Category: Pro Serv Podcasts

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Episode 36: The Boutique: The 3 Commandments of Service Design

Collective 54 founder Greg Alexander discusses how to re-think service design and delivery to accelerated profits.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case there are three commandments of service design. The service offering is to the founder of a professional services firm, what the product is to the founder of a product company. It’s how they deliver value to the client and designing it correctly is a mission critical task.

Sean Magennis [00:01:01] I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is actually one of the pioneers in service offering design in the boutique professional services industry. His approach has helped many founders rethink how they deliver their service value, leading to accelerated profits. Greg, great to see you. Welcome.

Greg Alexander [00:01:29] Good to be here.

Sean Magennis [00:01:30] OK, Greg, let’s jump in. Explain to our listeners why they should care about this subject.

Greg Alexander [00:01:36] OK, so many founders and executives leading boutiques are not imaginative when designing their service offerings. They do not think about how to design the service in a way that increases the value it brings to clients while simultaneously decreasing the cost to deliver it. So let me share a story to make this point. Not too long ago, I met a brilliant bookkeeper. She developed a way for small business owners to outsource bookkeeping for one hundred and nineteen bucks per year. Her prospects are those who do bookkeeping in-house, paying internal staff on average 40,000 dollars per year. She is, get this, three hundred and thirty six times cheaper for the same service as you can imagine, she is shooting ducks in a barrel and growing like a weed. So how did she do it? She reimagined. Our bookkeeping should be performed by uniquely blending technology automation in offshore labor. This is an example of a boutique founder winning because of intelligence service design.

Sean Magennis [00:02:42] Geez, I would not put growth and bookkeeping in the same sentence, but it seems to me this is a commodity service with an with an attractive growth prospects.

Greg Alexander [00:02:52] When I met her, I entered the meeting with the same assumption and she corrected this false assumption by telling me that she is one of a 183,000 bookkeeping firms in the U.S. That is a lot of firms, a lot of firm owners making money in the bookkeeping space.

Sean Magennis [00:03:09] And why are you attracted to such a crowded field?

Greg Alexander [00:03:13] I am attracted to her because she’s going to take lots of share. For instance, her typical competitor charges a small business owner sixty two hundred dollars per year for the same service. The way this will play out is more and more small business owners will outsource bookkeeping because of the 40000 dollar per year internal cost mentioned earlier. When these new prospects enter the market, they will look at her service at 119 dollars a year in her competitor’s service at sixty two hundred dollars a year. She’s going to win a lot of deals and take a lot of share. She just needs to get into as many deals as possible. Her close rate will be crazy high. This is why I’m attracted to her.

Sean Magennis [00:03:55] Greg, this is a great story. What lessons should the audience take from this?

Greg Alexander [00:04:00] Gosh, there are many. Let me share a few. So the first lesson is to be imaginative with designing a service. Too many boutique founders, a conventional in this area, for example, they turn their expertize into a methodology. They hire expensive domestic labor, train them on it and take it to market. This conventional approach constrains growth. Why? To earn an acceptable margin on this, a founder must charge a certain price and sometimes his price will price them out of the market. As you can see in the bookkeeping story, a little tech automation and offshore labor can go a long way. The second lesson is commodity services are ripe for disruption prior to meeting her. I would not have believed that bookkeeping is a growth industry and in the aggregate it is not. But she is a growth company. What is different between her and her industry? Intelligent design. The third lesson takes us to the three commandments of service design. Are you ready for them?

Sean Magennis [00:05:00] Yes have at it.

Greg Alexander [00:05:01] OK, so clients are boutiques for one of three reasons. The first reason is you can do what they can do better. The second reason is you can do what they can do faster. The third reason is you can do what they can do cheaper. Ideally, the boutique combines better, faster, cheaper into a single value proposition. And when I say better, faster, cheaper, I mean in relation to the alternatives, which can be internal staff, other boutiques, the big firms, etc.. So the three commandments of service design are better, faster, cheaper.

Sean Magennis [00:05:38] Excellent. I understand the three commandments better, faster, cheaper. How should we listen to put them to work in his or her business?

Greg Alexander [00:05:47] I suggest two immediate actions. First, screen all your current service offerings against the Three Commandments. If they are not clearly better, faster or cheaper than the alternatives, redesign them or sunset them. Second, screen your service roadmap against the Three Commandments. Do not bring a new service to market until you know for sure it is better, faster and cheaper than the alternatives.

Sean Magennis [00:06:13] Greg, that’s great practical advice. Thank you. Of course, this assumes our listeners have a service roadmap, but that is a topic for another day.

Greg Alexander [00:06:22] It is.

Sean Magennis [00:06:26] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Jessica Nunez [00:06:52] Hello, my name is Jessica Nunez. I own TruePoint Communications. We serve a company’s marketing needs with B2B and consumer services. Our clients turn to us to propel their brand forward through marketing, public relations and social media. We solve this problem by providing a custom marketing and communication strategy tied to business goals and designed to meet the unique needs of their core audience. If you need help with awareness for your business that propels your brand forward, visit our website at TruePointAgency.com.

[00:07:27] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire, we aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your service design is working for you. If you answer no too many times your service design is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:27] Number one, are you offering a service that clients already by? Number two, are there many legacy firms providing the service? Number three, are these legacy firms ripe for disruption?

Greg Alexander [00:08:45] Yes, I mean, one, two and three, if you answer yes to those three questions, I mean, you’re in a great space.

Sean Magennis [00:08:49] Yep.

Greg Alexander [00:08:50] Just outmaneuver everybody.

Sean Magennis [00:08:52] Number four, can you use less expensive labor to deliver it?

Greg Alexander [00:08:57] And that’s where to start, because 80 percent of the cost structure is is human capital.

Sean Magennis [00:09:01] Number five, can you use technology automation to streamline it? Number six, can you perform the service better than the alternatives?

Greg Alexander [00:09:13] And that’s in the eyes of the beholder. The client.

Sean Magennis [00:09:14] Right. Number seven, can you perform the service faster than the alternatives? And number eight, can you perform the service cheaper than the alternatives? Number nine, can you combine better, faster and cheaper into a single value proposition? And number ten, are you staying away from the latest fad that might not have staying power?

Greg Alexander [00:09:45] So number 10 may appear to be out of place when compared to one through nine, but it’s been there for a reason, and that is sometimes boutique owners think the only way to grow is to get into the new thing. And as you saw with bookkeeping, that’s not true. You know, if you’re in a large, quote, commodities market, then be the disruptor. And if you are the disruptor, meaning you do things differently, can make a lot of money in traditional marketplaces.

Sean Magennis [00:10:08] That’s what I love about this Greg, it’s introducing contrarian thoughts, very powerful. So in summary, entrepreneurs often do not put innovation and service design in the same sentence. Boutiques do not look at themselves as disruptors. The innovator label is most often only applied to leaders of product companies. Yet the facts point in another direction. 67 percent of the US economy comes from the service industry, and 49 percent of the workforce is employed by small businesses. The biggest opportunity for you is to disrupt the legacy professional services sector. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thank you, Greg. I’m Sean Magennis and thank you for listening.

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Episode 35: The Boutique: How to Prevent Greed from Stopping Your Exit

Greed, if left unchecked, can get in the way of a successful exit. On this episode, Collective 54 founder Greg Alexander shares a shareholder alignment framework to help you keep greed from stopping your successful exit

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case that greed, if left unchecked, can get in the way of a successful exit. I’ll try to prove this theory by interviewing Greg Alexander. Capital 54’s founder and chief investment officer. Greg has developed a framework to help you keep greed from sinking your deal. Greg, as always, good to see you. And welcome.

Greg Alexander [00:01:06] Thanks, pal. Nice to be here. I see we are tackling one of the seven deadly sins today. Maybe we should start by saying 10 Hail Mary’s.

Sean Magennis [00:01:16] I use that frequently, but I think we’re okay as I actually took… My mother would be proud. Greg, in all seriousness, what does greed have to do with exiting a boutique professional services firm?

Greg Alexander [00:01:32] Unfortunately, a lot. A common reason that attempts to exit fail is a lack of shareholder alignment. A good deal for some is not a good deal for others. Disagreements over who gets what and when they get it have sunk. Many deals. Greed is a very powerful force.

Sean Magennis [00:01:52] It is indeed. And I can see this being a real issue as many professional services firms are organized as partnerships with each partner being a shareholder. They all have rights and getting everyone on the same page can be tricky. Greg, I. I often hear you speak about shareholder and stakeholder alignment. Can you define these terms for our audience?

Greg Alexander [00:02:16] Sure, a shareholder, is anyone who owns a share in the boutique. A stakeholder is a person or group who has a stake in the business. For instance, in boutiques, clients, they’re a stakeholder. They rely on the firm. So they have a stake in the firm’s business. Or your bank is a stakeholder. They depend on you to pay back the line of credit, for instance.

Sean Magennis [00:02:45] And why do shareholders and stakeholders play an important role when an owner is trying to exit?

Greg Alexander [00:02:52] They can prevent a deal from happening. So let’s start with the shareholders. For instance, they will vote on the exit, either approving it or not. If enough shares vote against the deal, it does not happen. And at times, it can be nuanced and more nuanced than this. For example, let’s say one of our listeners is the majority shareholder and he has enough power to approve the exit. However, his junior partner, who owns 10 percent of the shares, does not want the deal to happen. The junior partner can cause real problems as he is a key employee. And if he threatens to quit, the acquirer might get cold feet and not do the deal. The investor is buying a people driven business. And if key employees do not want to stay, they’re not going to go through with the sale. Majority and minority control are an important element, but in practical terms, not as much as you think. The same can be said about stakeholders. Stakeholders have rights and can prevent deals from closing as well. For example, the landlord is protected by the lease agreement. The bank is protected by the loan agreement. In some cases, stakeholders are not protected by legal agreements, but they might as well be. For example, a key client legally cannot prevent a deal from happening, but they can stop it in other ways. The key client can tell an investor during diligence that if this deal goes through, he will take his business to a competitor that can stop a deal dead in its tracks.

