Rethinking organizational ties: Keeping clients when rainmaker leaves

Rethinking organizational ties: Keeping clients when rainmaker leaves

Michelle Rogan, INSEAD | Business | Sat, March 08 2014, 11:53 AM

Business News

When Tesco severed its £50 million (around US$83 million) account with advertising giant, Interpublic to follow former Interpublic executive and veteran ad man, Sir Frank Lowe to his new start-up, there was always going to be fallout. The multinational took legal action, accusing the original “Mad Man” of breaching a non-compete clause. Lowe responded by threatening to sue the group for defamation.

While this is an extreme example, potential client loss is an immediate fear when an executive – or in some cases executive team – jumps ship. For service industries like advertising, law and consulting, where clients are attracted to the human assets rather than the production side of the business relationship, the likelihood of significant client losses when a team leader leaves is even greater.

Getting executives to sign a non-compete clause has been a way to address the problem. But these contracts are notoriously easy to get around and difficult to uphold prompting firms to look for alternative structural rather than legal ways to hold onto their clients.

Binding Gulliver

One way of doing this is through multiplexity – diluting the control held by individual executives by creating a number of different ties between the client and the company. It’s a strategy used by firms like Procter & Gamble, which include cross-functional teams when meeting with clients, and McKinsey, a consultancy renowned for making sure that only rarely will they have a single partner serving a single customer.

A senior partner at a large management consultancy has likened the tactic to “binding Gulliver”.

“Each of these individual strings may not be tough enough to hold (the client) so you’re much better to try and have a whole range of small connections. This actually creates more strength than one strong piece of rope which can be cut with a knife leaving you with nothing”.

Multiplexity increases stability in a client-firm relationship, encouraging information sharing across ties. By having more than one contact at a company, the client has access to different pools of expertise, making them less likely to rethink the relationship based on the actions of one executive.

However, unlike the Gulliver example where the strength of the bond depended on the number of ties or connections, a recent study suggests not all multiplex ties are capable of holding the client. In my recent study, Executive Departures Without Client Losses: The Role of Multiplex Ties in Exchange Partner Retention, multiplexity diminished the chance of clients following a departing executive only when two important conditions were met – when the ties were spread across different units of the firm, (rather than held within the same unit) and when those units viewed one another as collaborators not competitors.

Strength of ties 

Using archival data on the advertising industry covering several years, I examined both multiplex ties within a single agency and multiplex ties linking the same client to a number of different agencies in the same advertising firm. The research showed that, in general, when a single agency held all the strings, the likelihood of losing clients was reduced. However, this did not safeguard the firm against the loss of clients following a departing executive. In fact when control of the client is concentrated within a single agency or division, it could actually be easier for an executive, or in some cases a team of executives, to lift their client relationship out of the agency and take it with them.

Further analysis revealed an important condition to the effectiveness of these types of multiplex relationships. Rather than assuming that because the agencies were in the same holding company they were working toward the same goal, the study examined the extent to which the agencies competed with each other. Such competition is not uncommon in the advertising industry where sister agencies bid against one another for the same client accounts.

Analysis showed that when sister agencies serving the same client viewed one another as competitors, the improvements in client retention from multiplex ties went away. Conversely, if the sister agencies cooperated with one another, the multiplex ties significantly reduced the likelihood that a client would leave following a departing executive.

Multiplex relationships can create a false security for guarding against the poaching of clients by executives. Without careful attention to the nature of the relationships among units sharing client ties – whether these are competitive or collaborative – firms will continue to risk losing valuable clients on executive coat tails.

However, by connecting clients to units which work together rather than compete, companies have a real chance of keeping relationships when even the most charismatic of executives departs for greener pastures. Gulliver can be bound – as long as the Lilliputians are working on the same side!

The writer is an Assistant Professor of Entrepreneurship and Family Enterprise at INSEAD.

 

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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