The ABC Gap of High Growth

The ABC Gap Dilemma

Somametrics abc-gapEvery company has some form of an ABC Gap: ‘A’ is where a company is today, ‘C’ is where it wants to be, and ‘B’ is its bridge (what it needs to do) to get from A to C.

The idea is that to the extent that a company is able to chip away at the gap between ‘A’ and ‘C’, then it is likely meeting its growth objectives on a consistent basis. Managing this gap and successfully moving closer to ‘C’ is what all executives spend most of their time doing, especially CEOs.

One important question is: when companies find it difficult to meet their growth objectives, is that because they don’t have a good plan ‘B’, or are they having difficulty executing on ‘B’?

What our research and experience shows is that it is more often the latter. Execution is the key challenge primarily due to resource constraints. Sometimes, a company doesn’t have certain skills it needs to execute the plan. But more often the case is that its people are already busy doing what today demands and don’t have the time to do the work that tomorrow demands.

In other words, when today (‘A’) competed with tomorrow (‘C’) for the same resources, almost always, it is 'A' that wins.

The reasons for this are well documented in books such as The Innovator’s Dilemma by Michael Clayton of Columbia University as well as in books by marketing consultant Geoffrey Moore (Dealing with Darwin and Escape Velocity).

We believe, however, that the reasons documented by these noted experts primarily apply to larger companies, and that smaller companies face a different ABC Gap challenge. This article discusses this issue from the perspective of a small company and attempts to provide a practical solution.

The Nature of ABC Gap

soma-generic-bus-mondelRegardless of industry, almost all companies must handle three generic business operations: they must continuously innovate and bring out new products and services, they must take these products and services to market, and they must fulfill the demand they created (manufacturing, delivering, supporting, and so on). While they don't have to do all three internally (and indeed that is not the best option), they must execute all three better than competitors to achieve high growth.

The assumption here is that a company continues to innovate and bring out new products and services, which it markets/sells, and then delivers and supports.

However, what seems to happen to most companies is that ‘today’ wins over ‘tomorrow’. In other words, the customers of today, who use the products of today, get the lion share of the company’s resources—both in number and talent—first.

Geoffrey Moore, in his book, Dealing with Darwin, outlines this issue—what he calls “Core” vs. “Context”. According to Moore, Core, which is what differentiates a company, must be continually renewed in order to maintain competitive advantage and grow at a high rate. However, most of the company’s key resources are allocated to “Context”—those things that if not done will result in really bad things happening, but doing them well will not increase growth.

While Context work must be done, it confers no competitive advantage. For example, paying taxes or meeting regulatory requirements are necessary in that the consequences of not doing them can be serious. However, neither enables a company to achieve high growth.

Differences in Small and Large Companies

The Large Companies Go-to-Market Dilemma

When it comes to large enterprises, their greatest challenge is that their new innovations do not see the light of day in time before competitors beat them to it.

Most of these large companies have very good labs and innovation centers where they develop many new products. However, the revenues that would come from these new products are so dwarfed by the overall revenues from existing products that they get little or no top management attention.Eventually, they die at birth from lack of attention.

A case in point is Apple’s infamous Newton. When Apple launched its first Macintosh computer, it celebrated the day it passed the million-dollar mark with champagne.

The Newton, however, did not get the same treatment. Although it generated far more dollars than the first Macintosh ever did, it was considered a dismal failure and scrapped. Why? Because by then, Apple was a multi-billion-dollar company and their existing products were generating many tens of millions if not hundreds of millions of dollars in revenues.

For big companies, the challenge is not that they don’t innovate sufficiently, Typically, it is that they never get enough "go-to-market"resources for these innovations to take off and become successful.

Small companies, however, face a different challenge.

The Small Company’s Innovation Dilemma

For smaller companies, the challenge is quite different. Typically, it is finding the resources to build new products. The visionary founders are never short of ideas. However, bringing these ideas to fruition seems to be the challenge.

The reason for this is pretty much the same as for large companies. All available resources are used to support the existing products and the existing customers that use them. In fact, their best engineers often work to fix issues for important customers, rather than working on new products.

And since support people are usually less expensive than engineers, they tend to have very large support organizations compared to their engineering department. It is common to have a ratio close to as much as ten support people for each engineer they have. As more support people are hired, there is less money to hire engineers, requiring more support people to patch together products, etc.

