Genre: Corporate Governance
Author: Charles D. Ellis
Title: What it Takes: Seven Secrets of Success from the World’s Greatest Professional Firms (Buy the Book)
Summary
Who are the world’s greatest professional services firms, and more importantly, how did they achieve such status? These questions led Charles D. Ellis to the inception of this informative guide to success. A well-respected expert in both investment and strategic management consulting, Ellis’s extensive experience allowed him to find the answers to the following seven keys that build upon each other in order to produce greatness:
Mission: the most important of the seven, is the overarching purpose that ensures dedication, determination and personal sacrifice from the firm’s “unusually” talented and ambitious people
Culture: the conversion of mission into daily practice is a set of values focused on teamwork and self- discipline to repeatedly achieve superior results, it is what bonds colleagues of the firm into a tribe
Recruiting: a relentless determination to recruit and retain the finest talent; achieving its goal to bring in brilliant and well-motivated people in order to execute the mission and vision of the firm
Developing People: a deliberate follow up to recruitment; an education up the steep learning curve is provided to trainees ensuring the mission is circulated in the firm from inception
Client Focus: differentiating between a client and a customer is the emphasis given to the relationship, allowing the client’s best interest to be served
Innovation: the only way to maximize the client value proposition is through the unrelenting spirit of innovation which can be executed strategically or structurally
Leadership: binding all the keys together, an effective leader must deliver maximum value, and stay laser-focused on making the vision come fully alive for clients and prospects
Ellis asked various firm leaders, within five service industries, a series of questions with the intent to identify the leading firms in today’s business market. There was a clear consensus; McKinsey & Co. in consulting, Cravath, Swaine & Moore in law, Capital Group in investment management, the Mayo Clinic in health care and Goldman Sachs & Co. in investment banking.
All the firms recognized in this brief are highly regarded by their peers, withstanding adversity and time. They exemplified the ability to not only achieve success, but sustain it time and time again. This brief will also look at the self-destructive downfall of once highly considered professional services firm, Arthur Anderson. Clear and present examples of how to achieve and sustain excellence is illustrated by Ellis, along with the reality that sustaining excellence is the most challenging factor of all.
INTRODUCTION
Charles D. Ellis is a best-selling author, expert investment consultant, and former founding managing partner of the international business-strategy consulting firm Greenwich Associates. In his book, What It Takes: The Seven Secrets of Success from the World’s Greatest Firms, Mr. Ellis provides the “simple” keys to being a successful professional firm grounded in excellence and sustainability. The following keys are derived from his extensive fifty-year career of studying and consulting in the financial services industry:
- Mission
- Culture
- Recruiting
- Developing People
- Client Focus
- Innovation
- Leadership
These seven keys were formulated as Ellis asked himself and other senior executives a series of questions with the objective of identifying the name of specific firms and their attributes that have withstood the test of time and are large enough to not be dependent on a few individuals.
To his surprise, the results were very much like an Olympic athlete where they might compete in different events but generally possess the same qualities: highly disciplined, voraciously competitive, willing to spend countless hours mastering their craft, and are all in top physical form.
The results to his questionnaire generated a clear consensus in five professional services fields. The remarkable leaders are McKinsey & Co in consulting, Cravath, Swaine & Moore in law, Capital Group in investment management, the Mayo Clinic in health care, and Goldman Sachs & Co in investment banking.
These five outstanding firms have made themselves known to operate as professional firms as to just a business and are leaders in their field of service. They have endured the good and the bad, indoctrinating their way of doing things to ensure that all the individuals in their firm function as a unit. They are always seeking out ways to continuously improve and serve their clients’ interests, believing all other success will follow as a result.
I. ACHIEVING EXCELLENCE
MISSION: AN INSPIRING LONG-TERM PURPOSE
Serving as the cornerstone to great organizations,
The commitment to a long-term “north star” is the first and most necessary step in a firm distinguishing itself as a professional firm, rather than just a business.
Selecting the Cornerstone
In formulating the purpose of the firm, a strong leader must aggregate the core essentials of the organization in a clear and executable manner. The late managing partner of McKinsey & Co, Marvin Bower, formulated a forty-two page booklet laying out the core values as well as the clear purpose for McKinsey’s existence.
John C. Whitehead, former Co-Chairman of Goldman Sachs & Co explicitly states in the first three of fourteen business principles, the mission of Goldman Sachs, leaving no confusion of whose interests Goldman is meant to serve. Simply translated, the Mayo brothers, founders of the prominent Mayo Clinic, incorporated their traditional values into a concise statement, “The needs of the patient come first.”
