What Size Is Your Business, Really?
Published On: February 2011
I deal with many software professionals, technology business users, consultants, and analysts, and it is interesting to observe that everyone uses the same conventional mantras and familiar words, but often with slightly different meanings, and sometimes with totally different meanings. A good example of this is how businesses determine their size category: small, medium, or large. It appears simple, but it is not always that obvious in reality. Definitions of small, medium, and large businesses vary significantly depending on the following factors:
• Defining method: The criteria for determining whether a business belongs to one or another category can be the number of employees, annual revenue, or a combination of both.
• Geography: Business gradation differs across regions. A regular small business in the United States may be defined as less than 500 employees, whereas in Europe it may be up to 50 employees. Moreover, such definitions may vary for different US states or different countries of European Union, and they may be additionally specified at the local level.
• Field of operations: Criteria fluctuate based on the industry that the company operates in. A medium manufacturing company may be a different size than one in agriculture.
• Other evaluations: Many business analysis and research companies have established their own methods to rank companies in various categories. For instance, Fortune magazine publishes its famous listings—the Fortune 500, the Fortune 1000, and so on. Such ratings may rely on nonstandard criteria; however, they are very popular and widely recognized and are usually used in parallel with traditional estimations.
Besides the three major traditional groups—small, medium, and large businesses—there are also many subgroups to classify companies with a higher level of granularity: upper segment of medium-sized business, or small-but-not-a-micro business, etc.
The gradation of businesses by size is quite important for many reasons. For example, governmental authorities may use this differentiation for taxation purposes. Also, the application of special professional, accounting, reporting, and other compliance standards may depend on company size.
It makes perfect sense to group companies by these criteria, since there are many commonalities among companies of the equivalent size, no matter how you define it. Although operating in different industries and/or countries, businesses of similar size experience analogous difficulties in their internal structure and interrelationships and in setting strategic objectives; they have similar growth- or size-related issues in all functional areas.
For instance, when a small company with a single owner experiences its first explosive increase in sales, it becomes difficult for a single decision-maker to manage everything from sales and customers to accounting and inventory management. A time comes when a professional manager needs to be hired and a formal managerial structure should be created that includes the delegation of authority. This stage, however, can be extremely hard for business owners who for years controlled all aspects of their business themselves. I have personally seen this problem in many businesses, in completely different markets and in different countries.
Take as another example companies that are in the upper segment of medium-sized businesses at the point where they start operating in multiple countries, dealing with multiple branches and divisions in many time zones, and employing thousands of people. Their managerial approach obviously cannot be the same as that used in smaller businesses. And they all experience similar problems related to geographical remoteness, speed of the decision-making process, business agility, and so on.
With regard to software and IT-related solutions, software and hardware vendors usually design and develop their products based on, among other considerations, the size of a potential customer. Although released by the same vendor, technology, databases, and an application’s technical limitations can be very different if they target particular business sizes. Enterprise resource planning (ERP) software that is oriented for small business usually cannot be used for large companies. And vice versa—ERP products designed for multinational and globally operating companies can hardly be used by smaller businesses. Although it is often quite possible technically, the cost considerations would usually be prohibitive. Those large systems require high-performance databases and servers, as well as highly skilled professionals that small business in general cannot afford.
However, there is a recent trend among business software vendors to offer solutions that cover the requirements of more than one size segment. Large business software is offered at a lower level of complexity, which makes it more affordable. At the other end of the spectrum, traditional small business–oriented products are becoming increasingly sophisticated, with extended functionality and the technical capability to handle more users in many geographic locations. Also, cloud-based or software-as-a-service applications are making the boundaries between business size classifications somewhat rhetorical, as they are able to support a large variety of companies, from just a few users up to thousands.
Certainly, the whole issue of business gradation is more complex than meets the eye, and varies in further dimensions that I have not covered here. When selecting software for your business, the actual and potential size of your business is a fundamental factor. Keep in mind, though, that real-world situations may not fit standard classifications and might require unconventional decisions and sometimes unexpected cross-class solutions.