Episode 78 – How a Consulting Firm Underwent Organizational Redesign toSuccessfully Deal with Pricing Pressure 

Episode 78 – How a Consulting Firm Underwent Organizational Redesign toSuccessfully Deal with Pricing Pressure 

Member Case with Jeff Pedowitz

Labor is the biggest expense for a boutique and has the biggest impact on profitability. On this episode, we interview Jeff Pedowitz, President & CEO of The Pedowitz Group to discuss how they creatively redesigned their organization to solve increasing pricing pressures.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those not familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. 

My name is Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to discuss organizational structure, and this is a very important topic for boutique pro serv firms because we are people businesses. And how you organize your labor dictates a lot of things such as your profit margin, your client satisfaction scores, your employee engagement scores, etc. 

So it’s a really big subject and we’ve got a great member to be our role model today. His name is Jeff Pedowitz and he has a company called the Pedowitz Group. And Jeff’s with us today. Jeff, how you doing? And please introduce yourself to the audience. 

Jeff Pedowitz [00:01:12] Thanks, Greg. Definitely glad to be here. Hello, everybody. So I am Jeff Pedowitz. I am president, CEO of the Pedowitz Group. We build digital revenue engines for our customers. So for all those businesses out there, we’re constantly trying to drive revenue in the digital world. That’s what we specialize in. We do strategy, technology and execution and end-to-end shop. 

Determining the right organizational structure

Greg Alexander [00:01:35] Okay, very good. So, Jeff, the reason why I asked you to be on the show today is that your firm has scaled to a very nice size. You’ve been at it for a long time. And you’re on the journey now of restructuring organizationally and leveraging different talent pools. And I would love to maybe start off at a high level and have you explain to the audience, you know, why you decided to come up with a new organizational structure. What led you to that? And then we can dive into, you know, how you went about determining what the right approach was for you. 

Jeff Pedowitz [00:02:11] Sure. Well, I wouldn’t necessarily call it new because I’ve had the relatively same hierarchy in place for a while. You know,we promoted some people and moved some things around. But one of the things I started doing a few years ago was really developing a core team around me and delegating the day to day responsibilities, including sales.

 So today I have a full executive team. I have a technology officer, I have a marketing person. I have chief strategy officer, chief financial officer, Chief Services Officer and they are all essentially running the business and providing the guidance and the leadership and the vision. But I can step away. They can run the business now and all the tools to do so.

 So that was really an important part of our scale, was really getting me out of that entrepreneur organization where everything that you run for me, we still we’re dealing with some, some legacy issues and married people and working at it for a long time. But we’ve really turned a corner on that.

 So even before the great resignation hit,because we work with technology now, our resources are in high demand. I mean, for years we recruited they command very high salaries and a premium. And up until last year, we actually had very, very low turnover. We were running about 5% per year, which in the consulting advertising industry -that’s fantastic. 

Greg Alexander [00:03:33] That’s best in class for sure. 

Jeff Pedowitz [00:03:35] But last year it caught up with us. Solast year we and our services team, we ran about 40% turnover. And most of that was just great resignation combined with some of the bigger technology vendors who are also our clients like Salesforce, Adobe, werepaying ridiculously high salaries, things that even at our size we just could not compete with. And we were already paying our people very well.

 So while we certainly have, I would say now year over year, our average salaries increased 30% from where we were a year ago. As you know, growing in professional services, you know, where you don’t just have 50% less margin – want to just want to double the salary in a low cost format- well we had a resource last year that was making 100,000 and my client was paying me 200,000 an increase into 130.

 Maybe they’ll pay to 60, but they’re not going to pay much more in that. And they’re not going to pay 300,000 for the same person that was doing the same job. Now, if we redesigned the services and added more value, of course they won’t. So it’s a matter of we’re trying to rebuild the plane while our client  -I have existing market conditions that enterprise customers for discerning and they also know they can get the labor if they need it to, by going offshore. 

So we’ve had to retool and strategically rethink how we want our labor force to be. So what we decided a year ago was for the lower end type of work, the execution work, data management, reporting, research, execution type of activities. We’re going to move those offshore. So we’ve been setting up resources in Colombia and then we want the people that are here to be the architects, the strategists, the engagement managers, the account managers, the people that are very client facing to be very versatile. And we will happily continue to pay them even more money than they’re making now because the value proposition will be there and then we’ll be able to kind of bifurcate.

 So we’ve been able to continue to be a competitive -pay the people that are really delivering value really, really well. And more than that now. And at the same time, move some of the other labor that we’re overpaying for because we’re able to turn that around and get value living out offshore.. 

So the net effect is we’re already doing pretty well with our gross margin. We’re running about 52%, but we should be able to get up over 60% by the -by the end of next year. And then we’ll be able to take some of that free flowing capital from the margin and reinvest it not only inthe employees, but into additional sales and marketing that will fuel our growth. 

