As football fans are well aware, the New Orleans Saint overtook the Indianapolis Colts to win this year's NFL Super Bowl championship. To outperform the competition and win the game's most sought-after prize requires a team made up of individuals with unique but complementary strengths that is directed by coaches who provide vision and clear direction.
It was not by chance that these winning players were selected to fill specific positions on the team. It was not by chance that they were trained and developed in the necessary areas and were supported by the right team members in order to produce outstanding performance. Extensive analysis and planning took place to assemble and oversee this winning combination of talent. For coaches and players, the road to the Super Bowl began with structuring the team for success.
Unfortunately, advisory firms were often far less aware of the need to combine the right skills and capabilities to meet the needs of clients and drive firm success when the market environment permitted nearly every participating firm to be a winner. For many advisory firms, however, better alignment of their organizational structure became more of a priority during 2008 and 2009. As assets and revenues took a beating, firms found themselves questioning if they had the right players, if each player's role was structured correctly, and if team members were working productively together. All of these challenges were often overlooked during better times.
In 2008 overhead expenses as a share of revenue averaged 45%, a dramatic leap compared with typical overhead expenses during less trying times, often 10 or more percentage points below the 2008 results. The burden of overhead now weighs most heavily on the larger firms with over $3 million in revenue (a group we label as "Innovators"). Firms at this stage would usually be expected to enjoy greater economies of scale (see Chart 1: No Benefit for the Biggest).
These results were brought to light in the 2009 FA Insight Study of Advisory Firms: People and Pay, a comprehensive human capital study sponsored by TD Ameritrade Institutional. This article is the second of a four-part Human Capital Series produced by FA Insight in partnership with Investment Advisor, our media partner for this research. This series, relying on the findings from People and Pay, is designed to support advisory firms in their human capital decision making. With this article, we specifically examine how firms are employing best practices in organizational design to control overhead expenses, and people-related expenses in particular, without compromising growth.
Hire to Meet Clients' Needs
It is fair to say that for many firms, the hiring done in better times was often not well-planned. Typical mistakes include hiring reactively to meet a short-term need, creating positions to match an available individual, and making organizational changes that fail to adequately consider the client experience.
Reactive hiring to address immediate firm needs may alleviate some initial pressure. This practice, however, combined with the temptation to create positions to suit individuals instead of meeting the needs of the firm and its clients, invariably leaves shareholders struggling to put underutilized people to work. Another common failing is to create positions from a business perspective that ignores the needs of clients and how the firm must be structured to deliver the desired client experience. Building the organizational structure around the client must be the first step in creating a client-centric advice business.
A firm that adds staff before defining its targeted future organizational structure and the positions needed to support it is destined to be just a collection of individuals. These individuals may not be well-placed to progress internally along a career path or support the firm's growth.
The People and Pay study identified a premier group of "Standout" firms based on two key indicators--growth and income. Based on annual revenue growth and owner income, the top third of all participating firms within each firm stage were considered Standout firms. The level of annual revenue defined firm stages. These stages included Operators ($75,000-$500,000 in annual revenue), Cultivators ($500,000-$1.5 million), Accelerators ($1.5 million-$3 million), and Innovators (over $3 million in revenue). Depending on firm stage, Standouts generated 40% to 90% more in total owner income, revenue growth was at rates 5 to 8 times higher, and profit margins were typically double that of their peers.
Hire Before Reaching a Capacity Crisis
In nearly every firm stage, Standout firms are better at defining their organizational structures. This means that prior to making recruitment decisions the firm maintains a blueprint that outlines the firm's future organizational structure. Positions are filled proactively in line with the needs of the business and its clients. This approach enables a firm to grow in a planned manner before a capacity crisis arises. Recruitment needs should be anticipated and met to avoid missing growth opportunities. Standout Accelerators and Innovators are especially adept at utilizing their predefined organizational structure to determine hiring needs in advance, with 89% of Standout Accelerators and 100% of Standout Innovators doing just that (See Chart 2: Proactive Hiring).
To reiterate, a truly client-centric advice business must be built from the client up; this includes the organizational structure. Defining the future organizational structure enables a business to design the structure in a thoughtful manner that will ensure that each team member is working effectively together to deliver to the needs of the firm's target clients.
Finally, clarifying the future structure will clarify relations between roles and how these relations must evolve as the firm grows in complexity. With the right organizational structure, individuals understand their own responsibilities and how their roles interact with others to deliver to clients in the most efficient and effective way.
Putting Together the Team
We have observed many firms that are either overweight with administrative and support staff or heavily weighted towards professional positions with little non-professional support. The organizational structures of Standout firms reinforce the importance of getting the balance right and delegating non-advice-related activities, increasing the number of individuals supporting the delivery of the client experience and reducing principal dependency. A higher proportion of non-professional positions per professional is particularly evident among Standout Innovators who are able to release the capacity of the professionals by delegating non-advice-related tasks. The largest Standout firms typically employ nearly two non-professionals for every professional position. In contrast, other Innovator firms are only employing 1.3 non-professionals per professional.
With the right mix of professionals to non-professionals in place, dedicated management will ensure the organizational structure works as it should with properly supported professionals that are able to delegate non-revenue-generating tasks to other support staff. Standout Firms are especially taking advantage of the use of dedicated managers. Standout Accelerators and Innovators employ more managers as a percentage of their workforce than other firms in their size groups (Chart 3: Leveraging Management).
In addition to freeing up revenue-generating capacity, the right dedicated management will deepen the firm's management capabilities given that individuals are true management specialists. The level of management that got the business to where it is today may not be the skill level required to take the business to the next level of growth. More experienced and specialized management skills will undoubtedly be needed as the business grows.
Where to Focus?
So where should firms focus their efforts when building or refining their organizational structures or thinking about the next recruit? Some of the fundamental best practices relating to organizational design include the following:
Aligning Business Strategy and Structure. Take the time to review your business strategy and consider the implications of your strategy on your organizational structure. As an example, consider what type of clients you seek to serve, what are your growth and profitability targets, and the desired client experience you seek to deliver. By answering these questions you will be better placed to define the future structure, the positions needed to serve those clients, and how roles must work together to drive growth and deliver to clients.
Creating Accountability, Not Just Responsibility. Define each position in your structure, covering both the responsibilities and the performance expectations that define success in each role. Job descriptions take time to get right but it is a worthwhile investment of time that provides team members with clarity around where they need to focus to be successful and how their role supports others in the business. This avoids a common pitfall where team members may be responsible for everything but accountable for nothing!
Release Professional Capacity. For firms seeking growth, releasing professional capacity must be an ongoing focus. This can be achieved by assessing your organizational structure and existing role accountabilities to identify opportunities to delegate and better leverage non-professionals including support and administrative staff, technical specialists, and management.
The current economic environment is forcing advisory firms to raise their games. Firm owners must think like Super Bowl champions in order to succeed in terms of growth and profitability. A well-planned organizational structure, aligned and managed to support the overall business vision of the firm, will provide the winning combination.
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Subsequent Human Capital Series articles will focus on the critical areas of human capital and delve more deeply into best practices. Stay tuned for the next release.