Evaluating Partnership Potential: A Comprehensive Checklist for Professional Service Firms

In professional service firms, the difference between partners and employees is often illustrated in their degree of “Skin in the Game,” as coined by Nassim Nicholas Taleb. Partners bear both the upside and downside of their decisions, while employees typically enjoy a compensation program, shielded from the firm’s potential losses.

Not everyone should, or indeed can, ascend to the partnership. Employees often harbor the hubris that they are entitled to partnership status. However, once they understand that becoming a partner means sharing in the downside, the luster of partnership often dulls. A partner’s decision to invest in a risky venture, for instance, could lead to significant profits (first-order consequence). But if the investment fails, the firm could suffer substantial financial loss (second-order consequence), and in the worst-case scenario, the firm could face bankruptcy (third-order consequence).

The analogy of a dog versus a wolf is insightful in this context. An employee, like a domesticated dog, feels safe and comfortable, with a stable supply of resources. But without its owner, a dog may struggle to survive. In contrast, a wolf, akin to a partner, is trained to survive in the wild, adapting to changing circumstances, weathering hardships, and hunting for its sustenance.

Another example of the contrast between partners and employees in a professional service firm is the “tragedy of the commons”. This refers to the exploitation of shared resources due to individual self-interest. In a professional service firm, this could manifest when employees overly focus on their individual success, neglecting the firm’s long-term strategic interests.

Partners and employees differ because of skin in the game. However, partners also differ from Founders.

Founders of boutique professional service firms are like artists as they have soul in the game, not just skin. They create for the love of creation, putting their reputation on the line with each piece. In contrast, partners take calculated risks. Founders often make better risk-takers because they are driven by passion, not just profit.

A concept to keep in mind when contrasting partners and employees is the agency problem. This arises when the decision-maker doesn’t bear the consequences of their decisions. For instance, a manager with no skin in the game might decide to cut costs by reducing staff, boosting short-term profits and their bonus. However, this decision could lead to lower service quality, damaging the firm’s reputation in the long run.

No amount of compensation can alleviate the feeling of shame when one’s decisions lead to negative outcomes. This is particularly pertinent in professional service firms, where the firm’s reputation is often closely tied to the individual’s reputation.

Long-term employees can become akin to housebroken dogs. They might be loyal, dependable, but often lack the hunger and drive needed in a partner. This is an issue in today’s market, where employees are loyal not to a company, but to their employability. They are often more concerned about maintaining a pristine reputation to keep their options open with potential employers.

Finally, it’s important to note that partners can inadvertently create a form of ‘slavery’ by overpaying employees. High salaries can make employees feel trapped, unable to leave due to the golden handcuffs. This aspect is often communicated to employees to ensure they understand the trade-off. It’s a stark reminder that a dog may feel safe with its owner, but without the owner, it may struggle to survive, while a wolf, like a partner, is always prepared to fend for itself.

If you are considering an employee for partnership, be careful.

Here is a tool to help when facing this decision. It can be used as a self-assessment by the employee or as a guide for performance reviews by the Founder. It’s not a definitive measure of an employee’s potential for partnership, but it provides a comprehensive view of the qualities and skills required.

1. Financial Acumen:

- Understands and analyzes the financial reports – Yes/No
- Identifies key financial indicators impacting the firm – Yes/No
- Makes effective budgeting decisions and manages resources – Yes/No

2. Strategic Thinking

- Understands and contributes to the firm’s strategic goals – Yes/No
- Identifies potential opportunities and threats in the market – Yes/No
- Makes decisions considering first, second, and third-order consequences – Yes/No

3. Risk Management

- Identifies, assesses, and manages risks – Yes/No
- Takes calculated risks, considering the firm’s long-term stability – Yes/No
- Understands ‘skin in the game’ concept and is willing to share in the downside – Yes/No

4. Leadership and Management Skills:

- Effectively leads and manages a team – Yes/No
- Inspires trust, respect, and loyalty in subordinates and peers – Yes/No
- Handles conflicts and difficult conversations effectively – Yes/No

5. Client Relations:

- Builds and maintains strong relationships with clients – Yes/No
- Can bring in new business and contribute to the firm’s growth – Yes/No
- Manages client expectations and ensures high levels of client satisfaction – Yes/No

6. Ethical and Moral Standards:

- Upholds high ethical and moral standards – Yes/No
- Makes decisions keeping in mind ethical obligations – Yes/No
- Handles the feeling of shame and admits mistakes when things go wrong – Yes/No

