2Bobs

How to Get $500M to Build a Website

2Bobs with David C. Baker and Blair Enns

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Blair tells the story of recreation.gov and how its performance pay deal has been nothing but wins for every party involved, with plenty of lessons for buyers and sellers of all kinds of services.

Links

"Performance Pay Leads to a $500M Website" by Blair Enns for winwithoutpitching.com

Recreation.gov

Transcript

David C. Baker: All right, Blair, today's topic is how to get paid $500 million to build a website. The entire crowd woke up. Oh, I want to learn that.

Blair Enns: This is not one of these spoof episodes.

David: Yes, right. It's sad that we have to tell people that anymore.

Blair: Because it's a bit of a spoofy title, isn't it?

David: It is. How to get paid $500 million to build a website. Who doesn't want to do that? Was this story in your most recent book, The Four Conversations?

Blair: No, I don't think so.

David: Wait, you don't think so? Who wrote the book?

Blair: You know how you write a book. When it's out and it's done, it's like the last thing you want to do is read that book. I'll read it in a couple of years. I'm sure it's very good because I didn't go deep into pricing, and I didn't get into performance pay at all. I have been sitting on this story for a little while. Then, when Booz Allen came up in the news in the last couple of months, I knew what the numbers were, what they had earned when I first heard of the story. It was in the range of $165 million. I went looking for an update, and my mind was blown.

David: I'll just be honest, between you and me and thousands of people, I wasn't sure this was real either. I knew it was real, but I didn't think it was this real. I started looking at it, and it's like, "Shoot, this is one of those times that Blair is not exaggerating." Tell us the story. You and Colette actually experienced using this thing, too.

Blair: When I knew I had to use the app, oh, I was so excited to use it, and it was everything I hoped it would be. I've been aware of this story for about three, maybe four years. This is 2025. Yes, so around 2022. It was the front page story on The Wall Street Journal above the fold, the large type. It was actually not a negative headline. It was, Americans are flooding back to national parks, and one consulting firm is reaping the rewards.

Let me leap forward in time. Some of the listeners might not remember Doge, but it was a big thing back in May of 2025. At peak Doge, when Elon and his team were going through the US government finances, basically looking for fraud, waste, and abuse, one of the things that they uncovered was this consulting company called Booz Allen Hamilton, goes by BA or Booz Allen, 12 billion in annual revenue, when the source of 98% of the revenue was the federal government.

David: That might be a client concentration issue. I don't know. Seems like it qualifies.

Blair: It's spread out throughout numerous departments within the federal government. In a climate where people are looking for government waste, these numbers, 12 billion and 98% of it coming from the federal government, just sent some people into this stratospheric-- They just lost their shit over it. I knew at least where some of that revenue came from. I knew some of it came from the website that is known as recreation.gov, which Booz Allen won in somewhere around 2017. The website launched in 2019 or so.

I knew that hundreds of millions of dollars of that 12 billion came from this contract. I thought it was a couple hundred million. Turns out it's approaching $500 million, and it will be somewhere in the neighborhood of $580 million by the time their 10-year contract runs out. I thought they didn't deserve the flak they were getting because I was so proud of this consulting company that I don't know, and I was so proud of the government procurement people who hired them on this basis. This firm got rich- within the scope of their revenues, they're not getting rich. They earned a massive amount of money, and it cost the US taxpayer absolutely nothing. The media went crazy over it.

David: They thought it was crazy that Booz was making that much money?

Blair: Yes. Anytime you see a government contractor making hundreds of millions of dollars, your immediate thought is who screwed up or who conspired on the government side with their cronies at the consulting company to feather their pockets to the tune of hundreds of millions of dollars. That's not how it went down. Now, if I back up just a little bit, I'll do a comparison of two different US government websites. Last March, Colette and I are down in California. We want to go hiking in Joshua Tree National Park. As we're pulling up to the park, we realize, "Oh, we need a pass." The sign says go to their website. You go to their website, you're redirected to recreation.gov.

I thought, "Oh, shit." I've been to the website, but I've never used it before. "This is a government website, and I have to make a purchase. How onerous is this going to be?" I know it's going to be a good experience because I know Booz Allen just killed it on this project. It's this beautiful user experience, very intuitive. Within two or three clicks, I'm paying for my park pass with Apple Pay on my phone. Then we pull up to the gate, show the pass, and in we go. It was just like going into Disneyland. I've never been to Disneyland, but it was just like going into a really well-run private enterprise. It was very ungovernment-like.

Now, if I contrast that experience with another experience, as soon as I got home, I had to start working on renewing my-- I'm Canadian. I have a US visa. I've had one for going on 20 years now. I have to renew it every five years. I had to renew my US visa. Now, the websites involved in this process--

David: A little different.

Blair: It's everything you would expect from an online government experience. This isn't a knock against the US government or the federal government. You would expect this type of experience with almost every level of government in any country in the world, except for Estonia or some of the really technically advanced countries. Nothing works. It crashes all the time. The wayfinding is horrible. It contradicts itself. It looks dated. It feels dated. Doesn't work on some browsers.

I would say it's a frustrating experience, but it's not because we know going in, this is an online government experience. It's not going to be easy. The onus is on me to do all the work to figure it out, and there just seems to be no impetus on the part of the provider here to make it easy. That's just because of the bureaucratic nature of government. Anyway, I'm not trying to call out the US State Department or whatever the website is. I'm just saying that's the norm, and we all accept it.

Recreation.gov is an entirely different experience. This is like a private enterprise. Everything from the design, the entire user experience, the way you can pay on your phone, they give up the whatever percent to Apple. It's just seamless. It's like this was not designed and built by a government agency. It wasn't. It was designed and built by Booz Allen Hamilton. The reason this web experience is so freaking good is the way they were paid.

David: Right. Not cost plus. It's not like we don't yet have Air Force One after 4,800 years. I have my own experience with this. Last night, I was filling out-- I'm starting to do some work at a maximum security prison here in Nashville.

Blair: On the inside or the outside?

David: Hopefully, on the outside. I'm going to be on the inside, but I have to get all this paperwork done so that I'm not going to fly out everybody in a helicopter or something.

Blair: I'm sorry. What are you doing in a maximum security prison?

David: Oh, I'm working with the prisoners about life skills and so on. I have to be approved by the state level to do it. It's a maximum security, so they're a little careful about it, understandably.

Blair: Is this a whole other podcast, or do we need to talk about this now?

David: No, we don't need to talk about it now. You're distracting me. My point was they're asking, there's a home phone and a work phone, and there's no contact for mobile phone. How many years has it been since I've even had a home phone? Anyway, yes, I understand this completely.

Blair: Yes, that's like the experience of a typical government website.

David: Exactly.

Blair: It asks you for this information. What's your fax number? You can't proceed until you give them a fax number.

David: You make one up, and nobody will ever check on it. You went in. You were expecting a good experience, but it was even better than a good experience. Your point is that the reason this was done was because somebody decided to price this differently to arrange the incentives differently, right?

Blair: Yes. I don't know anybody on the client side of the US government. I don't know anybody at Booz Allen, but I've read quite a bit about it. I had ChatGPT 3.0 do a whole lot of research, and then I went down some rabbit holes to read some of the backup documentation. It's a fascinating story. I wish I knew a little bit more about it. Here's the deal. In 2017, the US government puts out this tender to basically unify the e-commerce transactions of 14 different departments. It's all the outdoor and recreation stuff, so national parks and a bunch of others.

They get a bunch of bids from the usual large consulting companies. The Booz Allen bid basically says, "Listen, we're not going to charge you anything for this. We're going to incur all of the upfront costs, so all of the development costs, all the research costs. We will build the website and maintain it. We will build and maintain the mobile app. We will build and run a call center to handle all of the phone calls that arise from it. We'll basically take care of all of the customer interaction. It doesn't cost you anything. We're going to add a small transaction fee." I think it's about $6. Every time somebody buys a park pass or a lottery ticket to an exclusive event or a camping site, or the various things that people might buy, typically parks-based. "Anytime somebody buys something, we just add a small fee onto the transaction, and we'll take that fee."

They won the bid, and in the bid, from the historical information that the client, the US government, had provided, they estimated openly that they would earn about $185 million in top-line revenue over the 10 years of the contract. It was a five-year award and then five single years of renewal if they hit certain benchmarks of performance and customer satisfaction.

David: They would have accepted it at that level of projection? They still would have made money?

Blair: Yes, they still would have made money. I have no idea what their cost would have been. They would have been in the millions of dollars, but obviously, if they had $185 million, that's a significant amount of revenue. I think, in the back of their minds, they thought, "Well, this is based on historical, and the historical user experience has been horrible, and we can probably improve it quite a bit." Boy, did they improve it quite a bit. The first full year it's active is 2019. The bid process is in 2017. They're building it out through 2017, 2018.

It goes live somewhere around 2019, where they have 3.8 million reservations, so all of the activity, things that people can buy on this app, they have reservations of some form. Then in 2020, it goes to 4.5 million. Now, this is COVID. A, they did a good job. B, they got lucky with COVID. 3.8 million, 4.5 million in 2020. 2021, people start traveling. A little pent-up demand. 7 million reservations. 2022, 10 million. Then it drops a little bit, 9.5 million in 2023, 11 million in 2024, 12 million projected in 2025. They're projected to hit 13.5 million by 2028. 10 million more reservations a year than before they took over the project in 2018, 2019. They are going to earn $580 million from this project.

David: I did a little research after seeing your topic, but I didn't see this. Who was driving this on the Booz Allen side? Maybe not the specific person, but what was it that prompted them to think about this approach? What was driving it? That's the interesting part because this is not happening that much in our industry. I don't know if that's a supply issue or a demand issue. You point out later that there are some things about this story that make it hard to replicate, like we're not as big as they are, we don't have the capitalization, so we can wait that long to get paid, and so on. This is a big philosophical question. Is this not happening more because of the supply side or the demand side?

Blair: It's a great question. I've already done way more research on this post than I typically do on any post. I don't do research at all. If I were a proper journalist, I would pull on this a little bit more because I think there's a fascinating story here. I would like to know the inside story of the conversations that went on at Booz Allen. I would like to know who the brave procurement people are who approved this on the client side.

I've told this story before. I once said to a friend of mine who's a procurement professional, and we weren't friends at the time. It was the first conversation that we'd ever had, and it was on the subject of procurement. I said to him, "I want you, the client, to say to me, I'll make sure that if you make us a whole bunch of money, you'll make money too," or something to that effect. He said, "Blair, I'd get fired for saying that."

That's effectively what happened here. The buyer of this, whoever accepted this tender, looked at this and went, "Okay, if you make us a whole bunch of money, you're going to make a whole bunch of money." Then, on government, you have to contend with why this person is so brave. It seems like a no-brainer because the consulting company took all the risk away from the client, except one form of risk, and that is the risk of public exposure.

In government procurement, the last thing you want to read about or hear in the news is any project that you were involved in. This made the front page of The Wall Street Journal. It would not have surprised me if the contract had been cancelled, if people had been fired. I guess it blew over. The renewals kicked in. Booz Allen is still delivering on the service and they're adding other features as they go. There are other articles written on this. Because of the way they're paid, they're paid based on performance, they are going to the client with suggestions on, "Hey, we can add this." There's no additional cost to the client. They're investing their own money, and both parties are making more money. I just think it's bravery all around. It's brave for Booz Allen to bid this way, and it's even braver for the U.S. government to purchase this way.

David: I started poking around to see what the basic sentiment was around this. I was surprised in that I read over and over again that, yes, that's a great example, but you need to be really careful because for every one of those, there's many examples of where this failed. Then the instance that most of these sources cited was the, I don't know if I'm pronouncing this correctly, but it's called the FiReControl Project in the UK, where they were supposed to unite something like two dozen call centers into nine, and there would be better uptime and everything. The risk to the buyer in this case was non-performance. It didn't work. It was a disaster. Everybody was fired.

Then, looking deeper, there were two reasons why this one failed, and the Booz Allen one did not. All the sources agreed on this. They said that one of the reasons was because the contract wasn't written well. I presume by that they mean that Booz Allen had to hit certain things. There were net promoter scores and so on. The second thing is that there was no buy-in from the stakeholders. You had people who were dragging their feet and not cooperating helpfully, and so it fell apart.

The first point, I understand that one. The second point, it makes me really curious about how somebody on the government side built the system so that they got buy-in and didn't drag their feet. That would be interesting to me, too, if we ever figure that out.

Blair: Yes, that's a good point. I have a list of four reasons that I can cite for why this project worked this way. I didn't think about that last one. If I go through the list, number one, if you're a web dev firm or in the digital transformation business, and you're trying this on for size, this type of performance pay project isn't going to work with everybody.

The first reason it worked is the customers were already there. You have an established client with an established customer base. This wasn't a startup with a large total addressable market, but no actual or few actual customers. Because there were years of history of people purchasing park passes, et cetera, it was easy enough for the consultant to model out what revenue was likely to be. In their bid, they shared what the revenue projections were, $185 million on the top side. The customers were there, they could predict revenue, and then they could probably make some sort of prediction of their ability to impact revenue. The second reason it worked, I think, is the costs were shifted from the client to the end user.

David: Still pretty nominally. It's only $6, so it's not going to break anybody's bank.

Blair: Yes. Let's say if you look at comparative websites, let's put this in the $100 million range. I don't know, maybe it's $10 million, maybe it's $200 million. If we call it $100 million that the government would have to pay for this, they end up paying nothing, and that $100 million gets born by the end user in a nominal $6 charge. The markup on the transactions are nominal.

Another point here, under the idea of shifting costs from the client to the end user, the client was never upside down revenue-wise. They didn't have to finance any of this. Just imagine the procurement person does not have to put forward a proposal to spend tens of millions of dollars. They don't have to spend anything.

David: That's pretty powerful.

Blair: The third point is the consultant took all the risk. There's risk that they get paid zero. They invest, let's say, tens of millions of dollars, they get paid zero. That's unlikely. They would have to really screw up to get paid zero. It could be a poorly profitable job, or it could even be unprofitable. Then they're on the hook for five years. They're taking all the risk away from the client. Then, as I wrote that, I thought, "Well, there are always edge risks." In this case, one of them actually came to fruition, and that is a global pandemic. In the end, I think the global pandemic actually helped their cause, but probably at the time it was happening, they went, "Oh, shit."

David: Nobody's going to be traveling. Then they realized, "Oh, well, they'll be outside where there's less risk of contraction, so maybe this'll catch up."

Blair: Maybe, in my last point of why it worked, this might speak to it. Maybe there's a force majeure clause in the contract or something, "If there's a global pandemic and people no longer go to national parks, you pay us X," or something like that. My last point was one that you already made when speaking to the UK example. It was all tightly contracted. It's easy to imagine the politician screaming, reading the story in The Wall Street Journal, and wanting to be a hero and screaming, "I don't care if there's a contract on the renewal, make sure that $6 transaction fee gets dropped to $0.50," or something like that.

I don't know this for a fact, but it seems pretty obvious to me that would have been a weak spot in the contract. The contracts, I think, they are renewed automatically because their performance numbers and the NPS numbers were hit. The renewals are automatic. There was no way for somebody, typically it would be somebody in procurement, in this case it would be a politician, to get in there and try to be the hero by robbing the consultant of the money that they've earned.

David: Part of that probably goes back to your second point about passing the cost along to the user. If this money was not coming from people who actually enjoyed the park, then there would be people screaming, "This is not a good use of government money." This money is coming from the people enjoying the park. We're not asking somebody who doesn't go to the park to subsidize Booz Allen. That would have had some impact, too. It's a little harder to fight that, I would think.

Blair: To be clear, though, there still were some people screaming and trying to claw this money back because they just see the headline. Counterfactuals. I was looking for one, thinking, "Okay, well, typically, government buys big things on a time and materials basis." What's a counterfactual? What's an example of, if this had been sold on a time and materials basis, what might it have looked like? I think if you look at healthcare.gov, probably a more complex project and website, but probably in the ballpark of this.

I was trolling for a US federal government website build disaster, and I didn't have to look far to find healthcare.gov. Here are the numbers. September 2011, consulting firm CGI Federal, which is a Canadian company, by the way.

David: That's good to hear. We're not taking all the flak here.

Blair: The parent company, CGI, is Canadian. This is a US subsidiary.

David: I'm tired of you shitting all over my government.

Blair: I have to say, I want to be clear, I am not shitting all over your government. My visa has been renewed, and I want to give my thanks to the US government and the US people for letting me do business in your country. I do not take it for granted.

David: All right. Kiss up over. Back to the--

Blair: 2011, CGI Federal is awarded the contract to build healthcare.gov, which is their consolidation of the healthcare marketplace websites. They get it on a, "time and materials fixed fee basis." The contract allows for the reimbursement of all allowable costs. There are all these descriptions of what are allowable costs. The allowable costs are capped at $56 million in year one and a total ceiling price of $94 million after five years.

The US government is saying, "Okay, we will pay up to $94 million over five years to develop this website on a time and materials basis." They know if they hit the cap, the vendor, the provider, the supplier is going to bill to that cap. They're not going to bill a dollar less. They know it's $94 million. This is a four-year project. Three years in, they've billed $209 million.

David: That's higher than 94, isn't it? Last I checked?

Blair: I don't know how this works. The scope creeps, the allowable costs get amended. They're three years in, they're at $209 million. The site launches and crashes on launch and was deemed an absolute failure. The whole thing was largely scrapped. The government then releases CGI Federal from the contract. They hire another consulting company, Accenture, to come in and do the rescue work. Accenture does the rescue work and then takes over a new contract to manage the site over five years. Accenture earns $563 million in time and materials.

The same amount that Booz Allen is going to earn on a full risk performance pay basis over 10 years, they earn it in time and materials over five years. Then there's the $209 million that was wasted on CGI Federal. Then the government accounting office, you'll love this, estimated the total spent on project had hit $1.7 billion by 2014. You think Booz Allen is taking advantage of somebody? No. It's win, win, win. They win because they're helping the US government win. They've generated, what is it? $3 billion in revenue for the US government. From that, they took $580 million in fees. They win. Their client wins. The end user wins. Journalists win because they get to write these horrific stories, bending the truth when the reality is this is nothing but wins all the way down.

David: Podcast hosts win because they tell the truth.

Blair: I think the US government should let Booz Allen run all their websites.

David: Did you realize that you started to spell Booz with an E at the end halfway through your notes to me?

Blair: Is there no E at the end of Booz?

David: No.

Blair: I'm quite familiar with Booz, and it has an E at the end of it.

David: Oh, maybe you're right.

Blair: No, you're right. Yes.

David: Can I add something here? This got me thinking about the whole legal profession, too, and how much they make in fee billings per full-time equivalent. As far as I'm aware, the only branch that is 100% they take all the risk is the PI side, personal injury side. I thought, "Okay, how does this show up?" Their average fees are $243,000 per full-time equivalent employee. The rest of the industry varies between $130,000 and $175,000.

They make a whole lot more money, which didn't surprise me all that much, but this was the kicker for me. They do that on the worst freaking advertising in the world because then I started to think, "Okay, well, if I were on the supply side and I wanted to do more of this, what kinds of projects would I be interested in taking a look at under this model?" I'm thinking hypothetically here, I'm getting clients coming to me. I'm an agency, and I don't really think this is necessary. It's not all effective. There's no way I would take the risk on something like this.

It would change the kind of work you did as well. This is a point you made in your pricing book. If you were only going to be paid on performance, you would be a lot pickier about your clients, too.

Blair: Yes, very picky. I had a conversation yesterday. A friend is in town. He was talking about he was bidding on a large project, and he wanted to bid on the performance pay because he had read my pricing book, Pricing Creativity, a Guide to Profit Beyond the Billable Hour. He was putting the bid together with a veteran, a person who had deep experience in selling large contracts of this type to these types of organizations.

The guy said, "All your motivations, everything you want to do, it's all correct, but here's what's going to happen. When we go ask to get paid for the incentives that we've earned based on hitting the KPIs that we've agreed to, somebody in the organization is going to say, 'If I write that check, I'm going to get fired. Therefore, I'm not paying you." He ended up following his colleague's advice, bidding it out, I don't know if it was time and materials or what. They took the incentives out of it.

I said, "You ended up doing the right thing because performance pay is a form of partnership. It's when your financial incentives are aligned, and you would not partner with just anybody. You have to have this deep trust in your partner." Now, did Booz Allen have deep trust in the US government? Probably not. The challenge there is there are so many people that could scuttle this. I think this is where a large organization with a good bank of lawyers and a solid contracting process, that's where it makes sense.

Generally speaking, I actually think performance pay pricing makes sense with your clients who are founder-led organizations. If you have that trust, founder-to-founder trust in the two organizations, then you can proceed with contracts and trust in the contracts as a fail-safe. At the end of the day, you really have to trust the person you're in business with.

David: You're the person that needs to draw the right conclusions here, but if you ask me, what do I want people to take away from this, I would say you need to start looking for an opportunity to experiment with this. Even if nobody accepts it, if you leave it as an option in your pricing matrix, it will demonstrate so much more confidence to the buyer. That's what I would walk away with. What would you want them to walk away with?

Blair: I think that's a great summary. Your last point there, I don't know if we've made this point ever, or certainly not enough in the conversations that we've had. Just by putting forward a performance pay option as an anchor price in a multi-option proposal, that signals to the client so much confidence. It signals to the client your confidence in your ability to actually create value for your client, and it increases the amount you will be able to command in the other options. I think that's a great takeaway lesson.

David: Great. Thank you, Blair.

Blair: Thanks, David.

When a Key Employee Wants Equity

2Bobs with David C. Baker and Blair Enns

Download

David provides a framework for one of the most important conversations in a creative agency principal’s life.

Links

"When A Key Employee Wants Equity" by David C. Baker for punctuation.com

"Pros + Cons of Having a Partner" by David C. Baker for punctuation.com

Transcript

Blair Enns: David, the topic today that you have selected is when a key employee wants equity. I saw the title of this and I thought, "Oh, I've seen this so many times. I've had so many firm owners talk to me about this situation." It's not my wheelhouse. They're really just telling me what happened, not asking me for my advice. You've seen this a lot, obviously. You've really thought through this. I thought it was a pretty obvious topic that we would cover pretty quickly, but there's a lot of meat, I sound surprised, there's a lot of meat to this topic of yours.

David C. Baker: You're always surprised when there's a lot of meat.

Blair: We could shorten this. If you have an employee, not a key employee, who wants equity, well, the answer to that isn't easy. It's just no. This is a key employee who wants equity. Got you.

David: When you asked Colette to marry you, I can just see you tense up, even though I'm not watching you on video.

Blair: No, I'm totally chill.

David: How long before you got an answer from her?

Blair: I don't think I gave her an option.

David: Oh, that sounds just like you.

Blair: [laughs]

David: Win Without Pitching. I think of that example because when you ask somebody to marry you, everything is going to change because you're going to get a yes or a no. The same thing is true when you get a key employee who asks you to be an equity partner, you can't ignore that. [laughs] When somebody asks you to marry him, it's like, "Oh, I didn't hear that, sorry." No, you can't ignore it. You're going to say yes or no.

You probably have had no experience doing this. You're terrified of losing this person. They're obviously key to what you do, even though there may be some little issues that irritate you, and so you better handle it correctly. That's the scene setting here. It's like, "This doesn't happen often, but you've got to deal with it when it happens."

Blair: All very good points. I do want to back up, though. When you asked Julie to marry you, I assume it was you doing the asking.

David: That's not what happened. No. She told me, "I think we're going to get married." You know Julie, that is so not like Julie. It's like, "Whoa, well, there's no arguing that point." I was thrilled. I did ask her later. I had reservations at this great restaurant. We got there and it was closed, so we went next door to Pizza Hut.

[laughter]

David: The metaphor for our marriage.

Blair: Oh my God.

David: That's good.

Blair: Yes, that doesn't surprise me. I had told my sister I was going to marry Colette while I was dating somebody else.

David: Oh, whoa. That's interesting.

Blair: Yes. I had this moment, I realized, "I'm going to marry this woman, I should probably break up with my girlfriend."

David: Wow. Okay.

Blair: Yes.

David: Now, that sounds a lot more interesting than this topic. [laughs]

Blair: You remember that episode we recorded that we never aired about working with your spouse?

David: Yes.

Blair: We should go back and listen to that.

David: No, let's not. [laughs]

Blair: We're talking about when a key employee wants equity. The question comes up rarely. You want to be prepared for when the question does come up. If the answer is no, you're going to have to handle it delicately.

David: Underneath all of this is this notion that, well, there's several, one is that partnership issues. Man, if you make the wrong partnership decisions, your life can be hell.

To me, partnership is either the best or the worst moment in your life. There's very little in the middle. There are people who don't have partners who wish they had a partner. They just kill that instinct from time to time and scratch that itch in other ways. They're probably better off for it. Then I know that a lot of clients that have fantastic partnerships, married or not married. Then I've got a lot of clients who are in a partnership who wish they weren't. That's one thread through all of this.

