Understanding Equity: What Employees Need to Know Before Asking for Ownership

Understanding Equity: What Employees Need to Know Before Asking for Ownership

In the dynamic landscape of boutique professional service firms, the prospect of equity ownership often entices employees to envision themselves as stakeholders in the firm’s success. However, the allure of equity can sometimes cloud the understanding of its implications. Many employees, when faced with the reality of what it truly means to be an equity holder, reconsider their initial desire for ownership. In this blog post, we’ll delve into eight critical aspects of equity that employees should grasp before pursuing ownership in their firms.

8 Things Employees Should Know About Equity:

    1. Personal Guarantee of Obligations: As an equity holder, you’re not just an investor; you’re a co-signer. This means personally guaranteeing all obligations of the firm. For instance, banks often require “jointly and severably liable” agreements, holding all equity holders accountable in case of default. When an employee becomes an equity holder in a firm, they risk everything they have with a personal guarantee.
    2. Fiduciary Responsibility: Equity ownership involves accepting fiduciary responsibility, particularly in government scrutinized events such as payroll and sales taxes. In case of tax issues, the IRS will pursue all equity holders, emphasizing a shared liability that many employees find discomforting. With equity comes accepting the risk of the tax man coming after you.
    3. Salary Cuts During Slow Times: In lean periods, equity holders may need to slash their salaries, sometimes even down to zero, to sustain the firm. This level of financial sacrifice may not be feasible for many employees who rely on consistent income streams. Equity holders ride the wave up, and down.
    4. Loan Obligations During Crises: During crises, equity holders may be required to loan the firm money to meet its obligations. However, employees often lack the financial means to provide such loans, let alone the comfort level to do so. Partners in the firm carry another title: banker. If you do not want to loan the firm money, don’t ask for equity in the firm.
    5. Stricter Non-compete Clauses: Equity holders are subjected to more stringent and enduring non-compete clauses, often extending up to five years. This contrasts with employees who typically sign shorter, less restrictive agreements, allowing them more flexibility in career choices. For example, an employee can quit, wait 12 months for a non-compete to run out, and start a competing firm. An equity holder can do the same but after ~5 years. The difference is similar to the difference between dating and getting married.
    6. Personal Credit Tied to Firm’s Credit: An equity holder’s personal credit becomes intertwined with the firm’s credit. For example, a firm’s bankruptcy can result in personal bankruptcy for the equity holder, a risk many employees are unwilling to accept.
    7. Spousal Involvement in Equity: Equity holders will need their significant others to sign documents regarding the valuation and payment terms in the event of a divorce. This intertwining of professional and personal relationships can create discomfort for employees who prefer to keep these spheres separate. An ownership stake in a private company is an asset. In a divorce, the assets get divided up, including the equity stake in the firm. This means when you become an equity holder so does your spouse. To avoid this messy situation, you can ask your spouse to sign a post-nuptial agreement that excludes the equity stake in the firm, or, you can ask the firm to include your spouse in the partnership agreement. A post nuptial agreement and/or a modified partnership agreement is often a deal killer.
    8. Financial Obligation to Acquire Shares: Unlike receiving stock options, becoming an equity holder often requires purchasing shares. Many employees may lack the financial resources to afford such acquisitions.

If after reading these 8 items you do not want to become an equity holder, you are probably wondering if there are alternatives. And the good news is there are.

Alternatives to Equity

Here are two alternatives to equity that allow employees to participate in the upside of the firm without the downside.

    1. Exit Bonus for Executive Team Members: Executive team members can receive an exit bonus, a percentage of the purchase price in the event of a firm sale. This simplifies reward structures, offering incentives for successful exits without the complexities of equity ownership.
    2. Profit Sharing for Top Performers: Non-executive top performers can participate in a profit-sharing pool, earning a percentage of excess profits generated by the firm. This rewards individual contributions to the firm’s success without the legal and financial commitments of equity ownership.

Conclusion:

Understanding the intricacies of equity ownership is crucial for employees considering ownership in boutique professional service firms. While the allure of equity may initially seem appealing, it’s essential to weigh the associated risks and responsibilities. For those seeking further guidance and insights on navigating the complexities of ownership structures, we encourage joining Collective 54’s mastermind community, where industry leaders share invaluable expertise and support in professional growth and development.

Why Employee Turnover Can Be a Gift for Boutique Professional Service Firms

Why Employee Turnover Can Be a Gift for Boutique Professional Service Firms

In the ever-evolving landscape of boutique professional service firms, the notion of employee turnover often comes shrouded in negative connotations. However, as a founder, it’s crucial to adopt a perspective that sees turnover not just as an inevitable part of the business cycle, but as a potential catalyst for growth and rejuvenation. This blog post explores why embracing employee turnover can be a strategic move for your firm.

The Refreshing Wave of New Perspectives

Embracing Change

Every exit of an employee opens a door to new perspectives. Fresh talent brings with it updated skills, innovative ideas, and diverse experiences that can inject new life into stagnant processes. In the boutique professional service industry, where adaptability and innovation are key, this influx of fresh blood can be the difference between remaining relevant or becoming obsolete.

An Example: Reinvigorating Strategy

Consider a boutique consulting firm that recently experienced a wave of turnover. The new hires brought in a fresh set of eyes and proposed cutting-edge solutions that hadn’t been considered previously, leading to a significant increase in client satisfaction and business growth.

The Hidden Cost of Complacency

Long Tenure vs. Stagnation

While long-tenured employees are often seen as the backbone of a firm, there’s a hidden danger in complacency. Founders need to be vigilant about employees who might be ‘phoning it in’, lacking the drive and hunger that’s essential in a dynamic professional environment. Their disengagement can be more detrimental than the disruption caused by employee turnover. And, at times, work from home can mean working part time, especially for long tenured employees who feel entitled.

An Example: The Complacent Veteran

Imagine a senior employee who hasn’t updated their skills or brought any innovative ideas to the table in years. Their comfort with the status quo could subtly impede the firm’s ability to grow and scale.

The Opportunity for Cultural Rejuvenation

Building a Dynamic Culture

Turnover offers a unique opportunity to reassess and realign your firm’s culture. It allows for a cultural reset where new values and behaviors that align with the firm’s vision can be instilled. Fresh hires can act as catalysts, bringing energy and enthusiasm that reinvigorates the entire team. This is especially true for older lifestyle firms who have recently decided to become more than a lifestyle firm. Turning over legacy employees in the lifestyle firm is, at times, a requirement.

An Example: The Fresh Culture Effect

A boutique firm that embraced turnover saw a marked improvement in its work culture. New employees introduced more collaborative and innovative work practices, which were quickly adopted by the existing team, leading to enhanced team dynamics and productivity.

Strategic Talent Management

Quality over Longevity

In the world of professional services, the quality of your team is your biggest asset. It’s crucial to focus on attracting and retaining talent that is not only skilled but also hungry for success. Employee turnover, in this regard, can be an effective filter, ensuring that your team remains high-caliber and dedicated. This is why the firms that have reached scale have adopted the up-or-out pyramid organizational structure. In this model, employees need to develop and move up or get out of the way for the next generation.

An Example: The Right Fit

A recent example from a boutique financial advisory firm demonstrates this. They used turnover as an opportunity to realign their talent with their strategic goals, leading to better client relationships and improved financial performance. This fractional CFO firm decided they were going up market, serving middle market, private equity backed software firms. This required them to leave their core market, the small business owner. And, as you can imagine, new talent was required.

Reinforcing the Growth Mindset

Embracing a Learning Environment

Turnover can foster a culture of continuous learning and improvement. New employees often seek growth and development, which can inspire the entire team to adopt a growth mindset. This approach is invaluable in the professional services sector, where staying ahead of industry trends is crucial.

An Example: Growth Through Diversity

A boutique marketing firm capitalized on turnover by hiring individuals from diverse professional backgrounds instead of industry retreads, leading to innovative marketing strategies that significantly boosted their client engagement.

Conclusion
Employee turnover in boutique professional service firms should not be viewed through a lens of loss but as an opportunity for growth, innovation, and cultural rejuvenation. While the departure of employees can be challenging, it opens up avenues for fresh talent and ideas that can drive your firm forward.

Call to Action
If you’re a founder looking to strategically navigate the complexities of running a boutique professional service firm, consider joining Collective 54. Our community offers a wealth of knowledge, resources, and a network of like-minded professionals who can help you turn challenges like employee turnover into opportunities for growth. Apply for membership today and start transforming the way you see your business and its team.

Contractors vs. Employees: The Right Choice for Boutique Professional Service Firms

Contractors vs. Employees: The Right Choice for Boutique Professional Service Firms

The decision between hiring contractors or employees is a crucial one for founders of boutique professional service firms. Making the right choice can greatly influence the financial health, operational efficiency, and scalability of the firm.

