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The Principal's Dilemma (Part 1 of 2)

May 31, 2013 | By Rena M. Klein, FAIA | 0 Comments

Topics: Firm Operations

Are you the founder of a small design firm that has been in business for ten-twelve years? If so, you are at a moment of decision, a turning point. This moment in your firm’s life cycle would be the same in any economy, but it is especially critical during a recovery.

In a nutshell, the decision you are faced with is this: Do you want to grow your firm – bigger projects, more staff, more capacity? Or are you content with its current size and capabilities? You might be thinking that it's not worth the effort, that it is impossible to grow your firm in this economic climate. For some firms, in some regions, that may be true. However, if you really want it and apply your creative abilities, a myriad of strategies and actions can be developed for almost any situation. If not, that’s fine too, but know it as a conscious decision that also takes planning.

If you decide you want to grow your firm, it is likely that you can position yourself to make more money over time. But in order to grow your firm, and make more money, you will have to let go of some control. So the real question is, are you willing to do that?

According to Harvard researcher Noam Wasserman, most entrepreneurs go into business seeking both wealth and control. Entrepreneurial architects are more likely to say they want better pay and more opportunity to design. But whether they admit it or not, many firm owners do covet their autonomy and control.

In his 2008 article, “The Founder’s Dilemma,” and 2012 book by the same name, Wasserman reports on a decade of research involving hundreds of American start-ups. His findings show that as a business grows, it inevitably outgrows the skills, energy, and resources of the founder. Basically, Wasserman has discovered that most entrepreneurs eventually must choose between “making a lot of money or running the show.”

Wealth or Control

While letting go of control may lead to greater return on investment, many founders find this to be extremely difficult. As explained by Wasserman, “The founder creates the organizational culture, which is an extension of his or her style, personality, and preferences. From the get-go, employees, customers, and business partners identify start-ups with their founders, who take great pride in their founder-cum-CEO status. New ventures are usually labors of love for entrepreneurs, and they become emotionally attached to them, referring to the business as ‘my baby’ and using similar parenting language without even noticing.” Anecdotally, most founders of design firms seem just as attached to what they have created as the CEO’s in Wasserman’s study.

Wasserman also reports that entrepreneurs tend to be overly optimistic about their potential for success. Many entrepreneurs believe that they are the only ones that are capable of running their company, even when there is evidence over time to the contrary. Architects and designers are particularly susceptible to this belief since they may have built their reputation on a unique talent, ability, or style. Research also shows that founders are willing to work with uncommon dedication at start-up—51 percent of founders earned less than at least one employee, even if they shared comparable backgrounds.

According to Wasserman, founders come to a point where they must give up some control in order to grow their business. For a single principal/owner of a design firm that point usually comes when the firm has grown to beyond seven or eight employees.  Beyond that number, it is likely to become overwhelming and unsustainable for the principal. In order to grow, founders need additional managerial and “rain-making” capacity from experienced employees, or new partners, or experienced employees who become new partners. In order to acquire this additional capacity, firm owners must share control. Wasserman calls this the “rich versus king” trade-off and finds that founders who share control with others build a more valuable company and are better compensated than those who don’t.

Lifecycle of a Design Firm

If your firm has been in business for more than ten years, you probably have established a client base, a trustworthy staff and a reliable project delivery process. Even if you downsized during the recession, you likely have past clients, a network of consultants, and a portfolio to build upon. In the first ten to twelve years of an architectural firm’s existence, the founder establishes a professional reputation, builds a network of strategic alliances, and gains a considerable amount of experience and knowledge.

After around twelve to fifteen years, firms usually reach a plateau of stable maturity, with an established identity and foothold in the marketplace. Given the long recession years, this may take a bit more time for firms that were founded in the 2000s. But when this happens, founding principals may face Wasserman’s “rich versus king” dilemma. If principals are uncomfortable delegating responsibility and authority it will be difficult to successfully grow the firm. Figure 1 illustrates the likely lifecycle of a firm where the founding partner is not interested or unable to share control with second generation leadership.

Firm Life CycleFigure 1: Most small firms last 30 yrs +/- (the length of the founders’ career)

The critical issue is that a firm will not be able to build equity and have market value beyond the founder’s work life unless second generation leadership is fostered. No one is likely to value the firm more than experienced employees who, when they become firm owners, can take full advantage of the firm’s reputation, portfolio, and client base. For transition to second-generation leadership to succeed, founders must be willing to share responsibility and authority.

Whether or not firm growth is personally appealing, it is important to think about the long-term implications of this decision. Part 2 of this article will show you the lifecycle of a firm made possible when second generation leadership is engaged, and how deciding you want to grow, or not grow, your firm relates to planning for a comfortable retirement.

Rena M. Klein, FAIA is the author of The Architect's Guide to Small Firm Management (Wiley, 2010) and principal of RM Klein Consulting, a firm that specializes in helping small firm owners run their firms better.

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