Strategy versus execution 

Greg Alexander [00:06:12] Great story, great rundown and so many things to ask you about. The first question I’ll ask is when does when deciding what is kind of high end strategic work versus low end execution work, drawing that line and therefore determining what could be sent offshore? Sometimes our members struggle with that. They tend to think that everything is strategic. Even the tactical execution is super important, and oftentimes it is, but sometimes the clients aren’t willing to pay for it. So how did you draw the line between what to keep onshore and what to move offshore? 

Jeff Pedowitz [00:06:49] It’sthe very last thing that you said. It’s what are the clients willing to pay for custody? It doesn’t matter what we think t -he client is, what makes the market and the client who determines what the value is, not us. So if the client says, I’m only going to pay – I’m not going to pay more than $50 now for email execution. We can think it’s as strategic as we want to be, we can talk about deliverability but the client is still oing going to pay us $50 an hour

So we’ve been able to get pretty good information from our customers. And just seeing as the deals come in, what clients want, pay for what they’re not. Yes, because we work with a lot of technology and we now support over 600. 

For new technology. And it comes out like, let’s say some of the new ADX technology comes out for things like Snowflake or merchant platforms. Clients will pay a premium for that, for a short period of time, right. Until they get up and running. And then they view it more as a commodity. Then they will then want to drive the cost.

For ongoing OpEx to support and maintain technology in our business. Clients do not consider that to be strategic. Architecture isstrategic, Figuring out what systems to invest in, how they should fit together, how data should flow , business processes ,t he math, the technology – that is strategic. Running and supporting the technology itself is not strategic. 

Greg Alexander [00:08:11] Interesting. And sometimes clients might not know, but they think they know. So they might say to you, Hey, Jeff, I’m only willing to pay 50 when? Because it’s not strategic, but you know it is. Do you let the client stub their toe or do you -do you speak up in that scenario? 

Jeff Pedowitz [00:08:30] I think it’s it depends on the situation and what else we’re doing with the client. And it’s a bit of a give and take., But I think there’s a healthy  -we want to be respectful. We challenge our clients and let them know, know ultimately we’re trying to build a long term relationship.. 

And it’s also about the people and the personnel over doing the work. Even more important than the work itself.. You know, in consulting and such a relationship business, actually, one of the biggest challenges we have is a resource gets assigned to that project. And the client, they want that working really well, but the client doesn’t like it when that resource changes and gets to account because they become very attached and they’re convinced that nobody else in our team could possibly do that, even though that’s not true. 

But it’s just that trust and that bond gets built. So I do think that in so much it’s not just the type of service, it’s the person and the skill and the value of your trusted advisor to your customer. Then the client will tend to pay more for someone that they trust versus someone, of course, if they don’t.. 

Choosing offshore regions

Greg Alexander [00:09:32] Yeah. Now, once you decided what needed to be moved offshore, there’s a lot of choices there in lots of parts of the world. What part of the world did you choose and why did you choose it? 

Jeff Pedowitz [00:09:44] So we deferred to last year, so we started trying out different contractors in different parts of the world. So India was definitely an area that we know and we’re still using a bit more as a partner. Costs are higher, but we know what we’re getting. We work with ad some firms over in the Asian region, particularly in Cambodia, which is an emerging market, there’s a lot of strong tech talent that people are very good. But the time zone challenge was was difficult. 

We work with a lot of marketing teams in our business and it’s a little bit different than, let’s say, I.T. projects. The collaboration is more in real time. It’s not a follow some type of approach. But we can start something, we send it offshore, they work on it while we’re sleeping and come back the next day. The clients wanted me today and use time zones and collaborate, so we were having difficulties getting the resources over in Cambodia to work on our time zone – the costs were fantastic work and labor. At 15 or $20 an hour., highlyskilled, college educated, smart people, but not the time zone. We had been familiar with Colombia and the Latin America market for a while. We have a couple of our competitors that work down there. We’ve caught some good things, so we started looking into it. 

And then the more that we talked to different resources, we became more convinced that that would be a good market for us to enter into. It’sbilingual, college educated, good culture, hard working family values, which are very much in line with our approach and our value system. So, you know, this has not been without its challenges. Our original goal was to get this up and running in the first quarter of this year. We had a very good recommendation from-  from one of our investors and he was going to work full time for us.

 He had set up an 800 person shop down in Colombia over the last five years. So he was an expert down there, you know, unfortunately had a personal family situation. So he had to opt out after just a week on the job so that we were scrambling. But we were able to, through our professional networks… We reached out, people were great. We actually got eight referrals on different resources to use down in Colombia. We interviewed them all. We selected one and we’re now working with this partner account to set us up. So by the end of this week, we’ll have our first two full time people hired and our plan is to have 20 people by the end of this year. 

