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The Boutique Podcast

Episode 8: The Real Reason Revenue Growth Flatlines inside of Professional Services Firms
by Collective 54
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Transitioning away from a Partner Led sales model to a commercial sales engine is a key to creating wealth for owners of professional services firms. Learn how in this episode.

 

 

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 transitioning away from a partner led sales model to a scalable commercial sales engine is a key to creating wealth for owners of professional services firms. I'll try to prove this theory by interviewing Greg Alexander, Capital 54's chief investment officer. Greg is truly one of the world's leading experts in sales effectiveness. Greg, pleasure to have you again today. Why is this transition point a key milestone for professional services firms? 

Greg Alexander [00:01:14] It is a key milestone. You know, kind of the natural progression of a professional services firm is one that is a startup that becomes a growth firm, then becomes a scalable firm and eventually sells. This transition point usually happens in between that growth and scale stage and let me kind of walk the audience through this and I point that out, that kind of evolutionary track, if you will, to really highlight the word here milestone. So this is a something to shoot for and it's something that has to happen if you truly want to create an investable asset. So startups become boutiques by having the partners generate referrals and boutiques, become market leaders by building a commercial sales engine. So that's the difference. 

Sean Magennis [00:02:00] Yes. 

Greg Alexander [00:02:01] You know, when you're kind of a lifestyle boutique, you've got some partners. They have great personal networks and they're able, through positive word of mouth to generate business. So what's different between them, you know, in a high growth professional services firm that can become a market leader is somebody who builds the commercial sales engine and investors like Capital 54 and others, they want to see a maturing commercial capability before they make a buying decision and the sales and marketing process has to be proven capable of scaling. Otherwise, you'll be a natural kind of limitation on the size of the market. So there's an inflection point that all boutiques run into head on and this is when sales generation happens by employees and not by the partners. The kind of young pre scale firms did not invest in building a professional commercial sales engine. They don't have to. The partners are experts. They have very large personal networks and these networks expand as they gain exposure to their niche and then partners harvest these networks with businesses and successful projects lead to more happy clients and happy clients lead to positive word of mouth. And on and on it goes... You know, and the partner can really, with a group of partners, can really kind of carry the firm. I'd say for good five years and then all of a sudden it flatlines. 

Sean Magennis [00:03:35] So why does it flatline, Greg? 

Greg Alexander [00:03:38] So there's 52 weeks in a year and each of those weeks has five business days and a hardworking partner is going to put in roughly a twelve hour day. I mean, folks in professional services, particularly the partner level, work their tails off. 

Sean Magennis [00:03:53] Yep. 

Greg Alexander [00:03:54] So this means that each partner has about three thousand one hundred and twenty hours to produce. If you subtract some holidays, a few sick days, a vacation or two, it's more like, let's say twenty five hundred hours and these twenty five hundred hours are not spent entirely on sales activity. After all, the partners are running the boutique and as the firm scales, partners have only about half their time available for business development. So therefore, once each partners tapped out, sales flatlines. 

Sean Magennis [00:04:30] So obvious question, why not just add more partners? 

Greg Alexander [00:04:34] Well, most boutiques are very reluctant to do this, as I was, and I don't blame those that are reluctant to do this. This is a for profit business. We're here to make money. So the profit pool is distributed to the partners. So dividing the pie by, let's say, three partners is betting then, better than, dividing the pie, let's say 10 partners. So if the sales engine requires adding more partners, it doesn't scale. The current owners and partners end up making less and even worse, their equity gets diluted. That's why it doesn't happen. That's why they don't just add more partners. 

Sean Magennis [00:05:14] Yes, I can see how this is an inflection point, Greg. So follow on question, what options are then available to the owners? 

Greg Alexander [00:05:23] Yep, so the owners have to ask themselves. They've got to choose between really two approaches to sales. Let's call them option A, an option B. Option A is a partner led model and this means more sales, but less wealth for the owners. It requires more partners to scale as I previously discussed, option B, which is my recommendation, is a professional sales model. This means more sales and more wealth for the owners. It does require investment, but it does not eat into the equity and that is the most important piece. 

Sean Magennis [00:05:58] Critical piece. 