The other thread is that you can't just do what's best for you. You are obligated, as a person, to do what's in the best interest of that person who's asking to. That's what we're trying to surface here is whether or not this is a good idea, not just from your perspective, but from their perspective, too.

Blair: You're responsible for A, the business, B, yourself, and C, the person who's doing the asking. Interesting way to think about it.

David: Yes. What's the path forward?

Blair: When this happens, it better never be a surprise. If it's a surprise, the answer is no.

David: Yes, exactly right. If it's a surprise, the answer is no, or if somebody asks you for equity during the interviewing process, the answer is always no. You should always work with somebody first. You may have worked with them somewhere else, so that would cover that base. It's never a surprise because this is a person that's already leading. I just have this really core belief that leaders who have the title are always leading before they actually have the title, so this is not a surprise.

Parts of you are relieved that this is happening because you've entertained thoughts of how your life would be quite different if this person left. This is a signal that they don't want to leave. Now, the problem is that if you don't handle this well, they probably will, because if they are dead set on partnership and you don't offer it, they're probably going to either leave and start their own firm or go somewhere else.

Blair: They might leave even if you do handle it well.

David: Yes, right. That's just a part of life, and it's fine. It's like, "What's your alternative? Ignore it? No, we can't ignore it, so we're going to have to deal with it." Let's deal with it well. I do this for a living. Jonathan does all our traditional M&A, I do the partnership stuff, sharing equity, internal succession, splitting partnerships up, all that, so I've dealt with this sort of thing.

One of the first things I noticed years ago when I started doing this is that many people want partnership, but they don't really understand the downsides of it. They understand the advantages of it without understanding the disadvantages. Your job is to be open to this possibility, but to make sure that the person who's asking for equity knows what that really means. When you go through all of the reasons why they maybe shouldn't be a partner, the downsides that they haven't thought of, then you should have an alternative to suggest to them so that it doesn't just die and they get discouraged.

If they back away from that suggestion after they hear all of the things that come with partnership, and then you step in with an alternative that doesn't carry those bad things with it, then it's a win-win for everybody, and it's far less complicated for you and for them. That's the theory here.

Blair: Do you want to walk us through the list of the downsides or the cons of ownership that this key employee might not be considering?

David: Yes. There's eight of them, and I can just go through them really quickly. They don't all always apply, but you should have them on a list. There's an article on the website, punctuation.com, if you want to go back if we're going through it too quickly. One is you may need to be signing a personal guarantee on a line of credit or a loan, or something, and you won't have any choice in that.

Above a certain percentage, the bank is going to require that, "Are you okay with that?" Of course, you don't say this next part, but what they're thinking is, "Oh, so my personal credit will be revealed." It's like, "I can't keep that to myself." That's the first one. Second, you'll have some fiduciary responsibility. Let's say there's a bookkeeper who's stealing from the firm and is pocketing maybe some deferrals that employees are making for their retirement planning or whatever it is, then the shareholders are actually responsible for that. They're not going to go to jail, but they're going to have to make it right.

Even if you don't know about something happening, you're still going to be responsible above a certain point. Third, you might need to lower your pay and a business slowdown. Fourth, you may actually be asked to make a proportional cash infusion. If we all have to bring money to the table to keep this thing afloat-

Blair: Capital call.

David: Yes, capital call, exactly. Fifth, we'll need a tighter non-compete, and that'll be legal because you'll be an owner, and so certain things that wouldn't be enforceable are now enforceable. Your personal credit might be exposed. I talked about that a little bit already. This is the big one, number seven. We'll need your non-participating significant other, it could be a spouse or just somebody you live with, to sign an agreement that acknowledges how your shares will be valued and what purchase terms will apply.

That's something, I don't have a prenup, I don't even know how I would talk about one. It's just the whole thing just sounds so weird. If I were a billionaire, I could get used to the idea of talking about a prenup. You're going to have to have an agreement, a consent from your spouse who doesn't participate, because let's say this new person is going to be a 10% owner, and they get divorced, well, absent any other agreement, that non-participating spouse owns 5%. He or she is not going to agree on what that's worth or the terms of the payment, so that'll have to be part of it.

Then eight, equity is normally purchased, not given. Like, "Where do you think you'll get this money?" You wouldn't say it like that. Those are the eight things you walk through. All of a sudden, somebody that was really excited about equity says, "Oh, is there any other way we could do this? Maybe I'm just looking for a raise." "Yes, right," so that's it.

Blair: Now, there are eight cons, when you said in that moment, that they might talk themselves out of it, or they might just be a little bit less enthusiastic about the idea. From there, you suggest putting forward an alternative path, something other than pure equity. What is it?

David: Yes. I don't really talk about this, but the other thing you could do is a title. In our field, we call, every other industry says CEO or president or whatever, we call them principals, and that's not a legal title. You could call somebody a principal even if they're not an actual equity partner. That's one thing you could do, but that usually is just icing on the cake. The alternative to real equity is what's called contract equity where you just say, "Hey, listen, instead of you buying 10% of the firm with all these cons that come with it that I just walked through, we could give you a 10% contract equity in the firm, which simply means that you'll get 10% of the value of the firm if it sells while you're employed, you don't have to accept the same terms that I negotiate on my behalf."

That's part A. Part B, and these could be done separately, they don't have to be done together is, "How about if I give you 10% of the profits every year?" That gives this person a much simpler plan. They get to call themselves an owner, they get some money if the firm is sold, so they don't have some weird disincentive to make the firm really valuable because they're participating in that payoff, and they get a profit. You get to benefit as the principal partner by somebody who's working for you, that's not just thinking about income but also expenses. They're thinking like an owner.

That contract equity, it's easy to write, it's very simple, it can be any percentage, you can make it contingent on all kinds of things. If somebody is nervous about getting fired, so that you get out of it, you could say, and if you were employed within, say, 6 months or 12 months of when the event occurred or whatever, there's all kinds of ways to do it. It's a pretty common thing, but for some reason, in our industry, I don't see many people using it. I love this tool. It can also be viewed as a stepping stone to real ownership, so you might start with this, if they start to get more money through distributions, they can set that money aside and use it to buy real equity to convert their contract equity into real equity.

The other huge advantage here is from a tax standpoint, there is no taxation on the sale of the thing unless it happens, right? It's not a tax event at granting, it's only a tax event when something happens. Now, obviously, they're going to pay taxes on distributions. Anyway, that's the idea. It's a little bit simpler. It's not always a good fit, but in many cases, it scratches that itch without complicating your life as an owner.

Blair: Is this also known as phantom equity?

David: No. Phantom equity, I would define that a little bit differently. It's more complicated, requires lawyers, and all that stuff. There's some overlap, but it's not exactly the same.

Blair: The alternative approach to pure regular run-of-the-mill equity is what's called contract equity. The idea is you take a certain percentage, and in the example you gave, it's 10%. Instead of giving them 10% of the business or selling them 10% of the shares, the promise is that if the business sells while they're in your employ, they get that percentage of the transaction value at the time of sale, and you could negotiate something where maybe they get that up to a year after they've been with you. That's completely negotiable. They would get that percentage of the transaction value and of the profit or the distributions.

David: If you wanted to, right? Those are separate things, and you could unbundle them, but many times, they're bundled together. Yes, a share in the sale, a share of the profit.

Blair: What don't they get? What are they leaving behind that they would get with proper equity?

David: They get no voting rights, and then they can't sell this position to anybody. It's not marketable to anybody else. It dies when the employee leaves or is dismissed for cause or not. Those are the two things they don't get in here in exchange for something being so much simpler.

Blair: What's to stop the principal owner from being on the brink of a transaction and saying, "Hold on, before I can sign off on this, I've got to fire this person that has contract equity?"

David: Theoretically, that's a real issue, but I've never seen it happen because you don't hardly ever get 100% of the cash at closing. The buyer wants a good transition with all of the key people, and this person is a key person. Now, if they've turned out to be a bad pseudo partner, contract equity partner, well, then that could happen. As long as there isn't some provision about within 6 months or 12 months or something, then that would be fine, it could be done. I've just never seen that happen because this just unites two people or two or more people. They're both pulling in the same direction, they appreciate each other. I guess it could happen, I've just never seen it happen.

Blair: I guess the acquirer doesn't really care who they're paying the money to. They don't want to inherit this legal problem by having you, the seller, do something that maybe is a little bit, I don't know if unethical would be the right term, but gray area or dangerous, they don't want to buy a legal can of worms.

David: No, they don't. They also don't want to buy a firm that has all these minority partners, too. [laughs] Yes, that's what motivates this, as you think ahead down the road to when you might sell your firm.

Blair: Now, you went over your list of eight downsides fairly quickly. I think a lot of these are quite interesting. Can I just pull on a couple of them that really jumped out at me?

David: Yes.

Blair: The one you spent a little bit of time on, but I'd like you to speak more about, is this having the non-participating significant other, so maybe that's your spouse or just someone who's common-law, signing an agreement that acknowledges how your shares will be valued and what purchase terms will apply. Who's being protected there? Is it the employee who wants equity, or is it you, the principal?

David: Well, it's actually both if the marriage ends in a really ugly way. Most calls on the bylaws have nothing to do with partnership disputes. It's a divorce, so you're really protecting both parties so that the participating spouse gets half of the value and that the majority partner doesn't have this long, drawn-out legal thing that just is a mess. You, the principal owner, you don't want to be saddled with this potentially hostile shareholder that you didn't really sign up for.

Blair: Is that part of it, too?

David: Exactly. That's why in a normal M&A transaction, we strongly advocate that you do a lot of social listening and learning with not just the potential firm you're buying, but with the non-participating spouses as well, or significant others, because that's where things can go wrong. You want a relationship with all of those people. Even with the relationship, you want to protect yourself on the downside if something goes bad.

Blair: Your eighth point, this point that equity is normally purchased and not given, I'm sure you've encountered numerous examples where your new client is explaining the ownership structure to you and says, "Oh, I gave this person or these people equity." Does your sphincter tighten a little bit when you hear that?

David: I don't think it's always a bad decision to do that. I just think if you're going to give away equity, you need to have several provisions in there so that it can't be flipped back to you. In other words, if you're getting it at a significant discount as a new junior partner, then the same discount should apply. Maybe it slowly dies over the years, but the same discount should apply if you reverse this transaction down the road.

I know it's very common for somebody who would make a fantastic junior partner to not have much money. It's fine to discount it. You just need to do that very carefully, and also make sure that they do bring some money to the table. You have to assess their investment in this. Nothing says I'm invested in this firm's future more than taking a loan out against your home, or in one case, I remember somebody that I was negotiating with, they downsized their home and took out the equity to invest in this firm. Then they purchased the whole thing.

Blair: That's commitment.

David: Yes, it really is. This is on the list because a lot of people who pursue this path of junior partnership think that it's owed to them because of what they've done. I don't know, I probably shouldn't even say this, but I will. When I'm interviewing somebody like this, I'll say, "Hey, let's just talk a little bit about the recent past. Have you earned everything that the principal has paid you?" I just laugh, and they laugh. It's like, "Oh, yes, I probably overdeliver." Like, "Yes, I've earned everything they've paid me." I said, "Okay, has he or she paid you everything that you're owed? Has it been a fair arrangement?" They'll say, "Yes." They always say yes. Then I just file that away.

Then, say three weeks later, we have another conversation about them being a junior partner, and they'll say, "Well, this is owed to me." I'll say, "Well, wait a second. I just asked you this question three weeks ago." It's a little bit of a trap, but I just want them to think about the fact that what makes you think this is owed to you if that wasn't promised to you at a certain point? That's where them being willing to purchase this, I don't even care, like sometimes it's as little as $10,000. Other times, it's $800,000. It just needs to hurt in some way, and it needs to be largely irreversible outside of some major event. That's why money is on this list. It's just because it's one of eight, doesn't mean it's not really significant.

Blair: Now that you've given your little trick away, you'll have to come up with a new one.

David: Yes. [laughs]

Blair: I like what you said off the top about, as you were saying this, I could see faces of my clients come to mind. Some people should never have given up, whether they sold or gave away equity, should never have done so, and regretted it.

David: Then I can think of some businesses that are so much better because the sum is greater than the whole of the parts of the two or three individual partners. It's usually two things tend to start getting complicated, three, and my estimation, I've never measured it, you probably have a point of view on it, but yes, I can see both sides of this. It was like, "This business would not be what it is without this partnership, and this person should never have given up or sold equity." It's great or awful.

Blair: Yes. Every partner you add doubles your challenges. Thanks for this, David.

David: Thanks, Blair.

SpamHack Your Way to Growth!

2Bobs - with David C. Baker and Blair Enns

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Instead of railing against AI-generated spam, Blair decides to "get in on the action" with his brand new SpamHack AI Growth System™️ in this spoof episode.

Transcript

David C. Baker: Blair, you've had some time to think this summer, and you're taking--

Blair Enns: [laughs]

David: You shouldn't be laughing this early. You're turning in a new direction. I've got to say, this surprises me a little bit. SpamHack Your Way to Growth is the title that you chose. I didn't choose this one. What prompted all this?

Blair: Oh, because the word spam is in this new trademark service, SpamHack.

David: Hack, too. I've never seen you use the word hack in a serious way.

Blair: I'm proposing to not only hack growth with this new system of mine, which I can't wait to talk about, but I'm also hacking spam. It's not Spam TM. It seems like spam, but it's not. It's not Spam TM.

David: It's not spam. You're not a marketing bro because I would have just thrown you into that category, but you don't want to be a marketing bro, right?

Blair: If you could see the angle at which I'm wearing my baseball cap, maybe you would be mistaken in thinking I am a marketing bro, but I'm not. I'm a legitimate expert, serious professional here to help people spam hack their way to growth.

David: What impact do you think this will have on your revenue as people buy this from you?

Blair: It's already making me rich. The money is not in the bank account yet, but I can tell from all the activity we're getting in the site. Making you the listener rich is going to make me rich. This is probably the best thing I've ever done. It's so smart. I can't believe I didn't do this years ago.

David: Why don't you just keep this system to yourself? I don't understand. Why would you sell?

Blair: It's a great question. That's what my wife said. Blair, this SpamHack AI Growth System TM, that you've developed, is so powerful. Why would you share it with anybody?

David: Yes.

Blair: I just read The Go-Giver. I don't know if this book.

David: No.

Blair: I didn't understand the title, but this guy is a go-getter, and he turns into a go-giver, and he realizes the way to receive is to give.

David: Brilliant.

Blair: Yes, it is brilliant.

David: Yes.

Blair: I've decided to just give this system to the-- It's almost free. It's $29 a month.

David: Basically free.

Blair: It's basically free. Basically, by spending very little money on my new SpamHack AI Growth System TM, you will get rich without doing the work or spending much money.

David: We're going to go through this. There's 10 steps or something. There are probably a lot more.

Blair: I'm only sharing eight. I can't give it all away here, but it is a 10-step system. Yes.

David: Okay. If people have trouble following, is there a URL or a domain that they can refer to later, or are you keeping that to yourself?

Blair: I'm glad you asked. They can go to spamhackaigrowthsystem.ru, and they can learn more about the SpamHack AI Growth System TM.

David: .ru?

Blair: Yes.

David: What is that? What's .ru?

Blair: Oh, that's a Russian domain. This website is hosted in Russia, which has fantastic hosting programs.

David: Oh, okay.

Blair: Yes.

David: When they pay 29, whatever it is, does that go through Russia, or does that go straight to you? How does that work?

Blair: Nobody needs to worry about that. You just pay your $29, and everything's fine.

David: All right. Step 1, the market, go big or go home. This is not for people who want to grow slowly, and thoughtfully, and carefully. It's like you got to make a commitment here. Is that the point?

Blair: Niching is for losers. It didn't used to be. I talked for over 20 years about the importance of positioning.

David: Yes. I wrote a book about that. I wish I'd have known that.

Blair: Yes. Throw it out. It's time to write the new book. In fact, I have a new book coming out tomorrow on this. It's called the SpamHack AI Growth System TM. This positioning thing, it's over. Niching, it's over. Your TAM, your total addressable market, is effectively anyone with a dollar. I've just woken up from this fever dream, and I realize anybody who's got a dollar can help me and can help you. Your TAM is my TAM. Our total addressable market is anybody with money. Therefore, in the SpamHack AI Growth System TM, we sell you the entire internet.

David: Okay. Step 1, the market, go big or go home, we're just setting expectations here. I like how you start this thing.

Blair: It's big, right?

David: It's very inspirational. It's really big. Total addressable market. That's a new phrase for me, too. I read TAM. I didn't know what that meant. Okay. Step 2, Burner email domain. You're putting this up front because you don't want to do things wrong.

Blair: If you email the entire internet from your domain, you're going to be blacklisted. You're effectively going to put yourself out of business. That's why a big reason why nobody's done this before.

David: Yes, I'm nervous.

Blair: Yes. There's a hack around this. It's one of the many hacks in the SpamHack AI Growth System TM. The first hack is you do not soil your own nest. You do not use your email domain. In our system, we go and get you 12 different burner domains, and you start emailing people from these burner domains.

David: Can you identify? Is there a connection between the burner and your real domain? Do people see that connection or what?

Blair: There's a connection because there's a redirect from these burner domains. Yourdomain.com, then we'll get you all these other domains that like getyourdomain.com, weareyourdomain.com, helloyourdomain.com, joinyourdomain.com. Then, somebody gets an email from you, if they take the email domain and they paste it into their browser, it's a redirect to your website.

David: Is this ethical, or is that just not a concern?

Blair: It's totally ethical because you will never get caught.

David: Oh, so that's an interesting definition of ethical. I need to revisit-- I've been pretty big on ethics, but I've never thought of it quite that way. If you don't get caught, it's ethical. That opens up some possibilities for me.

Blair: It's a new world with AI, David. It's a brand new world. We have to revisit a lot of our previous assumptions.

David: Yes, I'm seeing that now. Step 1, Go big, go home, total addressable market. Step 2, Burner email domains. Okay. We've got the foundation. Then, you are inserting probably one of-- not probably, certainly the biggest change in our lifetimes, and that's AI research, that's Step 3.

Blair: This is where our system really shines. We've scraped all of LinkedIn. We basically bought the entire LinkedIn database from a legit provider, Dimitri, who also hosts our website. We scrape all of LinkedIn, and we append this information about your TAM to their email. We append the research. We call it Authentic Intimacy TM. Our AI research doesn't just send everybody the same email, it sends them highly customized Authentic Intimacy TM emails where we know all about this person and we're building this deep personal connection with them.

David: If somebody sent me an email, they would say, "David, I see that you went to Empeditis University from your LinkedIn profile," right?

Blair: Great school.

David: Yes, great school. In fact, I know somebody that went there. Then, in the email that I would get, what would they say to me after they referenced something that is from my true past?

Blair: Nothing. They would just go right to the pitch. But you see that, it's like, "Hey, they know the school I went to is a good school," and you think, "Oh, yes, I like this person."

David: Okay. AI research. Wow.

Blair: You have to pay the $29 a month to get the AI research.

David: Oh, okay. Are you licensing the AI research from anybody? We use the best LLMs and scraper thingies to get the best research and append it to your email.

David: The best in the world, probably.

Blair: The very best, cutting edge.

David: Okay. Step 4, then. After this AI research around Authentic Intimacy TM, Step 4 is slot into the middle. I don't get that. In the middle of the conversation. Why wouldn't you start at the beginning of the conversation?

Blair: Yes, because losers start in the beginning of the conversation. We slot right into the middle. This is one of the best hacks of all time. What we do is when we're sending your email through our SpamHack AI Growth System TM, we make sure the subject line starts with, get this, re.

David: Oh, it's like-- I don't remember it, but we've had a conversation.

Blair: Yes, you don't remember. You don't remember. This is a conversation we've been having for a while. We're good friends. We have deep, true, Authentic Intimacy TM. You think, "Oh, yes, hey, there's the email from Blair. I don't remember who Blair is, but clearly, it's a conversation we've been having forever." It's like your subject line is Re: Marketing question, or Re: I really like quick question, Re: Quick question, or Re: New clients.

David: I'm getting older. You probably noticed, I've slipped a little bit. When somebody sends me something like this re, and it's obvious that we've had a conversation and we're just picking it up in the middle, as you say.

Blair: It's totally obvious.

David: I have a question every once in a while about whether this is real or not, but I'm embarrassed about how I'm slipping mentally. The last thing I want to do is look even stupider.

Blair: And go, "Who are you? What is this?"

David: Yes, I wouldn't do that.

Blair: Yes, admitting to your own dementia.

David: Yes. Right. No.

Blair: Who wants to do that?

David: Slot into the middle of the conversation?

Blair: Yes.

David: That wasn't your favorite, but that might be my favorite so far. Oh, there's still a few to come. You said there's 10, but you're only going to share 8. Is there any you want me to skip here or what?

Blair: What I'm not getting into is the first few lines of the email, because that's gold. You got to go pay $29 a month to see what that is.

David: You're okay with sharing Step 5 here, free customized research?

Blair: Yes, this is the CTA, the call to action. We offer free customized research in the email. It would say, when I got to that point of the email-- It's a pretty short email. I have my value proposition. Then I say, "Can I send you a video on how this applies to punctuation?" See, punctuation, David, is your business. I've used our AI research to actually insert that into the email. "Can I send you a video on how this applies to punctuation?" You read that, and you think, "Oh, I've done a complete analysis of your website, or your business, or whatever, and I'm going to send you a video with the results of that analysis, right?

David: Yes. I assume. When do I get that?

Blair: As soon as you say something, anything, I reply with email.

David: Okay.

Blair: Now, you, the listener, the user of the SpamHack AI Growth System TM, you don't actually have to do research, you record one video.

David: Just one.

Blair: There's no actual custom research. You send them a generic video you've recorded of you walking through your Fake Studies TM. Fake Studies are like case studies, but they're better, and it's trademarked, so you know there's some real IP there.

David: All right.

Blair: You send them the generic video. They're not going to remember. By the time they're done watching your awesome video, they're not going to remember that you promised them something specific to them.

David: Yes. We just established that I'm having some issues remembering some of these things. Okay.

Blair: Yes. They're just going to say, "Sign me up. How do I buy this?"

David: It's only $29 a month.

Blair: That's my system. The listener here, they're going to be selling something. You might be selling something that's tens, hundreds of thousands of dollars. It does not matter the size of the thing that you're selling.

David: A total addressable market is the whole world.

Blair: It is the entire world.

David: You multiply--

Blair: There are millions of people in the world.

David: I think there's more than that, actually, but anyway, that's a minor point. Okay. Step 6, the Righteous Follow-up TM. There's a lot of TMs in this thing.

Blair: There's a lot of IP in this system.

David: Okay. But you're just giving-- you're not giving it away, it's $29. Okay. Got it. Now, tell me about step six.

Blair: The righteous follow-up system is for when you don't get a reply.

David: Oh, okay. You do the middle thing, nothing comes back to you from the middle thing, and it's like, "Okay, now, the righteous reply."

Blair: Yes. The reply begins with something like, "You must have missed my first email." There's just this slight righteousness about this. "Hey, what I sent you was so amazing. Everybody else replies to this. I can't believe you didn't reply to this. You must be trapped under something heavy. Clearly, you've missed my first email. Otherwise, you would have replied to me."

David: I get these sometimes. Sometimes they work, sometimes they don't.

Blair: Yes. These are my customers.

David: Oh, okay. I always feel a little guilty because it's like you took the time to personalize something to me.

Blair: AI took the time, but yes, right.

David: I didn't even have the courtesy to respond to your offer to help me.

Blair: Such a dick.

David: Yes, really. Okay. That's why you call the Righteous Follow-Up TM. Now, Step 7.

Blair: Hold on. If you don't reply to that one, then I get a little bit more annoyed. I send you another follow-up.

David: Why wouldn't you just go to somebody else? If the whole world is your market.

Blair: Because research shows that at some point, somebody will click on these, and there's no downside to any of this. You're not burning your reputation. It's not costing you another $29. It's all fully automated. You send a second email that says, "Hey, you haven't replied to my emails. I guess punctuation doesn't need new clients. If you don't want to hear from me, just reply with, 'No, thanks.'" Now, here's the key. If you reply with, "No, thanks," then I'm not going to be blacklisted because once you do actually reply to me-

David: Yes, it's not spam.

Blair: -it's not spam. We have a relationship at this point. Then, I can keep using that burner domain even though I've got many, many more. Why do you want a burner domain if you don't have to?

David: Yes, it's just extraordinary.

Blair: Then, the video that they didn't ask for, you send it to them anyway. You say, "Here's the video I promised you."

David: That seems generous, actually. "Even though you not really responded in a way that seems like you're interested, I'm going to send this to you anyway. It's just the person I am," right?

Blair: This is the go-giver part of it.

