The Eject Button of Exits: Opportunities and Perils of Acquihires

The Eject Button of Exits: Opportunities and Perils of Acquihires

Founders, executives, and investors in professional services firms should be generally familiar with the motivations, elements, and commercial considerations that attend “acquihires.” These transactions not only present a viable (if not optimal) path to exit a professional services business, but they also present attractive opportunities to assemble qualified teams, import unique knowledge and capabilities, and ultimately grow or defend market share. This article seeks to help the leaders of professional services firms understand the circumstances in which they might be involved in an acquihire (either as seller or buyer), the motivations of each party in such circumstances, and common structures for acquihire transactions.

    1. Why would my company participate in an acquihire?
    • Sellers: Generally, the opinion of business and academic commentators from the tech industry on acquihires is that they occur because of financial distress felt by a selling firm, and are alternatives to outright liquidation of the company. This has generally been my experience as well counseling professional services firms, with acquihire transactions tending to be quick matters led by buyer-competitors, with the goal of re-homing employees who would otherwise be terminated if the target elected to shutter its business. For many sellers, an acquihire represents an opportunity to capture some value associated with the winding-down of their business and signal a graceful, if not successful, exit to the market. 
    • Buyers: Buyers pursue acquihires for a range of reasons. These include:
      • acquiring qualified, cohesive teams, particularly in preparation for periods where additional capacity is needed;
      • stifling competition by onboarding talent that might otherwise flow to competitors following a liquidation of a target;
      • capturing goodwill, institutional knowledge, and customers;
      • entering entirely new markets or geographies; and
      • gaining new expertise or capabilities.

While one or multiple of these motivations have galvanized acquihire transactions from the likes of Meta, Alphabet, Amazon, Microsoft and other large tech companies, the same logic motivating these players also animates purchases among consulting and professional services businesses. Indeed, large consulting and advisory firms such as McKinsey  (acquihire of Hypothesis, a digital product consultancy), Deloitte (acquihire of the SAP team of VACS Technology Pvt. Ltd.), and KPMG India (acquihire of Shivansh Solutions, an SAP specialists consultancy) have each completed notable acquihire transactions within the past three years in order to strengthen certain of their respective technology consulting capabilities.

    1. What does an acquihire transaction look like?

It is difficult to generalize about the terms of acquihire transactions, as the details of such transactions are infrequently disclosed to the public. However, I note my experience and that of other legal practitioners and commentators:

    • Price:
      • Acquihires in the tech industry have historically been priced on a per engineer basis[1], however among professional services firms, I have not witnessed any sale prices expressed similarly. Instead, for such firms, prices often reflect the motivation of the buyer for approaching the purchase and the presence or potential for competitive bids to be issued from other parties.
      • In the most dire situations, right before a seller shutters its business and liquidates, most or all of the purchase consideration is allocated towards the compensation packages of the acquihired employees, with little or none going to the target’s business or assets, which may not be purchased at all. In these instances, the benefit to the seller may arise from the buyer’s assumption of payroll liabilities (or sometimes severance obligations) to the seller’s employees, allowing the business owner to retain more cash in a subsequent liquidation.
      • Sellers in the midst of a turnaround, but that have attractive assets or client relationships, are more likely to see valuations that include some take-home pay for the seller, however even that consideration is frequently subject to earn-outs, seller financing that is favorably discounted for the buyer, or otherwise given as retention bonuses, profits interests, or phantom equity that cannot be realized upon for a period of years or until a future sale transaction.
    • Structure:
      • As noted above, there may be situations where an acquihire does not include a purchase of a sellers’ business or assets. In those situations, the “deal” simply involves the seller executing a covenant not to sue the buyer for hiring its employees, with the buyer separately relaying offers to the employees it chooses to hire.
      • In transactions where a buyer sees value in a seller’s client relationships, the buyer is more likely to structure the deal as a purchase of some or all of the seller’s assets, with the buyer leaving the seller to settle the liabilities of the business.
      • Stock/equity sales are rare among acquihires, and generally are pursued where customer contracts or governmental permitting would make an asset transfer prohibitively slow or impossible.
    • Process:
      • Acquihires tend to be built for speed and simplicity.
      • For companies on the verge of liquidation, there may be limited or no due diligence conducted by the buyer, with the majority of the process dedicated to informing employees of the transaction, negotiating offers, and onboarding.
      • Larger transactions tend to feature many of the same steps as in traditional M&A transactions (LOI, buyer diligence, purchase agreement negotiation, customer reference checks, etc.), however even larger transactions are often completed on a compressed timeframe, with many capable of closing within forty-five to sixty days of an LOI.
    1. Is your company contemplating an acquihire?

For professional services firms, there may be good reason to participate in an acquihire, if not to capture qualified talent from a flagging competitor as a buyer, then as a more favorable option to shuttering as a seller. While this article highlights the motivations for pursuing an acquihire, and some common shapes that such deals take, the pursuit of an acquihire transaction (either as a buyer or seller) is attended by a litany of financial, tax, legal, and other considerations that impact the potential for success of the transaction, and the potential for a participant to realize optimal results.

If you are interested in, or are participating in, an acquihire transaction and want to speak more about your goals for it and how those may be accomplished, I’d be delighted to speak with you at [email protected].

