A Better Organizational Design Yields Better Results In A

Professional Firm

(c) 2016, Jeff Gilman The Center for Business Innovation

jeffgilman.com

How one professional firm went from startup to selling itself for $65 million in 10 years.

About This Slide Deck• One of a series of case studies

• For business and non-profit organization people

• Designed to point out innovations

• And promote creative thought

• From JeffGilman.com

Who This Is For

• Owners, operators and managers of small businesses and non-profits seeking creative ways to gain a competitive advantage.

• People seeking innovations to apply to their own operations.

Who This Is NOT For

• People seeking a simple - one size fits all solution.

• People looking to get rich quick.

• People that want the ‘secret’ handed to them.

Why Listen To Jeff?• Started, bought, developed, sold several businesses. Consulted for several

non-profits.

• Big 6 consulting firm background.

• Experience in large and small business, non-profits, and government.

• MBA, BS Accounting

• In addition to the US, Jeff has worked in Pakistan, Barbados, Saudi Arabia, and other countries.

• Big picture.

• Seasoned and experienced.

• Former SCORE Mentor

DISCLAIMER There is no warranty or representation that this information will meet your requirements, that it will be of satisfactory quality, that it will be fit for a particular purpose, that it will not infringe the rights of third parties, that it will be compatible with any situations, and that any of the information provided will be accurate. We make no guarantee of any specific results from the use of this information. No part of this information or conclusions is intended to constitute advice from professionals and your own analysis and the content of this information should not be relied upon when making any decisions or taking any action of any kind. No part of this information is intended to constitute a contractual offer capable of acceptance. No goods or services are sold through this information and service details are provided for information purposes only.

Business Science vs. Business Intuition

There are many perspectives and often disagreement on business problems. Some of this discord is because of honest difference of opinion - two people can look at the same facts and come to different conclusions.

Much disagreement is because people, driven by purely pecuniary interests, offer supposedly ‘common sense solutions’ as the key to business success. They promote their tonic as the cure all, be all, end all, for all ailments. Of course, most of this is nonsense. My response is, “there ain’t no free lunch.”

Occasionally one of their acolytes enjoys a success which is offered up as proof of their wizardry. However, in science, it is important to count the hits as well as the misses and that’s what separates business science from the mere promoters.

The Center for Business Innovation is committed to the science of business - to finding scientific proof of what works and what doesn’t so that entrepreneurs and business people of all levels of experience and abilities can enjoy the greatest possible chances for success.

Introduction

Only 5% - 10% of Professional Firms grow past 5 - 10 employees (e.g., lawyers, accountants, software, consultants, public relations, dentists, etc.)

At the end of the founder’s career, the firm is often closed and operations terminated.

If any value is realized, it is primarily from selling the book of business - the client files.

Some firms, however are perpetual and outlive the founder.

Some provide a means for key staff to monetize their entrepreneurial activities while making more money and growing the firm.

This case looks at the story of one innovator whose success is related to his organizational design.

“No matter what talent an individual possesses, what energy he might have, no matter how much integrity and how much honesty he might have, if he is by himself ... he can accomplish very little. But if he is sustained [by others] dedicated to the same things that he was attempting to accomplish, he can accomplish a great deal.” Bobby Kennedy

The ProblemCreate value

1. Motivate partners to optimal results.

2. Focus partner efforts and behavior.

3. Retain the best partners and remove non-performers.

4. Attract the best talent.

5. Reward for results as the first among many equally important goals.

6. To create customers and thereby create value.

7. Focus partners on their own results and compensation, not on that of other partners.

8. Promote associates to partner based on economic and not just professional criteria.

9. Require associates to demonstrate financial commitment to become partners.

10. Create an equitable system over the longer haul.

11. Allow value creators to share in their creations - to eat what they kill.

Background: Consulting Firm Starts Up and Sells for $65 Million in 10 Years

The story begins with the failure of the 7th largest audit firm in the US - the largest professional firm failure in history to that point. The failure was due to law suits claiming the firm knowingly overvalued assets of a client.

Like most audit firms - which are composed of ‘partners’ they had a companion firm composed of ‘principals’. The distinction is only CPAs are ‘partners’ in audit firms by definition. Work performed in a consulting role is lead by non-CPAs who are designated as ‘principals’.

