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Practice Management

In these uncertain times, the practices that are prepared will be the ones that not only survive but prosper.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

When I was a kid, setting out for a day in a small boat was an adventure, because I didn't know what to expect. The outcomes were uncertain. Sometimes it was fun, but occasionally it was dangerous.

Years later, in the U.S Navy, setting sail entailed much more risk and, at times, substantial danger, but the outcomes were rarely in doubt. As a boy, I was lacking in knowledge, unprepared, and unconcerned. In the navy, I was extremely well prepared.

What's the connection? The seeds of my business success were sown during my naval experiences.

These days, all businesses face uncertainty and sometimes even chaos. During bad times, some financial firms shrink, or even sink. But other firms survive and even thrive in the face of unexpected circumstances. What sets them apart?

Similarly, some companies, athletic teams, and individuals have great success in the face of crises, intense competition, or extraordinary personal circumstances. Why is that?

I've learned from history, research, and personal experience that conventional wisdom often does not teach how to prepare for success during turbulent times. Below are three myths about success that are regularly repeated.

Vision Myth
We've all heard, "You need visionaries and charismatics."

Fuhgeddaboudit. The most successful companies aren't led by bold, risk-seeking visionaries. The best leaders look at what works and build on proven experience. They weren't seeking more risk. Rather, they were more disciplined, empirically creative, and productively paranoid.

In his book Only the Paranoid Survive, Andy Grove, the legendary former CEO of Intel, writes: "You have to a certain course and a certain pace.... If you're wrong, you will die. But most companies don't die because they are wrong; most die because they don't commit themselves. They fritter away their valuable resources while attempting to make a decision. The greatest danger is in standing still."

Knowing when and how to react to circumstances is a key to your business success.

In his book Great by Choice, Jim Collins writes that company leaders who succeeded in turbulent times were not more "creative... visionary...charismatic...heroic...or prone to making big, bold moves."

Rather, he says, leaders who kept successful businesses on track during turbulent times did have three key traits: "fanatical discipline, empirical creativity and productive paranoia."

Innovation Myth
Another exaggeration: "Innovate or die." The best sports teams don't change their strategy or game plan every year. The most successful companies are no more innovative than those that are much less successful. What builds big success is the ability to scale innovation from a blend of creativity and discipline.

Dan Bricklin, my classmate at Harvard Business School, developed a highly innovative software program—the electronic spreadsheet VisiCalc. He couldn't scale his idea by himself, however, so he sold to Lotus.

Another classmate, Meg Whitman, figured out how to scale the business of her company, eBay, on the Internet and became the class's first billionaire.

Plenty of people have ideas. It's a combination of creative ideas and the ability to scale them profitably that helps businesses flourish. For Bricklin, it wasn't great innovation that was missing, it was scale.

Speed Myth
Going really fast in sports does not mean you'll win. Companies that regularly and rapidly change business goals or operational models are often killed by the competition. The best professional drivers know when to go fast—but also, just as important, when to brake. The best firms know when to go fast and when to move at a steady pace.

In Great by Choice, Collins compared two airlines: PSA (formerly Pacific Southwest Airlines, and now a regional carrier for US Airways) and Southwest. Southwest copied everything in PSA's business model (with permission) and started an airline, doing exactly what PSA did. When deregulation of the airlines came along, PSA changed its strategy and business model. Southwest did not, and it became a successful domestic airline.

Its success didn't have anything to do with being first, though. Rather, it was the ability of Southwest's leadership to blend creativity with continuous discipline, which resulted in what Collins called the "fire bullets first, then cannonballs" strategy.

Yet another former classmate, Jim Hackett, came in as CEO at Anadarko Petroleum in late 2003. The company's stock price had declined in spite of broad equity market growth in 2003, and expensive exploration projects had not resulted in significant finds. Being first to find oil wasn't the right idea.

Hackett came aboard and scaled back the size of exploration projects, resulting in lower financial risk and more successes. Those smaller projects were what Collins calls "bullets." When the probability of bigger reserves came along, Hackett committed more resources—the "cannonballs."

Applying the Lessons
How are we applying these insights at my firm, Savant Capital Management? We've created several approaches that we think will help the firm thrive, even amid uncertainty.

Emphasize discipline, creativity, and productive paranoia. We've set ambitious growth goals, which could quickly double our 2,700-client base. We use the repetitive discipline of measuring productive activity, such as specific advisor business development activities, asset inflows, client meetings, media mentions and involvement, and the like. This year, we're also employing a variety of outside consultants to work with key staff members to bolster their creativity in refining or even replacing procedures, processes, and technology to deliver more value to twice as many clients. We're focusing on the most technical and procedure-driven pieces first—portfolio management and trading—because our productive paranoia keeps telling us that if we can't efficiently scale our core business operations, we could stagnate.

Innovate and empower. In their book CEO Road Rules, Mary Key and Dennis Stearns describe a "right execution principle" as "holding people accountable for their personal and team objectives and give them the space to innovate." Recently, every Savant employee got a memo from the CEO. It read in part: "Increasingly, Savant's success will be accomplished by getting results through you, Team Savant.... [You] will need to lead the charge in the...development of new intellectual capital and management of our firm.... My job is to empower you to make sure you each have what you need our clients' and our team's overall success." Leaders in every firm must deliberately innovate and foster creativity by empowering, encouraging, and rewarding those closest to the front lines: advisors and professional support staff.

Grow—but not too fast or too slow. Our growth plans include four established business divisions and newer projects. Recently, we developed a small new distribution channel. (Remember, fire small bullets first.) We are about to slowly roll out another business division. Will either of these efforts replace our core business of wealth management to high-net-worth individuals? Whatever happens, we're not firing cannonballs—or, more specifically, committing millions of dollars—from the start. In a similar fashion, our growth strategy envisions the possibility of combining with other wealth management firms, as we did last year. From the lessons we're learning from that combination and integration, we are more clear on the time and effort it takes to successfully take on a new business partner.

Here are two questions your firm needs to answer: Do you think a business storm is brewing, or are you hoping for fair winds and calm seas? How prepared are you for either?

Glenn G. Kautt is a contributing writer for Financial Planning.


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