What Happens When You're Away
David and Blair list good and bad things that can happen when the principal steps away from their creative firm for a period of time, which is based on David's blog post on the matter.
Transcript
BLAIR ENNS: All right David, one of the reasons that we do this podcast, and I've never shared this with you, is because it's a great way for me to get a whole bunch of free consulting from you about my business. I feel bad, I've been listening to some of the podcasts that we pushed live, and some of them were recorded so long ago, I'm enjoying how much... I can't get over how much fun it is to listen to them. I'm listening to the advice you give, and usually I'm nodding my head. Sometimes I'm shaking my head.
I'm a little embarrassed at how much we're talking about our own businesses, or at least I'm talking about my own business, because this is supposed to be for the listeners. Having said that-
DAVID C. BAKER: They're not paying squat, so I think it can be for us.
BLAIR: Yeah, screw them.
DAVID: Screw them all.
BLAIR: In pursuit of me continuing to get free advice from you, we're going to talk about what happens when you step away from your business. I know you've written something about this, but this is really of interest to me because here we are four months into a new year and I've got my eye on next year, where one of my goals for the end of this year is for my business to be a self managing business. I've had to articulate, what is self managing mean? To me, it means in my business, and it's going to be different for everybody, but in my business it means I can take my wife and I, who's my business partner and the COO in the business, together we can take two months off, and the business will continue to run, number one.
Number two, we can both travel for an entire year, and work remotely, and the business will continue to function. When I say function, I mean function and continue to grow. I have this idea, these two ideas that by next year, I'm not saying I'm going to do these things, but I want to be able to do these things. Then you write this article that tells me-
DAVID: Gashing your hopes.
BLAIR: Yeah, exactly.
DAVID: I'm very good at... I have a PhD in hope gashing.
BLAIR: You live for this. What happens when you step away? First of all, am I alone in thinking that this should be a goal that I should set for myself? That I should be able to step away from my business for an extended period of time?
DAVID: I think for most people it should be a goal, but whether it's good or not, it feels to me, how we answer that question is different for the audience that you and I serve, creative entrepreneurs. I wish we could say that stepping away from a creative business, is the same as stepping away from say a dry cleaner or an accounting firm, or something like that, but it feels very different to me. There's also a lot of anecdotal evidence out there that it is different. That it doesn't work out quite the same way. Though, we probably ought to define one step away.
I don't mean for two months, I think that's very reasonable. In fact, I think if you can't step away for that length of time, if you can't for that length of time, then it's a sign of a poorly run business. When I mean step away, I mean more like the second half of your question, a self managed business where let's say you concentrate on a side business, and this one runs on its own and you check in every three months, and it sends you a check as if it was on autopilot. That's more the sense that I'm talking about, that these businesses don't run very well on autopilot.
Should they? Probably so, but we don't get into these businesses, our clients don't get into these businesses for the same reasons that everybody else does it seems like. That has repercussions.
BLAIR: Yeah, this is so timely, as you're talking I'm thinking I received two emails this week from clients. One said, "Moving to my retirement home in," the usual retirement place. "Going to continue to run the business. It's okay, I've got a really good partner up there who will be the face." The other one in another part of the planet, he's lamenting, "You know, I really don't want to do this business. I want to make art. Help me figure out how I can make art, and then put in appearance one day a week so that my partner will still think I'm worth keeping around."
DAVID: I love that.
BLAIR: I'm paraphrasing it. If he's listening to this, he's going to... I'm going to hear about it.
DAVID: We just lost a subscriber. I'll look at the stats, yeah.
BLAIR: Yeah.
DAVID: I just got an email too from, actually it was a phone conversation yesterday with a client of mine, who's running a medium size firm. He has wanted to switch more to a strategic consulting model that he's leading, and basically dispensing with a lot of the implementation. Of course, as we talk about how to make that transition I said, "So what's going to happen with the existing business? Are we going to spin that off, or sell the accounts, or sell it to an insider," or whatever. His response was, "No, that's going to continue as is. It's going to continue to write me checks and fund this new entity that I'm..." Immediately I realised that he was making some assumptions about how that business could run without his constant presence. It's the same idea.
BLAIR: This seems to be something where you've seen the patterns over the years, and you've probably had ideas on it for a while, but you've recently become quite resolute in what you believe about what happens here. Let's talk about, what happens when a principal steps away for an extended period of time? First of all, are there any good things that happen?