The failure took down both the audit and consulting sides of the firm.

As a partnership, the principals each also inherited some of the debt of the firm. The story is about the people who were ‘spun off’ and needed to find new jobs.

Enter our innovator. (The names and certain details have been changed to protect the privacy of the participants.) We’ll call him Joe.

Joe was a Principal and had a very successful practice in health care with about 20 people reporting to him. He also enjoyed excellent relationships with his key client. Based on these relationships he was able to retain his book of business after the failure because he could keep his team together and continue to provide needed services.

When the audit firm’s failure became certain, Joe had his team meet at his home and organized a new firm. Joe had also prepared a line of credit to acquire needed assets (computers, etc.) and working capital for payroll and so on.

Client service continued uninterrupted.

Background Continued: Joe was a smart guy and well educated with 2 advanced degrees. Fundamentally, however, he was a generalist and relied on people with unique technical knowledge to deliver work product in the health care field. He also possessed a fine eye for talent.

As he spotted talent, he’d recruit them to join his firm. There were two innovations at this point:

Many of the talented people he spotted were ‘square pegs in round holes’. They often had big consulting firm or other relevant experience but tended to be entrepreneurial and chaffed under the restrictions of large bureaucracies. Thus they were available, hungry, and motivated.

Joe’s second innovation was to create an environment wherein these talented people could keep the fruits of their labor - ‘eat what they kill’ as Joe described it.

The attractions to join Joe included splitting overheads - it was less expensive to split the receptionist, secretary, phone system, copy machines, rent, accounting fees, etc. - than to pay them as individual small firms.

Prestige of being part of a larger firm.

Access to some of Joe’s contacts and book of business.

And other inducements.

People joining Joe also had a share in key decision making. And they got to ‘eat what they killed.’

And most importantly, Joe’s leadership was much respected.

Thus in 10 years the firm grew from 20 people in one location and one field to over 200 people in 6 locations and had become a multidisciplinary firm. And sold for over $65 million.

Background Continued:

Because of its success, the firm attempted to go public. However, the market, which had been too liberal in financing startups, contracted.

This created a new opportunity - a much larger firm agreed to buy the company.

The firm converted partnership interests to stock interests and took the deal.

Joe took down over $20 million and principals took as little as $1 million and as much as $5 million.

The key elements in the sale were:

A dependable management team. Principals were highly committed to their own practices and were also experienced in working together. The team wouldn't dissolve.

Cash flow was reliable. The quality focus meant high quality clients who paid their bills. And the fact the firm was multidisciplinary suggested the cash flow would continue from many sources.

Momentum. The historic growth pattern implied the growth would continue.

SummaryThere are many ways to motivate a team to create:

• The opportunity to learn, grow, and achieve.

• The right to keep some of the value one creates.

• To have a voice in operations.

• Security - e.g., retirement accounts, professional insurance and other benefits of working in a bigger organization.

Many good people can be motivated by the entrepreneurial opportunity to ‘do their own thing’ - and that’s cheaper than cash. And more rewarding if they are good at it.

Summary• The cash flow generated by a firm can be ‘monetized’ - that is, sold for the present value

of the cash flow. This can be done both internally and externally - sold to employees of a particular practice, other desirable individuals, the firm itself can be sold to another firm, or the firm can be sold to its employees. This creates a ‘perpetual firm’ IF the cash flow is certain.

• Principals were motivated to increase the value of the firm because they shared in the value of their creation, had a voice in their own futures, and found the opportunity for growth in a desirable environment.

• Governance - that is the rules of conduct - were critical for success. Joe had a background in city and county politics. He ran the firm like a city council with principal meetings, votes, and other acts designed to ‘keep everyone’s oars in the water and pulling in the same direction’. Merit mattered. Politics were kept to a minimum.

• Quality matters. Over time, the firm asked some practices to leave due to conflict of interest reasons, and recruited other small practices to join the firm when there was a good fit. Maintaining work product quality was key to assuring steady cash flow resulting from client retention.

Analyzing the Consulting Industry

The following slides view the industry from ’30,000 feet’ to give context to the issues of managing the professional firm.

What’s happening in the industry?

Political

• Regulations that protected professional partnerships are under attack. (Legalzoom, for instance, is dis-intermediating the law firm - consumers can buy direct from the web site without a lawyer.)

