Strategy as Portfolio Management
post # 329 — March 13, 2007 — a Strategy post
A primary form of strategic competition among professional firms today is NOT the (direct) competition for clients, nor the (direct) competition for junior employees, but the competition for senior lateral hires who come in to the firm with a ready-made book of business, i.e. â€œwarlords with a following.â€
Building client relationships one at a time is a long slog, and takes persistence and patience. Itâ€™s hard to break in to new markets and locations solely by organic growth and patient investment: besides, market opportunities might move too fast to take that opportunity. How much easier to grow by bringing in people with pre-existing practices!
This approach is not unique to the professional sector — it reflects what corporations have long tried to do: increase their corporate return on equity by buying their way in to profitable businesses (and dropping unprofitable ones.)
The success of this approach in the corporate sector has been mixed. The real success of this â€œportfolioâ€ approach to running (and defining) a firm is not a superior ability to acquire successful businesses, but a superior ability to help them grow once they have joined the â€œcorporateâ€ family. How many corporations have met this standard? How many professional firms, with their focus on attracting â€œalready successfulâ€ lateral partners, know how to do this?
My own observation is that firms are playing with fire with this approach. By building the firm on bringing in a high percentage of lateral hires, they compromise the identity, the group cohesiveness, the loyalty that defines a firm. When a firm is managed as if it were nothing more than a portfolio of practitioners, it is unstable. The VERY approach of bringing in lots of laterals works against the thing that would be needed to justify it – the ability to exploit firmwide relationships and connections to expand and build upon the newly acquired practice.
Yet firms cannot have it both ways: they cannot be a cohesive unit and compete primarily by bringing in outsiders who â€œgrew up elsewhere.â€
Or can they?
Ted Harro said:
I agree with you that “growth by acquisition” in both industry and professional services is fraught with difficulty. I think this stems largely from the sort of “fit analysis” done by both sides. Leaders examine the business logic but often forget to consider the relational logic of the combination – and relationships matter even more in the professions than in the corporate world since the “assets” acquired are almost always people assets.
Recent research our team conducted with a cross-section of business leaders does give one clue about where to focus to, as you say, “help them grow once they have joined the ‘corporate family.'” When we asked leaders what mattered most in the first 3-6 months of a new leader/partner/principal’s tenure, the overwhelming response was on building constructive peer relationships. This activity won out over business strategy, creating a vision, and other “task-oriented” activities that people often focus on.
The big question: How many firms do you know that have a thoughtful, high-investment strategy for fostering those sorts of working relationships when lateral partners join up? It takes a lot more than a few rounds of golf to help someone learn the unwritten rules. But failure to do so dilutes the cohesiveness of the existing partnership and just creates messes for firm leaders to clean up later.
posted on March 13, 2007