Losing Effective Control of Your Firm

Regardless of the circumstances surrounding your firm’s birth, you were drawn to the promise of more control over your business life. You might have been tired of all the effort just to benefit someone else or tired of the management environment or tired of not being listened to. So you started your own thing.

Since that time, things have been a mix of good, great, terrible, and just plain average, but you still control your own destiny.

Until you don’t.

What I want to talk about is the difference between your legal control of the firm and your effective control of the firm. If you don’t make the right business decisions, you’re eventually going to lose that control that you crave. As that control wanes, you may “wake up” and take the wheel again. That’ll work some times, and at other times it’ll be too late.

What kills me about this argument is how lazy you can get about control over a long period of time. Control motivates you and you exercise it beautifully at the outset, but why do you slowly let momentum carry things forward? Why do you vacate certain leadership responsibilities and then let others fill those vacuums?

But first, here’s what I mean by losing effective control:

• You’re on a motorcycle on a race track. You’re completely in charge and at the controls. You lean a little more than I was leaning in this shot and you drag a peg instead of a knee and high side. Bam, you’re in control but you’ve lost effective control. (That’s me on Number 08 at Barber Motorsports Park. I was sponsored by Kawasaki when I was teaching motorcycle racing for the SuperBike School.)
• You’re running for office. Everything you say is your choice. You let something slip in a weaker moment and the press trumpets it far and wide. The populace turns against you. You’ve been in control all along until you lose effective control of the narrative and now you’re in a responsive, defensive mode.

So let’s figure this out. What might you let happen at the firm that would cause you to lose effective control? Here is what I most commonly see:

• Letting your cash cushion get too thin. The absolute minimum below which it should never dip is two months of overhead, but ideally you’ll have three or four months of cash (not AR and not LOC). What happens otherwise? Desperate people do stupid things and the most common example of this is to compromise on pricing, take work you shouldn’t, and not invest in the future. It’s a downward spiral. More on benchmarks.
• Incurring too much debt. Your total obligations should be somewhere between 20–60% of your total assets. When they exceed that, too much of your cash flow is diverted to cleaning up bad decisions you made in the past. Furthermore, the principal that you pay on those loans does not show on your accrual income (P/L) statements, so your firm looks more profitable than it really is. More on debt.
• Letting one client get too big…and then that client leaves. It’s not like you’re going to say no to that opportunity, but at least set aside a “gorilla tax” by peeling off a percentage of every invoice that client pays and setting it aside in a sacred fund. And for the sake of all that’s holy, please don’t stop your marketing efforts. Trying to spin them up at the last minute, in a panic, is a fool’s errand. More on gorilla clients.
• Slowly dropping all disciplined efforts to build your new business pipeline. Actually, most principals never start the process. They rely on WOM and referrals, which typically run out 3.5–5.0 years from the firm’s founding. Then they look around and wonder how they can teach others about marketing but can’t write a marketing plan for themselves. There’s an event on this on Jan 9–10.
• Letting an employee build a relationship between himself and the client rather than mediate a relationship between the client and the firm. If the person turns out to be evil, you’re screwed. We talk about these personnel mistakes at length in this podcast episode.
• Depending on one significant referral source who sends far more work your way than anyone else. No matter how great that relationship is, you don’t have effective control.

There we go. I love how driven you are by control, and my hope is that you’ll retain that control in spite of the forces that are at work to take it away from you!

Don’t let things tip too far past the point of no return.