Sean Magennis [00:04:36] I can clearly see how getting both the shareholders and the stakeholders on the same page is absolutely mission critical. This is a tough question. How is this accomplished?

Greg Alexander [00:04:51] Well, as they say, half of a solution to a problem is recognizing that you have one. So if you’ve listened to this show, you’re halfway there. The remaining 50 percent can broking- can be broken down into two actions. So, number one, have the difficult alignment conversations before you attempt an exit, negotiate who gets what and when they get it way before a deal is on the table. And number two is to remind everyone about the alignment frequently during the process. It’s important to keep everyone in the boat focused on the predetermined definition of success. When offers start coming in, you cannot let anyone conveniently change their mind.

Sean Magennis [00:05:41] This is excellent advice, Greg. Negotiate internally first and get everyone to agree on an acceptable price and deal terms prior to attempting an exit. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Scott Conard [00:06:22] Hello, my name is Dr. Scott Conard and I own Converging Health Consulting. Warren Buffett talks about health care being a tapeworm on the economy. Well, it’s a vampire on young companies who need their capital for growth. We serve companies that want to decrease the cost while improving their health benefit offering. They turn to us for help with the number two cost in most service companies health benefits. We initially work with them to flatten and then lower their costs while building a stronger culture, loyalty and engagement. We do this by having a 20 minute call with a CEO or president and their H.R. staff, where we explain a 30 day free evaluation of their current situation from a contractual and clinical viewpoint. If you need help with reducing health benefit costs while building and improving a stronger culture, reach out to me at [email protected] or 817-691-4970.

Sean Magennis [00:07:15] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:07:31] Okay, so this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions in this instance, if you answer yes to eight or more of these questions, you have greed in check. If you answer no, too many times, shareholders and stakeholders will put your deal at risk by bickering over who gets what and when they get it. Let’s begin.

Sean Magennis [00:08:14] Number one, do you have more than one shareholder?

Greg Alexander [00:08:18] You know, obviously, if you’re the sole proprietor.

Sean Magennis [00:08:21] It is a lot easier.

Greg Alexander [00:08:22] It is a lot easier. Yeah.

Sean Magennis [00:08:24] Number two, do they agree on an acceptable price?

Greg Alexander [00:08:28] You know, I would tell you this is a difficult conversation and the reason for that is, is that when you get all the shareholders together in a room and you asked a question, you know, what would you accept for the firm? They throw out these numbers and they have no basis, in fact. So handling this with care and making sure that everybody understands the common way upon which to value a firm like yours and bring some type of method to the conversation helps a lot.

Sean Magennis [00:08:52] And you always said preparation is key and planning and taking the time to do it properly.

Greg Alexander [00:08:57] Sure.

Sean Magennis [00:08:58] So number three, do they agree on the terms of the deal?

Greg Alexander [00:09:01] Another issue. You know, sometimes people are doing this for the first time, so they don’t understand things like rolling your equity or an earn out, how much cash is paid at closing, etc..

Sean Magennis [00:09:12] Number four, are everyone’s expectations, which is what we discussing, are everyone’s expectations realistic?

Greg Alexander [00:09:19] Yeah.

Sean Magennis [00:09:20] Number five, do you have multiple stakeholder groups?

Greg Alexander [00:09:24] Yep. So don’t just pay attention to shareholders. Make sure you’re thinking about your stakeholders as well.

Sean Magennis [00:09:29] And number six, do you know what each stakeholder group wants? Number seven, are their expectations realistic? Number eight, do you know which stakeholder groups could get in the way? Number nine, do you know what the acquirer will require from each of them? And number ten, can you find a compromise between the acquirer and the stakeholder group?

Greg Alexander [00:09:57] Yeah, there’s always a compromise. OK. So the solution to preventing greed from stopping your exit is just find- just find common ground and, you know, at the risk of being crude. Don’t be a pig, yourself. You know, if you want to keep greed in check. Don’t be greedy.

Sean Magennis [00:10:14] Yes. Well said, Greg. So in summary, remember that shareholders own part of your firm. They have rights and will need to agree with you and your deal. And keep in mind, you have stakeholders as well. They also need to agree for you to close. It is best to get alignment prior to attempting to exit. There is usually a compromise that makes everyone happy. However, this compromise is very hard to identify under the hot lights of a deal.

Sean Magennis [00:10:49] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

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Episode 34: The Boutique: What to Do When Clients Do Not Recognize Your Brilliance

Firms that add a great client experience to high-quality work reach scale, and those who do not, stay small lifestyle businesses. On this episode, we discuss the importance of the client experience to driving client satisfaction.


TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean McGuiness, CEO of Capital 54 and your host. On this episode, I will make the case that there is a difference between quality work and a great client experience. Firms that add a great client experience to high quality work reach scale and those who do not stay small lifestyle businesses. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg has helped many firms see the importance of the client experience. Greg, great to see you. Welcome.

Greg Alexander [00:01:19] Hey, Sean, good to be with you today.

Sean Magennis [00:01:20] Greg, I’d like to start by asking you, what is the difference between quality and client experience?

Greg Alexander [00:01:28] OK, so quality is measured by the finished product. So, for example, the quality of this podcast is determined by the quality of the recording. If the audience could not hear us clearly, this would be a low quality product. Client experience is measured by how a client feels when working with you. For example, I drive an old Cadillac which requires service. I love my dealership because when I show up, they remember my name. They greet me with a hot chocolate chip cookie.

Sean Magennis [00:02:01] Nice.

Greg Alexander [00:02:03] They have the vehicle history in front of them and they get me on my way quickly. They don’t just fix the car. Does this make sense?

Sean Magennis [00:02:11] Yes, it absolutely does. So why should a boutique professional services firm care about this?

Greg Alexander [00:02:19] Well, some should not care. So, for instance, firms who are not trying to scale can get away with ignoring this. However, for those listeners who are trying to scale, this is a must have not a nice to have. And here’s why. The reason is as you scale, you will attract more sophisticated clients. This is wonderful because they have bigger budgets and these clients are very profitable. However, they also have higher expectations. Chances are they have hired many professional services firms before and some of the best in the world. Their idea of what good looks like is very different. And if you don’t rise to the occasion, you will not be able to do work for these top companies. And if you cannot serve the top clients, you will never scale.

Sean Magennis [00:03:14] That makes complete sense. I would also add that one of the best things of scaling a firm is the opportunity to work with the best clients. The work is much more stimulating. So, Greg, what is a firm trying to scale really need to do?

Greg Alexander [00:03:31] So, they need to implement a client experience program.

Sean Magennis [00:03:35] Greg, what’s a client experience program?

Greg Alexander [00:03:37] Yeah, so that’s a big question. So I would ask you in the audience to bear with me as I attempt to answer this.

Sean Magennis [00:03:43] Got it. I know you’re going to do a great job.

Greg Alexander [00:03:45] OK. So a client experience program can be described as understanding the client journey and acting on it. So an illustration of a typical client journey is going to be helpful here. Usually a client journey starts when sales hands off the client to an engagement manager after a contract is signed. This is a delicate situation as the client will be leaving someone they have grown to know and are now being introduced to a stranger. Approaching the client at this moment takes skill as there is a heightened level of stress. Next, this handoff usually leads to some kind of project kickoff or a client onboarding process. It is critical the engagement team starts to build trust and credibility. This is done by keeping the effort level from the client very, very low. For example, the engagement manager should demonstrate that she has been fully briefed by sales and knows exactly what has transpired up to this point. Clients hate having to repeat themselves as they are very busy people. The project kickoff or client onboarding process lays out the goals and what’s going to transpire over the next few weeks or months. A great client experience always sets expectations and keeps the focus on outcomes and milestones. Clients hate uncertainty. After the onboarding or kickoff, the client begins adopting the early parts of the project. This is a great moment of stress as a client will be on a steep learning curve and no one likes to feel stupid. Be sure to recognize this insecurity and take action to replace their feelings of ignorance with some quick wins. The next part of a typical journey moves from early adoption to an expansion phase. This is where the client begins to use more advanced pieces of your solution. At this moment, clients are dealing with the fear of change. Getting a client to push beyond the basics and get more advanced is like trying to get someone to lose the last five pounds after losing the first one. Complacency sets in. Yet if you do not get the client to push through this, the full benefit of the project will not be realized. And lastly, the client enters the final stage of the journey. And this is project completion. It is important for the boutique to quantify the benefits of the project and to congratulate the client for a great job. This will result in a new client journey kicking off as another project starts up. Or if the project did not go well. This results in the parting of ways between the client and the boutique. Sean, that was a lot. But did you get the essence of it?

Sean Magennis [00:06:55] Yes, Greg, I did. And what struck me about this example is the emotional swings a client goes through along the way. This is a good reminder that how a client feels during the project is as important as what the client gets at the end,\.

Greg Alexander [00:07:13] You got it and notice in this example, I never once mentioned deliverables.

Sean Magennis [00:07:18] Yep didn’t.

Greg Alexander [00:07:19] You know, the quality of the work. And this is very typical. The client experience has nothing to do with the quality of the work.