7. Adaptability and Resilience:

- Adapts to changing circumstances and environments – Yes/No
- Handles pressure and setbacks, demonstrating resilience – Yes/No
- Is prepared to transition from the ‘dog’ mentality to the ‘wolf’ mentality – Yes/No

8. Commitment to the Firm:

- Is committed to the firm’s success – Yes/No
- Puts the firm’s interest ahead of personal interests – Yes/No
- Is ready to tie professional and financial success to the firm’s success – Yes/No

9. Innovation and Creativity:

- Demonstrates innovative thinking and creativity in problem-solving – Yes/No
- Seeks to improve existing processes and services for better efficiency and effectiveness – Yes/No
- Embraces and encourages new ideas and approaches – Yes/No

10. Communication Skills:

- Effectively communicates ideas and information – Yes/No
- Listens and responds effectively to feedback – Yes/No
- Has strong negotiation skills and can persuade others effectively – Yes/No

Scaling boutiques need to build a sales team yet delay doing so because of the perceived risk and expense. In this session, member Dan Morris shows us how to reduce the risk and ease into it by leveraging fractional sales leadership. Most boutiques use fractional finance, HR, IT, and Legal executives and it may be time for you to deploy the same approach to sales.

TRANSCRIPT

Greg Alexander [00:00:10] Welcome to the Pro Serv podcast, the podcast for leaders of thriving boutique professional services firms. If you’re not familiar with us, we are Collective 54, and what we are what is known as a mastermind community. And we are different than other communities in that we focus on a single industry, the pro serv industry, and a certain type of firm within that industry, what we call a boutique, which is kind of post-startup at pre-scale. And we have a weekly podcast that we put on where we profile a role model, and that’s what today’s show is about. And we’ll talk on today’s episode about fractional sales leadership and sales teams. But before we do that, let’s do a couple of intros. So my name’s Greg Alexander. I’m the founder of Collective 54, and I’m going to be your host. We also have with us today Dan Morris, and Dan runs one of these fractional sales outsourcing companies. And I’m probably not doing it justice so we’ll give him a chance to introduce himself in his company. So, Dan, it’s good to see you. Please, please give us an intro.

Dan Morris [00:01:22] Hey, Greg. Great to be here. Yeah. My name is Dan Morris. I’m Managing Partner at Mindray, a consulting. We’re a boutique management consulting firm. We focus on growth, efficiency, and in our case, what that means is we support our clients by helping them to develop effective growth strategies. And then when it’s required, we implement those strategies by leveraging fractional executives and fractional teams.

Greg Alexander [00:01:47] Okay, sounds great. So because you are a member, you’re familiar with our membership, the profile of a member and many of our boutiques know that in order to reach their full potential, they have to make an investment in sales. They get to a point in their journey where, you know, referral generation and kind of word of mouth is not enough. They have to invest in convincing people to hire their firms. And those folks of those folks, many of them don’t know who they are, but they’re gun shy to make the investment in this nonbillable asset. So they’re curious about fractional sales leadership. So let’s start there. So define it for us. What is it?

Dan Morris [00:02:30] Fractional leader. Or in our case, specifically a fractional sales leader, a highly experienced individual normally north of 15 years of experience. They bill and they run sales teams and sales organizations before in the industry using the business model that the clients have. So they’re very familiar with both the industry jargon and the ways of doing the types of deals that the client is doing. That means that they’ve committed themselves to share their experience with multiple clients who are non-competing at the same time, which means that they can give the client access to their experience at less than the full rate for bringing that person in. And their scope could be from carrying a bag themselves to actually help win a couple of deals to help refine the process before they’re then able to start bringing people in around them and building out that commercial sales team. And they can look at new business, they can look at upsell and cross-sell to the existing client portfolio, as well as exploring potential for partnerships and channel business as well, depending on the opportunity. And so their engagements would range from supporting a founder who needs some help building their confidence to get some complex deals done all the way out. So implementing and managing a commercial sales team and developing an in-house leader. So it runs a very broad scope, but it’s about role and then walk and then run in order to get things right. You might go from one fractional leader to another. Well, in the next stage and all the while not investing the full amount that you’d have to invest for a full person to be full-time.

Greg Alexander [00:04:28] Very good. And I’m assuming that there’s a natural point in a firm’s evolution where it makes sense to engage in this model. When is that point?