Clearly, the common theme among the world’s greatest firms is that their mission statements involve putting the service to clients, or interests of those they serve, first with the belief that success will follow when executed the right way.
Their missions are so strong they permeate throughout the entire firm, enlisting all of the firm’s professionals to rally to its cause. Choosing to place the client as the beneficiary of a service is only the halfway mark to setting a mission; the second half involves the action and devotion to the mission regardless of circumstance.
Laying Down the Cornerstone
Through preservation and strong execution, the mission of an organization can really take root in all factions of the firm. This action creates consistency for clients and generations to follow, as it seals the foundation of the firm’s purpose. A clear example is Cravath, Swaine & Moore, whose mission has withstood the test of time since the early nineteenth century.
In stating their mission “to be the most effective law firm on the most difficult cases involving U.S. law,” Cravath, Swaine & Moore was able to address not only interests they will serve, but also how they will execute it. When IBM enlisted Cravath in its corner to defend itself against the largest bundle of antitrust charges from the U.S. Attorney General ever seen, lasting over ten years, they and their opponents were astonished at the tremendous amount of muscle Cravath committed to winning the cases.
Cravath’s commitment to its mission brought about not only a dismissal of the charges by the Department of
This relays the underlying message, if a transaction is good for business but not professional, then it is clear the right choice is not
CULTURE: HOW WE DO THINGS AROUND HERE
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” – Aristotle
A culture comprised of the behavioral norms, values and beliefs of the firm’s professionals will result in the transformation of a mission into daily action. Core values that reverberate from a strong mission is what inspires those at great firms to work harder, give more and produce at higher levels than those at competing firms.
A firm’s culture is perceived as an evolving concept, through each challenge faced and each success earned, it morphs into a way of being or expectation for high-quality performance by the unit.
While the cultures of great firms come across as unique, they each possess the following demanding characteristics: intensity of commitment, persistent drive for improvement, unusually high quality standards, personal modesty, devotion to teamwork, long-term focus on serving clients well, ruthless objectivity, absolute integrity, and an unrelenting determination to excel.
Exceptional firms pursue action upon knowing these qualities and make them a want rather than a requirement. The approach a company has to implement and circulate a strong culture is what makes it unique, and has the potential to create a sustainable competitive advantage.
The individuals of the firm are united into a tribe through the realization of significance in their work and value they add to the firm, as well as to its clients. Through the devotion from the most senior leaders to ‘keep the ship sailing in the same direction,’ the protection of an organization’s core principles from generation to generation allows them to perpetuate excellence.
Additionally, to hold the organization accountable, the values are made a reality through reinforcement by an informal organization derived within the culture.
Because no large firm can assume that not one of its people would ever lie, cheat, or steal; an extra effort must be made during recruitment and constant self-assessment must be performed. At the Capital Group, they hold both their moral and intellectual integrity as their highest standard, having a zero tolerance for any violation thereof.
In an effort to maintain their integrity, they have installed multiple crosschecks into their systems and continuously seek out unexpected problems. McKinsey’s consultants across all levels have a policy to ‘speak up and speak out’ on any perception in deviation from the firm’s values.
As most firms and individuals will acknowledge, there is a very present struggle when dealing with money versus professional values.
For that reason, it is that much more necessary to safeguard the devotion to professionalism and the relentless pursuit of excellence. Only the firms that resist the pull to defect from professionalism place their names among the
Another common aspect of the world’s greatest firms is that they do not wait until new employees are admitted into the firm to begin their indoctrination, but rather seek out candidates with certain qualities ready and willing to further advance the mission of the firm.
RECRUITING: GETTING THE RIGHT PEOPLE
The pursuit of advancing a competitive standing tomorrow begins at the recruitment and training of the most capable people today. In an effort to continuously garner the finest talent; an attitude of absolute determination to obtain an unfair share of the prospect pool is undertaken, extending only the right people an invitation to join excellence. The idea being to battle competitors for the most exceptional soldiers before a battle is even set in place, and to possess a long-term perspective when scouting talent.
What deems the ‘finest talent’ or the ‘best people?’
Goldman has their three equally weighted criteria: intelligence, leadership
While most firms will focus on skills as a primary determinant, Mayo places the primary emphasis on making sure the prospective applicant’s values align with the firm stating, “Competency is irrelevant if we don’t share common values.” The right people reveal themselves by demonstrating intelligence, creativity
This attitude is based on the objective of selecting the most capable and willing individuals who will continue to not only carry on the values of the
Being capable means the prospect is smart enough to do the work, but the willingness to work from incompetent to competent and then to
The long-term mindset is understanding that being strong in quality is not enough. Candidates must be well-rounded with multiple strengths, ready and willing to push to new heights.