Sean Magennis [00:07:26] Yes, I noticed that, Greg. And in my experience, many clients cannot tell the difference between average work and great work, but they sure can tell the difference between a bad experience and a great experience. Heck, they can feel it in the depth of their soul.

Greg Alexander [00:07:42] Yes, they can. And sophisticated clients demand a great client experience. As our listeners scale, they will be dealing with clients with higher expectations. So this becomes very important.

Sean Magennis [00:07:55] Absolutely. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Denise Lambertson [00:08:24] Hello, my name is Denise Lambertson and I own an agency called LMS. We serve the consumer packaged goods industry in the US that are distributing the brick and mortar retail as well as direct to consumer and e-commerce. These cries turn to ask for help with connecting with the consumer, whether it’s sales, community building, like social media growth or education and awareness. We solve this problem by the most effective celebrity and influencer marketing solutions. If you need help with building your influencer marketing program, reach out to me through www.wearelms.com. That is w-w-w-.-w-a-r-e-l-m-s.com.

Sean Magennis [00:09:06] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help the listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your client experience is working for you. If you answer no too many times a poor client experience is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:10:12] Number one, have you documented the client experience journey for your firm? Number two, do each of your clients feel that they are important to you? Number three, do you understand the emotional context of the client during the engagement

Greg Alexander [00:10:35] most often overlooked.

Sean Magennis [00:10:37] Yep. Number four, do clients know why you were doing what you were doing? Number five, do clients feel they are part of the engagement team?

Greg Alexander [00:10:51] Super important, the client needs to feel like you’re on their team and you’re pursuing their goals.

Sean Magennis [00:10:58] Number six, do clients know what is going to happen next before it happens?

Greg Alexander [00:11:03] Again, they hate uncertainty. Yeah, tell them what you’re going to do before you do it.

Sean Magennis [00:11:06] Communicate and overcommunicate. Number seven, do you research meeting attendees prior to each meeting? Number eight, do you send prereading material to clients with enough lead time?

Greg Alexander [00:11:22] This drives me crazy. You know, I hire service runners myself and they’ll send me a deck five minutes before the meeting. I want to strangle them.

Sean Magennis [00:11:29] Absolutely. Number nine, do you make it easy for clients to use your materials internally?

Greg Alexander [00:11:36] That’s the other thing. You know, sometimes people are proud of their work. So they they, you know, put their logo everywhere and they want to take credit. This isn’t about you. It’s about the client. So allow your client to plagiarize your work.

Sean Magennis [00:11:48] And they paid for it.

Greg Alexander [00:11:48] Yes.

Sean Magennis [00:11:49] Number ten, do you call the client after every meeting to confirm the goals were met?

Greg Alexander [00:11:55] Just good hygiene.

Sean Magennis [00:11:58] So in summary, quality work is a commodity that’s tough I know, for a lot of you to hear you are proud of what you produce and you should be. It took years to develop your expertize. However, some clients are not capable of recognizing your brilliance. And you are not the only firm, by the way, providing quality work boutiques that scale understand the client experience is much more important for fewer firms can deliver outstanding experience in addition to quality work. This is the unique differentiator to develop in the scale stage. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you, Greg. And thank you to our audience for listening.

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Episode 33: The Boutique: A Practical Guide to Monetize Professional Services

In this episode of The Boutique podcast, Collective 54 founder Greg Alexander explores the nine common ways to make money in the professional services industry. You will learn how to monetize your services and which monetization strategy makes the most sense for your business.

How Can a Professional Services Firm Monetize Its Services?

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale, and sell your firm at the right time for the right price and on the right terms. 

I’m Sean Magennis, CEO of Capital 54, and your host on this episode. I will make the case that boutiques constrain their growth by thinking too narrowly about monetization. They often think there is only one way to charge, and only a couple of revenue sources are available to them . When in fact, there are nine common ways to make money in the professional services industry. 

I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is a monetization wizard of sorts. He will present a practical guide on how to monetize your services. Greg, good to see you. Welcome.

Greg Alexander [00:01:22] It’s good to be here.

Nine Common Ways to Monetize Professional Services

Sean Magennis [00:01:24] OK, let’s jump into it. Greg, tell us about the nine common ways to monetize professional services.

1. Hourly Billings

Greg Alexander [00:01:30] OK, so the nine most commonly used sources of revenue in professional services are number one hourly billings. Charging clients an hourly rate has the benefit of being easy to implement. However, it limits how much revenue you can generate. 

There is a fixed number of hours, and there is an upper limit on how much you can charge for each hour. 

2. Retainer

OK, number two, retainer. This is when a client pays you upfront to secure your services when needed. This has the benefit of getting paid in advance in a predictable cash flow. However, there are only so many retainers a boutique can handle at one time. 

3. Fixed Bid

OK, number three, fixed bid. This is using a flat amount, regardless of the hours worked. This is profitable work for boutiques if they can scope projects correctly. Clients are buying the deliverables, not the boutique’s time. If a firm struggles with estimating the level of effort for a project, this can be a money loser. These are the first three. Let me pause here and check in. Should I keep going?

Sean Magennis [00:02:36] Yes, Greg, I’m tracking right with you and hopefully the listeners as well. So taking note, hourly billings, retainer, and fixed bids. Got it. So a good refresher on the differences between the three, for example, many boutiques confused retainers and hourly rates.

4. Performance-Based Contracts

Greg Alexander [00:02:57] OK, good. So, number four, let’s move to performance-based  contracts. So goals are established. If the firm is successful, they get paid. And if they fail to deliver, they do not. This allows a boutique to capture upside as they are usually uncapped. The risk, of course, is if you do not produce, you lose your shirt. 

5. Membership Dues

Hey, let’s go to number five membership dues. This is when a client pays a professional services boutique if they see value in being in a group with other clients. The annual dues grant access to a group of people in similar jobs dealing with similar issues. This is profitable for boutiques as it scales nicely. 

Small amounts of staff can manage a large number of clients. The risk, however, is if you have unhappy clients, the word is going to spread very quickly. 

6. Licensing Revenue

OK, number six is licensing revenue. A client pays a licensing fee to a professional services boutique to use intellectual property. Many boutiques have methodologies and tools that clients want unlimited access to. They pay a license fee for this right. 

The risk to a professional services boutique with this is an inability to productize this service offering. If every project is a snowflake, this does not work. 

7. Subscription-Based Model

And number seven, a subscription-based  subscription is paid to a boutique by a client to gain access to an asset. For example, many boutiques have proprietary benchmark data. Clients who want access to this data pay subscription to a database. 

The risk with this is managing the asset. For example, in this case, if the data ages, it becomes worthless, and clients attrit. So Sean, let me check in again. Are you still tracking?

Sean Magennis [00:04:45] Yes, I’m right with you. So let me recap for five, six, and seven. We have performance-based  fee memberships, licensing, and subscriptions. Tell me about the last two, eight, and nine.

8. Events 

Greg Alexander [00:04:59] OK, so number eight is events. This is when clients buy a ticket or tickets to be granted admission to an event the professional services boutique puts on. This is very profitable as, typically, sponsors cover the cost of the event, and ticket sales are all profit. The risk is, of course, if no one buys tickets and no one shows up, that can be embarrassing. 

9. Royalties

And then lastly, number nine is royalties. This is when a boutique does not monetize the client but instead, they monetize other boutiques. This is often used by boutiques that  have training products in their bag. They allow other firms to use their training materials and collect a royalty every time they do. 

The risk with this is theft. A boutique that  chooses this monetization strategy needs to understand paywalls and royalty agreements. So, there you have it—nine ways to monetize professional services.

How Do You Pick The Right Way to Monetize a Professional Services Firm?

Sean Magennis [00:05:54] This, Greg, was an excellent overview of the practical ways to monetize. I have a nagging question in my head. So how do you pick the right one?

Greg Alexander [00:06:04] Well, you don’t. So going into the market with a single revenue source is a mistake. The important lesson here is to have multiple revenue sources. Therefore, our listeners should be asking themselves, what is the right mix for me? 

If you have one, try to get to two. If you have to try to get to three and so on. It is not uncommon for me to meet an owner, look at her business and locate two to three additional revenue sources within an hour. This opportunity is often right under an owner’s nose. They just need to know where to look.

Sean Magennis [00:06:38] Greg, again, really connecting hard and a little creativity and courage can also go a long way.

Greg Alexander [00:06:45] Yes, it can.

Sean Magennis [00:06:46] So thank you, Greg. And now a word from our sponsor, Collective 54. Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow, scale, and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Stephanie Groschup [00:07:16] Hello, my name is Stephanie Groschup, and I’m co-founder of GM Wealth Group. We serve women entrepreneurs and other business owners, corporate executives, and high net worth individuals across the United States. 

At GM Wealth, we create strategies to address tax-efficient growth of their businesses, planning for concentrated positions of company stock and other financial issues affecting them and their families. We create solutions by understanding those challenges that they face. Each solution is customized and client-specific. 

Please reach out to me if you’re facing some of the same challenges with company stock, tax-efficient growth in your business, or if you need help with addressing specific financial needs for you personally. You can reach me at www.GMWealthLLC.com or [email protected].

Questions to Ask to Know If Your Monetization Strategy is Working or Not

Sean Magennis [00:08:12] If you are trying to grow, scale, or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode. Let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. 

Our preferred tool is a checklist, and our checklist-style  is a yes-no questionnaire. We aim to keep it simple by asking only ten questions. In this instance, if you answer yes to eight or more of these questions, your monetization strategy is working for you. 

