Don’t be a Cult of Personality

By?John Simpson, Svoboda Capital Partners, LLC

Part 1 of the 10 Ways to Increase Equity Value in Your Services Business Series

Svoboda Capital is excited to launch our ‘10 Ways to Increase Equity Value in Your Services Business’ series! Based on our experience investing in professional services businesses, we’ll be bringing our thoughts on how to create lasting equity value in people-centric businesses. For our first installment, we are inspired by Living Colour’s 1988 hit ‘Cult of Personality’ and discuss the perils of building your organization around one.?

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Back when my father started his career at a large printing company in the 1970s, the company identified a unique way to test its leaders. Every so often, the company would remove a leader from her division for a few months and assign her special duties elsewhere in the business. Surely if the division could not survive without the leader's guiding hand, then the leader must be integral to running that division.

However, the company took a different view: If the division could function properly without the leader, then the leader had built her people and processes to scale without themselves. In the company's view, this type of leader was exactly the type of leader that was a 'force multiplier', someone that could create equity value for the organization.

At Svoboda Capital, we look at hundreds of professional services businesses per year. One of the most common themes we see in services businesses is what I call the 'cult of personality'. These businesses tend to employ anywhere from 30-60 people and typically have very modest growth rates, or no growth at all. When we dig deeper into these businesses, we often find that the clients, employees and even the business processes revolve around a single 'personality' in the business. That personality is often, but not always, the founder of business. Two other traits we tend to see in these types of businesses are (a) very tightly held and concentrated equity ownership and (b) a lack of true, empowered executive leadership outside of the personality.

Our theory is that services businesses built around a 'cult of personality' max out at around 60 people. At this size, the 'span of control' of the leader is exhausted, and these businesses never grow beyond this size. All operating decisions, no matter how small, must go through the leader. New business is only generated by the leader and the firm's value proposition to its clients is tightly connected to the leader's personal brand.?Opinions that challenge the leader are not welcome leading to a compliant – and complacent – staff.?And in general, the business tends to be run more for the benefit of the leader’s lifestyle than for shareholder value creation. ??

'Cult of personality' businesses are not inherently bad, but their value is considerably less than it should be. As private equity investors, we do not give these types of businesses a second look owing to the massive amount of key person risk. So, what can services businesses do to avoid - or unwind - a 'cult of personality'?

There are many ways services businesses can avoid the trappings of a cult of personality organization. Here, we will discuss a few steps we've seen firms take to scale their organizations away from the cult of personality. Perhaps most importantly, the personality in question must recognize what their highest value to the organization is. Maybe it’s new business development, solution delivery or team motivation. Regardless, focusing the leader on his most important use is key to scaling the business. In some cases, this may mean handing over the reins to a professional CEO or President. Another value-building strategy is to bring in and empower senior-level talent. For example, often we will see that a COO, CFO and/or Chief People Officers are added to take on the duties that the leader is delegating. Adding and empowering senior leaders is a major step to resetting the organization from a command and control culture built around the leader to one that understands and values different opinions and skillsets. Next, and one of the hardest steps to execute on, is institutionalizing the leader's value. Perhaps the leader is a creative genius known for their particular style. Or maybe the leader is known by clients for solving highly complex issues through their analytical ability. Either way, the business needs to identify a means for capturing and scaling the leader's value. For example, this may mean building a methodology around the leader's approach to creative or analytical issues that can be used to guide all employees. It may mean changing the recruiting criteria to identify and hire employees with particular backgrounds that better align with the leaders. Whatever the solution is, showing that the organization can 'rinse and repeat' on its value proposition is an extremely important element to convincing potential investors that the organization can grow and thrive. At Svoboda Capital, one of our tell-tale signs that value can be delivered outside of the leader is whether the leader has distributed equity deeper in the organization. If the leader has granted equity to others within the business, it’s a good sign that they also believe those shareholders are critical to the firm’s overall value proposition.

Many years ago, while serving as the CEO of a digital agency, I received a call on a Sunday from one of my senior business development professionals letting me know that she could not fly to a pitch that was taking place in another city on Monday. I offered to take her spot leading the pitch, but admittedly knew very little about the potential client and/or the solution we were proposing. My strategy was to focus the potential client's attention on my talented team, and to shut up out of fear of exposing my lack of knowledge. A few days after the pitch, I received a call from the potential client letting me know that we had won the work. Always curious about why our clients bought from us, I asked the client what part of the pitch resonated particularly well with the firm. The client responded, "We felt very comfortable with your team. Your biggest competitor's CEO came in, dominated the conversation, and wouldn't let his team talk. You did the opposite. And after hearing your team speak, we felt that we would be in very good hands with them, regardless of whether you are involved or not."

The lesson for me was simple: While no one can deny that it’s human nature to want to feel valued and 'integral' in any endeavor we undertake, more meaningful and scaled value can be created by building an organization that can thrive in your absence. For professional services businesses looking to maximize equity value, thinking critically about how the business could perform without the highest profile personalities is the key to unlocking growth and value creation over time.