Thriving In the Middle of the Road
Blair questions David on an article he wrote about identifying the risks on either side of the road and navigating a path between both extremes.
BLAIR ENNS: David, I don't remember exactly when and where it was. I think you were on a stage, and you were saying that you had data that proves, at least proved to you that the most successful people in business, you were talking about personality profiles and all the work that you do with DiSC, and I know you've profiled thousands of people and compiled the results, and you've come to some conclusions about creative entrepreneurs and those people in the firms of entrepreneurs who occupy specific roles, like specific patterns around specific roles. You said that you thought it was pretty clear that personality-wise the most successful people in the world were highly unbalanced or they had extreme scores in their personality profile, that was the first point. The second point was but they knew it. They were aware of it.
DAVID C. BAKER: Self-aware. Yeah.
BLAIR: I took away from that is that if you've got... No matter whether you're using a DiSC or a Kolbe or a [inaudible 00:01:24] or a Strength Finder or Myers-Briggs, whatever you're using, PI, there's a bajillion of them. I took away from that that when you look at somebody's profile and it's just kind of in the middle of the road, it's flat in the middle, that's somebody who's less likely to succeed. I won't ask you to comment on that directly, because I'm trying to get to you here.
DAVID: [crosstalk 00:01:49] I'm getting really nervous, like the longer this question... I'm shaking.
BLAIR: The longer the set up, the more trouble you are in.
BLAIR: It's probably the opposite of that. The longer it takes me to set it up, the safer you are.
DAVID: Do you mind if I go read something and then you can just buzz me or something when you're done with it. Ready to get to the meat of the question here.
BLAIR: David Baker is it true that you wrote an article with the title Smart Marketing Firms Thrive in the Middle of the Road?
DAVID: I did but I cringed when I wrote that title because it's just-
BLAIR: I cringed when I read it.
DAVID: Yeah, it's so not like me to say anything like that in the middle of the road. I'm like the world's most extreme everything to the-
BLAIR: Yeah. There's a photo at the top of the article, and it's you racing a motorcycle, and of course you're in the lead. You wouldn't show the 99 photos of you losing.
DAVID: Yeah. Photoshop. Yeah. My knee's on the ground.
BLAIR: Your knee's... Yeah.
DAVID: That's at the racetrack in Birmingham and I was going 130 miles an hour at that point. Yeah.
BLAIR: I don't believe you've ever been...
DAVID: Then I crashed right after that.
BLAIR:... on a motorcycle. There's no proof that that's you. Smart marketing firms thrive in the middle of the road. I have this intuitive reaction that that just cannot be right. Explain yourself. What do you mean?
DAVID: What I mean is that there's an optimum place in I don't know how many categories, maybe say a dozen categories. What you want to do as you're driving down this road running your firm, you want to stay out of the ditches on either side. I thought about writing the article because creative entrepreneurs tend to focus just on one ditch, and they try to stay away from that ditch, and they end up kind of dipping a wheel into the other ditch because they're so worried about one particular one, and so what I'm saying is there are two ditches here, and you really want to chart a path that's somewhere in between them, and then I explain how that applies to all kinds of different areas, like clients, and money, and employees, and space and all that stuff. That was the idea, it's like don't stare at one ditch. Recognize there's two ditches here.
BLAIR: That makes a lot of sense to me. Let's get into some of these areas. Let's talk about the number of clients. I've seen patterns here. I think I know where you're going with this, but maybe you'll surprise me.
DAVID: That's a perfect one to start with because I think that's the one that comes to people's minds the most. Something in their background has informed how they think about the number of clients they should have. Now, they don't really think about the number of clients. They think about how big the clients or how small the clients are, and of course that translates into the number of clients that you have. A lot of principals are terrified of any single large client, and so they overreact and have lots of small ones, and then the opposite is true. You really want to aim for somewhere the eight to fifteen, eight to twenty clients.
If you have fewer than eight, you're going to end up, almost certainly you're going to end up with one that's like a gorilla. Classically you call that a client concentration issue. If you have more than that, then you have lots of ankle biter clients, I think both of us call them that, and the problem with those small clients is that you're almost certainly not going to make a profit, but more importantly as it relates to what's good for the client, you're not going to get into their situation deeply enough to really make a difference, so you're aiming for the middle of the road there is eight to fifteen, eight to twenty clients.