If you answer no too many times, your monetization strategy is not working, and you are more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:09:13] Number one, will the client pay you more than five hundred dollars an hour?

Greg Alexander [00:09:19] So, this is important if you’re going to charge by the hour, and many of our listeners might say, “Boy, that’s a big number.” Well, the reason why it’s a big number is because you’re going to have wage inflation. 

So, if you hire somebody today and pay him one hundred thousand dollars next year, you will pay 110,000 the year after that and pay them 125,000. So, you better be able to charge a high hourly rate to accommodate for wage inflation.

Sean Magennis [00:09:37] Yes. Number two, will a client pay you in advance to secure your services on demand?

Greg Alexander [00:09:44] If yes, then you have a retainer.

Sean Magennis [00:09:46] Number three, can you scope your projects with precision?

Greg Alexander [00:09:51] If yes, that’s a fixed bid.

Sean Magennis [00:09:54] Number four, can you prove direct attribution of results in your project?

Greg Alexander [00:09:59] This goes to performance-based .

Sean Magennis [00:10:01] Number five, will your clients pay you for the privilege of speaking to your other clients?

Greg Alexander [00:10:06] If yes, that’s a membership.

Sean Magennis [00:10:09] Number six, will your clients pay you for the right to use your intellectual property?

Greg Alexander [00:10:15] If yes, that’s a licensing fee.

Sean Magennis [00:10:18] Number seven, do you have proprietary data that clients would like to subscribe to?

Greg Alexander [00:10:23] If, yes, you have a subscription business.

Sean Magennis [00:10:26] Number eight, do you put on events that are clients willing to buy tickets to attend?

Greg Alexander [00:10:32] Obvious.

Sean Magennis [00:10:32] Yep. And number nine, are other boutiques willing to pay you royalty to distribute your intellectual property?

Greg Alexander [00:10:40] Do you know who are  the most profitable rock and roll band of all time?

Sean Magennis [00:10:44] It’s got to be the Rolling Stones.

Greg Alexander [00:10:47] Kiss.

Sean Magennis [00:10:48] Kiss, great band.

Greg Alexander [00:10:49] Because of their royalties and their licensing.

Sean Magennis [00:10:51] Wow.

Greg Alexander [00:10:51] They figured out how to make money without touring.

Sean Magennis [00:10:54] That makes total sense now that I think about it. And then finally, number ten, does your business model include at least three sources of revenue?

Greg Alexander [00:11:02] And that’s the most important one.

Sean Magennis [00:11:04] Yep. Greg, thank you again. This is brilliant stuff. So, in summary, there are many different sources of revenue available to boutiques. Develop a clever monetization strategy. Think about a mix of revenue, not just one source. 

If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.

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Episode 32: The Boutique: The Anatomy of the Buy vs. Build Decision

To sell your firm you must prove to a buyer that buying your firm is a better move than building the practice internally. Collective 54 founder Greg Alexander reviews a framework to assess the buy vs. build decision from the perspective of an investor.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host on this episode. I will make the case that to sell your firm, you must prove to a buyer that buying your firm is a better move than building the practice internally. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s, founder and chief investment officer. Greg has developed a framework to help you think through the buy versus build decision from the perspective of an investor. Greg, great to see you. Welcome.

Greg Alexander [00:01:11] Thanks, Sean. Good to be with you today.

Sean Magennis [00:01:13] So allow me to set the stage a bit before I begin asking you some questions. When considering an acquisition, a strategic acquirer starts with a fundamental question. Should we buy this boutique or build the practice internally and owners who want to sell their boutiques must make it more attractive for a strategic to buy. Greg, in this context, what makes it more attractive to buy?

Greg Alexander [00:01:41] Three things. Time, cost and probability of success.

Sean Magennis [00:01:46] So time, cost and probability of success. Let’s take this one at a time when you say time. What do you mean exactly?

Greg Alexander [00:01:56] Sure. When a strategic buyer is looking at acquisition it is often to fill a gap. The market shifts and at times larger firms portfolio of service offerings falls behind. Clients are asking them for help in a certain area and they cannot deliver. So they must often miss the revenue opportunity. This gap can be filled either by building the capability internally or it can be filled by purchasing a firm who specializes in the area. The urgency on which the gap needs to be filled drives the timeline. If the market allows the strategic enough time to build the capability internally, they will. However, if the market is moving very fast, the strategic will buy a boutique. This gives them the capability the day the deal closes. And this is much, much faster.

Sean Magennis [00:02:49] Excellent. That this makes total sense. So let’s now turn to number two cost. So in this context, how does cost impact the buy versus build decision?

Greg Alexander [00:03:01] Well, cost is just as important as time. So, for example, right now, marketing agencies are buying up tech specialists. Why? Their clients are demanding more and more digital capability from them. And it is very expensive to build this out internally. Those who have tried to do so have failed miserably and paid a lot of dump tax. It is much more cost effective to acquire boutiques with specific digital capabilities.

Sean Magennis [00:03:33] I can see that, Greg, and there are many examples of multi-million dollar technology mistakes. Number three is probability of success. I think I know what you’re referring to here, but please expand for the audience.

Greg Alexander [00:03:48] So probability of success is often added to time and cost when deciding to buy or build. Professional services firms are only as successful as their reputation allows. A few high profile failed projects and a firm could become worthless overnight. When a large firm expands into new service areas, they are putting at risk long standing client relationships and millions of dollars of annual billings. They cannot afford to stub their toe, so they often buy and pay up great boutiques just to be sure this is going to work.

Sean Magennis [00:04:30] These are great examples, Greg. So this three point framework to think through the buy versus build decision from the viewpoint of the buyer is very helpful.

Sean Magennis [00:04:43] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Charles Fenstermaker [00:05:09] Hello. My name is Charles Fenstermaker. My family owns CH Fenstermaker and Associates LLC. For over 70 years, we served customers in the energy market as well as state and municipal governments, primarily throughout the Gulf Coast region. Our clients turn to us for help with projects dealing with surveying and mapping, civil engineering and environmental regulatory challenges. If you need our help in the surveying civil engineering and environmental regulatory space, you can find us at www.Fenstermaker.com. That’s www.f-e-n-s-t-e-r-m-a-k-e-r.com.

Sean Magennis [00:05:49] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.

Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm, our preferred tool as a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple, by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, strategics will find buying you is more attractive than building internally. If you to no, too many times strategics will most likely decide not to buy you and instead build internally. Let’s begin.

Sean Magennis [00:06:48] Question number one, as the market shifted, creating a gap in the service portfolios of the market leaders in your niche? Number two, are these market leaders aware of this gap?

Greg Alexander [00:07:03] Don’t assume that sometimes these big firms are just plotting blind. Yeah.

Sean Magennis [00:07:08] Number three is the gap, one that urgently needs to be filled? Number four, have you directly competed with the market leaders on a deal in this specific area? Number five, did you win?

Greg Alexander [00:07:25] Yeah, I mean, the quickest way to get people’s attention is be to beat them at that deal.

Sean Magennis [00:07:29] Question number six, do the market leaders know they lost to you? Number seven, do they know they lost because you have a capability advantage over them?

Greg Alexander [00:07:40] This is key. Very often they assume they lost because you were cheaper. What would be fantastic if the listeners could pull this off, is you competed head to head, you won and you were more expensive than them. That will really catch their attention.

Sean Magennis [00:07:54] Outstanding. Number eight, if they were to fill the gap, would it be faster to buy you? Number nine, if they were to fill the gap, would it be cheaper to buy? And number ten, does their probability of successfully filling the gap go up if they buy you?

Sean Magennis [00:08:16] In summary, the buy versus build discussion is happening with or without you. It is best for you to participate in and frame that discussion. Make a strong case that acquiring your firm is faster, cheaper and more likely to be successful than building out an internal practice.

Sean Magennis [00:08:40] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique Artist Start Scale and Sell a professional services firm. I’m Sean Magennis. Thank you for listening.

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Episode 31: The Boutique: 5 WAYS TO REMAIN RELEVANT TO YOUR CLIENTS

Scaling a boutique requires creating new service offerings. Firms that keep bringing the same thing to clients, over and over, stall out due to client fatigue. Building a system to continuously listen to clients and develop new offerings is key.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale a boutique, it is required to develop new service offerings. Firms that keep bringing the same thing to clients over and over stall out due to client fatigue. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg took his firm from one offering at launch to 100 offerings at Exit. Greg, good to see you and welcome.

Greg Alexander [00:01:13] Sean, it’s good to be with you today. I look forward to today’s episode.

Sean Magennis [00:01:16] Greg, the other day, we were meeting with an entrepreneur who was inquiring about growth capital from Capital 54. Her firm is nine years old and she asked you how you broke out of the complacency trap. You answered her by saying, we went from a one hit wonder to a firm with a greatest hits album. Can you explain to the audience what you meant by this?

Greg Alexander [00:01:43] Sure. So I launched SBI in 2006 with one service offering. It was a methodology to interview and hire salespeople. It was a hit. It got me on the main stage keynoting the INC 500 show, got me on TV and on the bestseller list. It generated lots of clients and it got me in the door of top companies. As we began servicing clients in this niche, we noticed our clients had other problems. For example, you could hire a great salesperson, but if you did not train him, he would fail. We would bring this to the attention of the client and because they trusted us, they acted on it. Unfortunately, at that time, this meant they hired other consulting firms who specialized in that problem area. I felt this was revenue that was rightfully ours as we identified the need. Yet we did not have service offerings in these areas, so we missed out. This prompted me to build a system to continuously listen to clients and develop new offerings. This significantly increased our addressable market and was a main contributor to our future growth.

