Boutique service firms often confuse staff augmentation work with advisory work and with managed services work. These are three different types of services that are marketed, sold, and delivered differently. Each has its own margin profile. Balancing the mix of these three correctly can be the difference between running a firm with good margins or a firm with poor margins. Attend this session and get clear on how to manage the revenue mix.
TRANSCRIPT
Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serv Podcast, brought to you by Collective 54, the first community dedicated to the boutique professional services industry. On today’s episode, we’re going to talk about finding the right revenue mix, the balance of revenue to hit your profit targets. And there’s different types of revenue that happen in services firms. And sometimes we don’t think about the mix. And that’s what we’re going to discuss today. And we’ve got a collective 54 member with us. His name is Ryan Buell, and Ryan has several types of revenue in his firm and we’re going to ask him to talk about those and discuss how he handles the balance of them to try to hit his targets. So, Ryan, it’s good to see you. Thanks for being here. Please introduce yourself to the audience.
Ryan Buell [00:01:08] Yeah. Thanks, Greg. I appreciate you having me. My name’s Ryan Buell and I’m the founder and CEO of Save US Solutions. We’ve been around for about nine years and obviously professional services firm, we kind of have three main services that we offer consulting, recruiting and managed services, and we specialize in finance and accounting, tech and h.r. And we’re located here in sunny san diego.
Greg Alexander [00:01:37] Okay, so, very good. So i’m going to ask you to kind of give me three definitions and then we’ll kick that around a bit and then we’ll have the conversation around mix. So give me your definition of staff augmentation work.
Ryan Buell [00:01:51] Yeah, sure. So, you know, staff augmentation, at least for us, it really means that we’re providing specialized resources to support project execution or interim needs. You know, our consultants may own certain aspects of the project or provide some strategic guidance, but ultimately, we do not own the outcome. We’re typically operating under the guidance of the client and helping them with the execution of the project. So they’re especially with our enterprise level clients relying on us to provide specialized resources to really come in and complement their team to help get the work done.
Greg Alexander [00:02:31] So maybe give me a sample use case just to let me sink my teeth into it a bit.
Ryan Buell [00:02:37] Yeah, sure. So we have, you know, as an example, we have some clients currently transitioning to the new S4 Hana SFP product, and it’s an extremely large undertaking and these are large multibillion dollar global public companies and they’ll come to us to bring in project manager or Scrum Masters to to really help complement their existing team. And they’ll leverage obviously all the background and experience of our team to help because the resources we’re providing have a lot of experience in that technical space. But ultimately they have somebody there as part of the PMO that really is owning the strategy, and then they’ll also have an external third party implementation partner. Really, our role there is, is to be kind of the interim interim communication between the implementation partner and the client to help make sure that requirements are defined, that the outcomes are consistent with the expectations that have been set with the implementation partner. We’ll help with testing and change control and some other areas, but all of it’s really under the guidance of the project champion there within the PMO.
Greg Alexander [00:03:54] Okay, perfect example that that brings great clarity to that. Okay, let’s move to the the second type of work that you do, which is advisory work. So please explain that and then maybe give us an example of that.
Ryan Buell [00:04:07] Yeah. So the advisory work that we do is and this is probably more just a function of San Diego, but typically those are going to be with more small to mid-market clients. You know, the difference there is really we have full ownership of the project and outcomes. So typically, you know, the work’s very specialized. There’s going to be a proposal upfront with a clearly defined scope of responsibilities, estimated costs, and then, you know, the costs may have, you know, various deliverables or performance milestones associated with it. So although a lot of times we’ll still bill time and materials for advisory work, not always, but but typically we will there’s there’s usually a lot more work upfront to set expectations with the client so they know what they’re getting.
Greg Alexander [00:04:57] Okay. And an example of that would be.
Ryan Buell [00:05:01] So a lot of the companies here in San Diego are small to midsize tech and life sciences companies, just as an example. So as part of their IPO prep, they might come to analysts to implement technical accounting standards. Okay. They may come to us to help with some sort of a system implementation or change control. We’ve had companies come to us to help stand up an integration management office for a company that was looking to become very acquisitive as part of their growth strategy. So, you know, there’s there’s different examples. But for us, it’s it’s typically all going to be under that that finance, accounting or maybe tech.