[1] Naftulin, Danielle. “So You’re Being Acqui-hired.” Cooley Go, https://www.cooleygo.com/acqui-hire-basics/.

The Payroll Peril-o-Meter: A Tool to Help Young Firms Survive

The Payroll Peril-o-Meter: A Tool to Help Young Firms Survive

Introduction:

If you’re a founder of a young and small professional service firm, you know the constant struggle of keeping your business afloat. The late nights, the relentless pursuit of clients, and the endless worries about making payroll each month are all too familiar. But fear not, for there’s a tool that can help you navigate these treacherous waters – the Payroll Peril-o-Meter. In this blog post, we’ll introduce you to this powerful tool that can be a game-changer for your business. We’ll walk you through its components and how it works, followed by a real-world example to show you its practical application. By the end of this article, you’ll understand the importance of managing your payroll peril and why joining Collective 54’s mastermind community could be the best decision you make for your business.

Part 1: The Payroll Peril-o-Meter Unveiled

The Payroll Peril-o-Meter is a financial assessment tool designed to help founders like you gauge the health of your young professional service firm. It takes into account four critical components:

    1. Cash in the Bank: This is the cash reserves your firm has on hand at any given moment. It’s your financial cushion and the first line of defense against unexpected expenses or revenue shortfalls.
    2. Backlog: Backlog represents the contracts and projects that your firm has already secured but has not yet executed. It’s essentially your pipeline of guaranteed revenue in the near future.
    3. Accounts Receivable: Accounts receivable are outstanding invoices that clients owe your firm. It’s the money you’re expecting to receive from completed work.
    4. Sales Forecasted to Close in the Next 30 Days with >90% Probability: This component looks at the potential new business that’s nearly guaranteed to come in within the next month. It provides a glimpse into your future revenue stream.

To calculate your Payroll Peril score, you sum up these components and then divide them by your total monthly payroll. The resulting number tells you how many months your firm can comfortably make payroll without any additional income. The key benchmarks to remember are:

    • Less than 3 months: You’re in peril, and immediate action is required.
    • 3 to 6 months: You’re stable for the short term.
    • More than 6 months: You’re in a strong position and can breathe easier.

Now, let’s dive into an example to make this clearer.

Part 2: A Practical Example

Imagine you’re the founder of a 3-year-old consulting firm with 10 employees. Let’s break down your Payroll Peril score:

    • Cash in the Bank: $50,000
    • Backlog: $300,000
    • Accounts Receivable: $100,000
    • Sales Forecasted to Close in the Next 30 Days with >90% Probability: $50,000

Total Cash Flow = $50,000 + $300,000 + $100,000 + $50,000 = $500,000

Total Monthly Payroll = 10 employees @ $100,000/year = $1.0 million/year = ~$84k/month.

Payroll Peril Score = $500,000 / $84,000 = 6 months.

In this scenario, your Payroll Peril score is 6 months. This means that you have a comfortable six months’ worth of payroll expenses covered, and you’re not in immediate peril.

You are not at risk of going out of business. You can pay yourself. And you do not need to lay anyone off. But, 6 months goes by in a hurry. You would sleep better at night if you had a year of runway. A year of runway would allow you to be more strategic. It would allow you to spend your time on bringing your long-term vision to life. With only six months of runway, you are working in the business, not on it. And you should be. You are edging towards being in trouble.

The Payroll Peril-o-Meter is a simple tool that gets to the essence in a hurry. Young firms do not need over-engineered and complicated financial reporting. Practically all of your expenses are payroll. Making monthly payroll is priority #1. Keep it simple and hopefully this tool helps you do so.

Conclusion: Join Collective 54’s Mastermind Community

While this example demonstrates a stable position, the reality for many young professional service firms can be quite different. The constant hustle and uncertainty of cash flow can be overwhelming. That’s where Collective 54’s mastermind community comes in.

Collective 54 is a community specifically designed for founders like you. It provides invaluable resources, mentorship, and a network of peers who understand the challenges you face. By joining, you gain access to expert advice and strategies for managing your business effectively, including tools like the Payroll Peril-o-Meter.

Don’t go it alone. Embrace the opportunity to learn from others who have been through the same challenges. Join Collective 54’s mastermind community today and take the first step towards securing a prosperous future for your professional service firm. Your journey to financial stability and success starts here.

How Good Are You at Predicting the Future? Reflections on Attempting to Time the Market for your Exit

How Good Are You at Predicting the Future? Reflections on Attempting to Time the Market for your Exit

Introduction

The road to a successful exit is littered with the bodies of entrepreneurs that have attempted to time the market[1].  Lest you become another casualty, I wanted to give you some things to consider before you try your hand at predicting how future macroeconomic or sector-specific conditions are likely to unfold.  Start by accepting that you are never going to know the perfect time to sell with 100% certainty.

A founder’s decision about when to take on an investment partner or consider a full sale via a strategic buyer is an important one.  And, as a founder, it may be tempting to incorporate the expected future states of the broader economic, M&A and sector-specific environments as part of your decision matrix.  However, these variables can unduly influence the ultimate yes / no equation because predictions about these arenas require the contemplation of a vast array of unknown information.  In this way, forward looking, market-based perspectives can masquerade as helpful data disguising what is really unnecessary and uncertain complexity.  As a rule of thumb, life-altering decisions are best made upon a solid foundation of what is known.

