Written by Tom Perrault, Chief People Officer, Rally Health
By now we’re all familiar with examples of small and lean digital companies popping up out of nowhere and outcompeting larger, established companies. Insurgent startups, such as Instagram and Snapchat, manage to operate with far fewer resources than legacy companies in the same industry in the “pre-digital” era. Instagram had only 13 employeeswhen it sold for $1 billion to Facebook in 2012, and Snapchat has approximately 350 employees. Compare that with Kodak, which at its peak employed over 60,000 employees.
But what’s even more notable is that these digital companies are staying small and keeping headcount low, even as the business scales. Look at WhatsApp, which had 55 employees (35 of them engineers) and reached more than 450 million users when it was acquired by Facebook in 2014. Today, while the number of users has doubled, its engineering workforce has grown only to 50. In the digital world headcount growth for growth’s sake is no longer prized. What matters is how lean a company you can create while still getting the maximum return on your assets. Smart headcount growth that optimizes technology is essential. Throwing headcount at a problem is not.
Digital companies are rewriting the rules of how to grow a company by using technology to scale and minimizing headcount growth. This not only allows them to make more money using fewer resources, but also gives them the strategic and cultural advantages that come with being a smaller company. In fact, as companies grow profit-wise, they may even end up shedding employees as technology advances.
Technology allows them to reach consumers and partners faster than ever before and to continually experiment with new ways of communication and information sharing. All of this allows digital companies to scale faster and create the connections with customers that legacy companies took years to build. As such, digital companies are able to bypass some of the traditional blockers to growth – such as expanding org charts, bloated layers of management, proliferation of systems and processes, and burgeoning bureaucracy – that used to bog down legacy companies. The irony for them was the more you grew by adding headcount, the harder it became to grow.
Still, headcount growth used to be one of the markers of a company’s success. If a previously small startup could announce that it was now 1,000 or even 5,000 people, that was an important signal to the industry of the company’s health and future prospects. Surely all of these people were equally and actively contributing to the bottom line, no? Well, no, actually.
In many cases, small, previously disciplined companies flush with success got caught up in the old legacy model of headcount growth and made investments in people that they never really needed. Look at Yahoo or even eBay. Can anyone really argue that a company truly needs nearly 33,000 employees to operate the same basic website idea it had when it was 500 employees?
Staying small has strategic advantages. Smaller companies are able to create products faster, turn on a dime, and enter new markets quicker than their larger, bureaucratic counterparts. It’s the reason that Facebook needs to buy companies like WhatsApp or Instagram: these fleet-footed startups can spot a problem and build and launch a product to fill the gap before Facebook even knows that a problem exists.
Smaller companies also have the benefit of being able to keep a close-knit, collegial, informed, and engaged workforce that in turn creates a compelling culture in which employees want to work. The best employees want meaningful work and the ability to see the connection between what they do and the end product. When a company becomes so big that an employee can no longer see that connection, they begin to feel like a small cog in a very large machine. The company begins to feel like any other large company, losing its competitive edge to the new, smaller, more agile companies that spring up in competition.
By staying small and nimble, digital companies are positioning themselves for future success by having the best of both worlds: products that scale and can reach every consumer and a small workforce that allows them to keep the best and the brightest fully engaged and committed to its success.
This business model, however, has profound implications for the larger economy that these digital companies will ultimately need to confront: fewer jobs. While the focus on staying small and nimble is good for the individual organization, it’s less healthy for an economy that has traditionally relied on companies as the engines of job growth. If Kodak had 60,000 employees at its peak and the newer digital photo companies in total hire, say, 1,000, what happens to the other 59,000 jobs that are not being replaced?
As more companies become more digital and more companies follow the idea of scaling while keeping headcount low, the larger economy will have to learn how to adapt to this new world order to stay healthy. This is exactly the challenge that these new digital companies may have to tackle next.
Published in the Harvard Business Review on February 11, 2016