Building the star firm

Following on from my change the world post, colleague and occasional collaborator Ray Wang asked me to look at Personal Log: The 7 Tenets of Building a ‘Star Analyst’ Firm. Anyone who is thinking about restructuring their practice or going for the creative destruction model needs to read this.

I remember meeting Ray in Pasadena just about the time he was ready to jump from Forrester to start building Altimeter. He looked awful. Those of us who are working as independents in the analyst/consulting/commenting game work darned hard, often keeping ridiculous hours, traveling extensively, constantly searching for fresh insights or clues to where the puck will go and not where it is or has been. It’s what you do to keep in the game. For those that really want to be stars as Ray puts it there’s a lot more to be done. Ray was just about washed up and desperately needed a break. I thought at the time: “He’s gone – outta Forrester – his time’s done there.” I was right. Ten days later Ray told me he was off and away. I know that situation, the relief it brings when you finally jump and the excitement of moving to the Next Big Thing. I’ve been there.

Let’s pick apart Ray’s analysis of what it takes and apply it to professional services more generally. There’s method in this because PS firms have many common attributes:

1.  Star quality requirement.

Lessons learned:  Hire and attract stars or risk spend your time spinning into a black hole.  Remove under-performers early or lose trust and collaboration.

When I was in the same place as Ray back in 1993 I created a plan that would create a star firm albeit in a different way. In my case, we needed to creatively destroy the firm. The partners were split and it then became a case of deciding whether some of us would break away. In the end, those who were on my side of the fence didn’t have the confidence to go with the proposal. This was when I found out that in truth, they were not star performers willing to do what it takes to build something fresh. I parted company very quickly.

2.  Analyst friendly policies and IP rules.

Lessons learned:  If you want the best, then no non-competes and analysts should have ownership and control of their IP.

In PS environments, there’s a premium on IP. The problem is that while professionals instinctively know they own their IP they are almost always sucked into an environment where that ownership is used to build individual power bases. It often creates situations where shared ownership is difficult to achieve. That partly arises out of highly evolved specialisms but is exacerbated by the idea that what I know is my power. Sharing of itself is not enough. This has to occur in an environment where sharing is the norm and where it is seen to increment value. This is very tough in an existing environment which is why I wanted to creatively destroy the firm. My experience suggests that may not be viable unless there are pain points that encourage a rethink. I see evidence of that but the pain is as yet not enough to make it a viable way of creating the new businesses of the future out of the old. Here’s the flip side. I give away about 80-90% of what I know. Guess what? I’m doing just fine.

3.  Analyst firm self-ownership.

Lessons learned:   The team must own a piece of the franchise in order to align with market driven business development priorities.

This is a long way of saying the new firm is a partnership and not a corporate entity likely to be flipped to a public offering. Ray might disagree but there is good evidence to support this theory. Part of it comes from the fact Ray’s model does not easily fit the managed environments that investors like to see. Ray’s theory has another defect. I know plenty of modest sized firms – say 15 partners, 100 staff where the reality is that there are 15 practices in motion trading under one roof. That plays back to point 2 but if you’re in that kind of firm you’ll know what I mean. From my research, that seems to account for some 70-80% of firms out there. They never started out that way but that’s what has happened over time. Can the entrenched practices be overturned? What about leadership? What about managing the evolving structure?

4.  Collaborative environment.

Lessons learned:  Collaboration is built on mutual trust and respect.  Collaboration is by nature an opt in activity and should be encouraged but not forced.

Building, delivering and extracting maximum value requires collaboration among those with complementary skills because it requires a multi-disciplinary set of tasks, drawing from the best available. Not everyone is built to collaborate. Ensuring that whomever you are taking on board has the desire and ability to be a natural collaborator is a skill in itself. But note there is a difference between collaboration and leadership. Star status assumes some level of leadership and authority but the two don’t necessarily go hand in hand. I am a natural collaborator but I wouldn’t put myself up as a natural leader. It is not something to which I aspire in the context of a larger grouping despite having been a partner in a firm. There are some things on which I can lead, others where I can’t. Understanding limitations early on is crucial. Now – can everyone collaborate at the same levels at all times? No. That would be a forced and false measure. Again, understanding the degrees to which people can go is crucial.

