Geographic distribution of consulting firms in the US.
752,254 firms spread across 50 states.
Why do you care? Firms follow clients and talent. When looking for prospects and employees be sure to cover your markets. I suspect this will change in the years to come given Covid’s impact on how work gets done. But, in the mean time……
Most founders in professional services are first-time founders. This means most founders are immature in their roles. They have the gumption but lack the wisdom, and the impact of this immaturity is making expensive and, at times, embarrassing mistakes. In contrast, a serial entrepreneur is a mature founder that has started multiple firms and makes fewer mistakes, and the ones they do make are less costly and humiliating. Therefore, the faster a first-time founder can go from a state of immaturity to a state of maturity, the better off they are.In my experience, there is one action a founder can take that moves them from a first-time immature founder to a seasoned mature founder in a flash. This action is the life-cycle behavior modification.
Firms, like living creatures, have life cycles — they are born, grow, age, and die. A founder must adjust her behavior to reflect the lifecycle stage of the firm. Yet, the immature founder does not do so, and this failure to adjust their behavior causes the firm to underperform. Mature founders, on the other hand, modify their behavior based on the stage of the firm. And as a result, the firm flourishes.
It is not easy for a founder to adjust their behavior. Human beings resist change, and founders are no exception.
Let’s start with the first four life cycle stages of a boutique professional service firm and break them down:
In this stage, the firm is not yet born. The founder is only “flirting” with the idea. The key here is that the future founder must test out the idea to see if it will hold water or needs to go back to the drawing board.
Immature Founder Behavior: An immature founder in the flirting stage is unrealistic. He is focused on hitting it big and does not bother to test the value proposition. The risk is large, and the founder is only partially committed. Often, he loses control of the firm in this early stage by prematurely raising capital and diluting their ownership stake.
Mature Founder Behavior: A mature founder in the flirting stage is grounded in reality. He realizes that all he has are assumptions at this stage. He goes about testing each assumption. At this stage, their commitment is commensurate to the risk, often remaining employed full-time elsewhere. He also maintains 100% control of the firm and doesn’t let emotion fill his head with wild dreams.
In this stage, the idea is real, and the founder makes the leap and commits to the idea. The founder must be wholly committed to the concept of the firm for success to be possible.
Immature Founder Behavior: An immature founder in the conception stage starts making lots of promises to co-founders, the first group of employees and the early clients. She needs others to commit to her in order to get the firm launched. In her eagerness, she overpromises and over-commits.
Mature Founder Behavior: A mature founder in the conception stage does not make promises she cannot keep. Yes, she needs others to commit to the vision, but she is realistic with everyone. They would rather potential co-founders, employees and clients say no than sell them a grandiose vision that will never become real.
In this stage, the firm is launched. Founders are trying to build commitment. They need to recruit others, such as clients and employees, that will support the new idea. This is how many marginal employees and clients make it into the firm.
Immature Founder Behavior: An immature founder, flush with early funding, launches with far too many initiatives. This can mean pursuing big dreams and lots of ideas. Often the prospects do not become paying clients, or if they do, they are small and too few in quantity. This stage gets prolonged, funding runs out, the founder becomes exhausted, his commitment wavers, and he often quits.
Mature Founder Behavior: A mature founder in the birth stage focuses on sales, sales, and sales. He needs cash and generates it consistently, and he understands this is not the time for new ideas. Thinking gets replaced with doing. He needs paying clients. The relentless focus on generating paying clients and cash flow results in success. The success fills the founder with confidence and, as a consequence, intensifies his commitment. The founder becomes willing to die for the cause, so to speak.
In this stage, the firm is working and growing rapidly. Sales are up, and the firm achieves breakeven and starts to generate cash flow. The firm is not just surviving but flourishing.
Immature Founder Behavior: An immature founder in this stage gets arrogant. She starts to pursue too many opportunities, has a hard time prioritizing, and ends up simply reacting to the environment. The founder is basically the entire firm, up to this point. Eventually, they make a major mistake causing a big loss, client defection, and/or the loss of key employees. The root cause of this major mistake is usually premature delegation. The founder tries to build a team and delegate authority, but she picks the wrong team. The firm is not yet ready for this and starts to underperform. The arrogant founder believes she is the only person capable of making the firm successful and jumps back in to save the day. Yet, they do not realize that they just got trapped in a lifestyle business by building a firm dependent on the founder and cannot thrive without her.