Benefits of Using Contractors:

Financial Savings: Using contractors can translate into significant savings for small firms. Contractors are typically not entitled to benefits like health insurance, overtime, workers’ compensation insurance, payroll taxes, and Medicare taxes. By hiring contractors, the firm can save on these costs.

Operational Flexibility: With contractors, firms can easily adjust their workforce capacity based on the influx of client work. When the workload is heavy, you can hire more contractors, and when it diminishes, you can reduce the number.

Minimal Management Hassles: Employing contractors means fewer management tasks. You don’t have to deal with the intricacies of employee performance evaluations, conflict resolution, or other managerial challenges that come with full-time employees.

IRS Classification Criteria: The IRS uses three primary criteria to determine if someone is a contractor:

    1. Control over Production: If the worker follows your proprietary process or method, they are likely an employee, not a contractor.
    2. Multiple Clients: A genuine contractor typically serves more than one client. If you’re consuming all their available time, they might be classified as an employee.
    3. Contractual Agreement: A formal written contractor agreement should be in place. Paying invoices without an agreement could be problematic.

Misclassifying an employee as a contractor can lead to hefty fines from the IRS, so it’s imperative to get this right.

Additional Classification Criteria:

Unfortunately, the IRS is not the only one you need to worry about. At times, disputes develop between individuals and the firms they work for. If you find yourself in such as dispute, the disgruntled person may use the following as leverage:

    • Supervision: A high degree of supervision suggests an employee relationship.
    • Training: Providing training is indicative of an employee, not a contractor.
    • Compensation Method: Bonuses or non-hourly compensation can be seen as evidence of an employee relationship.
    • Benefits: Offering benefits like vacation time can hint at an employee status.

Lifecycle Considerations:

Collective 54’s framework, shared in the best seller The Boutique: How to Start, Scale, and Sell a Professional Service Firm, describes the lifecycle of a service firm. From launch to exit takes fifteen years spent in three stages- growth, scale, and exit.

Early-stage boutique firms in the growth stage, facing unpredictable revenues, can benefit immensely from the flexibility of contractors. The ability to scale up or down without long-term commitments can be a lifesaver. A rule of thumb is greater than 50% of the labor force is contractors during the growth stage.

However, as a firm matures and revenue becomes more predictable, hiring employees can be more economically sensible. While contractors might appear cheaper in the short run, in the long term, the “renting” vs. “owning” analogy applies. Hiring full-time employees can offer better value through margin expansion. A rule of thumb is 50%-75% of the labor force is employees during the scale stage.

Moreover, when considering an eventual exit or acquisition, having a stable base of employees is crucial. Acquirers look for consistency, commitment, and a reliable team. They want to purchase both the client relationships and the team that serves them. A firm relying heavily on contractors might be less attractive to potential buyers. A rule of them is less than 10-20% of the labor force is contractors during the exit stage.

Checklist for Decision Making:

Here is a quick checklist to help you determine your mix of contractors and employees:

    1. Nature of Work: Is it short-term or ongoing?
    2. Control: Do you need to control how the work is done?
    3. Training: Will the worker require training?
    4. Costs: Have you factored in all associated costs (benefits, taxes, etc.)?
    5. Flexibility: How important is it for your firm to scale up or down quickly?
    6. Relationship Duration: Is this a one-off project or a continuous relationship?
    7. Future Plans: Are you planning to sell or acquire in the near future?

In conclusion, while contractors offer flexibility and cost advantages in the initial stages of a boutique firm, as the firm grows and stability becomes paramount, transitioning to a workforce of employees can be more strategic. By understanding the pros, cons, and implications of each choice, founders can make informed decisions that best serve their firm’s needs.

Recruiting Employees: How to Navigate This Need as Your Firm Grows

Recruiting Employees: How to Navigate This Need as Your Firm Grows

Play Video

Pro serve founders know labor is our biggest expense – meaning recruiting isn’t optional, it’s mission-critical! But recruiting becomes more challenging as your business grows. Hiring 40 employees might require 200 interviews and 1,000 applicants. It requires a lot of time to expand your network and reach all those candidates. How can you navigate this effectively?

In this week’s video, Greg shares:

    • The 3 stages of business and employee types in each stage
    • 4 recruiting needs for professional service firms
    • The difference between an executive team and a manager of managers

Episode 91 – How the Founder of an Architecture Visualization Firm Built a Culture That Produces Zero Employee Turnover  – Member Case with Jing Johnson

Culture can be described as how things get done in your firm. Intentionally focusing on culture is critical to the success of a boutique professional services firm. On this episode, we invited Jing Johnson, Founder & CEO of PRISM Renderings, to share how she built a highly effective culture and the positive impacts it has had on retention and the success of her firm.  

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your pro search firm. My name is Greg Alexander. I’m the founder and I’ll be your host today. And today we’re going to learn from a fantastic entrepreneur and a woman who I feel has achieved outstanding business results due in large part to the unique culture of her firm. And what I hope to accomplish today is to highlight how the culture and the uniqueness of it can translate into outstanding business results and why culture is more important in a processor firm than it is in a corporation. Because a processor firm is really a collection of people and therefore culture is of the utmost importance. We’re very fortunate to have a fantastic role model with us today. Her name is Jing Johnson, and she’s going to share parts of her story, which is a rather unique one. So, Jing, welcome to the show. 

Jing Johnson [00:01:26] Thank you, Greg, for having me. 

Greg Alexander [00:01:28] Would you please provide a introduction of yourself and your firm for the audience? 

Jing Johnson [00:01:34] Of course. My name is Jing Johnson, the founder and CEO of PRISM Rendering Space in Houston, Texas. Greg, we help commercial real estate developers raise capital, get entitlement and pre-leasing their buildings. We accomplish that by creating photo, realistic renderings and videos so our client can preview their visions with their stakeholders before the building get built. There are a couple of unique differentiators about our business and our team. First, unlike most of competitors, we can we can help our clients on early stage projects with new images or sometimes no design information because of all architecture backgrounds. Secondly, we are the only all women team in this male dominated field. I think we are going to talk more about that later. 

Greg Alexander [00:02:40] We are adjourned. You know, I’m going to share some stats for the audience and I’m sharing them because Jing is so modest. She would never share these on her own. So I’m going to I’m going to brag on her behalf. But for the members that are listening to this Jing, Jing’s gross margins are about 50% higher than the membership. She doesn’t do much hourly billings at all. Most of it’s fixed bids. She has 100% employees. No, no. 1099 are kind of freelancers, if you will. Remarkably has 0% turnover. Just let that sit in for a moment. 0% employee turnover. She’s running at about 80% of our revenue is coming from existing accounts. So just put those two things together. 80% of revenue from existing accounts, which would suggest an incredibly high client satisfaction score and no employee turnover, which would suggest an incredibly high employee satisfaction score. And those two numbers, employee satisfaction and client satisfaction and profits are really only two that count to get those two right. Everything else takes care of itself. So your numbers are outstanding. And I want to connect the dots here because as I understand it, you employ moms. Is that true? 

Jing Johnson [00:04:02] Yes. We are a team of all working moms. 

Greg Alexander [00:04:06] So tell us how you landed on that very unique employee strategy. 

Jing Johnson [00:04:13] Well, as come from my original story, I started a business at 25. I was struggling between my career and my family life. Basically, I work in a big architecture firm. It’s very demanding in terms of my schedule, my time and a time I had two boys, five and eight years old, need a lot of time from me as well. So I was just struggling between getting, you know, the balance between both and why I started this business is my goal is to, you know, first to provide a sustainable service provider to our clients. In the meantime, I can have the flexibility to raise my voice. So that’s how everything started. So when I started to hire employees, I realized that, you know, other working moms can benefit from this business model, not just me. So that’s my mission now, is to help even more clients and also help more working moms. 

Greg Alexander [00:05:31] Very good. And I also understand that you’re working. Moms are truly global. They’re all over the world. Is that true? 

Jing Johnson [00:05:38] We actually the our team, U.S. is all here. Some most of us are in Houston and one in Arizona. But we do have production teams overseas. 

Greg Alexander [00:05:53] Okay. So maybe that’s what I was thinking of. So what are the production teams do for you? 

Jing Johnson [00:05:58] Every day they create those images and they basically are our creative team to take the information we get from our clients and create those images and videos for us. Our team in us are, you know, basically our management, you know, members. 

Greg Alexander [00:06:24] Okay. Very good. All right. So how is it that you have 0% turnover? 