Sean Magennis [00:02:55] Excellent, Greg. And when you say we built a system to continuously listen to clients, what do you mean?

Greg Alexander [00:03:02] Yeah, we did five specific things, and I’ll walk you through each one because this will be helpful to the audience. So first we created a client advisory board. This consisted of a mix of current and past clients. We met periodically through the year whereby they told us the problems they were having, their priorities and goals, and described for us the solutions that they were looking for. Number two, we created a post project review process. In practical terms, this meant we did an autopsy on project objectives, timelines, profitability, budgets, deliverables and adherence to our SOPs. This often led to ideas for new service offerings. Number three, we initiated a client satisfaction program. This consisted of sending client personnel a questionnaire from time to time. And some of the questions were defined to get input on our product roadmap. Number four, we obsessed over our win loss program. After every sales campaign, the client told us why we won and the client told us why we lost. This was a treasure trove. Often we lost because we lacked the capability the prospect wanted. We immediately built that capability and watch the close rate improve as a result. And number five, we sent the team to conferences and these were not conferences for our industry. The sales effectiveness industry. No, we went to the conferences our prospects and clients went to. We would deconstruct the speaker decks, the agenda, the trade show floor, the sponsors. This told us where the market was heading. It told us what our clients were focused on and we would build offerings directed at these top priority items. And I should say this was a lot of work. But I can tell you, it taught us a very important lesson that I’d like to share with the audience. The lesson is your opinion doesn’t matter. The only thing that matters is the clients start with the big question what does the client want? And expand your offerings to make yourself more valuable to your clients. They will reward you with their budget dollars.

Sean Magennis [00:05:17] This is so excellent, Greg. And right on. So start with the question. What does the client want? And do five things to find the answers. One, create an advisory board. Two, conduct post project reviews. Three, execute a client satisfaction program for and this is one of my favorites, perform win-loss interviews after each sales campaign and five attend the conferences your clients attend.

Greg Alexander [00:05:51] You got it partner.

Sean Magennis [00:05:51] Perfect Greg. So, great takeaway value for our listeners. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

John Amos [00:06:25] Hello, my name is John Amos and I’m the founder and owner of Invex Technology Solutions. Index is a veteran on small business that provides cloud cybersecurity and big data services for the federal government and commercial businesses in the Washington, D.C. metro area. Our clients turn to us for help with designing and building and operating their systems in a secure cloud environment. We apply industry best practices to deliver cloud based systems that meet the client’s goals and objectives while complying with rigorous security constraints. If you need help with moving or operating your systems in a secure cloud environment, reach out to me www.Invextechs.com or drop me an email at [email protected].

Sean Magennis [00:07:09] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. This takes us to the end of the episode, as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions in this instance, if you answer yes to eight or more of these questions, developing new service offerings is not getting in your way. If you answer no too many times you have a lack of new service offerings, which is a problem. Let’s begin.

Sean Magennis [00:08:10] Number one, is your growth dependent on increasing revenue from existing clients?

Greg Alexander [00:08:17] And in scale, it has to be.

Sean Magennis [00:08:18] Yep. Number two, do you need new reasons to remain relevant to your clients?

Greg Alexander [00:08:25] All the time.

Sean Magennis [00:08:27] Number three, do your clients eventually get fatigued? Number four, do you know what your clients need?

Greg Alexander [00:08:37] Now, let’s be careful, audience, don’t be arrogant here. You think you do, but you only know the answer to that question if you ask him relentlessly.

Sean Magennis [00:08:44] 100 percent. Number five, can you continuously learn what your clients need?

Greg Alexander [00:08:50] It’s right under your nose to do some of the basics.

Sean Magennis [00:08:53] Yep. Six. Would your clients participate on a client advisory board?

Greg Alexander [00:08:59] You’d be surprised. Clients love to do that. They if you have a good relationship with them, they’re happy to participate.

Sean Magennis [00:09:05] Number seven, can you implement post project reviews?

Greg Alexander [00:09:10] Well-worn territory, lots of best practices available.

Sean Magennis [00:09:13] Yep. Number eight, can you perform client satisfaction reviews after every project?

Greg Alexander [00:09:20] Also c sats everywhere.

Sean Magennis [00:09:21] Got to do it. Number nine, and you perform when the reviews after every sales campaign?

Greg Alexander [00:09:28] You know, I’m shocked at this, but I would tell you that within collective 54 as an example. I’d say less than 10 percent of members do that religiously, and it’s such a shame to missed opportunity.

Sean Magennis [00:09:38] It’s a huge missed opportunity and a missed opportunity for your sales professionals who really get a tremendous amount out of it. And number ten, are they relevant industry conferences that you can attend?

Greg Alexander [00:09:51] You know, the people that put on those conferences know what they’re doing. Right?

Sean Magennis [00:09:54] They sure do.

Greg Alexander [00:09:54] So they think long and hard about that agenda. So if there’s a topic on that agenda, you can guarantee that your clients care about it.

Sean Magennis [00:10:00] I love that idea. And in summary, if you have one thing to sell and deliver, scale will be very hard. Expand your offerings, increase your addressable market, be more valuable to your clients, accelerate scale through service offering development. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Greg, great to be with you. I’m Sean Magennis. Thank you for listening.

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Episode 30: The Boutique: Scaling the Sales Function in a Professional Services Firm

As a firm scales, it must make a significant change to its sales strategy. On this episode we discuss how the sales strategy changes at different stages of a firm’s lifecycle.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I am Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as a firm scales, it must make a significant change to its sales strategy. The sales approach in a small young firm becomes obsolete when scale becomes the focus. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg built the legendary sales team at SBI, which led to record setting scale, you’re in for a treat today. Greg, good to see you and welcome.

Greg Alexander [00:01:15] Sean, my boy, it’s good to be with you. Today’s topic is my favorite thing to talk about. There simply is nothing more important to a professional services firm than the sales strategy.

Sean Magennis [00:01:29] Greg, amen. This topic is the most requested topic from our listeners. I’m thrilled to have you share your knowledge in this area today. Let’s get straight into it. I opened by stating that the sales strategy needs to change when scaling a firm becomes the focus. Can you explain why this is?

Greg Alexander [00:01:50] Sure. So let me frame this up for the audience. So boutiques have a lifecycle. I like to say they grow scale and exit over the course of time. At each lifecycle stage, the sales strategy goes through a dramatic change. For example, during the growth phase, virtually all the selling is done by the founders. In the goal is opening new accounts. During in the scale stage, the selling effort is split between the founders and the employees. In the objective is expansion revenue from existing clients. And during the exit stage, all the selling effort is done by the employees with zero involvement from the founders. The goal in this stage is to prove to a buyer that the firm is not dependent on the founders to grow revenue. So given these dramatic changes in who does the selling in the goal of the selling effort, you can see how the sale strategy must change.

Sean Magennis [00:02:46] OK, I get the framing of the idea sales strategy changes at different stages of a firm’s life cycle. However, I’m not sure I understand why it needs to. Why can’t a founder who is successfully growing his firm just keep doing what he is doing?

Greg Alexander [00:03:06] Because he cannot outhustle the law of big numbers. It is easy to go from one million to three million in revenue. Just close a few big deals and you are there. But it’s very hard to grow from 10 million to 30 million. The amount of deal volume this requires outstrips the capacity of the founder or the founders.

Sean Magennis [00:03:26] Greg, tell me why that is.

Greg Alexander [00:03:28] All right. Let us think about the amount of effort it takes founders to generate enough new business to scale the law of big numbers says the owner needs to get in front of a lot of prospects. This requires a marketing push in time for word of mouth to spread articles get written and published, speeches at conferences get made, podcasts, get produced and books get written, social media accounts get filled with posts. This wider net catches a lot more fish. Yet these fish now need to be qualified. Our peace require well written responses. Competitive bake offs required decks to be created. Sales opportunities must be managed with care. Relationships need to be nurtured. Lots of miles get logged and many Hotelbeds get filled, references need to be contacted, etc.. I’m exhausted just talking about it. Opening new accounts is a lot of effort and is very expensive. If the sales strategy, when trying to scale means doing more of this, it just won’t work. Yet many boutique founders approach to scaling is working harder, not smarter. So they just keep doing this kind of activity and eventually they burn out. This is when revenue growth flatlines.

Sean Magennis [00:04:59] Yep. My my goodness, Greg, now that you lay it out like this, it is obvious that when trying to scale boutiques need to redesign the sales strategy. Greg, what should they do?

Greg Alexander [00:05:12] So let me flip the table and ask you a question, Sean. What is the primary difference between a growth stage firm and a scale a stage firm?

Sean Magennis [00:05:23] Let me think on this. Well, at the risk of stating the obvious, I would say the primary difference is the number of clients and the number of employees,

Greg Alexander [00:05:33] Atta boy. You’re correct. The scale stage firm has more employees and more clients. This means that the sales strategy during scale switches from hunting to farming. The driver behind scaling revenue growth is generating lots and lots of revenue from existing clients. Gone are the days of depending 100 percent on the partners to bring in new clients during the scale stage, boutiques should generate approximately 80 percent of their revenue from existing clients and 20 percent from new clients. This is the complete opposite from the growth stage, whereby it was 80 percent of the revenue from new business and 20 percent from existing clients. And guess who sells to existing clients, it’s the engagement team, not the founders of the boutique. The engagement team is working day to day with the client, building the relationship and uncovering new projects in the process. And the best part is this kind of selling farming is much, much easier. In fact, Salesforce.com recently looked at their customer data and suggested it’s about seven times easier to win a deal from an existing customer than it is from a prospect.

