What Happens When A Company Grows Too Quickly?
hedghog lab's managing director, Sarat Pediredla, opens up about restructuring the firm and making redundancies.
In the fast-moving, fast-growing world of technology, the search for the next big thing is always on.
For the last few years, Newcastle digital consultancy hedgehog lab seemed one of the most likely, having experienced major growth since it was founded in 2007 by Sarat Pediredla and Mark Forster.
The company aimed to double its turnover every year, and has succeeded in opening offices in London, Copenhagen, Boston, Austin, and Hyderabad.
It seemed like the app developer would experience another surge of growth after it received £1m in investment from Maven Capital Partners last year. The cash was designed to allow the firm to invest in its sales and marketing function, boost its delivery capabilities and broaden its presence overseas.
But almost immediately after striking the deal hedgehog lab hit a major stumbling block when a client went bust and the company lost out on a six-figure contract. The situation was a massive blow to the firm’s growth strategy.
“2017 was a tough year,” admits managing director Sarat Pediredla. “A major customer breached a contract. They breached a six-figure contract.
“That was tough, we had to manage expectations and realign expectations, and we had some leadership and management issues we had to work through.”
The company, which had previously been riding high off the back of its huge growth figures, was forced to restructure its business and make redundancies. Rumours also circulated the market that staff were faced with delays to their pay.
“It was the redundancies,” Sarat explains. “It was directly related to the breach. We had to cut costs and there was no other way to do it really.
“I think when we finished we had to make 16 people redundant. They were mostly developers. There was some departments we didn’t need and it allowed us to take stock of what we needed. It was cost cutting and we had to balance the books.”
Sarat describes the breach of contract as “bad timing” as it happened almost immediately after the firm received its investment from Maven.
With hindsight, the senior team believe that much of the problem was created due to the company’s huge growth rate, which “comes with its own risks”. Sarat admits that he and his team made mistakes that led to the business being unprepared once pressure was placed on the firm’s finances.
“When you are growing at a breakneck speed, you are going to make mistakes. I have posted on LinkedIn about some of the mistakes we made. Ultimately the buck stops at the top.
“The key is, how do you learn from those mistakes and fix those problems? With the experience of 2017 we have grown every year and remained profitable.”
hedgehog lab’s problems last year stemmed from its success over the last few years and its rapid almost uncontrollable growth. The company now employs more than 140 members of staff around the world, including 65 in Newcastle.
Sarat is clear that the company is now focusing on growing the business in a “sustainable” way, which means having the right safety measures in place to weather external issues such as clients defaulting on payments,
Despite that, the company still has stuck with its growth targets.
“The 100% growth is still a stretch target, but the one word we have added is it’s 100% sustainable growth.”
Despite the difficulties that affected the business last year, Sarat points out that the firm still increased its turnover, although profit levels failed to grow.
(Finding accurate figures about hedgehog lab’s financial results isn’t entirely simple. Due to its agreement with Maven Capital, the firm does not release its profit figures, though when the company made the Inc. 5000 List of Europe’s Fastest-Growing Companies it was reported that the firm’s 2016 turnover was £2.4m.)
While growth is understood to have slowed last year the company is now “back on track” and is expecting to report turnover growth of 70% for 2018, at the same time as quadrupling its profits.
“We are at the half year mark but we had already booked more revenue by May than we had done in the whole of 2017,” says Sarat.
“It could have been 100% if we ramped up at the pace we wanted. We can’t just keep hiring people all the time. We have to balance that out with the risk, the fact that work might dry up.”
He adds: “We definitely didn’t foresee some of the problems in that we were optimistic in how fast we would grow. Our stretch target internationally is still 100%, so we are disappointed that we are 30% under target.
“We wanted to really shoot for the stars. It was always our stretch goal, that is the promised land. We are talking 70% now but there is still five month left of the year. We might be over or we might be under.”
The assurances that growth at all costs is not on the cards is somewhat undermined by the company’s continued aspirations for 100% growth, especially when the targets expected by the firm’s backers are considerably lower.
“We still want to keep growing at 100% as our stretch target but our expected growth in our business plan is 40% over the next three years. We want to keep delivering that. Our ambition is to build a world leading digital consultancy in Newcastle.”
One of the ways the company is attempting to grow sustainably is through the way it works with its clients. The firm is positioning itself as an investment partner with some of the North East’s biggest companies, such as Northumbria Water, AkzoNobel, and the Home Group.
Its work with Home Group, for example, has seen the tech firm develop an augmented reality version of a modular home. The home form parts of the Home Group’s Gateshead Innovation Village, a research project designed to show how technology can be incorporated into homes.
The company is also restructuring its senior management team, part of which involves bringing in new members of staff.
“One of the right things to do is getting the right people on board,” says Sarat.
“We brought in Aiden Dunphy, who is chief product officer. He has made an immense difference to the business. He is responsible for the product delivery and he has revamped that process. Customer satisfaction – which wasn’t great last year – is now through the roof.
“As the manager of the building of the software he has rewritten the process and restructured the team, what it does, and how it works. I don’t want to take anything away from the rest of the management team but he has been instrumental.”
After the problems faced by the firm in 2017, Sarat says that hedgehog lab is back on track. Turnover and profits are set to soar, and the company is currently looking to hire another 10 people to work in its Newcastle office.
But as it grows again, the business is wary of the mistakes it has made in recent times.
We are at the half year mark but we had already booked more revenue by May than we had done in the whole of 2017. It could have been 100% if we ramped up at the pace we wanted. We can’t just keep hiring people all the time. We have to balance that out with the risk, the fact that work might dry up.”
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