Every business needs a leadership infrastructure, no matter what the size. The trouble is, small businesses tend to have hands-on CEOs who do everything themselves, and large companies have entrenched leadership infrastructure in place. This leaves many mid-level businesses in the lurch because they have never had any kind of official leadership infrastructure. They’re more used to the day-by-day operations of a small business. A healthy leadership infrastructure can help make the most of your company’s resources to take your business to the next level. We talked to Robert Sher, founding principal of the consulting firm CEO To CEO, to find out more about developing a leadership infrastructure.

For people who’ve never heard the term, what is leadership infrastructure and why is it important?

It’s similar but not equivalent to what we all know as national infrastructure. This typically refers to the technical structures that support a society, such as roads, bridges, water supply, sewers, electrical grids, telecommunications, and so forth. Wikipedia defines infrastructure as “the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions.”

Leadership infrastructure is related but not identical to IT infrastructure, which includes IT systems, network structures and data storage management. Leadership infrastructure is the sum total of management systems, processes, leadership teams, skill sets and disciplines which enables companies to grow successfully from small scale operations into mid-sized or large firms. Leadership infrastructure is every bit as real as physical infrastructure: servers, wiring, hubs and the like.

What are the most essential elements for leadership infrastructure to be most effective?

Leadership infrastructure includes these elements:

1. A leadership team, led by an executive team, illustrated by an organizational chart.
2. Proven project management competence.
3. Strategic & operational planning processes and governance.
4. A market intelligence-gathering team and processes.
5. A Board of Directors.
6. An effective communications rhythm among leaders and between management and employees.
7. Key tactical experience on the leadership team in the requisite areas: acquisitions, international expansion, divestitures, etc.
8. Performance management and other HR systems.
9. Proven competence in forecasting and budgeting processes.

Mid-sized firms may possess some or all of these elements, but it doesn’t mean they are as robust or effective as they must be. Here’s a dramatic example of woefully inadequate leadership infrastructure. Between 2004 and 2007, charter airline JetDirect purchased a dozen smaller charter operations, building a $200 million business in the process. However, the company failed to build the systems or management team capable of integrating the acquisitions or effectively running a firm of that scale.

Clients grew unhappy with poor service. Incorrect invoices went out, which many customers refused to pay. The company hit a cash crisis. Only after the acquisition of a larger mid-sized company (TAG Aviation, with $400 million in revenue) did management realize that its “roll-up” was rolling out of control, but it was too late to make the adjustments. In 2009, JetDirect’s bank seized control and two months later filed for liquidation.

What are some of the major difficulties in establishing a leadership infrastructure if a company has been operating without one?

All companies have some level of leadership infrastructure, even if it is incomplete. The problem is that it is too weak and insufficient to support healthy growth. Imagine a water system for a city that was a third of the capacity needed! Most of the CEOs and executives in mid-sized firms are not experts at making the transition to the full leadership infrastructure required. Some common observations I’ve heard from leaders in mid-sized firms trying to grow are:

1. We held a strategic offsite for the first time, but no one seems accountable for delivering on the big ideas we came up with.
2. We made what looked like a great acquisition, but it has been a distracting headache ever since, sucking up money and leadership bandwidth.
3. Our CEO is creative. He comes up with new ideas all the time, pulling people off their “real” jobs to work on his projects, making us miss deadlines.
4. We have two executives who saved our bacon a few years back, but now that we’re larger, they seem lost, unable to step up and do what we need now.
5. Two million in cash used to be plenty, but not anymore – it feels like we run low too often.
6. With so many people involved in each decision, we seem to waste a lot of time in meetings but still miss our deadlines.
7. The CEO sticks his head into everything, making changes and redirecting energy. Even some of our best execs have given up and now just ask the CEO for direction.
8. Our CEO wants us to lead our function at a high level, but also wants us to manage every detail in our function as he used to do. We don’t have the time to do both well.

