Scaling is an exciting time for any tech firm, often involving periods of rapid and exponential growth. However, scaling also introduces new risk exposures which, if mismanaged, could jeopardise the ability of your business to fulfil strategic objectives, and ultimately threaten operational continuity. Against a background of macroeconomic, geopolitical and regulatory uncertainty, any expansion must be conducted with careful, strategic planning.
Below, we examine the key challenges that tech firms are likely to encounter as they scale:
1. Optimising capital allocation
Capital allocation is a critical component of the scaling up process, helping businesses to maximise growth and generate returns. Yet, misallocation can create several risks, including financial loss, missed opportunities, or operational inefficiencies. Where this impacts service provision, for instance, it could result in contractual and legal disputes with investors, clients, and customers. These risks are all the greater in the current economic climate, as higher interest rates, tariffs, and declining customer purchasing power, negatively impact firms’ access to capital.
When scaling, tech companies must create a defined risk tolerance and understand how the capital they currently possess can help mitigate potential risks, where possible. Investors should be kept informed around key decisions, with regular updates covering financial performance, and relevant risk considerations relating to capital allocation. Firms should also issue communications in the event of a major shift impacting risk exposure.
2. Protecting your intangible assets
Intangible assets serve as your corporate DNA, be it software, intellectual property (IP), brand reputation, or customer relationships. As companies scale, these assets come under increasing threat. Potential risks are various, but include employee misconduct, leakage or theft of trade secrets, infringement and counterfeiting risks, and data and privacy violations. Intangibles have also come to be seen as increasingly valuable in recent years, and they are now an attractive target for cyber criminals whose methods are growing in sophistication.
Insulating your business against these threats is key. Not only could they hinder your efforts to scale, but they could also undermine your competitive advantage and point of differentiation in the market. To minimise risk, strong IP protections, cybersecurity measures, and robust brand protections are essential.
3. Stakeholder requirements
Growth can be fuelled by new customers, suppliers, and investors. This will widen your pool of stakeholders and, consequently, widen your scope of liabilities. As your business taps into new services, markets, and a new consumer base, stakeholders will expect you to continually acknowledge and address their needs. Firms may encounter opposition to major decisions, and stakeholders may seek to undermine efforts to scale where their expectations are not met. This can lead to conflict, delays, and disruption. Meanwhile, businesses will likely come under greater regulatory scrutiny for their service delivery, corporate culture, and sustainability commitments.
To mitigate stakeholder risks, early engagement is key. To establish trust, firms should identify those likely to be affected by changes, and where possible, involve them in the scaling process. Regular communication around plans, timelines, and progress can help to minimise conflict, and ensure those affected have an opportunity to voice concerns. If managed well, stakeholders can be an effective partner when it comes to realising business growth.
4. Supply chain risks
For tech companies, hardware supply chains have become a key area of focus in recent years – particularly access to advanced semiconductors. Disruption has become normalised with the recurrence of systemic events, including the Covid-19 pandemic, Russia-Ukraine War, and other geopolitical conflicts.
Scaling a business increases its reliance on suppliers. A more complex supply chain is inherently more challenging to manage and maintain. As your supply chains expand, your business’ exposure is likely to include multiple single points of failure, which could significantly damage business operations in the event of disruption. The knock-on effects for service delivery could give rise to claims from stakeholders, third parties, and end-customers.
A proactive approach to these risks is key. Operating a diversified supply chain – for instance, by using multiple suppliers, or suppliers in different geographies – can reduce firms’ exposure to disruption. Likewise, companies may look to strengthen their supplier due diligence protocols. Opening regular lines of communication with suppliers can also make it easier to manage disruption as and when it occurs.
5. Regulatory and legal challenges
As companies expand in size, they are likely to face new legal and regulatory complexities, such as jurisdictional disputes, conflicting legal frameworks, and international trade regulations. Owing to the rapid evolution of the tech sector, these frameworks are often lagging the pace of development. This is spurring a dramatic period of legal and regulatory overhaul, often with contrasting implications, as evident in the differing approaches to artificial intelligence (AI) taken across the EU, UK, and US.
Tech firms must keep their legal and regulatory understanding up to date, both in relation to any jurisdictions they currently operate in, and those into which they might expand. Before entering a new market, thorough research of the local legal landscape is vital. As a business grows, its contractual agreements and liabilities increase simultaneously, exposing the business to further legal requirements and obligations. Non-compliance can lead to hefty financial penalties, reputational damage, and in extreme cases, operational disruptions and/or closures. Firms must ensure they are adequately resourced to deal with this influx of work. Investing in legal advice upfront will reduce the risk of legal issues occurring, and create a solid foundation for sustainable growth.
6. Mergers & acquisitions
Mergers and acquisitions (M&A) offer a hard and fast approach for companies looking to be the next market disruptor. Executed well, a merger or acquisition can trigger a significant growth spurt. But M&A also brings risks, including security threats, poor synergies, integration failures, litigation issues, and system incompatibility. A disconnect of culture or values could result in the departure of key personnel. At its worst, a failed merger or acquisition could stop growth in its tracks.
Firms should identify the likely impact of any merger or acquisition on growth, including compatibility with the acquiring firm, and potential obstacles to alignment. To prepare for the due diligence process, firms should compile relevant financial, legal, and operational data. Appointing a third-party advisor, such as financial advisors or legal counsel, will ensure firms are equipped with the necessary expertise to navigate the transaction process and potential risks.
7. Talent acquisition and retention
As tech companies seek to fulfil demanding growth targets, acquiring the required talent is critical. But this isn’t a straightforward process. An increasingly competitive talent market is making it more challenging to hire employees with the specialised skillsets needed for your growth journey. Without the right staff, firms may see their projects stall, and competitiveness decline. Meanwhile, a poor hire brings its own costs, potentially hindering development and incurring further costs if they need to be replaced.
To meet these challenges, companies need to recruit strategically. Firms should take the time to evaluate a candidate’s skills to ensure they fit with the demands of the role. Thinking ahead is crucial during the scaling phase; with a firm’s needs likely to evolve at pace, skills gaps need to be identified as soon as possible to ensure growth targets can be met.
Firms should also bear in mind that financial incentives are no longer the sole driver for employee acquisition and retention. To attract the best talent, a comprehensive employee value proposition (EVP) is essential, offering a healthy work-life balance, opportunities for growth and development, an inclusive culture, and a clearly defined corporate mission.
Building resilience through insurance
Scaling up is not without risk. Firms that prioritise resilience from the outset will be best placed to absorb and recover from any sudden shocks and/or loss events during their growth journey.
Insurance acts as a complement to risk mitigation, helping to further protect your growth and ensure the long-term fulfilment of your strategic objectives. As you continue to scale, your changing risk landscape may warrant the need for different insurances. An insurance broker can support you to establish an insurance strategy that is bespoke to the needs of your firm, and which remains relevant and effective in response to any evolving or emerging perils.
For further discussion on any topic raised above, reach out to a member of our Technology (opens a new window) team.
