People Economics - The fundamentals of growing better faster
Being part of a successful VC, we are reminded every day of how keeping the “unit economics healthy” is key to driving performance. And indeed I can vouch for the fact that the best performing businesses are the ones that have this as a mantra in their business. But there is another vector they understand really well: People Economics.
Successful fast-growing businesses excel in decisions around “hiring” and “getting the right external partner” when appropriate according to the different stages of growth and purpose. They understand all angles about people, from financial cost to cultural cost. In essence, they excel in understanding the People Economics of the business.
In my experience, most young businesses fail at understanding their People Economics well, and as a result, their growth slows down, they need more fixed capital, their burn rates are higher, and their emotional rollercoaster rides faster. Similar to “Unit Economics”, there is a strong correlation between growth and performance and the understanding of People Economics.
How to better understand People Economics:
1 - Understand how much an employee really costs. In the UK for example, you will have salary plus bonuses, and then direct social contributions. Easy start. But then remember to add the costs of the operation to the employee (desk, accounting, payroll, HR, recruitment, etc.) This is something at least half of the managers I talk to forget to account for.
2 – Understand how much external resources really cost. Some managers I talk to tell me they prefer to “hire freelancers” (think there is already a contradiction here) instead of employees. Remember to check if they need to sit somewhere (desk?), that someone needs to pay them (finance), and that they need to be contracted (legal, IP, confidentiality) amongst other operational costs you need to factor in.
3 – Understand “unique people” risk really well. I often ask this question to businesses that have only one person of anything, “What happens if that person leaves tomorrow? How will that undermine your growth?” While some companies understand the risk and make sure they have incentives to prevent people from leaving, others have nothing. And some people do leave - the good ones.
4 – Understand task accountability really well. If you have internal resources as a young business, chances are you will not have the allocation of internal staff time between areas. So as an example, if you have an internal designer and you need a presentation polished, you just ask for it. And everyone in the business will do the same. The consequence is that your designer becomes a free-for-all that will soon become overwhelmed with work and struggle to cope. Meanwhile, because it’s a free resource, some staff will slack at the briefs, change their minds, cancel mid-way, and other forms of waste for resource. On the contrary, if you use external designers keeping the cost outside the business, everyone will be accountable for the projects they assign, because the spending money externally brings a more immediate and transparent notion of cost. In all areas – Strategy, Marketing Performance, Design, Development, etc. You would be amazed at how much money going from internal to external has saved businesses.
5 – Understand people culture really well. If you instil a practice of collaboration and accountability, you will be driving a culture of agility while “finding the right partners to deliver solutions”. As opposed to a process-oriented culture with a lot of doers over senior thought leaders and managers. More doers internally means more process, which means the paper pushers will have the power. This will determine the culture of the company. Think of it as building a bank or building a fintech company. It is substantially different as the first will want to control everything and do everything in-house, while the second will hopefully be a gazelle growing and moving with nimbleness.
Have you ever wondered why really successful companies (Netflix, Airbnb, Google) are extremely collaborative and great at working with external resources? They are extraordinary at understanding People Economics. And more than any company, these guys certainly have the money and brand pull to attract resources.
If you understand your people economics well, you will have a much better chance of success in the market.
Because you will be a better business.