Dan Morris [00:04:41] Though there’s two points that we most often get hired, and one is where you’ve got a CEO that does not identify as a salesperson who is committed to figuring out how to grow in a scale. They’ve got some initial clients and often that’s somewhere between $1,000,000 and $3 million in top-line revenue. The second use case is where they brought in a fractional CFO or even a full-time CFO, and that person has somehow inherited the responsibility for driving revenues and reporting on revenue growth. And they bring in a fractional because they need to be able to deliver in that period of time.

Greg Alexander [00:05:26] Okay. And then is there a point in time when they graduate out, you know, above this approach where fractional is no longer enough and they want full time? Is that a natural evolution or no?

Dan Morris [00:05:38] Yes, it is. So we’ve actually built a whole service offering review, refine, roll out, and then replace. And in between roll out and replace is a lot of repeat will go round that cycle several times to get an organization to where they want to be. And it might be three months and it might be three years to get them to the place where they want to replace most often. And then a fractional person would develop somebody from internally within the team to take over and lead that team using all of the best practices and processes that have been developed in that business.

Greg Alexander [00:06:16] Okay. And then as I’ve gotten to know you, I’ve learned that it’s not just leadership that can be fractionalized, but it can be a sales team as well. So please describe that to us.

Dan Morris [00:06:27] That’s right. So we’ve developed over we’ve done over 300 advisory and engagements with clients now since 2014. So we’ve been around this for a while, since before it was called fractional. And so recently we’ve been developing more and more things around the clients the way that they want them. And so we were doing business just with sales leaders, revenue leaders and supporting a lot of founders. We found that there are really natural partnerships with other people in the fractional ecosystem, such as Chief Finance Officers or Chief Operations Officers but within our pillar which is revenue, we are able to provide the sales leader, the marketing leader, the revenue operations leader, which is the sales and marketing technology implementation and process management and actually a turnkey sales team to get a client from where they are to where they want to be. So having access to that in a very flexible way is what the market told us that they wanted to do. And so we’re supporting more and more businesses to get there until they feel confident enough to bring in the full-time leader and begin to either rebuild that internally or take over some of the resources.

Greg Alexander [00:07:42] So I’m very bullish on this idea because. You as a firm goes through its evolution and they need to make this investment in sales. They’ve reached that point where in order to hit their growth targets, the law of large numbers says they’re not going to get there by kind of shaking the tree of their personal network anymore. They’ve got to do more than that. But sometimes if you go full-time, especially if you hire leadership in a team, they don’t have the capital to do it and they don’t want to go into debt. They don’t want to raise the equity because of the dilutive effects of that. So they end up not doing it. But by doing it this way, they can grow into it because fractionalizing would suggest it’s more cost-effective to do it. So. Why are more firms not doing this? What’s standing in the way of pulling the trigger on this? Because it seems to make such great common sense.

Dan Morris [00:08:35] You’re right. And part of that is that they don’t know that it’s an option. It’s becoming much, much more talked about now. And I think the most common fractional engagement today is still in the finance department because bookkeeping is one of the most natural first things to outsource then the Chief Financial officer involved in a lot of the CPA’s offices around that. And so that’s where it started. And then operations followed because getting things organized in the back of the business affects that profitability very immediately. And then after that, people look at this other pillar, which is a lot scarier to a lot of founders. You know, the reason they haven’t built out the commercial sales team is because they don’t identify as salespeople. They don’t really feel confident in building that sales engine right away. They want to make sure that everything is going to land properly first before they go and get a lot of new clients. And so that we think that there’s definitely a trend in the market right now with people talking about fractional, them becoming feeling more relaxed about bringing in people on that basis. But also there’s a lot of businesses out there that just restructured significantly, right? They leaned out back or W2 based and are now looking to invest in businesses that can give them that level of flexibility. And so there’s been a lot of businesses transitioning to partner with us over that last few months for that reason as well. So one is more education and one is market timing.

Greg Alexander [00:10:05] So for those that are listening to this, that might still be afraid to do it after 300 engagements. I’m sure you’ve seen mistakes. What are maybe two or three things to think about before they jump on this fractional sales leadership concept?