 

If you are considering an exit, or you have received an unsolicited offer, there are three main types of market timing considerations that founders often explore – Macroeconomic, Sector-Specific and Company-Specific.  Indeed, all three can impact the valuation of your business, but it may simplify the exercise to apply Occam’s Razor[2] and focus primarily on Company-Specific factors.  After all, your intimate familiarity with your business represents an asymmetric information advantage and gives you privileged access to KPIs that are (i) certain and (ii) most likely to reveal the company’s future growth prospects.

In the event that you are not yet convinced to focus on company-specific factors to inform exit timing, the following sections will explore each of your market timing options with an assessment of the merits of attempting to do so.

I. Macroeconomic Timing

In this context, macroeconomic primarily refers to interest rates, growth and public company valuations.  Despite the vast amount of data and predictive intelligence at our fingertips, we remain remarkably bad at predicting most macroeconomic moves.  Note the irregularity in duration of each bear and bull market in the chart below.  Bottom line, we don’t know when the next boom or bust is going to occur, nor how long they are going to last[3].

History of U.S. Bear & Bull Markets (1942-2023)

Source: First Trust Portfolios, LP

Moreover, valuations for private companies do not always correlate to their publicly-traded peers.  A big contributor to this phenomenon is the concept of “dry powder”, which refers to capital that has been raised but not yet deployed[4].  As of the end of 2023, there was a record $1.2T (yes, trillion) in dry powder earmarked for investment into private equity transactions.  This capital needs a home.  This capital is attached to careers and families that depend on its timely deployment into favorable returns generating opportunities.  This capital is a constant that exists irrespective of economic market conditions, and this phenomenon has often led me to describe the private market as a sub-economy unto itself.  As a result, I caution many founders to disconnect their exit timing decisions from what they read about in the daily news.

Global Private Capital Dry Powder for Buyouts (2005-2023, $B)

Source: Prequin

There’s also what I call the “down market paradox” which means that a founder can actually generate a better exit outcome when the market is weaker if their company’s performance remains strong.  During more challenging economic times, many founders delay their exit plans with the belief that better days will bring a better valuation.  This indeed could be true.  However, weak economies therefore result in fewer deals for buyers to evaluate which means that scaled services firms with great management teams, strong profitability and robust organic growth (i.e. “A” businesses) will receive outsized attention from prospective buyers for lack of other deals to evaluate.  When there is less deal flow to go around, the scarcity of attractive investment opportunities can create a feeding frenzy amongst the buyer community when a great business comes to market.

Indeed, valuations for “A” businesses in 2023 not only held up, but many received far more offers than they might have in other environments.  There were companies for which we submitted an offer during 2023 that received 40 or more competing offers from other interested parties.  Imagine how favorable this dynamic is for founders.  So, don’t always assume that down markets translate to low valuations.

 II. Sector-Specific Timing

Like the economy, specific industry sectors experience cycles.  Any given industry has its own set of growth drivers, regulatory forces, technological disruptions, demographic shifts and other factors that impact investor enthusiasm.  To be sure, investment dollars follow good industry trends and, all things equal, valuations are better when sectors are expected to have a good run.  After all, the majority of the price that an investor or buyer will be willing to pay for your business is based on its future growth prospects, and your sector’s health is a powerful contributor to that analysis.

However, we are in an era of rapid technological change where today’s high margin services may be tomorrow’s AI-driven afterthought.  This rate of innovation, and resulting disruption, makes the exercise of predicting what a given sector will look like even 12 months out extremely difficult.  Case in point, take a look at the following chart which highlights the rapidly accelerating pace of adoption of select, household name technology platforms over the past 20 or so years.  Can any of us really predict the future state of our sector amidst change like this?

Time For Selected Online Services to Reach 1M Users

Source: Business Insider

For me, sector-specific market timing, like its macroeconomic counterpart, represents another gamble based upon sub-optimal information, and you might do well to put this consideration in its proper place.

III. Company-Specific Timing

At last, we’ve departed the realm of the unknown and have returned home to what you know best…your business.  And, nobody in the world understands the leading indicators and metrics portending its future performance better than you.  For instance, you know things like the true probabilities associated with your sales pipeline, why you’re winning / losing business, what backlog is likely to be shifted out, who on your team might be loose in their seat and an array of other intangible (but no less important) signals that contribute to confidence or concern.  Now, take a moment to compare the relative certainty of this company-specific information to your feelings about where you think the macroeconomy or your sector is headed.  See the difference?

When it comes to exit timing, you are playing with cards that the buyer can’t see and may not ever see until after a deal is done.  And, while there may be some temptation to exit when you anticipate challenges in the business, experience has shown us that the best outcomes occur when it’s a win / win for both sides and the new investor / owner continues to enjoy strong growth and profitability.  This is especially true when founders are expected to rollover, or retain, a significant ownership percentage of the business because this will impact your relationship with your new partners as well as the future value of your equity.  If you’re approaching an exit decision, a good thought experiment is whether you would invest in your business today.

