Business model innovation generates higher returns than any other type of innovation. Yet as this story reveals, it can all be undone by the wrong choice of leader.
This is a true story. Financial Alliance [not the company’s real name] was a boutique financial services group. It bought to life its founder’s vision for a professional service business providing integrated accounting, financial planning, loan and mortgage brokerage, insurance, superannuation and legal services to companies and high-net-worth individuals.
The innovation was in its growth strategy. There are many dozens of small financial service businesses around Australia owned by people in their fifties who are beginning to think about their retirement. Unless these people can find a talented younger person to groom, they face the possibility of selling their business, or just their client list, at a dismal price. What if they could increase the value of their business through a partnership with a national group that gave them the ability to broaden their offering and achieve an orderly transition? A partnership that would help them find someone enthusiastic about taking over their business because it was part of a successful national group with brand presence?
Financial Alliance offered a very attractive solution and after reviewing each business and explaining remuneration and bonus structures, it put money on the table. To purchase the businesses it borrowed against client lists and trailing commissions.
Over four years Financial Alliance grew rapidly from a small office in the back street of an inner suburb, to a larger office on a main road in the same suburb, to an attractive Collins Street head office where almost 20 staff worked; along with a growing number of suburban shopfronts, which at that time still had their own name in their window.
A few months later the head office was empty and locked and directors were arguing over the extent of personal liability for the bank loan.
The professionals who set up the business decided to appoint the brother of one of the founders as chairman and CEO with a brief to continue growing the business while each professional focused on delivering and watching over their own expanding service area and participating in board meetings, reviewing the growth and growing pains of the entire business.
Cash flow had taken a hit from difficult trading conditions, but the factor that paralysed decision-making and ultimately destroyed the business were significant value differences between the CEO and the founders. The CEO’s willingness to cut corners was an affront to the ethical precepts and practices of the founders. Board brawls became regular occurrences.
Excitement about the early success of their fledgling innovative business model and the tired friendship between experienced and hardworking professionals led to fatal failure to do due diligence on a decision about leadership that might, with more care, have contributed to a great growth story.
Darryl Bubner, CEO of Disciplined Innovation, is a specialist in innovation strategy, marketing and business leadership and a certified quality systems auditor. He worked for a decade in the public service before commercialising web-based innovation management tools with more than 1000 companies in Europe.
This article first appeared on LeadingCompany. Download your free LeadingCompany eBook “10 Key Considerations for Succession and Business Exits”.