Mature Founder Behavior: A mature founder stays humble. She understands that early success can be temporary and fickle, and she never forgets the struggle in the previous stages. Instead of reacting to the environment, the mature founder plans ahead for it. Rather than focusing on what else to do, she learns what not to do. The mature founder anticipates the future lifecycle stages and begins to build a team slowly. This begins with identifying high-potential employees and giving them incremental tasks to complete. She implements a succession planning process that prevents the firm from the whiplash caused by immature founders. The mature founder recognizes the firm is not mature enough to run without her yet. Rather than a dramatic exit from the day-to-day, she incrementally distances herself from the daily grind, allowing the team to slowly take control.
Thus far, I’ve primarily given you the description of the stages and the characteristics of a founder’s behavior in each stage. My hope in doing so is that you see yourself in these descriptions and adjust accordingly. If you see yourself in the birth stage, then you now know that you must focus on sales. The financial success during this stage is what will power your firm into the childhood stage, where you’ll be able to begin operating for short stints without the founder and continue cultivating skills.
Additionally, it is imperative that you don’t skip any stages. If you pass over the flirtation stage, you haven’t properly played with the idea enough, and the firm might tank before it gets to the birth stage. You’re back to the drawing board and disheartened.
If you don’t see yourself in these beginning stages, you might have an almost completely mature firm, but even those aren’t without their own stages and trials. In the next installment of The Maturing Founder, I will explore the later stages that focus on scaling your firm for the potential exit — what an immature founder will stumble over and what a mature founder will have the wisdom to avoid.
Note: blog part 1 of 2
It is that time of the year again- the annual price increase.
Here are the forecasted price increases in pro serv by segment.
If you are off these benchmarks, it might be time for a new pricing strategy, and maybe our community can help you.
Scalability is the highly sought-after holy grail of business, but not every professional services firm has scalability in its future. Understanding what scalability means for your firm is an important first step, and gaining a playbook of strategies for how to scale a professional services business will equip you to refocus your portfolio on growth.
Why and how does a service business scale?
A professional services firm is scalable if the cost of sales declines as a client buys additional services. The cost of selling two services together is less than the cost of selling them separately. The root cause of this benefit is the ability to share the sales resource across both sales. One business development person executes one sales campaign resulting in two sales.
For example, a cybersecurity service provider needs to develop a deep understanding of a client’s network. Because the activity “understanding a client’s network” can be shared in multiple sales campaigns, it is more economical to sell multiple services together. One business development person can sell remote access and Wi-Fi security rather than having two salespeople run two different sales campaigns.
On the other hand, a service is scalable if the cost of delivering it decreases as more people benefit from it. So when we imagine scaling a professional services business, the cost of delivering a portfolio of services must decline as clients buy additional services from the firm.
A management consulting firm that helps a client size their target market offers a highly scalable service. The labor cost to deliver the first market sizing is high; however, the labor cost increases only marginally when the client wants a quarterly update. The incremental cost of refreshing that market data is relatively low. Therefore, the market sizing service provided by a management consulting firm is a scalable service.
Lead generation services are another great example of a scalable service, even though they often require significant up-front costs in the campaign design process. The first few leads generated are expensive, but as the number of leads generated increases, the cost per lead declines. The upfront costs are amortized across a greater pool of leads, so lead-generation services provided by marketing agencies then become highly scalable services.
Beyond the initial challenge of understanding what scalability means for professional services firms — and for yours, in particular — other variables can intrude on a firm’s ability to scale successfully.
Some firms simply aren’t suited to scale. A business’s scaling strategy is sometimes only as powerful as the firm’s natural inclination to scale. Focus your professional services on proprietary, client-specific knowledge, and you will only be able to scale so far because increasing the volume only increases the cost.
An architecture firm is one such example, as they tend to not be scalable. Architectural projects depend on a unique relationship between practitioner and client — one-off assignments, plus crafting plans and designs that wouldn’t be replicable anywhere else. The knowledge and experience required to deliver these projects often belong to a brilliant, senior, and expensive architect. One brain. Thus, why 264,000 architecture firms exist in the US, and most are sole proprietorships and unscalable.
Complexity is another hurdle to scalability for professional services firms. Offering multiple services increases administration needs and can bloat overhead costs. So while a broad portfolio of services is good, if these services are each customized, growth will move linearly rather than exponentially. A custom software development firm trying to scale via geographic expansion can struggle to do so. This firm will grow as 200 billable engineers produce more revenue than 100 billable engineers. However, the growth is linear, not exponential. Scaling suggests costs increase just as quickly as revenue does.
Remembering this one crucial fact will be integral in leveraging your firm’s ability to scale: Services scale when the cost to deliver decreases as volume increases. By understanding this core truth of scalability, you can start to craft your services and your firm as a whole to refocus on more scalable strategies.
