The Lean (& Mean) Startup Operations — Part 1: Be Obsessed about ROI

So you’ve made it past the boot-strapping stage and now have the confidence of some investors. Finally you can hire that rockstar iOS developer you’ve been courting for weeks. You’re excited about the marketing channels that are now within your reach. The fun starts now.

But not quite. Investors’ funds are a privilege and a responsibility. Do not abandon your boot-strapping mentality or lose that hustle that got you to this stage. Here’s Part 1 to keeping your operations lean and mean.

This is one mean ass wolf

Be obsessed about ROI

Your resources will always be limited. Whether it’s headcount, budget or time. You need to do the best you can with what you have.

Now I’m not suggesting that you build a financial model every time you need to make a decision but you need to develop your own heuristics or mental shortcuts to make smart decisions.

Cut the jargon and just get to the point

But what does ROI mean in a startup’s operations? Let us start by defining the holy grail(s) of operations:

Will we ever find maximum theoretical efficiency and take errors to zero…
  1. Maximum efficiency
  2. Minimum error rate

Either goal or both should be the Return (R) in your mental ROI calculation.

Now what is the Investment (I) that you’re making? It’s typically a combination of these factors:

  1. Time: How long this gonna take
  2. Lifetime cost: How much money this gonna cost you all in
  3. Opportunity cost: What are you giving up to do this?

This is best illustrated with an example (fear not there is no math involved):

An e-commerce startup has grown from 50 to 500 transactions a week. Their 2 man operations team is strained and a solution is needed. There are typically two options:

  1. Hire more employees
  2. Develop or employ a technological solution

Let’s start by looking at the relative Returns (R). Option (1) would generally yield a lower return over option (2). Unfortunately, us humans have to concede that computational or mechanical processes done right can perform tasks much quicker and are far less prone to errors.

Wouldn’t every startup want one of these?

But before we start building an in-house Jarvis, let’s evaluate the Investment (I). Option (1) would require a fair amount of time and cost to search, screen, hire and train the candidate and of course their ongoing salary. There is also an opportunity cost to one’s time allocation to the hiring process. Now consider Option (2). Depending on the complexity of the required solution, it may require the attention of one or multiple engineers, not to mention the opportunity cost of products or features that they would have otherwise been working on.

Before you ask me what the solution is, I’ll admit that there is no straightforward answer.

Thanks for reading this far to find out that I don’t know the answer

Remember to clear up any uncertainty around the variables that fit into this equation before you make a decision.

Here are some questions you could ask yourself:

  • Do you have a training program to level up new employees quickly? Will they be repurposed once your tech catches up? (time & cost)
  • Your CTO tells you it will take 4 weeks to develop a solution but that means postponing the new payment gateway feature. Which is more business critical right now? (opportunity cost)
  • Or is there a compromise with a quick and dirty hack that will reduce the current workload by 25% for the next 2 months? (lower returns but also lower investment)

So get obsessed about Operations ROI and start making this mental framework a habit.

TLDR Notes

The Ops ROI = (Return / Investment)

where:

Return = f(efficiency, error rate)

Investment = f(time, lifetime cost, opportunity cost)