Greg Alexander [00:05:45] So yeah so the IPO prep great example that that helps us understand the difference between advisory work and staff legwork. Okay. So let’s go to number three, which is the MSSP or managed service provider space. So what’s your definition of that?
Ryan Buell [00:06:00] So the MSSP is where a company typically a small to midsize business is going to completely outsource all or certain aspects of their business functions to us. So for us, again, those those functions on the on the managed services side are finance and accounting in h.R. And so we typically have full ownership of the function with the ability to implement our best practices, systems, tech stacks and other strategies that we believe are going to really help the customer be in the best position for for growth. You know, billing for that can be fixed fee or we’ll sometimes do essentially a consolidation of timing materials, but there’s always a very clear scope of responsibilities. And for us, a monthly cost kind of do not exceed amount without approval arrangement with the client.
Greg Alexander [00:06:51] Okay. And an example of that might be what?
Ryan Buell [00:06:55] So, you know, a good example would be, you know, we have a collective 54 member as a client. We’ll work with a lot of VC backed companies. Usually what they’re coming to us, maybe they have a bookkeeper or CFO who’s maybe not quite what they’re looking for. We will provide a team, a dedicated team, a department, so to speak, to that client. And each client receives a CFO control or accounting manager, an accountant in the works, then fractionally allocated based on scope and workload to the appropriate level to provide a kind of a more cost effective solution. So really, it’s you know, it’s any company, usually less than 100 million is going to come to us to outsource either all or part of that function.
Greg Alexander [00:07:44] Perfect. And I think the key word there is outsourcing. That helps us to distinguish between the other two. Okay. So so with that, that’s a great distinction. And I know this sounds basic, and for you, maybe it is, but for some of our members, these terms tend to get blurred. And we really don’t know the differences between the two. And it’s important to understand the differences between the three. Excuse me. So right when you think about it from your perspective, the founder and CEO, you know, do you have an optimal mix you’re shooting for and if so, why? And how do you manage to that?
Ryan Buell [00:08:18] Yeah. Yeah. I mean, we’re actually working on that right now. I mean, we have found that because we also provide recruiting services as well. And so, you know what? We have found that if if we can get to right around a 90% or more of the recurring revenue and maybe 10% on on some of the recruiting side, that’s that’s been relatively optimal. The obviously, from an enterprise value perspective, the managed services piece is going to be going to be the highest just due to the nature of the client outsourcing the work to us and the stickiness of the work. And it’s usually a much longer term duration, but. You know, I would say right now about 90 about 90%. Consulting and consulting advisory and staff augmentation compared to the recruiting side is the mix that we’re shooting for.
Greg Alexander [00:09:20] Okay. And I understand why, because you want recurring revenue as opposed to kind of one off projects. That makes a lot of sense. Are there any other considerations? Like in my experience, the advisory work tends to have the highest margin. MSP work would come in second and then the staff augmentation work would come in third. That’s a generalization, but there’s a margin profile of the services come into play, or is it just focused on as little project work as possible and as much recurring revenue as possible?
Ryan Buell [00:09:55] I mean, the margins definitely come into play. I think on the staff augmentation side of the House, we will sometimes get more pricing pressure, which can lower margin. So although the volumes there, the margins may suffer, especially if things in the economy shift like, you know, things have softened a bit recently, although we’ve stayed relatively busy on the advisory side, it’s a lot more specialized. And so if the needs are truly there, although budgets always a piece of the fact, you know, a piece of it, you know, usually they’re they’re looking for the right partner that truly specializes in that area and can deliver value. Mm hmm. The managed services piece, the margins are definitely there. I think the challenge there is it’s a full bench model. And so with us being in high growth mode, it’s always the balance of, you know, how how much do we want to get ahead of the demand for service to have a strong bench available as we bring on clients? Because we, you know, we never want to you know, we never want to have quality suffer. And we’ve heard feedback from clients in the market that some of our competitors had tried to grow too fast. So they struggle with continuity and quality. And so, you know, we’re trying to find the right balance of aggressive growth with quality and not sacrificing the culture.
Greg Alexander [00:11:17] You know, and you brought to my attention and I had forgotten about this, but you have a fourth service as well called recruiting. So how does that compare on these dimensions?