Why does the leadership infrastructure issue hamper mid-sized firms as they grow? Because it’s often the first time they need it. Small firms don’t need much because while they’re getting rolling, the leaders must handle all the details. Even the CEO is at ground level answering the phone and managing every detail. Soon, the CEO has a band of helpers, but he tells them what to do and how to handle each task. This is the way it must be. Survival is the prime directive and there is no budget for overhead or “the long term.” The business stays lean, with little leadership infrastructure.

On the other hand, big firms already have the strategic, visionary c-suite. They already have solid middle managers who oversee getting the work done. They already possess trained workers, with defined processes and clear instructions. Big firms are rich in leadership infrastructure. The myriad of business books aimed at big companies assumes that a significant leadership infrastructure is in place – and helps them manage it, leverage it and improve it. But these books don’t tell mid-sized firms how to build their leadership infrastructure from scratch, with very little time and resources. Thus, mid-sized firms must design and build their own leadership infrastructure, but it poses a difficult task. Why is it so difficult?

1. One-size fits all is a nonstarter. The requirements for a $10 million revenue business are quite different from those of a $75 million or $250 million business.
2. Leaders who developed their skills in small firms don’t understand what they need in a growing company or that constructing one calls for a skill set they generally don’t possess.
3. Leaders who developed in big-companies over-invest in leadership infrastructure, often making it cumbersome, overly bureaucratic and thus unsustainable.

Many CEOs try piecemeal approaches based on books they read or bits of advice from peers or other advisers. But the entire organization was used to things “the old way” and generating change from within the organization is difficult and liable to fail. One firm in particular heeded the call from the team for more meetings and began meeting more often. However, the meetings were long and disorganized without clear outcomes. They ultimately had no benefit.

Many external consulting firms have big company experience. They’re accustomed to large, rigid systems which are cumbersome to implement and even harder to maintain and govern. For example, one $20 million firm began their business planning process with good success, but the executive team kept making the process more detailed and more far-reaching. After 3 planning cycles, it grew so comprehensive that they couldn’t find the time to plan anymore and went 18 months without any plan at all.

Some mid-sized firms try to act both big and small at the same time. Their CEOs still obsess over every detail, changing directions and directives all the time and all the while proclaiming big strategic imperatives but never focusing on them. Still other times, they abandon their small company agility and try to tackle long term objectives without the resources they need. Worse, they demand big company skills out of a loyal team that doesn’t have those skills.

What are some of the risks of operating without a leadership infrastructure, particularly for growing businesses?

Businesses with insufficient leadership infrastructure will feel out of control. Big decisions will be made without enough rigor. The left hand won’t know what the right hand is doing. Mistakes will be made that will cost the company dearly.

In particular, in our research work leading up to publishing our most recent book, Mighty Midsized Companies; How Leaders Overcome Seven Silent Growth Killers, we found that firms with insufficient leadership infrastructure were more vulnerable to all seven growth killers. Among the growth killers are making a bad acquisition, failure to deliver the quality and quantity of services/goods sold, a lack of focus on the core business and more.

Business schools don’t teach classes in how to build leadership infrastructure. First of all, why is that? Secondly, what would you make sure to cover in that class if you were teaching?

Business schools largely train students to work in big companies, not mid-sized ones where leadership infrastructure must be built. In the past ten years or so, they’ve fallen in love with startups, where little attention needs to be paid to leadership infrastructure. Too few schools realize that a third of the US economy depends on mid-sized businesses – those between $10M and $1B.

Look at the company’s needs for leadership infrastructure holistically – looking at all the elements of leadership infrastructure – and try to envision a picture of what needs to be in place one to two years hence. Assess your past performance in such endeavors, and get the guidance you know you need to build it right the first time. Then tackle the work in phases.