Jing Johnson [00:06:32] Well, I think it’s it really comes to our culture. I’m trying to create this culture that I want to be in. Right. That can allow the opportunity for our team members to realize their potentials in in a professional career. But in the meantime, they have that flexibility to take care of their families and their kids. And so we are very intentional in create this environment to feel safe, to feel appreciated and respected. And they they learn every day. It just we we tried to create this, you know, environment. Everybody feel that they are they have this opportunity. They can do whatever they they can to realize their full potential. 

Greg Alexander [00:07:31] Yet these brave working moms are also highly skilled. So share with us the typical background in terms of maybe professional credentials or education levels, etc.. 

Jing Johnson [00:07:46] So our team members range from, you know, M.D., have a master’s degrees to have just have no, you know, university degrees, but highly, highly skilled and and, you know, into like intellectual have an intellectual, you know, skill to and, you know, do their best to serve our clients. So for me is really not about your degrees, your your education, right? Is your excuse is how you can have that people skill. You can, you know, serve the clients and serve your team members the best way you can. 

Greg Alexander [00:08:32] Yeah. Now, Jing, when I was reading about you and and your story, I was I was really surprised at the juxtaposition of some of these numbers. So, for example, you run a pretty high utilization rate north of, let’s say, 80%. But you also have this remarkable 0% turnover. Those think those two things are usually in contrast with one another. You know, normally if somebody were working that much as your employees are, there’s some turnover because there’s burnout. How do you balance this requirement to satisfy employees and kind of log the hours, so to speak, but also not make to also make sure that your employees don’t get burnt out? 

Jing Johnson [00:09:18] Well, I don’t. I mean, I work long hours sometimes, but I don’t require my employees to. For example, I like to spend a few hours a Sunday to Sunday afternoon or evening to plan my next week I would set up. So, for example, if I have a few things I need to each team members to pay attention to, I will schedule those emails, send it out first thing Monday morning. I’m not sending out or doing the weekends. So they feel anxious to, you know, reply to my email, which is not necessary. I’m trying very hard to, you know, not taking their family time away from from, you know, just from work is really when during the weekend or evening time they should focus on their families and not on the work, but doing the work hours. So we are a very productive and efficient. 

Greg Alexander [00:10:20] Yeah. And I’m imagining when we get to the member Q&A on Friday, you’re going to get this question, which is it sounds like you’ve tapped into this hidden labor pool, these these moms, so to speak. How did you find them? Did you know the ball or what did you recruit? Like, how did you locate them all? 

Jing Johnson [00:10:41] Yeah, mostly either, you know, I met those ladies, wonderful ladies from my church or from work, some professional events or you know, they are highly recommended by somebody I trust and respect. So it’s pretty much from our inner circle. 

Greg Alexander [00:11:04] Yeah. Okay. Got it. You know, it’s always the hiring success goes up dramatically when the person that you’re considering joining your team. 

Jing Johnson [00:11:17] Yeah. 

Greg Alexander [00:11:18] It comes from a trusted source like you’re mentioning. 

Jing Johnson [00:11:21] That’s right. And also why you create that, you have that reputation of helping working moms and, you know, in the meantime, create some really beautiful, you know, work, you know, works get around and people notice. So it helps us recruiting. 

Greg Alexander [00:11:40] Yeah. Now, during the great resignation, which we’ve been living through the last couple of years, you know, there’s been a lot of poaching going on. Employees are getting lured away with bigger paychecks. And you’ve been able to not let that happen to you. Have you experienced any kind of wage pressure at all? 

Jing Johnson [00:12:04] Not really. We did increase our salary at the beginning of the year. You know, we kind of keep it that we usually have a salary increase every year. But we were able to no, we were not able to do that 20, 20 and last year, just trying to see how things going. But this year we did. And then we have a good. Benefit package used for one case and other benefits. But also, we actually I was just told a couple of weeks ago by a respected advisor that one of my team members was approached three years ago before Covid. It was a wonderful opportunity and it was perfect for her and she turned it down. She said, I just I love work here. I’m not going anywhere. And this advisor told me she’s he was saying that that says a lot about your culture, that, you know, this individual has a great potential. It was a great fit for that company. But she chose to stay with you. And and it says a lot. 

Greg Alexander [00:13:26] Yeah, it does say a lot for sure. You know, the the the point I really want to emphasize here for the member is that I learned from this is to remind ourselves that we have to value propositions. Mhm. We have a value proposition that tells clients why they should hire you. Right then we’ve got a value proposition that tells employees why they should work for you and founders of boutique pro. So firms are really competing in two markets, the competing in the market for clients and they’re competing in the markets for employees. And it’s just as important, maybe even more so they have a very compelling employee value proposition so that when somebody comes knocking, as was the case and one of the things employee three years ago, they don’t take that enticing job. They evaluate working for you in totality, the culture, who they’re working with, the type of work they’re doing. Yes, the compensation, the benefits package. But the whole thing in totality. And you’re just a remarkable example of putting that to work and and having it translate into these remarkable results that I just shared with the members. So it was it was wonderful to have you on the episode today, and you’re an inspiration for the rest of us. And thank you for being part of Collective 54. 

Jing Johnson [00:14:48] Well, thank you. We I just have learned so much from this community, and I appreciate that you include me in this episode. 

Greg Alexander [00:14:58] Okay, great. All right. Well, for those that are in professional services, who want to belong to a community and get a chance to rub shoulders with great people like Jane Johnson, consider applying for membership, which you can do at collective54.com. And if you want to read more about topics like this one, pick up a copy of my book called The Boutique on a Start Scale and sell at Professional Services Firm. Thank you for listening and I look forward to our next episode.

Episode 71 – How a Learning and Development Firm Retains Key Employees – Member Case with Renee Safrata

renee safrata

There is a direct correlation between employee loyalty and the valuation of a professional services firm. In this episode, we interview Renée Safrata, CEO & Founder of Vivo Team, to discuss employee loyalty and the invisible balance sheet.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Collective 54 is the first mastermind community to help you grow, scale, and exit your firm bigger and faster. I’m Greg Alexander, founder, and today I’ll be your host. And on this episode, I’m going to talk to Renee Safrata, and we’re going to talk about employee loyalty. So, Renee, it’s nice to see you today. Welcome. 

Renee Safrata [00:00:43] Thanks, Greg. Nice to see you as well. 

Greg Alexander [00:00:45] Renee, you’re one of the more interesting members that I’ve come into contact with. I understand we’re speaking to you, and you’re in Barbados. Is that correct? 

Renee Safrata [00:00:53] That’s correct. I am in Barbados. I am doing a digital nomad trial, and I don’t know if I’ll go back to Canada, but I probably won’t go back home. But I will go back to Canada at some point. 

Greg Alexander [00:01:03] Wow. So are you one of the folks that when COVID hit you decided to make changes? Is that how it came about? 

Renee Safrata [00:01:11] No. You know, it’s actually a bit different. We’ve been doing digital for ten years. Everything digital. My husband and I were always thinking of a digital nomad lifestyle. We were probably planning on doing this just before COVID hit, which, by the way, isn’t it odd? It’s almost like two years exactly this week, right when we all got thrown into lockdown? 

It’s crazy, but we got thrown into lockdown, and so we thought, OK, let’s take that. We’re here; we’re at home. Let’s take the opportunity to clear out our home. So we cleared it out down to two laptop bags and two carry-on bags. And we left Canada, and we don’t want to go home. We’re very happy here. 

It’s fantastic. And you know what? I thought, Greg, I thought we’d meet a lot of retired people, but we’re just meeting people doing the same thing. And so it’s really exciting. 

Greg Alexander [00:02:02] It is exciting. It’s a new world we’re living in. Good for you. Taking advantage of this new world and doing exciting things. OK, so let’s jump into this concept of employee loyalty. And I’d like to start by maybe having you explain to the audience a little bit about your firm and what you do. 

Member Case Study: Who are the Vivo Team?

Renee Safrata [00:02:19] Yeah, sure. So first of all, we create just winning companies and we do that by inspiring leaders. So our mission is to help increase competence, motivation, and collaboration in the pursuit of outstanding results. That’s what we do at Vivo Team. 

We have been doing it digitally for ten years because twelve years ago, we took two years to research the workplace of 2020, and we didn’t expect a pandemic. But we did understand that teams would be coming in from distributed teams from all over across multiple time zones and that leaders wouldn’t be necessarily in contact every day, all day with their teams. 

So we recognized that the learning and development space was not going to participate in that because gone would be the days of going into a classroom, face to face learning, and development. So what we do in Vivo Team is we use behavioral science to understand and diagnose how leaders are connected to their teams against the six key indicators of highly functioning teams. What’s the gap between the leaders and the teams? 

And as well, what we do is what we call space learning. So it’s in the flow of the day. It’s an on trend learning style one hour per week so that you learn something, you take it away, and you apply it. You come back, you learn something more, you take it away, and apply it. 

