Churn, Baby, Churn

David gets flack for his contrary perspective on how agencies shouldn’t necessarily aim for long-term client relationships. So he clarifies how he’s seen the the fear of both client and employee churn hold firms back.

Links

"Reboot Your Culture Through New Business"

"Your Firm Should Be A Team—Not A Family"

"The Problem of Standards" by David Maister

Transcript

Blair Enns: David, these businesses that our listeners run, they're pretty good businesses, but I think the case you want to make today is they would be better businesses if they didn't have clients or employees. Am I reading that right?

David C. Baker: As usual, you're dead wrong. [chuckles] I need to put an ad somewhere about a new podcast partner.

[laughter]

I don't know, just an instinct. I think they're going to need clients and employees.

Blair: It's a pretty good intuition, I think.

David: Let's call this the self-defense episode. I keep getting all this flack from people. In fact, I just did a conference and at the end, the closing keynote stood up and basically ditched all of his thoughts and in a pretty humorous fun way just went off on me.

Blair: Oh sorry to have missed that.

David: Great guy. I loved listening to it, but it is based on a misunderstanding of what I was saying. This is the self-defense. I just keep getting all this flack from people who say David doesn't think long-term client relationships are good. Then there should be some big pause, right? Everybody should say, oh my God. Then they go on and say, and here's what's even worse. He doesn't even think you ought to have long-term employees either. He wants you to fire employees every 19 months and swap out new ones. It's like that is so far from the truth. I'm not naturally a defensive person because I don't care enough, but here I'm going to care a little bit. Let's talk about this, right?

Blair: Well, it's a good reason to have a podcast. Clear up all the confusion that you've sown in the market. You've got some arguments for why you should cycle clients and some arguments for why you should cycle employees. What do you mean by cycling, first of all? Your point is you're not saying you don't value long-term relationships in either of these groups. You're saying some relationships are too short and should be longer. Some are too long and should be shorter. There's an ideal length for both of these?

David: There probably is an ideal length. I have an idea for them, but maybe I shouldn't have even said cycle as I think about this now, and I rewrite my notes in public here. Don't resist shorter client relationships. Don't resist shorter employee relationships. Don't intentionally try to make your client relationship shorter or your client one shorter, but don't resist it because when you resist it, you do all kinds of strange, crazy things.

Like on the client front, you try to create these sticky relationships with all kinds of monthly recurring revenue and penalties when they leave and all this stuff. On the employee side, what you do is you tend to overpay people to keep them there. My point is, it's not that bad to have shorter cycling of your employee and your client base. Anyway, don't fight it so much. It just helped me a little bit. I sit down and think, "Okay, maybe some of this criticism is fair, but why do I really think this is true?" That's the notes that I put together here.

Blair: Okay, where do you want to start? Employees or clients?

David: Let's start with clients that's a little bit less controversial. If we start with employees, they won't even get to the end. I've just got four reasons why I think cycling clients isn't a terrible thing and you shouldn't resist it. Against all the background of this, you and I have talked, and I don't know why I'm getting this flack because you say this stuff too. How come I'm the one getting the flack?

Blair: Maybe you're more defensive than me.

David: [laughs] The first reason why cycling clients is okay and maybe healthy for your firm is we did a podcast called You Reinvent Your Firm One Client at a Time. That was me interviewing you. It's just a fantastic discussion. It's like how you can manage that transition faster, moving from the firm you are now to the firm you want to be. If you view it as a process that depends on doing it one client at a time, you don't just have a big employee-wide meeting and then Monday, bam, you're a new firm. No, you just decide what the new firm looks like and then you create that reality by ushering in one new client at a time.

Now, if you're going to add one client and not lose another one, then it's just a different dilutive process and then you end up growing more than you should. My philosophy is that growth is a neutral concept and rather than adding new clients, I think it's better just to say, all right, this new client's here, before we add capacity and increase my management load, maybe we should look at our client base and say, okay, we could probably swap out these one or two that have been here forever.

