`It wouldn't be fun working in someone else's culture'

John Kay's London Economics is worth pounds 7m and has carved a niche for itself as a large private-sector economics consultancy. Here, he describes how he moved from academia into the world of commerce
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The Independent Online
There was an awful clanging coming from the lifts in the office block on Marylebone Lane when I first went to view it. There was someone stuck inside, shouting to be released. I was searching for premises for our new business, London Economics, and perhaps I should have looked elsewhere. We took it anyway. We were on the first floor so it wasn't so bad.

Perhaps it would be more accurate to say we got in on the ground floor. We were the first in Britain to devote ourselves to providing economic research to companies. We were essentially setting up not just a new business, but a new kind of business.

At the same time we had a fair amount of experience. I had taught economics in Oxford in the 1970s, and from 1979 to 1986 I ran the Institute for Fiscal Studies. When I went there it was basically just a broking house, relying on academics at other institutions to do the actual research. I had been brought in to develop its in-house capabilities, with Nick Morris as my deputy.

In that situation one learns to build up a small business. It gave Nick and I the confidence to believe we could do something like it commercially. We had a suspicion that privatisation and regulation would be a source of demand, partly because we had already been approached at the IFS by several companies. We had turned them down because the institute was concerned with public not commercial interests.

Our first idea was to ally ourselves with one of the big accounting firms or one of the commercial economic research companies in America. I remember having a totally non-interacting conversation with one group. They wanted to tell me how intellectually serious consulting was and I wanted to be told how much money I'd make.

Eventually we decided that we would be making profits for them without reducing our risks, so we thought we would be better off on our own. We also didn't think it would be fun working in someone else's culture. That suited me because I've never had a boss and I've never really seen the point of hierarchy.

Raising capital did not prove to be a problem. I had to put up my house, of course, but the real question was whether we would be able to pay back pounds 50,000, and our bankers didn't seem to have any major doubts. I was less worried by the financial risk, which I saw as being fairly well monitored, than by the risk to reputation and self esteem if one tried and failed.

What did prove to be a problem was recruiting good professional staff, as the pool from which one can draw is quite limited. During the six months before we launched we winnowed our pile of applications down to a short list of 12, and hoped to hire three, but we only managed to persuade one to join us. It wasn't clear to them what the job was - either what they would be doing or how much job security they would have. Our growth is still constrained by our capacity to get good people.

The first thought we had about how we would market the company was to write to everyone we knew and tell them we were in business. But I figured I'd spend the next six months going to lunch and not pick up much business at the end of it. So we opted instead for a more low-key style, and we still don't market aggressively.

Our biggest problems began after four or five years. By that time we had between 30 and 40 staff and had reached the point where one or two people could no longer know about and control everything that was going on. We didn't realise our staff were developing a university ethos, where the client was someone who got in the way of the work. Two of the projects went badly wrong and the clients weren't happy. And it meant we were expending far more resources on projects than we had budgeted for. We began to notice there wasn't enough money in the bank. One couldn't have said one didn't know it was going on, one just didn't realise how bad it was.

Those difficulties came to a head when a client complained that his report was two weeks late, and that he had not been able to get in touch with our researcher. We had to change the company's culture. We let one or two people go, and set up new systems to keep track of projects. After that it was a matter of constantly telling our people what was expected of them. Cultures tend to be self-reinforcing.

The general lesson I've learned is that the skills you need to run an established business are significantly different from the ones you need to set one up. You need an enthusiastic amateurism in the early stages, but you can't afford that when you grow bigger.