Thursday, July 3, 2008

High-Impact Firms

New businesses can be very exciting.  Not only do they provide interesting challenges for the founders and other employees but they can provide tremendous returns for investors who come in at the right stage.  Customers can benefit, too, by taking advantage of products and services that might not be deliverable from other firms on the market.  Of course, the government types take an interest, not only for the same reason that other customers might be, but because businesses that do well mean tax revenues.

Research has been done to study the dynamics of creating businesses and the impacts that those businesses have.

The U.S. Small Business Administration has just published a study entitled “High-Impact Firms: Gazelles Revisited” in which businesses responsible for most employment growth are identified.  By defining “high-impact firms” in terms of both significant revenue growth and expanding employment, authors Zoltan Acs, William Parsons, and Spencer Tracy are able to study available data to develop answers to questions like “What are high-impact firms before they become high-impact firms?” and “What happens after their high-impact phase?”

Quoting the Overall Findings:
High-impact firms are relatively old, rare and contribute to the majority of overall economic growth.  On average, they are 25 years old, represent between 2 and 3 percent of all firms, and they account for almost all of the private sector employment and revenue growth in the economy.
That's pretty interesting stuff.  Who would have thought that the biggest contributors in terms of growth of revenue and jobs are firms that old?  (It's not all about startups!)  A few other interesting things can be found in the highlights, but there is one in particular that struck me: Low-impact firms do not grow on average.  Given how rare high-impact firms are, I can't help but wonder what all of the low-impact firms are doing.  Think about it: if only three percent of firms are high-impact, what are the rest doing?  This seems to suggest that unless you intend for your business to grow at a healthy clip and set about making that happen, you're not likely to grow at all.

Another finding that struck me was that high-impact firms can be found in many different industries; these firms “are not limited to high-technology industries.”  Something that I would like very much to see is for a study to dig down into those data.  It might well be true that the high-impact firms can be found in industries beyond high-tech, but I cannot help but wonder how much impact high-tech is having on those firms in other industries. In health care, for example, there has been for a long time a massive underinvestment in information technology.  The systems that many are working with are positively ancient, primitive in design and implementation, silos of information that cannot communicate meaningfully with anything else, horribly insecure, and then if you look hard at them, you'll start to see some real problems.  While some might lament this state of affairs and think that it's only a matter of time before the sky falls and the industry implodes, others might see the situation as an opportunity.  Indeed that's just what is happening and some organizations in health care are starting to realize tremendous returns by starting to look at their information technology investments more rationally, seeing not just the expense of running a good infrastructure but the opportunity that can be exploited with a good infrastructure in place.  Are these the firms that are high-impact in this study?

Other kinds of information could likewise be gleaned by looking at these high-impact firms.  Finding commonality among them might well help to extract some guiding principles that could be used to help more firms get into the high-impact category.  I have in mind something like Built to Last: Successful Habits of Visionary Companies by James C. Collins and Jerry I. Porras.

Finally, I dug around in the tables to find where Columbus ranks.  Appendix A shows the Dun and Bradstreet Birth Rates, 1998-2001 by Metropolitan Statistical Areas (MSA).  Columbus ranks seventy-fifth overall, with 5,861 births total (including all three sizes measured: 1-19 employees, 20-499 employees, and 500+ employees) out of 51,390 firms overall in Columbus.  I confess that this did not strike me as particularly impressive.

What I did find is that Columbus does quite well where it seems to matter most in this study: high-impact firms.  Appendix B shows High-Impact Firm Distribution by Large MSAs, where Columbus ranks seventh overall.  A total of 2.43 percent of firms in Columbus are scored as high-impact.  Even the number-one-ranked Norfolk-Virginia Beach-Newport News MSA comes in with 2.58 percent of its businesses classified as high-impact.

It gets even better in Appendix E, High-impact Firm Distribution by Large Counties.  Franklin County, Ohio scores third overall, with 2.51 percent of its firms classified as high-impact.

So there you have it: we do have firms here that are enjoying real growth in terms of revenue and in employment.  Questions remain, however, on where these firms are coming from, and what role technology is playing in this growth.

What do you find interesting in this study? What questions would you like to see further explored?

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