Table of Contents
Entrepreneurial personal drive becoming a limit to the company potential, an
organisational dynamics prospective from a UK technology start-up case.
Francesco Burelli
Edgar, Dunn & Company
Candlewick House, 120 Cannon Street, London EC4N 6AS, UK
Tel: +44 (0)207 2831114, Fax: +44(0)207 2831007
francesco.burelli@ edgardunn.com
Abstract
A British technology start-up was failing to achieve sales targets and was suffering of high attrition
rates compared to a market physiological rate. This presentation reports on organisational dynamics
observed in a UK technology start-up during a consulting assignment. Issues affecting growth and
commercial viability of the company were found originating from an over- entrepreneurial attitude in
the founders that ignited some dangerous dynamics within the organisation. Missing alignment of
leadership and entrepreneurial personalities within stakeholders’ interests resulted in a situation in
which even positive market potential was failing to deliver. The organisational dynamics resulted in
causal loops that were reinforcing, with different delay times, in a negative manner and impeding
growth and business development activities. By changing the leadership style with the introduction
of a new management, it has been possible to alter the situation by enabling positive personnel
expectations, attitudes and behaviours.
Keywords
human_resources, organisational dynamics, HR, start_up, organisational growth, leadership,
entrepreneurship, attrition.
Introduction: history and assignment brief
The history of the company relevant for the scope of this presentation covers the months
immediately following the funding the company received from a Venture Capital at the end of year
2000. Up to receiving funding the company was operating within the IT services business in an
opportunistic manner by taking a wide range of assignments, some of them linked in a very loose
manner with their main, and differentiating, technical capabilities. With funding they received a
mandate to structure themselves and to focus their offering around their core technology
competencies by developing a defined product (software) offering, branding and a market position.
1 month 1 1 week
8 months 2months _ month
Foo ......
The company is Initial VC funding VC funding New CEO
founded (<£100.000) (> $10.000.000) joins
Consulting Consulting
assignment assignment
(2 months)
In the early stage of the company growth, roles and responsibilities were mainly hands-on;
management and supervision roles were minimal. The founders, assumed the title of directors,
covered business development and sales roles with the rest of the employees focused on technical
development and delivery. No support function was managed internally but provided by suppliers.
With funding came the growth mandate and the need of recruiting personnel and structuring the
organisation by departments. In November 2000 an HR manager was hired together with a
contracting finance director, and the organisation was split in two departments, sales and
technology, both supported by an embryonic personnel department dealing with recruitment. The
two founders took responsibility for sales and management respectively, dealing mainly with the
team of business developers.
By month 6 from (second) funding the company was still failing to achieve any significant sales
and there was little sign of a clear strategy being developed by the two founders; who were also the
only directors with decision-making powers within the organisation. Another organisational
indicator picked up at board level was a high percentage of attrition in the non-technical
departments. The rate was growing steady in value as the sales team grew with an alarming
shortness of employment length despite the adverse job market in United Kingdom. Despite the
formal request and direct questions to the founders about the company performance, the board was
incapable of achieving proper understanding of the situation and a consultant was hired to
investigate the situation.
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. ome - = -r cae
os 74 Se wr e :
Month Month Month Month Month Month Month Month Month Month Month Month
0 i 2 3 4 5 6 7 8 9 1011
= = Technical Department== *Sales Department otal Company
Monthly relative attrition rates by departments and overall organisation.
From funding the firm grew from 15 to nearly 70 employees with a peak of over 80 between month
7 and 8. In 11 months nearly 100 employees were hired of which more than 48% left. During the
same period more than 40 people joined the sales team with a leaving rate of nearly 74% percent.
Sales personnel numbers are reported in Fig. 1. Leaving personnel numbers keep rising even
regardless of hiring freeze and seem to decrease only at month 10 when the new CEO accept his
posting.
30
25
20 cea Ss
15
10 +
Personnel no.
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month Month
10 11
[Total Personnel = = Hires *Leaving |
Personnel by departments in absolute numbers by month.
Because of the recent nature of the described events, attention has been paid to avoid any detail that
may lead to the naming of company. While keeping meaningful ratios unchanged, data has been
neutralised so to avoid being used for identification and due to confidentiality limitations.
The consulting engagement and the organisational dynamics within the company
The consulting engagement lasted for two months during July and August 2001. The assignment
was two fold:
*to analyse the company approach to market and identify what was going wrong with sales strategy;
*to understand what was causing attrition (to be reported to venture capital board members).
By working as part of the sales team it has been possible to have a close look at the organisation.
To understand roles and organisational dynamics it has been possible to gather information by
direct interviews and in-the-field observations of the day-by-day company life.
