Recently, a group of partners of successful law, accounting, investment, and M&A firms met me for lunch and explained why their partnerships worked so well. I was most taken with how their success contrasted with the pain suffered by so many small businesses. Why do partnerships work so well with professional services firms and are so challenging for the rest of small business?
Here are the lessons I took away from the discussion:
Lesson I: Partners with the same professional degrees and training form tight, loyal and like-minded groups.
Implication: Small business partnerships are founded by experts with unique and complementary skills. Don’t expect different owners to think or act similarly. It will be harder and take longer to achieve the same esprit d ‘corps among small business partnerships.
Lesson II: The real definition of any Partner is to be a Rainmaker, who can land and grow clients, regardless of whether they have managerial duties in the firm.
Implication: Small businesses require strong operations, finance and sales/marketing in equal measures, so different Partners proficient in different functions are needed.
Lesson III: Successful partnerships do not pay compensation to equity partners based solely on their shares but on their performance and contributions to their firm’s profits.Implication: Regardless of ownership percentages, small business Partnerships would be well served to set up compensation plans based on their partner’s job descriptions and performance.
Lesson IV: Professional services firms make new partners, regardless of their experience or financial buy-in, work in their firm for a couple of years before bestowing formal partnership titles. This ensures they “fit” with the Partners regardless of how they “look on paper”
Implication: Small businesses would be well-served to similarly “date before marrying” instead of rushing into the arms of new partners, VC’s or private equity firms.
Lesson V: Professional services firms recruit talented individuals by offering partnerships, especially to those with books of business that can produce immediate revenues for the firm. Partnerships also provide the firms with the ability to institute and enforce non-competes’ on Rainmakers, protecting the firm’s long-term cash flow and revenue streams. Implication: Small business partnerships are usually created when partners bring different resources to the table including technology/inventions, operating ability, money and sales/marketing. As a result of these divergent contributions, it is not as easy to protect the firm from the power or departure of any one Partner.
Lesson VI: Partners in professional services firms build long-term client relationships which are leveraged through having less experienced/expensive professionals perform most of the actual “work.” Having the right amount of these professionals is critical to the Partnerships’ profitability.
Implication: Despite the personal relationships small business Partners build with their customers, much of the actual delivery of their firm’s value cannot be done by the partner.
Consequently, maintaining the same level of trusting relationships is difficult. So is the actual delivery of consistent “work” in the form of products, especially through distributors or inexperienced professionals.
Lesson VII: The recurring nature of relationship sales allows Partners in professional services firms to wield extraordinary marketplace power by closely managing their clients.
Implication: The transient nature of most buyers and customers makes building relationships much more difficult, especially since sales are usually more transactional than they are relationship-driven. Few Partners in small business know their customers as well as their counterparts in professional services do, despite spending more time and money on formal sales and marketing.
Partnerships in professional services firms have been around for centuries and laws and business practices ensure many of these will continue for decades and centuries to come. The goal of the small business Partnership should be to learn and apply the characteristics that can work in their businesses and not try to imitate what cannot be applied to their businesses.
As businesses struggle to succeed in our economy, mistakes are often deadly. And we see many businesses making deadly ones all the time.
Too often, insufficient capital, poor controls or inadequate customers are blamed as the main reasons a business flounders or fails. While these reasons are obvious, I believe they are symptoms, not root causes of business failure. The root cause of most business failures is the owner’s reaction to adverse events. Long before a business sinks, its owner has likely become distracted, detached or depressed. Why?
Business owners are still about the most independent citizens in the world. They act on their free will and build companies by pursuing their irrational dreams to deliver a product or service to customers who will pay for it. If you see an owner making one of the following three mistakes, admonish them to change their ways as soon as possible if they are:
1. Not exhibiting confidence and conviction in their actions to “Get There,” wherever “There” is for them.
Owners are excellent at implementing plans within their comfort zones but in tougher times often develop ambivalence or apprehension about what works or what to do. They
a) Don’t take quick and decisive action,
b) Straddle between multiple goals and
c) Implement tactics half-heartedly.
Lack of confidence and conviction saps their money, their energy and eventually their passion for business. The easiest remedy is to force or create a defining point in the business to rekindle confidence and conviction. Terminating a problem customer or employee, changing pricing or replacing vendors all can force a defining point. These shocks to the system open a business owner’s eyes to new possibilities.
2. Not refocusing on their Best and Highest Use (BHU) which is:
a) What they and their business are good at doing,
b) What they and their business like doing and
c) What has been valued by the market for what they do.
Businesses often get complacent and distracted from BHU. What would a detached, unbiased, outsider with “fresh eyes” learn from talking to your customers? Is your company still selling the same things your customers say they want to buy? After interviewing over 5,000 customers of my 450 clients, I have never seen a company who can’t better align what it offers to meet the needs of customers.
3. Not recognizing when their personal goals and actions are diverging from goals and objectives of the business.
When asked, “What are your goals?” fulfilled owners always list business goals alongside personal ones. When an owner gets bored or disheartened, his or her personal goals often diverge from their business passion.
If an owner admits he or she has lost their mojo, they have three opportunities to regain it fast by:
a) Reconciling their personal goals with those of their business,
b) Outsourcing their responsibilities to a president or
c) Selling their firm.
As long as a company is run by its owner-operator, he or she still plays the most critical role in its failure or success. Before their company fails or succeeds, that owner repeatedly faces (and hopefully overcomes) their own crises of confidence. If they are acting focused, engaged and optimistic, their firms will succeed. If not, they must confront and eliminate their doubts. For our economy to return to profitable growth, we need every business and their owners to hire more people, introduce new value and expand their capabilities. And that’s no mistake!