So what we’re doing is we’re actually selling learning development paths for leaders and teams. And what we’re doing is we’re providing to the C-suite a measure of evidence-based performance, which is really exciting as well. 

Greg Alexander [00:03:54] Okay, fantastic. Appreciate the introduction. Okay. So when I talk about employee loyalty, I think about it through the lens of an investor, which is my day job at Capital 54. And if I’m doing diligence on a pro serv firm, I’m always asking about employee turnover. 

The reason why that is is because when you buy a professional services firm, the assets are the people. And if they’re turning over, then there’s not a lot of assets. And unfortunately, at the time of this call with you today, we’re dealing with the Great Resignation and turnover has spiked, which is devastating when that happens. 

So the work that you do with clients, does any of it address this specific issue of employee turnover? 

How to Address Employee Loyalty and Turnover as a Professional Services Firm?

Renee Safrata [00:04:37] Absolutely, absolutely. And I’m going to be perhaps a bit provocative and say that maybe we need to shift the word of employee loyalty into really looking at what does the employee want? Because you’re right, the pandemic has created this paradigm shift where that invisible balance sheet, the assets of the people, they have more choice now. 

And just like you said in the introduction, I’m working from Barbados. I have more choice. So does employee loyalty actually exist? Or should we actually be focusing as investors, as you’re saying, on the intellectual capital of the knowledge workers and how tight our invisible balance sheet is? 

I think a lot of employers recognized that they were using only the traditional balance sheet and that their invisible balance sheet was extremely weak going into covid and it started to fragment and employees now have way more choice. So they are going to be the ones who are determining what’s going on. So unless you figure out what they want, it’s going to be tough. I’ll stop there. 

Greg Alexander [00:05:45] I love the idea of the invisible balance sheet. I’m going to blatantly steal that and I’ll give you attribution, I promise. But that’s a great way to think about it. If I think about your firm in particular and the digital nomad lifestyle that you’re living in, I’m assuming that your employees are living something similar to that. How do you retain your key staff? 

Employee Loyalty: How Does the Vivo Team Retain Key Employees?

Renee Safrata [00:06:09] Yeah, it’s a great question. And you know what, again, it hasn’t just happened in the last couple of years. Again, we’re Canadian, so our employees have been right from the East Coast to the West Coast in British Columbia, Ontario, and Nova Scotia, Halifax for ten years. 

We have attracted great employees because of our values, our vision, and their desire to be better,to contribute, and to bring innovation to the table. So good people can work anywhere. They also want to be held to account. So if they have good leaders and managers that are connected with them tightly around their accountabilities, now we’ve started to get a great equation. 

And by the way, Greg, you’re not stealing anything from me because the invisible balance sheet started in 1988 in Sweden, so it’s not my thing. We just talk about it a lot. Yeah. 

Greg Alexander [00:07:07] You know, you just talked about your mission, the vision, the values. That’s something that I advocate for. And I think those three things in particular: mission, vision, and values — that’s what makes up the employee value proposition. 

My belief is that each boutique needs two value propositions: a value proposition for clients (why they should buy from you, and why they should hire you), and a value proposition for your employees. You know why they should work for you. Because you’re right, they can work anywhere. They’re making a choice to work for you. 

So let’s start with the first one mission. So what is the mission of your firm? 

What is Vivo Team’s Mission?

Renee Safrata [00:07:45] Yeah, the mission of our firm is really to develop competence, motivation, and collaboration in the pursuit of outstanding results. So I always think of the mission. You’re right be for what’s external to my customers. But I also want my employees to be able to achieve that as well in their day-to-day and in their career achievement with us. 

Greg Alexander [00:08:07] So you were able to answer that question very succinctly and immediately, which tells me it’s real. And you’ve given some thought to this. So how did you develop that mission statement? 

What is Vivo Team’s Mission Statement?

Renee Safrata [00:08:18] With our team. So our team has participated in all of the core values, the vision, and the mission. And what I say to our team on a regular basis is the Vivo team is the vehicle for your career. Get on the bus. Be with us as long as you feel like you’re contributing, and you can be held to account, and you can get great career achievement. But get off it and go somewhere else when you’re ready for that. 

So again, to the beginning of this conversation, I think that kind of disrupts employee loyalty. But if we can think about that invisible balance sheet as people bring their innovation and their contributions to work and wanting to be here, what we as leaders and companies really need to understand is the platinum rule. 

What do they want? Like, what are they looking for in their career? And if we can connect to that and by the way, the leaders and the managers are really the front lines for that, aren’t they? They’re the people that are connecting with their people every day, and they have to understand those nuances of what is important. The soft skills, essentially, because hopefully they’ve got hard skills. What are the soft skills of how that intellectual capital is going to keep growing? 

Greg Alexander [00:09:37] So what we’re learning from Renee is that the mission is real. It’s not some academic exercise that nobody pays attention to. It’s created with the employees. It’s lived every day so that employees jump out of bed every morning and they can’t wait to go to work. 

And when you have a mission like that, a compelling reason to work at a firm, then you’re going to have, you know, very strong employee engagement. And I would say lots of employee loyalty, although it sounds like maybe that’s a little outdated concept, but it will keep retention where it needs to be, which is obviously very important. 

OK, let’s move to the vision side of things, and I think your vision is a picture of the future, something inspiring that says, you know, this is the goal that we’re shooting for. You know, if we’re successful, this is what it’s going to look like for everybody. So have you codified your vision as well as you have your mission now? 

What is Vivo Team’s Vision For the Future?

Renee Safrata [00:10:26] Very simply, we want to create winning companies and inspiring leaders. And if we can do that around the globe, we’re happy. 

Greg Alexander [00:10:33] OK. Sometimes when I hear vision statements and I love that and that is inspiring, there is numbers associated with it. You know, we want this much revenue of this many employees or this many clients, et cetera. And it sounds like you chose not to include that. Was that a deliberate choice? 

Renee Safrata [00:10:50] Yeah. I think of those sitting in our strategies and in our objectives for the years. Making smart, strong strategic decisions and smart tactical decisions. Smart meaning, Specific, Measurable, yadda yadda yadda. 

When I think of vision and mission, I think and I try to get all of our people to think of it like this as well. Your vision when you go to sleep at night is something you want to dream about. Your mission when you’re in the shower in the morning, that’s something that you want to think about doing every day. 

Greg Alexander [00:11:21] Yeah, that’s a good way to think about it. Ok, kind of the third pillar here is the values. And you mentioned that earlier that you’ve thought about this and the way that I think about values for what it’s worth is, how am I going to behave? What are your firm’s values and how were they developed? 

What Are Vivo Team’s Company Values?

Renee Safrata [00:11:42] Yeah. So I’ll start with how they were developed. They were developed online with all of our team together in a brainstorming session. We use storyboard. We thought about what are the behaviors that we demonstrate on a regular basis and what is of high value to us. 

We prioritize those. We had discussions around them, came up with a series of words that represented those core values. And then we essentially curated it down to three: we’re creators, we’re leaders, and we’re champions. 

And again, Greg, I’m going to say that what’s important for me about that as leader of the company is I want to make sure that everybody — going back to employee loyalty, employee engagement, and the intellectual capital of our organization — everybody can embrace that, that I too want to be a creator. I want to be a leader. I want to be a champion. And if they can have that excitment. Again, we’ve got something to build on. The vehicle gets more exciting. 

Greg Alexander [00:12:48] You know, members at Collective 54 are professional services firms and boutiques that are growing. Some of them have hit the scale stage and some have grown so much and scaled so much that they’re at the exit stage. And I often ask them this question, which I just asked you which you answered with the three values. “What are they?” And then I say, “how are they used?” 

And I hear sometimes that they’re used to make hiring decisions. They’re used in employee evaluations. They’re used to determine promotions when they’re available. And unfortunately, sometimes when people aren’t living the values, they’re used as a reason to separate from an employee. 

Do you believe in that concept of using values in that way? Or do you have a different perspective on things? 

Renee Safrata [00:13:30] Absolutely. Absolutely. And what I would say, in addition to that, is that I’m sure a lot of the companies that we’re talking to are utilizing Slack. That Vivo, what we do weekly is we speak to what are the behaviors that I or others demonstrated in alignment with those values. 

So we have a Slack channel that comes every week and at the end of the week, if you haven’t done it by Friday, it comes up and it says, “Hey, where have you seen creators, leaders and champions this week?” 

And so we’re activating that peer-to-peer feedback, which is as well important. I think you mentioned in your chapter about annual performance reviews. Well, that’s too long these days. It is too long. We got to have this as a regular feedback and feed forward have to be a regular thing across our organization. 