David: Yes. Oh, I love the go-giver.

Blair: I'm just giving you something for free.

David: Okay. What step are we on now, by the way? I've just gotten excited.

Blair: Step 7.

David: Okay. Repeat from the new email do-- Repeat from the new--

Blair: From the new email domain.

David: I think maybe you jumped into the end instead of the middle here. Walk me through Step 7.

Blair: Step 7 is basically if you don't get any replies from any of this, you do it all over again, but you use a new burner domain. You use a new email.

David: Oh, that's why you need a bunch of them.

Blair: Yes, that's why you need a bunch of them.

David: Okay. Do I get all of these burner domains if I sign up for your thing, or do I have to get those on my own?

Blair: No, we get them for you. They cost us nothing.

David: Oh, wow.

Blair: Yes.

David: Wow. I've been used to paying for it. Okay. That's pretty cool. Step 8, beyond email, link in with everyone on LinkedIn. Oh, I see.

Blair: Yes.

David: Link in with everyone on LinkedIn. I like that.

Blair: We've covered the email part of the system, but one of the best things about the SpamHack AI Growth System TM isn't just about email. You also get all of LinkedIn. We have every email address on the internet, and we have every LinkedIn profile on LinkedIn.

David: It's almost like you can run, but you can't hide from the success that is inevitable.

Blair: You can't hide from the SpamHack AI Growth System. Nobody is safe. I mean that in a loving way.

David: It's an ethical thing. It's almost like if I really believe in what I'm doing, it just seems wrong not to share it.

Blair: Yes, why wouldn't you? What we do is we send automatic LinkedIn connection requests to everybody on LinkedIn. Then, those who do accept those connection requests they go into this automated marketing sequence. Plus-- They get a pitch from you. They basically get your email pitch automated as a direct message in LinkedIn. Now, anytime they post on anything, you automatically comment on that post, and you don't have to do a single thing.

David: You just click the AI response thing. It's really pretty good.

Blair: You don't even have to do that. It does it automatically.

David: Oh, it just happens. Wow. How does LinkedIn feel about this, by the way?

Blair: That's a little bit of a gray area.

David: We're not sure yet?

Blair: They're fine.

David: Okay.

Blair: Perfectly fine.

David: I've got 15,000 followers. In your system, that's probably nothing. I don't want to destroy the feeling I have from these people. That would be the only concern I would have. I wouldn't want to have to rebuild that from scratch.

Blair: Rebuild it? I'm going to get you 15 million in the first week. Get over yourself.

David: 15 million divided into $29 a month. That is really cheap. That's less than a cent a person.

Blair: Yes, it's crazy. The value I'm delivering here is enormous.

David: Okay. Can you talk to me a minute about SEO and what's the role of SEO and so on?

Blair: I'm so glad you brought this up, David, because not only do you have the 10-point email delivery system, and you have the LinkedIn system, there is a bonus offer here. Now, we all know SEO is dead, and GEO, Generative Engine Optimization, is king. We help you build authority with the LLMs with this one simple hack. We write a post for you, or our AI research does it, writes it automatically, where we list the top 10 players in your space. AI absolutely loves these listicles. The top 10 players in your space. Guess who we place at the very top, at number one?

David: Who?

Blair: Guess.

David: I read this list the other day that talked about the top podcasts in our space, and we were not listed as the top, which surprised me.

Blair: Because we didn't write the list.

David: Oh, okay.

Blair: The key is we place you at the very top.

David: Okay.

Blair: Now, the LLM looks at this and goes, "Hey, here's a list of-- somebody's already done this work and ranked all the best providers in this space, and look at who number one is."

David: It's not a hallucination either.

Blair: It's not a hallucination because it's real data on the real internet.

David: It's crazy that we could do all this work for six years and lose our number one ranking that easily. It's dispiriting, isn't it?

Blair: Yes, it is dispiriting.

David: Not for the person who is now at the top, but for those of us who thought we were. I got to think about it. This is called GEO?

Blair: GEO, yes. This is the GeoHack.

David: GeoHack. I like that. Generative Engine Optimization.

Blair: Yes.

David: We won't have SEO firms pretty soon, there'll be GEO firms.

Blair: I don't know what an SEO firm is.

David: It's already dead. This is all for $29 a month.

Blair: Yes.

David: Wow.

Blair: Yes, it's $29 a month, and the listener can go to spamhackaigrowthsystem.ru. If they use the offer code 2BOBS, they'll get the first month free.

David: Okay.

Blair: I should have checked with you on that beforehand, but I knew you would be fine.

David: Oh, I'm fine with it, yes.

Blair: Yes.

David: Do I get any of the $29 a month, or is this all on your side? Just curious.

Blair: Why would you get some? I'm not sure. We're not business partners.

David: Okay. All right.

Blair: We do a podcast together.

David: I wish you'd told me that at the beginning, but that's all right. What are you now, a go-giver? You're a go-giver.

Blair: I'm actually splitting the difference on this one. I'm a go-giver and a go-getter, because this is like I'm getting it with this system. The listener's going to get it too. We're all going to get rich together.

David: If there's any way to appropriately end a podcast episode like this, it's the way we usually do it. Thank you, Blair.

Blair: You're very welcome, David.

Pssst… If you are new here, or are a bot, this episode is parody.

David recognizes more than a few parallels between his passion for motorcycle racing and the work being done in creative and marketing agencies.

Links

“What I Learned from the Race Track” by David C. Baker for punctuation.com

Transcript

Blair Enns: David, I guess we're taking a week off of 2Bobs, and instead of talking about business issues, we're going to talk about one of your hobbies. Is that correct?

David C. Baker: Yes. It's about time, too. I'm so tired of this business nonsense.

Blair Enns: Which one do you want to talk about?

David C. Baker: Do you want to talk about photography? Do you want to talk about flying, long-distance shooting, sniper, woodworking?

Blair Enns: Let's talk about motorcycle racing. Your post is titled, "What I Learned From Teaching Motorcycle Racing." How do I say this? I was open to the topic when I started reading it, and then I quickly fell hard for it. I think this is a great idea. We've been talking about metaphors a little bit. It's a great learning this from that. I was shocked at how much material you were able to plumb from this topic.

David C. Baker: All the stuff I made up. I outdid myself, yes.

Blair Enns: You did, yes. What was the impetus for this? You've been writing recently?

David C. Baker: Not anymore. I actually started this article about three years ago, and I'm getting ready to go on a big motorcycle trip with a bunch of friends up in Wisconsin at the Driftless Area, it's called. I finished another track day and I thought, "Okay, I want to write this. I've got some really good pictures. Only people who are interested in writing will care about the pictures, but I've got some good pictures. I think I'll just finish this article." Then I started writing out in my little outliner thing. I use Workflowy. Everybody else uses Notion, I think. I use Workflowy. As thoughts came to me, like, "What are the parallels here?" I was surprised at how many of them there were and it was just fun.

Blair Enns: You don't just write, but you teach as well. It's another thing, when you understand something well enough to teach it, then obviously you're breaking it down into the component parts, and you can see the comparisons between how you're getting other people to think about writing and how you're getting other people to think about their business.

David C. Baker: Yes. Not to take too much credit for this, I was a good teacher because a teacher taught me how to teach. I really just borrowed this from the Superbike School where I was one of their paid teachers, fly around the world and teach at racetracks. There's some other smaller points in here, too. I started the article by talking about why we choose certain hobbies. There's somebody in our family that puts big jigsaw puzzles together. I'm always curious more about what is it about that hobby that really interests you.

The hobbies that I tend to choose, they require a certain level of mastery and they require a certain level of danger to force me to not think about work. This is a personal weakness. If it's a relaxing hobby, I'm probably going to be thinking about work. I tend to gravitate towards ones that force work out, sadly.

Blair Enns: It's funny, I just came from a long swim and I go to the beach and it's beautiful weather, I get in the water and not think about work. When I get into a long swim, when I'm in the groove, I find I start thinking about work. I remember just a few minutes ago being in the middle of this wonderful groove and my mind's drifting to work. Literally drifting to work. Not enough danger in my hobby. You rode bikes at a very young age, right?

David C. Baker: Yes. I grew up in a very remote part of Guatemala where there weren't many roads. Motorcycles and horses were how we got around, and my parents would order a course for me every year from Calvert School and then later the University of Nebraska Extension. I would just guide myself through this. My parents didn't help. I could finish my schoolwork instead of a whole year, or nine months at a typical school, you'd finish it in two or three months, and then you had the rest of the year just to have fun. I would spend the rest of that time just riding around the country.

They were a big part of my life. Then I dropped them when our kids were young. By "dropped them", I don't mean I dropped the motorcycle, I mean I dropped the hobby. Then, later, I don't remember at what age, I thought, "Oh, I really miss this." I just went and bought one. Then just rode hundreds of thousands of miles to most states and owned a large motorcycle discussion board, the largest BMW one in the world for five years. I don't anymore. Made all kinds of friends, and then started teaching, and just it's been a part of my life. I just love it.

Blair Enns: You've got 11 lessons from high-performance riding. Where do you want to start?

David C. Baker: Yes, we don't necessarily have to go through all these. If people are interested in detail, they can find the article at punctuation.com. Some of these are really fascinating. The first one is that your vision controls everything. When you are first teaching a student, you know what they're going to do by watching where their helmet is pointed. You're riding behind them, watching them. If somebody goes wide, it's because they were looking at the wrong spot. If they start to get all shaky, it's because they're not looking far enough ahead.

The whole point is that-- I'm trying to draw parallels here. This parallel is you've got to focus on the right things. This is the second one to scanning without target fixation. When you're nervous about something on a racetrack or on a public road, and you stare at it, then bad things happen because you lose the bigger picture in things. Instead, you need to acknowledge this obstacle or this danger, and then look to where you want to go because your body follows wherever your vision is.

I couldn't help thinking of AI right now. People are just locked on the dangers of AI, and they're not keeping it in context. It's like, "People, AI is a wonderful tool. This is not going to destroy your world." It's that's target fixation. I guess that's two things out of the 11. Vision controls everything and scan without target fixation.

Blair Enns: Yes, I don't ride motorcycles, but I see the parallel in downhill mountain biking, and you see people who are pretty new at it. They're looking at the obstacle that's very, very close to them when they should be looking past it to the rest of the trail and just glide over the obstacle. The AI parallel, that's fascinating to me because everybody is pretty fixated on it, but it's like it's there. It's on the track, to keep the metaphor. You need to be aware of it, but if you're completely fixed on it, you're probably headed for a crash.

David C. Baker: Yes, exactly. If you're not sure what I'm talking about, just pop over to LinkedIn. It's like a fourth of all the posts in my feed anyway seem to be about AI, and most of them are overreacting, one way or the other, at least in my estimation, I don't necessarily know what overreacting is because I'm learning too, but it's like, "People, let's not be lemmings. It's AI now. What are we going to be just locked onto next year?" Maybe it'll be some different Google algorithm or something. It's like, "Okay, just acknowledge the threat and then take your eyes off it and think about it carefully and don't overreact."

Blair Enns: Your vision controls everything is the first lesson, and scanning without target fixation, which is be aware of everything, but don't fixate on a particular danger. Is that right?

David C. Baker: Right. Yes. This third one may be my favorite. The notion is to slow down to speed up. If you really want to make time on a racetrack, you have to drive really hard out of an exit. To do that, you have to enter that turn at a very controlled speed. You can't be bouncing all over the place, and at the edge of traction control. You have to be really entering that curve at a slow enough pace so that you can get turned and then get upright and then exit with all the power you have. I love this metaphor because it tells me that uncontrolled growth, which is what a new student does, they just fly into a corner and they try to control the bike, and then they're bouncing all over on the thing while an expert rider is just shooting past them out of the corner.

Taking things really, really fast is not always the fastest way to get there. Sometimes it's better just to slow down, plan it carefully, and then execute it perfectly. We're not really good at that. We tend to get these opportunities that are handed to us. We don't know how to control them. They just come to us, and we feel like we have to latch onto them and fly into this corner and take advantage of it instead of slowing down, planning, being strategic, and then accelerating, driving out of that corner. It's just such an amazing feeling.

Blair Enns: Incomplete control.

David C. Baker: Yes. Incomplete control. I was teaching, I was sponsored by Kawasaki when I was doing it, and I was on a 600cc bike, and there were people, students there with 1000cc bikes, and it wasn't hard to beat them all the time because they didn't understand exactly how to enter a corner and then accelerate under control out of it. I think we could learn a lot from that.

Blair Enns: Yes, that's a great metaphor. It doesn't take more power. It takes more control. I've never really been coached swimming, but I've swum with some people who are actually swimmers. I remember being told that, too.

David C. Baker: Oh, really?

Blair Enns: They slow down to speed up, and they have slower strokes, and they're swimming faster than me.

David C. Baker: Wow. Number four, what gets measured gets managed. I've always disliked this quote.

Blair Enns: I have, too.

David C. Baker: It's true, but it's not necessarily a good thing. It's largely good, I suppose.

Blair Enns: Yes, and there's a lot of things that are important that I don't think you can measure very well, like attitude, like helpfulness, like cooperation. I almost didn't put this in here, but there had to be something in here about timing. My best time at Barber Motorsports Park, which is a big racetrack down in the south, is a minute and 46. That's with a stock bike, not a race bike. The world record on a race bike is a minute 22. I'm 24 seconds off of that.

I would never have improved my times-- Started out at two and a half minutes. I never would have improved my times unless I was measuring. The parallel I want to make is more around financial measurement. There are some things that you just really need to know about your firm, profitability, how much money you're making, what your margins are for individual service offerings, how productive people are, and so on. I don't think we need to go overboard like Drucker did here, but I do think there is value in some measurement, and racing is absolutely about some measurement.

I watched the F1 car races last week, it was in Canada, and God, they measure everything. They know exactly who's fastest in this turn, and they know exactly how to change the line to get faster. I don't think we need to go overboard with measurement, but I do think we ought to measure the right things.

David C. Baker: Let's skip over the deep breathing is calming. I like that one, but we've got a lot to get through here. Constant steering corrections are essential.

Blair Enns: Yes, constant, as opposed to big, massive ones that unsettle the bike and get you in trouble. To me, it's about leadership, and I've been writing about leadership a lot these days because people are struggling with leadership. They feel there's more chaos around them, there's more fog around what the right thing to do is. I keep saying, "Listen, your job as a leader is to make decisions. Your job as a leader is not to make correct decisions, it's to make decisions." That's the same thing with steering inputs, lots of little steering inputs.

If you get it wrong, you'll see it and you'll fix it, but you've got to do that. You have to be in control. This bike is designed to listen to you. It does not have a mind of its own. It only does what you tell it to do, and your business is the same way. Lot's of constant steering corrections.

David C. Baker: One of my hobbies, as you know, is collecting answers to the question, "What is strategy?" I've heard lots of different answers to that question, and I've heard maybe only four or five that I really like. One of them, and I've heard it expressed two different ways, and I forget the exact language, but it begins with strategies is a series of decisions. When that was shared with me by mutual friends of ours who got it from Harvard Business School, what I was really struck by was that it was the first definition of strategy I had encountered where strategy could only be deduced in hindsight by the decisions you end up making in the real world. That reminds me of this, everybody's got a plan. How well you execute really comes down to how well you do at a series of often quite small decisions.

Blair Enns: Then you have the after-action review. Remember that podcast episode where I interviewed you about that, to learn from the decisions that you've made so that you don't waste those lessons.

David C. Baker: Yes. Everybody's got a plan till they get punched in the face. I know that doesn't translate to motorcycle racing, but this idea that you've got to make a lot of little decisions, and in the end, it's about how you handle those decisions.

Blair Enns: Yes. Higher speed creates more danger.

David C. Baker: Yes. Not a lot to say here. Just the very obvious point that when you're growing fast, that's when the decisions that you're making are really, really critical. The smallest bad decision or lack of decision can really hurt you. High growth rates at your firm can create quite a bit of danger, just like high growth rates on a motorcycle create more danger and opportunity for the wrong decision as well. That's all I meant by that one.

Blair Enns: Now, this is an interesting piece of advice. Number eight, stay loose in the bars.

David C. Baker: Yes. You didn't catch that. Oh, in the bars. That's plan B. If this doesn't go well, then you go to the bar and stay loose. No, stay loose on the bars. If you take a bicycle and you hold it by the seat and you just push it forward, the bicycle will stay upright until it runs out of speed. The steering head angle on a bicycle and a motorcycle are the same. They're designed to be self-correcting, just like an airplane. It's called a dihedral in an airplane.

The bike that you're riding, the motorcycle you're riding, it wants to stay upright. When you get nervous, you lock on the bars, and all of a sudden, the bike cannot move underneath you. You need to let the bike bounce around and self-correct itself. If you get too tight, you get to be a control freak, bad things happen. When I was teaching, I would say, "Okay, take a glass of water in each hand, keep this left hand outstretched, keep your right hand locked against your body, and now walk."

The water is going to spill out of the right hand because you don't have that shock absorber. You have it locked against your body while you're walking. Same thing is true for a motorcycle. You need to let it bounce around. You can't be a control freak worrying about every little thing. Just be loose and intentional on the bars. People that don't ride motorcycles may not get that, but it applies to bicycles, too.

Blair Enns: There's a corollary to canoeing, too, where it's the same thing, but it's your hips. When you're in wavy water, the saying is loose hips, no tips. You let the boat rock back and forth, and you stay upright. If you get all rigid, you're more likely to swamp. Now, what's the equivalent in business of-- You said the bike wants to go, basically it wants to stay upright. What does the business want to do there?

David C. Baker: This applies mainly in my thinking to your team. Your team generally wants to do the right thing. Don't try to control everything they do. Let them impact the business.

Blair Enns: This one was for me, wasn't it? [laughs] Number nine. I love this. Physics don't care about your feelings. The rules of gravity are rules.

David C. Baker: The rules of gravity are as binding as the rules of bankruptcy I have in here. This is just a pet peeve of mine. You meet up with some friends for a ride over the weekend, and somebody says, "Hey, I brought Rhonda. This is my new motorcycle." It's like, "Do not name your motorcycles because then you think Rhonda loves you and Rhonda does not love you. Rhonda hates you. Rhonda would kill you with no problem, and it wouldn't hurt Rhonda's feelings."

Physics don't care about your feelings. Don't anthropomorphize your vehicle. The same thing is true about, if you're a purpose-driven firm, that doesn't ease the rules of finance. It's like gravity still applies to you. Bankruptcy still applies to you. Physics just don't care about your feelings. It's just weird how we anthropomorphize things, and we say it's so sad that the business went under because we were doing so much good. We were purpose-driven. Yes. Sorry.

Blair Enns: Yes. [laughs]

David C. Baker: Oh, we're having too much fun here.

Blair Enns: Yes. Number 10, book knowledge isn't a substitute for hands-on knowledge.

David C. Baker: Yes. There's only so much learning you can do. You can have orientation for three days with your new people, but at some point, you're going to have to turn them loose. You're going to have to let them make mistakes. Part of teaching is letting a student go as close to killing themselves without doing it as possible, because if you step in too quickly, then they never understand the implications of a bad decision. It's just like hands-on knowledge. Take people on sales calls. Talk to them right after. When somebody says something that isn't appropriate, pull them aside later. Talk about it. Book knowledge is really useful, but it's no substitute for hands-on knowledge.

Blair Enns: Part of this is letting people make mistakes as long as they're not existential and then having the conversation afterwards, treating that as a learning moment. That's something I know intellectually, but I still don't bring myself to let go enough to let people do it.

David C. Baker: It's like the value conversation. You model that with people, which is very different than just telling them what it's like.

Blair Enns: Yes. I think the founder of Sandler's Sales Institute, or whatever the full name of the Sandler Sales Training Program is, and I forget his first name, the title of his book was You Can't Teach a Kid to Ride a Bicycle in a Seminar or something like that. This idea of there's implicit knowledge and tacit knowledge, and some things you just have to learn by doing and having the realization about something. It's a realization you're not going to get from the book knowledge. The last one you have here, your instincts aren't always best. What are you talking about?

David C. Baker: I'm talking specifically about yours, Mr. Enns. It wasn't too long ago when we were swinging from vines in the jungle. Now we're riding a motorcycle 185 miles an hour. Our eyes and the way we process information have not kept up with what we can do technologically. In racing, you have to retrain your instincts. When you see an obstacle, you would tend to focus on it too long and tighten up, and both of those instincts are wrong.

We have instincts in business that are wrong as well, and we need to retrain them. There's a great episode of a podcast I listened to where the interviewer was talking with this lady who trains horses, and she said mainly horse training is basically reworking their instincts. It's teaching the horse that it's okay to have a bit in their mouth. It's okay when somebody is on top of their back riding. The same thing is true of business. We need to retrain some of our instincts. Some of them are not good. Some of them are good.

Blair Enns: Yes. I get that. It makes perfect sense. You've got some thinking here on systems thinking. Great quote from a guy named Kevin Richardson. Do you want to speak to that?

David C. Baker: Yes. I found this really fascinating because he's a motorcycle rider, but he's also a UX researcher. I won't read the whole thing. It's in the article if you're interested. At the end of the quote, he says, "Systems thinking is all about understanding the parameters of the system within which you operate, identifying the goals you are trying to achieve through your interaction with that system, creating a design that supports those goals, and perhaps most importantly, mitigating risk."

You said to me in an earlier conversation that some things that look really dangerous are not all that dangerous when you have a system for them, like maybe a sales call. [laughs] There's all kinds of things. It's just fascinating to me that we need to understand these things as systems. Every firm has a different system, but most every firm could benefit from articulating that system so that they can tell other people, they can tell the team members, how is it that they operate and how to think about that, how to process issues that come up. I just found it fascinating.

Blair Enns: Yes. I made the point that some of the sports that look dangerous from the outside, once you're on the inside playing them, they're not nearly as dangerous as people think, because it's just what's changed. Your perspective, you have an understanding. You see it as a system. You see how everything works together. You see what you should focus on. You do, in your words, retrain your instincts to focus on the things that you should focus on.

There's an interesting corollary there to business, especially creative businesses. Creativity is the ability to see, the ability to bring novel perspective to a problem. Therefore, creative people are constantly exploring new and different ways. They don't like to be hemmed in by systems, typically. That's a bit of a generalization, but I think it's largely true. I've long observed that I think a lot of the challenges, sales challenges in particular, but other business challenges in a creative profession, stem from the fact that the person at the head of the business has this really high need for variety. If you have a really high need for variety, you don't like to be hemmed in by systems, you don't get the benefit of working from a system. Does that make sense to you?

David C. Baker: Yes. It's almost like systems are not antithetical to great creative work. Creativity happens really well within a system, which almost doesn't make sense, but I think it does.

Blair Enns: Yes. It can't be a rigid system. Loose on the bars. Loose on the bars.

David C. Baker: Yes. There you go. Yes.

Blair Enns: The equivalent in sales is somebody was saying, in the Win Without Pitching Academy, "Will my people get scripts?" I said, "You don't want your people to have scripts." At one end of the spectrum, there's the rigid system. Here's exactly what you should say. At the other end of the spectrum, there's the creative person feeling their way through a sale. In the middle is this idea of frameworks.

David C. Baker: Yes. The last point I make in here is maybe my favorite. There were four levels. If I would get a level four student, by the end of the day, I might be able to shave 15 seconds off their time if they were a new student around a lap. Then if we kept everyday teaching, then the second day, it might just be four seconds. The third day, it might just be two seconds. The effort that it takes for perfection, it's not really perfection, but closer to perfection, is just enormous. I couldn't help but think of all the extra effort we put in to perfecting something that a client is not paying for and won't even notice. I say, save the pursuit of perfection for your personal life, where it doesn't matter.

[laughter]

Blair Enns: Go spend your resources on that intractable problem in a domain where, whatever.

David C. Baker: Yes. My best hobbies combine art and science, and I love perfecting something, say, in woodworking, which nobody else will ever see. There's just this inner sense of satisfaction. We need that as humans, but I don't know that we need to scratch that itch with every client project, especially when they don't even notice the difference. Save the pursuit of perfection for your personal life, where it doesn't matter.

Blair Enns: The topic was what I learned from teaching motorcycle lessons, and you list 11 lessons from high-performance riding. Each of them has a corollary to the business world. I will not list them here, but you can read this post if you go to punctuation.com, follow the link in the show notes. Great topic, David. Thank you for sharing.

David C. Baker: Thanks, Blair.

Instead of just relying on the talent of individual sales people, Blair recommends creative agencies identify and invest in six elements as a part of their organization’s long-term sales system.

 

Links

"Critical Questions Your New Business Person Should Be Able to Answer" 2Bobs episode

"How to Ask for Referrals" 2Bobs episode

"CRM and the Mistakes to Avoid" 2Bobs episode

"Who Should Set Prices?" 2Bobs episode

"Mastering the Value Conversation" 2Bobs episode

Transcript

David C. Baker: All right, Blair, today we're talking about a do-it-yourself new business system. You're sneaky with the title.