Ryan Buell [00:11:26] Yeah, I mean, the recruiting piece, it’s it’s a nice piece of the puzzle because, you know, at the end of the day, it’s pure gross margin. So from a business perspective, it’s great for the business. The downside is it doesn’t really add much to enterprise value. Yeah, because there’s nothing about it that’s recurring. So, you know, it’s nice for us to be able to offer it because clients need it and ask for it. And there’s a lot of synergies from a recruiting perspective when we’re out in the market bringing in more consultants or internal employees to our practice, we obviously come across individuals looking for full time opportunities. So it’s easy for us to be able to provide that service, but we have to be careful that we don’t emphasize it too much. And so, you know, we’ve done that through how we structure comp plans and we’ve implemented a very specific sales strategy, you know, which has helped. So I guess the short answer is we want it to be part of the business, but we have to be careful about the mix of of revenue and how how we strategize how we’re going to achieve the right mix to optimize profitability and enterprise value. Yeah.
Greg Alexander [00:12:38] Okay. Very good. All right. My last question would be, you know, for service lines, for different staffing requirements, for different margin profiles. It sounds complex to manage. Is that true or not true?
Ryan Buell [00:12:54] Yeah. I mean, you know, there’s good and bad everything. And I think, you know, the good is that we never lose clients. We work with them through every stage of growth and they essentially graduate from one service to the next. The challenge can be. I think sometimes market confusion on maybe what we do or to be able to answer that question in a simple answer. I know there’s a lot of companies out there that have a lot more complexity than we do, but that but that’s a bit of a of a challenge. The delivery models, the nice thing is, is we’re able to leverage our internal recruiting team to feed the other lines of business, which is another another kind of competitive advantage. So anytime we’re hiring on the managed services team, the same recruiters that are working for these large multi, you know, helping support these large multibillion dollar public companies that have the highest standards you can imagine are the same people that are filling our positions. So we’re able to scale with quality. But but yeah, it creates challenges. There’s different business needs, different systems. So we essentially run run two different businesses. We have a managed services business and then the consulting, recruiting and advisory side of the business as two separate business entities. We have separate budgets by service and different leaders for each service just to ensure that someone’s accountable for the growth and strategy because, you know, they are they are different with different challenges.
Greg Alexander [00:14:23] And is that distinction between Mr. MSP and the rest of it because of the full bench model?
Ryan Buell [00:14:32] Well we have is what distinction that the.
Greg Alexander [00:14:35] So between the MSRP business that’s one line of business and then you grouping the other businesses together. As I understand what you just said and I’m wondering why you’re running those as two separate businesses.
Ryan Buell [00:14:47] Well, the the MSP we originally set up as a different business because we wanted to bring in leadership to really be incentivized to grow and scale the managed service side of the business. So I have a different cap table, different systems, different budget. Um, and, and it’s really a, it’s a different delivery model and in a lot of ways.
Greg Alexander [00:15:08] Okay, Very good. All right. Well, listen, you know, this was good old fashioned one on one education distinguishing these things. And as Brian and I just demonstrated even amongst us and we know each other, you know, clarification was required. Put yourself in the shoes of a client, you know, who might not know the difference between these things. And then you submit a price and they react to it because maybe they don’t know. So having clarity around these different types of services and when clients should leverage one versus the other, when it’s appropriate to use one versus the other, how the other cost benefit analysis might be thought about as a really important thing for all of us to keep in mind.
Ryan Buell [00:15:52] Yeah. Yeah, for sure. Revenue mixes is definitely something that we’re focused on right now. And you know, with the market shifting and us trying to continue to work on our ongoing growth strategy, it’s it’s something that is top priority.
Greg Alexander [00:16:05] All right, listeners, I’m going to give you three calls. Action. So if you’re a member, watch for the meeting invitation. Well, you’ll get invited to Ryan’s Q&A and you can ask questions directly for him. If you’re not a member and you want to become one, go to collect 254 dotcom and fill out an application. We’ll review that and get back in contact with you. And if you just want to learn more directed to Amazon in our book, it’s called The Boutique How to Start Scale and Sell a Professional Services Firm. But Ryan, thanks a bunch for coming on the show today and making a deposit into the collective body of knowledge. I enjoyed listening to you and we’ll talk to you again.
Ryan Buell [00:16:41] All right. Thanks, Greg.