Greg Alexander [00:14:25] So that’s a brilliant strategy. You’re reinforcing the values every week through a modern communication channel like Slack and its peer-to-peer, which means it’s believable. You know, it’s not artificial, it’s bottoms-up. Organic, authentic. That’s a brilliant idea. I love that very much. 

Renee Safrata [00:14:42] And it’s behavioral-based, right? We ask this question all the time, “how can I make sure on a regular basis that I am behaving in behaviors that demonstrate what we have articulated as our values?” 

This, by the way, Greg is really, really easy then when we give this idea to leaders and managers and they look at behaviors, they can give people feedback on the behaviors that they notice that are not in alignment with getting great project results or finishing great, you know, great tactics and great strategies in the company. 

Greg Alexander [00:15:20] If members are listening to this, if they want some help and they want to talk to you about it, how do they find you? 

Renee Safrata [00:15:27] Easy. Renee with two e’s. R-E-N-E-E at vivoteam.com or on WhatsApp. 

Greg Alexander [00:15:36] OK, fantastic. Well, Renee, on behalf of the membership, thank you so much for being here today. It was wonderful. You really do an exceptional job in this particular area. And we’re lucky to have you in the membership. So thank you very much. 

Renee Safrata [00:15:48] Greg, can I say one thing about what I really appreciate about this whole membership? 

Greg Alexander [00:15:53] Sure. 

Renee Safrata [00:15:54] I appreciate from the beginning of reading your book to every day you show up online. You have a positive spin that all of us can do this. That’s exciting. Thank you. 

Greg Alexander [00:16:09] Well, thank you for saying that. That’s inspirational because I do believe we can all do this. And that’s another way to make me happier than to see our members reach their goals by, you know, employing some of these concepts. So thanks for saying that. 

Renee Safrata [00:16:21] Thanks, Greg. Greg Alexander [00:16:22] OK. So for those that want to learn more about this topic and others, you can find our book, The Boutique: How to Start, Scale, and Sell a Professional Services Firm on Amazon. If you’re interested in joining the community, you can go to Collective54.com. And with that, we’ll wrap it up and we’ll see you on the next episode. Thanks, everybody.

Episode 69 – How a Challenger Brand Advertising Agency Won the War On Talent

Member Case with Mike Sullivan

As professional services firms scale, the culture erodes. Bureaucracy creeps in and employees shift from serving the client to serving the boss which stalls scaling. On this episode, we discuss scaling culture with Mike Sullivan, CEO of Loomis. 

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders. A boutique professional services firms, for those that aren’t familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. My name is Greg Alexander. I’m the founder, and I’ll be your host today. And on this episode, we’re going to talk about culture and we’re going to do so with our friend and member, Mike Sullivan. Mike, it’s good to see you. And would you please properly introduce yourself to the audience? 

Mike Sullivan [00:00:48] Yeah. Hey, Greg, good to see you too. So I’m Mike Sullivan, president and CEO of the Loomis Agency here in Dallas, Texas, and I’ve occupied this seat for 20 years, if you can believe it. 

Greg Alexander [00:01:01] Wow. And what doesthe Loomis agency do? 

Mike Sullivan [00:01:03] Well, we call ourselves a challenger brand advertising agency. And what that means specifically is that we specialize in the unique needs of challenger brands. And Challenger brands are defined as really classically any brand that isn’t number one in its market, but it goes well beyond that, too. And we can have a discussion around that if you like, but that’s – that’s what we do. 

Culture and scaling

Greg Alexander [00:01:27] Great. So you’ve been around 20 years, which is fantastic, and that’s proof that whatever it is you’re doing is working. What role has culture played for you over the years in growing and scaling and sustaining your for – your firm’s performance? 

Mike Sullivan [00:01:42] Yeah. So the firm has actually been around thirty-five years. So my partner Paul Lewis, I joined him in the year 2000. I came in as president and culture was something that I think Paul, you know what he thought about culture and he thought about yogurt. You know, I mean, nobody was talking about culture. You know, nobody was talking about the team member experience, if you will. And that’s no slight on Paul. I mean, nobody was really in the 90s. It just wasn’t the topic du jour, but it is now, obviously. 

And so when I came in, you know, the agency was in a very different place, it was much smaller. There was no intentionality behind hiring and bringing the right folks in. It was just, can you do this job? Good, go do it kind of thing with no guidance beyond that. And I began to slowly shape and shift that based on my own guiding principle for the agency, which was simple. 

I just wanted to create the kind of employment environment where people look forward to going to work on Monday morning, you know, no Sunday night blues and so on. So that’s kind of where it started, but it’s obviously become far more than that. I mean today, where I think we’reseven time best places to work. Morning News Dallas Business Journal. I think culture is a real differentiator for our agency, and we can talk about that. But there’s your short answer. 

Fighting “the way things are” 

Greg Alexander [00:03:11] Congratulations, you know, and the the agency world, unfortunately, I would say over the years has earned a reputation for not having great cultures. It can be a little transactional and lots of burnout. But clearly, if you’re winning these types of awards, that’s not the case with you. And maybe that’s why you guys are standing out the way that you are. When I think about culture, I think about everything you just said for sure, and it’s mission critical. 

But I’m always putting it in the context of how does how does it help me scale my firm? And one of the ways that it does is that when you get to a certain side size the founders, the partners can’t be everywhere at all times and there has to be this thing called “this is the way we do it around here”. And I know that sounds crazy, but you know, things get done a certain way without, you know, bureaucracy like procedures and policies. It just “this is the way we do things”. Has that happened at your firm? 

Mike Sullivan [00:04:05] It absolutely has happened. And Greg, it starts with identifying the kind of team members you want to have inside your organization, really, if you back it all the way back up to, you know, sort of vision, values, mission, that sort of thing. And then you go and you find people who fit that and you don’t get it right – you know, right off the start and you may you may get one that works well and maybe one that doesn’t, but you tune that over time. 

And because culture is, yeah, it’s all the things that we say and write down and talk about. This is what we stand for, but it’s really even more than that. It’s – it’s all the unwritten, unspoken, unsaid things. And so that – that creates that replication that I think you’re speaking it. So good things get replicated in aculture. Bad things get replicated in a culture. So the intentionality around that is really important. So when you’re applying that to the hiring environment, it’s  really important to get that right. And I keep coming back to hiring because I just think it obviously it all starts with the people, you know, creating the culture and sustaining it, rebuilding it. It’s a living thing. It’s not static. 

Connecting vision

Greg Alexander [00:05:11] Yeah, you’re right. It does come back to the people. And you do your best in the interview process to select the right people based on a set of values. But it is an imprecise science and sometimes you’re going to get those things wrong and the culture has to accept or reject people as they come into the organization. So it stays consistent. And you know, you have a strong culture when that’s happening. 

You know, you mentioned the word vision, which is a favorite word of mine, and that is, you know, you’re creating a vision of the future, the aspirations of the firm. Sometimes I think our members, which are partners and founders of boutique firms, you might even call them challengers Mike in your world. Sometimes they failed to connect the vision with an individual. So if I’m an employee, how do I contribute personally towards the accomplishment of the vision? And when I do so, you know “what’s in it for me?” Yeah, sometimes that’s missing from these vision statements. What are your thoughts on that? 

Mike Sullivan [00:06:09] No, I agree completely. You know, team members need to, and that’s why this just such a big, big part of what we do. Walking in the door, we’ve got this little actually little purpose book. But you know, I talk about this in terms of, oh, it’s got our vision, our values, our mission, all that stuff. You know, we like to say we are, let’s see, using creativity and service of capitalism.

 And so what is it that our folks are doing on a daily basis to help advance the… And help create the business impact that we’re trying to create for our clients and getting them connected to that, tTalking about this, getting me excited about this, like we’ve got a series of workshops, challenger workshops that we do in the agency. We get people enrolled in it. 

They need to understand that, you know, our agencies positioning is connected to our vision and that is helping challengers win. You know, I don’t think the – don’t outspend the competition, outthink them you know, kind of thing. But but yeah, people on the team need to understand it, which I think is, you know, the first objective making sure that everybody has a shared understanding of what the vision is and then understand how they can contribute to it. 

You know, at the end of the day, in a good high-performing culture, people feel like A) they belong and B), they have a purpose and they’re connected to. And sometimes I think we think in terms of purpose, like it’s a bit grandiose purpose. No, my purpose in this organization is to help do these things so that we can accomplish this on behalf of our client. 

Self-governing culture

Greg Alexander [00:07:45] Yeah. You know, utopia, which are perfection, which none of us obtain, but this is what we’re shooting for, is this concept of a self-governing culture, a self-governing team. And what that means is that the culture is reinforced through behaviors that get rewarded, behaviors that get punished. 