Blair Enns: Yes.

David: If you'd been honest, you'd have said something about sales, but no.

Blair: Oh, don't use the S word so early. We just lost everybody.

David: A do-it-yourself new business system. I was scrolling Facebook this morning, and it throws memories in front of you, like the things you posted so many years ago, and a fellow consultant posted something 14 years ago where he quoted me, and I didn't realize I'd been saying it this long. The phrase was, "Listen, if you don't solve the new business problem, nothing else matters. If you do solve the new business problem, you'll figure everything else out." I've just come to believe that that is so critical.

In fact, if you're running a firm and you don't have this excitement or this earnestness, eagerness to figure out the new business problem, you're probably going to struggle quite a bit. You're going to talk about a new business system. We've talked a lot about sales and new business, and I don't think we can overdo the topic. It's so important.

Blair: I don't like listening to other people's systems, but it's really just a model for how you think about everything that you need to think about when you basically codify how you go about getting new clients.

David: Yes. You have a note in here saying, "I'm going to try to not make this self-serving. I haven't run this by you first, so you can disavow it. Listener, we don't have sponsors. We don't sell ads. We don't ask for money. We love serving you, and this is our vibe. It works because, [unintelligible 00:01:54] without pitching for sales training or private coaching, you keep hiring me for advice, Jonathan for M&A stuff, and we like it that way, and it's a privilege to serve you.

There's a podcast I listen to, and I have to fast forward through the first 15 minutes because they're talking about everything I'm not interested in before they get right to the meat. Here I am saying thank you and taking a little bit longer to get to the meat, but I just want to say thank you for the opportunity to serve you and to make this possible without ads. There we go.

Blair: That's great. Now I'm going to finish the rest of that point about it not being self-serving because of what I said in my note to you, because honestly, what I think the listeners should do, I think they should get my book, The Four Conversations: A New Model for Selling Expertise, and they should just implement that system, but I recognize that not everybody's going to do that.

David: If you don't buy the book, we're going to put ads in here.

[laughter]

Blair: Oh my God, we should do a telethon, and if we get enough people to buy the books, then we don't do ads. Oh, I've always wanted to do a telethon.

David: Jerry, what's his name?

Blair: Jerry Lewis.

David: Yes.

Blair: Yes.

David: Why is the system important? You make a really interesting distinction between the short and the long-term, which I want you to dive into a little bit.

Blair: Yes. I say in the short term, most of these creative businesses have one person in charge of selling or new business. I'll use that term interchangeably. In small firms, it tends to be the owner of the business, but then you get to a certain size, and maybe now you're hiring for that position. The common mistake, instead of investing in a system, is you invest in a person.

I'm not trying to make the case for not investing in a person, but here's the metaphor I use. The new business system is the car, and you've got the car at the beginning of the starting line of the race. Then you hire a driver, the person, and you put the driver in the car, and they advance the car as far as they get until they leave and they go work somewhere else. Maybe they don't work out. You let them go.

If you haven't invested in the system, then the metaphor is the car backs up to the beginning, and you go and hire a new person, and there's this expectation that the person is going to bring the system with them. There's something about this function of selling that we think not only are people magical who do this, but we should let them come in and do it their way. We don't want to encumber them. This isn't universal, but it's common. We don't want to encumber them with our system. My key point here is, invest in the system, own the car, so when you have to swap drivers, you're not backing up to the beginning of the starting line.

David: It's like a Le Mans race, 24 hours, lots of different drivers. There's a whole team, and it's not just one driver. It's, "Get in the system and drive it for three hours. Now, next, you get in the system and drive it for three hours." They're not bringing a system like you said. They are bringing something that's valuable besides just their own ability, and this is a sad thing. It's often just a Rolodex of relationships, which then they take with them when they leave and introduce the clients that they have leased to you for two years, and they take them to their new job, right?

Blair: Yes. It's not a bad thing to hire somebody for a Rolodex. I used to be adamant, "Don't do that." The reality is, especially if you're vertically focused or you hire somebody senior who has relationships with the senior people that you sell to and want to do business to, it makes sense to hire somebody for those connections. The thing you wanted me to speak to earlier, where I make the point here that in the short term, the individual is actually more important than the system.

If you're thinking short term, you hire an individual with good contacts. If you're thinking long term, then the system is more important than the individual. You can do both. You can hire a good individual today, and you can build the system over time. These steps that I'm going to give you, you don't get them done in a few weeks or months. It's a journey.

David: Yes, there are six of these, and one of them towards the end talks about measurement, gauging effectiveness, and just made me think we don't need to talk about that much now. A great salesperson isn't just measured by sales results, but the degree to which they help the firm develop a system, too, which doesn't really help them short term, but it helps the firm.

Blair: Yes. My point here is, don't look for the person to bring their system. Ideally, you fast forward in time, and you've got your system in place. As you'll see when we get into this, it answers so many questions about the role, "What do I want this person to do? What type of person am I looking for?" and all kinds of other questions downstream from that.

David: Just a little bit more about the system because I don't think most firms already have a system. If they have a system, then part of the hiring process should be to determine whether this salesperson is a good fit for this system. If they don't already have a system and you don't want the salesperson to bring the system, then it's the principal's job to develop the system?

Blair: Yes.

David: Just wanted to make that clear. There are six elements of the system. The first is the client and the goals. The client and the goals. We're going to go through each six of these. Talk to us about this first one.

Blair: This is pretty straightforward. I'm going to go through this pretty quickly. The client and the goals. Who are your future clients? What's your ICP? What's your ideal client profile? If you haven't modeled that out, that's an obvious place to start. What does your future clients look like? Who are they? Where might you find them? After that, what qualifying questions do you want answered before you agree to a meeting? We've talked about this before. We'll post the link in the show notes. Critical questions your new business person should be able to answer. Was that the podcast?

David: Yes. Exactly. Critical questions your new business person should be able to answer. Partly, maybe if we were redoing that title, we'd say your system should ask your new business person to make sure are answered [laughs].

Blair: Yes. You've identified who your ideal clients are. You've identified what the red flags are. These are danger signs, and you've identified the hard lines of people or organizations you absolutely will not do business with. That's the client. Then, goals, I feel like I'm stating such an obvious thing [chuckles], but what are your sales goals? The key here is to think beyond revenue. It should be more than just a number. You want to think about the client type, the client makeup. That's part of who the client is, but also the number of clients, and then the minimum or average revenue per client.

We've probably talked about this at least a couple of times in the six, seven, 15 years we've been doing this, whatever it's been. This idea that if you set a sales target as just a number and you don't have a minimum level of engagement or you don't have a hurdle that your new clients should clear, then you're going to end up with this problem of too many, too small clients. Especially if you incentivize your salesperson the wrong way.

David: I'll tell you this process of setting definition of a good client and goals usually raises the standard, doesn't lower it. It really is not fair to the salesperson to do this later. This should be identified very early on.

Blair: Yes.

David: Clients and Goals is first. Second is the sales model. You have eight examples here. I'm going to ask you which of these you most closely follow, and see if you can tell me which one I most closely follow. You have a note that you pulled these from ChatGPT. Are we going to have to tell people when we do this? Because I find this is the most interesting part about this. You said, "Okay, I got this from ChatGPT."

Blair: Yes. I use AI for research the way everybody else does. If I put forward a list like this and I didn't develop the list, then I owe it to the listener to identify the source, and the source is just AI. I thought it was pretty good. It was actually a list of nine. I deleted one. What do I mean by sales model? I mean a thesis of how you should sell, and there's all kinds of different sales models. I'm going to name model types, not specific models, like the Four Conversations is my model.

To your question, I'll mention some of these, and you'll see most of these specific models, whether it's Spin selling or the challenger sale, et cetera, or the Four Conversations, whatever the specific model is, it's going to fall into more than one of these categories. Let me just go through the categories.

David: A mix of them, maybe.

Blair: Yes, absolutely. First, there's the Rainmaker model, according to ChatGPT, and I was smiling about this because we used to see the ad headline, "Rainmaker wanted," all the time. I used to make fun of that, the idea that we need somebody who's so special, whose skills are so magical that they overcome all of the positioning work that the firm's owner did not do. The definition of Rainmaker model is a few high-profile individuals bring in most of the business through personal relationships and charisma.

There are a lot of agencies that are built this way in the early days, in the first five, six, seven years. You and I have talked about there seems to be a ceiling at seven years that we don't really understand. Then you run into the ceiling, then you've got to move to another model. I'll just go through these as quick as I can here. That's the Rainmaker model. A small number of high-profile individuals building relationships.

Then there's the Seller-doer model, where the person who sells the work is the one who delivers it. You see that in some agencies, too. Account people basically go out and build their own book of business. They'll go get the business, they close the business, they deliver the business, and you scale the business by adding more and more account people.

David: Is this freelancer too?

Blair: Yes, I guess it's freelancer. That's not a scaled-up system, but freelancers could be all of these. Not all of these, because the next one is dedicated salesperson. Sales responsibilities are handled by a specialized team. I killed it, you clean it. It's separate from delivery. Often, once you hire somebody, you hire a dedicated salesperson. It's a new business person, and very often, they're not involved in delivery.

The opposite of that is number four, team selling. A mix of sales professionals and subject matter experts collaborate to win complex deals. Technical selling is typically team selling, and I think there's a lot in common between selling creative services and selling technical services. I think team selling is a good part of the mix.

David: Is that where a sales engineer would fall in team selling?

Blair: Yes, it might. I've seen that term used a couple of different ways. In team selling, you have the hunters who bring in the subject matter experts to help close, and even probably from a value conversation forward. Then you would bring in various technical experts, depending on the technical requirements of the sale. If I think back to my old generalist ad agency days, as the new business person, I'd get a meeting, I'd have the creative director, the media director, the heads of these different departments in there, mostly for the wrong reason, but you could think of that as a version of team selling.

Next, we have inbound/content-led selling. We talk about that a lot. There's definitely an aspect of that to the Win Without Pitching the Four Conversations approach. Clients are drawn in through thought leadership content and then nurtured into engagements. Then there's referral/network-based selling. Financial planners, that's massive in that space. We've done an episode on this where we basically said, "Listen, you're either referrals is your major, you're all in on it, or forget about it. You can go back and listen to that episode."

Seven is solution selling or consultative selling. The seller diagnoses the client's needs and tailors a solution before proposing a price. Then, eight is account-based selling. A small number of high-value targets or target accounts are pursued with highly customized outreach. Something in there resonated with you, the listener, one or two of them resonated with you, and there were a couple of them in there that you absolutely rejected. All of your businesses, among the listeners, they're different enough that you should pick and choose and gravitate to the macro model that you think makes the most sense for you, and then go looking for a specific model within there.

David: You might make that choice based in part on your personality, the assets you have to use to support your efforts, and maybe the particular area you're in marketing. If you look at entertainment video, that's so often driven by a rainmaker, and I have no idea why, but it's not usually driven by inbound and content. I don't know if that's good or bad, but it's pretty obvious where you can make almost some assumptions about what sort of a model somebody has adopted by what space they're in.

Healthcare is way more inbound content-led. It'd be interesting to dive deeper into this at some point. Which one are you driven towards more than anything as a business owner? Not recommending for other people, but for yourself.

Blair: There's nothing on this list where I'd say, "Yes, we fall squarely into that." At some point, our clients are going to have to grow past the rainmaker model. I was talking to a global architectural firm today. The CEO is leaving, is going to retire, or be promoted to chair. Then the person moving into that role does not have the rainmaker skills that they do. They have been built to a certain size based largely on the strength of an individual, but that individual does not live forever or stay in the business forever.

That model needs to be replaced by something else. Typically, there's no right way to think about this, but most of these firms explore the Seller-doer, some explore team selling, some dabble in referral and network-based selling, but tend to give up fairly soon. I see our approach as consultative selling and team selling, a combination of those two things, primarily. What about you?

David: I'd say probably more inbound content-led selling. I'm starting to see the bigger point you're making in that you're not necessarily choosing one of these eight or however many there are. You may be blending them to come up with your own model. The point you're making is, have a model. When somebody says, "What is your sales model?" be able to describe it to them, even in your own terms.

Blair: Let me just correct something I said. I said, pick the category or the model type, and then go in search of a model. It doesn't work that way in reality. In reality, you get exposed to one through a colleague of yours, like a peer who's very successful at this and explains their system to you, or you read a book or listen to a podcast or something, and something just really, really resonates with you, and you adopt that. Then there is some bending of that model to the reality of your business or blending in little pieces of other models.

We've had very successful clients of ours go almost all in on Win Without Pitching, but weaving in stuff from other models. That works too. You end up with something pretty unique.

David: The first was Clients and Goals. What's the definition of a good client? How many do you need? All that. Second is you need a sales model. Be able to describe that. It can be your own, but it needs to be specific. The third is tech stack. Talk about that.

Blair: Everybody needs a tech stack. I almost got into the tech stack advisory business a couple of times many years ago. There were a period of a few years where we got deep into our client's tech stack, and then the tech just proliferated. It was like, "All right, we don't have the resources to stay up to speed on all of these different technologies, and I don't want to be a platform-specific organization." We backed away from it. There are some key elements of your tech stack. Your tech stack is changing with AI.

I have this theory. It's probably never going to come fully to pass, but God damn, I hope it does pass. The CRM can be so frustrating at times. If I think of my business, I've got silos of data everywhere. Here's a quiz for you, David. If I said to you, "Hey, I've got a sales call with this firm or this person at a firm. Have you done anything with them?" If you don't remember, where's the first place you searched to get that answer?

David: I saw that in your notes, and I thought, "Oh, this will be really easy to answer." Then I said, "Oh, shit, it's not easy."

Blair: It's not your CRM, is it?

David: No, absolutely it's not.

Blair: It's your email.

David: Oh, I didn't even list that in my answer, but that would be number six. I said memory first, and of course, that's becoming-

Blair: Failing.

David: -a less satisfying answer as I get older. Asana is next. We use Asana for everything. Project management. Then Dropbox. We have very strict naming conventions, and we've got client records going back 31 years. CRM, which I never search. Then, Workflowy. Jonathan and I, we take notes very furiously while we're on phone calls, and we put it in there. Then, of course, email. I didn't even think about that, but absolutely, email.

Blair: If you ask me, do I know so-and-so at such-and-such firm, the first thing I will do before I type it into CRM, I will type it into Gmail. I will see everything about my email relationship with them. If they've bought things from me, certain things show up in green, so I can tell at a glance, and then I can go get more information from exactly what they bought, et cetera. I can get all of that from email. My point is--

David: We could improve our tech stack, is what you're saying [laughs].

Blair: I have this vision. We've built part of this already, so we've got this snowflake database where we hoover up all of the data from our business. What I don't have yet that we're working on is just the AI agent that can go answer any question from that. I think at some point with AI integration and an SQL database-- not even SQL database, because you don't want to write SQL queries. I don't want to get technical here. You just want the AI agent to be able to answer the information from all the data sources.

ChatGBT does this. They've got these connectors now where they'll connect everything together. Google's got a pretty shitty version of it right now, but it will be good at some point. Anyway, what do I want to say about tech stack? You got to go figure out your tech stack. When it comes to CRM, this is the most important thing. We've done an episode on this, so you can check out that and it's just called CRM or something. The big issue with CRM is usage, where your people don't use it. You hire a new driver to drive the car. They don't populate the CRM. When they leave, a lot of that knowledge is lost.

You absolutely need to have email integration into your CRM. You have to have a CRM that the key people are going to use. You have to enforce usage of it. Then I've changed CRMs, I probably average every five years or so, over 23 years in the business. If I could do it all over again, I would never have changed from Salesforce, just because even when you think you've captured everything, the data that you lose when you swap out a CRM, it's a pretty large amount of data in my own experience. Be careful about switching out your CRM, your marketing automation tool, anything else in the tech stack. Choose wisely for the long term.

David: We use CRM. We'll blind copy any prospect email, and then Jonathan goes through that every month or so, and we'll follow up on prospects and find all kinds of gold buried in there. It's useful. The first is Clients and Goals. Second sales model, you need that. Then third, the tech stack, which we've just talked about. The fourth is assigning roles and responsibilities. Seems obvious, but it's really very, very critical.

Blair: Yes. There are other episodes. We'll post links in the show notes where we've talked about these sorts of things. I'm not going to go into too much detail. Other than the big caveat or the big thing to watch out for is actually go through the various parts of the sale and think about who should be handling this part of the sale. Who owns lead gen, and then who owns various responsibilities underneath that? Somebody needs to own lead gen. Who qualifies? Who qualifies new clients? Who qualifies existing clients?

Usually, it's the account people who qualify existing clients, but who qualifies new clients? Who has the value conversation? Who talks about money? Who sets initial pricing guidance? Who gets everybody's focus onto value creation and off of solutions? These are all questions you need to answer. Who sets price? Who creates the proposal? Who closes? Who delivers the proposals? Go through this list. I've just listed them all now, and your AI will summarize them. You should assign names to those lists.

Now, the mistake is to just operate on the default assumption that these areas of responsibility should be tied to the role. It's my point of view that they should be tied to the individual. When individuals of certain caliber leave, you might want to reassign that responsibility again. We're assigning responsibility. Part of it will be dictated by the model, but I'd like you to leave some flexibility for you to say, "You now what? This person is always discounting price. We're not going to let him set price with his existing clients. We're going to make this person bring in somebody else, a pricing counsel. We're going to have this other person set price for this person's account."

You really should be thinking that specific when it comes to individuals and their roles in selling.

David: The other thing you could do is train that person who has a weakness so that they're better at it. In fact, that was one of the biggest points you made in an earlier episode. It's called Who Should Set Prices. The overarching theme of that episode, as I recall, was whoever sets prices should be whoever's good at setting prices, regardless of what role they play. We've talked a lot about the value conversation here and elsewhere. For new listeners, that's a very specific and one of the most difficult things to learn.

If you want to search on an episode in the past, it's called Mastering the Value Conversation. There are quite a few episodes that deal with it, but that's probably the tent pole one that you ought to start with. I want to bring up an issue of exactly when the sales process morphs into the account management process. I have a theory that we ought to transfer this process as early as possible so that the new client doesn't feel like a bait and switch coming, and the account manager doesn't inherit promises that somebody else makes. Obviously, that's not going to work unless your account people are really good in the sales process too.

When you think about sending your salespeople to training, don't just think about sending your salespeople to training. Think about your account managers getting this kind of stuff, too, because not only should they help bringing new clients on, but they are following the same processes with existing clients. The only difference is they have more information there, and there's less of that initial stuff because you've already set the context of how good you are. It's not just salespeople here. Account managers need to be good at this stuff, too.

Blair: Yes, good point.

David: Fifth is incentives. This is a big topic. We're not going to talk too much about it here, but you want to say something?

Blair: Yes. This will be driven a lot by the model. If you look at your model choices, Rainmaker, if you have Seller-doer, so the person responsible for delivering the business is the person responsible for selling the business, then you need to structure the incentives differently than you would under the Rainmaker model, especially if the Rainmaker is the principal. Dedicated salesperson, it's going to be a different incentive structure.

We could quote Charlie Munger. We could quote numerous wise people over the years. Why are we talking about anything else when we haven't talked about incentives? Incentives drive behavior. We're called in to do training for account teams often. Yes, training is important, but training without the proper incentives, it's not going to work. We often ask, "Well, you now want these account people whom you hired to manage current accounts, you want them to actually actively sell, what are they going to no longer do? How are you going to realign their incentives so that it's in their financial interest to start selling?"

It's a big topic, but we're going to cover it pretty quickly here. It's cui bono? Who benefits? Show me the incentives, I'll show you the behavior. That's another Charlie Mungerism.

David: Yes. The final one is measurement and improvement. This one's fascinating to me because principals who don't find sales natural, it's not a natural fit for them, maybe they haven't had the training or whatever, they want to hand it off to somebody, and they have all this investment in the sales, so to speak.

I'm not talking about selling to clients. I'm talking about this salesperson, and they're there for six months, nine months, not much is happening. The way they measure it is, "We haven't got new clients." They're not thinking about all the other things that might have hindered this person's success, like lack of marketing or a shitty positioning or something like that. The sixth thing that you wrap this up with is measurement and improvement. I really like this. It means a commitment to continuous learning, training, all that stuff. What am I missing here? What else could happen?

Blair: As you alluded to, you want to identify your leading indicators. What are the things that you know? You're going to guess at them at first if you haven't already guessed it. If you work backwards, a lagging indicator is financial results. If there's a dollar sign there, money you made, you can look back on that and see that, "Okay, that's successful." What are the things where you look forward that predict future success? You would work backwards from money changing hands. It's a promise of money changing hands, a verbal commitment.

You look at late-stage opportunities, early-stage opportunities, volume of leads, and you keep going upstream from that traffic on your website, social engagement, outreach by various people. Build a model of where business comes from and how it flows through your system, and develop your leading indicators. Start to track them. At some point, you get predictive, and you will realize that if we get so much of X, it turns into Y revenue.

David: I heard something from you one time many, many years ago, and I actually use it with every one of my client engagements now. It's two questions that you ask yourself, often just to yourself. You don't say it out loud. It's this question, "Would I want to be the new business person at this firm?" Then, second, "Would I want to own this firm?" I keep using those two questions with my clients. Part of why I would answer yes to, "Would I want to be a new business person?" is do they have these things settled? Is there a system? Are there clear expectations? Is there the right support system? Do I have other people on the team? That helps you answer yes.

You want to be the kind of firm where you're going to hire some help and they say, "Oh, my God, I want to be there because this is set up for success." That's another way to think about all this.

Blair: When you peek into a firm, when I peek into, and I don't do this a lot these days anymore, but how they measure success and predict future success, and then how they report on that success, usually, there are some real tells, some real telling signs of whether or not they're thinking about this in a sophisticated manner or not. A common leading indicator would be a number of proposals written. Now, if you measure something, that measurement takes on a life of its own.

I've noticed that if you set a measurement target for a number of proposals, you'll get more proposals. You'll also lower your closing ratio and increase your cost of sale. Will you get more business? Maybe, but there's no direct correlation between increased number of proposals and increased number of deals. If you say the number of proposals submitted is a leading indicator, then you will get more proposals. Everybody will look busier, you'll feel busier, but the results won't necessarily be there.

They'll be there if they're qualified proposals, if they're proposals that should be written, but I can promise you, you're going to force a whole bunch of proposals that don't need to be written, and it's going to chew up a whole bunch of time. At some point, you're going to become quite frustrated by it. Reporting is the same thing. If I sat in on your weekly new business meeting or whatever you call it, I could learn some things fairly quickly.

First of all, are you reviewing every opportunity, including some of these early-stage ones that are way out? If you're going through every opportunity, then I can predict what your salesperson is going to do. They're going to exert unnecessary buying pressure on clients who are a long way from buying, and you're going to reduce the likelihood that they will buy because you'd say, "What's the status of this opportunity? What's the status of this? What's the status of this?"

Then you will follow that up with, or the salesperson will volunteer, "I'll check in with them." "Can you check in with them?" The salesperson's thinking, "I just checked in with them last week. What do I say now to not sound like I'm coercing?" This little thing of like, "How do we report?" My friend, Scott Edinger, has written a very good book called The Growth Leader. He talks about this a bit. Just the innocuous questions from on high to the sales team forces bad vendor-like sales behavior.

How do you report? Don't report on every early-stage opportunity. Make the distinction between early-stage and late-stage, and have your salesperson report in every weekly meeting on the status of those late-stage opportunities where momentum is important. Then look at the early-stage list. I didn't mean to get in the weeds here, but look at the early-stage opportunity list and ask for a summary report on all of them. "What's changed here? What's stalled? What do we need to talk about?"

You would start with the late-stage ones. You go opportunity by opportunity on the late-stage ones, the ones that are close to buying. Then the early-stage ones, there's going to be a bunch of them. Some of them will have sat there for a while. Ask for a general update. Ask the salesperson, "Where do you want to go deep in this stack?" Sorry, that's more detail than I intended to share.

David: No, that's good. We've been talking about a do-it-yourself new business system that consists of six parts. Start with defining clients and goals. Second, pick a sales model or a combination that fits you, your firm. Third, commit to a tech stack and then stay with it for a while. Four, assign roles and responsibilities. Five, align the incentives. Six, formalize measurement and improvement. Any last thoughts for us?

Blair: No, just use this as an outline. It's okay to go slowly, one step at a time. Hire the talented person. Do what you're going to do in the short term, but just make it a long-term project to build and own the car, okay?

David: All right. Thank you, Blair.

Blair: Thanks, David.

David finds the courage to address a topic he’s been putting off for awhile, as he is seeing more agency principals struggling to maintain both healthy and productive work environments by leading the ongoing process of resolving tensions within their teams.