Help your clients buy additional services from you — but without your firm spending the equivalent in extra administration, materials, and time. This could mean designing services with more upfront costs but with lower ongoing overheads. Digital, repeatable services are also great scale boosters. Your service lines should be able to compound to be necessary for your client’s needs while decreasing the overall cost of the work to deliver those services.
For experienced insights from Cynthia Klint, a Collective 54 member and CEO at BRC, take a listen to our podcast.
Scalable professional services firms choose broad service portfolios, enabling demand for one service to increase the demand for others. With a portfolio of services that clients can pick and mix, you can design and reform your firm to focus on scaling, but time is money. If your firm is going to be scalable, it needs to take less time for it to do more. It needn’t be drastic.
For example, if your client purchased one of your firm’s services and now is adding on another service, you don’t want your employees to have to spend just as much time as they did on the original service. But for your growth to not be linear, your compounding services will need to take less time each time a client adds a service.
How to scale your professional services business? Founders must design their services and their firms with scale in mind, ideally from the beginning. A founder who designs for scale is one who has mastered their craft. A founder who fails to design for scale is one who needs to grow in their role.
Looking for more hands-on support from an experienced community? Reach out to Collective 54 now to schedule a call.
Macaroni and cheese. Spaghetti and meatballs. Those pairings exemplify the dynamic relationship between EOS (“Entrepreneurial Operating System”) and Collective 54. Yet some founders of boutique professional services firms remain unsure about how to use these complementary tools to grow, scale, and exit their firms one day.
This confusion tends to stem from a common misconception that Entrepreneurial Operating System and Collective 54 are two similar systems, therefore necessitating that leaders must choose one or the other. On the contrary, EOS operates as a management system, and Collective 54 drives the content that goes into that system. Both can operate separately, but together, they produce more powerful results — EOS plus Collective 54 is 1 + 1 = 3.
A prime example of how these tools work in tandem is the scorecard of measurable KPIs advocated by EOS. Many founders aren’t sure which metrics to choose when running a professional services firm, and once they do choose the right metrics, they are not sure what the goals should be. This makes populating the EOS scorecard difficult.
Collective 54 is designed to help founders build the right industry-specific scorecards for their needs. For instance, most professional services firms need to monitor utilization rates, bill rates, and project profitability. Collective 54 works with members to identify the valuable data variables that matter most to them. That way, they can customize their scorecard data in EOS — making their EOS implementation more relevant to them.
Want another example? Take the Entrepreneurial Operating System Meeting Pulse recommendation. EOS suggests all firms set up weekly Level 10 meetings, a monthly Same Page meeting, a quarterly meeting, and an annual meeting. However, meetings in professional services are expensive and non-billable time. A one-day quarterly meeting with five high performers can cost upwards of $12,000. That’s too much for a boutique professional services firm.
Consequently, what happens during those meetings must be valuable. Collective 54 ensures that founders design their meetings to be robust and productive. EOS’s Meeting Pulse becomes much more effective when customized by Collective 54.
With Collective 54’s guidance, leaders can structure their meetings with discipline and confidence. This enables them to ensure that every meeting is fruitful. No team should ever leave their EOS quarterly meetings only to realize they didn’t choose the right Rocks.
Advice for Making the Most of EOS and Collective 54
If your firm has been working independently with the EOS framework, you can get so much more out of your experiences by augmenting Entrepreneurial Operating System with Collective 54. Here are some tips for maximizing the potential of each program.
EOS and Collective 54: A Member Perspective
Jing Johnson, a member of Collective 54, summarized her experience utilizing both the EOS framework and the Collective 54 community. “EOS and Collective 54 have advanced my business in entirely different ways, but they complement each other. EOS is a practical framework to prioritize our goals and key objectives. Before implementing the EOS system, we found tracking and implementing all our plans challenging due to the need for more ownership and accountability. EOS helps us to be more focused on both short-term and long-term goals.
“One recent example is our new website; our VP of Operations was assigned to this goal during our first quarterly EOS leadership meeting. She is responsible for setting the objectives and timelines and breaking those down into individual tasks. In addition, she manages the process and coordinates among all stakeholders, such as the marketing agency, the copywriter, and our team members. She also reports to our team weekly to keep everyone on track and informed. As a result, this process runs much more efficiently and smoothly than our previous website design efforts before implementing EOS.
“Being part of the Collective 54 community has significantly expanded my entrepreneurial vision and business acumen. Greg and many Collective 54 members have higher expertise and insights than most of my business network. I’m constantly inspired and challenged by what I learn through the weekly sessions and discussions. In the Collective 54 community, I’ve surrounded myself with people who are more intelligent, more insightful, and have achieved a higher level of success than me. As a result, I’m more confident and strategic in growing and scaling my business.
