming an international titan with 3,000 employees & $212M in revenue.

The most amazing part was their culture. Even with such tremendous growth, they had an attrition rate of 1% & without any advertising, they’d get 300 resumes a week.

That’s because Ricardo learnt the 1st lesson of scaling without losing one’s soul:

Build leaders who delegate excellently.