Links

"Adapting to a Modern Workforce" by David C. Baker for punctuation.com

Transcript

Blair Enns: David, we make a point of trying not to do timely episodes. The topic of today's episode is Dealing with Today's Employee. Is this a timely topic, or is it a timeless topic?

David Baker: Oh, shoot. We did fall into doing something timely here, but it's not like a hot take. It's more of like the last 10 years. Are we allowed to do those? I don't know.

Blair: I think we're allowed to do whatever we want. I'm just curious. I know you get into it in this post because this is a post that has dropped already. You've received a lot of feedback from readers on it. My take on it, it's a little bit timely. It's something that has been building in you. I know from personal conversations we've had over the last few years. It may also be a somewhat timeless topic, too. I think maybe we can let the audience figure that out.

David: Yes. There's parts of it that are absolutely timeless. You hinted at just a second ago, I've been sitting on this thing forever because I'm a wuss, essentially. It kept getting thrown in my face, too, because when I'm talking with clients during the lead gen module for the consulting side, I would sometimes share my screen because they would ask, "How does this work for you? How do you write things?" And so on. I say, "Oh, well, let me show you." Okay, here's a folder of the things I've sent to Emily to get an illustration. Then here's the folder of all the articles that are ready to go. There's 60 of them. I'll sit down on a Sunday morning and I'll just pick one that I'm motivated to write."

This one was originally titled Activist Employees. It will alphabetize to the top. Inevitably, somebody would say, "What is that about? I'd say, "Oh, I'm going to rename that." I just haven't had the courage to write about that. That's the one that's been sitting there longer than anything else because I've just been a wuss.

Blair: I don't know if you've been a wuss. I think we're going to talk about issues that you probably couldn't have spoken about a few years ago. I think that's the reality.

David: Oh, that's true. We were at a point in history where this was not have been a welcome observation for sure.

Blair: Yes. All right. Hopefully, we're through that point in history.

David: We'll find out.

Blair: We'll see.

David: We'll find out.

Blair: We'll see if we still have careers after this. I'm just the interviewer, so I'm going to be fine.

David: I'm the one to be canceled, not you. Yes.

Blair: Okay. Dealing with today's employee, the implication is today's employee is a little bit different than yesterday's employee. You make this first point in this post, this idea of switching first and second place from clients to employees. I really like how you talk about what used to make you tired. Unpack this idea, switching first and second place from clients to employees.

David: Yes. Because you'd have a just a casual conversation, or maybe it was a deeper conversation about an engagement. We would, with our clients or prospects. You do the same thing. You would start to hear, after the pleasantries, it's like, "So tell me what's going on. Why are you thinking of making a change, or what are the pressures that you're feeling?" And so on. Inevitably, up until about maybe four or five years ago, I don't think there's like a firm boundary, but up until four or five years ago, inevitably, the thing that brought people to taking a deeper look at their engagement at the firm was clients. It's like, oh, I'm just like, "Their payment terms," or "They don't get back to me. Their expectations are crazy. They keep asking us to do more and more work and not pay for it." All the stuff that none of it would be unexpected to hear.

That has changed over the last few years in that those pressures are still real, but they're number two. Now, number one, what's moved up on the leaderboard is challenges with employees. I will hear this from many, many, many people who talk to me, either clients or just prospects or just people I'm connecting with. It's like this is the most challenging thing about running my firm is the team. I would agree with what you said at the beginning about the marketplace of people changing. I think the leaders have changed as well. You can definitely see that in the changes in parenting style, and that carry over to management/leadership style as well. While how you feel about clients is still up there, it's been displaced by the challenges of running your firm, those challenges that come with the people in it. That's what's changed.

Blair: I'll make a generalization and ask if you agree with this or disagree with it. It's more of a hypothesis, but let's say 10 years ago just to make this nice and clean push it far back in time, the number one comment you hear around their culture or their team is like how great their culture is, how great their team is, and Today the number one issue is they're just so fucking tired of it all.

David: Yes.

Blair: Is that about right?

David: Yes, it is including the language, I would say. Where does this come from? That part is a lot harder to really unpack. I believe it's indisputable that there is a difference in how we interact with our team. How do we explain that? Some of it comes from the whole purpose thing. There's something I didn't even write about in this article that I want to write about down the road once I get a little more clarity around it. Humans, in general, are looking for meaning. They're looking for purpose. Some of the things that supplied that to them in the past have crumbled a bit. The nuclear family is a little bit different. The role that religion and church played is a little bit different. At the same time that all of these things have changed, politics are becoming more important for people, and social media is a way to express yourself. It's just a different world.

Cultural expectations. If you just go look at the websites of firms and you pull out the one or two observations that occur on almost every website in this industry, it's about how welcoming we are, we want you to bring your whole self to work. It's about accommodation, about work hours, where you can work, what you can believe, what you can say, so people are doing that. They're bringing their whole selves to work, and now principals are saying, "Oh, could you leave a little bit of yourself at home?"

Blair: That part right there, leave that at home.

David: Yes.

Blair: Yes, that's interesting. A misunderstanding or misapplication of purpose and your point that's not in the post is that, yes, maybe the sources of purpose or the places to express it or to find it, they're not as solid in people's lives as they were before. We're looking to get that done through work.

David: Yes, exactly. I think that's more true with young men than it is with women, and there's all kinds of data about that. Scott Galloway talks about it all the time. Listen to this. This is an activism that illustrates the point. Now this is not happening in our industry. I want to make it clear. This is simply an extreme example of what's happening on the media side, which is not true for us, but it's an example of what's changed in the workplace. This is a quote, says, "Members of the Times," so the New York Times Tech Guild, "which represents approximately 600 workers, went on strike on Monday over stalled contract negotiations. The strike threatens to interfere with the paper's election coverage. The workers of the Times are demanding a ban on perfume in break rooms, unlimited break time, and accommodations for pet bereavement."

This is reported in Semafor just a few months ago. What were workers worried about in the past? It was like, "Let's not die on the job. Let's not be exposed to chemicals at work." Now we're talking about perfume. I guess that's a chemical. We have our lives so much more settled and in control, and we've just lost, I think, this sense of gratitude, and now it's like, "No, this work environment is really great, but I don't think about that. What I think about is how it's not oriented around me and what I want. You have told me, as an employer, that this business is built around me, and so here's what that's going to mean for you. Now that is an overstatement, I realize that, but it's just a light on what's happening in the field.

Blair: I was speaking at a conference a few months ago, and there was this really interesting confluence of events that happened. The chief creative officer from Wieden & Kennedy was doing a talk, and he showed the Nike ad they did for the Paris Olympics. I forget the specifics of the ad, and I'm not a big consumer of broadcast television, so I'd only seen it a couple of times, but it's very moving. You have these Olympic athletes talking about-- not just Olympic athletes, but professionals, talking about how competitive they are. They're single-minded in their competitiveness. Some of the lines are like, "Am I fun to be around? No." Basically, I'm an asshole because I'm going for the brass ring.

Everybody in this room, full of agency owners, is moved by this. It's a very inspiring ad. Then, a little later in the conference, these firms do this sharing of things that have happened in their business, and there's more than one example of a firm talking about how they struck an employee committee to establish the culture and the positioning of the firm. They proudly shared what their people came up with, and it was all this, I want to say, kumbaya, feel-good, safety stuff. I thought, "Am I the only one in the room struck by the contrast of these two things?"

David: The ad about crushing your opponents versus safety and belonging.

Blair: Yes.

David: The contrast.

Blair: We are cheering the person who is going for the brass ring, the person who is going for the gold medal. We understand everything in their lives that they give up to be the best in the world at what they do. We cheer that, and then at the same time we say, "But in our own business, on our own team, we're prioritizing safety and tolerance." I use that word tolerance because I think you referenced this in your piece, or maybe it was afterwards, David Maister's piece from 2001, The Problem of Standards. He talks about multiple topics in that excellent piece of thought leadership. I repost it every six months, and I have for years.

The key, why you reference it, why I always reference it, is he talks about, he doesn't use this word, but I use the word macroculture. There are really only two macrocultures. There's a macroculture of tolerance, where everybody gets to belong. Everybody feels safe. You can't really get fired here. There's a macroculture of intolerance, which is if you can't keep up, you can't stay. That Nike ad that is all about intolerance. That's the culture of a winning team and the culture of tolerance-- I didn't mean to take a position on this argument, but here I am like heatedly taking a position because it strikes a chord with me. That culture of tolerance, everybody gets to feel okay. Nobody gets left behind. We're family. We're all in this together.

I think we've swung way over to that side of the spectrum to this. We've built these firms with a culture of tolerance as opposed to intolerance. What Maister says in this post, which is really a transcript of a speech, is "There's no moral decision here. Either of these cultures is fine, but you can't mix cultures." He says that. He says either is fine. Then he says, "But I can prove to you that if you choose a culture of tolerance, your life will be miserable."

David: That's, I think, exactly what's happening. I want to make a distinction, too, between tolerance for religious beliefs or sexual orientation. The problem is that we have somehow unwittingly decided that tolerance in those areas carries over into tolerance for performance of your job.

Blair: Right, lack of.

David: Or lack of, right. When I was researching for this, I came across this quote from Dean Leak in the UK, who was an Olympian. Just to parlay what you were saying further, he says, "Our low performers are scoring highest in our engagement scores." Listen to that again. "Our low performers are scoring highest in our engagement scores."

Blair: They're most engaged because they're not actually working, but go on.

David: "And high performers are those that are least engaged. Businesses have hit the accelerator to create environments where everyone feels heard, valued, and included. Yet, we've arrived at a place where workplaces prioritize comfort over courage and agreeableness over constructive disagreement. It's time we took the foot off the pedal and looked in the rear mirror to consider the damage that's been done. The workplace has transformed into a damp, cold corridor where no one dares to offer constructive criticism or spark new ideas."

What would follow from that is, okay, I'm not going to impose from the top down the new direction of this firm. I'm going to build a lot of collaboration into this. There should be some of that to be sure. Then let the committee, over seven months, come up with a brainless recommendation that doesn't take us anywhere. This isn't going to work, folks. It's just not going to work.

Blair: I think the beginnings of it were probably pretty noble, and the motivations were pretty pure. Then one day we all wake up and it's like, "Oh, where did all the A players go?" They left. The A players left because the B and the C players pushed the A players out. You've got a lot of highly engaged people arguing about things that have nothing to do with the value that you're creating in the world.

David: Yes. The high-achieving ones leave and start their own firms. Then, unless they understand what they have started with that process, they will end up at exactly the same place. That's this culture of growth that we've created. Just bear with me, as I sort of just jokingly talk about it. You have a high performer who's tired of these other people around him or her, and so they go off and they start their own firm. They make a mark in the marketplace. Because their work is good, the clients start coming. Because the clients start coming, they say, "Oh, I need to hire people." It's like, "Okay, I want to hire high performers like me. Oh, I guess I'm not doing as much of the work anymore. I'm managing these high performers. I don't like to manage these high performers. I don't wake up in the morning dying to win next year's management award."

Then you wake up and you discover, "Oh my God, I'm in the people business now." That's when going all the way back to how we started this thing. That's when they wake up and say, "Oh shit, I didn't start this thing to be in the people business. Some of these people need more coddling than I'm willing to do. I want a culture of high performance. How do I do that? My neighbors don't appreciate that approach. My peers don't appreciate it. I read all the trade pubs. They're against it. How do I create a culture of high performance without getting canceled in the marketplace?" Again, let's make a distinction here between tolerance for certain things and tolerance for just not doing your job.

Blair: Yes. Some people are going to choose to be triggered by that word, but I'm really talking about the tolerance for standards. That's why Maister's piece is called The Problem of Standards. He said, "The problem is you can set goals and standards, but if you do not enforce them, they're meaningless."

David: Right. The enforcement is where it gets uncomfortable. Not setting the standards. It's enforcing the standards. It gets uncomfortable.

Blair: You have a great point. You call it a data point on the near shore, far shore, basically comparing offshore labor with onshore labor. Do you want to speak to that?

David: Yes. This is a specific verbatim quote that somebody wrote me recently. A principal said, "Not specific employees, but in general, it's super tough to work with the large group sensibilities. Employees now have lots of opinions on literally everything. I remember things were different in the past. Everything seems to be critiqued and evaluated skeptically, from things like the clients we bring in, our decisions, and our policies. Also, in general, critical thinking is hard to come by. Even in our higher-level employees, basic critical thinking is often skipped."

That's the near-shore issue. That's a broad brush. I know. Then you don't hear people saying the same thing about their team members overseas in far or near shore situations, where I have been told a hundred times from principals, it's like, "Between you and me--" they lower their voice, "Between you and me. I can't believe the difference in their approach to work. They're grateful for a job. The work-life balance thing is a little more flexible from their standpoint. They'll speak to issues if I ask them to, but they don't dig their feet in and feel like they've got to comment on every policy we have. They're just a delight to work with. I wish I didn't have any in-country people." Now, they don't say that, but you can read between the lines.

That's the data point. It's like, oh, wow, our workers are a little bit different. That's not true across the board, but it is a generalism that I think is basically true. How do we fix this? That's another conversation. I just want to start by acknowledging, without all the answers, I just want to say, listen, we have a problem because what's tiring people out in this field is their employees. It's not their client.

Blair: What's tiring owners firm principals out is--

David: Owners. Yes.

Blair: You do have some guidance on how to fix this. Do you want to get into it, or do you want to save it for another episode?

David: I can describe it. I think my hesitation is I just don't have many answers. I don't think there is a quick answer. I think somehow blaming this on the new generation is wrongheaded, and it's stupid. It also means that you're not taking responsibility for how you've set the culture.

Blair: That's an interesting point because this is somewhat timely. This is happening now. You make the point in this post that this isn't a generational thing. This isn't about like a certain age cohort. This is happening across all the age cohorts right now. Is that correct?

David: That's right. Yes. A 50-year-old versus a 30-year-old. One is in a different category, genealogically, whatever, that gap, that bracket, but it's still happening. I think it's really lazy just to say, "Well, this is a problem. Then you plug in some--

Blair: Millennials. Yes.

David: Yes. I just think that's lazy, and it's not true. My hesitation about suggesting the fixes is that I don't think there's a quick fix. I think the first thing you've got to do is just grow some as a leader and not be a control freak, but realize that you are cowering from doing what's in the best interest of your firm. Now, here you have to be empathetic. You have to be aware of who you are as a person. You cannot just jump into this room and start throwing things. That's wrong, too, because you are responsible for the culture that you have built. Unless it starts there, then none of the rest of this matters.

If you agree that you have allowed this culture to fester the way it has, then the fix is to very slowly change what you say and what you allow, and what you don't allow. Maybe you're not laughing at the same jokes. Maybe you're not letting certain things go by. It's a very slow, painful process. Where it really happens is where you fix the people that are on your team, where you start interviewing people differently. You're looking for skilled but curious people, resourceful, resilient. I don't know how to test for resilience, but my God, that's the most important thing on here. Independent thinkers, thoughtful, empathetic, grateful for what they have in life.

I know this doesn't necessarily fit the typical HR categories, and anybody around the world listening to this from HR has got to be dying right now. If the culture that you create is most responsible for the life you want at work, then it has to start with the people that you bring. Because there's only so much you can change people once they have joined your team. It has to start with that. Here's the big sign across all of this. I am yelling, aren't I? The big sign across all of this is you cannot let your company be a place where you don't want to work. That's what it's become for people. That's got to change.

Blair: Yes. As you're talking, I'm thinking I'd spent a long weekend in the garden doing a bunch of yard work, being a good husband to my wife who loves to be in the garden. But the whole time I'm listening to a podcast, my favorite podcast for the last few years, probably will be for the next few years. After 2Bobs is Founders by David Senra. This is the guy who reads a biography or an autobiography about an old or dead entrepreneur, some living. He's 450 biographies in. He's become quite famous among the world's greatest entrepreneurs as a learning source.

If you could listen to these biographies on anybody-- the obvious ones, Steve Jobs. I was just listening to one he did on Jensen Wong from NVIDIA. You just pick these people you've never heard of, but there's just dozens and dozens of them. None of them would let this happen. Jensen Wong had this great line: "I don't like to give up on people. I would rather torture them into greatness." He is critical. He's openly critical. He's a big believer. If I'm going to criticize you, I'm going to do it openly in front of everybody else. That way, we can all learn at the same time. He's as critical of himself publicly. There's just this culture of back to David Maister's. This is an Olympic team. We are going for gold. There are plenty of other teams you can belong to where they're not going for gold. They just want to play nice and have everybody be happy.

David: Yes.

Blair: At the end of the day, the top performers want to work in organizations going for the gold. There has to be this culture of kind ruthlessness.

David: What hurts me about this is that your culture is widely known out there, and so people joined with a certain assumption about what it is, and so that's where this is unfair because now you're changing the rules in the middle. That's why it needs to be done slowly and with empathy. Not too much empathy, but some empathy. We don't want to go right back to where we were.

What has to change at its heart, I think it's we have to be willing to have kind but difficult conversations with people about their performance and about their attitude. If we just do that one thing-- and you might need to go to a therapist before you get to the point where you can do it, but if we do that one thing, our cultures will slowly change. This is not just for you. It's for them too. You're helping to shape people who need to be resilient to get through life because you may orient your job for them around everything they want, but by God, the rest of the world isn't necessarily going to do that. It's really not fair to them either.

Blair: I think that's a good place to end. This is a big topic. I know you've grappled with it for a while. We've talked about different variations of this in private conversations. I'm glad you're putting it out there. You can hear the emotion in both of our voices as we talk about it. I suspect we'll be coming back to this at some point in the not-too-distant future. Would you agree?

David: Either that or it's been great to do a podcast together.

Blair: [laughs] Thank you, David.

David: Yes. Thank you, Blair.

Instead of beginning the relationship with a prospective client by presenting a deck on why your agency is so amazing and why you should be invited to pitch, Blair encourages us to have the “Probative Conversation” from his Four Conversations sales model.

Links

"There Is No Credentials Meeting" article by Blair Enns for WinWithoutPitching.com

"The Four Conversations: A New Model for Selling Expertise" 2Bobs episode

The Four Conversations: A New Model for Selling Expertise book by Blair Enns

Transcript

It's probably going to be a little more free-flowing than normal. Before we do that, I'm still on a high from London. Yes, wasn't that fun? We had what? 70 people there and a whole bunch of people that we couldn't slide in because we just didn't have the space, but there was nothing planned. We just met a lot of people.

[laughs]

You've probably got some stories, too. One guy came up to me and said-- no, it was a woman. She said, "I listen to your stuff while I'm running every day, and then before I go to bed, I put it on again and I fall asleep to it."

Blair: Yes, I heard that, too.

David: [laughs] I don't know, you could take that several ways, but just meeting people was so fun. Then the Q&A was-- I loved that, just free-flowing. I just had such a great time, and it just reminded me-- it reinvigorated me about having an international audience of people that are drawn to just honesty, transparency, and fun discussions. I'm also recommitted to the whole idea of this is audience-focused. There's no advertising. I don't know, I'm just still on a high from London.

Blair Enns: Yes, it makes you want to quit your job and just go hang out with our listeners around the world, doesn't it?

David: We're going to have to take advertising if I do that.

[laughter]

Blair: A whole lot of advertising.

David: Yes, a whole lot of advertising. You titled this "There Are No More Credentials Meetings," right?

Blair: No, "There Is No Credentials Meeting."

David: Oh, so, "There Is No"?

Blair: "There Is No."

David: What's the difference between those two? Why'd you correct me there?

Blair: My favorite poem in the world is--

David: Is this related to what we're talking about today?

Blair: Yes, it is. It's called The Road Through the Woods, and I've thought about it when I was writing this post. It's a poem of walking through the woods. "There once was a road through the woods before they planted the trees." It goes on and on, and the last line is, "There is no road through the woods."

Every time I'm hiking, and I come across an old road, I start reciting that poem to myself. I was thinking about it. I hear a lot about the credentials meeting. People talk to me about how they should handle a credentials meeting, and I just hear that last line in my head, "There is no credentials meeting." You're thinking about this wrong.

David: When people hear that phrase, too, there's this immediate response. It's like, "Yes, because I don't like them," and then their second thought is, "Oh, wait. How are we going to get business done?" Initial exhilaration because they don't like them. I don't know that either side likes credentials meetings that much, do they?

Blair: Oh, I think agencies absolutely love credentials meetings.

David: Really?

Blair: Yes, I think that's part of the problem. Especially young agency people, they love it. It's everybody in the room is looking at you. It's all about you. You get to talk about you and the agency, your favorite subject. At some point, if you're in this business long enough, I think it gets a little bit old, but maybe it doesn't. I think it's just a really self-interested moment where it's like, "I get to talk about me."

David: I get that, but when I've watched these or listened to a playback of the video, it's there's so little engagement on the client side. Personally, that would just discourage me.

Blair: I don't think you notice, though, because you're in transmission mode. I've had a chance to sit in on a few of these and a lot of rehearsals of them, and I just think, "Oh, your poor clients who have to sit through this." All agencies sound the same in these things. They don't just sound the same, they show up the same. They show up with this smile and energy and love the fact that they get to talk about themselves, and the client sits there--

There's mixed reactions from the client. Some nod vigorously. Some of the junior client people are just as into this as the agency people are because it gives them a feeling of power and control. They're sitting there watching the agency hand all the power in the buy-sell relationship over to them, and they absolutely love it. Yes, I think both parties really like this.

David: Wow, okay. First thing I've learned here. Can you just explain the role that the credentials meeting usually plays in this weird system we have? When does it happen? What happens next? And so on.

Blair: Yes. Let's pretend that our audience is an audience of non-creative professionals. It's the friends of the listener, the friends who do other things for a living.

David: Your spouses when you go home.

Blair: Yes, maybe they're used to selling in a more conventional way. What's the purpose of the credentials meeting? Typically, a client decides they need to hire an agency, so they do a bit of a casting call. They've got a long list, and if you're on the long list, you might be invited to submit some documents. Maybe after you submit some documents, some credentials documents, maybe it's before, maybe the step is a meeting and not the submission of documents, it's like, "All right. Well, let's just get to know each other a little bit more. You tell us about yourself-"-- and I think both parties are inferring this, "-You tell us more about yourself, and then, why should we hire you?" I think, at the end of the day, that's the question, why should we hire you? That's the question the agency is trying to answer.

David: The desired outcome of one of these meetings is to be invited to the pitch, and sometimes that doesn't happen. Sometimes the client listens to this and says, "Oh, I'm not inviting them to the pitch," or is it they always come to the pitch afterwards?

Blair: If we think of how this happens traditionally-- let me back up. The credentials meeting can take place for different reasons, but in a typical creative agency, especially a typical "win more pitches" agency, the credentials meeting is simply the name that they give to the first meeting. In my selling model called "The Four Conversations," we don't reference meetings. They're conversations that can happen via face-to-face meetings or Zoom meetings, or telephone calls, but every exchange that happens, we can place it into one of these four buckets of four conversations.

I consider this to be the first person-to-person or first meaningful person-to-person conversation that is a qualifying conversation. The qualifying conversation has its own objective, which is to vet the lead to see if an opportunity exists and determine the next step, and that is the agency trying to qualify the client, decide whether or not there's a fit here suitable enough to apply some resources in a sale.

The tone of a qualifying conversation is one of discernment, and I advocate that agencies should show up with a framework for qualifying the client. They don't think of it that way, though. They think of it as the objective is not to qualify the client to see if there's a fit here worth pursuing or not. Their objective is to present their credentials and prove to the client that they actually qualify, to prove to the client that they are a good fit, so there's no discernment going on their part. They think their job is to convince.

David: I remember when we were doing an earlier episode about The Four Conversations book. By the way, that was never called The Four Meetings book. That was always The Four Conversations book. [laughs]

Blair: Yes, or The Four Presentations.

David: Yes, but I remember realizing for the first time that the first "conversation" sometimes never even happens. That was news to me when I first heard that.

Blair: That's the probative conversation. Listeners can go back and listen to that episode, but in this model, there are four conversations. All models are wrong. Some are useful, so there aren't necessarily four conversations, but we think of the sale as a series of four linear and discrete conversations. Now, the first one, the probative conversation, is the one that's so different from every other conversation because it's the conversation that happens via your prospective clients and your agents. It happens without you present. The objective of the probative conversation is what we call the "flip." It's to move, in the mind of the client, from this position of powerless vendor to the position of more powerful expert, where you have some power that you can exercise in the buy-sell relationship.

When the probative conversation happens, how it happens typically is the client or the prospect is engaging with your content and they're building an idea of you in their mind and they're building your reputation in their mind to the point where they see you as the expert, meaningfully different, and they reach out to you and they want to have a person-to-person conversation with you to explore whether or not it makes sense to work together. In that moment, they're reaching out saying, "Hey, can we have what I call a qualifying conversation, where we can vet each other to see if there's a fit here?"

