Scaling Up: The Indirect Cost Dilemma

It doesn't matter whether your company is a single location business doing $2 Million in Revenues or a multiple location business doing $45 Million, when you commit to growing your business to the next level and embark upon making it real then you will be confronted with needing to take on a higher level of indirect cost overhead than you have previously been used to.

How so?

Well, in order to reap the benefits of scale you will need to have an infrastructure that can automate the systems, business processes and data flows of a meaningfully larger organization ...and there is a non-trivial cost to obtaining this infrastructure.

Here is an example to illustrate: If you have been running your organization on Quickbooks (probably the Enterprise version if your business is at $5 Million in revenues or larger) then there comes a point where it just does not provide the increased levels of automation that you now need ...and the next step is to select, acquire, install and configure a larger accounting system (quite possibly one with Enterprise Resource Planning or Manufacturing Resource Planning functionality). Yet the cost of this is an appreciable step up from the out-of-pocket costs of Quickbooks Enterprise.

Not only do you have to pay for the software license (sometimes that involves server licensing and a per user license, along with annual maintenance fees) and then you also have to pony up for the IT reseller partner of the software package to install and configure the software for you ...and this can end up costing you multiples of the software licensing fees. Along with months of time. This is a massive, and unexpected, step up from what you have been used to.

The natural first reaction is that this cannot be correct and someone is trying to take advantage of you ...yet larger companies know and accept this as a necessary cost of doing business at the scale that they operate at. Assuming that you have identified the best technology solution (and software installation partner) for your business at this time then the main issue is that your business has not been financially structured to be able to handle this larger overhead without issue. At first glance it seems as if you will be driving your EBITDA into the ground ...which equates to going backwards rather than going forwards.

This is the organic growth conundrum ...you have to afford and pay for the automation of a larger company while you still have the financial reach/resources of a smaller company. Suddenly your indirect cost overheads are ballooning ...and it will be quite a while before you get the reap the benefits of the increased level of automation, especially because it takes a while to implement and then dial in and perfect your use of the new system and to be able to efficiently handle a higher level of revenues without having to hire proportionately more people for the back office and other centralized functions. Maybe you are not charging enough for your product or service after all...