Lastly, the idea is that the right people will find themselves at great organizations. If a strong prospective candidate rejects an offer to go to a great firm, it is considered the applicants loss not the firms’.
DEVELOPING PEOPLE: TRAINING, EDUCATING, AND ORGANIZING FOR EXCELLENCE
Promoting an environment that ensures the mission stays well circulated within the firm is the last phase in the integration of individuals new to the firm. True development occurs through educating new recruits to become effective leaders, as to just training them to reproduce organizational processes.
The educational goal must be to understand issues so thoroughly that new best practices naturally develop and enhance the value a firm can provide to its clients. A training on the other hand suggests learning and replicating what previous leaders at the firm have already done, implying lower quality of work and the inability to learn how to be an effective leader.
The primary goal in developing people is transforming their thinking from being a solo performer into a team performer.
Usually coming from places where success is achieved on an individual level –college or law school– new people to the firm are monitored, evaluated and coached on being effective in a team environment. With so much focus being set on the unit in delivering the best value to clients for success, it is imperative there are few solo performers.
In addition to having a team aspect, being well rounded in the firm’s relevant business segments serves as a common thread among successful development processes. Putting trainees through a rotational program, or assignments to different clients, exposes them to different facets and mentors and is fundamental to their ability to deliver in the future.
The belief is that the immense efforts poured into recruiting will begin to pay dividends, in that the exceptional capabilities the firm sought out from the beginning will show through the trainees’ capacity to absorb and apply the firm’s conceptual framework.
Throughout the entire development process, great firms have phenomenal support staffs that really are able to show firsthand the message of excellence and commitment. They are the ones leading the way for trainees. For example, Cravath sees its support staff as ‘carriers of the faith,’ making the mission of the firm a reality to incoming professionals.
CLIENT FOCUS: DEVELOPING TIES THAT LAST
Capturing the essence of client focus is knowing the term ‘client’ is not a brand, but something much deeper. It is a relationship. True competition is the battle for the relationship with a client, knowing that the service to those interests will best any competitor and deliver above the client’s expectations. Professionalism is exuded through the integrity and consistent perspective on a long-term horizon for the clients’ interests.
Relationships are founded on what a firm declares it will do, and what it will not do to set expectations on a deliverable. Clarity on what a firm will not do can cement client confidence and attract new ones as well; feeding off the belief that if the utmost consideration is given to the interests of the client, the economics of prosperity and relationships will follow. The difference being, they have stood the test of time because they operate skillfully, with consistent and total integrity.
For instance, Goldman made the explicit decision not to provide services to corporate raiders in their hostile takeovers during the 1980’s. Despite majority participation by Wall Street banks competing for the raider’s business, Goldman saw this is a way to capitalize on years of developing relationships with companies who were in fear of being taken over, placing Goldman in a positive light.
For McKinsey, an important factor in delivering the best value is to be honest in its recommendations and refusing to let monetary gain stand in the way of a cutting away from a weak relationship. Marvin Bower at one time, terminated a highly lucrative relationship with a large bank because McKinsey felt the CEO was not spear heading the efforts to address a major strategic issue facing the organization.
It would be not only a disservice to the client, but also to the profession if Bower let a lucrative relationship keep the firm from upholding their principle values to their craft.
Client focus is the realization that relationships matter and understanding all of the value can be traced back to the mission.
Culture and highly developed firm personnel mean nothing without total devotion to the relationship with the client, holding their interests and the integrity of the profession at the highest levels. The difference between a client and a customer is important. Firms seek to understand clients in order to better serve their needs, building trust and cementing long-term relationships in the process.
At a great
INNOVATION: CHANGING HOW THE GAME IS PLAYED
As the focus remains on the service to the client’s interests, innovation is a tried and true concept evolving from the firm’s determination to drive maximum value. A product of the external environment, the leaders at all levels of an organization must be alert to changes in the present value of future progress. Innovation is not something that once formulated is easily implemented; it must be tested, cultivated and engineered to excellence.
There are two types of innovation.
One form is product enhancement, which is bringing about
The former can be seen through Mayo Clinic’s effort to revolutionize its ability to aggregate and centralize patient records. The latter is best exemplified through Capital Group’s change in legal structure, which
In the early twentieth century, Henry Plummer came on board the Mayo Clinic with a belief the clinic’s records should be complete, accurate and accessible to all its physicians. Upon board approval, he set about creating a record keeping system that revolutionized not only the way Mayo aggregates and organizes its files, but more importantly how they address the needs of the patient.