BLAIR: The most common mistake is which ditch do creative entrepreneurs usually find themselves in.
DAVID: I think having a client concentration problem, and in fact this is something I want to talk about at some point, but when you look at firms that have grown exponentially, like their growth rate is it just spikes over a couple of years, it is always because of the growth of one client, not a bunch of clients.
BLAIR: Interesting. Where does the large, lucrative client become a gorilla client and a threatening client, at what size?
DAVID: About 25% of your billings, and it's important to look at billings, like you wouldn't include pass through stuff like cost of goods sold, media, printing, whatever. Just the fee stuff is 25%. Above that, you're starting to enter pretty dangerous territory where you're actually just as likely to close the business, lose the business as you are to recover from the loss of a client bigger than 25%.
BLAIR: When you say lose the business, the firm.
DAVID: Yeah. Like bye-bye. It's gone. You're now working at Hardee's or something.
BLAIR: From Ad Age advertising agency of the year to working at Hardee's.
DAVID: We should say Tim Hortons for our Canadian listeners.
BLAIR: Exactly. What's another area where it makes sense to steer for the middle of the road?
DAVID: I would say number of competitors, so this is more of a question that would come up when you're making positioning decisions. Pretend that you're a completely undifferentiated firm, in other words you're interchangeable with thousands of other firms. Last I looked there were 45,000 firms in North America alone of all types under the marketing umbrella. As you become more and more unique and less interchangeable, you have fewer and fewer competitors and that's an obvious thing to do, but how far should you walk along that continuum? The answer to that is the number 10 to 200 or so.
If you have fewer than 10 firms who do pretty much what you do, then you're either really brilliant and first to the table, which is possible obviously, but it's a little bit dangerous of an assumption, or there just isn't enough need for that, because there aren't enough firms out there. Then, consequently, the flip side of that, and this is the other ditch would be if there are more than 200 firms that do what you do then you need to keep walking down this differentiation path until there are fewer competitors and you're in a space that you can actually own, so somewhere between 10 and 200 competitors.
BLAIR: That seems like such a big range. Are you telling me that if you see your firm as having 100 direct competitors, yours is a well-positioned firm?
DAVID: It could be, but the range is there because it's hard to answer that question specifically for each space. For instance, if we're talking about a firm that does marketing for pharma, there are not 200 firms there, and it's because there's so much consolidation on the client side in pharma, so that's why we have to have some kind of a range, but if we're talking about healthcare, for instance, healthcare is way too broad, but even if you narrow it a little bit more, you're still going to have hundreds, and so you have to keep narrowing healthcare to a narrower vertical until there are only about 200 of them. That range is meant to allow for the fact that the client landscape is pretty different as we move across categories.
BLAIR: We might want to go deeper into this in a future podcast, because you're talking about direct competitors who are essentially defining the marketplace the same way that you are, so that's one component of positioning: defining the marketplace. Another component would be defining the discipline, what exactly do you do for that marketplace, and yet another component would be your ideas or what I call your perspective, your overarching viewpoint on how this discipline for market should be done. We can break that down a little bit later, but is what you're saying here is that the number of established competitors who say, "I serve as a marketing firm, I serve this space," if it's less than 10 then there's probably a reason why there's less than 10, and you should think about it, and if there's more than 200 that's just too broad.
DAVID: Right. Exactly. The point you just raised is critical. I really missed that point earlier, because once you've got that positioning within this range, like outside of the ditches on both sides of the road, you're in the middle of the road, then that process stuff that you're talking about or the IP that you have, that should distinguish you even further from the other firms like the other 10 or the other 150 or whatever so that at some point there really is no replacement for you, but that's something a little bit different than positioning.
BLAIR: Okay. I think you also, moving on here, I think you identified the number of prospects that you would have in your pipeline or potential prospects as another area where firms should aim for the middle of the road, is that right?
DAVID: Yes, and I have to say that I've not done research outside of the marketing field, so I don't know if this applies to other professional service industries. I'd be very hesitant to say that. In our field it absolutely be true. I rarely come across a successful, well-positioned firm that has locked up more than about 1% of the market. Every once in a while I'll find one that maybe has three, three and a half, four, but it's very, very rare. If we're looking for, say, 15 clients and that's 1% of the overall market, you can see how we're getting to the number of prospects. We want to have at least 2,000 prospects because 1% of 2,000 would be 20 clients, which is what we're looking for.