DAVID: Yes, for sure. The one that I hear consistently principals say is that, "Well I discovered I'm not as essential to the day to day happenings." Which is exactly true, and it's something they should realise, because when that's the case then they quit inserting themselves in the daily happenings. I've always just laughed, chuckled to myself, you hear about a principal getting ready to take a two week vacation somewhere and they've worked so hard up until this point, and they really do not want to be bothered on this two week vacation. Maybe they're going to Europe or something.
They put up with extra long hours getting ready for that, and the express purpose of all those extra hours is so that they will not be bothered. They don't want to be bothered, that's the key point. All right, now when they get back, what... It flips, because they do want to be bothered. In other words, a lot of these principals, they'll never come out and admit that, but the truth is that they don't want to be bothered on vacation, they do want to be bothered when they're not on vacation because it feeds a certain sense of how essential they are to the process.
Back to your question, what are the good things that happen? One of the things that happens is they discover they're not that essential. In fact, the people say, "Things ran better when you weren't here." That's one thing that happens that's good. The other thing that happens is that they get their heads clear again about the bigger picture and because they're not messing around with all those little details, they're thinking of bigger, more important things that only they can do. Yes, some good things do happen.
BLAIR: Okay. Then the flip side of that is some bad things happen. What are the things that you are foregoing or opening yourself up to on the negative front when you step away for an extended period of time?
DAVID: I think we have to, our minds need to go to first of all to the things that only the principal can do. If a firm, this fictitious firm we're talking about, is well positioned, then we don't have to worry about anything until maybe five years down the road. Whether that's true or not, no big decisions around the positioning of the firm will be made. That's because positioning, even though any positioning decisions you make have to be socialised with all of your people, especially your key people, you don't want it to be a democratic decision.
That decision has to be made by the people whose butts are on the line. Those are the principals, the shareholders. If those decisions are being made by other people, they're getting watered down or they're not getting made at all, which is usually the case. That's the first thing that suffers. No big positioning decisions.
BLAIR: Yeah, and it seems to me that it's an issue of them not being made at all, and it's an issue of... It might beg the question, well how often do you need to make an adjustment to your positioning? It's really about keeping your eyes on the horizon, on the future as it is this CEO or the owners remit to do. Then seeing things that are changing or might change, and then making a shift really early. Ideally, it's really early.
DAVID: Right.
BLAIR: That is the domain of the principal, and you see the principals who struggle with that are the principals who have their eyes down at their feet dealing with the day to day. It's interesting, in some ways you say, once you come back from this two week vacation you might, and you realise the day to day takes care of itself you might actually be in a better position to cast your eyes back to the horizon and then make the adjustment. It's not going to happen, your people aren't going to make those changes.
DAVID: No.
BLAIR: They're just not going to see the opportunity, and when opportunities in the real world present themselves, and that usually looks like a potential new client, they're more likely to take something that just represents revenue than something that represents a step towards a strategic direction.
DAVID: Right, because generally you've been paying these folks to fulfil a mandate for which you've been very specific. That mandate does not include a lot of risk taking. It usually is a mandate to fulfil the promises that you've made to clients and so on. Very few of your employees are in your trusted circle about how they're going to assess risk. They're just simply... They're not rule followers, but they don't necessarily feel like they have the permission to go off and make those big decisions without at least checking with you first, so yeah.
BLAIR: Yeah, that's an interesting way to look at it. Never really thought of it that way before, but there's a delegation or division of responsibilities. At the ownership level and executive level, it's like, "We're making the high risk decisions, and below that you're making the low risk decisions," and you're paying off the promises that we've made. Okay, so the first negative thing that might happen when you step away is, your positioning doesn't change. There's no big bold adjustments to your positioning, or the company's strategy, which is essentially the same thing. What's after that? What else might go wrong?
DAVID: Well the other thing that comes to mind, and it's related to this positioning, is just the service offerings. Over the years, I don't, as I take a mental inventory of how I feel, how I think about these issues, the issue of positioning is no less important than it's ever been in my mind. The issue of service offerings is becoming more and more important in my mind. I actually feel like I'm just entering this room right now, and the lights are slowly coming on, and I don't even know yet what I'm going to discover around service offerings.
Recently I had this epiphany that most of your clients should be using most of your services, most of the time, or you shouldn't have them on the menu of service offerings. Following the idea that [inaudible 00:12:30] a lot about how we need to direct the client relationship, and if we're positioned well, then our clients are going to be somewhat similar and the processes we take them through are going to be somewhat similar. Thus the service offering should be somewhat similar.
All that to say that service offerings, if they're viewed appropriately, are very strategic choices, and those suffer as well. Have you, I'm curious, you and I have never really talked about service offerings too much, except maybe we have talked about having some sort of a diagnostic early in the process. You've been a big believer in that for many years, but other than that we haven't really talked about service offerings. Where's your thinking on service offerings these days?
