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Passion, People and Principles

Passing It On

post # 275 — January 4, 2007 — a Strategy post

Rich Saletan (who built a very successful consulting firm and then sold it to a mega-firm), posed the following question:

How does a personal services company/consulting company of small to medium size continue after its founders and key management people “retire.” Sustainability of the “Brand” is what I am talking about. It seems to me that only larger entities have been able to make this transition. Your thoughts?

Rich, I’m not sure it has anything to do with size. My hypotheses are that if the founders / key managers want the institution (and it’s “brand”) to survive their departure then they must start doing some things many years before their planned departure. In particular, the founders must:

  1. Make sure that the brand of the firm is built on the reality that there are shared ways of behaving,values and consistent principles that underlie decision-making. The founders need to have ensured that they have enforced these through the years, thereby ensuring that only those who share (and live) the values are allowed to remain in the firm. A brand is what people consistently do, and it takes a decade or more to build that reputation for consistency. If the goal is to have the brand survive the founders, people must have been living the brand for so long, they cannot conceive of an alternative way of running the firm’s affairs.
  2. Start grooming their leadership successor(s), choosing them on the basis of their ability to be “high priests of the brand religion,” not for their business or rainmaking skills. The force of entropy is very high, especially when the founder departs — leaders must be left behind who have been carefully groomed and battle-tested as stewards of the cause, not self-interested individuals who will run the firm as personal fiefs. Choosing the next CEO is critical.
  3. Share power, decision-making authority and ownership very early in the life of the emerging firm, so that the up and coming next generation have a sense that it’s “our firm” very early on. It’s hard to make an overnight revolution from the dictatorship of the founder. Founders can often act like kings — their people will accept it. But few of their successors can get away with acting that way.
  4. Leave money on the table. I often say that the founders can either extract the maximum sales price or leave behind a vibrant institution, but they can’t do both. They must decide what they want.

Anyone else have an opinion on this?


Tim Percival said:

Effectively, as David is saying I think, you need to institutionalise the brand values. This is done in my opinion not just by addressing the leaders whom you want to succeed, although that is of course is an absolutely essential prerequisite. In addition, I’d recommend taking every step to set expectations about the brand values amongst all the people you employ. Right through the recruitment process, induction and continuous learning/development during their careers, the values need to be clear and the business and people need to be managed in line with them. The beauty of this is that you get a group of people who may not be the leaders, but who have high expectations their leaders (present and future) to live the values. So, if you get your leadership succession plan right AND set the expectations of the wider team appropriately, you have an almost unstoppable combination of self-regulating forces at work!

posted on January 4, 2007

Doug Ferguson said:

Brand sustainability is helped, in part, if the original brand name of the firm was chosen carefully. Its a common practice for firms to be named after the founder. I believe this is a mistake in the short run and in the long run. In the short run, it makes it that much more difficlt to recruit talented colleaguse, especially if they are to receive equity inerests. Even if the senior colleagues are as talented as the founder the bias from the clients will be that they want to speak with the person whose name is above the door.

In the longer run its also an impediment to full value maximization upon sale. Having a firm named after a person raises questions about how likely other employees are to remain after a transaction and how transferrable intellectual propertty may be to the new owner.

There may be an exception in cases like David Maister, at least in the short run. David, you established your firm based on your name but you already had some branding from your name based on your prior work and your HBR platform. Nevertheless, its hard to imagine David Maister, Inc. succeeding as well without you since its your name, image and intellectual content which are central to your value proposition.

posted on January 4, 2007

David (Maister) said:

Doug, can I argue the other side of this one? I think your point is well made, but ultimately I don’t think it’s primarily about name but about behavior. After all, Bain & Company was named after Bill Bain, McKinsey was named after the founder, AT Kearney was an actual person and Goldman and Sachs were real people.

I think they institutionalized their firms through their management practices (although Bain nearly destroyed his by his manner of exit – trying to extract too much money.)

And you’re right – by keeping myself “front and center” I have made it impossible to pass on my brand – but then, since I never hired anyone, I clearly never intended to. It was the behaviour, not the name, that was determinative.

posted on January 4, 2007

Rachael Heald said:

I think the common element in what you are both saying is that in order for a firm to have sustainability after the founders, they needed to have set it up with a view to having it sustainable in the long run. In my mind its a question of how important a role the ego of the founder has played, or perhaps how they interpret their own success. For some, success if having a firm where they wield their power through their name and status. For others its about business success, and seeing the growth and success of their clients and their people. If the latter is what motivates you, you are more likely to work towards creating something that is sustainable without you. Leaving a legacy rather than just a mark.

posted on January 4, 2007

Rob Brown said:

Having just put the finishing touches on my book ‘How to Build Your Reputation’, I come back to the word legacy on this debate. The initial question from Rich asked whether smaller firms could make this transition. As a speaker and consultant like David (but a few years behind!) I am the brand. Then you get the crossroads where you think ‘how do I grow without swapping more time for money?’ Then you take on staff and associates. Then you realize you’re either running a day-care center or feeding a guzzling beast.

It’s at this point that many begin to wonder why they came into it all, and that’s where the legacy comes in. As David rightly pointed out, it can be a legacy of profitability (exiting for max sales price) or one of brand and image (a vibrant institution) but rarely both. Walt Disney and Dale Carnegie got something to live on after they’d gone that was sustainable and contagious.

Small firms growing organically with the leadership of an infectious and passionate CEO is, for my money, the only way to do it these days.

posted on January 4, 2007

Jennifer said:

I’d add that selling the firm to a mega-consulting firm is a way to make sure that the brand doesn’t live on (which seems as if it’s an option from your comment that you shouldn’t try and maximise the sale price).

I think when setting up the firm, and the remuneration structure, it is important to take seriously the need for the founders to retire, and think about how that sale is going to work. If there is no acknowledgement in the firm’s remuneratio methods of the value of goodwill, then the individual negotation when the founder retires is much harder.

posted on January 4, 2007

Robert Gagliano said:

Dave, you hit it right on the head. The name is less important than shared values and the sharing of power and prestige. Although my firm bears my name, my employment agreements include a “map” to the top, describing expected associate income levels (and the employer’s expectations on production and other responsibilities) over time and details on qualifying to buy into the firm. When I have partners in three to five years I intend to include their names in the company name, thereby making “me” less important and “us” more important over time.

posted on January 8, 2007