Small is Beautiful

Small is in. Why? There's a growing belief that small institutions result in more sustainable relationships. They result in more personal relationships. They result in more committed relationships.

According to the NYT, this now applies to banks. Why? Small banks can't take the same risks as big banks. Not because of different regulations. Not because they are less innovative. But because their incentive structure is different. Unlike big business, they have an incentive not to embarass themselves in the eyes of their peers. As the NYT article states:

Forget “too big to fail.” These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors.

Small companies also seem to have a leg up in this new economy, according to Harvard Business Review blogger Peter Bregman.

The gap of confidence between small companies and big ones is growing. We used to rely on the security of big companies. That's why we worked for them. And hired them. And put our money in them.

But with the virtual collapse of AIG, Lehman, Citibank, GM, Chrysler, and many more — now even GE is in trouble — all that's changed. Now it's a risk to do business with the big ones.

We simply don't trust companies anymore. We trust people. And in big companies, it's hard to even find a person to trust as we scream "operator" into our telephones only to get transferred to another menu whose options have changed.

That gives small companies a huge advantage.

Small companies can also focus on niches where they have real expertise and can provide real value. As individuals increasingly divide into niches of interest as opposed to feeling like cogs in a large mass market, these companies can satisfy a real need:

There are hundreds of thousands of [small] businesses like John's. Small companies that aren't making millions but provide a good living for the people who work in them. Niche companies whose owners are trying to build sustainable businesses they love rather than fast-growing companies they can flip. They have no intention of retiring. They like working in them. And their clients know that. Which is why they have a loyal customer base willing to invest in the relationship.

Big investment banks are burning — but lots of small boutique firms, each with ten to twelve people, are opening up. And they're doing well. They've gone back to the fundamentals. Finding a niche in which they have value to add and deals in which they are experts. And then sitting across from other people in the deal, building the relationship, making reasonable commitments, and following through.

Small companies with low overhead, reliable owners, a small number of committed employees, personal client relationships, and sustainable business models that drive a reasonable profit are the great opportunity of our time.

I've noticed this myself in the law firm industry. I don't hear of any big law firms that are hiring at a junior level, but there are some opportunities in small law firms. It seems that clients are no longer willing to pay huge rates for an associate who doesn't know their business background, hasn't had years of training, and doesn't have a personal relationship with the company. When associates are moving in and out every year, the wheel needs to be reinvented over and over again.

Of course, not all big businesses or law firms are going out of business. There is something to be said for economies of scale, being able to staff ten smart associates on a single case, or having a massive R & D budget. But I think that the writers above are correct in sensing that the flip culture of the past few years may cede to a more sustainable, more personal, more authentic economy in the wake of the economic crisis.