Structuring for Success

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.