Episode 67: Three Critical Questions Before Any Change is Made

Drawing on the framework of economist Thomas Sowell to help business owners  (particularly those in professional services like dentistry) evaluate major decisions before acting on them.

I encourage and invite you to apply these three questions to any significant change you consider making as a discipline against impulsive, unscrutinized decision-making.

If you're a dentist and looking for more dental specific content, I have another podcast called, The Sovereign Dentist. I'd love to see you there. 

More can also be found on my YouTube channel. 

Transcript

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0:01

Welcome to The Sovereign Guide. I'm your host, Alistair MacDonald. Let's get started

Speaker 0:09

One of my personal, professional, and intellectual mentors, though at an arm's distance because we've never met, is the iconic economist Thomas Sowell. Thomas Sowell made a name for himself in the seventies and eighties bringing economic principles to policy and political decision-making, specifically policy design. Of course, you can imagine if you're in the world of politics, the last thing we need is accountability and logic. Uh, that of course is what DC specializes in, and all governmental bodies, is spending their lives successfully avoiding responsibility, accountability, measurable outcomes, and logic. Just look around and you'll recognize it. So needless to say, Thomas Sowell, with his acumen and his razor-like thinking, Was very much a pin to the myriad balloons of bad ideas put up by politicians all around the Beltway. Unfortunately, his wisdom never really structurally changed anything. Why would they? All people respond to incentive systems, and politicians don't care about logic, accountability, and results. Their primary currency in trade is, of course, popularity, and they will do, be, say, and promise anything just to stay popular. It is a delta zero world, if ever there was. With all of that said, we don't have to let Thomas Sowell's wisdom die in the Beltway of DC or in the hallowed halls of Congress. We can actually steal those and pull them into our lives, and I have and will continue to, with all of the great minds that I get to have had the privilege of either meeting and engaging with or learning from, even those that have long since passed. What has this got to do with us in our businesses? One of the most profound frameworks, tools, ways of thinking, or list of three specific questions of Thomas Sowell's was his questioning major initiatives, big changes. Now, I ask you to give this as much attention as you can, because no matter where you are in the world and what you're doing with your business and where you're at with it, you are always being asked to, by the marketplace, by partners, by the industry, and by your own appetites and ambitions, to bring in new initiatives, to create change, to roll out policy and protocol adjustments, and so forth. And we do this so much more than necessary because we never stop to measure the impact of the choices we're already making. What's worse is there is an entire industry of experts, gurus, and mentors that always want to sell us on their particular solution to your problem. And seduced as we are by the promise of this eternal, this eternal carrot dangling that there is a different world on the other side of the hill That I could be a part of where I'd be suitably ripped and good looking and appropriately beautiful, and my spouse would be the same. There is an entire industry of people trying to sell you on new ideas, new initiatives, and so forth, and I am not above it myself. I myself deliver a lot of tools and frameworks and upgraded efforts to those that I have the privilege of working with. But this framework should be used nonetheless, and I encourage my own clients, as I encourage you, to protect yourself. Consider this a vaccine against unnecessary or unqualified change. This change could be any number of things. Expanding your business, selling, or most importantly, bringing in a business partner. When we bring in a business partner, we typically do it for one of four reasons. Number one, we feel the burden of business ownership. All of the responsibilities in the professional channel rest on our shoulders, all of them. Not just that, but we have the other, the revenue side. In the case of, say, dentistry, we have the clinical side generating and producing revenue whilst we are living in two worlds, the revenue producing world and the revenue management and enhancement and infrastructure support of the professional domain running the business. That's typically the first reason that individuals will bring in a partner, thinking that by bringing in a partner, I will automatically be relieved of all of these burdens and brain damage, stresses, and fractures in my well-being of business ownership. Super tempting. Now, don't get me started on whether or not your need immediately qualifies somebody. In fact, you can tell by the sentence I don't think it does. The other reason that we would typically do this is we are looking at pent-up demand matching constrained supply. Our capacity needs to expand if we are planning on addressing an increased demand. Capacity and demand, always pairing them together. And the idea of bringing in another person allows us to increase our capacity to no longer be maybe the revenue producing