Scaling a business is one of those phrases that advisers who run a business or are looking to set up their own firms will be used to hearing.
It is often assumed that everyone knows what it means, so articles and blogs may launch straight into their tips on how to achieve it. But what does it really mean and why does it matter to advice firms?
Measured growth
Government figures show that around 60 per cent of new businesses fail within the first five years. For businesses to be successful they need to keep moving, which will often involve growth. But scaling a business is not just a synonym for growth – it is about growing in particular way where revenue is increasing more than costs.
“Scaling is familiar to us,” says David Jones, head of UK and Ireland Adviser Group at Dimensional Fund Advisors. “An architect scaling a drawing will take measurements and if they want to scale it up, one inch can become three inches,” he says.
Scaling a business is not just a synonym for growth – it is about growing in particular way where revenue is increasing more than costs
In business terms, scaling up means increasing the revenue of the business. So, an advice firm may look to gain more clients who pay them more. But advisers need to be mindful of how many new clients they can realistically take on without being overstretched and compromising on the quality of the service.
“Businesses that want to increase the number of clients to grow will need to increase their capacity to see more clients,” says Jones. “If they don’t increase capacity and they take on more clients, they will lose clients.”
Efficiencies
To take on more clients advisers may need to hire another adviser or make changes to the way they currently work, such as improving their systems. Making the business more efficient can free up the adviser’s time to see more clients. So rather than just growing a business, scaling a business up is about ensuring that growth can be serviced and is sustainable. This can be quite complex, as business owners may be orchestrating a lot of different factors.
For example, if 100 clients need to be serviced by a team of three people, you could just double the number of employees if you wanted to double the number of clients. “But if I introduce the idea of efficiency in the business – better technology and training – I don’t need to have as many people in the business,” says Jones.
It may be that an advice firm will need investment capital to hire more people or upgrade its technology.
Hallmarks of success
Jones says that Dimensional has looked at what makes an advice firm successful in its global study of financial advisers. The research shows that firms that have a written strategy for growth tend to be more successful than those who do not. “It seems like an obvious thing to have. but remarkably, not all firms have a written strategy – a plan that is directed at growing the business in a measured way,” says Jones.
The research shows that firms that have a written strategy for growth tend to be more successful than those who do not
Dimensional’s research shows 57% of high-performing firms have a written growth strategy, while 49% of low-performing firms have one. “High-performing firms tend to be mindful and planned in their approach to growing the business. They will have figured out their succession plan ahead of needing it.”
The benefit of this is that the firm will have time to increase revenue, making it an attractive proposition if the owner wants to sell it further down the line.
“What we’ve also observed in high-performing firms is that they invest a lot in human capital. They have a high proportion of staff supporting their service and salespeople,” says Jones. “And they tend to use managed portfolio services – we found that assets under management are 5.5% lower for firms who don’t use managed portfolio services.”
The use of managed portfolio services is one way that advice firms can create the efficiencies needed to scale up. According to Jones, it is about firms recognise their skillset is seeing clients and dealing with their financial needs rather than investment management.
“When firms are trying to streamline their process, they are trying to strip out areas of additional hassle and potential risk,” Why take on risk of building bespoke portfolios when you can get better outcome with an MPS?”
Advice firms who are looking to scale up should also be clear on what their proposition is and who their clients are. They may, for example, decide to specialise in clients who are doctors or dentists. Jones says that this can build a lot of efficiency into the business because clients will have similar needs.
Advice firms who are looking to scale up should be clear on what their proposition is and who their clients are
“Advisers who specialise in doctors and dentists understand the needs of sector and they know what to do,” says Jones. “It is not only a particular adviser who has the skillset – the paraplanners and support staff do as well. Everyone knows what the business is doing and how to serve client.”
Perhaps the hardest thing for advice firms when scaling up is that growth and the firm’s capacity for servicing that growth will never be in synch.
“They’re never in a state of equilibrium so you’ve got to bring everything back into balance,” says Jones. It’s always going to be oscillating between the two, but your role as lead of the business, to manage that conundrum.”
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