How Small Service Firms Win in a Declining Industry

Industry Life Cycle - Declining Industry

A declining industry is an industry with an absolute decline in unit sales over time. For example, data recovery services in the US are declining by 9% per year. Companies once backed up their data on tape drives and shipped them to offsite data-storage facilities. Today, cloud computing has largely replaced the need for this service. Therefore, the data recovery services industry is in decline.

Declining industries can, however, create pockets of opportunity for boutique professional service firms. How? When an industry is in decline, large service firms decide to exit the industry as the prospects for growth are no longer attractive. However, there can be professional service niches, or segments, of clients whereby the demand is still strong for the services. These clients get abandoned by the incumbent service provider and are thrust into the market looking for an alternative. Boutique service firms, positioned correctly, can meet these clients’ needs and satisfy this demand—even nabbing clients that are unattractive to large service providers—and thus, grow their firms.

New Opportunities Come in All Shapes and Sizes for Professional Service Niches

Declining industries present opportunities for boutique pro serv firms that are not available in growth industries. For instance, clients in declining industries are price insensitive. They realize there are fewer firms providing the service and worry more about securing continued service than the cost of the service.

In addition, clients in declining industries stick around longer than clients in growth industries. These clients often have high switching costs, such as regulations, that mandate the need for the service. The service provider supplying this type of client can enjoy long client tenure.

Lastly, there is less competition in declining industries, especially from larger firms. This can make it much easier to win this business, find your service market fit, and earn high client satisfaction in declining industries. With fewer options, clients tend to be easier to sell and serve.

For example, from the year 1900 to 2000, the legal profession grew by 793% when measured by the number of lawyers. Since 2000, the growth rate has only been 1.4%. During this same period, the population growth in the US has increased by approximately 50 million people. The growth of the legal sector has slowed considerably, and when compared to population trends, it is in decline. However, lawyers niched in mergers and acquisitions have seen excellent growth. Why? Merger and acquisition activity is up considerably, creating lots of opportunities for specialist law firms.

The Boutique Professional Services Firm Playbook in a Declining Industry

There is a specific playbook to run in declining industries for small service providers:

First, be sure to pick the correct declining industry.

Sometimes large firms do not recognize they are in a declining industry and continue to compete fiercely. At times, large firms cannot exit a declining industry because of high fixed costs, difficult-to-shed assets, debt tied to the business, and the business unit in the declining industry being strategic to another business unit. Existing firms with high exit barriers will not leave a declining industry, and therefore, the opportunity for the small niche player does not emerge. Find an industry where the exit barriers and fixed costs are low. If the same firms are continuing to dominate the industry, it likely isn’t the right declining industry for your firm.

Second, locate the pockets of remaining demand in the declining industry.

A declining industry is often broadly specified. Within it, there are multiple segments, some of which will remain attractive to niche service firms. This is often called a niche strategy, but it is effective in a declining market because niche segments of a declining market can still be thriving, or even growing, and a steady profit can be made.

Third, within these identified segments, understand which clients will be dropped by the firms leaving the industry.

What is unique or characteristic of these clients? Once you’ve determined the common features causing them to be dropped, tailor your sales and marketing approach to this niche. Approach these clients with a value proposition of continued uninterrupted service.

Fourth, do not make investments beyond what is required to deliver the service.

These clients are not looking for innovation; instead, they want the continued service they were denied by being dropped by the previous firm. Lastly, be sure to create switching costs with these new clients. This can come in the form of multi-year, non-cancelable contracts, and other forms of switching costs. This will provide the boutique professional service firm with the support needed to stay in the declining industry.

It’s easy to assume that a declining industry is too risky to operate in, but if you look beyond the exterior, you’ll find opportunities within professional service niches. With these tips, you’ll know how to identify opportunities in the market and provide continued service for loyal clients.

Want to discuss this topic, and others, with your peers? Considering joining our community at https://www.collective54.com/contact/.