So, finally, setting aside anything that’s related to the markets, if one or more things about your business is true, then you may want to seriously consider your timing for an exit or the unsolicited offer that came in lest your bird in the hand fly away:

    • You’ve experienced multi-year growth in revenue and profits
    • Bringing on a partner could help you scale faster or larger than you could on your own
    • Proceeds from a transaction will allow you to “hit your number”
    • The leading indicators of your company’s performance suggest that the near- to medium-term outlook is good

Conclusion

At the end of the day, only you can determine the best time to exit your business and should do so with whatever information and advice allows you to sleep well at night knowing that you are making a well-informed decision.  As you weigh your options, just make sure to reflect on what is known and what isn’t – and if you ever want to talk about exit timing, shoot me an email.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in rapidly growing, founder-owned, knowledge-based B2B services firms.  Our value creation strategy is defined by a heightened focus on culture, continuity of founder leadership, an emphasis on organic growth, and a conservative approach to the use of debt.  In our long history, we’ve invested in and divested dozens of businesses and have made many decisions about the optimal time to sell the companies in which we are investors.

[1] Metaphorically speaking

[2]Attributed to the Franciscan friar, William of Occam, the notion that no more assumptions should be made than necessary

[3]One point of optimism that emerges from this chart is that the average length of time for a bear market is just under 12 months

[4]You may also hear people referring to “capital on the sidelines” which is synonymous to dry powder

Transforming Your Professional Service Firm’s Pricing Strategy for Success

Transforming Your Professional Service Firm’s Pricing Strategy for Success

As founders of small service firms in the US with 10-250 employees, you understand the significance of a well-crafted pricing strategy. Pricing isn’t just about setting a number; it’s about defining your firm’s value and ensuring sustainable growth. In this article, we’ll explore how a professional service firm’s pricing strategy evolves through the three lifecycle stages – Grow, Scale, and Exit, based on the framework presented in my book, “The Boutique: How to Start, Scale, and Sell a Professional Service Firm.” We’ll also delve into the common pricing challenges faced by firms in each stage and propose four transformative approaches that can elevate your pricing strategy to best-in-class status.

Understand the Value Delivered and Charge Accordingly

In the growth stage of your firm, it’s common to underprice your services. This often occurs due to a lack of understanding of the true value you provide to your clients. As you grow, it’s crucial to shift from a cost-based pricing model to one that reflects the value your services bring to the client. Calculate the potential benefits, ROI, or competitive advantage your clients gain by engaging with your firm. Align your pricing with the value you deliver, rather than simply covering your costs. Clients are often willing to pay a premium for tangible results.

Regularly Experiment to Determine Willingness to Pay

In the growth phase, scope creep can lead to a habit of giving away additional work for free. Transitioning to a more mature pricing strategy in the scale stage involves testing and pinpointing your clients’ willingness to pay for your services. Conduct regular experiments, surveys, or client interviews to gather insights into what clients truly value and what they are willing to pay extra for. This data-driven approach will enable you to establish pricing tiers that reflect your clients’ preferences while maximizing your revenue.

Charge an Easily Justified Premium Over Competitors

In the scale stage, it’s common to stop underpricing your work but continue charging similar rates to your competitors. To stand out and increase profitability, you should identify your unique selling propositions and charge an easily justified premium over your competitors. Focus on what makes your firm different – superior expertise, exceptional service, or innovative solutions. Showcase these differentiators to clients, making it clear why your services are worth the extra investment.

Centralize Pricing with a Deal Desk for Quality Control

Finally, as your firm matures, it’s crucial to centralize your pricing decisions through a deal desk. This approach ensures consistency and quality control in every proposal you send to clients. The deal desk evaluates pricing proposals, considering factors such as value, competition, and profitability. It prevents pricing decisions from being made in isolation, allowing for a strategic approach that aligns with your firm’s objectives. This centralized approach also fosters collaboration among team members to refine pricing strategies continuously.

Now, you may be wondering, “How do I successfully implement these strategies?” That’s where Collective 54’s mastermind community comes into play. Our community brings together like-minded founders of professional service firms who have successfully navigated these pricing challenges. By joining our community, you’ll have access to invaluable insights, case studies, and peer support, making your journey to best-in-class pricing strategies smoother and more effective.

In conclusion, your professional service firm’s pricing strategy is not static but evolves as you progress through different lifecycle stages. Recognizing the challenges specific to each stage and implementing transformative approaches can help you transition from an underdeveloped pricing strategy to a best-in-class one swiftly. To dive deeper into this topic and hear firsthand from peers who have successfully transformed their pricing strategies, we encourage you to join Collective 54’s mastermind community. Your path to pricing excellence starts here, among a community dedicated to your firm’s growth and success.

 

Embrace the Competition: Why It’s Great for Boutique Professional Service Firms

Embrace the Competition: Why It’s Great for Boutique Professional Service Firms

In professional services, it’s not uncommon to hear founders proudly declare, “We are the only firm that does (insert blank).” While this statement may seem like a badge of honor, it could actually be a red flag. In this edition of Collective 54 Insights, we’ll dive into why having lots of competition is a good thing for boutique professional service firms, and why being the only firm that does what it does is a risky proposition.

There are three primary reasons that lots of competition is a good thing.

    1. Validation Through Competition

First and foremost, the presence of numerous competitors should be seen as a sign of validation for your niche in the professional service industry. When you see a crowded field of firms offering similar services, it’s evidence that there’s a market demand for what you’re offering. The fact that these firms are not only surviving but thriving by selling and delivering the same service is a clear indicator that clients are willing to invest in it.

