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’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as boutique scale, the way decisions get made must change. A start up benefits from the speed of a single decision maker, however, during scale, the decision making ability of the central figure gets diminished. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many boutiques transition their power structures. Greg, great to see you. Welcome.
Greg Alexander [00:01:14] It’s nice to be here, Sean. Transitioning the governance system as a firm scale’s is a very important topic. So I’m glad we’re speaking about that today.
Sean Magennis [00:01:21] Yeah, I can’t agree more. Greg, can you set this up for the audience? Why should a founder of a scaling boutique really care about power structure.
Greg Alexander [00:01:30] Sure. So early stage growth firms require a dictator to be successful. These firms do not have time to build consensus. They must rapidly iterate and move very quickly. And the scope of the decisions that need to be made is small at this stage. The personal willpower of the founder dictator is a key reason these types of firms succeed. Strong leadership is crucial, and the skills needed in a dictator type of leader are easily defined and readily available am my making sense?
Sean Magennis [00:02:04] Yes, yes, you are correct. Please continue.
Greg Alexander [00:02:07] So when a firm starts to scale, it needs to implement a democracy. The boutique is larger and leadership must represent the team. More people need to have a say the dictator is removed from the front lines, his or her proximity to clients becomes more distant. As a result, his or her decision making ability becomes diminished. This person’s once prophetic instincts become dulled.
Sean Magennis [00:02:34] I completely understand that now. So owners of firms, when attempting to scale, need to make more and more complicated decisions. And the best people to make those decisions are those closest to the clients. A somewhat removed dictator is no longer the person uniquely qualified to steer the ship.
Greg Alexander [00:02:55] And you are correct.
Sean Magennis [00:02:56] So how does a boutique transition from the powerful dictator to a democracy?
Greg Alexander [00:03:01] Well, very carefully, as some foreigners do not want to go quietly, the strong willpower that made them successful in the first place now becomes a liability.
Sean Magennis [00:03:12] So, Greg, surely there must be some best practices to handle this transition smoothly?
Greg Alexander [00:03:17] Yeah, there are all firms go through this, at least the ones who scale beyond a nice lifestyle business.
Sean Magennis [00:03:22] So share some of these best practices with our listeners.
Greg Alexander [00:03:25] OK, so I’m going to try to simplify. So bear with me. All right. So the transition typically involves the election of a board. The board is comprised of the equity partners and at least one external independent board member. I play and have played this role. The board meets quarterly and it is mandated to make policy decisions. It is important to note that the board does not run the firm they have focused entirely on long term reporting to the board is a managing partner. The managing partner acts like a CEO does in a corporation. He or she is the boss and is accountable to the results. The managing partner has an executive leadership team that reports to him or her. Normally, the executive leadership team is comprised of the department heads. For example, the leader of the delivery staff is almost always on the ELT. This way the employees from each department are represented. These three bodies, the board, the managing partner and the Executive Leadership Team Act much like the checks and balances system in our government. For instance, the board is the legislative branch. The managing partner is the executive branch. In the executive leadership team is the judicial branch. The ultimate power sits with the owner or owners. The board answers to the owner. Think of the owner or owners, much like you would think about the shareholders of a public company. They own the company, but they do not run it. They elect a board to represent them and the board, selects a managing partner to run the firm. I’m dramatically oversimplifying, but does this basic structure make sense?
Sean Magennis [00:05:06] It certainly does in simplicity is preferred, makes it makes total sense. And I can clearly see how this power structure enables a firm to scale. And I do recognize how different this is than a small firm with all roads leading to a one shot caller.
Sean Magennis [00:05:26] 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 [00:06:30] OK, this takes us to the end of the episode, let’s try to help listeners apply this, Greg. 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 question that 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 decision making is working for you. If you answer no too many times your decision making is more than likely getting in the way of your attempts to scale. Let’s begin with the questions.
Sean Magennis [00:07:14] Number one, have you transitioned from a growth stage boutique to a scale stage firm?
Greg Alexander [00:07:21] So the way that you would know that is when your aspirations change. So are you moving from aspiring to make more money. To building a firm that’s bigger than you, you know, moving beyond a lifestyle business. So that’s how you would answer that question.
Sean Magennis [00:07:37] That’s a good distinction. Number two, are you attempting to become a market leader? For example, one of the 4100 firms who have reached scale.
Greg Alexander [00:07:47] And if you are so now, if you’re going from scale to market leadership, then you absolutely need to embrace democracy over dictator.
Sean Magennis [00:07:55] Number three, do you have a dictator in place today?
Greg Alexander [00:07:58] If you do try to try to handle a a peaceful transition of power, a coup d’etat is not a good idea.
Sean Magennis [00:08:07] Number four, have the dictators once great instincts begun to deteriorate? Number five, have the number of decisions to be made gone up considerably? Number six, has the complexity of the decisions to be made increased substantially? Number seven, does it make sense to distribute authority closer to the client?
Greg Alexander [00:08:31] Right, so if you answered yes to five and six, the number of decisions in the complex decisions has increased, then it does make sense to distribute authority close to the client. However, if you’re running a very simple business with very few decisions to make in the ones, you do have to make a simple that. Maybe not.
Sean Magennis [00:08:48] Yep, got it. Number eight, do the employees want a greater say in policy making? Number nine, do the owners want to delegate decision making more?
[00:08:59] So this is what’s in it for the owners. You know, if if they have to make every decision every day, they’re probably working more than they want to make, more than they want to work. So by distributing decision making down to trusted lieutenants who can do it for them, they actually reduce their workload.
Sean Magennis [00:09:13] And work smarter, not harder.
Greg Alexander [00:09:14] It’s exactly right.
Sean Magennis [00:09:15] And number ten, do you have a person capable of serving as a managing partner?
Greg Alexander [00:09:20] So this is the biggest issue. Dictators, right. Those that are the founders that drive their firms to certain level of success, they oftentimes don’t want to relinquish power. So the way to do it, at least the way that that I did it and those that I’ve seen, pull this off, do it as they grow their own. Yes, risk is really high when you’re bringing somebody in from the outside. But if you’re if you’re grooming a successor over a number of years, this becomes easier.
Sean Magennis [00:09:45] I love it. The institutional knowledge. Yes, the culture knowledge is so key. So in summary, we do love our founders. They had the guts to start the firm and the skill to grow it. However, growing a boutique and scaling it are two very different things. Scaling does not mean doing more of what you are doing. It means doing what you would doing differently. This is the point whereby dictators plateau and a new governance system is needed. 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. Greg, thank you. I’m Sean Magennis and thank you, our audience for listening.