They don't really know what we do now, which is quite different. They don't necessarily want to pay our new rates. Let's just cycle them. Anyway, that was a fantastic episode. I just think that's the first really big reason as you reinvent your firm one client at a time. If you're hanging onto your clients for dear life, that renewal process is going to be slower.

Blair: I think it's similar to the philosophy that we go into the new year thinking about what we're going to do, the new things that we're going to do, and we don't spend enough time thinking about the old things that we are no longer going to do. If you want to grow, you have to prune, and you're making the same argument with clients here. We're not only reinventing the firm by taking on new clients. We're replacing an old client with a new client and in that way, constantly refreshing the business. That's argument number one. As you pointed out, we did a whole episode on that recently. What's the second argument for cycling clients?

David: You're going to lose them anyway. You might as well be more in control of it.

Blair: Don't even take them on in the first place.

David: Yes. To never get a breakup in your life, never date anybody. Now, I couldn't help but think of that Seinfeld episode where it's called The Ex-Girlfriend if you haven't seen it. The whole thing is George trying to break up with somebody before the girl breaks up with him. He wants to be in charge, and that's what it made me think of. One of the things I've learned from you is that there is a slow slide down in how much money you can make and how much impact you can have with a client. The only variable is time. That's something that you've said many times. If you're going to lose a client, lose them on good terms.

In fact, when I work with my clients on service offering design, and it's one of my favorite modules, there are three big principles in there. One, is how you start. That's a lot of fun to think about. The second is designing your service offering so that most of your clients use most of your services most of the time. Think of it as a fixed-price menu and not a buffet where they just pick and choose, because the easiest way to lose money is to have entire departments that are idle because the client has decided they don't want to include this as a part of the normal process you do for everybody else.

The third one is to pre-plan a client exit so that the client doesn't feel like they've signed up for some timeshare plan or cell phone plan that has a three year out or something. Go into a client relationship thinking, "Hey, listen, our job is not done here until you don't need us anymore and so our perspective is going to prepare you to not need us. We're fine with that when it happens. We're not afraid of it."

That's part of thinking and just accepting the fact you're going to lose a client anyway and plan for it and then think of back to that third element of service offering design. Think about what you can do for the client that they will really value in that latest phase of the relationship. It could be things like training them or refreshing a library or checking in on the analytics every three months, or finding internal people that could be certified with whatever this method is or something like that. You're going to lose a client anyway, so plan for it. That's the second one.

Blair: Okay, I want to push back on this a little bit.

David: Okay.

Blair: Our listeners run different types of creative marketing digital businesses. Surely, some of the listeners are providing services that don't have an end date where you're not building capacity. You are actually doing the function for the client, where that idea that the client will no longer need you at some point isn't valid.

David: Like what? Give me an example of that.

Blair: Advertising agency of record, to the extent that that exists anymore, does exist in places, or a fully outsourced marketing department.

David: Yes, but there's going to be so many opportunities to upset that relationship, like a new hire on the client side or a change of approach or whatever. You might be right but we did an earlier episode on this too. They gain an account because they come in with a very fresh perspective and they're going to lose the account when somebody else comes in with a very fresh perspective.

Let's say that they want to push off that inevitable firing by continuing to offer a fresh perspective. What if a client doesn't want that from them and they feel like the only way they're going to get that is from another client? It's like, well, it's inevitable. Nike would be a good example of a client that is so wedded with their agency that it seems ludicrous that that agency would just intentionally cycle Nike out. That's a good example that would be a counter-example to this, I guess.

Blair: Yes. There are counter-examples everywhere, I think, and they're beautiful things to behold but in some ways, they're the exception that proves the rule. I get your point. Okay, moving on here. Your next argument for cycling clients is, if I'm reading this right, your own capabilities are changing, but in your relationships with your ongoing clients and those relationships that tend to last a long time, you evolve your service offering faster than your client takes up those services. Am I reading that point correctly?