But it’s not this kind of top-down, you know, dictator driven, founder driven way. It’s almost bottoms up where people are policing themselves, so to speak, which makes the job of the founder or the partner so much easier. Has your firm reached that level or have you gotten close to that? And what are your maybe general thoughts on this concept of a self-governing culture? 

Mike Sullivan [00:08:29] OK. So, yeah, absolutely. Self-governing, I have a little trouble with because I think it’s a rule, because maybe it implies to me a little bit of tuning out for leadership, which can never happen. Leaderships really got to be tapped into and connected to the culture. Leaders are so important for setting the tone and the pace and culture. 

Again, it’s what said, what’s done. If I am being congruent with the things that I say, believe me or are watching that? But yes, definitely. Once your culture becomes, I think, good and stable and sound and consistency across time is important and you invite the right people in to help you continue to perpetuate that. Yeah, it becomes self-sustaining in that respect. Absolutely. 

And it’s amazing. You know, when you – even the healthiest cultures, we’ve got 65 people. I think when you just get one higher rung, you know, it’s – it’s amazing the disturbance that that causes, you know? And again, it becomes and I like to say, look, if it’s not a fit, you’re going to glow in the dark, you know, and you do. And so it becomes a self-selecting culture in that respect, too. 

Greg Alexander [00:09:39] I love that – if it’s not a fit, it’s going to glow in the dark. It’s a really great way of saying that, for sure. And you’re right. I mean, one or two people out of 65 can make a difference, surprisingly, but it does, because it’s just a ripple effect. This is really something.

 Another topic onculture I find intriguing, particularly for boutique firms – firms like yours is… Sometimes it tends to be a dominant department or dominant function, like in my Old Firm, the rainmakers they – they kind of ruled the place and everybody else took – took the lead from them and that. It was the right thing for us, it’s not the right thing for everybody, but it was the right thing for us. Is there a function in your firm that is kind of the lead horse, so to speak, and sets the tone? Or is it more kind of, you know, democratic? 

Mike Sullivan [00:10:28] You know, that’s a great question, Greg. I believe in our firm that we’re pretty even with respect to that, that there’s that very often in the ad agency world, you’ll find a shop that is, it will say it’s a creative driven agency,  the creatives sort of rule the roost.. Many agencies that have that kind of reputation or as an account driven, you know, and it’s just, you know, the account people are running the show – sales driven organizations. 

That, too, is a culture that that is the culture. I don’t believe that we’re oriented in any one particular fashion, but that’s always something to check in on. And you know, you don’t want to overweight one group at the expense of another because again, that creates disharmony. 

You know, if you’re not optimized… a lot of times and I think this is really true for founders, you know, my background, for example, is account service and strategy. And so early in my career and early when I started doing this, I really did. You know, I was a little heavier on that side of things and maybe appreciating more what the account team was delivering and how hard their job was? Well, I had to even that out my own approach. I had to check in and go, Wait a minute. My media group, my creative group, you know, the folks working production. All of thesethings makes the band work. It’s not, you know, any one component of it. 

Maturing in the developmental cycle

Greg Alexander [00:11:52] So my own journey is something similar. You know, I was I was in the Rainmaker Group and I hired in my image and the Rainmaker Group became the dominant group. And I ran into a scalability problem because most of my team at that point didn’t truly understand what was required to scale. And what I mean by that is we would just go out and sell work, and we wouldn’t think about how we were going to deliver that work and the impact that had on profitability. 

And it wasn’t until those people got promoted to the partnership tier and they were equity owners, and they understood how things flowed through a PNO. Did they change their opinion on things? Oh, I don’t want to sign that piece of work because that actually is going to cause us harm. But that type of client and that piece of work makes a lot more sense to us. So maybe, maybe, maybe sometimes that’s just a function of maturity and where a firm is in their developmental cycle. 

Mike Sullivan [00:12:46] I think so, Greg. And within the leadership, I was very much like that – new business guy. It’s like, gosh, you know, I mean, just go up, get new business. It’ll, you know, revenue takes care of everything. It can cause a lot of challenges. And and thankfully, my executive creative director Tina Tackett, who’s been with us for  – she started the same day I did 20 years ago. She’s has tamed me appropriately. You know, and I have a complete and I think kind of respect for the process, as it were – that younger Mike Sullivan just never would have comprehended. It took a while, but I definitely got. 

Priority of culture

Greg Alexander [00:13:26]Yeah.  So your firm is winning awards for a great place to work. You know, you have cultural artifacts like your book you just showed me, which is great. I would suggest to the audience that you have an advanced perspective on culture, which is probably the reason why you’re having so much success. How do you – this would be my last question. There’s only so many hours in the day and you’re running a substantial firm. You probably have a to do list the size of Texas, and you could just only get to so many things. So so where does culture fall from a priority perspective and – and how do you allocate time towards it? 

Mike Sullivan [00:14:06] You know, Greg, honestly, for me, it’s number one. I mean it all, it really is number one. In fact, here’s the other book you know The Voice ofthe Underdog: How Challenger rands Create Distinction by Thinking Culture First.

 I’m always thinking about this stuff, you know, because I believe that if you get culture right, it does allow you to scale. For instance, you know, we our average tenure among our employees is almost three times the industry average. As a result, our average client tenure is three times the industry average-  that creates instability, stability, it a smoothness in the organization that you don’t always find in the agency world. And I think there is just so many cascading advantages that spill from that. And it’s like I said, it’s the number one thing that I think I think about. 

Greg Alexander [00:14:57] Yeah, that’s a bold statement. I know you got a lot to think about the number one thing that’s really strong. So give us the name of that book again. And if people want to read more about this, how do they find it? 

Mike Sullivan [00:15:06] Yeah, it’s the voice of the – Voice of the Underdog: How Challenger Brands Create Distinction by Thinking Culture First. 

Greg Alexander [00:15:13] And they can find it online?

Mike Sullivan [00:15:14] Mike Sullivan and Michael Tuggle. Yes, on Amazon, you know, like good stuff. Yeah,.Yeah, yeah, 

Greg Alexander [00:15:21] OK. And if members want to find you personally and reach out to your read about you, where can they do that? 

Mike Sullivan [00:15:28] So they can certainly shoot me an email at [email protected]. That is our URL. Theloomisagency.com. And yeah, I’d love to talk to folks about this. This is one of – like I said, it’s my favorite topic from a business standpoint. 

Conclusion

Greg Alexander [00:15:45] So, all right. Well, listen, you’re a great member. We’re lucky to have you. Thank you very much for being here today. I really appreciate it. 

Mike Sullivan [00:15:51] Thanks so much for having me on. I appreciate it. Okay. Greg Alexander [00:15:55] And for those that want to learn more about this subject and others, you can pick up our book called The Boutique How to Start, Scale and Sell a professional services firm, which I’m proud to say, just hit bestseller status on Amazon and our little niche so you can find it there. And then if you want to meet other great people like Mike, consider joining our mastermind community, which is Collective54.com OK, thanks everybody. Thanks again, Mike. Appreciate it.

Episode 61 – Yield: The Ultimate Measure of Productivity – Member Case with Aaron Levenstadt

Yield is the ultimate measure of productivity for professional services firms. On this episode, we interview Aaron Levenstadt, Founder and CEO of Pedestal Search and discuss how he uses yield to manage his firm.

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis Collective 54 Advisory Board member and your host. On this episode, I will make the case that yield is the ultimate measure of productivity. I’ll try to prove this theory by interviewing Aaron Levenstadt, founder and CEO of Pedestal Search Pedestal, is a marketing technology company and data driven search engine marketing platform founded by former Google employees. Pedestal create systems and processes to help businesses better leverage internet search engines as a growth channel. You can find Aaron and his business on pedestalsearch.com. Aaron, great to see you and welcome. 

Aaron Levenstadt [00:01:17] Thanks, Sean, it’s good to be sharing this conversation with you. 

Sean Magennis [00:01:21] Likewise, it’s great to have you. So today we’re going to discuss one of the most often looked at metrics in all of professional services, yield. A reminder to our audiences that the definition of yield is simply the average fee per hour, times the average utilization rate of the team. For instance, if a boutiques average fee per hour is $400 and the average utilization rate is 75 percent, then the yield is $300 per hour. Aaron, let’s start with an overview. Can you briefly share with the audience an example of how you think about and manage yield? 

