Scalability Is Not Accidental 24. February 2012 Rahul value investing (0) I spend most of my time researching listed companies in India. India has thousands of companies that have a market capitalization of less than $200 million. I spend a lot of time trying to figure out whether companies are scalable or not. In my research I've found that many companies become big by accident. They either catch a product/demand wave or a capital wave or a regulatory wave etc. However, none of the companies that become big by accident are able to stay big and sustain themselves as organizations. If the company is extremely lucky, it gets acquired at its inflated size and implodes inside the acquirer. Most of the time, however, the disarray that sets in at its inflated size is publicly visible. In the companies that do scale up and sustain, prosper and continue to grow, one can distinctly see a design and plan for scalability. I recently met the CEO of a mid-sized IT company that, in my opinion, is building a very robust and scalable foundation for future growth. He told me that his scalability and design plan involved focusing on five distinct factors. In my opinion, these are the most critical factors that can enable an organization to scale continuously and successfully. His five focus areas are: Build Robust Systems and Processes: Without a strong orientation toward systems and processes an organization cannot become institutionalized. Too much dependence on key people and rock-stars can provide short term growth at the expense of long term sustainability. Develop People and Leadership: Companies that do not develop leadership and do not empower people at all levels of management are destined to fail. A company that is driven exclusively by a star CEO who makes all decisions is unlikely to survive competitive onslaught over time. Governance and Compliance: Companies that do not run themselves in a manner that is transparent and fair to all stakeholders usually start crumbling as they scale up. Honesty truly is the best policy. As they say, if you are going to lie make sure that you have a good memory. Most opaque and poorly governed organizations struggle with keeping the ball in the air as they try to scale up. Innovation and Organization Excellence: The only constant is change. Customers' needs keep changing, the competitive landscape keeps changing, the economic environment keeps changing and the needs and demands of employees keep changing. Only organizations that build a culture of innovation and change are able to scale up in a continuously changing world. Strategy and Vision: Without a goal, a road-map to achieve the goal and a unified determination to execute the road-map a company can loose direction in a sea of potential opportunities and paths. Mistakes of commission and of ommission can seriously stall companies in their growth paths. Companies that can embrace and execute effectively on the above five areas are on their way to the big leagues and provide attractive opportunities for investors. The rest will continue to wallow in mediocrity and are most likely value traps.