You have heard business leaders say that their goal is to make sure that their business continues to feel small even as they grow beyond its humble beginnings and scales into an industry leader with attendant dimensions. Why do they feel this way:
- A small business affords the principals the opportunity to see and therefore control the whole business. This is not just a control freaks obsession, it means: 1) the principles are engaged and contributing; and 2) that all the people in the company understand that the boss is actively participating and aware of what they are doing. When done right, this is very motivational and adds real value.
- Individuals who are involved in small groups tend to feel greater responsibility for their actions. Partnerships work this way. Participants in small partnerships tend to understand that the consequences of their actions have a significant impact on the employers and other partners, and those actions (and their consequences) are very visible to all the players.
I remember when Price Waterhouse became too big to be a traditional partnership— partners were not acting in the way I outlined above and it was hurting the bottom line. The response from PW management, they turned the organization into more of a corporation, in it was operated and managed, than the partnership it had been. This, in my opinion, made PW less entrepreneurial and most definitely less fun to work at.
- Communication among a small group is easier. As companies grow, you can’t get everyone into one room, you don’t know everyone and you don’t have daily hallway conversations. This raises the cost of communications (the amount of time spent in meetings) and makes it much more likely that communications are missed and when they are missed the costs of fixing the miss are even larger. Don’t ever discount this point, it is the beginning of the end of the success for many growing businesses.
I am not sure exactly when I decided that business organizations (as a management unit) whose size vastly exceeded 200 people didn’t work as well as those that were 200 or less. But over the last 20 years or so, my experiences/observations have only strengthened my confidence in that observation/decision.
My first recollection of thinking about this was at Price Waterhouse (later PricewaterhouseCoopers) where I spent a large percentage was/is a partnership. I was part of the consulting practice. Our business was organized geographically with each country that we operated in being a legal partnership that had agreements with all the other partnerships that detailed working relationships and revenue/profit sharing arrangements.
At that time, I was a part of the consulting practice in the Midwest Region of the United States. We had between 10 and 20 partners and the ratio of staff to partners was between 10 and 20 to 1. This seemed ideal:
- I knew all my partners well and most of the staff. The costs of communication were low and there was a great deal of trust among the group. This made getting things done easier, since I had well developed relationships with all the parties involved;
- There was a real sense of mutual accountability and responsibility that was felt throughout the organization. This is a characteristic of a high performing team (see The Discipline of Teams, HBR Classics) one of whose attributes is manageable size; and
- We were also aligned as it related to our goals and objectives. Once again, a necessary characteristic of a high performing team. We spent our time going for the gold, not arguing about how we were going to get there.
This combination of circumstances (mostly) drove good decisions and resulted in a high performing business unit that served its customers, took care of its employees and made considerable money for the partners.
So, you might ask why did this little consulting business have to be part of the larger PW organization. There were several reasons:
- Branding—PW had a good reputation and this made it easier to get business for what was then really a start-up;
- Leveraging the relationships that were already established by PW’s audit and tax businesses. There were competitive reasons (a prime example being Anderson Consulting) that the audit and tax partners felt they needed to develop a complementary consulting practice. In other words, the audit and tax partners didn’t want Arthur Andersen to make inroads into their clients via consulting engagements that would have been staffed by their competition. The anxiety on the part of the audit and tax partners most definitely benefited (through introductions and financial support) the nascent consulting practice; and
- Consulting, especially systems integration (which was PW consulting’s ambition in the day) required investment in tools and methodologies that a small consulting practice just couldn’t afford. Even in its early days the global PW consulting practice could make the investments necessary to grow and continue to compete in the most profitable pieces of the consulting market.
So, each of the practices essentially signed on to be part of the larger organization as they recognized the benefits I outlined above.
And, this worked well for several years. The practice grew and became very profitable. The dynamics of the practice also changed. The organization became more bureaucratic and the partners in a couple of important ways seemed to lose the sense that they were owners of the Firm:
- Partners, in my opinion, increasingly did not seem to recognize that decisions that they made would affect their compensation. They could spend money on things (like internal dinners or excessively expensive client entertaining) that did not provide the expected return on investment. And, they began to see some of these practices as part of their remuneration.
- Partners, again in my opinion, did not have the incentives to do what was best for the business. This was the result of incentive systems that too narrowly focused on their personal performance (in bringing in their revenue bogie) and failed to continue to encourage the teamwork that can be driven by shared accountability, responsibility goals and objectives.
And, while I am careful to use the phrase, “in my opinion”, actions that were taken by PW senior management indicated to me that top management shared my opinions. They implemented rules that took autonomy away from the partners and treated them more like managers than owners. Years later when I engaged Accenture (the follow-on to Anderson Consulting) to do a significant piece of work for one of the organizations I worked for, I was shocked to see that the same rules, even more draconian in their implementation had been imposed on their “partners”. They weren’t allowed to do sell the work. A team of negotiators was dropped in to do that. It makes it difficult to get the partner bought in and committed to delivering when they are not the ones making the promises—having the person selling the work being the same person delivering was one of the hallmarks of exceptional client service, because the triumvirate of accountability, responsibility and authority are in place.
In my next post I will talk more about this as I discuss ways that businesses can organize and manage their business to keep the business small even as it scales.
Copyright 2017 Howard Niden
— you can find this (days earlier) and other posts at www.niden.com