Boutique professional service firms need to listen to their clients intentionally. One effective way to do that is a client advisory board. On this episode, Luke Johnson, CEO & Co-owner at Katalyst shares how he launched a client advisory board recently. Luke shares the early benefits, some mistakes to avoid, and how, exactly, he runs his.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated entirely to the needs of leaders of thriving boutique serve firms. My name’s Greg Alexander. I’m the founder and I’ll be your host today. On on this episode, we’re going to talk about the Client Advisory Board and why it’s an important tool for all of the professional services firms. And we’ve got a great role model with us today, someone who’s recently implemented this. He’s a collective 54 member. His name is Luke Johnson. Luke, great to see you. Please introduce yourself to the audience.

Luke Johnson [00:01:00] Hey, Greg, great to see you as well. As you said, I’ve been a member for I think almost a year and a half, and we put a client advisory board in place at the beginning of 2022. It’s been great. I am the CEO and one of the owners of Catalyst out of North Carolina.

Greg Alexander [00:01:24] And what does Catalyst do?

Luke Johnson [00:01:27] We are a boutique services firm, Greg, focusing in the technology space and we enable our clients to go faster, further and safer.

Greg Alexander [00:01:38] Okay. And I tell you, like a MSP, it’s outsourcer type firm. I get that. Okay. You are.

Luke Johnson [00:01:45] Exactly correct. All right. A lot of cybersecurity work for us as well in that space.

Greg Alexander [00:01:49] Okay, Awesome. Okay. Well, let’s start with the basics. So would you provide a definition of what a client advisory board is?

Luke Johnson [00:01:59] Sure. To us. It is a board that we lean on. It is currently comprised of all active clients, although I don’t think it would have to be ours today. It’s someone that we lean on to get advice around what we’re doing as a business and figuring out if that’s relevant to them as well as a board that we lean on to better understand the real everyday challenges in our clients. So I think the distinction I would draw very clearly is this is a board that serves us far more than it does the clients directly.

Greg Alexander [00:02:37] Yeah, fantastic. You know, we advise our members to stand up a client advisory board for a very basic reason, which is we want to be outward in in everything we do. We want to be listening to our clients as much as possible. And the knowledge we can gain from our clients is extensive. Affects everything from how you market and sell to the types of services that you bring out to the problems you go after is just a really great tool. Look, what I’d love to hear from you is that there was a time in your company’s history where you did not have a client advisory board and you recently installed one in 2022 at the time of this recording. It’s January of 23, so that’s a really fresh use case. So what what prompted the need?

Luke Johnson [00:03:18] I think it was a few things, Greg. We always struggle with enough very direct feedback from our clients. A lot of times we get a lot of indirect feedback and we’re doing our best to guess what is needed and we put it in place. So we were looking for a mechanism to get more direct feedback. I think also it was a way to draw closer to a specific group of clients, and most of the clients on this board are some of our largest and most meaningful. Not all, but but good, good mix up there. So it’s a way to get really close with those folks and improve the relationships.

Greg Alexander [00:03:58] Okay, so let’s talk about those folks. One of the challenges of standing up a client advisory board is to figure out who to invite to participate on the board. So how many clients do you have on it and what was your selection criteria?

Luke Johnson [00:04:14] So we we have seven active members today because we started. Yeah, thank you. We started a little smaller. I think I reached out to maybe nine or ten in the beginning and we started with six. I’ve asked the board if they felt like the number was right. If we could grow it a little bit, we decided we could grow it a little bit. So we added somebody else. And I’m not sure there was a great science around the criteria, but what I did is spend some time looking at years worth of business with a variety of clients, and I tried to make sure that I picked certainly some from the Top End. So folks that have done the most business with us. But I also wanted to accurately represent our client base as a whole. So I sort of looked to that bottom side as well, and maybe not somebody who’d only transacted business with us once, but smaller clients as well. So it’s it’s a real representative group of the clients we are dealing with every day. I also did interject a little bit of personality in there in the sense of some some clients I know really well, some I don’t know really well, But I tried to pick people that I thought would be great, interact with us and share really, really candid feedback.

Greg Alexander [00:05:31] Awesome. So obviously you had a good pitch because just about everybody you invited said yes, which is an indication you have great relationships with your clients, which is fantastic. But what was the pitch? I mean, why did they agree to be on your client advisory board?

