PDF Document

There are various ways to build and grow a business, some grow by acquisition, others prefer organic growth. In the servicing sector, the decision to grow organically is arguably the tougher route, but it enables businesses to stay true to its original values. You will struggle to find many owner-managed businesses in the financial sector that are not quickly offered the opportunity to sell and become part of something much larger.

The decision to stay independent is a conscious one. Owner-managed businesses by definition stay close to their clients. Scaling irrespective of the consequences is not an option.

Growing a business organically, when compared to growing by acquisition, is hard work! When establishing any new business line (e.g. a depositary business), you may be able to use additional infrastructure, but you still need financial resources, a coherent plan, additional human resources and clients! And when setting up in a new jurisdiction, you are building from scratch! Everything from office space to staplers, employees to cleaning contractors, business licences to business cards need to be sourced. But the hard work of growing organically brings with it some obvious advantages. There are no legacy issues. You have a clean page. This means you can instil key values from the start and grow the business using these. We would assert that an organically-grown business is infinitely more sustainable than a business built by acquisition.

Organically-grown businesses can benefit from existing infrastructure and know-how of the senior management to build another business line that imbues the core group values. Professional services businesses are people businesses, where you have motivated managers and engaged employees, happy clients always follow.

Successful businesses don’t stand still. Growth avoids the trap of getting “stuck in the middle”, it allows a business to keep ahead of competitors, and creates opportunities to grow and retain talented individuals. However, business expansion does not come without its pitfalls. For professional services businesses, the most critical issue for growth is retaining the standards of quality and the personal involvement that have enabled a business to succeed in the first place.

Time has shown in many cases (and it is also our experience) that there need not be a trade-off between growing a business and keeping the same level of focus. There is certainly no single right approach and different firms have found different way of doing this. From our experience we might suggest that the following broad ingredients are important, albeit the details will differ by situation:

Proactive management. Leading a business through in an expansion phase requires active input by senior management. Many tasks that work fine without too much planning when a business is small need to be upgraded later. This likely includes formalizing the way planning and supervision is done, scheduling internal communication meetings more explicitly, and implementing additional internal reviews and controls.

Keeping the business model intact. Essentially this is about keeping the distinctive factors that are responsible for putting a business in a leadership position in the first place. It is important both inside and outside the company, to define the approach to market. An organically-grown professional services is likely to include a partner-led approach and a deep specialization of the industry in which it operates. A boutique led by partners motivated by continuous learning is likely to succeed. Many professional services businesses have switched to a “sales vs. operations” blueprint, or delegate their “back office” work to far off locations. This causes a gap between the people who speak to the client in the pre-engagement phase, and those actually providing the service day to day.

Formalising professional development. In a small team led by experienced partners, an apprenticeship model will naturally take shape, at good businesses this will be reinforced by professional qualifications. As the team expands, implementing a more structured professional development plan is critical to maintaining the model and ensuring that no critical skills are missed. This can be done in a variety of ways: specific topic coaching by management team members, organized experience sharing in peer groups, and external training.

Smoothing the expansion of resources.
Markets often proceed in a stop-start manner and this seems to be especially true of the private equity markets and fund-raising cycles. The challenge for businesses is that growth tends to comes in spurts (for example closing Fund II!), rather than on a smooth trajectory. The tested tactic for mitigating this challenge, to the extent possible, is to adopt a level of anticipation and confidence in expanding team and resources smoothly over time.
One learning that has been reinforced many times is that it is a steady adherence to the professional services model which enables staff to absorb and apprentice new talent, and which in turn allows a smooth transition through the various business phases.

In an entrepreneurial space such as the private equity and real estate funds industry, expansion phases are helpful for healthy professional businesses. The fundamental success factor is for the business founders to stay focused on their core values and the models that reinforce those values.

Disclaimer: The material on this website is intended for information purposes only. We are providing general educational information on the investment industry. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular course of action. Please seek a duly licensed professional for investment advice.
Please note that the views expressed in this talk are the speaker’s own and do not necessarily constitute the views of their organisation. Thank you.