Ideally we're looking for about up to about 10,000, and these overlay, these last two things that we've talked about. You're kind of working them together a little bit. You're walking one foot with the other and then moving the other foot. You're thinking about these two things together, the number of prospects and the number of competitors. Competitors, 10 to 200; prospects 2,000 to 10,000. These are rough rules of thumb.
BLAIR: Do you ever see successful firms, like really successful firms who are basically operating firmly outside of one of these ditches?
DAVID: I do. I work with a client that serves a very specific segment of healthcare, and without being too specific and giving away their secrets, there are I think about 380 possible clients that they have, and they are serving about 25 of them. They've got, I think that's 7 or 8% of the marketplace, and they're very successful and they're really smart. I do see it, but it's pretty rare, honestly.
BLAIR: The next item on your list, areas where firms aim for the middle of the road or should be aiming for the middle of the road, average client tenure. This is a really interesting one, isn't it?
DAVID: Oh my goodness. Yeah.
BLAIR: Isn't longer better?
DAVID: Almost everybody seems to think it is, and you know they think it is because I would guess that you're hearing the same thing I am, it's like when they talk about themselves it's a point of pride. It may even be on their website. It's like our average client has been with us X many years as if, obviously, underneath that is this assumption that that's a really good thing. You'll hear people talk about that with employees too, which maybe we'll talk about in a minute. I don't think it's a good thing. I want to differentiate between being an invading force and an occupying force, and the longer you're with a client-
BLAIR: See, in Canada we don't know what that means. We don't know what any of those things are, but go on.
DAVID: The longer you're working with a client, the more difficult it is to create those aha moments with them, and there's more opportunity to mess things up. If we drew a chart and one axis was how much they love you and the other axis was how long you'd been around, it diminishes over time. I don't know exactly what the timing should be, but when I do talk about specific numbers if somebody forces me to, I say about four years, four to five years is ideal because that means that you have lived through at least one CMO change. You've navigated that and come out on top, and then maybe you moved on.
Just fundamentally in life I think we shouldn't start things unless we know roughly how long they're going to last. Maybe we should do that with this podcast, right? Like how long is this podcast going to be?
BLAIR: I thought we had that conversation. Maybe it was just me having the conversation with you in my mind, the idea of planned obsolescence. We talk about that in other places as well. I think that's a great principle to apply to your relationships, and even you might even say to the client right at the beginning, "Our relationships typically last three to four years and we find that's pretty good. Five's all right, but you get out there and we start to take each other for granted. You're going to erode my profit margin over time. My ability to lead the engagement is going to diminish over time, et cetera." Just under the tenet of saying what you're thinking, why not put all that stuff on the table?
DAVID: Unless you're thinking, "You look like a nine month client, and I'm already a little tired of you, but let's do this and pretend it's four years." What about employees too? I've often thought we should do that.
BLAIR: Yeah. Let's jump to that, so how long should the average employee be with you?
DAVID: Before we agree on how we define that either in years or months, we all know that if somebody moves on too quickly that's a sign that either you didn't do a good job screening or whatever, but is it also true that if somebody is around for a long time, especially if this is their first job, like if your agency is the first agency they worked for, you are missing out on so much because you are not learning from people who have worked at other agencies and bringing best practices to you, like confidently knowing what we should charge people, or what processes we should bring to the table, or maybe taking advantage of the connections they've made to bring new business in, and so on.
I don't know what the number is. I mean I know what it actually is, but I don't know what it should be. It's a little over two years in terms of people moving on and it gets shorter and shorter every time, every year. The reason it gets shorter, LinkedIn did a great study on this, is because employees don't rely on getting consistent raises anymore from their existing company. They move [crosstalk 00:17:36] because that's how they make money, they get big raises, jumps, by going to another place. I would be happy if I were back in this business, I would say three to four years would be about ideal.
BLAIR: Back in my consulting practice days, I found myself a few times asking the question, and I'm sure you've asked it to: "So, what do you have to do to get fired around here?" You'd ask it in those firms where people had been there for years, 10, 12 years was the average in some place, and David Maister wrote an article back in 2001 called The Problem of Standards, and it's the best piece of thought leadership I've ever read by anybody, and if you can find it online. It was on his website davidmaister.com. He's been retired a few years. In that, among the many gems he drops in that article is this idea of that there's only two macro cultures, and that term's not his. It's something I'm applying to it.