BLAIR: When you're describing it, I'm thinking about buyer types in the pricing world. When you describe somebody who uses most of your services most of the time, that's a description of a relationship buyer. It's not that they're buying on relationship, and sales people make the mistake of thinking that. When they hear that term, that yeah they can try to build a relationship, and people are buying a relationship. No, what it means is they're buying a deeper, longer term, more complex relationship, working relationship. Where if we invite you in, we are going to expect to buy many of your service offerings, and you're going to become deeply ingrained in our business.
It makes sense to think, for many firms, to think about building your... I haven't thought about it deeply either, but as you talk about it, I see that it makes sense for many firms to think about being clear about the fact that they are looking to do business with relationship buyers. Then there are other firms where, maybe it's AppDev, I don't know. Just to pick an example, where it's more SWAT team-like. You get in, you do the project, you come at a high margin, you get out, you move onto the next project. I think either of those paths are valid, and I think in most firms there would be an ideal profile or mix of those types of clients.
It certainly is a lot more stable and probably... I don't know if it's more lucrative. Potentially more lucrative, to focus on relationship buyers, and to have these conversations with prospective clients where you say, "Listen, we're not in the project business." That's language that we model all the time. "We're not in the project business, so we'll take this project on, but the understanding is that if the project goes well, we're going to do more work together that looks like X and where your minimum spend is Y."
DAVID: Yeah, and we can model out what that relationship will look like, assuming that you want to move forward, but we're not just sitting here taking orders as you look through the menu. It's more of a fixed price sort of a menu, right?
BLAIR: Yeah, and we understand that the project that we're agreeing to do is a test of the fit, and then at the end of that project we'll sit down and see if it makes sense to keep going.
DAVID: I just said fixed price, because I don't know how to pronounce that in French. Do you know how to say fixed price menu?
BLAIR: Well it would be, is it prefix?
DAVID: I don't know. See I didn't want to embarrass myself like you just did.
BLAIR: See I'm the Canadian, I should know this. This is an official language.
DAVID: Yeah, I know.
BLAIR: My book's been published in French.
All right then, so no big bold adjustments to your positioning. A little discernible change in your service offerings. Your people are not evolving your service offering in your absence. What else happens? On your list here, you've got, slow descent into IP hell. What does that mean, a slow descent into IP hell?
DAVID: Well, so positioning is made up of so many different elements like what we do for people, or which people... I guess you'd say, what we do for clients and what kind of clients we do it for, and so on. When you move up that positioning ladder, near the top we're talking about owning your own IP. Having the black box, having various inputs, and then in a dark mystery, all these algorithms running. Then there's the output that no other firm could replicate. That sort of stuff does not happen with the principal there.
Now, what's interesting about this to me, and I need to do more research around it, but you have these firms, think of different kinds of firms. You've got firms where the principal is not all that smart, and surprised you didn't stop me right there as a crude statement.-
BLAIR: No, I was just imagining yeah, how many of our audience just put their hands up and went, "Yup, that's me."
DAVID: Yeah, that's not me, right. We have some firms where the principals are not all that brilliant, and where they have a lot of people who are in the same category. Then we have really brilliant principals and then a lot of helpers. Then we have average principals, and really brilliant staff. What's interesting to me is that the firms that are really thriving, have brilliant principals and some brilliant people, and they're all rowing in the same direction. The IP doesn't come from one source or the other. I guess the pace of the IP and the direction of the IP is set by the principal, and then there are multiple people on staff who are contributing to that.
You don't lose that IP when the principal is gone for a period of time, it just stalls. It just doesn't develop into new things. My perspective for firms would be to say, "Listen, share almost everything in that black box, and don't keep looking over your shoulder. Don't worry about who's going to copy it. Just keep reinventing new things." That process of reinventing new things tends to stop when you're gone. I'm talking about gone for a year. Maybe it's a health issue, or maybe there's some family thing, or whatever it is. When you're gone for a year, you don't lose your firm necessarily, but nothing happens.
You come back to it, and you look around and you think, "Huh, I wonder what happened while I was gone." You say, "Ah, nothing." Nothing, especially this IP hell thing. That's what I mean by that.
BLAIR: The second part of slow descent into IP hell, you wrote, "Where the firm's insight begins to look more like content." There's something behind that. "The firm's insight begins to look more like content." Aren't we all in the content creation business these days? What's wrong with publishing content?
