You are either re-risking part of your business… or your are pushing it. You can’t do both.
Balancing this is key to building a company that lasts.
Performance is about optimizing output. If you sell a product, how do you sell more? If you sell a service, how to do you over more clients?
Pushing output maximizes revenue.
Combine this with increasing margin and you are now maximizing profits too.
The Cost of Performance
All this pushing comes at a cost. As you focus on smaller and smaller improvements, your resources become more and more specialized. This in turn creates a brittle organization.
This specialization leads to lower cross trained individuals. In fact, it leads to lower incentive to cross train at all. Before you know it you’ll have many areas of your business that can only be done by one person, one machine, one method. You create an organization with 100s of breakage points.
Given the craziness of day to day small business, you default to ‘survival’. You do what you need to do to get to the next day. You satisfy the customers making you the most money or the most noise and move on.
What happens is that through this pressure, we default to performance. We unwittingly always opt to maximize more, even if just to survive.
De-risking is Expensive
On the other hand, running an operation at 50% capacity for the pure sake of training is not ideal. This is essentially 50% of potential margin. Would you give away have of your annual cash flow in return for proper training? Probably not, this is most likely more expensive than dealing with the fire.
When you frame de-risking, buffers, or redundancies in terms of % of capacity or potential, and thus % of cash flow paid for that buffer, you realize just how expensive these ‘investments’ can be.
Using that concept, we can look at optimizing a business based on lower total risk cost.
By balancing these costs between investments in buffers and training, and business shutdowns, you can find a balance between these two.
While the math doesn’t matter much for most businesses, the concept does.
Don’t make the default decision each day to push performance each day to survive. Instead, make the conscience decision to run less than maximum so those extra resources can build a more robust operation.