Probably the biggest burden that any new company owner can take on is the act of hiring and supporting their first couple of staff members. For a start, it requires quite a change in mindset. One minute you are looking after yourself: devoting all of your attention to your customer's needs and having the satisfaction of giving them 100% effort and effectiveness. Then, as you hire in another person or two, you find yourself having to provide training, execution support, personnel management, as well as salary and legal administration.
The impact can be heavy on those unprepared for the burden - increasing stress and significantly draining profits and customer satisfaction. Clearly, before you jump into hiring staff, you need to make sure that you are prepared for what's to come.
I usually tell new company owners that they should not to take on new staff unless they can meet the following requirements: 1) have sufficient funds to support the new people as an unproductive part of the team for at least 6 months, 2) have a plan to quickly ramp up to 5+ people once the hiring starts, then further, to ramp up to 20+, 3) have someone to help provide the administration for the new staff, because they will be way too busy just managing financial shortfalls to worry about whether or not a pay adjustment was registered with a particular government office. Let's look at these points in a bit more detail.
*Smallest Practical Unit
Companies with just 2-3 people are not really self-sustaining. Instead, they are more likely to consist of yourself and your skill set, supported by a couple of helpers. If you want your business to expand, then you need people who can support themselves, and in particular, who will keep working while you're away on holiday or are sick. This, after all, is a major reason why we would even bother hiring more staff in the first place - to expand your capabilities as well as to provide continuity. In my opinion, there are two benchmarks for staffing.
The first is around 5 or so people, who are largely there to support you, but who also consist of 1-2 other individuals who have the capacity to grow and become independent contributors to the business. The second is around 20 or so people, when the company requires you to stop being the sole proprietor and start considering having managers who help you manage their own teams. Once this first layer of managers appears, providing you have trained them in your value system - the company becomes considerably stronger and able to overcome hurdles, which a one-man company cannot.
In my entrepreneurship classes, which I conduct once every 4 months or so, I tell my audience that most new businesses in Japan are services oriented and most of them will spend about 70%-80% of their costs on their personnel. It therefore becomes an easy matter in working out your business plan to figure out what your main costs are going to be - they will be people.
How many of what type is a pertinent question. You will probably need sales staff, producers of your final product or service, and people to manage both. At the start, I usually recommend predicating 2-3 sales staff to each back office producer - and if you run short of back office producers, outsource the overflow, change your business model, or stay at the office after hours. This ratio of sales to production means that the smallest practical unit for a multi-person company is about 4-5 people including yourself.
How much money do you need to support this kind of structure? In my opinion about JPY3m-JPY5m per person that you are newly hiring - representing a 6-month ramp-up term for them to figure out how to do the job and become effective, and over the same 6 months, a drop in salary for yourself as the income of the company drops while the training is occurring. This would mean that if you decide to jump from 1 person to 4-5, you'd need anything up to JPY20m in the bank to fund it. Not a small consideration...
From the above, it goes without saying that I believe in ongoing growth of a business, and if you decide early on that this is appropriate for you, then make one of your earlier hires an all-round administration person who can handle recruiting as well as navigating the paperwork involved in registering your team for shakai hoken (social insurance) and meeting the local labor office requirements. This person can either be a bookkeeper with office operations experience, or simply someone with HR-specific abilities and you outsource your accounting and payroll to another company.
Next week, we look at the actual administration involved in employing people.