The two founders lead the company in its initial growth stages but were failing to appreciate the
fact that with the funding, the company was not their own property anymore and that from that
point in time, as company directors, they were meant to represent the interest of investors. They
perceived the board as invading and eroding personal power positions. As the company grew,
managing it became more complex as they were suffering from lack of management culture and
were missing the preparation needed to deal with the development of a structured approach to
market. The professional sales people hired were seen as another threat to personal status and being
very difficult to control. With the goal of preserving the personal control over the company, the two
founders were blocking any contact between the board and employees, limiting and resisting the
creation of other director roles and by managing personnel in a way to keep their full discretionarily
decision making power. Loose job descriptions and vague personal targets together with lack of
formal “grievance” procedures were enabling them to eliminate on the spot all those employees that
were complaining because of lack of empowerment or delegation or for the lack of attention to
bottom-up feedbacks. The founders exercised their power over the sales team by dismissing spot
any employee perceived as a threat to their power or failing to deliver on their personal
expectations to be introduced to senior business professionals and to achieve, in a very short time,
the major sales needed to prove their position to the demanding board.
In the company early days, sales were generated by the relationship capabilities of the two founders
and mainly achieved by an intense and successful cold-calling activity and ranging between £ 5.000
and £ 50.000 deals. To achieve the £ 1 million + kind of deals needed by the business after funding,
the firm needed a much more structured approach to market since their target client were much
different from those of the earlier stage. Despite the fact that the founders were missing the needed
experience and skills to cope with the expected sales requirements, they were not prepared to
delegate the development of value propositions or to allow for the time and resources needed to
study the market and to develop marketing collateral and a sales strategy. The pre-sales activity
continued to generate a good volume of contacts and leads by cold calling but with very little sales
follow up.
Deal size: £5-75k © —— Sales cycle: 1 to 3 weeks
Opportunistic market approach L Organisational approach: accentrated founders effort
Sales force: founders <
Targets: founder's network and random cold calling
Sales cycle: 3 to 24 weeks
Deal size: £100k to 1 million
Structured market a wit Organisational approach: team effort
Ee Sales force: professional dedicated team—< u Pe
Targets: specific vertical and funtional industries
Number of failing
dotcoms and tech
start-ups + Pressure on
board (VC)
Time lenght to
4 as close a mo
Number of disrupted sales
s
processes (actual and Pressure on
Remaning cash
Prospective clients by otential :
personal contacts sy Pp ) Sy funders/directors
+ Ms ‘ ;
Motivation and Delegation and
commitment of Pressure On empowerment
remaining personnel sales ae
el
Board members were under pressure from their respective V enture Capital organisations to achieve
investment profitability in the midst of the 2001 dot.com burst. This, together with the slipping
sales and the cash burst were acting as multipliers for the pressure that was passed on to the
founders. They were then passing it, by threatening dismissals to employees with negative effects
on commitment and morale. As directors missed to acknowledge the failing sale cycle and the
longer time needed to close deals, longer business development times were perceived as lack of
capacity and commitment from the sales team. The consequences of these perceptions were mutual
distrust and dismissal decisions.
Number of failing .
dotcoms and tech ~~ Remaning cash
start-ups + Pressure on
board (VC)
Time lenght to
c a close a deal
Number of disrupted sales +
P sve ienieh processes (actual and pressure is
rospective clients by tential r
personal contacts Sy B N ) Se funders/directors
~ + Motivation and Delegation and
commitment of Pressure On — empowerment
Sy remaining esome =_A sales team
UK job market (no. of
positions we
NW pesignation, and
Dismissals
As the pressure on founders was increasing so did the strictness of controls on personnel with
further declining empowerment and delegation levels. The higher the level of seniority of sales
personnel, the more frequent the discussions, the quicker the exit. Low morale and motivation were
also manifested by resignations of those capable of securing altemative jobs determining, together
with dismissals, the high attrition rates. The consequences were disrupted sales processes both in
actual and potential terms. Actual sales in case of personnel leaving during a delivery project or a
negotiation. Potential sales due to the reluctance in committing personal contacts and leveraging
personal networks within an arbitrarily managed environment. The more disrupted the sales
processes, the longer time taken to close contracts.
Number of failing
dotcoms and tech
start-ups
Time lenght to
4 as close a oo
Number of disrupted sales
processes (actual and
Remaning cash
+ Pressure on
board (VC)
Prospective clients b ‘ eh on
sersanal contacts . Sy Potential) Sy funders/directors
+ f+ + Motivati ’
otivation and Delegation and
commitment of
Se remaining personnel
UK job market (no. of sQ
positions advertised) et
Resignations and:
Dismissals
Positive firm's
reputation
Pressure on empowerment
sales team
Departing employees passed their experiences to
business contacts and agencies creating a reputation
of “a bad company to work for’. Attrition affected
also the delivery capabilities since sales personnel
were not only engaged in commercial initiatives but
also. in delivery projects, managing client
requirements as well as expectations. Over time,
delivery issues and missing operational policies
resulted in a reputation of unreliability and of sloppy
delivery, feeding back in a adverse manner on
perspective sales.