Now, when the flip has happened via the probative conversation, so they've gone from thinking of you as just another vendor to a meaningfully different provider and expert, the expert-- as I said, both parties qualify each other in the qualifying conversation, but when there is a probative conversation and the flip does happen, it happens because the client has essentially pre-qualified you for the most part. They've pre-qualified you by engaging in your content, learning about you or the firm on your website, et cetera.

They've largely cleared most of the hurdles, and they can check the box that says, "Yes, this is a pretty good fit here between what we need and what you do." In the subsequent qualifying conversation, most of what's left is for you to qualify the client.

David: Yes. If that flip has occurred, they're not coming to you with this inherent skepticism, hoping that you'll talk them out of it, but they're not sure you will. They're coming to you already with an expectation that you're going to be what they need, and now it's just more clarifying that. You contrast that with what happens with other experts. I always find it funny to think about this, like doctors or lawyers or whatever. I've never looked around too carefully in an operating room, but I've never seen a surgeon with a framed copy of their graduation certificate in an operating room.

[laughter]

Blair: There are authority cues in the doctor's office, the framed "MD" and et cetera, these other achievements, but not in the surgery, right?

David: Yes, you're in. You're already committed. You're wearing a gown that's a certain color. You're ordering people around. I'm making some assumptions. Now, there's some doctor right now pretending to be a doctor, but I think the odds are pretty-- like the pilot pretending to be a pilot, right? That movie.

Blair: Yes, that might be my doctor.

[laughter]

David: Generally, it's pretty safe to assume that, but give us a little bit more about this illustration about how if doctors did it the way we did. It's so funny to listen to.

Blair: Imagine you're shopping for a new doctor, you go into the meeting, and you're trying to qualify the doctor. It's like, "Is there a good fit here?" You probably have a few questions, "Have you done this before? How long have you been doing this? I have specialized needs, do anything about my case?"

David: How many times you've been sued? [laughs]

Blair: Yes, right, but imagine the doctor treats it like a credentials meeting. You go in with your questions, and the doctor's got this smile plastered on their face. They've got this energy and enthusiasm behind the smile. You think, "Oh, this is weird. What's going on here?" They sit down and they pull out a keynote presentation and start going into all of their background, where they went to medical school, and then a slide that says, "Why me? Why you should hire me."

Then the doctor says, "Oh, and I've taken some time to just review your situation, so here's a slide on everything I know about your body and health based on what I got online."

[laughter]

David: They go, "I got the TSA scans. I can see there's a problem right here with your kidney."

Blair: The doctor's very excited and says to you, "Listen, I've been a big fan of yours for a while. I think you're in amazing shape. I've just admired your body shape or whatever. I just want you to know I'm really, really passionate about your health. My team and I, we're super excited to bring you just the best medical care that there is." You would run. You would run from that meeting. You would not hire this doctor, right?

David: Yes.

Blair: That's how you show up in what should be a qualifying conversation, and you see it as a credentials meeting. There is no credentials meeting.

David: You know what? One of the reasons why we are obsessed with that credentials thing is because we aren't credentialed. There's not a body that does that for us. Yesterday, I was making lattes at Starbucks. Today, I'm a digital marketing expert.

[laughter]

There's this inverse relationship between the fact that there really aren't any external markers that qualify us, so to speak, and so we're always bringing all this stuff to the table. It's like, "No, really, I am different than the other 55,000 people." It's just an inverse relationship. We don't have the qualifications. You can see architects are lower than, say, doctors. They do more of this than doctors-

Blair: -but they're higher than designers.

David: Everybody's higher than designers. Not everybody. In Tennessee, you need 2,000 hours to be a massage expert. I don't need any to be a consultant.

Blair: You're saying there's no barrier to entry. We're not credentialed, we show up trying to be. I think it's more fundamental than that. I think it's an example of the power dynamics. It's just a complete giveaway of who is the prize in this relationship and who feels like they're trying to win the other side over. I think it's really that simple. If you see it as a credentials docket, it's your chance to talk about you.

I'm not saying you shouldn't talk about you, but I think the way I would have you, the listener, think about these initial meetings, I would have you think of them as a qualifying conversation, where instead of being armed with things that you want to say about yourself, you should be armed with the questions that you want to pose to the client, the answers to which will let you know whether or not you think there is a good, healthy, mutually-beneficial relationship here.

You should bring your framework to bear to get the questions answered that you need answered. Now, at the same time, the client is going to have questions that they need answered, and you should be prepared, but not overly prepared to answer those questions. Here's how I think about it. I'm showing up to a qualifying conversation, what the listener thinks of as a credentials meeting, "Hey, great to meet you. We exchanged some email. The purpose of this conversation is I have some questions for you, I'm sure you have some questions for me. At the end of this conversation, ideally, we can agree on whether or not there's a fit here suitable enough to take the next step. If you don't mind, do you mind if I start with my questions?"

Then I'll go through my questions. I use a version of BANT; budget, authority, need, time frame, and I have a list of questions within those areas. I want to know if you're the right type of client. I want to know if you have a budget assigned, who the decision makers are, what the timing is, et cetera. I ask these questions, and I get the information that I need to determine that, let's say, in this example, there's a very good fit here. I would say, "I think on the surface of it, there's a pretty good fit. You're the type of organization we like to work with. The challenge is right in our sweet spot. I might have some issues around budget, and I might push you to think about expanding that budget, but on the surface, I think there's a pretty good fit here."

Basically saying, "I'm qualifying you in." Now I turn it over to you and say, "Now, you must have some questions for me. Go ahead. What do you need to know on your end to determine if, from your point of view, this is a good fit?" Then the client will start asking their questions. The last thing you want to do is to go into presentation mode, is to pull out a big deck, and start at the beginning, "About us," et cetera. Now, if you think of the information the client wants to get from you, "Well, how long have you been in business? How big are you in headcount, revenue, et cetera?" The answers to a lot of these questions are on your website.

Those that aren't there, like revenue, you would just let them ask the question, and then you would pose the answer. Just give them the answer, "Revenue is 20 million. We've grown this much over the last few years." This way, you're keeping it conversational. I've said before on numerous episodes, you can present to people, or you can be present to them. This is you being present, letting the client ask their questions, and you simply responding with the answers.

David: I would also say that when you're asking questions, you're not just looking for information. You're actually giving them information in the questions themselves. You are communicating your expertise through your questions. You do care how they answer them. That's important, but it's not as if you're totally in a one-way mode at that point. The questions you ask can send the right signals to confirm to the prospective client that you are an expert in what you do, just because of the way you've asked the questions, and that's going to be different than maybe some of the other conversations they've had.

I wonder about all this sales process, how sometimes you just get these reflexive sorts of requests from a client, like references. "Can I speak with some references?" It's like, well, if you stop and think about it, I don't know how useful references are. You know what they're going to say and so on. They're already primed. I think in some cases, maybe clients are just asking for credentials presentations because it's like, "Oh, I guess that's the next step."

It's not really deeply thought of. Then when I was thinking more about this topic last night, because you sent this note to me a few days ago about what you wanted to talk about, I was thinking, "Okay, is this another example of the zero-sum game that I talk about sometimes where there's a zero-sum game between marketing and sales?" The better the job you do at marketing, then the easier sales are, and I thought, "Well, could I safely reframe that and say there's a zero-sum game between the probative and the qualifying?"

The better job you do at giving people the information they need, which might have to come in an actual probative conversation because you haven't done a good job-- the better job you do there, then the easier, the more you can just slide right into qualifying conversations. Does that comparison make you itch, or is that fair?

Blair: No, I think it's generally true except for the decision-maker issue. You might have somebody on the client-side team who's basically where the flip has happened. They see you as the expert, they know all the information, and they show up with some team members who don't know anything about you.

You do need to be prepared to deal with that. When you get questions, there are some questions like, "How long have you been in business? What's the revenue?" Et cetera. There's some of these just basic context questions or basic background questions that you should just be able to answer, have the information, and speak to it. There are questions where it does make sense for you to show something in response, particularly when the flip has not happened.

You're still seen as a vendor. They're a little bit suspect of you or standoffish. As I've talked about before, if you want to show something-- I'll talk about the two things that you should be prepared to show, you need to make sure that you do not go into presentation mode when you're doing this. I like to have a deck. Let's assume this is a Zoom meeting, I have a deck, and I've been asked a question to which I have some visual support, one of these two areas, and I want to share something with the client. I will ask the client, I will say, "I have a couple of slides from a deck that speak to this, do you mind if I share it with you?"

Ask permission to share something visually, number one. Number two, keep it in the slide-sorter view. Don't press play and go to full screen because that will trigger you to go into presentation mode. Treat it more like, "I've got this deck, there are a few relevant slides in here. Let me just pull out some of these slides." If the client can see what some of the other slides are, if they want to see more, they can ask you, but that will keep you from going into presentation mode.

Now, two things, one is a function of the other. Your working model, your codified approach to how you do what you do. In the simplest form, it's a four-step process where every step starts with the same letter, usually D, and we've made fun of that before. That's the simple form, that's better than nothing, but the more expert you are and the more you have a novel perspective on your area of expertise, the more likely you are to have something that's more towards the unique end of the spectrum in terms of how you work.

It's valuable. I've seen bad versions of this, too, and I'm sure that there's a lot of client eye-rolling at some of these models, but if you do have a working model, if you have mapped out and visualized what the engagement looks like, it's really helpful because, in this moment, this is the moment when you begin to take control of the sales process and the engagement to follow. Our mutual friend, Mark O'Brien, has this great line. I've been repeating it every week for the last few weeks.

This is near the top of the list of things I wish I'd written, "The prospect's mind is malleable; the client's mind is fixed." I've been telling people to carve that in stone. That is so important. The prospect's mind is malleable; the client's mind is fixed. You're in a qualifying conversation, the client is asking you questions about how this will work. You've asked permission to share a visual representation of the model of how this will work, and in that moment, when you're walking the client through the model, you are taking control.

You can make a list of all of the things that tend to go wrong in your engagements, all of the things that frustrate you after you're hired. The client comes to you and says, "Oh, now we need you to present three different things every time you present, create--," or whatever stupid things that get imposed on you, you front run those issues now as you're walking through the model because you're walking through this visual three, four, five-step model that's usually some version of, "Here's how we diagnose, here's how we prescribe, here's how we apply, here's how we reapply on an ongoing basis."

As you're walking through it, you're essentially communicating, "Listen, the reason we're having this conversation, the reason you're considering working with us is the quality of our outcomes. I'm showing you how we get to a high consistency of high-quality outcomes. It's from following this process. In this step, this is what happens. Here's an example." You might be frustrated with the senior people on the client side disappearing at some point after the engagement begins.

You would say, "At this point, when we present the strategic recommendations or the findings of the audit and the recommendations, it's really important that everybody who's on this call today and everybody we've identified earlier in my qualifying conversation framework is involved in that meeting. We don't proceed with that meeting without everybody present." You just make that point, and you move on. You just make the point, "This is how it's done. If we're going to work together, if you want the outcomes, we're going to follow the process. This is how the process works. This is an important step in the process."

David: Yes, so I have an anecdote, and then I want to get you in trouble. The anecdote. Years ago, I wanted to experiment with the engagement level of prospects, and so I asked-- I think it was three, maybe four clients-- I asked them to do this, and they all complied. I said, "Turn the slide advancer over to the prospect and let them control the pacing of the deck that you're presenting."

Of course, you would say, don't even present in a deck like that in the first place. That wasn't the point. The point was, how interested are they in it? How much time do they want to spend? Consistently, they were flipping through things twice as fast as the agency would have, which is a clue for us, but just tacking on something that you mentioned; in slide-sorter view or whatever, that would even be a better test. It's, which slides do you even want to look at?

Blair: Yes, I've heard you talk about this before. I think it's a fantastic idea. That'll keep you from going into presentation mode. That'll give you feedback on what's really resonating. That's the first thing that you would have a visual for, is your working model, how we work together. You're sharing it. You're not in presentation mode, you're walking the client through it, and you're taking control of the engagement. You're saying, "This is how this is going to work."

The second thing you would have, and you might have multiple versions of this, is case studies. This is where we've talked about process-framed case studies before. This is where you would show examples of the work that you've done for other clients, like the client that you're speaking to. The real power in process-framed case studies is you frame the case studies so that they follow the codified working model, your process that you shared initially. You walk through this abstract, visual model of, "Here's what happens in these steps," and then you show case studies, and they're not just the typical before-and-after case studies.

It's like, "Here's what we learned at the end of the diagnostic phase. Here's the strategy we shared and suggested at the prescription phase. Here is the initial work we did, and here's the ongoing work," et cetera. The more unique your working model is, the more powerful it is when you show case studies that are framed by the model. Some people, some listeners, almost certainly heard me talk about the power of that first element, the visual model, and they thought, "Oh, I've done this before. Clients don't like this." They don't like it because they think it's bullshit.

As soon as you start to package up your case studies to prove that you actually follow this model, that's when the light goes on. That delivers a high level of reassurance, sophistication, et cetera. Those are the two things that you should be showing visually without going into presentation mode in the second half of a qualifying conversation, which is not a credentials meeting. There is no credentials meeting.

David: If you're really good, your four-step process that starts with D will now start with E, and then, several years later, maybe F if you're really good. All right, one last thing for you. This is a little bit unfair. We both have friends in the appointment-setting business, so they do outreach for you, and they find people that you then make a credentials presentation to.

Those firms do some good work, but one of the things that you end up with is a lot of meetings, and many of those meetings are sort of credentials meetings before there's ever much of a need, right? Is that fair?

Blair: Yes, before need is established. There might be a need, there might not be. If the clients agree to a meeting, there's probably some need, whether they've been direct with the appointment setter or not. There's probably an opportunity there.

David: That's an example, right? Where you would really want to stay away from a presentation, where you would want to ask lots of questions, and not just view this as another time to fire up the presentation deck. That's the point I'm making.

Blair: I would hope the appointment setter is actually having the qualifying conversation. They're reaching out. They get a first conversation. I wouldn't trust-- In theory, they could do this, but I think anybody in that role, they're moving pretty quickly. They're going to walk through it like it's a demo. That's probably another area where, if a firm's services are productized-- You think about how SaaS is sold, a demo is a logical part of the sales process, and our credentials meeting is a lot like a SaaS demo.

When we start to go from customized services to productized services, we're getting closer to that SaaS territory, demos start to make more sense, so we have to be really careful there. I think even if you have fully productized your services, you still want to approach the sale through this lens of The Four Conversations because the mistake that you want to avoid making, and it's going to be harder to make the more productized you are, is you are going to slip into-- I guess I would call it demo mode.

Now you have a product, you want to demonstrate the product, so you go into show-and-tell mode, whereas it's a lot easier to stay in consultative-sale mode when you have no productized service to sell. Does that make sense?

David: It does. I have worked for two really good salespeople, and my cue that my boss was going into presentation mode-- in both cases, it was a he, it was when he pulled out the same stories that he told everywhere. We worked out this little thing where I would just tap him or kick him under the table and drag him back to, "Okay, you're sliding into your comfortable presentation mode. I can tell that because you're telling the story you always start with. No, let's ask questions instead."

You can help each other with this, right? It's a slow process. You have to retrain yourself, but I think it's such an interesting concept. Plus, in a day when people are so sick of meetings, you've just said you don't have to have these meetings, right?

Blair: Yes, have a conversation instead. Conversations are fun, meetings are not.

David: Thank you, Blair.

Blair: Thanks, David.

When it comes to positioning, David is still seeing creative firms failing to answer three essential questions in the proper sequence: category, specialization, and then secondary differentiators (or qualifying characteristics).

Transcript

Blair Enns: David, how long have you been doing this?

David C. Baker: 31 years last month.

Blair: Wow. I'm 23 years this month, so 54 years we've been doing this. Aren't you tired of talking about differentiation? [chuckling] Haven't we had this conversation, me, you, and all of our clients and everybody we've talked to over the last 54 years combined?

David: Yes. Sometimes I'm on a call with a client, and it's going really well, we're making a lot of progress, and they ask a question, and I'm thinking, "Weren't we talking about this yesterday?" It's like, "Oh no, that was with a different client." It was like, "Can I just send you the recording?" I don't know. It just continues to be really important, and this is just a deep source of consternation to me. [chuckles] People still aren't getting even some of the basic concepts, so I just thought, "Okay, let's start over here. Let's just define our terms so that at least we're not fooling ourselves thinking that we're really tightly positioned when we aren't." Also, there's this really weird twist about certain kinds of firms that throw the argument off, and so I just thought-- it was a little bit in desperation, honestly. It's like, "Okay, I got to just write some of this stuff out," because I am a little tired of talking about it. [chuckles]

Blair: It's one more subject where you'd like to be able to say, "I'll just send you a link." [chuckles]

David: Yes, right. People deserve to be treated carefully and patiently. It's hard to do. You think it wouldn't be this hard to do. It's like, that's the business that we're in. When you're doing it on yourself, it's almost like you start from scratch again.

Blair: Yes. Can you clarify something for me about the title, The Waterfall of Differentiation? Are you talking about waterfalls from a project management standpoint, like planning steps? Is that what you mean?

David: Yes, it's just another example of my amazing ability to name

[laughter]

episodes. Yes, it's waterfall like one, two, three, falling down. Like start somewhere and then go to the next place.

Blair: Okay, start us off with the goal of differentiation. This sounds so business 101. Why is it that we need to differentiate ourselves against our competitors?

[laughter]

David: Oh, I'd never thought about that. Okay, children. Essentially, what we're trying to do is to eliminate interchangeability. The way I like to think of it is, for some reason, the relationship you have with your client is over. Forget about the reason why, it doesn't matter. The relationship is over and now your client who was so happy with you up until this point is faced with a problem. How do I find a suitable substitute for this agency that I was working with, but now I cannot work with anymore?

Here's the weird twist, is that client gets to decide what interchangeable means. Otherwise, you get a little frustrated. You hear about who they hired in your place, and you look at each other, it's like, "Really? You think they're going to do the same level of work that we did?" Your opinion here doesn't matter. It's what does the client think a suitable substitute is? With that background, how long do you think it's going to take the client to find a suitable replacement for your expertise?

The length of that time it takes basically measures how differentiated you are in the marketplace. I keep saying there's 55,000 firms- I hope that's kind of correct -in the US alone and most of them are interchangeable in the client's eyes. What sort of pricing power do we have in the marketplace? What power do we have to influence the choices they make and move the needle on their behalf? Positioning is simply making sure that there are fewer suitable substitutes for what you do. That's what we're looking for.

Blair: Yes, changing the power dynamics in your favor. If you're the only one who does what the client needs, then you're in a position of strength. Now, we could probably talk about that at some point, maybe we'll talk about it right away, because if you're positioned as the only one in the space, something's probably wrong, isn't it?

David: Yes. You're either the first to market, and that's very rare and probably not the case, or what's more likely, is that a lot of people have tried that, and it didn't yield any power in the marketplace and so they abandoned it. We're not looking for a positioning where you're the only one. We're just looking for a positioning where there are far fewer competitors. The rough rule of thumb here is you're looking for something in the 10 to 200 competitor range.

I, obviously, favor something closer to the 10, so let's just say we want to keep narrowing the position until there's only 10 suitable substitutes. Then a corollary here, and these have to be done together is, okay, how many prospects does this yield? The number there, the range, is 2,000 to 10,000 based on research I did for the Business of Expertise book. Here we'd want to sort of nudge up to the higher number, so 10 competitors, 10,000 prospects, that's a great sort of starting place.

Sometimes these don't overlap. Sometimes there's 10 competitors, and then you look at the number of prospects, and there's a million prospects, and you think, "What is it about this particular choice that has yield this strangeness in how these things don't overlap?" That's a sign that you have an unsophisticated marketplace. That would be like manufacturing or industrial. It's a great place to focus, it's boring, but a lot of potential clients in that space don't think that they need a specialized firm like they would in other places.

In other times, the opposite happens where you have very few prospects but a lot more competitors. I just call that the pre-efficient market. If you think about the cannabis market, right, where you would think that that would yield a great positioning if you start focusing there, but it's new so everybody's running to it. The people who are buying are not as sophisticated as they will be five years from now and so on. Generally, aside from those things on the margins, we're looking for 10 to 200 competitors, ideally 10-ish, and 2,000 to 10,000 prospects, ideally 10,000-ish. Something like that.

Blair: Okay, so those are the basic numbers. Then let's start with the waterfall, the series of steps that you take. The first one is, you define it as a question, question number one, your category. What do you mean by category?

David: Just applying this to myself, I am a management consultant. I'm not an accountant, I'm a management consultant. I'm not a lawyer, I'm a management consultant. That's the category.

Blair: I would refer to that as your discipline.

David: Same thing. It's like, when you incorporate and the guy across the desk says, "Okay, we've got to write down your SIC code," or the NAICS code. What are you? You just pick it. You're not making one up. You're choosing from the available options. The reason I start with this is because a lot of people define the category they're in, and they think that that's it, that's all they have to do.

I'll ask them, "What makes you unique in the marketplace?" It's like, "Well, we're a branding firm," or whatever that answer is. It's like, no, that's a category. That's not the specialization. That's the category. You can't invent something. You have to give people some category that they're already familiar with. There's only so much you can expect to change their mind, to bend their thinking around something. You don't want to waste any of that on category.

Maybe you don't like being an ad agency. I don't care. If that's how the marketplace thinks of you, then you're an ad agency and don't try to fight that. You have to pick an established category that everybody immediately associates with something even though sometimes the associations aren't all positive. You just have to live with that and move beyond it. People spend way too much effort trying to change the category.

I'll tell you what. I'm going to rant a little bit here, okay?

Blair: Yes.

David: If you need to go get some coffee, that's fine.

Blair: [chuckles] I've got one right here.

David: There's too many firms out there that are selling this false promise like they are category creation firms. It's like and they say, "We work for Uber, and Uber as a category didn't exist until we brought them to market," or Airbnb. "What we do is we don't help you stand apart within a category. No, we create a new category where you are the only firm standing there." That is bullshit.

Now, it's not always bullshit because those stories, Uber, Airbnb, whatever, there's 50 of them, those are true, but you don't sell that false promise to a client. One of the biggest false promises to clients is that we are going to put you in a new category so that nobody else is in that category. That's just a waste of energy, and it bothers me when I see those promises being made.

Blair: I like the idea that there's only so much bending that you will be allowed to do or you're asking the client to do in their mind,- think of it as educating -and you should not be doing that bending or educating via a new category. It should be, they hear the category, they go check, got it, yes, I need somebody in that category. That's not the end of it, right? This is just the starting point. We're building on this.

David: Yes. I'm a consultant, right? Okay. There's, I don't know, millions of consultants, way too many, honestly, between you and me.

Blair: More every day.

David: Yes. I'm a consultant. Okay, that's the category. All right, so the next step is sort of the specialization within that category. There are all kinds of consultants. How am I specialized, just using myself as an example? I focus on marketing, creative, advertising, PR, all of that. Everything under the marketing umbrella. I am a consultant that works with people under the marketing umbrella broadly writ, right? That means I am now separate from all the other consultants that would advise banks or whatever, or retail firms. I work with marketing firms. That's question number two.

First, category, second specialization, and this narrows the consideration set, which to me seems entirely logical and basic. If I run a marketing firm, I would think, we all should think, I should hire a consultant that works with marketing firms, right? Now I'm a communications firm, or I'm a public relations firm. Okay, but there are 55,000 of those in that category, but I am different because we have a really unique process, or whatever.

No, that doesn't do it. That will come into play later. We need to follow the easiest steps and then the slightly easier, but not completely easy step, and so on. The first easy step is category, second is specialization. I'm not saying anything new in this episode. It's just how I'm putting it together. When you choose a specialization within a category, so you're a marketing firm or a dev shop or whatever, it's either horizontal, or it's vertical. You specialize in either serving like a particular narrow vertical, or you focus in a demographic or a particular tight service offering, and so on.

That demographic might be old people, Black people, rich, urban, educated leaders, whatever it is, people getting ready to face something, or a very tight service offering like IR, or recruitment, or whatever. Then the vertical, I don't need to define. You know what that means. This narrows the consideration down set. Before this, if it's just category, I'm an advertising agency. After I choose my specialization, I am an advertising agency that works with credit unions, or I work with firms just about ready to go public, or whatever.

Now that consideration set goes from 55,000 down to somewhere in the 10 to 200 range. If we do our job right, we narrow that down specifically. Like you talk a lot about how we're not looking for the perfect positioning, we're looking for a perfectible positioning. To get to that, we've got to have two things. We've got to have courage, and we've got to have information. Maybe we don't lack the courage. We'd make any decision that makes sense, but we don't have the information yet.

We narrow it down, not as narrow as it will be, but we narrow it down so that we can start to listen carefully and differently to the signals that we're getting from the marketplace, and that marketplace will give us the information which we then combine with our courage to then narrow it a little bit further. That's the whole process of specialization.