This innovation in record keeping contributed to the development of Mayo into an integrated practice, uniting all the physicians working on a particular case into a virtual team. What was once the brainchild of Henry Plummer, became a core competitive advantage for Mayo, as this has immensely added onto the patient-centered values the clinic holds.
In an effort to liberate itself to operate in business lines outside of its traditional mutual fund business, Capital Group incorporated itself into a one-firm holding company in 1969. In the wake of realizing their success in their mutual fund business, Capital began to take notice of the opportunity in managing investments for institutions and wealthy individuals; as the investment firm’s client institutions were shifting assets to originally from banks who were charging extremely high fees compared to Capital.
Although there was initial internal resistance to reallocating Capital’s resources away from Capital’s primary mission of managing mutual funds, a consensus emerged allowing the firm to initiate “Project Mutation” whereby the legal structure of the firm became a holding company. The result of Capital becoming a holding company for multiple business lines allowed it to grow its institutional business larger than its original mutual fund division.
Capital’s multi-business line structure allowed it to deliver superior investment returns, and maintain a strong market position when the market tide turned. In turn, loyalty and trust from its investors and brokers
Innovation never ceases among the greatest firms, it is wired into their DNA to continuously seek out ways to improve themselves strategically or structurally to give the maximum value to their clients. Bringing about change within any organization must be implemented in stages, worked through and tested repeatedly by determined leadership.
Leadership is what ensures the success of any firm aspiring to excel. They are the ones who can make or break a great firm, as inspiration flows from the top down.
LEADERSHIP: BRINGING THE SECRETS TOGETHER
Leadership, contingent upon internal commitment from the leaders who take it on and the followers who accept it, is the closing key to the success of the world’s greatest firms. The true mark of a leader is the degree to which he or she achieves and establishes a change that makes an enduring positive difference at the firm.
They are classified as a transactional, process, strategic or servant leaders, according to their lasting impact and execution style thereof.
Transactional leaders, a category that most leaders fall into, focus on the regular, expected work of the organization.
They are skilled in being able to develop business relationships as well as able to set an inspiring example in the quality and approach to complex transactions with certain clients. Their skillset is set in the way of enhancing the firm’s competitive advantage through client interaction and transactions, but the actions required to transform the organizational structure or its work is not up for consideration.
Building on the hierarchy, the process leader brings about another dimension to the firm improving the repeatable, teachable processes by which the same or similar transactions repeat and grow. The previously mentioned Henry Plummer of Mayo Clinic is a prime example, as he was a lead in the transformational process related to the way Mayo kept its records.
Although the process is lasting in making the firm more effective in its strategy, a greater impact is reverberated when the strategy of the firm is transformed.
As seen through the Capital structural innovation example, the impact on a firm from a structural leader echoes throughout as it alters work done for clients and the firm’s competitive position. This change can be large or small, short or long term; but the most important strategic initiatives have a lasting influence.
These types of leaders incorporate others to believe in the new change, bringing about a successful structural innovation as an integral part of the organization and its work. At the highest level of leadership, servant leaders are considered as greatest amongst all. They see their existence as a means to serve the firm, developing process and transactional leaders throughout their firms.
Their leadership is translated to the organization’s individuals through broad goals, major concepts
Even though Sidney Weinberg was a phenomenal transactional leader and Gus Levy a superb strategic leader, neither was as great a servant leader as John C. Whitehead was during his time at Goldman Sachs. His intentional focus on building the firm left a more value adding long-term positive impact on Goldman than any other leader.
It is said Whitehead was clear in delivering information he wanted to convey, regal in the sense that he made the individual receiving the task not only believe they will be able to do
A fundamental contribution to Goldman’s status as a great firm is that the “Two John’s,” took the opportunity to introduce and institute a lot of the core values and culture the firm led later on. Instead of simply enjoying their success they utilized the
Leadership is fundamental as it ignites all other keys of success.
The firm’s leaders exemplify and inspire others to remain committed to the long-term mission. What is simply in the best interest of client is not sought in the short-term, as it may not be sustainable and does not provide true value to both parties. If the focus alters to a short-term perspective, everything the firm worked hard to build is at risk and can lead to its demise. The questions arise, how easy is it to fall from grace and is it even possible to recover?
II. SUSTAINING EXCELLENCE
FALLEN ANGELS: EXCELLENCE CHALLENGED AND EXCELLENCE LOST
Just because a firm establishes itself as a market leader and great amongst its peers, does not mean the organization, whether internally or externally, is immune to challenges affecting its mission.
Actually, some would even say that great firms are more susceptible to failure in conquering these challenges and transforming them into opportunities for growth. Again, when the mission is not fully kept and a long-term perspective is not protected, the step in to the dark of short-term profitability is much more enticing.