Think about it this way: If you were the only player in town, how could you be sure that your service is genuinely valuable? The existence of competition provides reassurance that your expertise is in demand and that clients are willing to pay for it.

    1. Shorter Sales Cycles Through Choices

One of the significant advantages of having multiple competitors in your space is that it makes the decision-making process easier for potential clients. When prospects are faced with a new project or service they’ve never explored before, fear of making a mistake can be a significant hurdle. However, when there are numerous options available, clients can educate themselves and make a more informed decision.

Having a variety of firms to choose from allows prospects to compare and contrast their offerings, pricing, and track records. This leads to shorter sales cycles because clients are more confident in their choices, knowing they’ve thoroughly evaluated their options.

When I was in your shoes, running my boutique (SBI), I listed my competitors on my website. See here. People thought I was crazy but the brilliant David Meerman Scott saw the logic behind it, which was to help a prospect make a decision by educating her on what her options were. Instead of letting her waste weeks, or months, thrashing about trying to comparison shop, save her time by saying “here are the competitors in our niche. Go spend time with them and let’s talk about how we compare.” By my estimate, this cut our sales cycles in half. And I was confident that we were the best and would show well when compared to our competitors. In addition, my win rate went up because this demonstrated to the prospect, during the sales pursuit, that I cared about her and truly wanted her to make the best decision for her situation, even if that was not selecting my firm.

    1. Ample Opportunity for Differentiation

Competition also provides boutique service firms with ample opportunities to differentiate themselves from the pack. Standing out in a crowded market can be challenging, but it’s also where the real magic happens. You can showcase what sets your firm apart, whether it’s your unique approach, exceptional client service, or innovative solutions.

Imagine a 5-year-old trying to determine her favorite flavor of ice cream. Mom takes her to Baskin Robbins and presents the child with 32 flavors. The child choses strawberry after considering the alternatives. You have a chance to create your own unique flavor in the professional service industry’s Baskin Robbins. Your flavor might not be for everyone, but for those who resonate with it, you become the go-to choice.

Conclusion: Beware of Being the “Only” Firm

In conclusion, the mantra of “we are the only firm that does (insert blank)” should raise alarm bells. It’s not a badge of honor but a potential warning sign that there may not be enough prospects seeking your specific service. Instead, embrace the competition as a positive force that validates your market, streamlines decision-making for clients, and fuels your differentiation efforts.

Remember the wisdom from the members of Collective 54: “The reason you’re the only firm that does (fill in the blank) is because there are not enough prospects looking for (fill in the blank).” So, don’t be afraid to join the ranks of competitors, because in the world of boutique professional service firms, it’s often the crowded market that holds the greatest potential for success.

Want to get more wisdom from the members of this remarkable community? Consider joining the community. You can apply here.

Moving Up Market: A Strategic Shift for Boutique Professional Service Firms

Moving Up Market: A Strategic Shift for Boutique Professional Service Firms

In the ever-evolving landscape of professional service firms, one question looms large for boutique firms: How can we move up the market and focus exclusively on strategy work? In this article, we’ll delve into why your firm might want to make this shift and outline a four-step method to successfully transition from implementation to strategy. By the end of this journey, you’ll see why bigger is not necessarily better, but being more profitable is.

Why Move Up Market?

Many boutique professional service firms often find themselves at a crossroads, grappling with the desire to scale and expand. However, in the quest for growth, they frequently fall into the trap of taking on implementation work, diversifying their service offerings, and diluting their unique value proposition. The question to ask is: Is bigger truly better, or is it more profitable to specialize and excel in what you do best?

Moving up market by focusing exclusively on strategy work has several compelling advantages:

    1. Increased Profitability: Strategy work often commands higher fees, leading to more substantial profit margins for your firm. By eliminating the operational overhead associated with implementation, you can boost your bottom line significantly.
    2. Enhanced Reputation: Specializing in strategy work positions your firm as an industry leader in your niche. Clients are more likely to seek your expertise and trust your recommendations when you’re recognized as an authority.
    3. Strategic Relationships: Referring implementation work to trusted partners can lead to mutually beneficial partnerships, expanding your network and access to clients seeking your services.
    4. Focused Growth: Eliminating implementation work allows you to allocate your resources towards enhancing your strategic capabilities, ultimately attracting clients seeking your specific expertise.

Now that we understand the why, let’s explore the how with our four-step method to transition from implementation to strategy:

Step 1: Remove All Mention of Implementation

The first step in your journey is to eliminate any references to implementation from all your communications. Update your website, proposals, statements of work, social media profiles, emails, and any other client-facing materials to emphasize your strategic focus. Consistency in messaging is key to rebranding your firm successfully.

Step 2: Start with Assessment Projects

Begin every new client engagement with an assessment project. Assessments are inherently strategic, offering insights and recommendations without committing to implementation. By leading with assessments, you train your clients to understand your firm’s unique value in providing strategic solutions.

Step 3: Refer Out Implementation Work

While you may still assist clients with implementation, consider forming strategic partnerships or outsourcing implementation tasks to trusted collaborators. This approach allows you to provide comprehensive solutions without the need to perform implementation in-house.

