Bouncing back from the Great Recession, advisory firms have returned to growth mode. While the turnabout is a welcome one, few firms are growing in a manner that is sustainable. Of those firms that participated in our fourth annual industry study, “The 2012 FA Insight Study of Advisory Firms: Growth by Design,” the vast majority (85%) reported achieving significant growth in recent years. About three-quarters of these growing firms, however, also reported some type of negative impact as a result of growth.
As noted in our previous article (see “Growth Gone Wild,” Investment Advisor, January 2013), common side effects associated with growth tend to be related to people. Providing clear career paths becomes more challenging, dependency on key individuals increases and staff become overworked and stressed. Additionally, growth frequently stresses a firm’s technology and operational infrastructure.
The remaining one-quarter of firms with significant growth somehow escaped any negative consequences. A deeper analysis of these firms reveals that their ability to grow in a sustainable manner was hardly by chance. In the 2012 FA Insight study, we separated this group of “sustainable-growth” firms from those that had experienced challenges with growth. This latter group was deemed “growth-at-risk.”
The differences between the two groups were striking and offer important lessons for firms seeking higher quality growth and thereby greater enterprise value. In this article, the third in the 2012 “Growth by Design” series, we explore these differences and highlight the best practices that they reveal.
The fact that managed growth clearly pays is perhaps the most important revelation from comparing how firms grow. Intuitively this finding makes sense as the ability to sustain growth in income is a hallmark of a valuable firm. In contrast, value is put at risk for those firms that achieve growth at the expense of weakening their operational infrastructure, failing to fully deliver client service or burning out team members.
Study data also demonstrate clear economic advantages. In terms of annual revenue, service offerings and number of staff and clients, the typical sustainable-growth firm was roughly identical to its growth-at-risk peer. Even growth rates were about the same. Despite these similarities, sustainable-growth firms achieved significantly better financial results. As Figure 1 illustrates, the typical sustainable-growth firm was better able to convert revenue to owner income and manage overhead expenses, which resulted in a substantially higher operating profit margin.
Distinguishing Business Practices
Sustainable growth clearly has its rewards, but how is it achieved? Why is one firm able to grow trouble-free while the other faces challenges? As is frequently the case any time we have examined a group of better-performing firms, the answer lies in how resources are deployed—not how much.
At the highest level, sustainable-growth firms are distinguished by their discipline in business planning and management. In particular, sustainable-growth firms outshine their peers in three key areas: target client focus, workflow processes and the application of technology.
Client-Centric Focus is Key
Better firms understand the type of client they are best suited to serve and tailor the client experience in a way that resonates with this target client. This is true of the sustainable-growth firm as well. This client-centric approach supports greater marketing success, more operational efficiency, better productivity, more satisfied clients and ultimately greater profitability.
Relative to their peers, the sustainable-growth firm is far more likely to have a defined target market and is also more likely to implement a minimum fee in order to cover the fixed costs related to onboarding and ongoing service (Figure 2).
A clear focus on the target client forms a foundation for firms to develop a client value proposition, which is critical for effectively attracting and retaining clients. Here again, sustainable-growth firms not only have a greater tendency to develop a client value proposition, but chances are greater that all staff members understand the value proposition and that it is consistently implemented with all clients. Nearly every sustainable-growth firm (97%) reports its client value proposition is consistently implemented with clients, compared with 80% of growth-at-risk firms.
Adherence to a target client and effective implementation of a value proposition produces a powerful combination for sustainable-growth firms to defend against growth’s negative impacts. Their discipline in adhering to client acceptance and servicing standards limits exceptions that lead to inefficiencies and cost “blowout.”
Processes are Priority
Among other benefits, a stricter focus on serving a target client contributes to efficiencies as there are fewer workflow exceptions necessary. When similar clients can be serviced in similar ways, resource-consuming exceptions are avoided.
Sustainable-growth firms gain further advantage, however, by exercising strict management and oversight of key processes. Perhaps in no other area do sustainable-growth firms outshine their peers more. How work gets done is clearly a priority with sustainable-growth firms. Relative to growth-at-risk firms, sustainable-growth firms are far more likely to have well-documented business-to-client processes. What’s more, staff members are more likely to be aware of, and understand, this documentation (Figure 3).
Further, a sustainable-growth firm relative to a growth-at-risk firm is nearly three times as likely to proactively review the effectiveness and efficiency of processes on an ongoing basis. They are also more likely to have designated a team member responsible for overseeing processes, including development, implementation and management of processes. Better management of processes, combined with a target client focus, results in sustainable-growth firms being more than twice as likely to consistently implement processes relative to their peers.
Higher Return From Technology
Another key distinction for the sustainable-growth firm is a more disciplined approach toward technology. While average technology spending as a percentage of revenue is nearly identical for sustainable-growth firms relative to growth-at-risk firms, sustainable-growth firms tend to have practices in place that enable a higher yield from a similar level of investment.
Those firms achieving sustainable growth are over 50% more likely to utilize their technology in ways that fully support workflow processes. Aligned with their forward-thinking approach to process evaluation and improvement, they are more likely to set annual technology budgets for new investments and have a consistent procedure in place for technology evaluation. Their discipline with technology investment leads to the greater likelihood that sustainable-growth firms report more tightly integrated technology components within their operations. Finally, sustainable-growth firms get more out of their technology by demonstrating a much greater propensity for providing adequate technology training for staff, ensuring that all staff members understand technology systems and are using them effectively.
A tight focus on target clients, strong process management practices and an ability to get more out of technology are characteristics of sustainable-growth firms. These practices lead to a higher quality of growth as well as greater efficiency and more productive team members. Professionals working in sustainable-growth firms, relative to growth-at-risk firms, are 18% more productive in terms of revenue per full-time employee (FTE) and 32% more productive in terms of assets managed per FTE (Figure 4).
This edge in productivity is not a result of overworked professionals, but likely a result of a greater ability to focus on clients and prospects. Despite the higher productivity measures, sustainable-growth firms were less likely to report that their professionals were “over capacity.” Driving the productivity advantage is the fact that professionals working for sustainable-growth firms dedicate 63% of their time to client-facing or revenue-generating activity compared with 50% for growth-at-risk firms.
Quality of Growth Trumps Quantity
Good things can happen when firms grow, but it is important to realize that growth can be counterproductive as well. Quantity or pace of growth will not necessarily build value in a firm. Quality growth that is controlled and sustainable will build value.
Sustainable growth, and the long-term success that accompanies it, requires a business discipline that fosters growth while insulating the firm from growth’s negative impacts. This discipline starts with consistently delivering value to a targeted client base and extends to active management of processes and technology in order to achieve the most with finite resources. The result is a defense against the unpleasant side effects of growth and a firm that is well-positioned to take full advantage of increasing scale to build shareholder value.