Business management: Do startups need a formal control system?
There has been a lot of talk lately about start-ups and the future possibilities they generate. Startups are surrounded by creative, innovative ideas with a strong technological component, which makes them great competitors to traditional companies. However, they also require certain guidelines in order to have a place in the market.
Control systems are absolutely necessary in order to have certain information about the company, how resources are being used and how objectives are being achieved. Without a minimum of information to diagnose how the business is doing, it is difficult to make decisions. Assigning responsibilities and making a small organisation chart of these responsibilities is basic. This is normally clear to everyone and the partners, who are usually the first promoters of the idea, informally distribute responsibilities according to their profiles and preferences. This is key.
After some time, a certain degree of formalisation will be required to avoid problems with staff that may be incorporated. But beyond this minimal formalisation of roles, functions and responsibilities, many start-ups do not consider formalising management control very much. Moreover, as start-ups grow more organically and progressively, there is often no formal control until certain problems start to arise. It is then that the need to formalise the monitoring of objectives and to make a budget, a plan and a follow-up with the latest adjustments appears. Simultaneously, this growth that has led to the need for formalisation implies excessive formalisation, due to the lack of formal control.
Is control a loss of the essence of startups?
We must be careful to incorporate formal controls and review the informal ones at the same time and add only what is strictly necessary, since informal control has already created an organisational culture and an informal organisation that we must respect and only change when it creates problems. We must continue to do everything that people do beyond control and that has also led to success. Abrupt changes are not justified when part of the sense of belonging to the organisation is what has helped to make it work, despite having shortcomings in formal controls.
Start-ups aim for very high growth. From the very beginning, this growth is often financed by external resources. It is precisely these investors who will want to know how their investment is going and whether it is producing the expected results. Therefore, these start-ups, from the very beginning, already incorporate professional experts in the research of financing and also in the control of the evolution of the investments. This leads to the need to formalise this monitoring with certain documents that show outsiders how the company is progressing and whether the objectives are being met. If the start-up understands the importance of some formal monitoring at this stage, the chances of it working well are likely to be much higher. It is a good time to take advantage of this moment to budget, to monitor, to complement the existing informal control with some formal control or even to incorporate an external manager.
It is very important to note that companies are more likely to succeed if they incorporate some formal controls from the beginning, which is also applicable to ambitious growth start-ups.
However, there are three very important aspects to bear in mind.
- Formal control has to be the minimum necessary and should never go against informal controls or the entrepreneurs’ way of being.
- Formal control must always add value to management, because bad formal control is always worse than no control at all.
- Be aware that as the company grows, the tendency to solve problems by implementing formalisation is high.
In reality, the important problems are solved by looking at informal control systems. In fact, hell is that place full of laws that can never be enforced and we have to avoid making our company a nightmare for the people working in it.