Aaron Levenstadt [00:02:02] Yes, certainly. So we keep track of yield, but we don’t obsess over it. And by keep track, I mean, we look at utilization for our team members individually as a collective, as a company. Yes. And also on a per account basis, we think of yield attributed to an account. And although we know that it actually should be the most looked at metric, I want to start off on this piece, we don’t obsess over it. Rather, we focus on and we think a lot about how to source technology and actions from our team members that are value drivers for our clients. So that yield becomes less of a focal point. And we’ve found that over time, focusing too much on yield can lead to some inherent scalability gaps. On the other hand, If we can shift our focus to where we can open up value, that can allow us to create a significant gap between each counts of utilization. Yes, and value created. 

Sean Magennis [00:03:08] Outstanding, I mean, that makes a lot of sense to me. So what I’d like to do is get your thoughts on some of the best practices that we recommend in this area. So there, four specific things, I’ll walk you through and then have you share your thoughts on each. So the first one is the typical boutique runs of an assumption of a 40 hour workweek, a 48 week year that equates to nineteen hundred and seventy two hours per employee, and using our early example at $300 per hour. The boutique will do five hundred seventy six thousand in revenue per employee, a 100 person firm. Let’s say with this yield, we’ll do fifty seven point six million in annual revenue. So understanding yield means you understand how much you can scale to. It establishes a ceiling. What are your thoughts on this concept Aaron? 

Aaron Levenstadt [00:04:00] Yeah, so that exactly where we last left off on the ceiling, so the way that we think about it is instead of sort of focusing on the ceiling, which is defined exactly by the yield equation, if you think about it from that perspective, yes, we think instead of us deploying program stocks as opposed to hours or manpower that generate value, tech driven by great people. And in that way, yield becomes less of a focus and we shift the focus to how to drive value throughout our engagements. 

Sean Magennis [00:04:39] I like that. So deploy program stack and shift to the value rather than exclusively focus on yield. Have I got that right? 

Aaron Levenstadt [00:04:49] That’s exactly right Sean. 

Sean Magennis [00:04:50] Excellent. So the second one is we contend that most firms, when they try to scale, they’ve reached a point of sort of diminishing returns on utilization rates. And we feel this way because there’s only so much juice to squeeze out of the 40 hour workweek and the 48 week year. What’s your opinion on this? 

Aaron Levenstadt [00:05:12] So I think I think, you know, you’re exactly right in how how we’re thinking about this, because the economics and the way that we think about it is the economics around what we do in the way we’re working with a client. They have to work for the client. Most importantly, they also have to work within our our rubric, and we think about it that way. They can allow for scalability. Yes. In a different way than thinking about yield on the, you know, hours and then and then person in the equation. So there’s that, you know, there’s that parable of the chemist that gets called into the factory, right? The factories sprung a leak. Yeah. And the chemist walks in and looks around. He’s taken a look at the machines and he scratches his chin and he thinks, you know, he sees where the leak is coming from. He sees it. He identifies the problem. He quickly creates a chemical compound, using his knowledge to patch the leak in the factories, able to resume production. And then the factory owner calls the chemist, you know, some time later, and he says, Hey, I got your invoice here. It’s for thirty thousand dollars, but you were only here for ten minutes. And the chemist replies, Yeah, that’s right. That’s $10 for my time. And 29 990 for knowing how to fix your problem in 10 minutes. Beautiful. We try to apply that same philosophy. 

Sean Magennis [00:06:34] I mean, that really hits the nail on the head. I mean, and you know, how have you learned that lesson? I mean, you know, that’s a great parable. You know, give me give me a practical example of how you’ve done it. 

Aaron Levenstadt [00:06:47] Yeah, we’ve learned this lesson the hard way. So like, you know, I think like how a lot of us, maybe all of us learn through experiencing pain and a lot of it. And early on in the life of our business, we accepted some engagements where our clients asked bill by the hour and we we took those on those early stages of our company. You know, from a financial perspective, they weren’t. They were great. They were not great. But they also, more importantly, they were not great from an internal morale perspective because the conversations with our clients shifted to, you know, our teams were talking to our team members or talking to clients about why sixteen point three minutes was spent on that and an hour and 12 minutes was spent on this. And they just they weren’t productive, fulfilling conversations. So endured some pain learned the hard way, and we don’t do that anymore. 

Sean Magennis [00:07:46] And to your point, earlier, when you focus on value, you know, when you’ve created this, you know and deployed this program stack, you don’t have to get into that nickel and diming conversation, which is soul sucking. I agree with you, it’s it’s just not productive. So let’s turn to fees. The key to scaling in this context is to figure out how to become more valuable, which is what you’ve said. And remember, this is an equation with only two variables. Utilization rate dollars per hour. So owners of boutiques have a lot more juice to squeeze out of the dollar per hour. And in your case, maybe the value of the dollar value per stack and then impacting the dollar per hour variable. It’s just not as easy as raising prices. Clients will pay more for boutiques that bring more value to them, and this is because they turn to boutiques for specialization. What do you think about this? 

Aaron Levenstadt [00:08:45] I think it resonates very well with our experience in the sense that it resonates so much that today what we do when we’re first meeting with the client, when workers starting that conversation before we’re engaged and working with them, we try to have this conversation openly and candidly at the outset. So very early on and speaking to a potential client, we will communicate and that we’re we’re a specialist, we’re not a generalist and we are going to do the way that we think about our engagements is really by how much value we can drive. 

Sean Magennis [00:09:19] Yes. Yes. Excellent, and then, you know, I guess there’s a lot of things that come into that in terms of variability. You know, and it’s really working to change sometimes the client perspective, right? 

Aaron Levenstadt [00:09:35] Yeah, you want to. You want to change the client perspective, and I want to do it early on in this conversation, so it will we’ll see things in these conversations. You know, like what we do is we help you generate more productive traffic from search. Yes. As importantly, will also say what we don’t like and we’ll say things like, We don’t make pizza, we don’t shoot.  

Sean Magennis [00:10:02] Right? Yeah. Your expertize are search and by the way, with the resume of of you and your team. I mean, that would appear to be, you know, a no brainer. But reminding them of that specialty is key to creating the kind of value that will drive the fees and drive the recognition and obviously get you more business. I get that. That’s really great. So the fourth aspect in our experience, we see five forms of specialization that translate to higher fees, and they are industry specialization, function, segment problem and geography. And in our view, if you’ve got at least three of those, you truly are a specialized firm. So in your case, where are your areas of specialty? 

Aaron Levenstadt [00:10:54] Yeah. So this is an area that we give a lot of thought to. I it’s an area that we’re continuing to refine as our business evolves and grows. And there’s the three that I think that stand out at sort of top of mind would be the function of the problem and the segment go function. Having worked at Google and worked on the search engine algorithm itself, we really understand that world and that’s the functionality that we want to be operating on and what we specialize in. Yes. The problem in a kind of stemming from that. So the second prong problem is really about how to unlock search discoverability, and we’ll see if things are going our conversational, the clients we don’t we’re not here to help you solve 50 different kinds of problems. We we are going to help you solve the problem that we specialize in. We know how to do how to solve for. Yes. And then the third one on our world is is segment. And the way that we think about this segment is really in terms of a profile, psychological to a certain degree, in the sense that our potential client, our partner who needs to know what they’re looking for and know that they have had some success with search and they really want to invest in building and bringing systems and processes to drive that search engine optimization motion more. 

Sean Magennis [00:12:16] Outstanding and that’s again for our listeners. You know, take this from from Aaron. When building your your firm and thinking about your specialization, be really clear, like Aaron is in terms of what what your service can offer the specific problem and don’t try and be all things to all people, I think is the ultimate lesson. Would you agree, Aaron? 

Aaron Levenstadt [00:12:38] Yeah, 100 100 percent. Even on going back to a little bit about what we were talking on earlier is will remind the client when we’re talking to them both before we work with them and while we’re working. Yes, there are lots of things that we are not good at. And if you ask us to do those things, we’re going to say, no. We will fuel you with those things. I think by reminding the client of that, it reaffirms the fact that we’re not a generalist. We’re not just going to do anything that the client’s willing to pay us for. Yes, we’re nationalist and that’s what we’re here to help them with. 

Sean Magennis [00:13:18] That’s such a key point. And I’m I’m assuming that during the course of your journey, you found that at some point it was difficult to say no to client coming you for two for business, right? So scoping is important and really having the professional integrity to say no is key. What do you think about that? 

Aaron Levenstadt [00:13:36] I cannot agree more. Also learned through enduring pain and pain. 

Sean Magennis [00:13:45] Exactly, you learn. That’s how we learn. 

Aaron Levenstadt [00:13:48] Yeah. So yeah, we’ve taken on some work that you know early on that we should not have diverged from our land of expertize from, you know, the thing that we’ve done hundreds of times in doing successfully. And now we’re more careful about that. 

