December 2008
|
Firm Success: Leading Your Investment Firm Jim Ware, CFA and Jane Marcus Adapted version. For original white paper contact the author. |
Navigating the Life Stages of an Investment
Firm
Striking the Balance between
Entrepreneurial Creativity and Professional Structure
As investment firms grow, we are often asked by their leaders: “How do
we manage this growth?” And the deeper question arises: “How do we manage
the chaos that accompanies this growth?” This paper uses “growth in
staff,” not AUM, profit, revenues, or other such metrics, as a measure of
a firm’s size. As a firm grows from an entrepreneurial shop to a more
structured organization, there are predictable changes that occur in
these areas:
|
|
Each of these key areas will be discussed in what we call the journey
from “small to big.” Based on our work with hundreds of investment firms
globally, this journey can be broken into roughly four phases. Each phase
has different characteristics and dynamics and each has a different
“feel.”
Entrepreneurial creativity (1-20 people): Small, exciting, hectic, entrepreneurial shop with a handful of people.
Creativity meets structure (21-50 people): The small, growing shop becomes successful enough to recruit new talent and introduce structure into the firm.
Harmony of creativity and structure (51-100 people): The larger firm has successfully integrated entrepreneurial creativity with professional structure so that a healthy dynamic tension exists in the firm.
Large size to mega-firm (over 100 people): These firms have “meta” cultures which pervade the whole organization and then many smaller, distinct cultures based on location and function. The mega-firm also has geographically diverse leadership (multi-locations, products, and channels).
A context for this discussion is the idea that any major change requires disruption or “chaos.” Imagine cleaning out a closet; it looks much worse before it looks better. If you cannot tolerate the “messy” part of cleaning the closet, then the job will never get done. Adding new people, products, and the like at a firm will necessarily create some chaos. Knowing this in advance and setting appropriate expectations can make the journey much smoother.
Vision and Strategy
As investment firms grow, they often need to more carefully articulate their definition of success. Specifically, founders should be able to articulate the “why” and the “what” behind their motivation. Why do they want to build a world class asset management firm? What is it that really matters deeply to them about this firm and its mission?
All employees should be able to state the vision and values of the firm. We call this the 30-second elevator speech: if someone said to you in the elevator: “Tell me about your firm,” you could respond without hesitation. And your answer would nearly match everyone else in your firm.
A good vision of success includes a clear picture of the future in three to five years. We recommend that investment firms reexamine their vision and mission statements yearly to make sure they continue to accurately describe the purpose and passion of the leadership group.
Culture
Culture is described as the “values, beliefs, and behaviors that would differentiate one firm from another.” Increasingly, it is recognized as a competitive advantage in the investment business.
In the early days of an investment firm, the mood in the office is upbeat and exciting. There is no bureaucracy — yet — and each founder is busily plying his or her trade, trying to find alpha. Physical proximity is important in this early stage. The small team works together closely and culture is built from that interaction. The founding partners define culture by the way they treat each other. Newcomers to the firm witness the interactions and learn what beliefs, values, and behaviors are part of the way that business is done. For example, if the founders challenge each other’s ideas in a respectful way, then newcomers learn that it is okay to challenge one another. If the founders are passive and conflict avoidant, then the staff learns to do the same. This learning occurs at an unconscious level and it is hard to undo. Successful firms emerge because their leaders naturally practice a set of constructive behaviors, supported by useful beliefs and values.
Decision Rights
Another important dynamic that changes in the life cycle of a firm is the concept of decision rights. Initially, the founder may make all the key decisions. Or the three founding partners may decide in concert, a consensus style. As the firm grows, however, they are forced to delegate decisions and to become more conscious about how decisions are made.
Often growing firms are unclear about who has decision rights for given responsibilities. Therefore, we recommend a session in which decision rights are clarified. The founders list all the major areas of responsibility and the decisions associated with them and carefully decide who has the “right” to choose how decisions will be made. A clear understanding of this process will eliminate much of the drama that goes on in most organizations. Along with clear decision rights, founders should discuss and agree on clear roles and responsibilities.
Human Capital
At the heart of the investment engine is human talent. Smart, talented people make it run. As firms grow, they need to add people who will both contribute and blend with the chemistry of the existing firm.
The way in which firms think about talent is changing. Executive searches used to be all about putting a body in a box. Now the discussions start earlier and are focused on the strategic needs of the firm, the competitive forces in the market, and the additional capabilities and competencies needed for success.
Often as a firm grows, it seeks a balance between the initial talent and entrepreneurial spirit of the founders and someone who can run all the non-investment aspects of the firm. A danger for rapidly growing firms is that their talented investment professionals spend less and less time using their natural talents for investing and more of it on running the firm. Top firms aim to keep their investment pros aligned with their passion and talent for investing.
Compensation and Ownership
In the early days of an investment firm, compensation is usually a “seat of the pants” exercise. Often at the outset, the excitement of building a firm outweighs concerns about “Am I being paid fairly?” Base salaries are seen as less meaningful when bonuses can double or triple the salary. Compensation discussion and decisions will always be highly subjective, so this final sense of buy-in, based on perceived fairness and transparency, is necessary for a successful outcome.
Another successful element of attracting and retaining top talent is ownership. The guiding principle is clear in each case: key staff must feel that they are fairly sharing in the profit and ownership of the company. Founding teams which are unwilling to have these discussions tend to lose their key talent. Research continues to show that compensation is not the driving force around a person’s decision to join or to leave a firm; however ownership is a driving force behind retention and recruitment.
Succession
Finally, there is the issue of succession. Obviously, at the outset, during entrepreneurial creativity, succession is the last thing on the founder’s mind. The problem arises as the firm grows and reaches critical mass. Clients and consultants ask the inevitable questions around succession. Most investment leaders tend to resist these questions because they assume that they will live forever. The succession decisions should be well thought out and will not be jarring to employees, stakeholders, clients, or consultants.
Creativity Meets Structure: Dynamic Tension
A final thought on the journey from entrepreneurial creativity (1-20 employees) to dynamic tension (over 20 and over 50 employees) involves the personalities and skills of the leadership team.
If a firm has handled the issues discussed above skillfully, it can emerge as a larger, mature firm that has both the entrepreneurial excitement of a small firm and the necessary order and structure of a larger, professional firm. The goal is to find the balance between the two: to accept the dynamic tension that comes from welcoming a certain amount of chaos and creativity bounded by the appropriate structure.
Growth in consciousness usually is part of this process because it
requires embracing two very different personality structures:
- The creative, flexible, go-with-the-flow, mad scientist and
- The practical, planful, structured Mr. Spock.
Some of the best investment firms have a senior combination of these two types, and, as a result, they are well positioned to be both creative and structured.
Importantly, as firms mature, the balance between creativity and structure must be managed as a healthy tension. When we see leadership teams in which these two opposing forces are embodied and respected, the prognosis is good.
Summary: The Journey from Small to Big
As with any trip, it’s good to have a map. This article has attempted to share key milestones on the journey from a small, entrepreneurial boutique to a mid-sized, professional firm. In the beginning, most successful founders are focused on the day-to-day operations. They are like the martial arts master who is watching the opponent’s every move and countering each action skillfully: punching, blocking, and counter-punching.
As the firm succeeds and grows, the founders must periodically step back from the business and reflect on where they have been and where they are going. They lose some of the spontaneity and engagement that they experienced in the early days. The new puzzle that presents itself is finding the balance between creativity and structure. Another way to describe this evolution is that the founders must move from unconscious leadership (being reactive) to conscious leadership (being proactive).