Recruitment was mostly managed by agencies but hired candidates did not stay long enough for
agencies fees to be paid, and together with consistent negative reports from placed candidates,
caused the company’s reputation to decline substantially even amongst search and selection
providers with some of those stopping dealing with the company. The more the new hires, the more
the working days invested in assimilation and initial training, the bigger the amount paid for
agencies fees.
Number of failing Remaning cash -
dotcoms and tech + Pressure on
start-ups board (VC)
Time lenght st
- a close a deal
Number of disrupted sales
é five clienteh processes (actual and Set én
rospective clients by tential
persia: contacts gy Pi N ) Sy funders/directors
toh Motivation and Delegation and SQ
commitment of Pressure ON —_ empowerment
& remaining enone sales ee
ad i Work days spent to
UK job market (no. of 1 induce new.Hites
positions . at new Pitas ag
NX pesignation ee os a
a
Agencies fees
+ Agancies available to
Positive firm' rr
reputation SS eee trade with the firm
The hiring freeze
By end of month seven, the two founders stopped any hiring process with the aim of attract less
attention onto employee fluctuating numbers and to reduce expenditures.
Elapsed time from + 2
funding
. Pressure on
Time lenght to board (VC) |
close a deal ~~~\
+ NS jy
®Y /
Number of disrupted sales fe + ¥
rocesses (actual and
Prospective clients by ‘ ean Pressure on
personal contacts sQ funders/directors
Va Motivation and Delegation and
/ commitment of Pressure on empowerment
/ oe
i Sy remaining personnel <g——— sales team
fics 3 -
t
{ UK job market (no. of Z
1 jo. el sQ
\ iti i Z Needed new hires
\ positions acegted) ad oe ew hin
\ a. . “
\ Resignations and aK
\ Sy Dismissals *
NS A
Sey . 4 Agancies available to
~~~.___Positive firm's
1 : > trade with the firm
reputation
Remaning cash.
><
The new CEO.
The two founders did not fully accept the system thinking model as their mental models were
conflicting with any suggestion and the need of a change in leadership style proved to be a
challenging task. Since the time of funding the VC board members expressed the wish of hiring a
CEO with relevant professional experience and to appoint other directors to share the leadership of
the company. Until the outcome of the consulting engagement, these requirements were delayed by
the two founders but after the presentation the board took direct responsibility in appointing a CEO,
an HR manager and a financial director moving the two founders to less managerial roles. Lately
one of the two founders has been removed from any direct involvement in the company.
For the remaining personnel the new CEO and the leadership change created the expectations of
positive changes in terms of a less arbitrarily managed company and of stopping the daily dismissal
threats they were subject under the previous style of management. During month 11 the new CEO
took the helm and by implementing a collaborative style of management and by paying attention to
relevant suggestions and bottom-up contributions, he developed further the approach to market and
the value propositions. These positive changes induced further expectations in terms of
improvement in the work environment and reduced considerably attrition by zeroing the dismissals
and considerably reducing resignations.
The diminishing pressure on the sales team fed back to the expectations of positive changes and the
more the new CEO was managing the company in a collaborative and open manner, the more the
sales team were left free, and encouraged, to contribute to improving the approach to market; thus
creating a positive reinforcing loop. Senior sales personnel started committing personal contacts
and some early relevant perspective sales were developed. Time to close the deal started shortening
as the prospects pipeline grew. The closer the first deal, the less the pressure on the CEO, the more
empowered the employees, the more expectation for positive changes, the higher the morale, the
less disrupted sales processes, the closer (and probable) the deal.
Loops structure under the new leadership style:
ela, a, Remaning cash
- + Close a deal ~~
f Delegation and
Number of disrupted sales
a (actual and Sy cnenowernent
a's contacts | Pressure on
fi Motivation and SQ funders/directors
commitment of Tobe rad
oe wa personnel ee Pressure on Expected positive
As exignation / .
a
UK job ‘. (no. of
_
Time lenght to 4 Pressure on CEO
Prospective clients by ak 4 .
reputation _ eee team. changes
positions advertised)
Conclusions
This case is a good example of how the wrong kind of leadership may disrupt a good business idea.
An unsuitable leadership approach mainly focused on personal power and characterized by lack of
trust toward colleagues was acting as the disrupting factor despite commercial potential, cash and
resource availability. The personal drive of the entrepreneur together with their lack of self-
confidence towards specific management topics (in this very case: marketing and strategy) ended
up being the main barrier to business growth. The founders failed to appreciate the change of their
roles when they sought and accepted extemal funding. This was despite the fact that a driving
leadership might have been a strong asset for a growing organisation if aligned with stakeholders’
interests and if aware of its professional limitations.
The company recently secured a significant (> £1.000.000) deal and took over another technology
start-up that close to file for bankruptcy.
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