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November 01, 2011 at 08:00 PM
The trick to creating a successful independent advisory firm is exactly the opposite of what is taught by business schools and business gurus. Conventional management wisdom says great businesses result from great managers. My expertise, though, is in helping independent advisory firm owners build great businesses, and I know for a fact that on our end of the business spectrum, the conventional wisdom is flat wrong.
Most owner/advisors will never become great—or even good—managers in the conventional sense. They don’t necessarily have to be.
What they have to do is build businesses that create great employees, then stand back and let their employees help them grow the business they’ve dreamed of. To build a business that literally grows itself, advisors need to integrate four key principles—preparation, pay, perks and productivity—and let the system work for them. Each principle is essential to creating an environment that supports a firm’s employees to maximize their contributions to the success of the business.
It may sound simplistic, idealistic or even a bit new-age, but it’s the most practical business strategy that you’ll ever hear. I’ve spent the past four years conducting clinical research on advisory firms to determine what makes businesses successful. I published my findings in a white paper titled “P4: Building Great Businesses by Creating Great Employees.”
One reason that the principles are not conventional wisdom is that getting information from small businesses is exceedingly difficult. For the most part, small businesses are not public companies, so their financial data isn’t readily available. What’s more, there is little incentive for most successful owners and advisors to participate in industry surveys—even if they do, they rarely take the time to look up actual figures or fail to understand them. Thus, they wildly “ballpark” numbers or unintentionally inflate or deflate figures.
Then there’s the problem of expenses and profits. Small business owners have an incentive to manipulate them, maximizing costs and minimizing the bottom line, which often skews a true financial picture.
One afternoon five years ago, I was thinking about “problem” employees in my client firms. As I thought about the small number of employees who have been problematic over the years, I realized that they all worked for the same firms—about half our clients, while the other half have never had any problem employees.
At first, I thought the problems might be next-gen employees. But, a quick look at employee rosters showed that “no-problem” firms had just as many next-gen employees as did problem firms. Next, I suspected that some businesses were simply better at hiring good employees than others. You might suspect this, too. But, when I looked at the data, I found a very different picture.
I regularly quantify employee performance at the firms with which I work, rating them from one to five, with five indicating a great employee and one a problem employee. To gauge a firm’s success at hiring great employees, I took the average employee rating at the end of the first year on the job for all the employees at each of the firms I work with. For the firms with no problem employees, the average rating was 2.90; for the firms with chronic problem employees, it was 3.54. That means the problem firms were significantly better at hiring good employees. So, better hiring didn’t necessarily lead to better employees.
Next, I looked at the average rating after employees had been on the job for four years (see Figure 1, left). Those good hires at the problem firms were down to 2.63, while mediocre hires at no-problem firms were up to 4.33. The problem firms were taking good employees and making them mediocre at best—and problems at worst—while the no-problem firms were taking mediocre employees and making them great employees.
I found striking differences in the way the two groups treated their employees (see Figure 2, below). For instance, 100% of the problem firms paid above-market salaries, while 84% of the no-problem firms paid market or below-market salaries. All of the no-problem firms communicated their firm’s goals to its employees; none of the problem firms did. Only 20% of the problem firms provided laptop computers so their employees could work at home; all the employees at the no-problem firms had laptops. All of the no-problem firms paid revenue-based incentives, compared with 0% of the problem firms, which offered profit sharing or performance bonuses. Of no-problem firms, 100% offered lifestyle benefits, which gave employees a flexible working environment to maintain work-life balance; only 20% of the problem firms did. And, while every one of the no-problem firms had an orientation process for new employees, only 20% of the problem firms did.
The bottom line was that instead of trying to hire great employees, the no-problem firms were creating an environment where their employees were prepared, equipped and enabled to help their firms succeed. The only question left was: Did it work? That is, were the non-problem businesses actually more successful? During the turbulent three years ending Dec. 31, 2009, the no-problem firms had zero employee turnover versus 34.6% at problem firms, of which 23.1% were terminated by the owner for poor performance (see Figure 3, next page). No-problem firms had 14% annual revenue growth (versus 3%) and 15% annual increases in owners’ income (versus -10%). During this rough economic environment, owners of no-problem firms worked an average of 31 hours per week (versus 54 hours), and 100% of their firms achieved their goals compared with 0% of the problem firms (see Figure 4, next page).
The message of the data is clear: Businesses that prepare their employees to succeed by basing a significant portion of their compensation on the success of the firm; creating a flexible and supportive work environment; and supplying the tools necessary for employees to excel at their jobs, create great employees, who in turn create great businesses.
The good news for advisory firm owners is that the P4 principles are neither overly complicated to integrate nor very expensive, especially when compared with the high costs of hiring star employees, chronic employee turnover, low employee productivity and hiring a consultant to solve these problems. In fact, the increased growth of the P4 firms far exceeds any additional costs of implementing the P4 principles.
The P4 principles are basic, if not obvious, once firm owners can come to terms with the fact that it’s largely the structure of their firms—not recruiting, management or even the employees themselves—that determines whether or not their employees will be great employees. Because the P4 principles appear to violate conventional business management wisdom, most advisor/owners need to unlearn what they think they know about running a business. In fact, the difference between successful P4 firms and not-so-successful non-P4 firms is a willingness to try one or two of the P4 principles: Once they see the difference in their employees (and the decrease in their own workload), they’re convinced.
Preparation
The first and hardest P4 principle to implement is preparation: To create great employees, firm owners need to first prepare themselves to support the success of their employees, and then prepare their employees to be great. The first step is creating an owner’s mentality that focuses on building a successful business. Figure 4 shows the striking differences in the goals of P4 and non-P4 firm owners. P4 owners are focused on growing their revenue or growing revenue while working fewer hours (83%), while non-P4 owners simply want to take more income out of their business (100%). By focusing solely on the bottom line, non-P4 firms fail to reinvest in their business, particularly in the areas that create great employees. Notice that in the end, the non-P4 owners’ strategies proved self-defeating; not one of them achieved their goal, while all the P4 firms succeeded as their owners planned and a nice result was a significant increase in owners’ income.
The second step of preparation is designing a culture that fuels passion, purpose, growth and happiness—it’s about sending a clear message to the employees that their job is important, and that their firm and its owner stands behind them. This includes clearly communicating the firm’s goals, the role of the employee and the firm’s organizational strategy.