“One of many things I learned from Collective 54 is to tie my company’s growth strategy with investment in our sales force. I discussed this opportunity with Collective 54 Founder Greg Alexander and the other members. It led to my decision to hire a fractional sales manager to help us to grow and scale. After joining Collective 54, I became more daring and confident in tackling strategic decisions like this. I contribute this to the role models I met in the community and the successful implementations of their creative methodologies and solutions.”
Two Are Better Than One When Building Business Frameworks
The bottom line is that EOS and Collective 54 are complimentary tools, not competitors. Our team loves and endorses EOS; we wish all members used it, to be honest! So if you’ve hesitated to bring both into your firm’s ecosystem, you don’t have to be reluctant anymore. Try both and discover how to construct a business growth framework that’s as satisfying as… well… a peanut butter and jelly sandwich.
Boutique professional service firms are living on the edge. The % of revenue coming from the top 5 clients is way too high. If 1-2 clients stop buying the firm will fall apart. These firms are one bad phone call away from a crisis.
Founders know this, are trying to fix it, but cannot seem to pull it off. Very little change from first half 22 to second half 22.
Bill rates in boutique professional service firms in 2022.
Across all sectors in NAICS 54 in North America.
Founder market fit is the relationship between the founder of a firm and the environment in which that firm operates. A good founder market fit means that the founder has a set of qualities, skills, and experiences that they are uniquely able to offer for the problems and opportunities of their chosen market.
The question it answers for clients is: Why you? Why should I choose you to deliver this service to me?
The quality of the founder market fit affects scaling a professional services firm. Professional services are considered “credence goods” — a credence good cannot be tested ahead of a sale, so prospects must take a leap of faith when purchasing them. These goods rely much more on clients trusting the service provider. Uniquely suiting your market matters because it helps you secure clients’ time and attention. Professional services firms rarely compete with other professional services firms. Their market competitiveness is for the client’s notice. So, founders who have a tight fit with the market can more easily convince clients to take that leap.
Founder market fit, then, encourages faster and easier scaling, especially for a boutique firm. Boutique service firms are small and their time is precious. They will face so many barriers to their firm’s growth, so they can’t afford to waste their limited resources on growth efforts that fall flat. They’re also people-based businesses. They can’t hide behind a beautiful object; the founder represents the business as a product would, and a founder with a clear market fit is a far more convincing representative.
There are nine main attributes of founder market fit. Screen your firm against these attributes to calculate if the founder and the market are a fit for your firm.
1. Client segment expertise. Does the founder know who comprises this market and do they understand how to form long-lasting relationships with these segments?
2. Proposed value. Is the founder offering something unique to the market, a service that will encourage it to turn to him or her for help?
3. Channel understanding. Does the founder have an affinity for the communication and distribution channels the market uses to educate themselves and buy services?
4. Sales. Is the founder acquiring clients in this market and do they know how to turn leads into clients?
5. Revenue streams. Does the founder understand the revenue model for this particular market? Can she develop revenue streams successfully, balance them with expenses, and earn a profit?
6. Relevant talent. Can the founder build and support a team whose skills are perfectly suited to serve this market?
7. Capital. Can the founder bootstrap herself to profitability to win in this market? If not, can she raise the needed capital to fund expansion?
8. Service delivery. Does the founder have confidence in the level of service they’re able to deliver to meet the needs of market members and earn repeat business?
9. Partnerships. Can the founder form the kind of key partnerships needed to win in this market? Referral generation and word of mouth is the key to market success.
One relevant example is Collective 54 member Ali Schwanke, founder of Simple Strat. Schwanke got her firm to dominate the YouTube search results for the term “Hubspot,” which is a very competitive term to go for. Now, firms who want to dominate search results on YouTube for their niche turn to her for help in this area. With these results, Schwanke showed that she understands how to build relevant talent, show her channel understanding, and provide her firm’s services with confidence (just to name a few).
Once founder market fit is accomplished, the daily challenges of business and the mission of small firm growth become easier.
If you haven’t reached your ideal founder market fit or are looking for scalable business strategies, check out my book “The Boutique” or listen to our podcast for real advice and stories from Collective 54 members.
Fixed Bids beats out Hourly Billings in 2022.
Makes sense. Better for the client and the service provider.
Remember, multiple sources of revenue is better than one source.
Keeping your people billing during a recession is the best way to avoid layoffs.
It looks like we saw a dip in utilization in Q3 but are recovering nicely in Q4.
Hats off to our peeps in IT Services. Steady as a rock.