DAVID: Nothing, except everybody's doing it. 10, 12 years ago, nobody, not many people were doing it. Then that became. Then as the internet matured, it became a process. New business became a process of clients finding you, potential clients finding you, and they did that because of the content you produced. At the moment, that content was good enough, more than good enough. Now that everybody's doing it, content isn't enough. It's just really, really blah. I've just started to refer to insight as basically better content. That's all I mean by those two words.
BLAIR: Gotcha, and that falls by the wayside. Okay, there's a pattern here that the things that suffer when the principal is away, surprise surprise, those are the things that the domain of the principal, looking out into the future, making big changes, thinking about the creation of future value. Whereas, the people who are running the day to day, they're in charge of delivering value today. These ideas of creating future value, positioning new service offerings, evolving your IP, those are the things that stall. Although, it sounds like you're saying and I could see how this would be the case, operationally usually things go really, really well, is that right?
DAVID: Right, exactly. Because principals are not moving in and out of the process unpredictably, that's the single thing that drives employees nuts. It's not that you're very involved, or you're not very involved, it's that you're not involved at the same degree on a regular predictable basis. When you're gone, what they love about it is not that you are uninvolved, they love the fact that you are predictably uninvolved. Does that make sense?
BLAIR: Wow, that's a great insight, yeah. I would've never thought... Okay, but there's a fourth thing on your list and this is... I said, operationally things seem to go well, but maybe not in this last category. You want to talk about that?
DAVID: Yeah, and so people don't spend your money the way they would spend their own. This is interesting when you think about transitioning a firm to internal people. If we can change the subject just a little bit, and think about succession. Some principals will think pretty significantly about, pretty deeply about transferring the firm to internal key employees for one of two reasons. Either they just feel indebted to these folks who have been with them, pulling the plough for so many years, who are so responsible for the success of the firm, or because they can't find anybody who actually has money to buy it. That's when they default to this.
Now, switching back to this conversation, if you think about these firms who are run by principals who may take some time off, extended time off and just leave somebody in charge to run the firm. Okay, now who is going to be in charge back at the firm and make the right decisions? This is going to have to be somebody who is entrepreneurial enough to act like an entrepreneur and make the right decisions, but who's not so entrepreneurial that they think they don't need the principal anymore. That's the catch 22, because somebody right there in that middle ground, sometimes they don't have... If they think they can do this without the principal, then they're just going to go off and start their own thing.
If they think they need the principal, somewhat as a crutch or as this safety net under the high wire act, then they probably aren't going to be making the risky enough decisions to keep the firm thriving. When it comes to spending money, oh my goodness, that is a terrifying thing to see how the employees, even key employees want you to spend your money. If you aren't there making those decisions, you will be pretty shocked because you're still going to be personally responsible for the decisions that they make.
BLAIR: It sounds like for you to step away for an extended period of time, you really need to have the parameters in place around how money gets spent, is that right?
DAVID: Yeah, and we agree on what we're going to track, and how decisions are going to be made, and how you're going to report those to me, and how much leash you're going to get, and what does the leash tug look like, and how will you react to that, and so on. I'm not saying that... Well, listen, here's another way to look at it. Do we know, do either one of us know of anybody who has invested in this, in small creative entrepreneurial firms, as an external investor, as a hands off investor? I can't think of a single person. I don't know if you can or not.
BLAIR: Yeah, I know a few.
DAVID: You know a few, okay.
BLAIR: Yeah.
DAVID: Apparently, it's not a good investment decision. Apparently, in other words, people need to be involved in the day to day, to protect their investment, which is not the case in thousands of other situations. There's something very different about our business, because there is not... We don't have a lineup of people waiting to invest in this field as non-participating investors. We don't have that. That tells us that there's something different about these firms. It tells us that you can't, if you are the one in charge, you cannot walk away, which would be exactly what an investor would do. There's a clue there. Maybe we don't understand it completely, but there's a clue there.
BLAIR: Well I think you're right, and I think of... The examples that I can think of, all but one, I'm probably thinking about that one a little bit differently. The rest of them, they're all friends and family. They're investing to help the principal out, not because... I imagine, I haven't talked to all these people, but not imagine because they feel like it's a great investment. Probably they hope it's a good investment, and they're doing the right thing, because they want to help this person out.
DAVID: Right, but it's not a pure financial investment or financial decision.
BLAIR: Yeah, hey, so back to the idea of having a strong number two, who's a little bit entrepreneurial but not too entrepreneurial. I was wondering, as you were explaining this, thinking well you've worked with about almost a thousand firms now, directly on a consulting basis. Have you ever seen a situation or can you imagine a situation where the principal goes away on an extended vacation or sabbatical for whatever reason, they do have a strong number two that's maybe a little bit more entrepreneurial, do they ever worry about a coup number one? Number two, has a coup ever happened that you've seen?