David: Yes, exactly right. The trend line of what your clients as a group need is trending upward because the marketplace is changing, technology's changing, consumers are changing, there's more segmentation and so on. There's one client that comes to you and says, "Hey, we should do this." You haven't done it before and they know that, but they trust you at this point and they're willing to be the early guinea pig. You do this, and wow, this is amazing. You start to add this to your service offering and now you begin to look for clients who need this new service. You look back over your existing clients, and a lot of them, the majority of them, don't need it yet.

Your abilities as a firm change much faster than what your clients as a whole need from you. This is another reason to cycle things, because your abilities are changing so quickly. They're usually changing because of new employees that come aboard. That's the second part of this argument too. Your capabilities are typically changing faster than what your clients need and you are stuck in this place. When you first initiate this relationship with a client, they have this picture of what you are good at, what you can do. Meanwhile, you're getting better and better adding new things, but their image of what you do hasn't changed. You know this is true because you hear through the grapevine that they just hired a firm to do this for them, and you're thinking, "What? We do that."

Blair: We do that. You find yourself in all these relationships where the client doesn't fully understand the breadth of your capabilities, because you didn't have those capabilities at the beginning of the relationship.

David: Yes. In my world, it was M&A. I think it was probably six years into my consulting practice, and a client came to me and asked if I could help with a M&A a project. I didn't know what I was doing. They knew that. They were willing to have me help. Now, some of those early clients have no idea that I do M&A, even though it's been for 20 years. It's okay to cycle your clients because sometimes it's very hard to reeducate them on the new you. That's the third point.

Blair: David, do you have one more argument for cycling clients?

David: Yes, and this is my gift to you.

Blair: Thank you.

David: Like somebody who's been married a really long time, I could be an example of this.

Blair: As could I.

David: Yes. 42 years for me. I was married super young when I was three. If something happened and I had to date again, it's like, "Oh, God, I wouldn't know how to do that." It's like these firms that have all these clients they've had for 11 years, 17 years, 4 years. They get out of the practice of new business and they're pretty good at selling when they get in front of a qualified prospect, but they don't know how to do anything before that. They don't know how to fill the funnel and all of that stuff.

I think one of the most important skills you can have as a firm owner is the ability to generate new business. If you can figure that out, you can figure everything else out. If you are okay with client cycling, then you're all of a sudden not panicky about the whole new business process. You have a marketing plan, you understand the process. There is a big flywheel that's spinning all the time and you love it. You just love learning about it and doing it. That's a real side benefit, but this should help your business if people believe this, Blair.

Blair: Your point is, if you're not cycling clients, your new business muscle is atrophying. Then, when you need it, all of a sudden, those skills aren't there.

David: Right.

Blair: We're talking about the arguments for cycling clients and cycling employees. We've just gone through four arguments for cycling clients. You reinvent your firm one new client at a time. We did a whole episode on that. Number two, you're going to lose that client anyway, so plan for it. Number three, your capabilities typically change faster than your clients take up those new services. Number four, if you're not cycling your clients, your new business muscle is atrophying. Now, we're moving on to the more contentious and controversial points, and you've got twice as many points or arguments here for cycling employees. Let the defense begin.

David: Are you nervous?

Blair: I'm not nervous. I'm nervous for you a little bit.

[laughter]

Okay, where are you kicking this off? What's your lead argument for cycling employees?

David: I think people have this visceral reaction to the idea of cycling employees as okay because they think of their company as a family. The idea that you're going to kick out Jonathan at seven and then go find another kid, it just strikes everybody as wrong. That's because they're thinking of their company as a family. It's not a family. It's a team. It's a team where people come and go. Long marriages are sometimes good, sometimes they aren't. Are long employee-employer relationships good? I don't know. I don't think the two things are the same thing. You have to decide, first of all, whether you think of your group of people, the people you work with as a family or a team. If it's a family, then cycling is a bad idea. If it's a team, then cycling might be okay.