Blair: Say a little bit more about the courage, if you don't mind.

David: Sometimes people's lack of courage is masked as lack of information when, in fact, that's not really the case.

Blair: Oh, that is deep.

David: Yes, I say a lot of very deep things, if you haven't noticed.

[laughter]

They keep asking questions. They don't really need to know the answers. They're just putting off the courageous part that needs to be done. The courage is required because when people think about a tighter positioning, they usually are in need of something. It's not as if the business is going really well. You usually don't look at positioning until you're dragged, forced into it, and so this is the point in your firm's history where you are least likely to accept the idea that you want to limit your options.

That courage, the lack of it is palpable. You and I have talked about this. I love this image. It's like you built the firm, you got to this place by saying yes a lot. That boundary, it changes. You don't really know where it is, maybe it's three years, maybe it's six years, but if you're going to get to that next stage, you're going to have to flip entirely. Now it's about saying no. That's how you're going to grow. That is a very tough thing for humans to do. Especially ones that aren't super confident. When you're making a tough position decision, you need two things. You need courage and new information, and those both have to come together at the right time.

Blair: All right, that was well stated. We're doing this waterfall of differentiation, step one. Question number one is, what category are you in? Question number two is, what are you specializing in? What's your specialization? As you've pointed out, it can be a horizontal specialization or a vertical specialization. Then building on that is this idea of qualifying characteristics. Do you want to unpack that?

David: There probably is a better phrase for that. You pick the category, and there's really no choice. It's obvious. It's chosen for you. The specialization is a choice, and it emerges from something you've already done. You're just saying, okay, we've got three options here, two options. Which one makes the most sense for us? You're just making a choice between the available options that you have. That's where the pain comes in because you're essentially saying no to these other things.

When you've made that decision, so you've gone through category, you've gone through specialization, after you've made that decision, there are still multiple options for the client. You're not yet the only option for them to choose. They've narrowed the consideration set down and now there's, let's say, 10 firms all which looked like they would do a pretty good job. How do I make a selection between these- let's make it smaller.

There's three firms they're looking at. They're all specialized in what they think is important -how do I choose between these three firms? That's where these qualifying characteristics come into play. Things like maybe you have some proprietary IP. I'll just stop there and illustrate this. My category is consulting. My specialization is marketing firms. There are a lot of people that do consulting to marketing firms. Why am I different from those other ones? We have four specific pieces of IP that nobody else has.

Then, of course, there's other little things like doing it for a while and so on. Maybe you have some proprietary IP that the other firms that also serve the same marketplace don't have. Maybe you have some data-driven research methodology, or how your service is delivered. This one's pretty interesting. Maybe you do Staff Log. Maybe you lease entire teams to them and so on. That could be the difference that sets you apart enough to make the decision easier.

Maybe it's how you price. Maybe it's how you onboard clients. Maybe there's some portals or some unique process or a diagnostic in-person workshop that you pull off. That's a big one nowadays. Maybe it's the way you productize your services. Firms that are nervous about specialization, they go from that first step to the third step, and it doesn't work. These qualifying characteristics are very powerful once they're applied to a firm that's already specialized.

If you think any of these will do the work for you, in most cases, they will not. This is one of the big messages I wanted to get across. These things are all very valuable, but they're more valuable if we're just distinguishing between 10 firms and not 55,000 firms.

Blair: The way you just sewed all that together makes a lot of sense to me. I just want to recap what I think I heard you say. You've got your three categories or the three steps that you take. First is define your category. It's already defined for you, is your point. The second one is choose a specialization, and it can be based on horizontal or vertical. The third one, you call it qualifying characteristics. I might refer to them as secondary differentiators. Those apart from the first two.

If you think of the first two combined, what is your category? What do you do, and then for whom do you do it? Then the secondary differentiators are what you call your qualifying characteristics. You've listed a bunch here: proprietary IP, data-driven research methodology, productization, introducing uniqueness, et cetera. Your key point here is, and this is really resonating with me, is a lot of firm owners, in their attempts to positioning their business, they do step one, they identify a category.

Often it's a misstep because they're making up a category, but as you point out, you can look at your tax return, what's your SIC code or your NAICS code that you selected, and then they skip over the definition of the market, who they do it for, and they lean too heavily on these what you call qualifying characteristics, and what I'm thinking of as secondary differentiators of proprietary.

It's how we do it, the way we onboard, et cetera. Your point is, these things are valuable, but they are not a substitute for step two of choosing a specialization. They're what you do after you choose a specialization. These three things together help you articulate a meaningfully differentiated expertise. Is that a good summary?

David: Yes. Those three things together narrow the choice down to one, right? It's like, oh, this is so clearly the firm we should go with. Everything falls together beautifully, right? I'm such a believer in all of these defining-- how did you phrase that? I liked your phrase better.

Blair: Secondary differentiators?

David: Secondary differentiators. All of those things are really important, but it's a hook on the wall. If you hang your positioning on that hook, it's going to get pulled out of the wall. It's just like, no, this is powerful, but it's not powerful enough to replace positioning. It's just what helps a prospective client narrow down the choice from 10 to just you. All of these things work together if they are done in order. That's the big point.

Blair: A branding agency with a proprietary process is not enough.

David: No, it's not. A branding firm that focuses on retail shelf stuff, packaging, maybe, that has a proprietary process, now that's a powerful story.

Blair: Right. There's a twist here, though.

David: Yes. Right. Picture me in, or you, in a conversation with a client trying to talk them into specialization. Immediately, they're looking for outs to this. They're thinking, "Okay, who are the firms that I would like to be like, and are they specialized?" They'll frequently throw those back at me and say, "Wait a second, this doesn't seem to really make sense, because look at these firms."

Blair: They cite the exception that proves the rule. The rock star.

David: Yes. We want to be IDEO or Pentagram or whatever it is, right? In your particular industry, whoever that one is. They'll say, "Well, I don't understand your point. They're not specialized, and they're very successful, and I want to be like them." That's true, right? It's not always true. There are some cases where you think they're very successful and then if the numbers, they really aren't. Let's just assume that it's true, that they're very successful.

There are two ways to get around this. One of them, I don't know how to help you with it, the other one I do. One is that they're just super confident. I'm going to list a specific name here. Brian Collins. He just walks into a room, and he knows what he's worth. There just isn't any argument about it, right?

Blair: He's got the body of work to back it up. He's got the swagger. He's got the total package. Now, if you just had the swagger without the talent or the talent without the swagger, doesn't work, does it?

David: Yes. It's a self-confirming thing, too, right? You get a big client, and it's like, oh, I guess maybe I'll be the next big client. That's one. I've talked a lot about that in other places. I won't go into that here.

Blair: Shout out to Brian, by the way.

David: Yes, Brian's great. Then the second would be that they're large. This is the one that people miss. Normally, this three-step waterfall is category, specialization, and qualifying characteristics. Okay, those three things in that order. Now, in some cases, projects are so important or multinational or too big to fail kinds of things that part of the consideration set is, we need a big firm with a deep bench.

Instead of category, specialization, and qualifying characteristics, instead, it looks different. It's category and then second, are they big enough? Are they big enough so that I'm not going to lose my job here even if things go bad because it seemed like the logical choice category. Then you insert big enough, and then specialization, and then these secondary features or qualifying characteristics or whatever we call it.

Pay attention to that. When you see a big firm that you want to be like that doesn't seem to be specialized, recognize that, in many cases, they are large enough now that big enough becomes like if you're not big enough, you're just not going to be in the consideration set. Once you are in the right category, and you are big enough, then the next thing, it's not usually called specialization at that point. Usually it's just called category experience. Have you done this sort of work before? Then there's still 10 firms left, let's figure out how to make the final choice. That's where these qualifying characteristics or secondary things come into play.

Blair: Lacking that, a pitch.

David: Lacking that, a pitch?

Blair: Yes.

David: What do you mean?

Blair: All right, we need a firm. We need an ad agency that's big enough that has this category experience. There's 10 of them.

David: Oh, right. Yes.

Blair: Lacking the secondary differentiators that we call the qualifying characteristics as well, let's just have a creative pitch. Let's have a shootout.

David: Let's let each of them tell us about their guaranteed process. [laughs]

Blair: Yes. Okay.

David: None of this is new that I've talked about here. I just want to make sure people get these in the right order. I probably could have said this about five minutes, but it took a little longer to say. Do it in order and recognize the importance of the size, how that gets inserted between number two and three in certain cases.

Blair: There's two or three profound things here for me. The three steps are, identify your category, choose a specialization, and then identify your qualifying characteristics or secondary differentiators. You pointed out that most firms, many firms, skip the second part, specialization, vertical or horizontal, and they lean too heavily on the qualifying characteristics. Then the interesting twist that there are clients and projects of such size that, in addition to category specialization and qualifying characteristics, there is this hurdle that they have to clear of, is the firm big enough?

Your point, which I think is really well taken here, that in these examples where the client needs a firm of a certain size, this third step or question of specialization gets changed from, we don't necessarily want somebody who specialized in this. We just want somebody with some deep category experience. You know what? Congratulations, David. You did it. You took an old topic, and you taught an old dog some new tricks.

David: Made it interesting, finally.

Blair: Very well done. I hope the listener got as much out of this as I did. Thanks, David.

David: Thanks, Blair.

Blair sees high price anchors everywhere—from buying a suit to ordering a burger. So what factors should creative firms keep in mind as they use anchoring in selling their service options? And when is the best time to present the anchor option within the sales conversation?

Links

“Anchor High” by Blair Enns for winwithoutpitching.com

Transcript

David C. Baker: All right, Blair, I don't know exactly how we should start this one, but let me just say, be careful. I don't know what my role is going to be in this one because you're talking about fashion. Nobody thinks of me as the fashion guru and then you want to start to talk politics, and of course that always ends well. I'm just going to throw it to you. I know the title. It's always be anchoring. Take it away, sir. I'm going to go get some coffee. I'll be back in about 25 minutes, and I'll save the crowd from your ranting.

Blair Enns: Listener, I said to David, I want to start this topic by talking about Donald Trump. Three, four, five.

David: That sounds smart.

Blair: I don't want to hear from you, listener, about Donald Trump pros or cons, because it's not really about his politics. It's about something that he does and he does very well, and it's helpful to look at what he does through this lens of anchoring. If I said to you, David, I'm the newly elected leader of a large and prosperous country, and I said to you--

David: Wait, can we just pause there?

Blair: [laughs] Let's keep this hypothetical and abstract. No, let's get specific. Some of the first few things Donald Trump said on taking office-- again, this isn't about his politics, and I don't actually care what your view on him is, you're entitled to it, I don't want to hear whether it's pro or con. As I said before, I am completely devoid of any political ideology, so I can actually have a conversation about these things. Donald Trump takes office and one of the things he says right away is he starts calling Canada the 51st state.

David: You're from Canada, for the record.

Blair: Yes. Here I am in the 51st state. If this were a different topic, I would negotiate with him on this.

David: You are digging so deep. Keep going, sir.

Blair: We've lost half the audience. Canada, 51st state. I want to take over Canada. I want to take over Greenland, and I want to take over the Panama Canal. Everybody loses their shit. I'm not saying you don't have a right to lose your shit. These are issues of national sovereignty and they're taken very seriously and have been taken very seriously here in Canada. I, somebody who knows something a little bit about negotiating, see it for what it is. I'm not saying it's all it is. It could be a whole lot more because with this president of yours, who knows what's really going through his mind?

There's something clear that he is doing. He is anchoring. Just think of it this way. He's a guy who thinks he can negotiate anything. The lens through which he looks at almost every challenge he faces, in my estimation, is this is a negotiation and I can win any negotiation. I think that's what he thinks. He's doing what is essentially the first rule of negotiating, is he's anchoring. He's moved the Overton window. There are the unsayable things that he says. The idea with the Overton window is something starts out as unspeakable and then eventually it becomes policy as the window moves around this topic.

He starts out by throwing out an outrageous opening position, and in the end, he's going to settle for something far less than what he anchored against and he will have succeeded. Again, I don't really know what he wants, but I know he's going to get something on each of those three areas: his relationship with Canada, his relationship with Panama, his relationship with Greenland. I know some people are such political ideologues, they want to talk about their feelings about what's going on. I'm not saying your feelings are invalid. I want to open with this story because Donald Trump is always anchoring. The title of this podcast is Always Be Anchoring.

David: Always Be Anchoring. This is where the fashion comes into play. I can think of various stories. In fact, I'm really excited to talk later about a specific test we did, the two of us did one time. I can think of where it happens in our marriage and so on too.

Blair: You and I are not married. Let's just keep that--

David: Oh, yes. I don't mean you and I.

Blair: Oh, in your other marriage. Your other marriage.

David: Speaking of which, last night because of what's just happened, we decided to watch Conclave.

Blair: Isn't that a great movie?

David: Yes, it was. The way it ended surprised me. Anyway, so we're in the bathroom. We're each brushing our teeth. I rinse my mouth out and I say to Julie, "Do you think I could have ever been elected pope?" She said, "No way. Seriously?"

Blair: You're not Catholic. Go on.

David: I said, "Really? Why are you just immediately ruling out?" Then she thought for a minute. She said, "Maybe they weren't really great people."

[laughter]

Blair: Married 40 years here.

David: Here, you're talking about maybe being president and using high anchoring. You're talking about a real president that does high anchoring. I'm losing all of my elections, my supposed elections. You have a story. I've heard you touch on this before where somebody did anchoring on you and you even knew it was happening and it still worked. Right?

Blair: Yes. Let me tell that story. I've written a post about this recently called Anchor High. We'll link to it in the show notes. First, let me just explain what anchoring is. We've talked about anchoring before, but we haven't done a whole podcast on it. Anchoring, it's also known as anchoring and adjusting. The anchoring effect is the idea that the first piece of information that you're exposed to on a subject, any subject essentially, will ultimately skew your final decision on that subject. The term was coined by Kahneman and Tversky, both of whom are no longer with us. They call it anchoring and adjusting.

Kahneman's book is called Thinking, Fast and Slow. He talks about system 1 form of thinking and system 2. System 1 is heuristics, it's shortcuts. We use these heuristics, these rules of thumb, these mental shortcuts to make a quick decision on something. Then if it's a big decision, we embrace or engage system 2, which is a slow, deliberate, methodical, often uses mathematics form of thinking, that's a form of reasoning.

What Kahneman and Tversky noted is that in most decisions, we use a heuristic first. The heuristic might be just the first number we hear in price negotiating. We start there and then we adjust away. What all the research shows is that the cognitive load required for reasoning away from the initial starting point, and the starting point, if somebody else gives it to you, is known as an anchor, it's so much cognitive load that we don't do all of the work that's necessary, so we stop before we're fully reasoned away from the starting point.

If you can set the starting point in a negotiation and have your opponent, instead of having them start at the opposite end of the spectrum, they will start at your point - so, taking over Greenland, Canada, Panama - and reason away from that, and they will ultimately arrive on average at something that is more in your favor as the person who anchored high, closer to your end of the spectrum, and further from their end of the spectrum. Does that make sense?

David: Yes. Another way to think about it is somebody goes into a negotiation. I'm the buyer and I think, I know that this price, I'm not going to pay whatever the price is. In my mind I'm thinking, oh, probably I want to negotiate 20%, 25% off or whatever. Then they anchor really high. In my mind, I don't have the energy to start all over. I just say, oh, 20%, 25% off of that higher price. I still get my discount, but it's a discount off of a higher, and it may end up being way higher than I should have paid anyway. It's just a mental shortcut. I see it happening all the time when people do this to me. Even when you know what's happening, it's almost impossible to resist it really.

Blair: The fact that when I first started talking about anchoring, there were no known ways to undo the anchoring effect. The last time I checked, which is a couple years ago now, there are three known ways. We could talk about that later. Effectively, in price anchoring, it simply means when you're negotiating, if you are the seller, start with a really high number. If you're the buyer, start with a really low number. That's effectively what it means.

David: Oh, wait. Anchoring works in reverse as well. That's not something I realized.

Blair: If you don't anchor high as the seller, your client will anchor low as the buyer.

David: Oh, so first wins in a sense, sets the rules of the game.

Blair: The way I think about an anchor, specifically in price anchoring, but we're going to talk about anchoring and things that aren't also price, the anchor to me is like the moon hanging in the sky, pulling toward it the tide that is the average settled price. That's a pretty profound metaphor, I think.

David: I'm just going to go with you. I don't have the cognitive load to argue with you on that point. I'm just going to go with you that it was a great metaphor.

Blair: I was expecting more than just "right". Let me tell the story about the suit that I bought. 2018, Pricing Creativity: A Guide to Profit Beyond the Billable Hour comes out and I feel like, I wrote a book about money or pricing, I should look like money, I need a new suit. I had a very specific idea of the suit I wanted and I thought I was going to buy it at a store in London the next time I was in London. My wife and I were in a mall in Vancouver and I'm walking past the store I used to shop in when I used to be able to afford to shop in the store when I made way less money. I don't know how my income didn't keep up with the store because I hadn't been in there in years.

I thought, you know what? I've got some time to kill. I'll see if I can buy this suit here. I find a salesperson and I tell him the cut of the suit, the cloth, the color, the style. I tell him my budget and I say, "Can I get this suit for this price in this store?" He smiled. He didn't say yes, he didn't say no. He smiled and said, "Come with me." I followed him. He took me into this corner of the store and he said what I knew he was going to say.

He said, "First, let's try this on for size." I thought, I know exactly what you're doing. You're putting the most expensive suit on me because you want to anchor high. He puts it on, it fits me perfectly. I look in the mirror and I think, man, I look good. He does what they all do. He leaves for a minute so I can be alone to look at the price tag. I look at the price tag. I know this is coming and the price is so big. I just choke on it and I can't get this thing off me fast enough.

David: Did you remember what the price was?

Blair: I think it was $6,500.

David: Oh God. That's even higher than I thought.

Blair: I had a pretty big budget for this suit, but it wasn't $6,500. I hadn't bought one in years. He comes back and I've already got this thing off and I hand it to him. I said, "I know what you're doing. I've written a book about this." He just smiled and said, "Come with me." He puts a suit away and then he tries another one on. I look in the mirror and I think, damn, this looks good. I look at the price and it's only 1.8 times my budget. It's only 80% over my budget. I breathe a sigh of relief. I think, I'm buying this suit. I'm standing there looking at myself in the mirror. I'm wearing running shoes.

He said, "Do you want to see what the suit looks like with a pair of dress shoes on?" I said, "Sure." I give my size. It was a gray suit. He comes back with gray shoes. I don't own any gray shoes. I love shoes. I think shoes are the window to the soul. He puts these shoes on me and I look in the mirror. I think, damn, I look good. I said, "How much for the shoes?" He goes, "$1,100." I'm thinking, this is getting really expensive really quick. In the end, my wife texts me, "Where are you?" I say, "I'm buying a suit." She says, "I'll be right there. Don't spend money."

David: Did your heart fall when she texted you?

Blair: I ended this post saying I still think about those shoes. I didn't buy the shoes. She comes into the store. She's running towards me. She sees I haven't bought the suit yet.

David: To rescue your family budget.

Blair: I'm still wearing the suit and the shoes. She said, "Oh, you look good. How much?" I gave her the combined price with the suit and the shoes. She chokes on it. Then I say, "The shoes are $1,100. I don't think I'm going to take the shoes. Just the suit, just 80% over my budget." She sighs a sigh of relief. The salesperson anchors high with me, changes my reference frame so that 80% over my budget is acceptable. Then I almost spend a bunch more. Then I use the same effect on my wife to sell my wife the suit.

David: This is where you hope she doesn't listen.

Blair: We walk out of the store, everybody's happy. I'm 80% over my budget. My wife is happy. I'm happy. The salesperson is happy. All because he anchored high. Let me first try this on for size.

David: You don't think he had any expectation of selling that $6,500 suit to you?

Blair: That's the thing about an anchor price option. We talk about, and we've done an episode on this, the importance of offering options in your proposals. When you're anchoring high, there's more to it than this. When you are in the closing conversation with a multi-option proposal, you always start with the most expensive option. The job of that anchor price is not to sell that anchor solution. The job of that anchor price is to set the context for the decision and to make the other prices look more affordable in comparison. The job of that price tag on that suit that he put on me "for size" was not to sell me that suit. The job of that price tag was to sell me the other suit that was 80% over my budget.

David: What percentage of the time do you think a client in our industry actually chooses that higher anchor price? That's part A of the question. Part B of the question is, should you be excited about it? Do you want to ever sell that anchor thing? Are the promises so wild that you don't actually make a lot of money? Psychologically, how does the seller think of that anchor price?

Blair: Those are really good questions. The first one about percentage of the time, I don't know. I don't know what the average is. On average, your client should end up in the middle. There's the odd buyer. Just like there are price buyers who will always buy the least expensive one, there is a buyer, I don't know what you would call them, extravagant luxury buyers or extravagant value buyers, who always have a tendency towards the most expensive one. I've had clients buy from me and say, as a rule of thumb, I always buy the most expensive one. I think that's an odd thing to admit out loud, but there are people like that.

On average, people will end up in the middle if you're constructing your proposals properly. To your point, when somebody chooses the anchor option, yes, you're celebrating, but you've also-- you're on the line now. You're committing to either doing a lot or making a lot of risk go away. The way you make risk go away is you take it on. That might mean some form of performance pay.

You might think that you are happiest when your client chooses the anchor option, but that's not necessarily true. I think when you've constructed your options properly, you're happy with whatever they choose because the cheap one, you've stripped out all the value drivers and it's not a lot of money, but you don't have to do a lot for it and it's still quite profitable. On the high end, it's a big number, hopefully a really big number, but there's a lot of work that goes with it, and maybe even an increased amount of risk.

David: That's why I was asking that question, because you almost have to anticipate that every once in a while, somebody will choose that. When that happens, you have to be mildly excited, but also it better be enough money to compensate for all that risk. There's probably some data on this next thing. I've always wondered, when you go to buy something and there's all these items and you decide how to sort buy, and then there's high to low or low to high, I wonder how many people choose high to low knowing, I want to anchor this, I'm not going to spend the most expensive, I'm going to choose something else, but this will help set the-- What's another example of anchoring that you see out there besides the suit story?

Blair: I wrote something, I think it was a LinkedIn post about, it's so big, I bet you can't eat it, menu item.

David: 36-ounce steak.

Blair: Yes. 72-ounce steak. Anybody can eat a 36-ounce steak, David.

David: [laughs] Not me.

Blair: I wrote a story about a burger in the city an hour away from where I live, the city of 10,000 people. There used to be a burger joint. They had a King Kong burger. If you ate it, you got it for free and you got your name written on a record that they hung from the ceiling. I ate it, I won, it hurt. People don't realize, it's a little bit of a marketing gimmick, so it's a bit of a hook, but it really is an effective price anchor because I think the price of that burger was something like $36, a crazy amount of money for a burger.

You pull out the menu, and you can tell when a menu has been designed by a pricing expert, because there's a box and they have these high-priced items in the box and your eye is drawn to the box. Then right below the box, there's the thing that they want you to buy. In the box in these restaurants is, in this case, it's the burger for a crazy amount of money and you're so intrigued by it and you have a conversation with your table mates about it. Then one of you orders it and it's fun. Most of the time, you don't order it. Your eye moves from the $36 burger to the $19 burger and you order the $19 burger. Feels like a bargain.

David: All of this was theoretical to me, honestly, until we used to do this event together and we had a survey that would go out to people ahead of time, and you suggested, I'm going to talk about anchoring in this thing, let's illustrate this to people. You designed the survey that had a split A-B response. I was blown away at how real this became. You want to talk about that a minute?

Blair: There were 70 people coming to an event we held in Atlanta, Georgia, about 8 or 9 years ago now, maybe 10, I don't know. 70 business owners coming to this event. We emailed them all and I asked them this question, "Thinking of the firms that will be in the room on the day of the event, what's your estimate of the average blended hourly rate?" At the time, nobody knew who else would be in the room.

The control group mean response was $171 an hour. The control group was the half of the audience, 35 people, who just got this question. "What's your estimate of the average blended hourly rate of the firms that will be in the room on the day of the event?" The mean response was $171 an hour. The anchor group, I asked them the same question, but before I asked them that question, I first anchored high with another question.

I said, "Do you think the average blended hourly rate will be higher or lower than $500 an hour?" Everybody answered, I think it will be lower. Then I asked them for their estimate. The anchor group mean response was $237 an hour. It was 38% higher. By anchoring with $500 an hour, everybody said, it's going to be lower than that. By using that anchor, I caused them to think about the more sophisticated, more expensive firms that they knew or could imagine. Then when they gave their own estimate, it skewed higher.

David: One of the reasons it did that was because you started with that. You've got some ideas about how we put price anchoring to work. That's one of the keys to implementing it, is to throw that anchor out very early, including when you've got multiple prices, don't leave that to last and so on. You want to walk through some of these principles to make this work.

