Growing Without New People: Where Productivity Comes Before Hiring

Why the first answer to growth is often the most expensive

When a business has more orders than it can handle, the solution seems clear: hire another person. The calculation behind it is simple. If you have ten percent more work, you need ten percent more people. But it overlooks two things. First, the new person is not fully productive from day one. Second, their onboarding uses exactly the resource that is scarcest: the time of the experienced employees and the owner.

This essay asks: when should a small business first become more productive before hiring staff, and when is hiring the right step? To answer it, I first set out the labor market situation, then present a mental model with Edith Penrose's theory of the growth of the firm, weigh two perspectives, and finally derive a sequence that can be applied day to day.

A new position is first of all a task for those who are already there.

The situation: scarce people, slow productivity

The labor market makes the hiring route harder. The German Economic Institute (IW) published a projection to 2029 in September 2026. According to it, Germany could be short of 723,000 skilled workers in 2029, 47 percent more than in 2024. The largest single gap is in sales. How this affects sales operations is described in detail in the analysis skills shortage in sales.

At the same time, studies show that productivity gains are possible but not automatic. In a large field study, customer service employees with an AI assistant resolved on average 15 percent more inquiries per hour, as the analysis AI and jobs in small and midsize businesses describes. An analysis by KfW and ZEW, by contrast, found that a 10 percent higher digital capital stock went along on average with only 0.159 percent higher productivity, and 0.808 percent among the most digitized companies. The lesson from both figures: tools help, but mainly where processes are already in order.

The mental model: the Penrose effect

In 1959, the economist Edith Penrose presented a theory of the growth of the firm that is still cited in strategy research today. She understands a company as a bundle of resources put to productive use. Growth does not happen by itself but is planned and carried out by people who know the company. Penrose calls their contribution managerial services, meaning the leadership and organizing capacity of experienced people within the firm.

This capacity is the bottleneck. It cannot be multiplied at will, because experienced people have to grow within the company and cannot simply be bought in from outside. Penrose puts the consequence like this: if a company expands its organization faster than the people in it can gain experience with each other and with the company, its efficiency suffers. This limit is known as the Penrose effect (Bort, Wiklund, and Yu 2025). Tan and Mahoney (2005) speak of adjustment costs: new employees and new managers initially disrupt ongoing operations, and so there is a limit to how fast a company can expand its resource base.

For a small business this is not an abstract problem. Its leadership and organizing capacity often sits with two or three people: the owner, a master craftsman, an experienced person in the office. Every hire ties up part of their time for onboarding, questions, and correcting mistakes. Hiring several people quickly can therefore lower the capacity you wanted to raise. An everyday analogy fits: a cook who instructs a new helper in a busy kitchen cooks less in that hour, not more.

Two perspectives: become more productive first or hire first?

The first perspective says: productivity comes first. Before a business hires, it should remove the work that creates no value. The Penrose effect supports this, the labor market supports it, and so does an observation from the article lean in the office: in the office, a task usually waits longer than it is worked on. Removing waiting times, rework, and duplicate data entry gains capacity without onboarding. This also fits the capacity ladder from the analysis on the skills shortage, which first provides for retaining, relieving, and developing people, and only as a fourth step turns to the labor market.

The second perspective says: growth needs people, and if you wait too long, you overload the ones you have. This is supported by the experience that productivity programs easily turn into work intensification. The article on lean in the office notes that lean carries this risk and that time gained should not simply be filled with new work. A more recent finding that puts the Penrose effect into perspective also supports this view. Bort, Wiklund, and Yu (2025) linked employee reviews on an employer review platform with growth data from startups. Moderate growth went along with higher satisfaction. Only with very rapid workforce growth did it fall, because cohesion and trust suffered. The authors conclude that the Penrose effect may be less binding today than originally assumed and mainly affects the companies with the most extreme growth.

I consider both perspectives justified, but for different situations. The question is not whether a business should hire, but in what order it proceeds. If you hire for work you could have eliminated beforehand, you pay for it permanently. If, on the other hand, you have a genuine bottleneck of valuable work and try to push it away with efficiency programs, you intensify the work of your best people. The finding of Bort and colleagues comes from startups, often with extreme growth, not from a trade business with twelve employees. But it argues for reading Penrose's limit not as a prohibition but as a pace guideline: better one hire after another than three at once.

The sequence: where productivity comes before hiring

From the mental model and the two perspectives, I derive a sequence of five steps. It begins with what is possible without new people and ends with a hire that is prepared.

1. Find the bottleneck

   Check where work actually piles up: with a person, a machine, an approval. Goldratt's theory of constraints shows that improvements increase throughput only at the bottleneck. How to find it is described in the analysis Goldratt's theory of constraints.

2. Remove work without value

   At the bottleneck, cut whatever brings the customer nothing: duplicate data entry, searching, rework, queries caused by unclear orders. This gains time without anyone having to work faster.

3. Standardize

   Turn special requests into packages and processes into templates. The article scaling or just growing? asks the relevant question: what does the tenth customer cost compared with the first?

4. Hand routine to tools

   Only once the process is settled does automation pay off. Which sales routines can be handed off first is shown in the guide automating sales.

5. Then hire, but prepared

   If the bottleneck remains, hire, with an onboarding plan, a mentor, and a limited pace. How to shape the first 90 days is described in the guide onboarding new employees.

What follows beyond the individual case

The idea reaches beyond the individual hire. In many small businesses, growth has so far mainly meant volume growth: more orders, more people, more vehicles. If skilled workers remain scarce, competition shifts. It is not the business with the most applications that wins, but the one that creates the most value with its people and can therefore keep them. Productivity thus becomes a question of attractiveness as an employer.

At the same time, the approach has limits that I want to state openly. Penrose's theory describes companies in general, not small businesses specifically. The study by Bort and colleagues is based on startups and on reviews that employees post voluntarily online. The figures on AI and digital capital come from other contexts and show averages. For the individual business, they do not replace a look at its own processes.

Conclusion: when productivity comes before hiring

To answer the guiding question: a small business should first become more productive when its capacity is lost in work without value, when processes are not standardized, or when several hires at once would overwhelm the few experienced people. The Penrose effect explains why: every hire first costs the time of those who know the company. Hiring is the right step when the bottleneck is a person with professionally necessary work and efficiency there is exhausted, and then with a plan and at a limited pace.

The findings of Bort and colleagues (2025) caution against overestimating the Penrose effect: moderate workforce growth causes little strain; only very rapid growth becomes a problem. For a small business, this means: productivity first, hiring afterward, one at a time. The sober observation is this: if you hire people to cope with chaos, you hire the chaos along with them.