Blair: This is really interesting. I've gone into firms back when I was a consultant and said the line, "So what do you have to do to get fired around here?"

David: Yes, I love that line.

Blair: That's a David Maister line, I think. The point is, wow, there are employees who've been here forever. David Maister, we will post a link to this in the show notes, he wrote an article in 2001. It's actually the transcript of his speech, and it's his best piece of thought leadership in my mind. It's called the Problem of Standards. He talks about this idea of, I'll put words in his mouth and use the language that you're using, you can have this culture where we're a family, and it's important for everybody to be happy. He calls that a culture of tolerance. You can have a culture of intolerance where, no, we are striving to be the best that we can be, and if you can't keep up, you can't stay.

That idea of we're a family, anytime I hear that we're a family, I think, "Okay, that's a tolerant culture." A tolerant culture pushes the top performers out because the top performers don't want a tolerant culture where you can't get fired. They want to go for the brass ring. They want to be the best that they can be. If we stick with the family analogy, I once said to a friend of mine, "Did you hear our mutual friends are getting a divorce?" I was sad, and this friend of mine, she said, "Yes, isn't it great? I'm a big fan of divorce. I think more people should get divorced." In that moment I realized, "Oh yes, these two shouldn't be together. That's the right attitude." Back to the family metaphor. Not all marriages are better off sticking together.

David: Yes, I'm thinking of a family walk where one of the people just can't keep up. It's like the decent family would slow down, maybe carry that person or whatever. It's like, "Ah, no, not in a team."

Blair: Not in a relay team.

David: No. Sorry. You know what I love the most is that, I just let you go on and on, and I dragged you into this argument. Now it's not just me, it's you and me who are defending this.

Blair: Yes, all right, I'm in with you. What's the second argument for cycling employees?

David: If you resist cycling, if you fight it too much, you are going to overpay people. How many people are doing that? It's just crazy. Nowadays, this is not just an opinion, there's lots of evidence that the best way for people to make more money and to move in their career is to go to a different company. That's just the way it works now. If you fight that and try to keep them and try to reverse the normal order of things, then you're just going to overpay people.

This happens all the time. One of your best people is going to leave, and you say, "Oh shoot, I should have had that conversation with them earlier, but now at least having it now is better than letting them leave, so I'm going to match their contract." You watch college coaches the same thing, right? Somebody gets offered a job somewhere else, they get a contract extension. It just always happens. That's the second one.

Blair: Yes. I'm thinking of some agency principles I know who I think see every employee departure as a sign of personal failure in some way. They end up matching whatever the offer is, and then they're in this situation where you look at the payroll, and you can't believe what they're paying some of their people. They're effectively held hostage.

David: Yes, but you know what if they thought and said that the work we do has an impact on our clients, but really the impact I have on people is bigger. I'm changing the world mainly through the impact I have on people as a leader and a manager. Maybe you ought to say as many people as possible have to be exposed to the culture we have at this place. They're here for two or three years or four years, and they go somewhere else, and I have a fresh victim that I can help see the world through my eyes. That's a very arrogant view of it, but I think it's maybe how we ought to think.

Blair: I love that perspective, and I remember the first time I heard you say it, and I've cited you many times in the years since where you've said you're not going to be remembered for the work that you do. If you're remembered at all, it's going to be the impact you had on people's lives, how you shaped those people. Those people are your employees. Very few of your clients will remember you. If you take that to heart and see that that is your primary job here, you're impacting these people's lives, you will embrace the idea possibly to impact another new life.

David: Yes, absolutely. The more I hear this, the more I believe these reasons. This is really good.

Blair: Me too. Let's just keep talking to each other.

[laughter]

Welcome to the Confirmation Bias podcast.

