Leverage your brand. You shouldn’t let two guys in a garage eat your shorts.
—Guy Kawasaki
Scaling your business is the only option that allows you to continue growing. It demands that you leverage and build on your strengths.
I don’t care how large or small your company is, you will always benefit from leverage and scale. In other words, if it takes one hundred dollars to build ten widgets and I can figure out how to build fifty more widgets for that same one hundred dollars, that’s something that I want to know. In fact, leverage and scale are so important for businesses in difficult times that they can be essential for a company’s very survival. A well-known analyst who spoke at a banking conference I attended in New York City said it this way: “When you look forward in your company, what you need to do is one of these three things: sell it, shut it, or scale it.”
And while I personally think those are harsh words, in this type of economy he’s probably not too far off.
Every leader, every company owner, every CEO should be on a constant quest for leverage and scale. For the first time in my career—because of the state of the economy and because of competitive factors—I believe that size can make a difference. If you’re a small company, how do you leverage yourself into a company that’s larger or makes products that you can leverage up?
While you’re looking for leverage, however, you’ve got to be willing to quickly let go of investments that aren’t bringing you the results you hoped for. Because an investment in your business has money, employee time, and other significant assets attached to it, it can sometimes be difficult for leaders to abandon and move on. And that creates unproductive assets or resources, which can become a serious drag on a company.
The road ahead is a balance. You’re always looking for leverage and scale, but at the same time you’ve got to be able to let go of the investment you’ve made in an asset when it’s not working.
In my experience, many businesspeople have a hard time letting go of assets because they’re eternal optimists. They say, “Just give it a little bit more time, and it will work.” And they might be right—or not. I’m an optimist by nature, and I’m glad because I think the alternative stinks. But no matter how optimistic you might be, there’s a point when some investments aren’t going to work out. When that’s the case, the best approach is to cut your losses quickly and move on to more promising investments.
A lot of people talk about how they leverage technology to the advantage of their businesses. With the price of much technology as low as it currently is, almost anyone can get what they need no matter what type of company they’re running. I take for granted that technology will make things run better, faster, and quicker in my company. But what I’m really interested in when it comes to leveraging technology is what it adds to my value proposition—in other words, how does it contribute to the customer experience? To me, that’s where we can most effectively leverage technology. It creates tremendous value, which we like.
When it comes to leveraging assets, people have to be creative. I was on a discussion panel a few years ago with four other bankers representing banks smaller than Umpqua. Each of us on the panel was asked to respond to this question: “In what area of lending are you going to grow this next year?” Now keep in mind that this was during the heart of the recession, 2009 or 2010, and lending was still tight. The moderator worked his way down the row of bankers on the panel, and everybody said they were going to increase their commercial and industrial (C&I) loans—their business loans. When the moderator got to me, I had a different answer.
“Well,” I said. “First, yes, like the other four banks on this panel, we are going to grow our C&I lending because we’re adding incremental resources to ensure we succeed. So if my friends on the panel today believe they’re going to grow their C&I portfolio faster than they have before without adding incremental resources as well, well, I wish them luck.” I wasn’t very popular when I said that.
I said it in a nice way, but the message was the same: the chances of these other banks growing their C&I loans was low unless they were prepared to invest in the incremental resources required to get the job done. This goes back to when you’re building leverage, you’ve got to know exactly when to invest to have the greatest impact. The trick is timing.
My point was that if these other bankers thought they were suddenly going to grow increased C&I lending in the next year just because they said that they would, I’m afraid they may have been drinking some sort of funny Kool-Aid. I’m going to guess that the people working for these other banks were already working their fannies off. In my opinion, their leaders would have to add people and strengthen their lending infrastructure to produce better results. That’s what we did at Umpqua. We scaled up and leveraged the different types of resources and infrastructure changes we needed, giving us the capacity and opportunity to increase our loans.
In this case, some technology leverage was involved, but for the most part it was us going out and hiring away teams of commercial lenders from other banks and markets that we wanted to move into. And what do you think was the biggest draw for us to do that—to get an entire team of people to come from a large, national bank to our small, Oregon-based bank? It was our culture and the value proposition we offer that these men and women were interested in. They had read so much about our culture and value proposition that they were intrigued by it. By no means is our unique culture the right fit for everyone, but it does give us a chance to attract and recruit some really top-notch people.
The competitive nature of business requires that we constantly become more efficient to compete, survive, expand, improve profits, and thrive in the long run. This is especially true in difficult times, when there’s less room to maneuver or make mistakes. As a result, during the course of this most recent economic downturn and the aftermath—which we’re still in—companies have aggressively tightened budgets and cut costs. The impact can be seen in the nation’s unemployment rate, which I believe is going to take a long time to get back to prerecession levels, if it ever does. This is due to the fact that companies are more efficient now: they don’t need as many people to do what they used to do. This, combined with reduced consumer demand, means that companies will be producing less with fewer people than before for at least the foreseeable future.
