Have a Sustainable Business Model? Here's a Test

No matter how hot, companies need a sustainable business model, particularly as they enter the middle market. The concept of quick returns is a myth.

There are companies that see an explosion of success in a short amount of time. But even if you look at a company like Twitter, which recently had a popular IPO, the success was long in the making. According to the National Venture Capital Association, VCs don't expect a return on investment for 7 to 10 years.

Sustainability is really a question for middle market companies: Small companies focus on survival, and large companies are interested in market dominance. It is the middle market companies that are established but that face the greatest competitive challenges and market threats. They don't have the resources and staying power of the biggest companies, and yet they have more people depending on them and are a larger target than a startup.

How can you tell if your company has a sustainable business model? You really have a series of considerations and examinations to perform.

1. Strategy. A company is only sustainable if its strategy is conceived as a resilient and flexible plan that takes into account how markets, competition, and customers change. It should recognize how technology and innovation can become a disruptive force. There should be a portfolio of activities and revenue lines that can support the company.
2. Financial. Time for an audit. Have your outside auditor examine your finances with an eye to long-term health. Certainly capitalization levels are crucial, but so are financial controls, fiscal reporting systems, and cash flow adequate over time to support the business strategy and capital needs for growth.
3. Legal. Of course your company has been properly incorporated and does its best to follow the law. But there are other legal implications of a sustainable business model. Have an outside law firm look at intellectual property protection, such as patents and trademarks, trade secret agreements, employee contracts, agreements with suppliers and business partners. Examine documentation of compliance with regulatory issues. Ask where any weaknesses might potentially threaten a lawsuit or government action that could stop the business in its tracks.
4. Customer relationships. Any company that must constantly replenish a significant portion of its customer base faces difficulties. See how strong your customer relationships are by talking with key customers and undertaking satisfaction studies and surveys. Examine lifetime value trends and other data that indicate how inclined customers are to do business with you.
5. Operations. Business processes and practices should be periodically examined to see if they are still consistent with the company's activities and changes in markets. Have you done this recently? Are processes even documented so that if the company lost critical personnel, it would be possible to continue with the loss of intellectual capital?
6. Supply chain. The structure of a company's supply chain can become a stranglehold on a company's existence after a disaster or sudden disruptive change in markets, technologies, or geopolitical realities. What-if scenario planning is critical to see how a company would respond to such a massive change. There should be alternative suppliers, delivery routes, and distribution plans.
7. Business continuity. Although understandably linked with information technology, business continuity is more than backing up systems. It means having ways of reaching employees if a business location becomes suddenly unusable due to a natural or man-made disaster. There should be plans and technologies to facilitate continued operations in alternate locations or even in a decentralized way. Business continuity can even extend to topics that seem mundane, like arranging travel so that top managers are not all potentially vulnerable in the same way and time. A sustainable business model should have detailed consideration of the topic.

This isn't meant to be a definitive list of examinations or tests. The specifics of a given company might suggest other potential considerations. The main point is to recognize that sustainable business means one that is built so that all of its critical functions and parts can manage disruption and change. If any part cannot, it becomes a weak link that could endanger the business.

Erik Sherman is an NCMM contributor and author whose work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, Newsweek, the Financial Times, Chief Executive, Inc., and Fortune. He also blogs for CBS MoneyWatch. Sherman has extensive experience in corporate communications consulting and is the author or co-author of 10 books. Follow him on Twitter. Circle him on Google+.