David: The third one is when you're dealing with cycling teammates, you're eliminating single points of failure. I have a client who in addition to paid time off, which is already generous, every employee has a mandated month sabbatical, and that's yearly. When that happens, that employee, everything is turned off, their emails turned off, all the passwords are changed, and they don't have the new ones. What I love about this beyond just the fact that it really helps a person who's taking the monthlong sabbatical, is that it forces this business to operate differently. It forces them to not have single points of failure, so that if an employee leaves not just on that month sabbatical, but leaves, then they already have a system in place to manage that. I forget what the number is, but I think I've discovered embezzling and I think it's 3% of all my clients or something.

Blair: Wow.

David: I didn't discover it. It was discovered. Who knows how much is really happening? In almost every case, that person never wanted to take a vacation, they had access to things with no duplication. They had passwords and everything, and it's a really tricky thing to manage that thing. Now, with a team member, it's not quite that crazy but I just love the fact that when people are cycling for the right reasons, not because you're a shitty manager but they're cycling for the right reasons, because of new opportunities you can't offer them or whatever, they leave with gratitude and the firm, there's a little pause, there's some pain, but it's not a big thing because you're set up that way to manage that.

Blair: You've codified all these systems and processes. Somebody moves out of the chair, you're prepared for somebody else to move in. I love, love, love that idea of, "I'm not going to do it."

David: Not that much.

Blair: But of mandating a month sabbatical with no access because it forces that. It forces you to codify everything and have backups for every role.

David: I keep thinking about how to do it. I just don't have the courage yet but I love the idea too.

Blair: What's number four on your list of arguments for cycling employees?

David: It forces you to be much better at recruiting and then screening and onboarding game because you have a system for it. We've talked a lot about how on the one side you've got positioning, then you have a marketing plan all designed to find a high number of qualified candidates to work with. On the other side, your positioning is actually your culture and what we're missing is a marketing plan for people. I don't know if this is true. I sometimes wonder if it's harder to find really good people than really good clients. You always ought to be in that mindset.

Just like you're always in the new business mindset, you ought to always be in the new team member mindset too. If you're resisting at all costs, the need to find and screen and hire new people, you're not going to get very good at that and you're going to overpay people and all these other things. It forces you to have that muscle built up too if you're okay with cycling employees.

Blair: I was just thinking about the muscle atrophy metaphor that we used when it comes to new business when you're- an argument for cycling clients. It's the same argument here on the employee side. You're recruiting, onboarding, training muscle atrophies if you're not cycling employees.

David: Yes.

Blair: Okay, what's next?

David: Fifth one is when you have not much change in leadership at the top, you're going to tend to lose your most entrepreneurial hard working people because they just look at that and they say, "Oh God, they've been here five and a half years. They'll probably be here another five. I've got to go somewhere else to spread my wings." If you view this as an opportunity for people to get more opportunities, then you're okay because somebody left and you're a little panicky about it and then, I don't know, 10 weeks later, it's like, "Why was I worried?" This person that stepped into that role has done really well. There were a few problems, but they helped us think about things a little bit differently.

They brought some fresh ideas to it. Why am I so worried about that? If you take that view and you transplant it to somebody that's working for you, when the top always stays stable, it's always the same seven people in the executive committee meeting where nobody knows what they're talking about and so on. Somebody just like, "We talked about that too. We throw ideas over the wall and they just die. Then nothing ever happens to them." When you have an environment where people move around quite a bit, you get a lot of fresh ideas. People don't just leave because they think there's no opportunity to move up.

Blair: Yes. That's an important point.

David: Yes.

Blair: Number six, constant renewal.

David: Yes, constant renewal.

Blair: New energy.

David: New energy. Fresh team. I just love this. I guess we've talked enough about this. I don't really have much more to say about that. I'm looking out here now. It was 27 degrees this morning. Things are dying, and it's kind of sad, but it's also like, nah, this is just kind of what has to happen. It's like next year it'll be even more interesting, so yes, constant renewal. Number seven is you get rebound team members. I love this one a lot.

