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Posted: July 7, 2014
Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 


 
 

Not-So-Mad Men

Bottom LineWhen a key executive with important ties to a client leaves a firm, the company can suffer. To offset the loss of key personnel, companies must minimize competition among their departments and ensure that they have a broad relationship with customers.

In 2003, British advertising pioneer Frank Lowe left the world-renowned Interpublic Group to found his own agency. He brought his former company’s £50 million Tesco account along with him. For any firm relying on client relationships, this scenario represents the ultimate nightmare. Indeed, horror stories abound of departing executives who have used their personal connections to poach valuable clients from their former companies.

When a firm’s links to a client rest primarily with one executive, the firm is in danger of losing that client if the relationship holder leaves. Research has shown that these broken relationships can damage the subsequent performance of the jilted company, especially when departing executives take clients to a competitor.

As a result, conventional wisdom suggests that firms should establish as many bonds as possible with their clients to guard against the damaging effects of any one executive’s departure. In the fields of accounting, advertising, and consulting, for example, firms often encourage managers from different departments to develop their own unique relationships with client partners.

But what really happens when key executives walk away? A new study finds that companies with multiple ties to their clients, scattered throughout the organizational hierarchy, are indeed less likely to lose their customers—in general. Crucially, however, this premise doesn’t hold when certain executives leave. When a high-powered manager with important ties departs, only firms that can boast cross-organizational relationships with their clients, largely free of internal strife between divisions, withstand the blow.

Indeed, the fewer the squabbles between a company’s units, the more likely the firm is to hold on to an account despite an executive’s departure, the author found. When a trusted executive leaves, a company must come together to keep a client on board by minimizing internal conflicts, presenting a united front, and reinforcing the importance of firm-level bonds over individual relationships. By distributing responsibility for the client relationship among several organizational units from the beginning, a company reduces the potential impact of any executive’s eventual departure.

The fewer the squabbles between units, the more likely it is that a firm can carry an account.

The author analyzed a sample of client relationships among advertising agencies in North America and Europe during a recent three-year span. Using the most comprehensive global database of advertising firms—which includes information about their annual billings, client relationships, location, managerial characteristics, and size—the author studied more than 2,300 links between executives and their clients.

To eliminate firms that had lost clients because of customer dissatisfaction, the author’s analysis focused on advertising firms that had gone through a merger, the sort of shake-up that emphasizes network links and reduces the impact of ordinary conflicts that lead to dissolutions. The author also controlled for clients’ size and diversification, along with the number of workers an agency employed, the state of its competition, and its recent performance record—as measured by the number of high-profile Clio awards won by the advertising firm leading up to the study period.

The advertising industry is particularly relevant here. Like other companies that specialize in professional services, ad agencies inherently rely on their executives’ creativity, market expertise, and ability to coax the best out of their subordinates—skills that can’t be readily codified or replicated, but that are nurtured by long-term exchanges of knowledge between an agency and its client.

And these findings should extend far beyond the advertising industry, to the many fields that are fueled by personal connections: consulting, investment banking, even hospital networks. The more that firms can extend and complicate their ties to particular clients, while encouraging internal cooperation, the more they can protect themselves from vulnerability should executives make the choice to leave.

The findings also shed light on the value of service-oriented firms operating underneath the umbrella of a holding company. When one large firm can spread its experiences, contacts, and insight among several companies, those smaller units can build relationships with clients that will persist despite the turnover of any one executive, in turn enhancing the company’s stability.


Source: Executive Departures without Client Losses: The Role of Multiplex Ties in Exchange Partner Retention, by Michelle Rogan (INSEAD), Academy of Management Journal, Apr. 2014, vol. 57, no. 2

 

 

 
 
 
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