DAVID: Oh, yes and yes to both of those questions. They do worry about it, although I can think of more situations that went well, than ones that ended up in a coup, but they certainly do worry about it. Yes, that's happened very frequently. It almost always happens when a principal does not enjoy running the firm, which usually revolves around the employee side of things. They bring in this operating person, and because they want to empower them, they often give them some sort of... Well at least a title and money, and maybe even some ownership so that they'll have the equity with the employees.
The odd thing is that, if you just measure that experiment across the first say six months or nine months, things look really good. Things are better than they were, because this person is a better people manager than the principal was. It's true. Now, but every time that person, the COO makes a decision that employees like, they frequently think about what the principal would have decided in that same situation. Over time, the loyalty switches from the principal to this COO. One day, usually a year and a half to two years later, the principal wakes up and discovers in this shock of reality that they no longer have a firm. That this other person has the firm, and that they have lost all the loyalty with their... That happens frequently.
What's dangerous about it, is that the early signs of this experiment are very good, and so it lulls you into this sleep and you wake up and it's... Many people have lost their firms over that.
BLAIR: Do you think that's the norm? It seems to me that when that happens, the principal is abdicating her number one responsibility, which is future value. I'm imagining principal, she turns, she feels, "I'm not a good people person. These people are driving me crazy. I'm going to bring in this really strong operations person," do all these things that you've talked about. The operations person starts to get things running well, gets the respect of the people underneath her. Then the principal, she can go play tennis, or sale the Caribbean or whatever, but if she really uses that opportunity to lift her eyes on the horizon and come into the office one day and say, "People, we're making a dramatic shift. There's something changing. We are going to make a big investment in X."
I'm imagining that just rattles everybody, maybe including the operations person a little bit, but excites them and gets everybody running in that direction. To me, that's the role of the principal, the CEO of the firm. I'm just imagining this, you tell me if it happens or the reasons why it wouldn't or couldn't happen. I'm just imagining it that CEO principal, really does elevate herself to the CEO level, and really does take that responsibility of future value seriously, then I think that would be a way for that person to hold onto... Keep a spiritual hold on the firm, therefore ownership of the firm.
DAVID: Well I think that could happen. We probably would need to make a distinction, and I don't know exactly where we draw the boundary, but when firms are large enough, they do need professional management. Those professional managers might not have any equity or might just have 1% or 2% points, and that's not a danger to the firm if you have the right person in place. In a smaller firm, where the key people, say the three, four, or five department heads need to answer to somebody, when those people answer to anybody who is not a shareholder, it's very dangerous.
I have not been able to figure out exactly where that line needs to be drawn, but I know that 100 person firm needs professional management, and what I've just described is not danger. I also know that a 20 person firm, does not need professional management, other than the principal. I don't know where the line is between 20 and 100. What you can't do is have the department heads answering to somebody who is not an equity partner. That's what destroys things.
BLAIR: Gotcha, that's an important point. Okay, we're running along here, but I want to hit one more point before we wrap up. I mentioned two examples from earlier this week, where principals who had partners really wanted to move... One wanted to move away physically, is moving away physically, or has already. The other one wants to physically and beyond physically, chronologically, I mean in terms of how much time they spend in the business.
DAVID: Right.
BLAIR: You've got some strong thoughts around what the partnership agreement should say about that.
DAVID: Yeah, I would always, if I have a choice, and if I have input in the decision, I always build an automatic trigger in a partnership agreement that says, if for any period of time greater than X, say six months, a partner is not working at least say 60% in person in the business, then it triggers a sale clause where they must sell and the remaining partner has the option to purchase. You can't force somebody to purchase, but they should have the option to purchase. Because in every case that I've seen this happen, it doesn't work well.
Now, you can have let's say, so I've got a client that has basically there's two parts to the firm. One in London, one in San Francisco, and there's a principal in both places. Now that works fine. I'm not talking about that. I'm talking more about if there's say a 15 person firm, two of whom are principals in New York City, and one of them wants to move to San Francisco by themselves, but the rest of the staff and the other principal stays in New York. That's not going to work.
There's going to be a lot of resentment build. Most resentment around partnership issues, comes from this feeling of disparate work load. No matter how much the San Francisco partner wants to do their part, they simply won't be able to do their part, and so it falls apart. That's why I would put that trigger in the partnership agreement.
BLAIR: All right. Thanks David, this has been great. Well people, that's what happens when you step away from your business.
DAVID: Thanks Blair.