Every CEO of a small company knows this problem too well. But where to find a practical solution that takes care of today as well as tomorrow?

Outsource what's Context

There is one strategy that small companies can use effectively to free up scarce capital so they can close their ABC gap:

Hire for Core and outsource as much context as possible.

This strategy enables a company to get two benefits in one fell swoop: free capital for Core and improve the quality of Context work, both at the same time.

Outsourcing Benefit 1: Focus

The problem with Context is that it tends to take over and create a distraction. Employees are human beings with lives, and lives are complex. The more employees a manager has reported to her, the more time she spends dealing with “people” problems separate from the functional or business problem over which she has responsibility.

By definition, context is work that must be done since not doing it will create very bad problems. However, doing context work in no way improves the competitiveness of a company.

Think of it context as a bad headache. You can’t ignore it when you have one. But not having a headache does not mean you don’t have any other problems. It just makes it harder to solve other problems with a bad headache.

Outsourcing context work is essentially outsourcing the headache so you can focus on solving the real problems you need to solve without the distraction of the headache.

Outsourcing Benefit 2: Flexible Spending

Another important benefit of outsourcing Context is enabling a company to pay for what it needs when it needs it and at a higher level of expertise, instead of committing to “bulk purchase” of resources it can’t fully utilize.

For example, a typical B2B marketing operation may consist of the following tasks: building and managing campaign lists; developing new content; maintaining the company website and its social media properties; managing outbound and inbound campaigns, and more.

Each of these tasks is a specialty area with its own best practices. Hiring a specialist for each task is usually overkill for a small company. So, what typically happens is that smaller companies hire a couple of people in their marketing department and have them basically divide the tasks.

Since each marketing staffer cannot reasonably master more than one area, he or she will end up learning just enough to complete the task, but not enough to do it exceptionally well. That is all he or she can do given the amount of learning required and the limited time they have to master each area.

Compare that with an agency that has several specialists, each focused on a single area of expertise. Because each is an expert, whatever work they do is done at a higher level of effectiveness. At the same time, the client company only pays for what it needs when it needs it.

This enables the company to utilize a small portion of its available resources for Context work, and have it done even more efficiently and at a higher level of competency than it would internally.

How to Decide what to Outsource

The chart below provides a short analysis for making a decision to hire versus to outsource.

Function Category / Decision Analysis
Sales Core/Hire Sales needs to partner with buyers in order to effectively sell products and services. The more complex the solution, the more strategic the relationship and the more it needs to be in-house. Winning a deal greatly depends on the sales rep’s ability to forge trust and build partnership with the buyer.
Business Development Context / Outsource This is a very high-volume short-relationship engagement. Potential buyers will remember if this goes bad, but will not remember if it goes well. No company wins customers because the person who first called them and set an appointment with a sales rep impressed them.
Marketing Context / Outsource While the development of a marketing strategy should never be outsourced—it is what the top level management does—the execution of the marketing strategy is largely context and confers no competitive advantage to the company.

Most often, companies mistake strategy and execution. Execution on the strategy requires expertise that most companies do not need to develop—content creation, messaging, list management, campaign management, etc. There are many firms that have both the expertise and the advanced systems to do this work more efficiently than any company could or should internally.

Innovation / Development Core/Hire For most product companies, this is where their competitive advantage lies. While there are aspects of product development that are context (quality assurance, release management, etc.), the actual design and development of products should be an in-house operation.

We should make the distinction between a product company developing in-house versus say a financial firm outsourcing the development of an App to an independent agency.

Customer Support Context / Outsource Many companies can get away with outsourcing their customer support operations. The key is to make sure that the company to which they outsource would provide at least the same level of support to customers as they would.

In reality, however, many companies do not feel comfortable outsourcing this operation and tend to hire in-house.

Finance, Accounting, HR, IT Context / Outsource Generally, these areas of operation can safely be outsourced. The key is to have a very senior and strategic head with a very thin in-house operation managing by results the efforts of the outsourced team.
Legal / compliance Context / Outsource For companies that are in a highly regulated industry, the consequence of getting on the wrong side of the law can be very grave. Therefore, although this is clearly context, it is so mission critical that most companies will have a hard time outsourcing this function. The key is to really understand the risk and manage it in the least costly way for the firm.