Deciding on direct hire

Greg Alexander [00:12:10] Wow. That’s an aggressive plan. And did you decide to hire a firm and partner with a firm? And did you decide to hire directly, you know, one at a time kind of thing? 

Jeff Pedowitz [00:12:23] We split it so that we – we are working with a firm called SolvoConsulting. So they are basically doing all the recruiting and it’s they are technically managing all the employees or their employees. We pay them and then they pay the employees. But we employees are fully white label so they are notworking for anybody else but we don’t have to deal with the benefits or paying taxes in Colombia or doing any of things we pay them. 

However, we also have the option as we start to build our practice areas to convert any of these people into actual TPG employees at any time. So we thought this gave us the best of both worlds. It gave us expertize down in there and mitigating our risk at the same time. 

That way we don’t have to set up a Latin America LLC. We don’t have to deal with paying taxes and doing all that stuff in a foreign government. But we still get the talent and the labor and the partnership and all the resources as if they were our employees. So obviously, check back in with me in 3 to 6 months as we get this up and running, because its still relatively nascent,. I certainly don’t want to tell everybody that we’ve cracked the code. We’re really just getting started on our journey. 

Learning to ask for help

Greg Alexander [00:13:31] Yeah. Yeah. Well, the reason why I wanted you on the show is sometimes many people need to be doing what you’re doing, but they’re not even getting started on the journey. I mean, most of our boutique founders are in similar situations where they have clients that are willing to pay a premium for some services, but commodity prices for other services. 

And unless you get to some version of this, then you’re going to have a tremendous margin squeeze and it could put the business at risk, especially in this high inflation, high wage inflation, great recession environment that we’re in. My last question, Jeff, regarding this particular avenue here is, you know, you said you got a bunch of people to go talk to and you interviewed them all. What did you learn during that interview process and what advice would you give to a founder who’s starting on this journey about how do you even know what good looks like? 

Jeff Pedowitz [00:14:21] Well, first of all, I was pleasantly surprised at the sheer response that we got, because at the time that the person opted out was one of these things where I at -at that moment, I certainly was not an expert in offshore labor or working with Colombia in particular. 

Whether or not whether we go there, you know, this is still really important. Where do we find resources? So yeah, I suppose it was a momentary situation, where am I? But I think like any entrepreneur, that faded pretty quickly. Right. Okay. But this is still the right decision for us. Let’s move forward. Let’s just start reaching out and asking for help. And I think one of the first things I was surprised, pleasantly surprised about was how much help there was – just by asking the question.

 And I think that’s one thing I’ve learned. I wish I would’ve learned this earlier in my career as a CEO – how and when to ask for help? You know, I was on my own a lot. I made a lot more mistakes that were made because I didn’t think that there was anybody I could turn to. 

So having networks like Collective 54 is great because I realize there’s a lot of people out there, that can help. You just have to be willing to ask the question and to listen., Sso myself and my business partner, who’s my chief service officer, we listened. We took copious notes, we interviewed and we learned that there’s… We learned a lot. We learnedthat much like the states, there are different ways to do this. You can go the route like an ADP, you can hire direct. 

We learned about different parts of the country and what each country, not just Colombia, but different countries and what they brought to the table. And I learned that there’s four different taxing authorities within Argentina and it’s incredibly complicated. I learned there certain provinces to stay away from and certain not to. And so, I mean, it was very, very educational over the course of two weeks.

 And so ultimately, you know, given everything else that we have on our plate right now, we decided going with someone that already knows how to do this and do this well, even though we’re going to be paying a little bit more – like if we were to go down and hire people directly in Colombia ourselves, we would probably pay them an average of 18 to $20000 per year for a college graduate. That person that has similar skills to what we have here in the US that’s maybe making 120,000. With the service we’re usingsing the margins areup 30 to 50%. But it’s still very, very cost effective. We’re still be able to make great margin, but may take care of all the headaches for us. 

Conclusion

Greg Alexander [00:16:59] Yeah. Yeah. Very good. Awesome. Well, listen, we’re out of time, but on behalf of the membership, I just wanted to thank you for your contribution today. You know, the way ollective works, as you got to contribute to the collective body of knowledge. And you have, you’re always doing that. Today is another example of that. So thanks for being a great member and being here today. 

Jeff Pedowitz [00:17:17] Thank you. I appreciate it. Greg Alexander [00:17:18] Okay. And for those that are interested in this topic and those like it, who can pick up a copy of the book, The Boutique, How to start scale and Sell the Professional Services Firm. And for those that are interested in meeting great people like Jeff, founders of scaling professional services firms, consider joining our mastermind community, which you can find at Collective54.com. Thanks.