Sean Magennis [00:14:03] Outstanding. And this is so helpful. Thank you so much for spending time with us today. I’ve learned several additional aspects to the importance of managing yield. I like the way you presented your business in terms of the technology and the value aspect. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist, and our style of checklist is a yes or no questionnaire. We aim to keep it simple by asking only 10 questions. And in this instance, if you answer yes to eight or more of these questions, you’re running a tight ship with excellent yield. If you said no too many times you have a yield problem and this will be an impediment to scaling. Given the proprietary nature of Aaron’s business, I’m not going to put Aaron on the spot with these, but I am going to read off the questions for the benefit of our listeners. 

Sean Magennis [00:15:09] So the first one is are your average utilization rates above 85 percent? Number two, senior staff above 70 percent? Number three, mid-level staff above 80 percent? Number four, junior staff above 90 percent? Number five, are your average fees above $400 per hour? Number six, are your senior staff above $750 per hour? Number seven, mid-level staff above 500? Number eight junior staff above 250? Number nine are you assuming a 48 week year and 40 hours per week? And number ten, are you distinguished from the generalist with three to five forms of specialization? 

Sean Magennis [00:16:04] So in summary, yield is the ultimate measure of productivity for professional services firms. Watch out for the trap of over rotating to utilization rates and under indexing the second variable in the equation, which is dollars per hour. Drive up your fees like Aaron, by becoming more valuable to your clients by becoming hyper specialized. If you do so, the sky is the limit on your scale potential. Aaron, a huge thank you for sharing your wisdom with us today. It’s a pleasure having you. If you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell a Professional Services Firm. Written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening. 

Episode 39: The Boutique: 4 Different Recruiting Needs for Professional Services Firms to Scale

As your boutique professional service firm scales, talent acquisition shows up on the list of top priorities. Collective54 founder Greg Alexander discusses why the ability to recruit at scale separates the winners from the losers.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as your boutique scales, recruiting shows up on the list of things to excel at. The days of recruiting from your personal network are over, and the ability to recruit at scale separates the winners from the losers. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is considered one of the industry’s best talent pickers. In fact, Dr. Jeff Smart in his best selling book, Who the A Method for Hiring suggests Greg is one of the best he’s ever seen. Greg, great to see you and welcome.

Greg Alexander [00:01:26] Sean, it’s good to be with you. I see that you dug up Dr. Smart’s classic book and who Jeff and Randy who run smart and associates are the best in the world at hiring the right people. I encourage everyone to read that book and check them out. I was flattered to be mentioned as a success story in their work.

Sean Magennis [00:01:45] Will do. Greg, I have heard you mentor boutique funders in the area of recruiting. So during these conversations you discuss how there are four different recruiting needs when scaling. Can you walk the audience through these four?

Greg Alexander [00:02:01] I’d be happy to, but before I do, allow me to place this into the proper context. If you are a small, young firm in the startup phase, this does not apply to you. Recruiting in the startup phase is not a mission critical task. The needs are basic in most jobs can be filled from personal networks. In contrast, if you are a firm trying to scale, meaning build something more than a lifestyle business, then recruiting is a mission critical task. Not all the jobs can be filled from personal networks as there are just too many of them to fill. And also the stakes are higher. So, for example, as you leave the scale stage and start to prepare for exit, you will need to recruit a CEO so you can ride off into the sunset. If you miss higher this role, you can kiss your earnout goodbye. Recruiting goes from a passive activity to a mission critical task as you mature. Does this make sense, Sean?

Sean Magennis [00:03:00] Yes, it does. Thanks for setting the table, Greg, and for the context.

Greg Alexander [00:03:05] OK, so let’s jump into the four different types of recruiting as a firm scales. I will start with the first big change, replacing generalist with specialist. As you scale, you will attract more sophisticated clients. These clients will pay you more and therefore expect more. These clients are experienced buyers of professional services and they know what to look for. For example, they will require you to name and describe the team on the account in the proposal. This means you will need to spell out the years of experience, industry references, project case studies and many other items. The prospect is deciding on which firm to select, due in part to the bios of the account team. If you recruit generalist, you will lose too many deals and will not be able to scale sophisticated clients. The types of clients our audience wants to work for, the mad, hyper specialized talent. Does the first recruiting change makes sense?

Sean Magennis [00:04:12] Yes, it does, Greg. So switch from recruiting generalists to recruiting specialists in response to the needs to more sophisticated clients. What is the second recruiting change that happens as you scale?

Greg Alexander [00:04:26] The second recruiting change that pops up when scaling a boutique is the need to hire a manager of managers. You see, startups are filled with small teams, boutiques are filled with medium sized teams, and the market leaders are filled with large teams. Therefore, startups hire managers who manage individuals, boutiques, hire managers who manage other managers and market leaders, hire managers who lead entire departments. So during the scale stage, owners of boutiques need to recruit or develop managers of managers at about midsize. The need for this role again, manager of managers shows up. So this is the second recruiting change and does that make sense?

Sean Magennis [00:05:14] It sure does. So when small startups graduate to the scale stage in their life cycle, the need to hire managers of managers shows up for the first time. This is a big change and it makes logical sense. What is the third recruiting change on the journey?

Greg Alexander [00:05:33] So the third recruiting change that pops up when scaling and boutique is the need to hire executives, boutiques at scale require an executive leadership team. These executives have autonomy to make decisions. They’re not simply executing the founders plan. They are drafting their own plans in at times even have their own independent profit and loss statement, which means they have spending authority. Does the third recruiting change make sense to you?

Sean Magennis [00:06:00] It does Greg and I have seen many a founder stumble at this point. This requires giving up some control and that can prove to be difficult for some. What is the fourth and final recruiting change as a firm scales?

Greg Alexander [00:06:17] So the fourth change that pops up when scaling is a need to reassign the founder. So we all love our founders. They are the pioneers who created jobs and wealth. However, at a certain point, founders become a bottleneck founders. They want to launch new services into new markets and innovate. They do not want to install process and systems and scale. And yet that’s what’s needed at this stage. Therefore, founders must hire or promote a new CEO. The objective is not for the founder to stop working or to work less. Rather, it’s to make the founders contributions much more impactful. The CEO runs today’s business while the founder is developing tomorrow’s business. This one two punch accelerates the pace of scaling. Does that fourth recruiting change makes sense?

Sean Magennis [00:07:15] It absolutely does. Greg and I especially like the word reassign as opposed to replace. We are not showing the founder the door. Instead, we are creating an environment that allows his or her creativity to blossom and not be strangled.

Greg Alexander [00:07:31] Yeah, that’s correct. I mean, where would jobs have been without Cook or Zuckerberg? Without Sanders?

Sean Magennis [00:07:36] Absolutely. Excellent advice and examples as usual. Greg, thank you.

[00:07:44] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Matt Rosen [00:08:09] Hello, my name is Matt Rosen. I’m the founder and CEO of Allata. Allata service enterprise clients in the financial services, health care, retail distribution and professional services sectors. Our clients are nationwide and we have offices in Dallas, Pheonix, Salt Lake City and Boise. Our clients, such as Freman Associates, and the Army Air Force Exchange, turn to us for help with strategic initiatives typically creating new revenue streams, creating digital customer experiences or increasing productivity. We help our clients by building digital strategies and roadmaps, designing product custom, developing software and helping them gain insights into their data. If you ever need help with a digital strategy, product development, customer development or data initiative, please reach out to me at [email protected] and the websites www.allata.com.

Sean Magennis [00:08:56] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your recruiting strategy is working for you. If you want to know too many times, recruiting and the lack thereof is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:10:01] Number one, the individual contributors need to evolve into manages? Number two, the managers need to evolve into managers of managers? Number three, do managers of managers need to evolve into executives? Number four, do you need to shift from generalists to specialists? Number five, are you attracting sophisticated clients with higher expectations? Number six, has the founder become a bottleneck? Number seven, can the impact of the founder be amplified if partnered with the CEO? Number eight, does Decision-Making need to be pushed to those closest to the clients? Number nine, is it time to shift from experimenting with the model to scaling the model? And number ten, is it true that what got you here won’t get you there?

Greg Alexander [00:11:17] You know what I love about those 10 questions in particular in this episode is there’s a yes box in a no boxes, no maybe box.

Sean Magennis [00:11:24] That’s exactly right.

Greg Alexander [00:11:26] So you founders’ out there when you’re asking yourself these questions, make sure you’re you’re answering accurately.

Sean Magennis [00:11:32] Thank you, Greg. In summary, recruiting as a startup is not a mission critical task, yet when scaling, it is the need for specialists, managers, executives and a CEO arrive on the scene. These are new roles and usually cannot be filled correctly from the founder’s personal network. To scale, your boutique needs to become a master recruiter.

If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thank you, Greg. I’m Sean Magennis and thank you, our audience, for listening.