Sean Magennis [00:06:54] Greg, you’re so right. I can speak from experience that this is true. In fact, it might be conservative. Selling to existing happy clients almost is not selling. It just happens so naturally

Greg Alexander [00:07:08] It does.

Sean Magennis [00:07:11] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Jay Smith [00:07:37] Hello, my name is Jay Smith. I’m the co founder and president of Sales at Security Seven Networks. Security Seven Networks is a managed cyber security service provider. We help our clients protect their businesses and prevent cyber attacks. Our clients rely upon us to protect them from the constantly shifting digital threat landscape. We’re able to do this by providing security thought leadership around compliance and security operations. If you need help protecting your business from cyber security threats, reach out to me at [email protected]

Sean Magennis [00:08:11] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. You know, and unfortunately, we are running out of time and this takes us to the end of this episode, we could discuss the how to portion of this for hours. We will do so on a future episode. Let’s bring this home, Greg. As is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these question, your sales strategy is scaling. If you answer no too many times your sales strategy is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:09:23] Number one, are you generating a lot of business from existing clients? Number two, have you reduced your need for new clients substantially? Number three, do you understand your share of wallet for your current clients?

Greg Alexander [00:09:44] Just a quick explanation there, share of wallet says client X, Y, Z spends X amount of money on this particular area. What percentage of that spend are you capturing? That’s what share of wallet means.

Sean Magennis [00:09:58] Great point. Great number four are your current clients up to date on your full capabilities?

Greg Alexander [00:10:05] Yeah, this plagued a lot of boutiques.

Sean Magennis [00:10:07] Yep.

Greg Alexander [00:10:07] They bring it out new services and their, quote, legacy clients are unaware of them.

Sean Magennis [00:10:12] Number five, are you investing non billable hours directly into your existing clients?

Greg Alexander [00:10:18] So notice the word investing there.

Sean Magennis [00:10:20] Yes.

Greg Alexander [00:10:21] Many times boutique owners look at their utilization report and they say, hey, we’re 80 percent utilized. We have 20 percent waste. I don’t look at it that way. If the 20 percent of non billable hours is an investment into existing accounts to gen up new business, that’s not a negative. That’s a positive.

Sean Magennis [00:10:35] Yeah, I think that’s golden. Number six, have you redesigned your business development process to prioritize existing clients? Number seven, have you trained your employees on the new business development process? Number eight, are your delivery teams gold and measured on finding new opportunities?

Greg Alexander [00:11:01] Now, this will be controversial. The people that are in the, quote, delivery side, those that are tasked with being on time, on spec, on budget, they’ll say we shouldn’t be gold on finding new sales opportunities. And I disagree. During the scaling stage, their contribution to sales should be recognizing new client opportunities. And they don’t have to close them. You know, they can kick them up to the partner or they can kick them up to the BD person. But it’s their job to have the ears open where when they’re on the client site.

Sean Magennis [00:11:29] Absolutely. And I love your comment that you always make to me. Everybody should carry quota.

Greg Alexander [00:11:33] Yep.

Sean Magennis [00:11:34] Number nine, are the employees who are best at business development, your cultural heroes?

Greg Alexander [00:11:40] So important. So it sends the message, right?

Sean Magennis [00:11:42] Absolutely. And number ten, do you make sure that your current clients know how important they are to you?

Greg Alexander [00:11:50] Never take a client for granted.

Sean Magennis [00:11:52] Absolutely. So in summary, as you scale, life gets easier. You have happy clients, they buy more from you. They refer their friends to you. You win more business as word of mouth spreads the brand, your win rate goes up and your cost to acquire clients goes down. Make sure this is happening at your firm during the scale stage switch from hunting to farming. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell Professional Services Firm. I’m Sean Magennis. Thank you for listening.

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Episode 29: The Boutique: The 5 Competitors Boutiques Must Defeat to Grow.

There are 5 competitors’ boutiques must defeat to grow. On this episode Collective 54 founder Greg Alexander discusses a playbook to defeat these competitors.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal for this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that there are five competitors boutiques must defeat to grow. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has developed a playbook to defeat these competitors. I will ask him to introduce his competitive place to you today. Greg, good to see you. Welcome.

Greg Alexander [00:01:05] Hey, Sean, it’s good to be here today.

Sean Magennis [00:01:06] OK, Greg, let’s dove straight in. Tell us who these five competitors are.

Greg Alexander [00:01:11] OK, so the five competitors are in order of importance. Number one, do nothing. This is the project that went away because of a competing client priority. Number two, internal resources. This is internal client staff who think they can do what you do better than you do it and it’s quote-unquote, free. Number three boutiques. These are firms like yours in size and specialty. Number four, market leaders. These are the mega-firms that have offerings in your niche. And number five is other. This is the other ways clients can solve the problem. Often there is more than one way to skin the cat, so to speak.

Sean Magennis [00:01:53] Excellent. So there’s a do-nothing, internal resources, boutiques, market leaders, and others. What I find fascinating about this list is three out of the five are indirect competitors, do nothing, internal resources and other. These are often overlooked, but can embrace a deal from the sales pipeline in a real hurry. Greg, you mentioned these are in order of importance. How do you assign this relative importance to them?

Greg Alexander [00:02:25] I assigned relative importance based on the frequency they show up in sales campaigns. And this is determined during the win-loss review process. For example, we have learned that boutiques will compete with do nothing about 40 percent of the time. Sometimes it’s as high as 50 percent of the time. You’ll compete with internal resources about 30 percent of the time, boutiques, about 20 percent of the time, market leaders about five percent of the time and other about five percent of the time,

Sean Magennis [00:02:57] hmm, this is super interesting. My hunch is our listeners are not conducting win-loss reviews and they don’t know how they compare to these benchmarks. That should be a takeaway for all our listeners. OK, now that we know who the competitors are, how do we beat them?

Greg Alexander [00:03:18] So that is a big question requiring a long answer. Given our time constraint all I can do today is introduce the plays to run against each. Is that OK?

Sean Magennis [00:03:26] Yes, I completely understand.

Greg Alexander [00:03:27] All right. First up is do nothing, which again is 40 to 50 percent of your deals. Whether you know it or not, the way to beat do nothing is to calculate the cost of inaction for the client. This dollar figure will prove to the client that your project deserves their full attention. It is a priority and that is the goal, getting the client to prioritize your project above the other things they may be spending their time on.

Sean Magennis [00:03:51] Greg, I remember this play from another episode titled Are You Losing to Do Nothing? For those listeners interested in learning more about this, I would direct you to that show. It’s excellent. OK, Greg, what’s next?

Greg Alexander [00:04:06] Next up is beating internal resources. As a reminder, this is internal client staff. I realize it’s weird to think about the client as a competitor, but they are about 30 percent of the time. The way to defeat internal resources is to establish a deadline that the project needs to be completed by. You see, clients think they can do what you can do. However, they will never be able to do it as fast as you can. Why is this? They have a day job. This project is not the only thing on their plate. They can only dedicate a portion of their time to it. You, on the other hand, can dedicate your team to it and therefore it gets done much faster. Cell speed in this situation, deadlines are a wonderful way to defeat internal resources

Sean Magennis [00:04:54]  This is a perfect example and it makes complete sense. OK, next up is the boutiques. How should our listeners compete with firms that are just like them?

Greg Alexander [00:05:05] The silver bullet in this situation is the guarantee. Simply offer your client a money-back guarantee for any reason, no questions asked. Most owners of boutiques are risk-averse. They have limited resources. They have limited amount of money, limited amount of staff. The idea of putting fees at risk makes them very uncomfortable. The threat of not getting paid scares the, you know what out of them. By guaranteeing the work, you separate yourself from the boutique competitors. They are unlikely to match this offer and it sends a powerful signal to the client. And that signal is Mr. Client. We only get paid if we make you successful.

Sean Magennis [00:05:45] Greg, so true. As president of YPO, I hired many boutiques over the years. I was always very skeptical of those who were unwilling to put their fees at risk, and I gave my business to those who were willing to do so. And truth be told, I paid them in full every time, sometimes more. I cannot think of a single instance where I called the guarantee and demanded a refund. My message to our listeners is the risk is a myth. The reality is the likelihood of clients calling the guarantee is very low. OK, I think the next up is competing with market leaders. This is only five percent of the time. So should-should we skip over this?

Greg Alexander [00:06:32] No, no, no. Yes, it is true. You will run into the mega firms only about five percent of the time. However, these few deals can make or break a year. These are the big deals in the forecast. Just one or two wins a year in this category can turn a good year into a great year. The way to beat the market leaders involves a five-step play. It’s a little tricky, but here are the five steps. Number one, you must establish credibility. The mega-firms will try to discredit you. Number two, deliver a top-quality proposal. This will prove to the client you are credible. It’s a signal to the client that your work will be top quality. Number three, demonstrate to the client that you can complete the work much faster than the mega firms. Big firms are very slow, beat them on speed. Number four, price to work about 25 percent less than the mega firm’s. Market lead are very expensive. The fact that you are in the deal suggests a client is budget-conscious. Big firms are vulnerable because their prices are so high due to the massive overhead they carry. And number five, offer an enjoyable experience. Mega firms are like a tornado when entering the client and are very disruptive. For example, we hear all the time Bain is our pain about how difficult it is to work with Bain Consulting, one of these mega-firms. The advantage of working with a boutique over mega-firm is that it’s just simply easier.