A lot of companies took advantage of the economic downturn to become more efficient. If it took me ten people to build fifty widgets before the recession, and I’ve since been able to figure out how to build those same fifty widgets with just six employees—letting go of the four people I no longer needed—when the economy gets better, I’m not going to add those four people back. If I wanted to increase production to eighty widgets to gain market share, I might add one or two employees back, and this then becomes a way to leverage my assets.
If you’re not looking to build scale and broaden your span of control (another word for leverage) in today’s business environment, I can pretty much guarantee that you’re going to have problems. The reason is that in this economy, you need as much room to maneuver as you can find, and you need to figure out how to compete on more than price. And if you think about it, remember that larger businesses, if they’ve been successful in taking advantage of scale and leverage, can outprice small companies anytime they want, all day long.
I’m not a supporter of growth for the sake of growth, but I do believe that growth can be a very good thing. It needs to be profitable and efficient growth, of course. In the banking industry, smaller community banks make virtually 100 percent of their income from the net interest they generate from their loan portfolios. That doesn’t allow much room to maneuver. Larger banks have the ability to add to this by diversifying into other types of revenue-producing activities. giving them more capabilities to improve earnings and leverage their assets. Smaller businesses can’t attract the necessary talent and in many cases don’t have the capital needed to grow profitably. So, yes, size can be a very good thing in creating leverage—but only if you don’t forsake your company just to get larger.
Culture is the greatest asset we possess at Umpqua Bank, and it’s also the greatest area of risk because if our company grows and for some reason we forsake our culture, we will have lost what’s unique about our business. We would then lose our differentiation, our competitive gap, and our value proposition. Our reputation would go to hell, and our customers would seek other options.
Countless companies have gotten big just for the sake of getting big, and along the way they lost their unique culture. Bureaucracy and process took over, and the company became stagnant and lost its appeal and, with that, whatever competitive gap it had built. There are many companies big and small that have gone out of business because of this reason. As writer Edward Abbey once stated, “Growth for the sake of growth is the ideology of the cancer cell.”1 It can be the death of even the most vigorous and hardy organization.
According to management consultants Graeme Deans and Mary Larson, increasing shareholder value depends on a growth strategy that builds competencies in three distinct areas:
Deans and Larson go on to say, “Indeed, absent these competencies, a strategy of growth for its own sake is a trap that is hard to escape. It’s also overrated because it’s not necessarily attuned to the actual drivers of profitable, long-term growth.”3
A small business that isn’t as efficient as it can be will have difficulty competing. In fact, because small business owners can’t compete on price with the large chains, they have to devise a different strategy that will entice customers to shop at their stores. How do you come up with this? I believe it’s usually obvious but only after you turn over a lot of rocks.
Here’s a hint: you’d better have a better value proposition, a strong reputation, and empowered people. These qualities will help to differentiate your company so you can compete against companies like Walmart on more than just price. If you can’t do that you’re done.
Growing just for the sake of growth, as some companies do, is not a strategy; in fact, it’s a formula for disaster. For example, many companies consider acquisitions to enter new markets or to leverage up assets. It’s not a bad strategy unless you’re acquiring just to get bigger. But bigger isn’t always better. I think that’s a weak reason for doing any acquisition.
The key to moving forward with any acquisition is to answer two questions: “What is our strategic rationale for taking this action?” and, “Does it make financial sense?”
The first question, the most difficult hurdle to get over, is the toughest question anyone can ask: “Why?” The answer can’t be “just to get bigger”; there has to be a strategic reason. For Umpqua, I want to know the answer to a single question: If we acquire another bank and I apply Umpqua’s resources—leveraging all the tools and products we have—can we develop that bank faster than it was growing on its own? If we see growth potential, we’re interested in it. If not, we’ll pass on the deal.
Not too long ago someone asked me if we would ever consider doing a small transaction because conventional wisdom says they’re just as difficult to integrate as a large one and have fewer benefits. My answer surprised them: “It depends on what market it’s in.” If it’s a market with potential and where Umpqua’s culture and value proposition would flourish, you bet I’m interested.
The second hurdle—determining the financial metrics of a transaction—is easier. The numbers speak for themselves: they either add up profitably or they don’t. Does the potential profit from the acquisition outweigh the costs? Does it make good financial sense? If the numbers don’t support an acquisition, then the strategic rationale better be particularly strong if you’re going to proceed any farther down that path.
Notes
1. Edward Abbey, The Journey Home: Some Words in Defense of the American West (New York: Plume, 1991), 183.
2. Graeme Deans and Mary Larson, “Growth for Growth’s Sake: A Recipe for a Potential Disaster,” Organization (September/October 2008), http://www.iveybusinessjournal.com/topics/the-organization/growth-for-growths-sake-a-recipe-for-a-.potential-disaster#.Ub9YwPZARMg
3. Ibid.