Blair: Yes, me too.

David: You can't really plan for it. You've seen this happen?

Blair: Yes.

David: It's just remarkable, isn't it? Somebody is a great employee. They left on good terms, they go learn all kinds of stuff they never would've learned with you, and then they come back. That's why you have to just let people go, but make sure it happens on good terms and encourage them and stay in touch with them. Then, when these people come back, it's like, "Wow, this is great."

This is especially true if it's somebody that's related to you that you gave a job to. Some of these people are never going to be fantastic leaders if their entire experience is with you, but they start with you. They go somewhere else, learn a whole lot, they realize what a good boss you were. They come back and want to work with you. There's more opportunity. People are changing jobs. It's just a beautiful thing. What is that called? Boomerang employees, I think it's called.

Blair: Yes, boomerang.

David: Yes.

Blair: Small percentage of them come back. Some you wouldn't have back. Some come back, and they're twice the person they used to be. They got the experiences that you were unable to give them and added to the experiences you were able to give to them. I love the idea. Let's finish on a high note here. Your list of eight arguments for cycling employees. Goodwill.

David: Yes, goodwill. Building careers. I just love this. I take particular pleasure in picking people out who have these entrepreneurial instincts and helping them launch their careers by shoving business to them, giving them advice, that kind of thing. Then 10 years later you get an email from somebody. It's like, you have no idea how grateful I am for that little bit of which you don't even remember you did. It wasn't even that significant. Just building careers and building goodwill and some of your team are entrepreneurial. You should kick them out of the nest, and you should help them.

Like there's plenty of business. Don't think of this as competition. Others are not entrepreneurial. They're fantastic people, great leaders, very talented, and you're going to be fine without them. You ran into them like a ship in the night. You had some parties, you had a lot of good conversations, and then they went somewhere else. That's all right. There's other people that will come along. Anyway, I just want this to clear up some misconception about what I'm saying here. I'm just saying that cycling employees shouldn't be resisted at all charge, and it can actually do some good things for you.

Blair: Yes, embrace it. Whatever the healthy cycle is, the healthy level of churn is in employees, and it's going to be different from employee to employee and from firm to firm. I think we know when we're able to look back, maybe not in the moment, but I think we know what a healthy churn is and feels like when we look back on it. Then we can take that information and help us inform the decisions moving forward. You've listed eight arguments for cycling employees. I'm not going to summarize them all. We've talked about four arguments for recycling clients. I have a question for you. Do you think we should impose term limits on clients and or employees, like politicians?

David: You're just not satisfied, are you? You're just trying to get me in trouble. We do think that term limits for politicians is good. Why do we suddenly think the idea of term limits are terrible for clients and employees? It's inconsistent for me.

Blair: I've heard you say before that in an interview with a prospective employee, you might want to say out loud you feel like a three-year employee.

David: No, no, no.

Blair: Didn't you say that?

David: I said that, but not out loud. It was more like in your mind you ought say.

Blair: Oh, okay.

David: Let's hire her. I kind of think she'll probably be two years, but that'll be a good two years.

Blair: To all the people listening to whom I've passed on that advice and claimed it was my own it was David's and it was wrong.

David: [laughs]

Blair: So no term limits?

David: No term limits.

Blair: All right, any last point you want to hit before we close on this?

David: No, I'm screwed.

Blair: I think the defense rests. We'll see what the jury comes back with. I'm with you on this. I don't think you need to be defensive. I think that it's really hard to effectively argue against the need to cycle both clients and employees. I think the real question is what constitutes appropriate cycles. Your point of view is they're probably shorter cycles than people intuit. I agree with you.

David: We ought to differentiate cycles. People leaving for the right reasons, people leaving for the wrong reason.

Blair: Yes. All right, thanks, David. This was great.

David: Thanks, Blair.