CA Statute 699, the FTC and the Demise of the Non-Compete. Consequences?

The recent US Federal Trade Commission (FTC) decision this week to ban nearly all non-competes follows on from a similar decision made in California a few months ago. Does this herald a new era in employment practices in professional service firms (PSFs) or, as Mark Twain said about reports of his likely demise, are the reports of the death of restrictive practices greatly exaggerated?

We are yet to see authorities in other places, such as the EU, follow suit, though it is expected they will. Despite this, the impact of the CA 699 and FTC rulings go way beyond the borders of the USA.

The FTC estimates that about 30 million Americans are restricted by non-competes, and that the policy change could lead to increased wages totaling nearly $300 billion per year by encouraging people to swap jobs freely. This sounds good for the workers, and perhaps challenging for the employers. But what are we seeing so far, and what are the likely long-term consequences?

There are likely to be unexpected consequences of the FTC decision

It is a little early to see too much in the way of change, or to attribute any particular change to the removal of non-competes. Watch this future space.

However, we have seen large firms, McKinsey has been mentioned in the press, paying people they consider to be underperforming 9-12 months pay to leave the company. This buys the firm 9-12 months to secure the relationship with any client the person leaving worked with. Of course, as far as I understand it, the employee does not have to agree to the deal, they could simply leave without a non-compete. On face value this looks like an increased cost to the employer, they are basically buying a non-compete through mutual agreement, and a win for the ex-employee. However, big firms have done this before, they see the cost of removing someone through performance management programs, the ongoing pay costs and the opportunity-cost of time taken, as potentially costing less than the 9-12 months pay. It will be interesting to see whether other firms, especially smaller ones ,take up this practice. It may be worth asking the question "If you have to pay an underperforming employee 9-12 months pay because of your fear they may take a client away, how strong is the client relationship?". Rather than develop this practice, would it be better to develop ways to strengthen your client relationships?

It may be worth asking the question "If you have to pay an underperforming employee 9-12 months pay because of your fear they may take a client away, how strong is the client relationship?"

If smaller firms do follow the large ones and this practice of "Buying" non-competes becomes common, it will feel like an increased cost to the firms. It may make firms less likely to recruit, or slower to recruit, and more cautious about which clients people work with. Even if they don't it may make the following practices become common in PSFs

• Shielding top clients from new staff. Until they prove their worth, new members of staff will not work on top accounts, they will work on smaller, less financially important accounts
• Rotation of staff, especially senior staff. Even the best staff will be rotated through accounts so that they never become pivotal to the relationship. This is especially important with senior staff, who are the most likely to be able to take "A client with them when they leave". This will address the often common practice of one person at the PSF owning the client relationship. This is now too dangerous a practice, and the client relationship needs to be owned by a team with an owner/partner leading the team
• The increased involvement of owners and partners with clients. To preserve client relationships, the owners and partners in a business are likely to remain more centrally and visibly involved with top clients, to protect and preserve critical relationships. This may stifle the ambitions of senior people in the firm, and may also not please some partners who thought they had moved beyond the management of client relationships. This has been reported at large firms. Of course, those clients who don't feel this "Owner love" will demand it too!
• The creation of proprietary methods of communication. In an effort to create strong links with the client, firms may create communication methods and databases that require the client to stay with them. We are already seeing this happen in areas such as data analytics, consulting and CI, where firms are creating platforms that capture data and often add value through an AI interface. I've spoken about this before, and it is becoming a critical piece for many PSFs
• In an effort to deal with increased costs some firms will push up prices, though they may struggle to get clients to accept this. It's an obvious response, in the face of more client volatility push up prices so that each client is profitable all the time, and that the additional costs and risks are covered. However, today, and for the foreseeable future, it is a buyers market. If you do not have a differentiated service, you will find it hard to put up prices, clients will simply go elsewhere, doing the very thing you don't want them to do. Furthermore, clients might ask a top employee that they respect to do the work for less, again leaving the PSF without a client

What can PSFs do to have a robust response to the new world without non-competes?

What can PSFs do to have a robust response to the new world without non-competes? I look forward to seeing what PSFs do to respond to this challenge. Speaking with some leaders in the field the following topics are important.

• Differentiate your business. I talk about this a lot, apologies for doing it again. However, leaders should focus on creating a business that is somehow and valuably special, seen as unique in ways that are important to clients. The PSF should be perceived as being more valuable that the individual employee, and providing services that the individual can not
• Make your workplace somewhere that people do not want to leave. To avoid a large number of leavers potentially massively disrupting your client base, make people want to stay. Ask staff what they want, make their wellbeing a priority, deliver on your promises, and provide a package of pay and benefits that is attractive. This may not stop an individual leaving, but it is likely to stop many people leaving at once
• Put the client at the centre of the business, especially for leaders. Leaders should ensure they spend most of their time with clients, listening AND adding value, bringing their knowledge and expertise to bear on client challenges and ensuring the client sees the value of the owner/partner. This will make some leaders uneasy, especially those that think their role today is to look at spreadsheets and issue policies. If they are worth what they are paid, they will want to be involved and lead client relationships. This may lead to restructuring of firms

Will the next few years see a growth in small firms as client relationship leaders leave larger firms and take clients with them?

Will the next few years see a growth in small firms as client relationship leaders leave larger firms and take clients with them? It probably will happen. No doubt this will lead to a cycle of small firms being established, some larger firms struggling and getting smaller, and ultimately the smaller firms being absorbed back into larger firms, or coming together to create their own larger firm. Who wins will be determined by the ability of the existing firms to address the points above, create a unique and valuable proposition, amend their client relationship practices, and face the new future.