bottleneck in the business. I need help running the business, but if someone else could increase production, revenue, and the clinical realm, for example, it will alleviate my stress. So the second reason we typically do this is opportunity, uh, embracing opportunity, leverage and expansion. The third is the idea, and it is just an idea, that bringing in a partner will dramatically reduce the risk in your life. They could take some chips off the table and maybe give them fifty percent or twenty percent, and that'll de-risk my life. Again, don't get me started on this one. The idea that an unqualified, inexperienced person should step in and take a twenty or thirty percent, uh, ownership of your entire life's work and nest egg as a de-risking Is of course preposterous on the face of it. Nonetheless, this is what they do. People do this all the time. I will te-- I'll de-risk my life, and I'll actually go from, you know, being a hundred percent owned in this practice and this business. I'll reduce the risk and give them thirty percent. What you've actually done is you've taken seventy percent of your net worth and reinvested it with a rookie. Anyway, this is the third reason people typically bring in partners. And the fourth is typically as reason for their, or expectations for a final exit. I'm gonna start with this person. We'll do this tranche-based or incrementally based buyout, and I will step back and finally get the full yield of my efforts and labors over the years and leave them to shepherd this legacy that I've built. These are the things that we're solving for: reduced stress and brain damage, entrepreneurial brain damage, increased capacity and growth leverage, reduction of risk or exit. These are typically the reasons that somebody considers taking someone from an associate to a partner. With this idea in mind, we step into the first of Thomas Sowell's three brutal questions. The first question, given that this is what we're trying to solve, one of these four things, that's what you're doing. Given whatever your channel is, whatever is true for your particular circumstance now or in the future, because I pause for a moment to remind you that all of, or certainly one of these four things will arise in your journey and in your experience. One of these four roads lies ahead of you. I mean, don't you know that one of these four roads lie ahead of you? So if you're a forward-thinking person and you're looking out and you can see this future coming at you, the very first question is really the most brutal. The question is this: If we're looking to solve this problem, pick risk reduction, let's say. The first question is, at what price? At what price will this solution solve it for me? At what price to me? Now, this is where the word price is deceptive because when I say price, what's the first thing you think? Dollars. How much money? What will this cost me financially? Well, if I'm bringing in a partner and giving them fifty percent of equity, that has a me-- an immediate, measurable, and permanent impact on my income. I am choosing to forego fifty percent of my income in perpetuity until and unless this business doubles, at which point I've just ended up right back where I was. Let's widen the aperture on the term price of Thomas Sowell's three questions. First one, at what price? These prices are myriad. The price of your energy levels, your emotional and mental well-being, putting fifty percent or thirty percent of your practice in the hands of somebody who has never spent a day in their life in that role. Somebody who, as I refer to them, has never signed a check on the front. At what price cognitively? What about reputationally? We've identified that whatever I choose to forego in equity, I will forego in income going forward. What about reputation? You know, that thing that you've spent twenty years building, nurturing, and cultivating, protecting. That can be destroyed in minutes. Haven't you noticed? It's not a day that goes by that we don't see a high-profile person who has unfortunately leveraged their reputation in a dangerous domain and ended up being completely betrayed by the outcome. Reputations take decades to build and just minutes to destroy. At what price? Financially, socially, familiarly, emotional and mental well-being, stress levels, reputation, and so on. What about time? What is the time price? How long is it gonna take for this associate to become a qualified partner? That's the first question. At what price? The second question is compared to what? Compared to what? Again, we've identified four specific problems that your conviction about bringing a partner in are going to solve. They're gonna reduce my brain damage. They're gonna increase my potential and capacity. They're going to de-risk my life, or they're going to represent my exit plan. Compared to what? This question is powerful in that it immediately has us realize that there are many, many ways to skin a cat. A thousand different ways that we might choose to otherwise solve one, two, or all of these challenges that we're facing. There are many, many of these things that can be solved with a paycheck or an incentive that is not giving away equity. As I say to my w-- uh, my clients and friends all the time, "Don't pay with seed what you can pay for with harvest." Compared to what? This question forces you to do harder thinking. We realize our instincts and our, uh, assumptions are