A lack of lifecycle awareness and management prevents scale. It results in expensive senior people doing junior work. Boutiques with poor cash flow and low client satisfaction do not scale.
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’ll make the case boutiques often suffer from an identity crisis, and this makes scaling harder than it needs to be. I’ll try to prove this theory by interviewing Gregg Alexander, Capital 54’s founder and chief investment officer. Greg has developed an approach to solving this problem. It’s called lifecycle management. And I’d like him to share that with you. Greg, great to see you. Welcome.
Greg Alexander [00:01:09] Hey pal, good to be with you. I think it was Aristotle that once said when asked the key to happiness, know thyself. Today I’m going to modify this quote in state when asked the key to scaling know thy firm.
Sean Magennis [00:01:24] Excellent. So why do you feel boutiques need to know thyself when trying to scale?
Greg Alexander [00:01:31] Sometimes boutiques suffer from an identity crisis. They are unsure of the type of firm they are and the types of clients and projects they should pursue. This makes the challenge of scaling a boutique harder than it needs to be. You see, conflicting client needs drive, confusing staffing models, and this leads to overly complex financials. For instance, one month there is not enough work and employees are underutilized. And yet the next month the firm is at 120 percent capacity. These violent swings between boom and bust make it very hard to scale.
Sean Magennis [00:02:09] Yeah, I can see how this can make managing the boutique difficult and frustrating. So what advice do you have for listeners who might be suffering from this?
Greg Alexander [00:02:19] So the first step is to understand what type of firm you are, in my opinion. There are three types of firms. First, we have what we call an intellect firm. Intellect firm is hired by clients to solve difficult never before seen one of a kind problems. These firms are staffed by brilliant people, very senior, with lots of experience. An example might be a think tank or something like that where there’s P.H.D.’s everywhere. Second, we have what we call a wisdom firm, a wisdom firm decided by clients because they are a been there and done that style of firm. The client problem is new to that client, but is not a new problem. Others have had it and wisdom firms have accumulated the wisdom to solve this problem. These firms are staffed in a traditional sense. Partners, mid-level managers and some junior staff examples to think about from the consulting industry are firms like Bain and McKinsey and Boston Consulting Group. Third, we have what we call a method firm, a method firm hit hard by clients because of their unique methodologies. The problem is well understood by the client, but by hiring a method firm. It can be solved faster and a lot cheaper. These firms are staffed with lots and lots of junior staff who have been trained on this highly procedurized method. Examples are the BPO firms such as Accenture and the like.
Sean Magennis [00:03:59] Got it, Greg. So three types of firms, intellect, wisdom and method. But I’m I’m not connecting the dots as to how this understanding helps firms scale.
Greg Alexander [00:04:13] OK, so let me explain. So imagine you are in Method’s firm in one of your BD people sell an intellect like Project, a never before seen one of a kind problem. How will this project be staffed?
Greg Alexander [00:04:27] Well, it cannot be because a method firm does not have a bunch of gray haired P.H.D.’s lying around. This forces them to go outside the firm and either rent some contractors or hire some new talent. Both approaches come with different salaries and utilization rates, and this will blow up staffing in the financial models. Or let’s say imagine you are a wisdom firm and one of your BD guys goes after a method style project, one where the work can be off-shored or completed with junior staff. Well, in this instance, there will not be enough junior staff to do the work. So what happens? Senior expensive staff now must perform cheap junior level work. This destroys margins in the financial model.
Sean Magennis [00:05:10] Okay, now I get it. So the advice is to collect the type of client and the project to the type of firm you are. Only go off to work that the firm is staffed to handle based on skill level. By doing so, an owner, one of our listeners can predict the skills needed to perform the work. And with this understanding of required skills, the owner can forecast labor costs and utilization rates. And then, with precision on labor costs and utilization rates, the owner can more easily scale the firm. He or she can match the demand coming in with the supply on the org chart. Did I get this correct?
Greg Alexander [00:05:53] Yes, you did. You are about to ask me why owners do not do this. And the answer is because they lack discipline. They think all revenue is good revenue and they take any deal that comes their way when in fact some deals, if taken, can destroy a firm’s ability to scale. Adopting lifecycle management, which is what this is called, requires prudence to go without today for the promise of a better future. Greg, I get the concept, but I’m struggling a little to get the name. The lifecycle management. Can you explain it? Sure. So boutiques like humans have a lifecycle. For instance. They are born. They grow. They scale an exit much like a human is born. Comes of age, matures and dies.
Greg Alexander [00:06:50] And firms like humans are different based on where they are on the life curve. For example, is very common at birth, a firm is an intellect firm. The partners have some secret sauce to a brand new problem. Then as time passes, the secret sauce gets out.
Greg Alexander [00:07:10] Others have it and eventually it becomes a commodity. Well, an owner manages a firm very differently when it is an intellect firm than a wisdom or method firm. Everything is different from the pricing of deals to staffing, utilization, salaries, etc. So lifecycle management refers to the active management by the owner of the boutique as it scales through the lifecycle stages.
Sean Magennis [00:07:36] Okay, now I get it. And it does make a lot of sense. So this is an illustration as to why there are only about 4000 firms out of about one point five million that have actually reached scale. It’s hard to do. And it takes an exceptionally skilled owner to pull it off. 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 live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.
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Sean Magennis [00:09:05] 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 the collective54.com. 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 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 questions one through three. You are an intellect firm. If you answer to questions, four to six, you are wisdom firm. And if you answer yes to seven to nine, you are a method firm. And lastly, if you answer yes to question, ten lifecycle management should be a top priority.
Sean Magennis [00:10:10] Let’s begin. Number one, do your clients hire you for never before seen problems? Number two, do you employ leading experts in the field? Number three, do you have legally protected intellectual property? Number four, do your clients hire you because you have solved their problem before? Number five, do your clients hire you because you have direct, relevant case studies? Number six, do your clients hire you because you help them avoid common mistakes? Number seven, do your clients hire you because they are busy and need an extra pair of hands? Number eight, do your clients hire you because you can get the work done quickly? Number nine, do your clients hire you because you have an army of trained people to deploy immediately? And number ten, does your service offering start out as leading edge and over time become a commodity?
Greg Alexander [00:11:26] OK, so just a quick recap there. So yes, to one through three, your intellect. Yes to four to six, you’re wisdom. Yes to seven and nine, your method. And then obviously, number ten is regarding lifestyle management. So does your service offering start out as leading edge and over time become a commodity? If you answer the questions that answer, that question is yes, then you should prioritize lifecycle management.
Sean Magennis [00:11:48] Great. Thank you, Greg. So in summary, a lack of lifecycle awareness can make scaling more difficult than it needs to be. It can lead to poor cash flow and unhappy clients and employees.
Sean Magennis [00:12:01] 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.