Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I am Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as a firm scales its culture, erodes. Bureaucracy, creeps in as a firm, gets larger, this converts the owner from an inspirational leader into a law enforcement officer over time, which is not healthy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg, while owner and CEO of SBI, built one of the great cultures in professional services firms, he has much to share on the subject. Greg, good to see you. Welcome. Great subject.
Greg Alexander [00:01:21] Yeah. Sean, it’s good to be with you. I’m looking forward to today’s conversation.
Sean Magennis [00:01:25] Excellent. Greg, let’s start with an understanding as to why affirms culture erodes as it scales. Why does this happen?
Greg Alexander [00:01:34] You know, the reason is pretty simple. Founders of boutiques did not know how to scale a culture. And the root cause of this is there’s very little material available to founders on this subject. And most founders do not recognize the importance of scaling a culture until it’s too late.
Sean Magennis [00:01:50] And why is it important to scale a culture?
Greg Alexander [00:01:54] Culture defines how things get done, and defining how to do things matters, especially as the firm gets larger. There is more work to be done by more people. A hazing culture gets in the way of scaling because employees do not know how to behave. And when this happens, founders react by installing bureaucracy with lots of procedures and rules. This turns him or her into a law enforcement official. And once rules replace creative freedom, politics creep in and politics destroys firms. Employees shift their focus from serving the client to serving the boss and scale stalls out.
Sean Magennis [00:02:41] Boy, do I understand this one. Greg, you’ve taught our audience about the three life cycle stages of a professional services firm. Those are phase one growth, phase two scale and phase three exit. It appears that culture is a strength in phase one growth, but it becomes a weakness in phase two scale. Why is that?
Greg Alexander [00:03:10] That’s a great observation. You make a very important point here, Sean. The reason culture breaks down during phase two scale is because scaling is messy. The chaotic nature of scaling means that employees work while the system starts to break down due to all the growth. As previous methods are replaced with new procedures to accommodate the scale, employees struggle to adapt. And it is at this precise moment that they need to know how to behave. And this is when a strong culture can be very helpful. For example, let us imagine an exercise, a picture you and I meeting with a firm in Phase one growth. The firm is, let’s say, twenty five employees and has been in business for about five years. We ask each employee the following questions. Number one, what kind of behavior does the firm hire to? Number two, what types of behavior does the firm promote to? And number three, what types of behavior gets people fired? The answer is coming back from this group of 25 employees will be very similar and crystal clear. This will demonstrate employees know how to behave. Now, let us imagine, we are meeting with a firm in phase two scale. Let’s say this firm’s about 100 employees and has been in business for, let’s say, 15 years. We ask each employee the same three questions. What kind of behavior does the firm hire to what kind of behavior does the firm promote to? And what what types of behavior gets a person fired? The answers coming back from this group of 100 employees will be dissimilar and unclear. And this will show that employees do not know how to behave.
Sean Magennis [00:04:59] I can see that. And the hypothetical example makes common sense, but I’m not sure I understand the so what? Why should a listener care if employees do not know how to behave?
Greg Alexander [00:05:12] Good question. The reason our listeners should care is because during the scale phase, they cannot be everywhere and do everything themselves. They need to know their employees are representing the firm the way the founder wants it to be represented. Employee behavior shows up everywhere, shows up in sales calls, in job interviews and client meetings, etc.. If the culture does not scale, the firm will bring in the clients, hire the wrong employees for client satisfaction and so on and so on. And in the end, a eroding culture will result in missed budgets.
Sean Magennis [00:05:45] Yep, OK, I get it now. A strong culture is how a founder can succeed without having to be personally involved in everything. Greg, I recently listened to an interview. An interview you did on John Warrillow’s Built to Sell podcast. It became very popular as thousands of people have now listened to it. One of the reasons it was so well-received is you talked about the famous SBI culture. Would you share some of this with our audience today?
Greg Alexander [00:06:16] Sure, boy, there is a lot to share here, and I should not repeat what I shared with John as listeners of this show can go listen to that one. But let me share some of the story with you here. So my firm, SBI, was in the consulting space. One of the challenges in that industry is very high employee turnover. It is not uncommon for consulting firms to run it, let’s say 30 to 40 percent annual employee turnover. And we ran it less than 10 percent for years. One of the reasons for the high turnover in consulting is big consulting firms fire employees for not being compliant with the procedures in the rules. I mean, these firms have an operating manual for how to eat lunch. It’s insane. Personally, I hate rules. I recruited mavericks and hired rule breakers. My firm only had three rules. This meant an employee back then can only get fired for three reasons. And they were number one, if you steal from me, you’re gone. Number two, if you lie to me, you’re gone. And number three, if you mess with it with another employee’s ideal life, then you were fired. So, for example, if you goose an expense report, you were out. If you lied to me about a project or the outcome of a sales call, you were gone. And as it related to number three, we had every employee tell us what their ideal life was, meaning exactly how they wanted to live in the role the job with us played in that life. If you were someone who caused a teammate to be miserable, you got fired. This meant no midnight emails, no finger pointing, you know, none of that bad behavior. So my basic philosophy was you had lifetime employment with me, if he did not break the three rules, I hired adults and I treated them like adults. I did not question their work ethic and I did not let suspicion destroy trust. It was an innocent until proven guilty culture, not the other way around, as so many companies are. Everybody was clear as to what behavior got you fired. The net result of this was we scaled rapidly, we won big, we won fast, and we won more often than the typical firm. And this is what led to our remarkable exit. In my case, we scaled our culture by keeping it very basic. We prevented bureaucracy from creeping in and we relentlessly eliminated politics from affecting behavior. And I should note, this culture was not for everyone, but that was OK. I liked it that way. I wanted lots and lots of people to tell me I was nuts and that they would never work for me because those that opted into my tribe were my peeps, so to speak. I knew if I could recruit enough of my peeps, I could really do something special. And we did.
Sean Magennis [00:08:59] Greg, this is a great story. And my journey with you is is so bang on with this. I mean, it’s it really, truly is remarkable. I encourage your listeners to look to Greg as a role model in how to really scale a culture. Doing so is very important to be true to yourself and lead with your authenticity. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.
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Sean Magennis [00:10:14] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.
Sean Magennis [00:10:30] OK, this takes us to the end of this episode, and as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your culture is working for you. If you want to know too many times, culture is more than likely getting in the way of your attempts to scale. Let’s begin.
Sean Magennis [00:11:12] Number one is your culture important to the success of your boutique? Number two, does every employee understand the way things get done around here? Number three, does every employee understand what you are trying to accomplish? Number four, does every employee understand how they personally contribute to these goals? Number five, is it clear which behaviors are awarded? And number six, is it clear which behaviors are punished? Number seven, is it clear which function inside the boutique is the dominant function? Number eight, is the leader of that function, the leader of the boutique? Number nine, is the culture scaling naturally the way you want it to? And number ten, are you nurturing the culture as you scale?
Greg Alexander [00:12:21] You know, nine and ten are related and worth adding a little something to them. So cultures should scale naturally if the culture is healthy. Yep. Then people are going to take ownership of it and they’re going to scale it for you. If that’s not happening, then it’s upon it’s the responsibility of the founder to nurture it. You know, almost think about it like a plant. You know, you’ve got to fertilize it, you’ve got to water it. And there’s things you can do to nurture the culture to make sure it’s happening.
Sean Magennis [00:12:51] Critical. Great finishing comment, Greg. So in summary, culture allows a boutique to retain its identity as it scales. Culture is a welcome substitute for bureaucracy that can plague scaling boutiques. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.