Step 4: Execute a Reduction in Force

To fully commit to your strategic focus, consider restructuring your staff. Lay off employees who primarily handle implementation work. This decision may be challenging but is essential to eliminate the temptation to revert to old practices and maintain your commitment to strategy. If implementation staff remain on the payroll, you will feel compelled to keep them utilized and bring in implementation work. And avoid the common mistake of trying to develop an implementer into a strategist. It more often than not does not work out.

In conclusion, remember that bigger is not always better. Your firm’s profitability and reputation can soar when you focus exclusively on strategy work. Strategy firms often yield higher returns and position themselves as industry leaders, setting them up for long-term success.

If you’re eager to make this pivotal transition and want to learn from peers who have successfully executed this strategy shift, we invite you to join the Collective 54 Mastermind Community. Here, you’ll have the opportunity to connect with like-minded professionals, share experiences, and gain valuable insights to take your boutique professional service firm to new heights.

Join us today, and let’s embark on this journey toward greater profitability, enhanced reputation, and strategic excellence together.

7 Key Diagnostic Questions to Determine If Your Firm Is a Strategy Firm or an Implementation Firm

7 Key Diagnostic Questions to Determine If Your Firm Is a Strategy Firm or an Implementation Firm

Are you wondering whether your boutique professional service firm is a strategy firm or an implementation firm? This crucial distinction can significantly impact your business growth and operational strategy. In this blog post, we will provide you with a comprehensive diagnostic tool to help you identify your firm’s true identity. Knowing whether you’re primarily focused on strategy or implementation is crucial when aiming to scale your operations effectively.

7 Step Diagnostic

    1. External Perception: Have a friend visit your website and ask them if they think you are a strategy firm or an implementation firm. Sometimes, an external perspective can reveal how your firm is perceived in the market.
    2. Billing Breakdown: Examine your billings. What percentage of your total billings come from high bill rate employees (senior strategists) versus low bill rate employees (implementers)? This ratio can indicate your firm’s primary focus.
    3. Client Titles: Review the titles of the clients you market to, sell to, and deliver for. Are they primarily in the C-suite or middle management? High-level client titles often correlate with strategy work.
    4. Project Timeline Analysis: Scrutinize your project plans. What percentage of the project timeline is dedicated to strategy versus implementation? A heavy emphasis on strategy might signal that you are a strategy firm.
    5. Client Questions: Listen to 10 recent Zoom calls that you recorded. Isolate the questions asked by the clients. What percentage of these questions are related to strategy and what percentage are related to implementation? This can provide insights into the nature of your client engagements.
    6. Competitor Analysis: Examine where your existing clients are choosing to spend with your competitors instead of your firm. Are you losing out on strategy work or implementation work? This can highlight areas for improvement.
    7. Delegation Patterns: Investigate whether clients are delegating you down to lower-level employees. If so, to which titles? Do these titles correlate with strategy work or implementation work? Understanding delegation patterns can shed light on your firm’s core competency.

In conclusion, understanding whether your boutique professional service firm is primarily a strategy firm or an implementation firm is crucial for scaling your operations effectively. It is hard(er) to scale a firm that does both. This diagnostic tool will help you gain clarity on your firm’s identity and areas for improvement. If you discover that you’re in the wrong category and want to pivot, consider joining the Collective 54 Mastermind Community. Our community can provide the guidance and resources you need to execute a successful transition. Don’t hesitate to reach out and explore how we can help you navigate this strategic shift in your business.

The Gift & The Curse: Non-Billable Time

The Gift & The Curse: Non-Billable Time

Most firms have hours, days, weeks even – of non-billable time unceremoniously dumped into “admin” every month… or worse, not even recorded at all (but we’ve talked about that before!).

That could be $100’s of thousands of dollars of time on genuine, useful & essential “admin”… or not. Mostly likely “not” to be honest.

Don’t get me wrong – tracking non-billable time as “admin” is a useful starting point on your journey to superior $margins, but a common curse is it often becomes the final destination…

Imagine: You’ve sold in the value of time management across the firm, so your team diligently record everything billable to projects, but then stick the remaining 10-50% (junior > senior) of their week in the “admin” dustbin… you still feel positive, because you can start to analyze utilization, project margin & staff availability (to a degree) …

Not bad.

By doing that though, the curse is cast, because you tell yourself you’ll get on top of the “admin” bucket later… once time-tracking has been fully adopted, when your team grows, or whenever the next excuse you want to tell yourself occurs… and it never, ever, happens.

If you break-down non-billable time from this day forwards, it’ll be the gift that keeps on giving… 

There are, at least, 5 game-changing insights you will gain:

    1. Sales and new business are often a big suck of your most senior (& expensive) people’s time… so many firms commit resource & expense to building relationships, proposals, proof of concepts… ‘Cost of sale’ is often a huge hidden expense in PS firms, who are constantly working on RFPs or bids… so get a handle on which opportunities drive revenue & high margin work, are a sunken cost, or just a complete waste of time.
    1. Continued learning & development is crucial to your key employees, so ensure they track every internal & external training, mentoring session, company insights… so when it comes to their performance review, the hours of education your firm has provided, is well-documented… & given you know their hourly rate, you can put a $dollar value on what you’ve committed to their personal development. 
    1. Intellectual Capital (IC) is huge in PS firms – it’s the secret sauce in your delivery methodology, it’s the value creating documentation, a framework that delivers client results… find out how much $investment is being made into your IC, which feeds your pricing, your value proposition, or reveals it’s under-invested & needs TLC.
    1. Marketing & personal brand will help drive referrals, inbound & your lead-gen machine… and for most PS firms that doesn’t mean huge $spend on Ad campaigns, but getting their people to tell client stories, share industry insight & therefore use their non-billable time in a productive way. Insight into the true cost of your webinar series, eBook or in-person events is often startling.
    1. Admin! After you’ve run a Work Breakdown Structure, you’ll be able to determine what “admin” actually constitutes (pro tip: changes for different people) … updating spreadsheets, creating reports, filling in CRM records… this gives you a clear picture of which “admin” you should automate, outsource, rationalize etc.