Luke Johnson [00:05:45] I was really candid, Greg, with them and basically said, I feel a little selfish in asking, but this is for our benefit. I believe that that indirectly benefits you because if we tune our services to be in line with what you need, it should benefit you as well. But we want to pick your brain about what we’re doing. Is it the right thing? Is it in alignment with what you need? We want you to be candid with how we’re doing. If there’s things that we’re not doing well, we want you to call it out and we want to talk about it very directly. And another piece of it is we really pick their brain about competitors as well. And we like to know what are they doing that you like? And. And that may help us as well. So we kept it. We kept it pretty simple. And and that seemed to work well with everybody.

Greg Alexander [00:06:36] You know, it always this is a great confirmation point, because sometimes when I advise members to stand up a client advisory board, they say, well, none of my clients are going to want to be on it. And I said, You’d be surprised. People generally like to help, and it’s flattering when you get asked to be on a client advisory board. And this is a testament that people are willing to help. Obviously, you’re an important vendor for these clients and they’re probably saying to themselves, If I can help Luke’s firm improve the benefits, may I get higher quality service and new service offerings, etc.. So I would encourage all the listeners to not be bashful there. I think you’d be pleasantly surprised as to who agrees. All right. Let’s talk about the mechanics a little bit. So is it in-person, virtual? How often do you meet and what’s a typical agenda like?

Luke Johnson [00:07:20] You know, we we’ve kept that simple as well and tried to kind of roll with the times that we’re in. At one point in time, the geography that we dealt with was tighter than it is today. It’s, you know, we have clients all over the place now, so we do it in a in a format very similar to this. Zoom or a WebEx is is how we meet. We meet once per quarter. It is a one hour long meeting and it is a fast moving session. That is probably one of the greatest challenges, is naturally some people like to talk more than others. So you want to make sure you give everybody a chance to say what they need to say. Or maybe you need to prompt a few people along a bit. But we Greg, could sit in that session for 4 hours and it would be wonderful. But we’re being really respectful of these folks time. I mean, they’re really extremely busy people and we’re just grateful to have that one hour from them. So we try and put the agenda out there in advance. We follow the magic a bit on the call, so it’s not terribly structured, but at the same time we try to make sure everybody’s got a chance to give the input that we’re looking for from them.

Greg Alexander [00:08:33] You know, it’s an interesting tradeoff. So when I had my firm, we had a client advisory board, we did it in person, but it was only twice a year and it was an all day session. The benefit to that, obviously for us was great because we were really able to go deep. And as you mentioned, you could go on and on in these things because the insight is so fantastic. But the challenge we have with that is we add spotty attendance. Sometimes people last minute would cancel on us because it was a big ask. So the tradeoff here is if you do it like Luke is doing it, which is only an hour once a quarter, so you do it more often four times as opposed to two. But each session is shorter in length and it’s virtual instead of in person. You’re probably going to get better attendance. Do you have attendance problems? Is everybody showing up?

Luke Johnson [00:09:16] We have an excellent attendance, I think one session and let’s see, I think we’re four sessions deep now. In one session, somebody had a last minute emergency that they had to they had to cancel on. But outside of that, now we have we have great attendance.

Greg Alexander [00:09:32] Okay. And is there any prep work that happens beforehand or you just get on there and wait?

Luke Johnson [00:09:38] We know we do prep prep with the leadership team. We really try and figure out what is it that we want to take away from this and we try and put an agenda together. We’ll send them generally about two weeks in advance. Here’s the three things we’d love you to answer, you know, on this call. And we’re going to kind of go around the room and ask everybody to give us the input. We may have some dialog around it, and then we’ll invite them, you know, to participate in any other agenda items. Most of the time they don’t. I think people are really respectful and saying, Hey, this is your session. You tell us what you want from us, but we always invite that as well and we give them a couple reminders along the way. So when we get to the session, we’re ready to we’re ready to roll. Right.

Greg Alexander [00:10:24] And what do you do with the output? So you’re getting all this insight. Then you get off the call and you’re like, holy cow, you know, I just got the keys to the castle. What happens next?

