Settling operational issues in advance lays the foundation for a successful merger.
Merging practices has become quite popular in recent
years, owing to the perceived economies of scale. Having a larger asset
base could potentially gain negotiating advantage with independent
broker-dealers and custodians. Combining staff, resources and
experience could result in advantages as well.
However, depending on how the merger is structured,
those advantages could quickly disappear. Therefore, it is wise to
consider carefully several aspects of a merger before attempting it.
The list is long, but five key issues to get a handle on are:
Compensation and expenses
Organizational structure
Operational requirements
Staff issues
Facility issues
Compensation And Expenses
Defining a compensation structure among new partners
can be a complex task. One method used with RIA-type fee-only firms is
to pool the revenue and portion it out to the partners based on some
predetermined scale (often chosen based on agreed-upon prior-income
figures). As an example, if four merging practices jointly produced
$500,000 of annual revenue, but one of the four partners produced
$250,000, or half, of that number, in this example he/she would be
entitled to 50% of the joint revenue of the merged firm.
Scaling is often applied to this model, where an
assumption of income leveling over some predetermined length of time
might occur, subject to some productivity measures to ensure that each
partner is pulling his or her own weight in the new firm. With
broker-dealer relationships, this type of compensation sharing may not
work depending on the rules of the brokerage.
Therefore, some firms have adopted an
expense-sharing model to account for the relative needs of the partners
who merge into a single firm. In this instance, developing a sharing
model using percentages gained from past performance may not be fair to
all parties. As an example, there could be a firm with higher expenses
owing to overweighted staff or inefficient use of technology, office
space or equipment leasing. Is it fair to meld that practice into
others, who may be more cost-efficient and use a cost-sharing method
based on relative percentages? Probably not! In those cases, the
relative needs of the merging firms must be considered in the larger
context of the merged firm's overall efficiency.
Organizational Structure
This leads us to the issue of organizational
structure. Some struggles with merging firms involve how the new merged
firm is going to be run and who will run it. The idea of rule by
committee is fallacious (on its face) owing to the confusion on the
part of staff as to who is "calling the shots." Given a merged practice
with four to five partners, staff might be left to deal with four to
five sets of mandates, each in conflict with the others. Without clear
workflow controls and managerial oversight, task assignments can
migrate away from the less efficient staffers and toward the
overburdened efficient ones creating workflow bottlenecks, employee
frustration and overall loss of productivity.
Clearly, naming at least a managing partner is
called for in this instance. If the firm is large enough (20-plus
employees), creating a middle management position could relieve the
staff frustration. This middle manager, perhaps titled an operational
manager, would presumably be responsible for overseeing task
assignments and overall workflow within the merged practice.
By eliminating partner interference in task
assignments through a requirement that all tasks go through this
manager, workflow could be evened out among appropriate employees,
which could result in lower levels of staff dissatisfaction and higher
overall productivity. The key is to measure objectively the level of
loss of productivity from not having this position created and weighing
that cost against the salary and benefits for a manager who could
reverse the situation.
Operational Requirements
Another complicating factor is the operational
requirements of the merged firm. The so-called "silo" firm is one in
which each merging partner brings a specialized aspect of his/her
practice to the new, merged firm and continues to operate as though
he/she were still independent. The silo firm presents unique challenges
in designing the overall operations in that melding staff can be
especially difficult, given the potentially different tasks they might
be asked to perform for each partner.
For example, a merging practice might consist of an
estate planner, a divorce planner, an asset manager and a family
financial planning practitioner. Each of these potential partners would
have distinctly different practices, potentially different technology
(software) needs and day-to-day operational needs. Asking a
paraplanner, for example, to be nimble enough to adjust to four
different financial planning styles, much less juggling multiple tasks
throughout any given day, would prove daunting to even the most
efficient of us.
Given that each partner might view his or her set of
tasks as of greatest importance, such a structure is inherently prone
to inefficiencies, staff frustration and higher employee turnover
rates. The answer might lie in centralizing those core tasks that can
be centralized (i.e. data entry, order processing, filing, client
relationship management, etc.) and setting up employee teams to focus
tasks around the specialized partners for the rest of it. Leveraging
technology to build in additional operational efficiencies also can
lift some of the burden off the shoulders of your employees.
Staff Issues
Speaking of employees, another key issue in merging
a practice is the considerations of staff. Not all merging practices
bring identical employee resources into a merged firm. One partner
might bring in a larger number of employees. Another partner could
provide a key, highly trained employee. Yet another partner might have
an employee that is not a good fit for the merged firm.
These delicate issues should be worked out well in
advance. Hard as it might be, developing a strategic plan for the new
firm will mean that each employee is subject to a rehiring process.
Because the operational requirements of the new firm could be
considerably different from the older firms, it is necessary to ensure,
in the words of Jim Collins in his book, Good to Great (HarperCollins,
2001),
"that ... you are getting the right people on the bus." It is no
different than if you were starting the practice from scratch, as far
as the employees are concerned. Responsible business owners must
consider the health of the new firm and make good hiring decisions.
Facility Issues
Finally, the new firm must decide on the arrangement
of the new offices. Often, a merging practice is going to be a much
larger practice after the merger, both in revenue and in number of
people occupying the offices. The result could be a disorganized
arrangement of hastily placed office furniture, filing cabinets and
technology if it is not carefully planned. One thought is to position
desks and group employees in light of their workflow interactions. As
an example, if one employee has primary responsibility for filing, yet
his or her desk is at the opposite end of the office from the main
filing area, it would lead to unnecessary additional steps to complete
those filing related tasks.
If an employee works along side other employees with
similar tasks, yet those employees are not necessarily grouped
together, there could be inefficiencies that develop purely from
positional issues. Another issue could be visual and/or auditory
interference. Having a cubicle area with cubicle walls that do not
adequately prevent auditory spillover (being able to hear another
person's conversation in person or on the phone) could make it
difficult for another employee to concentrate and/or carry on their own
conversation.
Imagine the impression of your clients when they
might speak with an employee, hearing excessive noise in the background
of that call. Visual interference occurs when cubicle walls do not
prevent constant interruptions from people walking by, or talking to
that employee. You may not want to eliminate (totally) this type of
interference, as a certain level of employee interaction could be
healthy for the firm. However, cutting down on unnecessary visual
interference has been shown in studies to improve employee productivity
and lead to increases in a firm's profitability.
By carefully planning a merger, partners can enjoy a
merged firm in which the whole is greater than the sum of the parts.
The key is to build in efficiencies as you design that firm.
David Lawrence, AIF (Accredited
Investment Fiduciary), is a practice efficiency consultant and is
president of David Lawrence and Associates, a practice consulting firm
based in Lutz, Fla. (www.efficientpractice.com) David Lawrence and
Associates offers a variety of consulting services, including
technology consulting related to the financial planning process and
investment management.