Art & Science Archive
We recently asked a top consultant: “How often does the “dark horse” — i.e., the unknown contender — actually win the business?”
His answer, “surprisingly often,” holds hope for dark horses everywhere — as well as vital strategic lessons for big-name contenders. Let’s take a look at some of the reasons why dark horses may have a competitive edge:
More pressure on the favorite. Big-name firms confront the pressure of high expectations. For the favorite, it’s often “theirs to lose.”
The ability to exceed expectations. Dark horse contenders have the ability to perform above expectations, precisely because there are no expectations. When the audience merely expects competence, extraordinary talent stands out. The known quantity struggles with the opposite phenomenon: any shortfall in excellence is more noticeable.
The natural human desire for something new. By virtue of the fact that they are unknown, dark horse managers may be accorded a higher level of interest and attention. Astute consultants capitalize on this phenomenon by bringing a few new managers to the table, as opposed to constantly presenting their clients with the same-old, same-old menu of options.
The market’s appetite for “developing” or “emerging” managers. During the past decade, plan sponsors have shown a rising interest in managers identified as “developing” or “emerging” — entrepreneurial, employee-owned firms representing new talent and innovative investment strategies. In his book, Pioneering Portfolio Management, Yale University Chief Investment Officer David F. Swensen writes, “Attractive investment management organizations encourage decisions directed toward creating investment returns, not toward generating fee income for the manager. Such principal-oriented advisers tend to be small, entrepreneurial and independent.”
The perception that “specialist” managers represent greater expertise. Small, entrepreneurial firms tend to specialize in one asset class, particularly in the earliest phases of their existence. Sometimes, specialist firms are perceived as offering greater expertise. In reality, many mainstream firms consist of specialist teams, each dedicated to one asset class yet supported by the immense resources of a global firm. But the specialist firm still may be accorded greater credibility. In his book, Marketing Institutional Money Management Services, Philip Halpern, former Chief Investment Officer of the University of Chicago, captures this bias toward specialization as follows: “…there is limited evidence suggesting that the best firm in U.S. equity markets is also the best in international equities or international bonds. Many of the best money managers are individualistic and entrepreneurial, which makes them resistant to working in large organizations.”
The power of storytelling. In this same book, Mr. Halpern recalls a wonderful story about a dark horse win based on the simple power of storytelling:
“I have a classic story that occurred at the Washington State Investment Board,” writes Mr. Halpern, who also served as CIO of the WSIB from 1992-1996. “In one search, staff was prepared to bring in six candidates with the idea that two would be hired. The same six emerged at the top of the list for all of the individuals on the evaluation team. Unfortunately, at the last minute, one was forced to be eliminated because of major organizational upheaval. Rather than bring in only five, the team decided to go back to the pool and pick one more candidate (‘Toulouse Lautrec Associates’).*
Both Mr. Toulouse, who was in his sixties, and Mr. Lautrec, who was in his fifties, came to the Committee. Mr. Toulouse was propped up by his cane, but had a liveliness and a presence that was captivating. Mr. Lautrec provided the serious pitch and Mr. Toulouse the seasoned commentary. After spending a perfunctory amount of time discussing the usual oratory requirements, they proceeded to illustrate their experience with personal tales of investment lore.
They captured the imagination of the Committee members. Their approach was brilliant. One of the Committee members wanted to give them the whole amount. When convinced that this was not such a good idea, the member insisted that the action resolution state the order of selection — with Toulouse Lautrec as the clear number one.”
By capturing the imagination, the dark horse contender took the top spot! This story dramatizes the vital role of the final presentation. The RFP response is important. All aspects of the firm’s marketing communications program are critical. But what really drives the hiring decision is the in-person presentation. The final decision often is based on what is seen and heard on that day.
Even when a brilliant, Toulouse Lautrec-style presentation does not win the business, there are potential long-term rewards for the manager who shows up and tells a powerful story. There are situations where, like it or not, you may be invited to present merely to round out the roster of competitors. Investment firms often share with us their concern that they are being included in a final merely as “cannon fodder” or “filler.” The silver lining is that, if the “filler” manager presents well, the consultant is far more likely to put that manager forward in future searches. A firm we know, who started as a dark horse (zero assets under management) succeeded in winning several significant mandates based on this very scenario. An impressed consultant continued to put this company in search after search when the firm performed well in their debut role as “cannon fodder.”
What strategic lessons does the dark horse phenomenon hold for the big-name firms who enter the race as favorites? Just this: beware complacency. Maintain the hunger and energy of a dark horse firm for whom every potential piece of business is vital.
Never assume an edge in a finals presentation with an unknown firm. In many important ways, the big-name firm has to compete even harder: By demonstrating greater conviction, by forging a connection with the audience through superior customization and by showing — with fresh, accessible examples — how a large, well-resourced team generates decisions that consistently enhance returns.
The lesson for dark horses and marquee names is to treat every presentation as the honor it is. In some industries, alas, business is awarded mainly based on past relationships without benefit of a formal search process. Viewed from this perspective, every invitation to compete formally is a grand opportunity, for Seabiscuits and War Admirals alike.
* Throughout the book, Mr. Halpern protects the identity of the real-life firms he describes by naming them after famous artists.