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The Rise and Fall of a Great Company: The Death Spiral and How to Avoid It

There is a scenario so dangerous for a company we have come to call it the death spiral. It sounds grim, but it is entirely avoidable. The gist of a death spiral is this: when something used to be the key to success not only stops working but is now causing the decline of the company. The instincts of executives are to keep using what has always worked. Imagine that someone used to be healthy because he ate carrots. But for some reason one day carrots started making him sick instead. But the feeling of being sick is prompting the man to eat more carrots, causing a death spiral.

Let’s pretend that we are starting a new company and Earl is in charge of purchasing.

Phase 1: Long, slow, solid growth.

This is just the kind of growth that makes a company strong, and the push from the top is what keeps everyone on task, as it should. At this point there is no real purchasing process defined other than Earl. How do we do purchasing? We call Earl.

Phase 2: Growth pains.

The company continues to grow, and the demands on Earl increase. The very nature of things grooms Earl into a one man purchasing machine. Earl is getting very good. Earl is becoming an expert. Yet, because of the demands of doing purchasing, defining a process or even putting key things on paper seems less important than meeting deadlines.

Phase 3: More growth.

The company is really taking off now. The top line is strongly up and to the right. Earl lets the executives know he needs some help, and they approve two more staffers in purchasing. However, Earl doesn’t really know how to manage staff and has never really thought of what he does as a process—he just does the work. This turns the purchasing department into Earl and two helpers instead of three active purchasing agents. The helpers try to do what they can, but with no defined process they are not sure how to really dig in. Additionally, Earl is so good and so fast that they can’t imitate him. Earl does not have time to train, and it is just easier to do it himself. The executives believe that they have solved the workload problem for Earl, but Earl is now working harder and longer hours. The stress on Earl is beginning to mount.

Phase 4: The tipping point.

Earl keeps getting asked for more. The push from the top is as intense as ever. All the key knowledge on how to do purchasing is just in Earl’s head. Earl talks about how stressed he is, but the executives listen less because, after all, didn’t we just get him two more people? Earl’s wife is telling him that he can’t keep working the late nights and weekends. Earl is very good, but at some point the stress gets to him and he accepts a job down the road at another firm. He takes all of that tribal knowledge about how to do purchasing with him.

Phase 5: The death rattle.

Earl’s departure creates a shock to the system. HR begins to hire more people for purchasing—now five at a time, but only two will stick and the revolving door in purchasing begins. Platooning people in and out is a serious financial drain and margins shrink. Because there are Earl’s all over the company, turnover skyrockets as profit vanishes. Up to this point, the senior executives have grown the company by putting pressure on their key leaders, and this pressure, when put on the new staff, is the heart of the death spiral. The new staff need time to accommodate to their roles and figure out how things work, especially because the tribal knowledge has left the building, but time is exactly what the company doesn’t have. This thing has to be turned quickly or the bank will take action.

Phase 6: The end.

The driven senior executives refuse to slow down. The teams are not responding to things the way they used to and their instincts are to push even harder – so they do. Complaints are made that HR can’t seem to find good people. More push. There are attempts made to get Earl back, but Earl is settled into his new job and just can’t imagine going back to that stress. The remaining talent has to work unthinkable hours and also leave, pushing turnover even higher. Consultants are brought in, but the recommendations are so drastic. Eventually capital runs out and the company goes into receivership.

What is the solution? Process definition and knowledge transfer.
Much earlier in the process, all that understanding of purchasing (and accounting, and shipping, and all of operations) has to be documented and standardized into processes. Those processes have to then be used to onboard additional staff, allowing the staff to learn from a process instead of from someone who can not be imitated. In the end, the very thing that seemed to be a waste of time was key to the whole thing.

If this rings true for you and your company, call us immediately. That tipping comes fast, and when word gets out the Earl left others will too. This challenge can be met, but the earlier it is addressed the better.

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