Dan Morris [00:10:20] Well, it’s an experiment until it’s not. Right. So you’re getting on board with somebody who can come in and give you a 5000 or 10,000 foot view of your business in 30 days. That’s the first thing that you’re doing with the fractional executive. Is not like making a higher W-2, where you have to figure out you’re going to give this person a year. You’re going to get the sales number. You’re going to try and work it out. The first 30 days of this is figuring out where the priority should and should not be working with that person. And that’s something that’s very bite-sized that a lot of founders and CEOs don’t think they can do but they can. And so, you know what we see one of the problems is when founders or CEOs try and buy a tactic that they’re not sure about, that we know we should be doing outbound sales. Okay. Well, is that the right thing for you to do first? They haven’t thought that through and they try and buy a vendor who will do that for them and they set fire to a bunch of money. What we often find is that they’re already trying to do too many things with the resources that they’ve got. And in that first 30 days, often we’ve identified businesses. There was one who were trying to do 17 growth strategies with four people on their team.

Greg Alexander [00:11:37] Oh my Lord.

Dan Morris [00:11:38] We help them focus on five of those growth strategies and they 5x that business in the next 12 months. Mm hmm. Do less with more, but the right things. And so a good way of protecting themselves is to get really clear with that front workshop, get the strategies aligned for what they’re going to do, what they’re already good at, and, you know, go with an individual who has less experience as a fractional or may not give them that straight away. And the risk is where a CEO is not familiar with hiring a sales group and brings in an experienced fractional or who just is being a really strong individual contributor. There’s room there for missed expectations, and that’s the biggest risk I think, out there in the world of fractional. Oh, we had this fractional when we tried out and it didn’t work. Yeah, well. There’s a better way. Yeah.

Greg Alexander [00:12:30] What do you say to the member who believes, in my view, incorrectly, but still very strongly held belief that what they do requires so much industry and domain knowledge that outsourcing it to a fractional sales team is just impossible?

Dan Morris [00:12:49] Well, we do run into a lot of business owners and CEOs who struggle with overcoming that, and they come back to us a year later in the same place. They haven’t grown. They’re still stuck there, they’re more upset about it. It’s a natural barrier for us to be overcome with a crawl and then walk and then run approach. And a simple way of looking at this is to say that one day if you want to exit your business, you have to solve this problem anyway. And getting the right support to do that in a fractional basis to help you along the way is one way of doing it. And I’ll give you an example. We’ve been working with a founder on and off for eight years. A super nice guy, really brilliant at what he does, and finally came to us in January and said, okay, let’s look at this a bit differently. And what we helped him to do was a Done with You program, which helped him to do the activities he needed to do to get out of his own way. And now he’s doing massive projects with his ideal clients. Four months later, he’s in that procurement process is where he’s never been before. Now we can show him what the roadmap is to have somebody else do those activities and gently begin to walk him backwards outside of that process so he can focus on the other parts of his business. Just one example, but it’s got to be crawl and then walk and then run with people who are really holding onto that mindset. Otherwise, they just never get down to that.

Greg Alexander [00:14:18] Yeah, you know what I would offer the audience is that, you know, we’re all comfortable now with fractional CFOs. Most of us are using fractional I.T. departments. We might call them something different, like a managed service provider. Pretty much most of our members use some type of outsourced fractional HR Leadership. A growing number of our members are using fractionalized chief technology officers as they attempt to productize their service offering. So I don’t think it’s a stretch to now expand that philosophy into the revenue growth engine, the sales team. And if you take the approach that Dan recommends today, which is the crawl, walk, run approach, it’s actually very little risk. There might even be more risk not doing it than there is to do it. So that’s what I would kind of conclude with. So Dan, we’re really happy that you’re in the group. Our community really needs what you do, so you’re adding a lot of value to us. So on behalf of all the members, thanks for being here today and we look forward to the Q&A session with the members and having them give them an opportunity to talk to you directly about this.

Dan Morris [00:15:22] Thanks, Greg. There’s been enormous value for us being part of this community, and so we’re really happy we’re here as well. And thanks for making the time to talk today.

Greg Alexander [00:15:29] Okay. Very good. All right. A few calls, action for listeners. So first, if you’re not a member of Collective 54 and you want to be, check out the website, Collective54.com and fill out the form. One of our representatives will get in contact with you. If you are a member, be sure to attend the session that we’ll have with Dan, the Q&A session. And if you’re not ready to join just yet, but you like content like this, I would point you in two directions. First. Subscribe to our newsletter that’s Collective 54 insights. You get three things a week, you get a blog, you get a video, you get a chart of the week, or you can check out our book, How to Start I’m sorry, The Boutique: How to Start, Scale, and Sell a Professional Services Firm, which you can get on Amazon. But until next time, I wish you the best of luck. Audience members. And as you try to grow, scale, and someday exit your pro serv firm. Take care.

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Day: June 26, 2023