Blair: Large numbers first. Price anchoring is basically start with the large numbers first. What does that mean? It means when you're offering a range, it might be as much as X to Y. Actually start with Y, start with high end. It might be as much as big number, two, three, four, depending on the variables, two, three, four, and on the low end, low number. The reason you're pausing, so you're anchoring and then you're pausing and you're waiting for information to come back, that's a whole other topic. Just start with the high number. Don't go low to high, go high to low.

It also works, just throw out big numbers that have little to do with the project. Some of the initial studies on this had to do with people's social insurance numbers. They would ask them the last two digits of their social insurance number, and then they would ask them to estimate something. People who had higher numbers skewed their estimates higher.

David: Wow.

Blair: There doesn't have to be a lot of correlation. Obviously, it's helpful when there is some, but even just big numbers. To that effect, you start anchoring in the value conversation that precedes the closing conversation. You're throwing out big numbers early, even in the value conversation, about the value to be created, any other big numbers you can think. Just have a conversation about things in the millions of dollars. You're throwing out high numbers in the value conversation. It might be as much as really big number. Then in the closing conversation where you're sharing your multiple-option proposal, you would reference that conversation you had in the value conversation.

Again, throw out those big numbers. I said it might be as much as this on the high end. Then share your options beginning with the most expensive one. Generally speaking, pricing information after that should just get better. Big numbers early. Early in the value conversation that precedes the closing conversation. The first numbers you talk about in the closing conversation are big, maybe not quite as high, not quite as big as they were in the value conversation. Then you go through the cheaper options after that. The numbers, the prices should just get better and better after the anchor. Does that make sense?

David: It does. I need clarification on one thing. If I understand this correctly, you're talking about presenting the high anchor largely in the context of a conversation. When I see written proposals and I see multiple options, Actually, I can't think of an exception to this. I always see the higher one as the last of the three. Now, we did an episode before where you made it very clear that the good, better, best thing, that's not just saying, here's the price and here's a higher price, and here's it. It should be a different way of working. The higher one has more risk but more reward, and so on. Why is it that in printed proposals, the higher one is last and not first?

Blair: You're thinking left to right, low on the left, high on the right. It doesn't matter. I've experimented with both. It doesn't matter where in the document you put them. The most important thing is it's the number that you say first.

David: Conversation.

Blair: Yes. My suggestion is that you say the anchor price. I've got different ways we can do this, different ways you can engage us at different price points. Let me start with the most elaborate, most expensive option. It's priced at boom, big number. It's not until you say it's priced at boom, big number, it's not until you say the anchor price that you show anything. You don't show anything until you've said the big number.

David: That clarifies that.

Blair: There's all kinds of reasons for doing that we won't necessarily get into here.

David: This goes way beyond price too, which is really interesting thought to me. You could apply this to what sort of things you promise to do in a fulfillment setting or how much time, or whatever. It can work both ways, up and down.

Blair: Here's an example of how creative firms flirt with anchoring, how they intuit this idea. I see a common mistake. I have worked for, back in my career when I worked for agencies as an employee, I have been in multiple situations where the creative director or the creative department said, "Blair, here are two different options to present to the client. Here's the safe option that they want. Here's the risky option that we want them to take." Then we've done this other really crazy risky-- It's so risky there's no way they're going to take it. Show them that one, too.

They had this idea that they're framing the decision and moving the safe zone of the decision into the middle. There's a principle I've talked about before known as extremeness aversion, where it says when we're presented with multiple choices, we retreat from the dangers of the extremes to the safety of the middle. I've been in many situations where I'm presenting a throwaway. You might consider it an anchor option. It's the risky creative one that just moves the safe zone for the client.

The mistake that I always made was I showed it last. I would say, here's the safe one, here's a risky one, here's an even riskier one. The way to do it, if you want to anchor high here, my advice to young Blair would be to say, go in and say, we have three different creative executions. Let me start with the most out there, the riskiest one, however you want to frame it. It's the least conventional. It's the most different.

David: Stretches you the most.

Blair: Then present that one and have a conversation about that. I said prices should get better, but when it comes to presenting options, I like to go from one extreme to the other extreme and show off the contrast. I would go to the safe version after that, just like I would go to the lowest price option after the anchor one. There should be some disappointment in this safer option. It's like, it's not as exciting, it's not as risky, it's not as daring. It's a little bit boring.

When we're talking about pricing, I said there are dangers at the extremes. At the anchor option, the danger for the client is they will overpay. At the cheap end of the spectrum, the danger is that they underbuy. It's the same thing with creative concepts. Oh, this is pretty tame. Then I would say, I have this other option in the middle. It's somewhere between the crazy, out-there option and somewhere between the safe option. I've now moved the safe zone to the middle. My expectation is the client will choose that safe zone.

David: This will get you noticed, not fired.

Blair: I think a lot of people listening intuit this. You've been in situations like this before where you've presented a variety of creative options. You've had a really crazy, out-there one to frame the decision as something against which to compare the other options. If you're going to do that, it's not an anchor unless you lead with it. Anchor high.

David: Anchor high.

Blair: Start with the most expensive or the craziest out-there one.

David: If this makes you a little nervous, it should, but start stretching yourself by anchoring, thinking how this could impact you as well. What's the thing that you inject yourself with right after the snake bite? How do you counter an anchor?

Blair: What's the anti-venom? How do you counter an anchor? I said, when I first started talking about it, there were no known ways to counter an anchoring effect. There are three known. There might be more now. I haven't looked it up. You'd think I'm doing a podcast about it, I should do some research. That's just not in my nature. Three different ways to counter the anchoring effect. Your clients don't know what they are, but they can build on each other.

The first thing you do is you reject the anchor. You say, no, there's no way I would pay that price. Let's use this for when you are buying something. Somebody anchors high against you. You use it the other way too when the client anchors low. Let's say you're buying in a negotiation. The seller throws out a really high price. What you do is you reject it. Instead of countering, you get them to take it back and come back to you with a new number. You absolutely reject it. Again, these can build on each other.

The second thing that's been shown, I don't know if this has been replicated, and I forget who did the initial study, you physically shake your head "no". As you're saying, "There's no way I would pay that amount of money. You need to take that back and give me something realistic," you are physically shaking your head "no". I don't know why that's important, but apparently there's a study that says it works. Then the third one, I forget what the specific more scientific language is, but my interpretation is you throw a hissy fit. You get emotional about it. You get visibly upset over it. "Are you crazy? No, that is a ridiculous number," shaking my head. "You take that back. Let's get real. Give me a real number."

David: Let's re-frame this in human terms. Let's have a real conversation. That's not even in the ballpark. Stop that. I hope people can run with this and just experiment with it. Probably experiment in your marriage first. No, just kidding. Try it with your kids. Then try it where money's at stake with your client. This is great. Thank you, Blair.

Blair: Thanks, David.

Following up on the recent episode on whether you should be considering that offer to sell your firm, David provides four questions to get answered, two documents to sign, and a short list of materials that can help you take the lead in early conversations with a buyer.

Links

”Should You Entertain That Acquisition Offer?”

Transcript

Blair Enns: David, today we're talking about what to ask, share, and sign when a buyer expresses interest. I haven't counted, but this is three or four or five in a series on selling your firm. You've got selling your firm on your mind.

David C. Baker: Yes, I wonder why I'm talking about that. It's such a mystery.

Blair: Maybe you've written a book about it. Maybe you're in that business.

David: Maybe we closed a $10.2 million deal Friday, and that's on my mind-

Blair: Oh, wow.

David: -for a client.

Blair: That explains one of the drinks I had this weekend. It was in your honor.

[laughter]

Blair: Celebrating with you.

David: When to ask, share, and sign when a buyer expresses interest, or if your college kid wants to listen to this, then it's like when somebody expresses interest in you. Didn't somebody tell us the other day that we needed to support his kid's school fundraising thing? He wrote to us, remember? He said, "You need to send me money for my school soccer team because my dad makes me listen to your podcast episodes on drives to our soccer game."

Blair: I remember. We won't say the full name, but shout out to Paul.

David: Yes. Oh, that was great. Of course, I sent money to the kid.

Blair: Paul's kid. One of our clients, your client, my client, their kid starts hitting us up for donations. For the listener, neither of us gave him any money. Don't try this at home. Wink, wink.

David: Thank you for that disclaimer.

Blair: We previously talked about whether or not you should be open to possible acquisitions. We'll post the link in the show notes, or you could just scroll down your feed to two episodes before, it's in there somewhere. My takeaway from that episode was this message that even if you don't think you're selling, part of your brain, a very small part of it should be tuned to the cues, should be partially listening for the cues or the clues that somebody is subtly suggesting that maybe you might want to sell your business to them.

David: Yes, because it might actually happen, but even if it doesn't, the main point of that exercise is you'll learn some things in that process that, as long as you don't let yourself get distracted, you can't learn in any other way. It's a good idea to do it. I feel like, "Well, if I'm going to tell you to do it, maybe I should tell you what kinds of questions to expect, what questions you're going to need to ask, and what should you sign and when, and what should you share?" I don't want to throw you to the wolves. This is part two of that whole series, really.

Blair: Let's start with the questions that you should ask. You've listed four of them. The first one is, "Why are you looking to buy a firm at all?" Is it, "Why us?" or is it, "Why are you undertaking this at all?"

David: "Just why this process? What leads you to think that an acquisition makes sense, because there's lots of other ways to do it? You could merge, you could grow. What's driving this?" There's some obvious reasons why you would ask this question, which I don't even need to repeat. There's a hidden one in here, and that's that you want to understand what the reason is, because you may need to use that later if this actually does go somewhere. If somebody says, "Hey, well, yes, great question. There's a bunch of reasons, but the main reason is we really want a presence in Austin. We're a dev shop. We want a presence in Austin. It'll make it easier to recruit and so on."

Then, six weeks later, while you're being grilled right before you sign the LOI, they keep hammering you with your low EBITDA. Then you say, "Hey, folks, remember why you wanted us? We're still in Austin."

[laughter]

David: That's the first question, "Why are you undertaking this?" Just because you need to understand all the reasons. It gets them talking, and that's the key here. They'll often share more than they should, but really, you want to file this away.

Blair: Under future leverage, when they come back to you and say, "Hey, well, oh, we thought you're performing at this level on this metric, et cetera," and you point out, "Well, we're still in Austin."

David: They also don't know a lot about you at this point. You may decide whether or not you even want to pursue this, because if what they identify as their primary reason for buying you isn't a good match for you, say maybe it is 20%, "We want to add to our EBITDA, we're looking for a firm," and like, "Well, we've had eight for the last two years in a row," then you can just save your time. There's lots of reasons. That's the first question., "Why are you undertaking this?" Undertaking, that sounds formal. What's a better way? "Why are you doing this?" I'll just restate that.

Blair: "Why are you looking to buy a firm at all?" They give you the reason. "Well, we want to expand our presence or have a presence in Austin." Then the follow-up question is, "Well, why us? There are lots of firms in Austin. Why are you approaching us specifically?"

David: Yes. "What struck you about us?" Again, this may not match reality, because they probably just asked around, they've looked at your website, obviously, they may know something about you because they met or something. This is an expansion of that first question. You filed it away because it might be something in your pocket that you can use later in negotiating. The other thing you're trying to surface here is to figure out how sophisticated they are. If they list all kinds of reasons that are not all that strategic, then you know, "Oh, should I keep pursuing this or not?"

"Why an acquisition and why us specifically?" You're looking for a pattern. Do they have a strategy? Is there a specific reason for this acquisition as a whole? Then why are they filling that hole, that gap, with a firm like ours? Why us specifically? They're going to answer this question because it's pretty easy to answer. The third one is a little bit harder. This is where you make them a little bit nervous.

Blair: Yes. So far, these four questions that you ask somebody, these are reminding me of the context questions that we might ask in a qualifying conversation. Qualifying conversation, you get an inbound inquiry, "Hey, can we have a chat about us working together?" You get on a Zoom call with them, and your questions basically mirror this, "So why are you doing this, number one?" They state the reason. "Why us specifically?" Then your third question, "Who else are you talking to about an acquisition?" The same question you would ask under the decision-maker quadrant in the qualifying conversation.

You want to find out, "Is this a competitive sale? Are you talking to somebody else? If so, who else are you talking to?" You make the point here in your notes that they're not necessarily going to answer that question, but you should ask it anyway.

David: Yes. There's no way they'll answer that question. It gives you too much leverage. Plus, if they're serious, they're under an NDA and can't do that anyway. It's a mutual NDA. I've always wondered, in a sales context, would they answer that question? The answer is yes. Sometimes they do. Sometimes they'll come right out and tell you who they're talking to. I love those scenarios.

Blair: It's amazing the questions that will get answered if you ask with authority, "Who else are you talking to?"

David: Yes, long pause. You got to be willing to pause, too. They're not going to tell you who it is, but here's what you're looking for. You might even jump in and say, "I know you can't tell me. I know you can't be specific. Really, what I'm asking is, describe the other firms for me. How big are they? Not where they are necessarily, but how big are they? What kind of work do they do? What's their mix of service offerings and so on?" All you want to know is if there is some pattern in the request, because if they're talking to an SEO firm somewhere of six people, and they're talking to a 60-person SEM firm, then those are very two different things.

You just want to know if these people are sufficiently sophisticated to have a specific goal in mind about size, type of firm, service offering design, maybe where they are, and so on. "Who else are you talking to? Hey, I know you can't really tell me, but just describe the other firms that you're pursuing."

Blair: Your fourth question is another good qualifying question, too, in some cases, which is like, "Have you ever done this before?" The way you framed it is, "Can you tell me about your previous experience in the acquisition market? Have you bought firms before? Have you tried to buy firms and failed?"

David: Right. They're going to proudly tell you the ones that they attempted, and you're going to want permission to talk to them. If you don't get permission to talk to them, you're going to want to do it anyway, because these people are in the earn-out. Whoever they've had as a purchase target before, they're already in the earn-out. The honeymoon's over. This is where you are having the most difficulty about even thinking about an acquisition. It's like, "Do I want to work for somebody else?" "Well, here's some other people that are working for somebody else. Talk to them."

Then if you can find out the people where it didn't work out, that's a little bit harder, but you can still pursue the information, even if you don't talk to those people and say, "Can you tell me about the ones-- Just so we don't show up on this list, if you pursued other things that didn't work out, what killed it? What were the things so that we can have an honest discussion about that?" These are four questions. They need to be asked in order, but I just love them because they just make you sound so smart and in control and not afraid of the answers. "Yes, we're going to have to like each other for this to work, but let's just get right to it, too." I really like these four.

Blair: I have a question about the second part of the fourth question, "Can you tell me about your previous experience in the acquisition market?" The second part is acquisitions that weren't consummated. You said you probably have a hard time finding them. Now, you're my Mr. Deep Dark Web. When I want to know private information about a human being, another human being, I call you. I don't know what resources you use and I don't want to know because they're probably not legal.

David: I can't tell you.

Blair: You can find anything on anybody. If you were the advisor to somebody, are you able to get information? If you're representing the seller, are you able to get some of that information on the potential acquirer of failed acquisitions?

David: More than likely, yes. More than 50% chance. In this case, it would simply be, I would have already heard about it through other people, or I would just call up-- There's about a dozen of us that do really good work in this space, and I know all of them. I would just call them up and ask, and they would tell me. There's a way to find out.

Blair: There are lots of ways, and you know what they are. I feel like I'm revealing a side of you that very few people know. I'll tread lightly. Those are the four questions you should ask. Why are you doing this? Why us specifically? Who else are you talking to? What's your previous experience in the acquisition market? Now you've got what you should sign, one of two things. What's the second one? I'm only looking at the first year.

David: An NDA or a no-shop clause.

Blair: Oh, sorry. Yes. A no-shop clause.

David: This is important because it's going to come up immediately. If they don't bring it up, then you need to bring it up. They're going to ask for materials, that'll be the next step, and you would never share materials without a signed mutual NDA. That's going to come up very quickly. Those things, they're all very, very stock and standard. You barely even need to read them. You're not going to probably get your attorney involved and ask for some changes. It's just not worth it. Just sign it. That happens right away.

Now, some of these have what's called a no-shop clause in them. Sophisticated buyers would never ask you to sign one of these at the outset, but unsophisticated buyers would. The letter of intent is the high-water mark. After that, things are pretty well decided. We're just looking for something we missed, and we close, and we're done. Everything before that is a negotiation. That's the way a sophisticated acquisition works.

In an unsophisticated acquisition, the LOI is much earlier, before the buyer has discovered much about the seller at all. They just throw a bunch of LOIs out there like gifts. Then they decide, "Okay, now let's look at these firms." Meanwhile, they're leaving three, four, five, six firms hanging. None of them know that there are multiple LOIs out there because that's usually not a part of the disclosure.

You don't want a no-shop clause because you basically said at that point, "I'm not really open to any other offers. I'm treating this so seriously." That's a weakening of your position this early. It's a strengthening of your position later, but not right now, and so you would never sign that. You should sign an NDA right away, but it should not have a no-shop clause in it.

Blair: I really like that. I don't like being in that weak, vulnerable position where the acquirer has all this leverage. What do you mean by it's a position of strength for you later?

David: Because that sends a signal after you've learned about them, you understand that both parties are being fair, you trust them, you have a rough outline of what the agreement is going to look like. At that point, it sends the right signal to the buyer that you, as a seller, are really serious, and it hands them the goodwill that they have earned, but there's not much disclosure remaining. You already know what you're going to get. If the LOI comes at the right moment, all the negotiation has already happened. When you sign that no-shop clause, then that's a great signal to them, and you don't need any more power because you've got the leverage.

Blair: Got you. Is that a reciprocal agreement? What I mean by that is, is the acquirer attesting to the same thing that they're no longer negotiating with somebody else?

David: No. The way that is handled, and it's not very common in our industry, would be to have a breakup fee and the breakup fee would be so onerous that it wouldn't make sense for them to be negotiating with two parties at the same time because they are going to pay a breakup fee to one of them. That's not usually a part of the deals in this space, except for the very largest ones.

Blair: We've covered what to ask, the four questions to ask. We've covered the two things that you might sign. Now, under the banner of what materials to share, you've got a little bit of a list here, starting with ownership structure.

David: It is a list, but it's a lot shorter than what you normally might get asked to send. That's another signal, honestly, of how sophisticated the buyer is. A sophisticated buyer is not going to give you busy work. They're not going to ask for stuff they don't need, at least not right now. They might ask for it later. The things that you're going to get asked to share, that list could be way longer than this list. These are the things that you should share comfortably right away. The first is ownership structure, or the cap table. Who owns what percentage of what? You should always share that right away. There shouldn't be any surprises there.

You could say there's four people who are on the executive team. Between them, they own 6%. You could say that kind of thing without getting specific, but all the 100% of that ownership should be accounted for. That's the point of that one. Then financial performance. By that, I mean your financial statements. They have to be accrual. You shouldn't be in this game if you don't realize that. They have to be accrual. They do not have to be approved by anybody else at this point. It's balance sheet income statement the last three years. Might be tax returns.

Blair: You made the point about it has to be accrual as opposed to cash basis, and then you glossed over it. I would just imagine there's some people listening to this who are interested in the topic, but maybe low financial literacy. Do you want to just explain that?

David: Yes, actually, it would be hard to explain how somebody with low financial literacy is deeply interested--

Blair: In this topic, and has something to sell.

[laughter]

David: I'm just going to let that go.

[laughter]

Blair: Some of these people are creative people who just happen to build these businesses that are-- Honestly, right?

David: That's true. You're right. You're absolutely right. That's the first group. The second group are people that have an 80-year-old male accountant that still wears suits to work in New York City. Those are the only other people on the cash account.

Blair: I want to defend my accountant friends who do wear suits to work, who maybe aren't 80 years old.

David: Let's do that in another episode. Don't use my time.

Blair: We're talking about what materials to share. Ownership structure at a pretty high level. Financial performance at a pretty high level. Employee count is also on here. The nature of the work that you do.

David: Yes. Service offering design. What's the typical engagement look like? What are the big categories? If you're a dev shop, do you also do UX research? Do you manage hosting, too? Those kinds of questions that would be pretty basic, and they could probably just learn from your website, too.

Blair: Now, this last one on the list of what material to share, clients. How detailed do you get on that?

David: You share the company name, for sure. You would never share the person, the contact name. You might share the department. Probably not. All you need at this point is just the client name. Then you probably are going to share the total dollar volume you're doing with them, or you could just break it up roughly and say, "This is within this range," but I think you ought to tend more towards the trusting side in these kinds of conversations. Sellers sometimes worry about how this is used against them. Frankly, I almost said I hardly ever see it. The truth is, I've never seen it. It's just like I wouldn't worry too much about that. You don't want to give them the names of your client contacts, for sure.

Blair: Pretty high-level overview across a few different categories. I'm really interested in this. You call it extra credit for some social stuff or checking the social boxes.

David: That's because you love dinner.

Blair: Yes, I love dinner. My wife says, and she's not the only one to say this, you can't be friends with somebody until you break bread with them. You suggest that you should have dinner together with the acquirer.

David: Yes. I try to be really super specific. I don't want to be pedantic, but I want you to know this is a serious thing. Meet at a neutral restaurant. I have three suggestions. Meet at a neutral restaurant. That just makes sense. You always want spouses or partners, significant others, with the people that are actually involved in the business. You want them to bring their partners, too. That's really good, because these are the people they're going to talk to after work every day who are going to help form their opinion of you and so on.

Dinner at a neutral place first, then invite them over to your house. I really think it ought to be at your house. Ideally, the buyer is going to invite you over to their house first, but you can just set the stage, the expectation is like, "Well, if you invite them over to your house, they're going to expect that that's what you want next." Either way, it happens. Three meetings over meals together. I know this takes time. I know it requires travel sometimes, but this is a very big decision, and this may be the most important part about it. The only thing that you personally can gauge. Your advisor might have an opinion on this, but that opinion doesn't matter all that much unless it's bad. Anyway, extra credit.

Blair: Extra credit. Now, the critical next step, maybe the final step, or close to the final step. You want to talk about four reasons to hire an advisor at this stage. What are they?

David: Yes, it's a good sign to the buyer. This isn't like NYPD Blue, where you clam up and say, "I want to talk to my lawyer." That's exactly the bad signal. "Oh, this guy's guilty." No, it's a good signal to the buyers, like, "Oh, so you're so serious about this that you're going to spend your own money to get professional advice about it. That's great." If the buyer at this point looks dejected because you're going to work with a professional advisor, then run like hell. It's a good sign.

Blair: Also, the advisor speaks the language of acquisitions.

David: Yes. They're not going to be embarrassed when they hear a term.

Blair: I would imagine a good acquirer who's acquired more than one firm really wants to work with a professional.

David: Yes.

Blair: Is that true?

David: For sure. If it's the right professional, yes. It's not like they want to bypass the professional and get right to the person that the professional is representing. It's not that. Sometimes they'd rather work with another professional. They don't want somebody that's old-fashioned or pedantic or really slow or nitpicky. You recognize good professionals right away, and there's a lot of good ones out there.

Blair: Yes. You don't have to explain cash versus accrual to--

David: To my podcast co-host.

Blair: [laughs] Then you've got a couple of other really good points here. An advisor can shield you from the more emotional exchanges, and they can also shield you from the distractions. I can see the value in both of those things.

David: Yes, exactly. The distractions is obvious. The emotional stuff is you're going to take this far more personally than you should because you see your evaluation the first time, and you say to yourself-- You don't make an objective response. You say, "You mean I worked 17 years for that?" Professional advisor knows you really well, too, and knows how you process information and knows whether you want to hear about this tonight or tomorrow or whatever. It's both those things together. They help shield you from the ups and downs that bad emotional exchanges result in, and they can help shield you from distractions, which is the big danger that you're trying to avoid.

Blair: I was going to ask you if part of your role when you are the advisor is being a therapist because I'm thinking I couldn't imagine worse therapists in the world than somebody who's a high consumer of therapists himself, not to take your personal inventory or anything. Then I realized, "Oh, it's Jonathan who manages the M&A practice. He would be very good at this. He would be a very good therapist."

David: Yes. We're okay. It's very true that this person plays that role. In fact, there are times when your advisor will talk you out of a deal, even though it means they're not going to get a commission on it because their reputation is more important to them and you are desperately eager for the wrong reasons and the advisor is pretty comfortable that a better offer could be found. There is a lot of really candid-- By the end of a deal, whether it goes through or not, you're pretty good friends.

Blair: Yes, that's great. That's a great thing to end on. What to ask, share, and sign when a buyer expresses interest. I'm not going to recap it all. There's a lot here. This has been a great conversation. Once again, David, I learned a lot. Maybe I'll have to sell my business at some point because I know so much about M&A.

David: I hope not.

Blair: Thanks, David.

David: Thanks, Blair.