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FEATURE17 December 2010

A strength in numbers

Features

We speak to pollster Nick Sparrow, formerly of ICM, about how the spirit of co-creation, cooperation and coalition can be applied to the research agency business model.

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.

“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”

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.”

“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”

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.”

6 Comments

8 years ago

Partnership is a nice phrase but about as clearly defined as "fair". What's more interesting is the fact Nick is uttering it just as his non compete's are about to expire from his former plc home. Bravo if it's a new agency recruitment idea but excuse the cynicism if you are about to build something to sell again before retirement. As for Truth and all the "Partner" carrying cardholders - I suspect one partner (Mr Dexter) will get a whole lot richer than any other partners when Truth is sold. And if it's a partnership, why's it constituted with shares (partnerships have partnership agreements), why's the focus on capital growth on sale (presumably to one of those less partnership style plc's), and why does the partnership need a quick exit for a one off capital gain (I thought it was all about equitable income distribution and the sense of ownership?). How does that work the day after the sellout when the plc buyer turns up to meet the "partners" not rich enough to retire. In my experience it can be described as unsatisfactory at best -for staff and clients alike. And that's the flaw in all the fake partnerships I've seen in the sector to date. They still look to the dreadful old plc's they criticise (only once they leave) to buy whatever they recruit and build. The sharing is minimal and on sale proceeds, so the "partnership" dies on exit, I've yet to see anyone say they'll keep the model sustainable by leaving the partnership as a partnership, letting the next generation of leaders take over and sharing profit not exit value. Anyone up for proving me wrong?

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8 years ago

At least Andy D is putting (some of) his money where his mouth i, and quite a lot by the sound of it. There are not many companys around that give shares away so fair play to him! There is a place for all these types of businesses in MR be it plcs or private co's. By the way I liked the way Truth thanked Ginny Valentine when they won the Best Agency Award. It was a generous thing to do.

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8 years ago

As a younger up and coming industry professional I think a partnership scheme is a very interesting idea and could well win my loyalty. There's no doubt it has intrinsic value for all and the hope is that it would have some extrinsic pay off too (i.e. some cold, hard cash and more than your average bonus!). The reality is that company founders will always get more and so they should, that's their reward for taking the risk and for their innovation and leadership. No one would benefit without them! If it's a toss up between working my arse off for someone else to get rich and working my arse off to make myself a bit more cash in the process, I know which one i'd choose... even if I can't retire and it all goes to pot when the company sells its soul 5-10 years down the line. The cycle goes on and I'd just be sure to kick start the next evolution!

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8 years ago

I think this is quite interesting. This is about a partnership "philosophy" surely, not the strict legal definition? There are plenty of ways to skin a cat in terms of involving people, from shares, to share options, to employment benefit trusts... the list goes on. Plcs can do this as well - if they choose. It is more about an attitude to people rather than what the structure is, that's what I take out of Nick's piece here. I also agree with the last poster that there is a balance to be struck in terms of how these things work regarding risks and rewards. People like Nick and Andy have done a huge amount of good for the research industry over the years, and inspired people with their thinking, and there are good reasons why they are successful as entrepreneurs / agency heads. I guess the first poster will be launching his own agency pretty soon?

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8 years ago

Mr. Dexter should apologise to the whole industry RIGHT NOW for setting up a successful business, creating jobs in a recession, winning awards, and on top of that, and here comes the outrageous bit - giving his people a healthy share of the pie!! Who does he think he is anyway?!? Seriously though - food for thought. I am right now thinking about setting up myself - and the boss wouldn't be best pleased (watch this space)! If I can do anything like what Truth has achieved in 3 years, and with some kind of similar sharing model, I'll be very happy. Well done to them! PS. I think I am right in saying Martin who started this post works for a PLC, and if it is the one I think it is, it has lost 95% of its market value in the last few years!

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8 years ago

Interesting! Who would have thought such an innocuous idea as "sharing" could be so discussable? Obviously there is something here that catches peoples' imagination. At least the budding entrepreneurs who are commenting. Raymond hits the nail on the head, in my view. There are lots of ways to do this sort of thing, if the appetite exists to do it. It's about wanting to do it. Cheers & Merry Christmas Andy (PS: any of you entrepreneurial "anonymouses" ... do feel free to drop me a line...!)

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