There's only two possible macro cultures in an organization. One is a culture of tolerance and the other is a culture of intolerance. In a culture of tolerance, we're all in this together, everybody's okay, and you can't get fired unless you steal money or act inappropriate with a child or some horrible thing. That's the only way for you to lose your job. In a culture of intolerance, the firm is on a mission. We're trying to be the best that we can be. The vision is clearly articulated. Everybody has bought into the mission, and if you can't keep up, you're pushed out. It's very clear to everybody on the team that you don't belong here, so in an intolerant culture you're moved on very politely, kindly, et cetera.
McKinsey is a great example of an intolerant culture and a lot of those big professional firms are where they have an "up or out" culture. If you don't move up in two years, the expectation is you will move on. The people who can't cut it, they move on. They become executives in other organizations and they refer business back to McKinsey. When I see a firm where the average employee tenure is really long, that tells me it's a tolerant culture.
DAVID: Let me ask a question related to that. What's your perspective for these principals like about regularly hiring interns, like having them intern and then automatically bringing many of them onboard, like this is their first, basically their first job. How do you feel in general about interns?
BLAIR: I haven't thought too deeply about this, but generally speaking I love interns. I love the idea of bringing in lots of bright young people and finding out where their skill sets are and paying them very poorly, and seeing if they're hungry, and using that as kind of a farm system for your future employees. I think it's a great idea. I know some people are vehemently opposed to the idea interns. They feel like it's taking advantage of these people. They wouldn't be doing it. You're not running a sweatshop, at least I hope you're not. They wouldn't be doing it if there wasn't something in it for them, so I'm a big fan of interns.
DAVID: Then on the other side of it, do you see the benefit of bringing in senior employees with other agency experience?
BLAIR: I do from time to time. Certain roles are a little bit less straightforward. I'm not a big fan of bringing in senior people in business development roles from other agencies, and there's a few different reasons for that. We could get into that later in another podcast. Probably the biggest mistake I see is an independent creative firm and it's most of the firms in our program, it's most of the firms you work with, and so because they're independent they tend to be smaller. They're looking to the large, maybe the network agencies as an example of how to do things. They go out and bring in the bigshot, senior person from the big New York agency or design firm and they're hoping they're going to bring some of that stardust from the big firms, and they come in and they are firm wreckers. They are wrecking balls in small firms. Now, not always, but most of the time.
DAVID: They need to bring a whole troop of people with them to do the work. They don't want to get their hands dirty. They want to spend a lot of money. They're not interested in some of the smaller clients you're working with. Yeah, we should do a whole podcast on that.
BLAIR: They want to water down the positioning of the firm, et cetera, et cetera.
BLAIR: Okay, we've just alienated a whole bunch of people. The next item on your list, we could probably cover two or three more here, a couple anyway. Employee workload. You're saying aim for the middle of the road employee workload-wise. You're saying don't overwork everybody, don't under-work everybody. Seems fairly intuitive. Is there more to it than that?
DAVID: Here I think the ditch that most principals focus on is let's not overwork people, because they... This is certainly more true than it was 10 years ago. There wasn't much fear of overworking people back then. There certainly is now, and it's a healthy place they've come to. It's just as dangerous to have people sitting around. When that happens, people get nervous. There's like a lack of purpose, a lack of mission when there's not enough work to do, and the culture gets a little brittle at that point too, because people instead of collaborating quite as much they start to build taller walls around their influence area.
If a layoff is coming and they suspect it will be at some point, they don't want there to be any question about their contribution, so they don't share, they don't collaborate as much because they want to protect themselves in that decision, that layoff. It can be just as basically detrimental on morale if it's too busy or not busy enough.
BLAIR: Okay. We're all famous with the Steve Jobs mythology where he just worked everybody to death would be an overstatement, but he just drove people hard. I just finished Elon Musk's biography, and he's in the same camp. Maybe not quite so vicious, but probably almost, maybe even equally so, but there's something about these leaders. The reason they demand so much of people is they have this strong vision of doing something bigger than themselves and everybody's bought into the mission. The flip side of that, I think, is when you're demanding so much of your people and they haven't bought into a vision or a mission. That can be a horrible situation, and I think we've both seen firms that just cycle through people constantly. Those are sweatshops, right?
I think now that I mention it, do you see as many pure sweatshops today as you did in your consulting business maybe 15 years ago?
