I have a friend who recently made partner at a big law firm. He fits the mould of a successful lawyer: smart, hard-working and willing to wine-and-dine clients into the wee hours to win business.
He joined his firm after law school and worked 100-hour weeks for the first seven years. His schedule was hard on his first marriage, which ended in divorce. While his personal relationships suffered, his career thrived as his partners continually recognized his dedication to the firm and alluded to his candidacy for partnership.
Finally, at the age of 32, he made partner.
His firm didn’t have much of a choice. My friend was starting to build his own relationships with clients and he could have run a file independently. His partners ran into the same problem many business owners face when trying to retain high performers: dilute your equity by making them partners or risk losing them altogether.
Whenever you sell people’s time, you become beholden to your employees as their expertise increases and their client relationships deepen. Like installing wheels under your most precious palette of inventory, the better they become at their job, the more likely your best people are to roll out the door. It’s one of the reasons service-firm owners typically dilute themselves into nothing more than a collective of highly paid employees and rarely get acquired for much more than a long and gruelling earn-out for the principals.
Warren Buffett talks about the depth and breadth of the “moat” around the businesses he invests in. A big moat gives you pricing power against your competition, but it also makes it harder for employees to leave you and set up shop as a competitor.
If all you’re selling is time, the moment an employee is fully trained and meeting independently with clients, he or she becomes a flight risk and a potential liability. If you have a deep and wide moat, employees will need to invest significant time or money to build what you have created and they will realize there is more to your business than marking up their time.
In my former company, we set out to become the de facto conference in our industry. By owning the most important trade show in our space — one that both companies and vendors wanted to attend — we created a moat that was hard for a single employee to replicate. In fact, I did have one employee leave to set up a competitive shop despite having signed a non-compete agreement. She claimed to offer the same service we did, but we had a five-year head start on creating the “go to” conference for the industry. More than just hawking hours, we had a moat that would be difficult for a single former employee to recreate. Last I heard, she had given up and taken a middle-management job for a big company.
Wondering what your moat could be to protect you against employee defection? Here are a few ideas to get you thinking:
Own the annual ranking study for your category: Interbrand does the ranking of brand equity among marketers, making it tough for a one-person brand consultancy shop to compete.
Own the annual awards program for your category: Ernst & Young created the Entrepreneur of the Year awards program and it has solidified its position with fast-growth entrepreneurs, which gives the company a real advantage over a disgruntled former employee who hangs out his or her shingle at tax time.
Own the industry trade show in your space: The consultants at the Yankee Group own “4G World,” which is the conference that has become a must-attend for most of the players in the wireless industry.
Own the benchmark: Fred Reichheld is the founder of Bain’s loyalty practice and the creator of the Net Promoter Score methodology as a way to predict re-purchase and referrals for businesses. His firm owns the database of benchmarks. Companies using the Net Promoter Score want to know where they stand with other companies, so they go to Bain for the benchmarks and strategy for implementing a loyalty program. Bain has a barrier to entry that would take years and many millions of dollars for a single aggrieved employee to replicate.
Your moat gives you a pricing advantage, but it also erects a tall barrier for your employees to hurdle.
Special to the Globe and Mail
John Warrillow is the author of Built To Sell: Turn Your Business Into One You Can Sell . Throughout his career as an entrepreneur, Mr. Warrillow has started and exited four companies. Most recently he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to The Corporate Executive Board in 2008. He is the author of Drilling for Gold and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.