April 9, 2021
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.
Courtney Kehl [00:09:48] Hi, my name is Courtney Kehll. I own Expert Marketing Advisors. We serve B2B tech companies across the U.S. These clients turn to us for help with establishing best practices, growing and scaling up companies, as well as even launching or plugging in holes across there and marketing. If you need help with any of these areas or even interested in partnering, reach out to me at www.expertmarketingadvisors.com.
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.
December 18, 2020
The “wow” factor matters. Like it, or not, you are in show business. You are an expert. And your firm is made up of experts. No one wants to buy the boutique who regurgitates other people’s innovations. They want to buy the songwriters, aka The Rolling Stones.
Sean Magennis [00:00:16] 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 when selling your firm, the wow factor matters. And when I say the wow factor, I’m referring to the innovation you’re generating in your field of expertise. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is considered to be one of the most innovative thinkers in the professional services industry. And, in fact, don’t take my word for it. Adam Prager of Korn Ferry was recently quoted as saying, and I quote, Greg is a world class visionary in our industry. End quote. Greg, great to see you. Welcome to the show today.
Greg Alexander [00:01:22] Thanks, Sean. Good to be here. And thanks for the kind introduction.
Sean Magennis [00:01:25] Let’s begin with a simple definition of innovation specific to the professional services industry. How would you define it, Greg?
Greg Alexander [00:01:35] So innovation is a new idea, a new service, a new business model, maybe a new way of solving a problem. It matters to professional service firms more than other types of businesses because pro-serve firms position themselves as experts and experts innovate. Clients do not pay firms to regurgitate other people’s innovations. And investors surely do not buy firms that are copy cat body shops. They buy firms who are true experts today and will continue to be excellent.
Sean Magennis [00:02:10] Excellent, Greg. So when I think of innovation, I, I think mostly of products. For example, Elon Musk innovated in the auto industry and brought us the Tesla. Reed Hastings innovated in the entertainment industry incredibly and brought us Netflix. I do not think of professional services firms in this way, so can you share some examples in the pro-serve of industry?
Greg Alexander [00:02:34] I’d be happy to. In fact, I am somewhat of an amateur historian in the professional services industry, and I have found many great examples of innovation in our space throughout history. So here are a few fun ones to think about.
Greg Alexander [00:02:50] I admire greatly, Boston Consulting Group. They have built a private partnership with thousands of employees and billions in revenue. But it all started with their founder, Bruce Henderson, and one of his early innovations called the experience curve. This proved that a company’s costs fell as their experience increased. Today, this is widely understood. Back in the 1960s, this was a real innovation. Let’s turn to the law profession. The law profession has pioneered the use of technology for centuries. For example, in the 1920s, the recorded deposition changed the litigator’s relationship to witness testimony forever. Law firms that embraced this scaled rapidly. Imagine the law today without recorded depositions. Very scary. Well, how about the great Italian innovator Luca Bartolomes Pacioli. Say that 20 times in a row. Around fifteen hundred, he invented a system of record keeping that used a ledger and later he wrote the first accounting books that explained the use of journals. This earned him the title of the father of bookkeeping, bookkeeping. And Sean, if the accounting industry can innovate, anyone can.
Sean Magennis [00:04:13] These are really great, Greg, and super interesting. These pioneers were truly the Zuckerberg’s of their day. Are there any others that come to mind for you?
Greg Alexander [00:04:24] Sure, there are dozens and I enjoy speaking about this. Let me share a few more. So I have recently studied the innovations in the marketing and advertising industry. Sean, did you remember these campaigns? When it rains, it pours and a diamond is forever.
Sean Magennis [00:04:37] Yes. And the second one, to my chagrin, because I had to buy a big one once.
Greg Alexander [00:04:43] Well, these were created by an agency led by a gentleman, by the name of N.W. Ayer in the 19th century. He convinced the likes of AT&T, the U.S. Army, [inaudible] to hire a new kind of firm called the Full Service Agency. Rather than just selling advertising space in publication, he offered planning creative and campaign execution. Mr. Ayer innovated at the firm level, creating an entirely new kind of marketing agency. He was a giant. I wish I had the chance to know him. How about I share a few recent examples because we are living in the golden era of boutique innovation. In 2008, the distributed ledger, known as Block Chain, was invented by Satoshi Nakamoto. Transactions will never be the same. An architect by the name of Daniel Cuzzi has turned shipping containers into working farms, producing the equivalent of five acres per container. And I love Wix. They have injected artificial intelligence into website design. What used to take months now takes nanoseconds. A brilliant example of tech-enabled services. You get the point. I could go on and on forever.
Sean Magennis [00:06:09] Wow, these are inspiring examples of innovative pioneers and the professional services industry from yesterday and today and this is a standard all of us should aspire to. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live 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 [00:07:37] 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 the collective.54.com. So 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 the 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 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove you were a true expert and you are innovating. If you answer no too many times, you have some work to do. Let’s begin.
Sean Magennis [00:08:33] Number one, have you pioneered a new approach in your niche? Number two, are you more than a one hit wonder? Number three, has your industry adopted your way of doing things? Number four, does your industry use your language as its own? Number five, do the smartest in your niche come to you with the most challenging issues? Number six, as an ecosystem of boutiques formed around your innovation? Number seven, do you mainstage the keynote for the most important industry conference? Number eight, do you get more than fifty thousand dollars for a speech?
Greg Alexander [00:09:34] That’s a real sign that you’re in high demand and a true innovator.
Sean Magennis [00:09:38] Absolutely. Number nine, do employees join your firm for the opportunity to learn from you? And number ten, have you created a legacy that will live on in your niche after you leave?
Greg Alexander [00:09:55] Yeah. I just walked the audience through history and I cited all these examples. Imagine how fortunate we would be if people are speaking about us 500 years from now.
Sean Magennis [00:10:04] That that is part of our goal.
Greg Alexander [00:10:06] Yes, I love that.
Sean Magennis [00:10:08] So in summary, the wow factor really matters. Like it or not, you are in show business. You are an expert. And your firm is made up of experts, investors and acquirers want to invest in and or buy the true experts. The innovators challenge yourself to be one every day.
Sean Magennis [00:10:33] If you enjoy 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 Professional Services Firm. I’m Sean Magennis. Thank you for listening.
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