industry instincts and indus-industry assumptions. From the very same industry in the case of dentistry, where approximately, and this is... I don't know how reliable this data is, but it's thrown around and bandied about enough that I can reference it. Between fifty to eighty percent of dentistry partnerships fail within five years. If that were true of skydiving or bungee jumping, do you think anyone would sign up? Those aren't pretty numbers. Let's take the lower end of that range. You stand a fifty/fifty chance of success. That's a coin toss. In the world of investing, we say if a strategy works fifty percent of the time, it doesn't work at all Compared to what? We need to get more creative, and we can. And you can splice these problems apart and ask yourself, "Can this be solved with a check or does it need to be solved with equity?" One final question from Thomas Sowell lays bare the ignorance and lazy thinking that brought us to the places that we're just about to destroy us. That question is this: On what evidence? Mm. On what evidence? That's damning. That's damning. On what evidence? The fifty to eighty percent of those that implode within five years, the evidence is not pretty. Now, it's worth putting a little disclaimer here. The reason that those numbers are so bad is because the design of partnerships and the selection and qualification of the partners themself is never done with the long game in mind. Most people do not have a solution for this. Very few will ever do the work to craft one that is future-proof. I have done that work. I have that solution. I have a philosophically driven game theory-oriented solution for all of the myriad possible outcomes and iterations of a partnership's future, its potential, and its potential demise accounted for. I have my own. I'm sure you have one. If you don't Let me know. I'll be happy to share mine. It only works whenever I do. Those are the questions: at what price, compared to what, and on what evidence? I've used partnerships as an example here because they are such a pitfall for so many. They're such a yawning gap of temptation that are, in fact, nothing but a hellacious experience for all too many. It's completely unnecessary. But I share this framework because, as you can see, this can be used and should and must be used with any initiative that you're taking on. Remember that to choose one thing is to not choose a thousand others. Every yes is a thousand nos. Every no is a thousand yeses. These questions force us to qualify the idea through three different filters and bring our most creative, most deliberate, and most disciplined, scrutinous thinking to the decisions to change anything. You'd have noticed most changes are irreparable. They are very hard to unwind. This is even more so the case when you are bringing in team members that you expect to make that change manifest in the world. Do you have any idea how sick to death your team is of hearing the words on a Monday morning after you've been away to a seminar that makes their stomach turn? From now on, we're doing dot, dot, dot. Guys, I went to the mountain this weekend, met the guru, and now we're gonna change everything. The worst day in your team's life is the day you come back from a business seminar. They are as tired of this unqualified, unfiltered, and unscrutinized change as you probably ought to be too. These are the questions: at what price, compared to what, and on what evidence? One last point about the last question. On what evidence means you have to check your data set. For example, considering partnership and looking at your friend who has a functional one. Functionality does not suggest success. Functionality suggests the average outcome, status quo. Why would you partner with somebody unless the sum of the parts would be worth more than the individual components? Individuals don't share the difficulties of their partnerships any more than they speak publicly about the misery in their marriages. It's just in bad taste, and they feel foolish for ending up where they are, and they will get a mountain of unqualified what you need to do's. What I'm saying is, even if you were to find somebody that has a functionally-- apparently functional partnership, we still never quite know the underbelly. The same is true of all changes that have been bought As consumable goods, here's just the thing. Use this twenty-step process to change dot, dot, dot in your practice. Do you ever really know the results that they create? The hyperbole of the sales machine typically overwhelms our investigation and due diligence into the actual net outcomes. Haven't you noticed? I know I am just as susceptible to this as you are. What I'm getting at is evidence of one is not evidence at all. You need a lot-- larger data set. I encourage you to look outside of your industry, which is what's made the biggest difference for me in all my experience. Seven different businesses in five different industries over thirty-two years, in my case, with nine partners over that time. The framework is for your use in all domains. Take it, run with it. It will only let you down when you don't honestly assess yourself with it. Cheers.

Speaker 2 17:12

That's it for this episode. Thanks for being here. Hey, there's only two things that you have in your life, your time and your attention. That you've given both to me for these few minutes of today means

17:22

everything. Cheers.