From boutique to institution

Insight shared by:

Kiddy & Partners

The organisational and human capital challenges investment firms face as they grow are complex, and often daunting.  Here’s what to know – and do – today to see your firm through a successful transition from boutique to institution.

In the past ten years, leading alternatives firms have experienced exponential growth in their headcount, geographic footprint, and number of investment plays, becoming almost like bulge-bracket banks in terms of their platform and reach.  Even newer, single-strategy firms are facing continuous pressure to scale their businesses and operations.

With all this upsizing comes a set of daunting organisational challenges completely unlike what your firm has faced before.  Take recruitment as an example: to survive and compete, you must recruit, develop and retain top people often in new geographies and/or strategies, and increasing numbers of them, year in and year out – an endeavour that requires a completely new approach and tools.  Or the investment decision process: What used to take a simple discussion amongst the founding partners a few times per year now must occur biweekly, across offices, regions and strategies, with ten times as many constituents.

The risk is that firms either retain key cultural elements like the hustle, creativity, central control and oversight by the founding partner(s), or they develop the processes, systems and structure that permit scale, but in doing so, turn into very different, bureaucratic institutions, stifling the very behaviours that drive performance and growth.

So, is your firm ready?  Do you have clear, practical, cost-efficient strategies in place that will enable the move from “small” to “big” firm – ones which won’t distract from core investment activities, but will preserve the special culture that fostered your original success?  Have you seen round the corners of growth and institutional scale, and mitigated the challenges coming?

We spend the majority of our time working alongside alternatives firms to put in place the right, and the right amount of, organisation and process to enable growth, foster investment results, and preserve each firm’s unique culture.  Yet while each organisation we work with is different, there are certain key issues that every single one of our clients faces, and has to overcome.  Over time, we’ve come to see this list as a blueprint by which any firm can maximize its chances for success in larger form.  Here are eight of the issues most prominent on our list – ones that, if you’re a smart, ambitious firm in growth mode, we recommend focusing on early:

  1. Make expectations explicit.  Just as your portfolio is organised around a cogent, disciplined view of where to find and build value, your firm should be, too. By developing a clear, and widely understood view on “what we’re looking for, who succeeds and what gets rewarded here”, you pave the way for consistent and effective hiring, compensation and promotion decisions in larger numbers in the future.
  2. Clarify roles. At inception, growing the team meant finding a few smart, reliable, long-standing colleagues to join the effort. Significant growth often starts to reveal that there are overlaps between some roles and, far more worryingly, areas of whitespace in which essential activities are no-one’s concern.  To enable scale, you must clearly define roles, particularly those at leadership level or in key specialist functions, in terms of the contribution they make and, crucially, the performance for which they are accountable.
  3. Define governance.  Small size permits informal decision-making and makes it possible to control and manage with rudimentary tools.  You could see everything that was going on.  Again, at scale this becomes unworkable. Prepare for growth by designing light touch processes and clear decision-making authorities and information flows appropriate for monitoring and managing the larger business you intend to be. There’s no need to become a bureaucrat – but there is a need to pick the key spots where you need better practices and processes!
  4. Develop a workable performance-management ethos and system.  Like many, a 360 review system may be the way you manage performance.  But the emails-and-spreadsheet system of subjective write-up evaluations you may be using currently will become impossible to administer, and yield little useful data, at scale.  An effective long-term system does not need to be lengthy, time consuming, or done in a fancy online platform, but it does need to be consistent, specific, thorough, transparent, and point towards actionable performance outcomes.
  5. Manage your culture – relentlessly.  The simplest definition of corporate culture is that it is the thing that governs the behaviour of people within the organisation when their boss isn’t around.  As your firm grows – and as constant managerial oversight of a large, multi-site team becomes impossible – culture becomes ever more important.  Your most important tool for managing culture: Promotions.  Who gets advanced in an organisation sends clear, specific messages as to what is valued and rewarded.
  6. Develop – and retain – your people.  The “apprenticeship model” of talent development – by which your younger employees learn and grow by sitting near the more experienced ones – erodes quickly as your firm expands, and must be strengthened by new strategies for training and building capability.  Frequent performance feedback, staffing variety, formal training sessions led by internal leaders, and executive coaching are a just a few of the time-efficient tools you can use to develop your people quickly, and without distraction from their work.  Don’t expect rising stars within the firm to “figure it out”.  Teach them.
  7. Refine your hiring process to minimise the required time investment – and maximise reliability.  First, position your “brand” in the marketplace – make your “people investment thesis” clear inside and outside the firm.  Second, ensure that all investment professionals within the firm have a “hit list” – a clear view on top talent they would hire, if they could.  Third, make sure your recruiters, both internal and executive search, know the firm’s business and decision-makers very, very well – such that they can be effective proxies for the firm.  And fourth, approach assessment as an organised process and interviewing as a team sport to eliminate “false positives” and time spent on marginal candidates.
  8. Develop a people-related risks framework – and let it work for you.  People-related and organisational risks grow exponentially with size, and even low-grade people issues can balloon into a significant distraction as the firm becomes larger.  Get your legal and operational strategy in place, and ensure that all employees understand the rules of working within your firm – and consequences for breaking them.

Issues surrounding organisation and people can feel daunting, if not downright forbidding, to most investors. They’re slow-moving, less exciting than the deal process, and seemingly fraught with layers of interpersonal drama, but they don’t have to be.  By focusing on a few prominent, critical points pre-emptively, and before a firm’s growth demands it, and taking decisive action, savvy investors can grow their organisations into the firms they want to be.

Got a question? Get in touch.