DAVID: No. Very, very rarely.
BLAIR: It's really changed, hasn't it?
DAVID: Yeah. In a good way. Besides, very few of these companies are so well-known that graduates are just dying to work for them, so they'll put up with... It's not going to work for Apple or Google or Facebook or something. It's not that important to their resume. They're more interested in work-life balance. It's a different expression of work-life balance. They're okay working after hours, but they don't want their social life to get destroyed or blown up because of something. They want notice. They kind of spread the work out. They're okay doing that. I think overall it's good. It's interesting to me that we don't pay as much attention to people not having enough to do.
If you've got people that are sitting around without enough to do, you seldom are going to land enough good business without some dangerous compromises, so that does point to a layoff, and it's painful, but it's just as painful but in a slow way to leave a whole bunch of people without enough to do, too.
BLAIR: Yeah. I think Peter Drucker said it best: "Those who lack status or purpose see conspiracies everywhere." If your people don't have a sense of purpose, they're not busy enough, then they start to imagine things, right?
BLAIR: The next thing on your list where agencies or firm owners should aim for the middle of the road is space in your facility. By space, you mean physical room space?
DAVID: Yeah. How many square feet or how many square meters there is, sort of an optimum. You start with, so the low end of this would be 200 square feet. I'll just use square feet instead of square meters. 200 square feet of common area and then about 200 square feet per person, and then the upper end would be 500 square feet of common area and then about 250 per employee. It's more important to not bust your budget, so if you are in a market like Hong Kong or New York or San Francisco where you can't afford that much space, then you have to crowd people, and actually the people who work in those markets understand that and their psyche is not damaged by it.
If you crowd people like that in Omaha, for instance, it's going to be a problem. Again, if you just like having a bunch of people without enough to do, having a lot of empty desks is really detrimental to the morale of a place, and it's better to actually just let some non-profit use it or let a bunch of freelancers come in, or sublease it, or just put a wall up and don't do anything with it. There is some middle of the road there in terms of the amount of square feet that you need for your employee load.
BLAIR: Probably not across the creative or marketing firm space, but there are probably studies done on productivity relative to density as well.
DAVID: Could be. Yeah. Actually there are some studies that I've read about in the Harvard Business Review. Some firms the employees are allowing them to track what happens and they're finding that the more people move around, the more innovation there is in the environment. Everybody's wearing these little tags that are Bluetooth trackable, and so that points to the fact that if they have to walk too far they're not collaborating as much, but if they don't walk at all then people are getting on each other's nerves.
BLAIR: Everybody's wearing trackable tags. The libertarians are just crawling out of their skins right now.
DAVID: That's right. At least they're not under our skin yet. We're wearing them.
BLAIR: Yeah. That's what I was thinking. Why not just inject it, right? Last thing on the list is cash in the bank. You're telling me there's such thing as too much cash in the bank. Of course there is.
DAVID: There is. Yeah. There is. There's not too much cash but there's too much cash in the bank. We all know, here again, there's one ditch that we're focusing on generally as a principal, and we're focusing on the ditch of not enough cash cushion. Obviously we know what's going to happen when that's the case. There are many firms that have millions of dollars in cash in the bank and the purpose of a corporation is to protect what's not in it. If you have a corporate wall that your agency is operating within, it protects everything that's not in like your home or whatever, so if the cash is in the corporation it's not protected in the event of a wrongful dismissal suit or sexual harassment suit or some lawsuit from a client, or whatever, it's all attachable if it's still in the corporation, so you want to strip that out.
Now, if you don't sleep well at night without a bunch of cash set aside, then you strip it out of the corporation, put it in a personal account that's separate that you can loan back to the company if it's needed before you buy a boat with it, but there is an optimum amount of cash that you should have in the business too.
BLAIR: Makes sense. I just bury mine.
DAVID: Yeah. Right. Yeah.
BLAIR: My accountant says, "No. No. You want to keep all your assets in the corporation." My lawyer says, "No. No. No. You want to keep all your assets including cash outside of the corporation." Obviously there's a [crosstalk 00:30:03]-
DAVID: I'm burying my Bitcoin now. I've got this metal container. Every day when I buy a new Bitcoin, I go out and I bury it.
BLAIR: Attaboy. You'll be fine in the apocalypse. Thanks for this, David. This was great.
DAVID: Yeah. Great to talk to you Blair.