Luke Johnson [00:10:34] Well, the leadership team and I have figured out we need to clear our calendars immediately following that meeting because there’s so much dialog that happens with us when we leave that session. It’s so great. So we usually try and combine all of our notes. All of us are taking notes throughout. It’s kind of depending on who’s talking and that sort of thing. So we combine them, we put them in a directory where we have them that we can reference back. Our sales leader specifically always takes those notes and shares them with his sales organization and obviously not in an incorrect way, but just more of a guy. As we just left seven companies, good brand representation of the cattle business as a whole. Here’s what’s going on with them. Here’s some of the trends that we see. So we try and get that out within our organization as well. We’re a in a shop, so generally speaking, it seems things that happen in that session usually lead to things that we put on our issues list as well. And a lot of time, the long, long term issues list. So we’re looking to solve or create some new offering based on something that came out of there. Yeah.

Greg Alexander [00:11:46] That’s a great follow up action. Many of our members are EOC members and sometimes they struggle with selecting the right rocks. Rocks are 90 day sprints recommended by EOC, but EOC is generic in nature, meaning it’s not focused on a single industry. So, you know, it gives you that is great tool in how to run your business, you know, and pick a rock as an example, a priority. But, you know, if you don’t know what those priorities are, can be really challenging and you can pick the wrong rocks and waste time. So something like a climate advisory board, you know, fantastic rocks, so to speak, reveal themselves. Directly from the clients. It’s a fantastic tool for that. You know, you mentioned your team. So who are you leading this or is it a group of people that are leading it from your team?

Luke Johnson [00:12:31] Yeah, I, I generally lead it. I have two leaders that participate in it with me. So I have our services leader and our sales leader both who join. And they’re they’re a big part, heavily interactive with all these clients as well. But in the boards a lot of times some topic that’ll come up, they’ll be more suited to address or talk to you in that session. So we all participate. But generally I’m the one that sets the agenda and I run that by them and get their input and sometimes they’ll disagree with what I say. You know, maybe the gentleman that leads sales is saying, Hey, we’re really seeing a lot of this right now. I’d love to talk to them about that. And so it’s a very interactive process with the team.

Greg Alexander [00:13:12] Okay. So it’s fairly new for you, but not so new. I think You said you ran. You’ve run four of these so far. So based on your early experiments. Any any landmines you want to tell members to avoid stepping on?

Luke Johnson [00:13:28] I think that. There’s a few. Maybe. Be diligent if you can. And picking the right folks. And again, I’m not sure that there’s a perfect science to that. But do you think about the interactions you have with these people and you really need people who are willing to engage. And that’s probably the most important thing. And they have to be fine with candor. It’s not a great place. You don’t want somebody to feel like they need to be polite in there. Just tell you what you’re doing. Well, not doing well, what the competition’s doing well, not doing well, etc.. I think the other thing is set expectations upfront that you may be a bit of a project manager in the session in that you’ve got to give everybody a chance to speak. So you’re not trying to be rude, but if somebody talks a little too much, you may cut them off just so someone else can can talk. So set those expectations upfront so no one gets their feelings hurt by accident if you have to cut somebody off.

Greg Alexander [00:14:30] Yeah, well, fantastic advice. Well, listen, we’re out of time, but thanks for making a contribution to the collective today. I’m really looking forward to the private member Q&A, which will happen on an upcoming Friday. But Luke, you’re a great member. You’re always contributing to the collective. So thanks for being here today.

Luke Johnson [00:14:48] Greg. Thanks for having me. Fun, fun topic to talk about. Great day.

Greg Alexander [00:14:52] Thank you. Very good. All right. I’m going to give audience members a couple of calls to action, if you will. So first, if you’re a member of Collective 54 and you’re inspired by Luke’s story and you want to get a client advisory board going yourself, we’ve got some tools for you. One is called the Service Offering Development Roadmap. And in that it talks about how to listen to clients. And one of the templates there is a client advisory board. And then also if you’re a member and you’re trying to find your successor, trying to replicate yourself and others and maybe remove the founder bottleneck, this is standing up. A client advisory board is a fantastic development exercise for high potential employees. So you might download a copy of the High potential Employee Development plan, which you can find on the portal as well. If you’re not a member of Collective 54, you should be if you’re listening to this. So how do you find out? Join me. So I go to collective 54 dot com and a couple of things there. You can either fill out a contact us form and talk to somebody about applying for membership or if you’re not ready to join and just want to further educate yourself. I recommend that you subscribe to collective 54 insights and you can find that it collective 54 insights dot com as well. Okay with that, thanks for listening and I look forward to our next session. Take care.

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Day: March 6, 2023