ing, I have time to spend with my kids while they’re young, and I’m able to tend to my clients’ needs.” Surprisingly, when his turn came later in the meeting to present a new initiative, he rolled out a very aggressive marketing program in alliance with a local certified pub- lic accountant and law firm, which was producing great numbers of new opportunities. His fellow study group members eagerly pointed out the contradiction between this plan and his desire not to grow.
Chastened, he said, “I guess I’m just addicted to growth.”
He became even more uncomfortable when the group looked over his financial data. They saw a tremendous increase in overhead expenses as a percentage of revenue, especially in the categories of marketing and administrative salaries (and related expenses, such as benefits). He also told the group that he was looking for more space to accommodate his fleet of support staff. He later admitted that it was getting harder for him to tend to his clients while having to man- age a growing number of staff who were not directly involved in the advisory cycle but were hired primarily to support him.
This example points out one of the biggest hurdles for advisers who choose to work alone, at least in terms of managing both costs and lifestyle. The solo model works extraordinarily well for those who do not want to grow, but for many advisers, that’s a little like a heroin addict not wanting a fix. There are exceptions, but the law of professional practices is that once you become known for being really good, everybody wants to do business with you. And it’s very hard to turn away good clients. Furthermore, it seems that for many advis- ers, the concept of working alone applies only to other professional staff, not to support staff. Consequently, they have all the headaches of adding people without the benefits of including other profession- als who could challenge them, give depth to their practice, and be another source of revenue and profits for the business.
So, if you’re addicted to growth, is there a more practical way to become an elite practice? Yes.
enterprise often brings more reward than pain. Without growth, it’s almost impossible to provide a career path for staff members.
Without a career path, it’s almost impossible to recruit, develop, and retain excellent staff. And without excellent staff, it’s almost impos- sible to build capacity and create operating leverage in a practice.
Ensemble models provide an opportunity to do all of this: handle growth, offer career development, and create leverage—the corner- stones of every professional practice.
Growing Concerns
Of course, there are legitimate concerns about whether growth can work for you, such as:
! Rising costs
! Loss of management control
! Loss of quality control
! Client satisfaction
! Training staff that may later become your competitors
But these threats exist whether you grow or not. Let’s break them down.
Cost. A key concept to keep in mind is the difference between operating profit and gross profit. If your gross profit margin is declining, it’s likely to be due to one of five factors: poor pricing, poor productivity, poor payout, poor product or service mix, or poor client mix. If your operating profit margin is declining, any of three factors might be involved: reduced gross profit, insufficient revenue volume to support your infrastructure, or poor cost control.
Since we began in the mid-1980s to benchmark the financial per- formance of financial-advisory firms, we’ve observed that overhead costs as a percentage of revenue have been steadily increasing, even in good markets. The three fastest-rising costs have been rent, salaries, and payroll-related expenses like benefits. And these costs have been increasing at a faster rate than revenue has, making the trend even more alarming.
Apparently, skyrocketing office-rental rates were only part of the reason this category was seeing a spike. The biggest driver turned out to be additions in square footage to accommodate the growing
support staff of many practices and the desire of many advisers to be housed in more impressive quarters. But the addition of staff by itself is not a negative. The negative is the relationship of staff costs to revenue and revenue to total staff. When practices add overhead costs without adding productive capacity, it’s logical that their profit margins will suffer. So if the squeeze is on anyway, why not add pro- fessional staff who will add productive capacity and not costs alone?
Loss of management control. The extent of control is a legitimate problem for any business, regardless of size. It appears that practices hit the wall managerially when they grow to eight people, then again at fifteen, and again at twenty-five to thirty. It’s as if the commu- nication links get disconnected and the management process breaks down. Advisers in all firms, but especially smaller firms, are at a disadvantage when this happens, because they have no one to whom they can delegate key responsibilities. Larger practices need to build in structure to manage and communicate effectively.
Loss of quality control. As with management control, the increasing size of the business may cause the owner and lead adviser to lose touch with much of what’s going on. But most advisers tell us that they’re concerned about what may be falling through the cracks anyway. The absence of protocols to manage client relationships simply makes the problem more glaring as the practice gets bigger and attracts more cli- ents. These protocols are critical regardless of the size of the business to ensure clients are served and work is done consistently.
Client satisfaction. The linkage continues with client satisfaction.
In a firm headed by an adviser who has little time to manage the business and serve existing clients and whose grip on quality control is loosening, client interaction and consequently client satisfaction are likely to suffer. Remaining small does not prevent this, although having competent administrative staff to tend to clients does help.
Limiting the number of active client relationships per professional staff enhances your chances of having fulfilled clients. But putting a limit on relationships also puts a limit on growth if there is no one else in the firm able to deal with the new clients.
Training your competitors. It seems that the No. 1 reason solo practitioners do not want to add professional staff is because they fear that by training them and giving them access to the firm’s clients,
they’re spawning new competitors with an insider’s edge. Of all the concerns about a firm’s growth, this one is the hardest to resolve, because ambitious people usually do want to have their own busi- nesses. Yet we’ve seen many examples of firms that have provided a legitimate career path, including the opportunity for ownership or partnership, and consequently have retained outstanding people to help the business develop. This is the model used successfully by other professional service firms such as accountants and attorneys.
Through the use of restrictive legal agreements, the firms are also usually able to protect their client base from poaching by a disaffect- ed former employee or partner. Even better, through the deliberate development of a career path and human-capital plan, the firms are able to create skilled professionals who see as much or more oppor- tunity inside the firm as they do outside.
These issues arise regardless of a firm’s size. They show up in dif- ferent ways in a solo practice, but they do exist to some degree. The elite firms have recognized these pressures and have structured their organizations to use size to their advantage instead of battling them from a position of weakness.