Sean Magennis [00:08:08] While Greg, this is exceptional, five straightforward ways to win those few launch deals every year when competing with these market leading firms. Boy, OK, we’ve got one more. What play do I run when competing with other?

Greg Alexander [00:08:26] OK, so as a reminder, other means, other ways to solve the problem. For example, clients often think they can solve a problem by firing someone and recruiting new talent, or they think they can solve their problem by licensing a new software tool. These other ways to skin the cat show up about five percent of the time. The way to beat other is to do a post mortem highlight to the client. The last time they took this approach, it did not work. For instance, hiring success rates of 50 percent at best. This means solving a problem with new talent has a 50/50 chance of working. And the adoption rate of software tools is a problem that has plagued corporations for decades. It is estimated that most users use about 10 percent of the features and most software tools. That’s 90 percent waste. The odds of success working with you, the specialized boutique is clearly better than a 50/50 proposition, isn’t it?

Greg Alexander [00:09:24] This is a superb way of framing this in the minds of a client relative odds of success. It’s just fantastic. Today we learned who the real competitors are for boutiques, how often they show up, and how to defeat them. That is a ton of value in fifteen minutes. Thank you, Greg.

Greg Alexander [00:09:45] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Jude Ramayya [00:10:11] Hello, my name is Jude Ramayya. I service here offering biotechnologies. We serve small and midsize businesses looking for a true partner to unlimited potential with digital technologies. These clients turn to us when they want to digitize and automate their business processes so they can scale their business and make it available 24 by 7. We solved this problem by starting with digital strategy consolidation customized for the businesses and implementation of digital solutions with mobile, cloud, web, RPA, and artificial intelligence technologies. If you are looking for a Digital Solutions partner, please reach out to us at www.IMPIGERTECH.com, I-M-P-I-G-E-R-T-E-C-H.com.Thank you.

Sean Magennis [00:11:00] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let us try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, you are positioned very well versus your competitors. If you answer no too many times, then you are not positioned well versus your competitors and you are likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:12:02] Number one, can you calculate a client’s cost of inaction? Number two, can you find a compelling event that puts a deadline on the client’s project? Number three, are you confident enough to guarantee your work?

Greg Alexander [00:12:21] Boy, if you answer no to that when you’ve got a real problem.

Sean Magennis [00:12:23] Yep. Number four, can you establish credibility in the eyes of the client? Number five, can you signal quality to the client by delivering a best in-class proposal?

Greg Alexander [00:12:37] Remember that the first thing, the first deliverable a client sees is your proposal.

Sean Magennis [00:12:42] It’s got to stack up against the big guys, in fact, look better.

Greg Alexander [00:12:44] Yes.

Sean Magennis [00:12:45] And number six, can you deliver much faster than the market leaders in your niche? Number seven, if you earn healthy margins and still be 25 percent less than the market leaders? And I would say every day.

Greg Alexander [00:13:03] Way more.

Sean Magennis [00:13:03] Yeah. Number eight, are you more enjoyable to work with than the market leaders? Number nine, do you understand the alternative solutions to the problem you address?

Greg Alexander [00:13:15] You know, I hear this one all the time. Hey, I lost this deal because they hired a new executive, you know, and then they say, well, I really didn’t lose a deal. Yes, you did. You know, they decided to solve the problem in an alternative way. By the way, hiring a new executive is expensive.

Sean Magennis [00:13:27] Right.

Greg Alexander [00:13:28] Yeah.

Sean Magennis [00:13:28] Yep. That’s a great one. And number ten, will a postmortem revealed to the client that these alternatives have a poor track record? So, Greg, in summary, a boutique must win a high-percent of the time, they are not in enough deals to allow for many, many deals to be lost. No one wins every deal, but that should be the goal. By establishing a competitive playbook, you can make sure that you beat the bad guys. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thanks again, Greg. I’m Sean Magennis and thank you for listening.

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How to Reduce Investor Risk When Selling a Business

Episode 28: The Boutique: The Fine Line Between Risk Taking And Carelessness

One of the keys to selling your business is to reduce investor risk and eliminate the risk for the buyer. In this episode, Greg Alexander and Sean Magennis discuss how owners can increase the attractiveness of their firms and the mistakes they must avoid when reducing investor risk. 

Why Do Owners Struggle to Reduce Investor Risk When Selling a Business? 

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. This show aims to help you grow, scale, and sell your firm at the right time for the right price and on the right terms. 

I’m Sean Magennis, CEO of Capital 54 and your host. In this episode, I will make the case that one of the keys to selling a business  is to eliminate the risk for the buyer. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many boutique business owners increase the attractiveness of their firms by reducing investor risk. Greg, good to see you. 

Greg Alexander [00:01:05] Thanks, Sean. This will be a controversial episode.

Sean Magennis [00:01:09] I love it.

Greg Alexander [00:01:10] Some of our listeners are running firms that carry a lot of investment risk, and I bet some of them don’t even know it. I might inadvertently call some babies ugly today.

Sean Magennis [00:01:20] Well, the good news is we do not have a live studio audience, so you will not hear the boos. On a serious note, tell us why some boutique owners have blind spots in this area when selling a business.

Greg Alexander [00:01:36] Firm owners think like operators; they do not think like investors. Therefore, they approach a deal with all the reasons it works. Whereby, the investor approaches a deal with all the reasons it will not work. For investors, their number one goal is to not lose money. A return is expected for sure. But the rate of return is considered only after the threat of capital loss is calculated.

Sean Magennis [00:02:05] Greg, you’re correct on this one. Our listeners are owners of firms, but they are also entrepreneurs and founders, and as a breed, we’re an optimistic bunch. We have to be. I can see how this glass is half full mentality can be a hindrance when trying to develop a business exit strategy and selling a business.

Example: How Not to Exit Your Business

Greg Alexander [00:02:26] Yeah. Let me share a story to bring this to life. So a few years ago, a media buying firm put itself up for sale. For those unfamiliar with a media buying firm, these firms buy advertising space for media companies and sell it to advertising agencies. The advertising agency uses the space to place ads for its clients. 

This firm’s specialty was newspapers. This was pre-Internet. A roll-up  of media rep firms was happening. A few large firms are buying up all the boutiques. This owner was getting a lot of interest. Yet, he blew it. He had a golden opportunity to exit immediately for a very high price, and he royally screwed it up.

Greg Alexander [00:03:13] Sadly, he eventually had to file bankruptcy because, as you know, the newspaper advertising business got crushed by the Internet. What was the fatal mistake made by this owner? He was unable to complete due diligence quickly. 

His financials were a mess. His personal life was wrapped up in them. He was unreasonable with his add-backs . His family members were on the payroll and didn’t do any work. His salary was not reflective of the true cost of the position. He took family vacations and charged them as business expenses. I mean, this guy was a real cowboy. All of this could have been worked out. However, a land grab was underway.

Greg Alexander [00:04:02] Speed was of critical concern. The firms, particularly the big firms, looked at his books and concluded it was simply too much work. And it would take too much time to figure out this mess. So they bought this guy’s competitor instead. His competitors were running tight ships and could close quickly. This was a tragic story.

Sean Magennis [00:04:28] Geez, what a shame. So the moral of the story is to run a tight ship. Greg, what advice would you have for our listeners to help them avoid this type of tragic outcome when selling a business?

How to Reduce Investor Risk: Mistakes Professional Services Firms Should Avoid

Greg Alexander [00:04:41] The big lesson here is that there’s a fine line between taking risks and being careless. Entrepreneurs are risk-takers , and therefore they build great boutiques, but this cannot go too far. If it does, once in a lifetime, wealth creation opportunities can pass you by.

Sean Magennis [00:05:03] Greg, give our listeners some examples of how they might be taking it too far. What mistakes should they avoid?

Greg Alexander [00:05:10] Gosh, there are so many. For example, don’t cheat on your taxes. Investors and potential acquirers hate cheaters. Don’t be careless with the law. You know, if you push the limits here and get caught. Lawsuits will get filed against you. These get found during diligence. That can kill a deal as fast as you can say sorry. 

And heaven forbid if you were in the crosshairs of government regulators, you know, then you’re in real trouble. You’re not going to be able to sell. So stay far away from regulators. So those are just a few obvious mistakes to avoid when selling a business.

Sean Magennis [00:05:45] Those are great examples, Greg, and extremely good reminders.

Sean Magennis [00:05:53] And now a word from our sponsor. Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow, scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brenna Garratt [00:06:18] Hello, my name is Brenna Garratt. I own Sustena Group of Business-to-business brand development firm. Most of our clients are mid-sized B2B companies with investor or private equity backing. 

Our key areas of focus are business, and tech-enabled  services, technology, and health care. We work closely with executive leaders and private equity firms. Our clients seek our help when their brand strategy is out of sync with their business strategy. 

We solve these challenges by developing a strategic foundation, the brand infrastructure, and go-to-market brand activation programs to help our clients articulate their business and brand. If you’re interested in learning more, please visit sustenagroup.com or connect with me at [email protected]. And lastly, a nod to Collective 54. The organization has been absolutely invaluable to me.

Sean Magennis [00:07:10] If you are trying to grow, scale, or sell your firm and feel you would benefit from being a part of a mastermind community of peers, visit Collective54.com.

Questions to Ask When Reducing Investor Risk and Selling a Business

Sean Magennis [00:07:29] So, this will take us to the end of this episode. And as is customary, we end each show with a tool. This allows a listener to apply the lessons to his or her firm. Our preferred tool to use is  a checklist. And our checklist-style is a yes-no questionnaire. 

