In February 2011, Borders Group, the second-largest bookstore chain in the United States, filed for bankruptcy. Shortly after, the company announced the closure of an initial 200 stores disclosing losses estimated at $2 million per day. Those avid readers who enjoy spending weekends perusing Borders bookshelves were surely saddened by this news, but clearly the way most consumers acquire and read books is changing. The growing popularity of digital books and online purchasing reportedly played a debilitating role in the Borders saga. One thing is clear—in the face of dramatically shifting client-purchasing behavior, rising debt, increasing staff and retail store expenses, the operating model that may have served Borders well in the past failed to function effectively in a rapidly evolving marketplace.
Keeping Pace with Expectations
To grow sustainably over an extended period of time, any business must consistently deliver to the needs of its target clients. This is particularly true of advisory firms. While growth requires a capable business development function, creating a fertile environment for growth further requires that, once new business is won, the firm is able to service its clients in a manner that keeps pace with client expectations.
Operations relates to a firm’s ability to efficiently and effectively manage the various processes, people and systems that interact to deliver valued client outcomes. How a firm structures and manages its operations is essential for delivering on the firm’s value proposition in order to retain target clients and attract more like them. A strong operational capability ensures the firm can efficiently and effectively service increasing numbers of clients. A properly structured and maintained operational capability will cater to the client experience in addition to realizing efficiencies and controlling costs.
In our most recent annual survey, The 2010 FA Insight Study of Advisory Firms: Growth by Design, clear and direct ties link operational capabilities with the quality of a firm. As regular readers will recall, we distinguish “Standout” firms at each of our four stages of development. Standouts represent the top one-third of firms at each stage according to two key criteria related to building firm value:
- The ability to generate income for owners
- The ability to grow (as measured by revenue)
Beyond these defined criteria, the most obvious performance difference further distinguishing Standout firms is disciplined management of overhead expenses, a key indicator of operational efficiency. Overhead expenses as a share of revenue are at least 10 percentage points less for Standout firms relative to other firms as shown in Figure 1 (left). Standouts do an especially good job of managing expenses related to administrative, technical and support staff. Expenditures for technology, office space and travel are also relatively low among the various overhead expense line items.
Productivity can be another sign of an operationally sound firm. Indeed, staff productivity for Standout firms is 16% to 20% greater in terms of revenue per team member. This advantage in productivity, combined with efficiencies, contributes to Standouts earning significantly more profit per client. Despite having no particular edge in terms of AUM per client, Standout firms earn a profit per client that is 2.4 to 3.5 times greater relative to other firms (Figure 2, left).
The lower expense structure and higher productivity that propels client profits are more specific signs of operational excellence, but they do not reveal much about how to achieve it. The solution starts with designing firm operations around your target client. Getting operations right also extends to thoughtful technology deployment, consistent work flow processes and an organizational structure that fully utilizes the capacity and capabilities of every team member.
Tailor Operations to the Client
A first priority is to have a laser-like focus on identifying the firm’s target client and then structure firm operations around the preferred client type in a way that is tailored to the desired client experience. It is no coincidence that at every development stage Standout firms demonstrate a greater tendency to have a clearly defined target or niche market.
The result, from an operational perspective, is that Standouts are better able to fully utilize, as well as standardize, their resources. A focus on target clients limits servicing exceptions and thereby enhances firm efficiency as well as productivity. In terms of both personnel and technology, the firm only maintains those resources required to support target clients. Further, building around one preferred client type gives the firm a significant advantage in developing and implementing standardized and repeatable processes.
Deliberate Deployment of Technology
Technology is obviously important to the operational success of the firm to the extent that deployed technology allows the firm’s people to efficiently carry out work flow processes in a manner that is consistent with the desired client experience. However, technology spending, per se, clearly does not differentiate Standout firms (Figure 3, below).