Here’s a step-by-step approach to building your leadership infrastructure:

1. Assess your own and your top team’s experience in larger mid-sized firms, as well as your assembled knowledge and past success building leadership infrastructure. Do you know what you need to do? Have you done it in your collective careers?
2. Assess your recent attempts to build leadership infrastructure. What worked, and what did not? Have you been able to significantly raise the performance of your leadership team over time?
3. If points one and two both receive positive self-ratings, it may be that you only need to make building leadership infrastructure a priority and/or appoint a senior exec (CFO, CEO, CHRO) to drive it.
4. If points one or two above highlight a weakness, bring in outside help who can act as a catalyst for change, as well as a source of knowledge. Help could come from a new c-level executive brought in for this purpose, or it might be a mentor or a consulting firm.
5. The outsider should start by listening not only to the CEO but to others in the environment, perhaps in a series of interviews. Additionally, there are a number of effective survey tools, of which my favorite is the Elkiem assessment.

Create a project plan around each phase – clarifying job descriptions, creating and guiding your business plan, building a communications cadence, and so forth – each with clear objectives and deadlines. Manage the building of leadership infrastructure just as you’d manage any other plan. If your leadership infrastructure building is going well, you should see the following gradual changes as the company grows to the next level:

1. The CEO transforms from a doer/innovator to a leader of leaders.
2. The top team changes from being the CEO’s helpers to executive level leaders.
3. Middle managers are hired, allowing the c-suite to be strategic and concentrate on the long-term.
4. Reliance on instinct and slavery to urgency are reduced, mitigated by planning and processes.
5. Heroic individual actions are replaced by disciplined teamwork.
6. The startup “do it all” team of three becomes a three to four level leadership team.
7. Growth comes not just opportunistically, but by staking out strategic customers and acquisitions.

Here is a fine example of intentionally building leadership infrastructure:

Pelican Products is a manufacturer of high-performance protective case solutions and advanced portable lighting systems headquartered California. For over 28 years, the company expanded only through organic growth; but in October 2004, Behrman Capital – a private equity firm with 1.8 billion in assets – bought out the founder for $200M. At the time, the firm was generating revenues of approximately $100M with 500 employees. In August 2006, Lyndon Faulkner came on board to lead the company. Faulkner is a serial CEO, most recently General Manager of Microsoft’s Americas Operations Group.

In September 2008, just as Lehman Brothers filed for bankruptcy – at the edge of the abyss that was the great recession – Lyndon was negotiating to buy Pelican’s arch competitor: Hardigg Industries, the world’s leading manufacturer of roto-molded protective cases. Lyndon comments, “By then, Pelican had advanced significantly from being a totally entrepreneur-run company to being a more delegated-style company, generating sales gains, planning. We were now doing a lot of planning first and execution second, as opposed to daily execution of a series of tasks. I will admit that the day-to-day execution style had delivered excellent results in product development over the years. Yet we had begun to bring strategy to bear in the company. Everybody knew their roles and responsibilities. Many people had been empowered to do more during this period of time than ever before. That in turn allowed us to drive growth.”

When the deal was announced in January 2009 and valued at $200M, Pelican jumped forward, now 1300 employees strong with revenues approaching $300M. While the target firm Hardigg had been successful, they had always been run informally, with little emphasis on planning, project management and the tight accountability required by firms which choose to grow aggressively. It was precisely this sort of management discipline that the Pelican team had been learning since Lyndon’s arrival. They had refined it during ongoing operations and their first two successful acquisitions.

“We discovered in the acquisition of Hardigg that they were still in that place where Pelican was three years ago. Hardigg was still a very execution-focused company, not a big analysis company. They made great products and brought them to market. It was what they had decided to do every day and they did it well. “We went in and with a clean piece of paper, built a plan around merging the two businesses. A secondary plan was crafted to bring Hardigg’s planning and project management acumen up to the place where Pelican was, but in a much shorter time frame.”

How can a well-functioning leadership infrastructure help a business make the most of their resources, to be as competitive and efficient as possible?

Strong leadership is ultimately responsible for making the most of resources and being highly competitive. But as a business grows into mid-sized and at each step up in growth from there, those leaders need a platform from which to manage. That platform includes systems and processes that stabilize the company, giving those leaders information and time which they use to grow the business in a healthy, sustainable manner.

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