We aim to keep it simple by asking only ten yes-no questions. If you answer yes to eight or more of these questions, you have successfully de-risked your deal. If you answer no too many times, you are too risky for investors. So, let’s begin.

Greg Alexander [00:08:05] Number one, do you have five years of audited financials?

Greg Alexander [00:08:10] Yeah. I mean, such an easy thing to do.

Sean Magennis [00:08:12] Exactly.

Greg Alexander [00:08:13] Pay somebody; they can do it. It’s beneficial not only when selling a business , but it also is beneficial as an operator because it gets you thinking about your business as an investor would.

Sean Magennis [00:08:22] Great example. Number two, do you have five years of tax returns? Number three, are you operating according to industry-standard  accounting principles? Number four, do you have a few, if any, add-backs?

Greg Alexander [00:08:39] I mean, don’t be a cowboy.

Sean Magennis [00:08:40] Exactly. Number five, is your personal financial life clearly separated from your business financials? Number six, have you ever been sued? Number seven, have you ever sued anyone? Number eight, are you clear of any outstanding legal action?

Greg Alexander [00:09:05] If you have any, settle.

Sean Magennis [00:09:07] Yep. Number nine, are you using industry-standard  legal contracts with clients, employees, and suppliers? And number ten, are you compliant with your industry regulations?

Sean Magennis [00:09:24] In summary, do not give a buyer a reason to say no when selling a business. Run a tight ship. Run your boutique by the book. Operating in the gray area will make a potential buyer nervous. And any gain from doing so is just not worth it.

Sean Magennis [00:09:44] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.

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Episode 27: The Boutique: The Subtle Art of Scaling Your Culture

As a firm scales its culture erodes. Bureaucracy creeps in as a firm gets larger. The owner shifts from an inspirational leader into a law enforcement officer which is not healthy. On this episode, we discuss how to build a great culture in professional services firms.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I am Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as a firm scales its culture, erodes. Bureaucracy, creeps in as a firm, gets larger, this converts the owner from an inspirational leader into a law enforcement officer over time, which is not healthy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg, while owner and CEO of SBI, built one of the great cultures in professional services firms, he has much to share on the subject. Greg, good to see you. Welcome. Great subject.

Greg Alexander [00:01:21] Yeah. Sean, it’s good to be with you. I’m looking forward to today’s conversation.

Sean Magennis [00:01:25] Excellent. Greg, let’s start with an understanding as to why affirms culture erodes as it scales. Why does this happen?

Greg Alexander [00:01:34] You know, the reason is pretty simple. Founders of boutiques did not know how to scale a culture. And the root cause of this is there’s very little material available to founders on this subject. And most founders do not recognize the importance of scaling a culture until it’s too late.

Sean Magennis [00:01:50] And why is it important to scale a culture?

Greg Alexander [00:01:54] Culture defines how things get done, and defining how to do things matters, especially as the firm gets larger. There is more work to be done by more people. A hazing culture gets in the way of scaling because employees do not know how to behave. And when this happens, founders react by installing bureaucracy with lots of procedures and rules. This turns him or her into a law enforcement official. And once rules replace creative freedom, politics creep in and politics destroys firms. Employees shift their focus from serving the client to serving the boss and scale stalls out.

Sean Magennis [00:02:41] Boy, do I understand this one. Greg, you’ve taught our audience about the three life cycle stages of a professional services firm. Those are phase one growth, phase two scale and phase three exit. It appears that culture is a strength in phase one growth, but it becomes a weakness in phase two scale. Why is that?

Greg Alexander [00:03:10] That’s a great observation. You make a very important point here, Sean. The reason culture breaks down during phase two scale is because scaling is messy. The chaotic nature of scaling means that employees work while the system starts to break down due to all the growth. As previous methods are replaced with new procedures to accommodate the scale, employees struggle to adapt. And it is at this precise moment that they need to know how to behave. And this is when a strong culture can be very helpful. For example, let us imagine an exercise, a picture you and I meeting with a firm in Phase one growth. The firm is, let’s say, twenty five employees and has been in business for about five years. We ask each employee the following questions. Number one, what kind of behavior does the firm hire to? Number two, what types of behavior does the firm promote to? And number three, what types of behavior gets people fired? The answer is coming back from this group of 25 employees will be very similar and crystal clear. This will demonstrate employees know how to behave. Now, let us imagine, we are meeting with a firm in phase two scale. Let’s say this firm’s about 100 employees and has been in business for, let’s say, 15 years. We ask each employee the same three questions. What kind of behavior does the firm hire to what kind of behavior does the firm promote to? And what what types of behavior gets a person fired? The answers coming back from this group of 100 employees will be dissimilar and unclear. And this will show that employees do not know how to behave.

Sean Magennis [00:04:59] I can see that. And the hypothetical example makes common sense, but I’m not sure I understand the so what? Why should a listener care if employees do not know how to behave?

Greg Alexander [00:05:12] Good question. The reason our listeners should care is because during the scale phase, they cannot be everywhere and do everything themselves. They need to know their employees are representing the firm the way the founder wants it to be represented. Employee behavior shows up everywhere, shows up in sales calls, in job interviews and client meetings, etc.. If the culture does not scale, the firm will bring in the clients, hire the wrong employees for client satisfaction and so on and so on. And in the end, a eroding culture will result in missed budgets.

Sean Magennis [00:05:45] Yep, OK, I get it now. A strong culture is how a founder can succeed without having to be personally involved in everything. Greg, I recently listened to an interview. An interview you did on John Warrillow’s Built to Sell podcast. It became very popular as thousands of people have now listened to it. One of the reasons it was so well-received is you talked about the famous SBI culture. Would you share some of this with our audience today?

Greg Alexander [00:06:16] Sure, boy, there is a lot to share here, and I should not repeat what I shared with John as listeners of this show can go listen to that one. But let me share some of the story with you here. So my firm, SBI, was in the consulting space. One of the challenges in that industry is very high employee turnover. It is not uncommon for consulting firms to run it, let’s say 30 to 40 percent annual employee turnover. And we ran it less than 10 percent for years. One of the reasons for the high turnover in consulting is big consulting firms fire employees for not being compliant with the procedures in the rules. I mean, these firms have an operating manual for how to eat lunch. It’s insane. Personally, I hate rules. I recruited mavericks and hired rule breakers. My firm only had three rules. This meant an employee back then can only get fired for three reasons. And they were number one, if you steal from me, you’re gone. Number two, if you lie to me, you’re gone. And number three, if you mess with it with another employee’s ideal life, then you were fired. So, for example, if you goose an expense report, you were out. If you lied to me about a project or the outcome of a sales call, you were gone. And as it related to number three, we had every employee tell us what their ideal life was, meaning exactly how they wanted to live in the role the job with us played in that life. If you were someone who caused a teammate to be miserable, you got fired. This meant no midnight emails, no finger pointing, you know, none of that bad behavior. So my basic philosophy was you had lifetime employment with me, if he did not break the three rules, I hired adults and I treated them like adults. I did not question their work ethic and I did not let suspicion destroy trust. It was an innocent until proven guilty culture, not the other way around, as so many companies are. Everybody was clear as to what behavior got you fired. The net result of this was we scaled rapidly, we won big, we won fast, and we won more often than the typical firm. And this is what led to our remarkable exit. In my case, we scaled our culture by keeping it very basic. We prevented bureaucracy from creeping in and we relentlessly eliminated politics from affecting behavior. And I should note, this culture was not for everyone, but that was OK. I liked it that way. I wanted lots and lots of people to tell me I was nuts and that they would never work for me because those that opted into my tribe were my peeps, so to speak. I knew if I could recruit enough of my peeps, I could really do something special. And we did.

Sean Magennis [00:08:59] Greg, this is a great story. And my journey with you is is so bang on with this. I mean, it’s it really, truly is remarkable. I encourage your listeners to look to Greg as a role model in how to really scale a culture. Doing so is very important to be true to yourself and lead with your authenticity. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Courtney Kehl [00:09:48] Hi, my name is Courtney Kehll. I own Expert Marketing Advisors. We serve B2B tech companies across the U.S. These clients turn to us for help with establishing best practices, growing and scaling up companies, as well as even launching or plugging in holes across there and marketing. If you need help with any of these areas or even interested in partnering, reach out to me at www.expertmarketingadvisors.com.

Sean Magennis [00:10:14] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.

Sean Magennis [00:10:30] OK, this takes us to the end of this episode, and as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your culture is working for you. If you want to know too many times, culture is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:11:12] Number one is your culture important to the success of your boutique? Number two, does every employee understand the way things get done around here? Number three, does every employee understand what you are trying to accomplish? Number four, does every employee understand how they personally contribute to these goals? Number five, is it clear which behaviors are awarded? And number six, is it clear which behaviors are punished? Number seven, is it clear which function inside the boutique is the dominant function? Number eight, is the leader of that function, the leader of the boutique? Number nine, is the culture scaling naturally the way you want it to? And number ten, are you nurturing the culture as you scale?

Greg Alexander [00:12:21] You know, nine and ten are related and worth adding a little something to them. So cultures should scale naturally if the culture is healthy. Yep. Then people are going to take ownership of it and they’re going to scale it for you. If that’s not happening, then it’s upon it’s the responsibility of the founder to nurture it. You know, almost think about it like a plant. You know, you’ve got to fertilize it, you’ve got to water it. And there’s things you can do to nurture the culture to make sure it’s happening.

Sean Magennis [00:12:51] Critical. Great finishing comment, Greg. So in summary, culture allows a boutique to retain its identity as it scales. Culture is a welcome substitute for bureaucracy that can plague scaling boutiques. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

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