Every PS firm is different, but the non-billable time gift is present for all firms to maximize. Avoiding the curse doesn’t have to be Founder-led – whoever wears your “Operations” hat in your firm should be tasked with driving this… but the benefits are huge for founders & your team.

Feel free to reach out to me if you have any questions.

Choosing Between Strategy Work, Implementation Work, or Both: A Founder’s Dilemma

Choosing Between Strategy Work, Implementation Work, or Both: A Founder’s Dilemma

Hello, Collective 54 subscribers, I’m Greg Alexander, and today, we’re diving into a crucial decision many founders of boutique professional service firms face – whether to focus on strategy work, implementation work, or a combination of both. This decision can significantly impact the trajectory of your firm, the types of clients you attract, and your overall satisfaction with your work. Let’s explore the pros and cons of each approach:

Why One Should Do Strategy Work:

    1. Attracts the Best Clients: Offering strategy services often draws higher-caliber clients who value strategic thinking and are willing to pay a premium for your expertise.
    2. Higher Profit Margins: Strategy work typically commands higher hourly rates or project fees, resulting in better profit margins compared to implementation work.
    3. Less Employee Headaches: Strategic projects tend to involve smaller, more specialized teams, reducing the complexity of managing a large workforce.
    4. Lower Client Concentration Risk: By working with a diverse range of clients on strategy, you can mitigate the risk associated with over-reliance on a single client.
    5. More Enjoyable for Some Founders: Many founders find strategy work intellectually stimulating and fulfilling, making it a more enjoyable aspect of their business.

Why Someone Should Not Do Strategy Work:

    1. Stiffer Competition: The allure of strategy work attracts more competitors, making it challenging to stand out in a crowded market.
    2. Longer Sales Cycles: Closing strategy projects often takes longer due to the need for extensive client education and relationship-building.
    3. Inconsistent Revenue: Strategy projects can be sporadic, leading to uneven cash flow, which might not suit all business models.
    4. Less Predictable Workload: Strategy engagements can be less predictable in terms of workload and deadlines, causing stress for some founders.
    5. Potential Client Disappointment: High expectations for strategic outcomes can sometimes lead to client disappointment if results don’t meet their lofty goals.

Why One Should Do Implementation Work:

    1. Steady Client Flow: Implementation work can provide a consistent stream of projects and clients, ensuring a stable cash flow.
    2. Diverse Revenue Streams: Offering implementation services alongside strategy can diversify your revenue streams, reducing dependency on one area.
    3. Loyal Client Relationships: Implementation work often fosters long-term client relationships, leading to repeat business and referrals.
    4. Predictable Workload: Implementation projects usually have well-defined tasks and timelines, providing founders with a predictable workload.
    5. Client Satisfaction: Clients appreciate one-stop shopping, finding it convenient to have both strategy and implementation services under one roof.

Why Someone Should Not Do Implementation Work:

    1. Lower Profit Margins: Implementation work often involves more extensive resources and lower billable rates, resulting in thinner profit margins.
    2. Higher Employee Headaches: Managing larger teams for implementation projects can be more complex and labor-intensive.
    3. Client Concentration Risk: Relying heavily on a few long-term implementation clients can expose your firm to client concentration risk.
    4. Less Enjoyable for Some Founders: Founders who prefer strategic thinking may find implementation work less personally fulfilling.
    5. Intense Competition: The implementation space can also be competitive, especially if your firm lacks unique differentiation.

Why Someone Should Do Both Strategy Work and Implementation Work:

    1. Meeting Client Needs: Offering both services addresses the full spectrum of client needs, creating a holistic client experience.
    2. Higher-Quality Work: Combining strategy and implementation allows for seamless execution of strategic plans, ensuring higher-quality results.
    3. Diverse Client Base: Serving clients in both areas can help balance your client portfolio, reducing concentration risk.
    4. Optimal Profitability: A balanced approach can optimize profitability by leveraging the strengths of each service offering.
    5. Client Convenience: Clients who seek comprehensive solutions appreciate the convenience of obtaining both strategy and implementation services from a single provider.

Why Someone Should Never Do Both Strategy and Implementation Work:

    1. Overwhelming Workload: Juggling both aspects can lead to an overwhelming workload, potentially compromising the quality of your work.
    2. Confusion in Branding: Mixing strategy and implementation services without clear branding can confuse clients and dilute your firm’s identity.
    3. Lack of Focus: Splitting your focus between two distinct areas can hinder your ability to excel in either one.
    4. Resource Drain: Balancing both aspects can strain your resources, including personnel and time.
    5. Limited Differentiation: Without a clear differentiation strategy, you may struggle to stand out in the market compared to firms that specialize.

