Ever Increasing Returns to Scale


Can an organization have ever increasing returns to scale as they grow?

Returns to scale is nothing but how much additional returns you get by increasing your Organization capacity.

Let us say you are small IT Services Company with 100 engineers playing various roles like Project Managers, Business Analysts, Developers, and Test Engineers etc. With 100 such engineers, let us say you make 100 programs every month. Assuming there is no shortage of Business, if you hire another 100 people, can you increase the number of programs you create to 200? If you can, then your returns to scale increases, if it remains same then it is constant and if it decreases then your returns to scale decreases

The typical way in which “returns to scale” works is something like this. When you are a small Organization, there is lot more room for everyone to play their game and hence an incremental addition in head count increases the overall output as everyone can do something or other towards increasing the overall output. But as your grow bigger (assuming you don’t have any constraints in getting new business), the way you should increase your head count should be in such a way that everyone onboard has enough room to play / share their own contributions. To give an example there is no use in increasing number of developers when number of managers in the Organization is sub-optimal as there would be no one to coach / train / mentor the developers. This is true if it is other way around too

Also make a note that if you don’t add the resources in a thoughtful manner, it is not only going to decrease / keep your output constant, it will also increase the per program cost that you develop making you less competitive in the market. Above holds good enough when you have business. When you don’t have business you would bleed much more.

So mindless increase in head count without understanding whether it is going to give returns to scale would ultimately bring down profitability / competitiveness.

For any reasons if you are already in that position due to past mistakes spend time in innovating how you can increase the scope of what each and everyone can play in the Organization or restructure the Organization to make it balanced so that returns to scale increases

This also brings another point that as you grow up in the Organization ensure you are not getting redundant but add value at a higher level otherwise you would be one of the leading factors for decreasing returns of scale and not the new comers 🙂

So the answer to the above question is “Yes”, provided you put your thoughts well on how do you scale. Share your views 🙂

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3 thoughts on “Ever Increasing Returns to Scale

  1. “..This also brings another point that as you grow up in the Organization
    ensure you are not getting redundant but add value at a higher level
    otherwise you would be one of the leading factors for decreasing returns of
    scale and not the new comers..”

    Hmm, so how does one get around to grow up in an org if one has not been adding higher value?

    • Paddy, I guess both Organization as well as the Individual have mutual responsbility. The organization to provide opportunities to the Individual on basis of his experience to add more value and inidividual to scale up his skill sets to meet the increased demands

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