Greg Alexander [00:05:59] Yep. The partners slash owners invest budget dollars in hiring a professional sales force. The partners no longer sell, the sales team does the selling. Now, investors typically want to buy boutiques that have made it through this inflection point. It indicates to them that this boutique actually has the sales capability to scale and it's important for the listeners to keep in mind that Acquirer's are buying the future growth of the boutique. They're not buying the past, the buying the future. So the more likely a boutique is to grow. The more they will want to buy it and boutiques that can generate sales without the owner's involvement are just simply more likely to grow and boutiques that take this approach can grow sales cost effectively. Commercial sales team is less expensive than adding partners. 

Greg Alexander [00:06:58] So when I look at firms and I see them either just completed this transition or in the process of this transition, I get very excited and it makes me want to invest in the firm. Number one, they become aware of the need, which is not obvious to many. Number two, they had the guts to pursue it, which is the type of people that I'd like to invest in. 

Sean Magennis [00:07:22] Me too, Greg. 

Greg Alexander [00:07:23] Now, I should point out that building a commercial sales team inside a boutique is not easy to do and this is one reason why so few few owners become market leaders and failure to pivot away from the partner led sales model results in many lifestyle businesses and as a result of that, potential aquirers are not interested in these lifestyle businesses. And I might add just one more thing, if I can. You know, I'm making a comment that it's not easy to do, and here's why. When a client meets with a partner and the partner is selling the work, they say to the partner that you're going to be involved in the project and when the partner says, yes, I'm going to be involved in the project. He or she says that because they're trying to close the deal. Now, that's the worst thing you could do, because now you're stuck. You can't tell the client you got to be involved in the project and then be MIA for every key meeting. But partners are very reluctant to say, no, I'm not going to be involved in the project and that's a mistake. And what I recommend, they say, is, Mr. Client, no, I'm not going to be involved in the project and oh, by the way, that's a good thing for you. My ability is not in delivering client work. I'm the worst project manager in the firm. My ability is creating the methodology, hiring the staff, training the staff, running the firm. I'm going to introduce you to my team was about 10 times better than delivering this work than I am and then you bring the delivery team into the sales call and then the client gets to experience your exceptional engagement manager and your analyst, et cetera and they say, yeah, I agree, you don't have to be involved and then the client, the partner, can move away. So that's the key thing that stands in the way. Most owners of boutiques feel, as if they have to remain committed to the project after selling it. 

Sean Magennis [00:09:13] Outstanding advice. This is a big milestone and I can also see why so few make it through this cause that's a challenge for business and for partners that are so hands on. 

Greg Alexander [00:09:24] Yes. 

Sean Magennis [00:09:25] But in order to scale, it makes total sense and I can see why they do, why those that are successful at doing that, really become wealthy. 

Greg Alexander [00:09:33] Yep.

Sean Magennis [00:09:37] We will be right back after a word from our sponsor. Now, let's turn the spotlight on Collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who have focused exclusively on growing scaling and maximizing business valuation. Today, we have the pleasure of introducing you to Jon Jones, president, CEO and co-founder at Anthroware, an On-Demand Innovation Force creating high impact digital solutions firm. 

Jon Jones [00:10:20] I'm Jon Jones, CEO of Anthroware and Anthroware makes beautiful digital products. We do this by studying people, your customers. We put them in the center of our process in order to make tools that they both need and love to use. Our work ranges from MBP apps for funded startups to big HIPAA compliant platforms for large established companies. We're smart, a little rebellious, and we love working on hard problems. 

Sean Magennis [00:10:49] Please get to know Jon and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:11:09] So in an effort to provide immediate take home value for you, I prepared a ten question, yes no checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you've made it through this inflection point. Number one, are the owners removed from the sales process? 

Greg Alexander [00:11:31] So let's talk about that. So with diligence when I pull the sales report. 

Sean Magennis [00:11:36] Yes. 

Greg Alexander [00:11:38] Typically from a CRM system every opportunity, a close piece of business has a name associated with it. If that name associated with that client record is one of the owners. I'm not in, I become less interested in make an investment that business because that tells me the owners are driving the business. If their name is nowhere near any of those records and there's somebody else in the firm who doesn't have an equity stake in the firm. Who's the person that owns that client who's sold the work is delivering new work. That's that's a real positive. Now, if you lined up 10 owners of professional services firms right now and you asked him what their forecast was for the next 90 days. They could recite it and if I told them all that they could not go in the next sales call, the next five sales calls, the close of business, what would they tell you? We'll lose the business as a result. So they have to have the courage to step away. 

