A strength in numbers

Partnerships exist already in research – that is, companies run by a handful of partners. The idea Sparrow’s been mulling over is more along the lines of the John Lewis model, where all employees are co-owners of the business. The retail group has become a common reference point used by the British government as it looks to encourage public sector workers to form co-operatives to take over the running of public services.

Sparrow’s vision is of a business “run solely for all the people presently employed in the company”. He is of the view that a sense of shared ownership is important for delivering quality of service. “I remember hearing on the radio once… somebody posing the question ‘How do you expect a person to love something they don’t own?’” Sparrow understands the sentiment well, having co-founded ICM 21 years ago. He left the business in August, four years after it was sold to marketing services group Creston in a deal worth up to £37m.

ICM was owned by 10 shareholders before its sale, but Sparrow is interested to see research businesses go further than that – to make all employees shareholders. “A partnership offers the opportunity to ensure that the company is always run for the benefit of the employees, and the clients know that there is a genuine interest among those people who are doing the work to deliver the best-quality, best-priced research,” he says.

Sparrow’s viewpoint may seem at odds with his and his colleagues’ decision to sell to a larger, publicly listed marketing services group all those years ago, but he makes a distinction between what is pragmatic and what is idealistic. There is a cycle at work in the research industry that says agencies are born, grow to a decent size and then are bought by bigger rivals. “I think there is an inevitability when you start a business that if that business is successful then at some point it has to be sold,” says Sparrow. “One might like to carry on forever as a private company, but there are things that all come together to create a situation in which the sale of a company is the sensible thing to do.”

Look at the way research agency takeovers are typically structured, he says. The offer of initial consideration, plus an earn-out period of three years or more means that “if you start a business and you gradually build it up, once the owners hit the age of around 50 or so then the clock starts ticking”. In a business like research, where the people are as much an asset – if not more so – than anything else worth owning, the new owners are going to want to know that the principals of the company they are buying are going to stick around in the short to medium term.

“If, as an agency owner, you leave selling until you are 60 or 65,” says Sparrow, “then the new owner will think – whatever you say – that ‘this person isn’t going to be with the company very long’. And so they’ll ask, ‘If the assets are not going to be there, what am I buying?’”

An agency’s ownership structure can also make a sale an unavoidable eventuality, he says. “This wasn’t particularly the case for ICM,” says Sparrow, “but when you start a company you distribute shares among however many people, and over a period of time the aspirations of those people might start to diverge. And then you have the emergence of more junior people who become more important to the business and maybe get some sort of stake, but the stake they get is limited by tax considerations or the willingness of the principals to actually give equity to others.”

In such a scenario, Sparrow says, a purchase by another company can be a useful way of holding something together, thanks to the previously discussed earn-out. “It becomes the obvious or right thing for a smaller company that’s not on the stock market or part of a bigger group… [a sale] becomes the right thing to do,” he says. “Whether the individuals associated with that sale are actually that comfortable about moving back in to being employed by someone else, those companies still get swallowed up. What actually remains of those companies in five or ten years’ time depends upon a whole set of new dynamics in the situation, but the field is left open for new start-ups to come along.”

A true partnership – where every employee owns a share of the business – is one possible way to avoid the birth-growth-sale-rebirth cycle, suggests Sparrow. At the very least, he says, a sale is not inevitable. “I could imagine that at some point you might get people who would want to turn the partnership into a limited company in order to sell out,” he says. Indeed, such an idea was floated within John Lewis in 1999 in response to a fall in profits, though it never even made it to a referendum. It seems the 65,000 employee-partners of the retail group appreciate what they have and are reluctant to give it up.

This speaks to a strong sense of employee commitment and, as stakeholder researchers will tell you, engaged staff means engaged customers. Sparrow says: “A company is best run, and gives the best service to clients, when the people doing the work feel a sense of ownership of that organisation and share in the profits of that organisation.”

John Lewis’s head of strategy Rob Weston made a similar point in a recent interview with Research. He said: “The longevity of partners [employees], and the responsibility they take in focusing on the customer experience, is incredibly important. We’re all interested in the long-term success of the company and the customer is at the heart of that, so if you’re not meeting their needs you’re not looking after the company or yourself.”

The partnership philosophy has already been embraced by one research agency of note – Truth, recent winner of Research Magazine’s Best Agency Award. Founder Andy Dexter says everyone employed by the company has some form of share in the agency, though there are different classes of shares that are distributed. Collectively, employees own a third of the business. In this, the fourth year of its existence, the company is expected to report around £7m in revenue.

Dexter is convinced the ownership set-up has had a part to play in the agency’s success to date. “By giving all staff a stake in the agency it encourages two things: firstly, an interest in and understanding of the commercial dynamics of the company; secondly, a knowledge that what they are doing is not just for the benefit of an ‘employer’, but for everybody including themselves,” he says.

“I believe this has been a contributing factor particularly in revenue growth and repeat business, but how much a factor is hard to quantify. I think, though, that the slightly scary reference to ‘clinically efficient growth’ in our Best Agency Award citation gives a sense of the momentum that really good people can build, with the right offer to clients, and the right business model behind them.”