Rule of 3 or 10

The "Rule of 3 or 10" has been around for a while. In essence, it goes like this, “Everything breaks at multiples of 3 and powers of 10”. And while I believe we can debate the validity of it at every level, I propose that it does lead us to good advice to plan for and execute on growth strategies as your business or organization grows.

So what does the rule apply to? Some would say "everything". But here are a few:

  • Employees.
  • Customers.
  • Revenue
  • Locations
  • Investors
  • Leadership team members
  • Products offered

An example - Employees

Let's apply the rule to the first one on the list, employees. The rule would say that your model will break at multiples of 3 and powers of 10.

When your company starts out, maybe it's just you, or perhaps it's just you and your partner. That's not uncommon. As soon as you add a third person you suddenly enter a new realm of operating:

  • Decision making - does majority rule or do all three of you have to agree?
  • Hierarchy - a partnership is easy to make 50/50, but it's difficult to have an organization of 3 without one being "in charge".
  • Collaboration - two people can get on a phone call or chat and easily collaborate. As soon as there's a third person, you have to be more intentional to make collaboration work.

I remember a discussion about how many children we would have with my wife. We decided that going from two to three children was going to be a bigger change than we wanted to deal with. I compared it to basketball, saying we would have to go from a 1-on-1 to a zone defense. Adding a third child, a third employee, a third partner, ... they all lead to a change in strategy.

You can also imagine another complexity at around 9 or 10 employees. At that number, you have to have at least some level of management or supervision. You would not all be partners (even though all may be owners). There has to be a decision-making model that limits the decision makers to a reasonable number. Ten people can't lead an organization of ten. There is a point where organizational structure must be put into place.

Larger Breaks

Okay, so the rule of 3 or 10 is easy to apply at 3 and 10. But how does it apply to larger numbers?

It's easy to see how what works for 3 won't work for 30 or 300. The same can be say for 10 and 100. At 100 you clearly must have systems in place. You must have formal HR processes. You must train and develop your team. Benefits packages are typically more robust. There is an expectation that a company of this size has more to offer employees than an organization of only 10.

Applying the Rule

I believe the rule can be applied proactively in order to assess and adjust systems before they break. For example, let's assume you are a retail establishment and you are opening two new locations next year. You should examine what this is going to do to all of your numbers (think of the list above - employees, locations, customers, etc.). Evaluate whether the increase is going to break any of your processes or procedures.

As an example, let's say that these two new stores will take you from 7 locations to 9. You should think about the various support systems in place (physical security, computer systems, building maintenance, etc.) and determine if (1) "have any of these remained unchanged since we had three locations", or "are any of these already giving us challenges at our current capacity". If either is the case, you should evaluate whether updates to the system are in order. The rule of 3 or 10 would suggest that it is very likely the case.

Another example comes in the form of evaluating mergers and acquisitions. One company I worked with purchased an organization of similar size. When the transaction was complete, they nearly doubled in every way. Employee count doubled, revenue doubled, customer base doubled. It was a challenge, but we worked through those items pretty effectively. One area that was a bigger challenge was managing a more remote workforce. The company they purchased had more than three times the number of locations. Therefore, the workforce was much more spread out. Logistics of coordinating with so many locations was much more complicated than they realized. Some of the systems, such as inventory management, did not work well in a highly decentralized environment.

Looking back at that acquisition, I recognize that the items that simply doubled in size were much easier to manage than the items that tripled and quadrupled in number. So I believe the rule certainly proved true in that case.

Be Proactive

Whatever you take from the "Rule of 3 or 10", the one thing business owners much keep in mind is that growth brings challenges. The most successful mergers and acquisitions are ones where owners proactively plan for all of the risks associated. When you build your M&A team, do not forget to include a business advisor that will look at culture and leadership issues. Many owners only look at the financial aspects, and they do so at great peril. Talk to me if you are interested in getting advice from someone who has been through several transactions.

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