The successors to the “Two John’s” at Goldman Sachs, Bob Rubin
As a result of the new trading mentality environment, they evolved into a massive
During this time, multiple missteps by Goldman were revealed and their most prized possession, their reputation, was severely damaged. Goldman was no longer considered by clients and competitors to be the professional firm it once was.
The difference with Goldman is they made an effort to identify and address the core issues holding them behind the curve, issuing a major firm-wide self-examination in 2010. More importantly, they announced before shareholders their intentions and delivered the results of their findings to the public, creating thirty-nine recommended actions to execute in order to solve the multiple issues.
They made an effort and chose to rebuild the public’s trust – time will tell if Goldman really has the values to bring back its unquestioned leadership.
On the other end of the spectrum, Arthur Anderson was never able to recover to their competitive position despite the fact that they had it all, and more importantly had the incredible potential to be the best of its kind. It was a firm grounded on strong principles and succeeded by transformational leaders, so what could go wrong?
A tale of not doing things the right way for the satisfaction of short-term gratification infiltrated the being of the firm and bled it out. The sad realization is, Arthur Anderson could have stopped the bleeding at any time, but instead contributed to its own self-destruction.
As only one of two thousand two-hundred CPAs in the United Stated in 1908, Arthur Anderson broke off from Price Waterhouse and decided to buy his own accounting practice for a mere $1,000 and had a staff of seven. He was a man driven by the quality of the value he and his firm delivered, with profits never held as the primary interest.
Soon after opening its doors, the president of one of his most important clients insisted it was his balance sheet and his income statement when it became evident that earnings were lowered as result of Anderson’s work, compared to previous forecasts. Anderson simply replied, the CPA certification was his to hold and there is no amount of money that can persuade him to change the earnings numbers.
Fast-forward seventy years after numerous innovations, significant challenges and massive growth (especially in the consulting sector), to an era of conflicted unity and no real true north star to follow. The original values held that being a ‘one-firm firm’ was a sin qua
In 1989, the theme for the annual meeting was “Keep Raising Revenues,” encouraging a ‘do whatever it takes mentality’ to take advantage of opportunity and seize the kill. One of the aspects to this attitude was to do all that is necessary to deepen client relationships, an act that is good for business but is not becoming of a professional auditing firm.
A notorious client, Enron, began to come under investigation for the financial statements – statements Arthur Anderson certified.
Because of the massive negative impact Enron inflicted on the markets, Arthur Anderson felt the body-blowing effects of their involvement in the downfall of Enron convinced clients to leave in waves. Although in the “midnight hour,” Anderson made a decision to bring Paul Volker on board in an effort to show they meant to recover and learn from their mistakes, the damage was too catastrophic. Nothing could really be done to save the firm from its own self-constructed demise.
Arthur Anderson’s focus swayed away from delivering uncompromising value to its clients, to
Unlike Goldman who acted upon their shortfall, Arthur Anderson tried to ride it out; with the trouble being, when they did decide to act, the damage had already been done and trust evaporated along with their existence.
CONCLUSION
The age old question, “Why do we fall?” fed the belief that organizations are, after all, living organisms and are naturally subject to failure in “so we can learn to pick ourselves back up .” The seven keys Charles Ellis provides are profound in that they build on one another, each key stressing the importance of the last.
Whether in investment banking, consulting, law, investment management or health care – the focus must always be on what is best for the client’s interests; emphasis on the product is the sole purpose for a services firm’s existence.
The mission is manifested in daily actions and implemented into the DNA of the firm. This enables individuals at all levels to become “carriers of the faith,” and spurs innovation in determination to continuously maximize client value. All the keys
Utilizing these keys to success equip great firms to continuously outperform its two greatest competitors, time and themselves. Only a truly great firm can be the architect of its own demise, but also the author of its generation to generation success.
AFTERWORD
With Goldman Sachs & Co. and Capital Group being the financial focal points of What it Takes, it is worth taking note that the assessment by Charles D. Ellis was conducted amidst the aftermath of the 2008 crisis. The crisis spurred public interest and scrutiny in the industry unlike ever before, putting reputations and the ability to perform under extreme turbulence.
A further study perusing how Goldman and Capital Group have fared since the market trough in March of 2009 uncovers a somewhat contrarian viewpoint in regards to the superiority they receive in the book.
To assess Goldman, which has experienced the most reputational damage, the total return on their stock price versus industry peers will be analyzed. Additionally, the annualized returns of Capital’s largest funds will be evaluated against benchmark indexes to assess the impacts of the crisis on the management and total return of their products.
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