5.  Greater transparency and strong code of ethics.

Lessons learned:  While individuals play the primary role over the firm, you must be guided by a code that sustains both the firm’s and individual’s ability to conduct business.

I have nothing much to add here except to say that codes of ethics need to be enforceable and subject to review. The sustainable businesses of the future will be architected around a very different framework than worked in the industrial age.

6.  Lifestyle friendly autonomy.

Lessons learned:  High performers seek a greater degree of freedom to control their lifestyle and make their own judgment calls.

I’ve had a number of debates around this. Most recently I was discussing this issue with colleagues and one said: “Why do you do what you do if you don’t really need the money?” We all need some money to live upon but much of a person’s attitude towards money is individual. In my case, I don’t need or want a lot. Paradoxically, that has meant I have more than I need which is all a bit bizarre for someone who doesn’t actively sell in the conventional sense. All the same, if you are building something sustainable then there needs to be some structure in place that both respects the wishes of the individual while allowing for a planned build of the firm. But how? I sense this will be a lot harder than Ray imagines, especially if people are coming and going in the early stages.

7.  Performance based compensation and expense management.

Lessons learned: Pay more out to the analysts as way to keep expenses in check.  Trust the power of the purse to provide good judgment.

This is an interesting one. In most PS firms there are bands of base salary and then bands of profit sharing. The idea is to standardise while rewarding good and exceptional performance. Having a firm of the kind Ray describes is really setting the stage for a loose group of individuals who are sharing the same roof. That might seem dangerous given what I said above. However, there can be merit in Ray’s approach provided the benefits of collaboration along with the intellectual challenges posed by working only with stars outweigh the problems. Even then such approaches don’t overcome the need to build structures that allow for the star performer to shine while growing the business. Individuals don’t scale and there will inevitably be a need to address support staff. It’s never an issue in the early days but quickly becomes apparent. There are ways to mitigate the problem but none of them eventually substitute for the need to bring in more people.

My caveats and thoughts

Ray’s approach codifies many of the things I’ve been thinking about for more than 20 years. Whether it is do-able at scale is another matter. If you follow Simon Wardley’s analysis of innovation leading to commoditization then creative destruction seems the only way to achieve what Ray seeks in the context of existing firms. The Big Four have tried building star status through branding but, that is not enough. The many audit and implementation failures carried out in their names are testament to the poverty of that idea. I suspect that as Ray grows Altimeter he will find there are touches and nuances that need to be introduced. Here are a few of the questions I expect to see arising in Ray’s vision of a star firm.

• How do you manage a growing structure while retaining the cohesiveness of the whole?
• More to the point, can such a structure really grow beyond a relatively small number of extremely high value people? I suspect the answer to that is no unless there is heavy investment in the future.
• Can you envisage being part of loose, collaborative networks where you might fly under one banner but be prepared to share with many?
• Where will the stars come from? If I am brutally honest and without wishing to sound like an arrogant pratt and despite the UK and US combined supporting an accounting industry numbering some 1.3 million people, I doubt there are more than 1,000 people in those two countries that could be classed as stars. I’ve met maybe 100 in my travels. By their nature, stars are few and far between but the last 20 years has seen a decline in talent investment that creates future uncertainty.
• Who leads and how? The differences between collegiate and dictatorial approaches to leadership have their merits and demerits. Partnerships as currently constructed are not really working so is there a new or variance model that could work? In that context does Ray’s model have the right attributes to replace the existing in an effective manner?
• What happens when one star far outperforms others?
• How about succession even in a shared IP and collaborative environment?

But what do you think? Has Ray laid out a (and I stress ‘a’ not ‘the’) blueprint for the future into which you can buy? Does Ray’s model imply a way to build the next great firms?

Tagged as: Altimeter Group, Business, Collaboration, Education and Training, Intellectual property, Leadership, Management, Ray Wang