The Enterprise Game: Why Some Service Organizations Evolve And Some Don’t
As appeared in Chief Executive.
For many years, I have been thinking, talking and writing about the evolutionary path of service organizations. By “service organizations,” I mean organizations that provide personal or professional services, including in the areas of finance, law, accounting, medicine, engineering, architecture and consulting. I have come to believe that there are four primary stages of metamorphosis for service organizations, starting with “practice” and ending with “enterprise,” so I call the evolutionary process the “path to enterprise.” But, until recently, the answer to one related question has eluded me: Why is it that so many service organizations strive to evolve into enterprises but fail in the attempt? In this article, I will propose a hypothesis.
The Path to Enterprise
I will first summarize the path to enterprise in order to frame the problem in need of a solution. The path to enterprise describes the primary stages of evolution that service organizations may reach as they grow beyond their original limitations. In effect, there are four such stages:
I co-authored an article on the topic in 2019, but the general framework looks like this:
Many (though certainly not all) service professionals strive to be part of an enterprise because:
1. Only through an enterprise is continuity and succession assured for clients, employees, and other stakeholders;
2. Enterprises typically can offer a broader array of services, including ones that require deep specialization;
3. Practitioners can more easily specialize and focus on their desired activities when part of an enterprise; and
4. The economic rewards, including through equity, associated with operating in an enterprise are typically greater than in earlier stages of evolution.
Yet, surprisingly few practices ever do evolve into enterprises. They instead tend to (a) fade away over time, (b) shut down when their founders and other key people retire, often after a failed attempt at internal succession, or (c) engage in a sale or merger. Why? In 2020, I wrote an article specific to financial advisors that looked at game theory for some answers. I suggested that advisors should start by considering Jean-Jacques Rousseau’s hypothetical stag hunt:
A group of hunters have tracked and cornered a large stag and, if we assume they are patient and cooperate, should be successful in their hunt, providing an ample food source for themselves and their families for several days. If, however, they do not cooperate or are noticed by the stag, they will lose it and go hungry.
They lie in wait for many hours when, suddenly, some hares wander right in front of them. If one of the hunters goes after a hare—an easier target that will feed that particular hunter and their family for a day—the stag will surely notice and flee, causing the hunters who did not go for a hare to go hungry.
Each hunter must individually consider the risk that any one of their companions might selfishly go for a hare, as any such “defectors” know that at least they will eat even if the other stag hunters go hungry. What would you do if you were one of these hunters?
Under classic game theory—the mathematical study of strategic interactions among rational decision-makers—the following are both rational decisions for any individual hunter to make:
1. Cooperatively go for the stag and hope that others cooperate as well; or
2. Selfishly go for a hare.
I say “rational” because there is math to prove it, pioneered by John Nash, whose story is told in A Beautiful Mind. Both solutions are said to be “Nash equilibria,” which recognize that when dealing with complex social dilemmas, cooperation can be costly when others refuse to cooperate. But while both decisions are mathematically rational (one being risk dominant and the other payoff dominant), the optimal solution requires a change in the parameters of the game so that all the hunters are required to trust each other and cooperate to acquire the stag successfully.
I argued that the same can essentially be said of financial advisors. The secret to optimal success lies in their ability and willingness to trust each other so that they can turn their “game” from a non-cooperative one into a cooperative one.
Getting back to the evolution of service organizations, is there a useful inference here? I think so.
Service organizations can fail to achieve enterprise status for many reasons, but their risk of failure is heightened dramatically if their members cannot agree to cooperation over self-centered behavior. In game-theory terms, the players must all agree to play a cooperative game and not a non-cooperative (or competitive) one. Failure becomes probable when the players individually decide to play different games.
Sound simple? It’s not. People are emotional creatures. We feel insecure. We experience jealousy, envy, fear, uncertainty, sadness and anger. We want attention and constant validation from others. Sure, a group of people may agree at some point to pursue a consistently cooperative model of behavior. Why not? That certainly sounds good. But agreements can be forgotten, and it can be easy for people to “defect” (game-theory term) and act selfishly when, whether justifiable or not, they become convinced that their interests are better served through self-centered behavior. Such a possibility becomes a probability when larger groups of people are involved (though there is research to suggest that while the odds of one or more individuals randomly defecting may increase with group size, overall cooperation levels may not be impacted by group size, depending on the conditions).
In the specific context of service organizations, the odds of universal cooperation are even worse because the nature of these organizations is often to aggrandize the contributions of individual service providers or professionals, leading to feelings of exaggerated self-importance by some and consequent underappreciation by others. Both types of feelings invariably lead to self-centered, uncooperative behavior.
Service organizations that evolve into sustainable enterprises do so because they learn how to minimize non-cooperative behavior, ensuring that everyone is playing the same cooperative game with few defectors. Fortunately, there are many ways to achieve this result, though all methods require regular practice and vigilance – not just words. The primary tools for ensuring a cooperative game in a service organization include:
1. A clear mission, vision, plan, and shared set of values in which all team members can and do believe;
2. A healthy culture in which everyone feels valued for their contributions and no one feels “replaceable” (see The Most Dangerous Business Cliché);
3. High levels of social capital, powered by deep and long relationships among team members;
4. Strong, authentic, multi-level leadership that relentlessly focuses on the power of teams, including its own power as a unified leadership team focused on cooperation;
5. A diverse workforce that respects and values differences;
6. Rewarding career paths for all organizational functions; and
7. Effective accountability structures for quickly addressing self-centered and negative behavior.
Ultimately, an enterprise, while fully dependent on its collective team, must transcend its over-reliance on any one individual. A good friend of mine recently wondered whether this concept might be “socialistic.” I would call it nothing less than capitalism designed for optimal results, though others might prefer something along the lines of “sustainable capitalism.” The individual must always be respected and treasured. But when it comes to organizations, individuals need to come together, work together and stay together if they choose to create something that transcends, outlasts and outperforms them (and that choice, of course, is always theirs to make).
So it is with service organizations that seek transcendence to enterprise. They find ways to be fully cooperative—to play the same game—or they remain practices, collaboratives or businesses whose time frames are finite and ultimately terminal.