• It’s a flat world. For instance, rules that may have prevented foreign companies from engaging in US business are disappearing or not being created. A professional firm can hire ‘associates’ in India to conduct research, do technical drawings, etc.

• Competition is where ever you find it and will likely continue to grow.

• Laws built on ‘values’ (e.g., it is unethical to advertise) are gone. Laws that limit ownership options (e.g., in some states doctors cannot form shareholder corporations) are likely to dissolve too.

• Thus, creative practice builders are more important than ever.

What’s happening in the industry?

Economic

• The recession eliminated many professional firms (e.g., high profile law firms with high overheads at platinum addresses vanished. No one wants a return to high overheads.

• Likely fewer positions available for new associates in bigger firms. This may make more entrepreneurial talent available to small firms.

• The internet changes the economics of firms - collaboration on-line can create value while lowering overheads and making resources available on a ‘pay as you go basis’.

• Deal makers, rain makers, and practice builders have never been more important.

What’s happening in the industry?

Social

• Although relationships continue to matter, on-traditional ways of hiring professional firms are acceptable. “I found them on the web” is now considered a good referral.

• Social media marketing of professional services is an area in which to innovate: “I found them on the web and they come well recommended” is an even better referral.

• The work at home movement means there is more talent than ever available to small professional firms.

• The people employed by the firm continue to be the key strategic statement of the firm.

• This creates new ways to connect to markets, design a firm, and create customers.

What’s happening in the industry?

Technical

• The pace of technical innovation is creating more need for real problem solvers.

• Technical solutions for managing a practice (email, teleconferencing, VOIP, video, etc.) mean there are more options for responding to clients.

• Every firm can now place content on-line to demonstrate capacity or fulfill client demands. We are all publishers now.

• The variety and pace of change makes it difficult to forecast in which technical area services will be in demand.

• More practices - diversification - is one way to place more bets on where the market is going.

Summary• The business environment is changing rapidly and professional firms must be proactive in their

approach to change. • Small firms lack the capacity to hire top tier talent but have an advantage in attracting select

talent with ‘entrepreneurial opportunities.’ • Small firms lack the capacity to hire enough talent to deal with all emerging trends. However,

small firms can attract professionals with an entrepreneurial opportunity. • Attracting experienced and proven talent lowers the risk and investment in employees and

makes them profitable sooner. • Attracting a range of entrepreneurial talent diversifies the firm’s book of business and lowers its

market risk. • Leadership remains the key element.

Advantages of developing partners in the firm:

• Commitment. • Giving a person opportunity is cheaper than paying

cash. • Provides a growth path for all future employees and

thus commitment. • Gives key staff - i.e., those with the ability to develop

business - the opportunity to create something for themselves - motivation.

• Can create diversity thus if one practice fails, it doesn’t generally take down the whole firm.

Disadvantages • Loss of control. Business becomes more

consensus oriented. • Need for standards and proper rules of

governance. • Partnership laws may make all partners equally

responsible for the actions of one member. • Time and effort needed to deal with and

manage the governance process.

Conclusion: Management Is Inexpensive

• Of all the things a firm can do, managing better delivers the most bang for the buck.

• This case demonstrates that organizing the firm to encourage entrepreneurial growth cost nothing and can create extraordinary results.

Ad campaigns, hires that don’t work out, etc.

Successful new key hires, plant,

equipment

Details of daily business

Better management of

the team

Management Delivers More Results For Less Money

Results

Investment

MoreLess

Mor

eLe

ss

Focusing on the business of business is the least expensive and highest return activity leaders can under take.

The Innovation

Creating a form of governance that encourages innovation, diversifies the firm’s book of business, and develops extraordinary commitment is a great innovation.

About Jeff Gilman

jeffgilman.com

Jeff is a multidisciplinary consultant that helps small businesses with coaching and developmental services.

There are just a few things that make a big difference to small organizations: better fundamentals and a clearer vision of how they create customers. Jeff helps with both.

The innovation series is devoted to demonstrating that opportunity is just one innovation away.

"There is no one better at listening and helping small business people sort thru their ideas and choices." - Tom Peric

“I love my talks with Jeff.” – Carajoy Nash

“My relationship with Jeff is very important to me.” – Willie Davis

“Jeff is a life time friend.” – Dale Brooks

Certified mentor, retired