In conclusion, the decision to focus on strategy work, implementation work, or both is a critical one that should align with your firm’s unique strengths, goals, and client base. Consider your passion, competition, profitability, and client needs when making this choice.

If you’re interested in further discussing this topic and connecting with peers who face similar decisions, I encourage you to join the Collective 54 Mastermind Community. Here, you can gain valuable insights, network with fellow founders, and navigate the complexities of the professional service industry together. Your journey to success awaits!

The Hyper-Specialization Strategy for Boutique Professional Service Firms in the Age of AI

The Hyper-Specialization Strategy for Boutique Professional Service Firms in the Age of AI

Hello, I’m Greg Alexander, and I welcome you to another edition of C54 Insights, where we delve into the latest trends and strategies for boutique professional service firms. Today, we’re going to talk about a critical shift in the professional services landscape driven by the mainstream adoption of artificial intelligence and how boutique firms can regain their competitive edge.

The Evolution of Professional Services in the Digital Age

Remember the pre-Google era when professional service firms thrived on local clientele and word-of-mouth referrals? Those days are long gone. The emergence of search engines marked a significant turning point. Suddenly, anyone, anywhere could find and compete with your firm. The geographical boundaries that once protected your local market no longer applied.

This shift forced professional services firms to adapt quickly. Those who recognized the importance of optimizing their online content for search engines gained a competitive advantage. The firms that embraced this digital transformation early on saw remarkable success compared to those who adopted a “wait and see” approach.

However, as time passed, search engines began prioritizing paid advertising over organic results. This shift favored larger firms with hefty advertising budgets, leaving boutique service firms struggling to compete. But the tide is turning once more, and small firms are poised to regain their competitive edge.

The AI Era Levels the Playing Field

Enter the era of large language models like ChatGPT. Unlike search engines, these AI models do not offer big firms the opportunity to outspend smaller ones. A simple prompt can produce results, giving boutique professional service firms a unique opportunity.

The playing field is level once again, and with the right strategy, small firms can easily be found by prospects. This strategy revolves around hyper-specialization.

The 4-Step Hyper-Specialization Strategy

I will now provide a 4 step strategy to show you how to do this. And I will use Collective 54 as the use case. The reason for using Collective 54 as the use case is you are reading the Collective 54 newsletter and are familiar with this use case.

Step 1: Specialize into a Category Begin by narrowing your focus. Instead of trying to be a generalist, define your service category. This is your starting point for differentiation.

For example, Collective 54 has specialized around the mastermind community category. There are ~400 firms in this category, out of the ~3 million B2B firms in the U.S. This makes Collective 54, a small service firm, easier to find. Prospects looking for a mastermind community are more likely to find us because of our decision to specialize in this manner.

Step 2: Specialize into an Industry Within your chosen category, delve deeper and specialize within specific industries. Understand the unique challenges, trends, and needs of these industries.

For example, Collective 54 has specialized around the professional services industry. This also makes Collective 54 easier to find. A prospect looking for a community for professional services firms is much more likely to find us because we intentionally selected an industry.

Step 3: Specialize into a Segment within that Industry Further narrow your focus by targeting specific segments within your chosen industry. Identify the most lucrative niches or underserved markets.

For example, Collective 54 has specialized around the “boutique” firm, which is defined as 10-250 billable employees. This makes finding Collective 54 easier to find. A prospect looking for a mastermind community for small boutique professional service firms will most likely find Collective 54. And we have not relied on luck. We got found because of the strategic decisions we made.

Step 4: Specialize into a Role within that Segment Finally, pinpoint a specific role or function within your chosen segment. Become the go-to expert in that area, offering tailored solutions and unmatched expertise.

For example, Collective 54 has specialized around the owners of boutique professional services firm. This is most often the founder, co-founder, CEO or managing partner. This makes it easier to find Collective 54. A prospect looking for a mastermind community for the founder of a boutique professional service firm is very likely to find Collective 54.

In fact, I would wager that Collective 54 is the only mastermind community that serves the founder of a boutique professional service firm. If not the only, certainly on a very short list. As a result, Collective 54, a small service firm like you, can be found, without having to spend advertising dollars.

By following these steps, you’ll create a hyper-specialization strategy that sets you apart from competitors. However, these four steps are not enough. Of course, you need to publish high quality content for this hyper-specialized audience. This should be books, blogs, newsletters, podcasts, videos, infographics, research reports, rankings, etc.

Large language models like ChatGPT will likely use your content when responding to prompts related to your specialized area, further establishing your authority. Large language models rely on this content to generate responses. If you are the firm providing the model the content, you will be discovered.

Join Collective 54 for In-Depth Insights

In conclusion, the need for specialization in professional services has never been more critical, especially with the rise of AI-driven solutions. Boutique firms now have a golden opportunity to shine in the digital landscape. By embracing the 4-step hyper-specialization strategy, you can regain the competitive edge you’ve been looking for.

If you’re eager to learn more about how small service firms are successfully implementing these strategies and navigating the evolving professional services landscape, I invite you to join Collective 54. Our mastermind community is filled with like-minded founders who are ready to share their experiences and help you thrive in this new era of professional services.

Don’t miss out on this opportunity to excel in the age of AI. Join Collective 54 today, and let’s pave the way to success together.