Sean Magennis [00:12:33] Absolutely. 

Greg Alexander [00:12:34] And trust your employees that they can get the get the deal done. 

Sean Magennis [00:12:37] Brilliantly, said Greg. So question number two, follow on from number one, are there are employees generating all the sales? Number three, is business being generated from scalable sources in addition to referrals? Number four, have sales increased consistently without adding partners or new owners? Number five, your financials being able to handle the expense of a commercial sales team?

Greg Alexander [00:13:12] Yes. So let's talk about that. This is another obstacle. The cost of building a commercial sales team goes in the overhead bucket. Those aren't billable resources. So partners have to be willing to make the investment and very often boutiques come to us at that moment in time because they don't have enough free cash flow to go do this. So they need an outside investor to help them. 

Sean Magennis [00:13:33] Excellent. And that's where we provide the growth capital, the stimulus. And by the way, your extraordinary experience in in in a building these commercial sales teams. 

Greg Alexander [00:13:42] Correct. 

Sean Magennis [00:13:43] Question number six, have the sales results from the commercial sales team been consistent over time? Number seven, have the win rates with the commercial sales team been on par and I'm going to throw in or exceed the partners? 

Greg Alexander [00:14:00] Yep. So some advice to the owners out there. The first time you do this, the win rates are going to drop substantially. Just hang in there. 

Sean Magennis [00:14:09] Hang in. 

Greg Alexander [00:14:09] You got to go through that period. You got to give the employees a chance to improve. Eventually, their win rates will be as good as yours, but there'll be a difficult transition there. So just buckle up for that transition. 

Sean Magennis [00:14:21] Well said, Greg. Number eight, have the deal sizes with the commercial sales team been on par with the partners? 

Greg Alexander [00:14:28] Same thing. Originally, the non partners are going to sell smaller deals or they may cave under price objections, et cetera. You just got to hang in there and get through that period. 

Sean Magennis [00:14:39] Great. And number nine, fairly similar. Have the, have the sales cycle links with the commercial sales team beem on a par with the partners again? 

Greg Alexander [00:14:46] Correct. 

Sean Magennis [00:14:47] Good. And then finally, number ten, can the commercial sales team be expanded significantly without breaking the boutique? 

Greg Alexander [00:14:55] Yeah. So this is a really interesting component. In fact, this one can be a show in and of itself. So for every, quote, sales head you have. You're going to have an assumption for the amount of revenue that they can bring in and that's going to be impacted by a lot of things linked to the sale cycle, win rate, the size of the deal, is the salesperson generating their own leads or the leads coming from another source. There's a lot of factors that go into that. But in the end, you'll get to a point where you'll know plus or minus 10 percent with the revenue production, per sale said is. Now, you've got to think through how that impacts your service delivery, because in theory, if you go out and hire 10 salespeople, you're gonna generate a lot more business. Can the back end handle it? 

Sean Magennis [00:15:42] Exactly. 

Greg Alexander [00:15:43] So figuring out how to tie the delivery engine of the back of the house to the front of the house is really important. And this question number 10 is really important because sometimes that's overlooked. They hire all the salespeople, they generate all the new business. Everybody's excited and next thing you know, the delivery team is 120 percent capacity. 

Sean Magennis [00:16:04] And you can deliver the business. 

Greg Alexander [00:16:05] Can't deliver it, and then clients sat falls, employee sat falls and you actually create a problem for yourself. 

Sean Magennis [00:16:10] Yep. 

Greg Alexander [00:16:10] So don't forget the downstream impact of this. 

Sean Magennis [00:16:13] Outstanding, Greg. Outstanding. So the path from a boutique to market leader results in creating a viable, superb commercial sales engine. Potential buyers would rather wait until you have made it through this inflection point, jumping in prior to this is simply too risky for many. If you want to sell your firm, invest resources into developing a scalable sales and marketing engine. 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.