All revenue is not good revenue. Some types of revenue create more wealth for owners than others. On this episode, we interview Tony Mirchandani, CEO at RTM Engineering Consultants to discuss his approach to consultation fee quality.
Transcript
Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis Collective 54 Advisory Board member and your host. On this episode, I will make the case that all revenue is not good revenue. Some types of revenue create more wealth for owners than others. I’ll try to prove this theory by interviewing Tony Mirchandani, CEO at RTM Engineering Consultants. RTM serves architects, developers and owners to produce sustainability, construction quality and streamline schedules on each project. An extensive set of capabilities has allowed RTM to deliver superior work on industrial, commercial and retail builds, as well as well as other complex building types such as health care and laboratory facilities. You can find Tony rtmec.com. Tony, great to see you and welcome.
Tony Mirchandani [00:01:34] Thank you. It’s great to be here.
Sean Magennis [00:01:36] And it sounds like you’ve had an extraordinary busy four days with your in-person team meeting, so we’ll run through this. So Tony, let’s start with an overview. Can you briefly share with the audience an example of how all revenue is not good revenue?
Tony Mirchandani [00:01:53] Absolutely. Earlier in my career, I would have thought a $100000 cell would be equal to another $100000 cell and think the real differentiator between the two is what’s the profit margin on that going to be? But the reality of it is being in professional services. We have to have a continuous backlog of projects and want to have the opportunity to be able to improve the actual product that we’re pushing out. Mm-Hmm. So having revenue that is driven by surfaced, in our case, sophisticated buyers, buyers that are willing to start at the $100000 mark and then continuously increase that amount as time’s going on. If we’re able to produce have the desire and the need based on the product that we’re pushing out. Actually allows them to continue to build their business if their business does not require the services we have on a multitude of years, that revenue that we’re driving really becomes it becomes a one trick pony ride and we have to go out and sell again.
Sean Magennis [00:03:03] Right. So that becomes bad revenue.
Tony Mirchandani [00:03:06] Exactly, exactly. And then the cost to go out and win that next hundred thousand dollar job takes away from that first one versus one, that’s going to be basically having a recurring revenue stream as best we can.
Sean Magennis [00:03:20] That is such a great example to kick us off. And what I’d like to do is get your thoughts on some of the best practices we recommend in this area. Now there are many I’ve selected for specific things that I’ll walk you through and then get your thoughts on each. So the first one is high fee quality comes from a proper balance of fees from new and existing clients. A rough rule of thumb that we use as a 60:40 split. So 60 per cent of fees hopefully sourced from existing clients and 40 per cent fees source from new clients. What is your experience and thoughts in this area, Tony?
Tony Mirchandani [00:03:59] I completely agree with that. I think every year we should be turning over some of our clients and being able to rank those and whatever that internal ranking is, as long as it’s tied to whatever your end game is. Yeah. So internally, we see it more around an 80 20 rule. But our clients take a six to 12 month onboarding period before we actually receive true revenue from them. And it takes about 24 months to unwind a client that we don’t want to work for anymore. So that slow cycle, we have to be very selective in who we want to have as our next client.
Sean Magennis [00:04:33] That’s an that’s an outstanding example. And you know, again, each firm is going to have slightly differences. So your 80:20 works in your scenario and with your 24 hour, you know, move off cycle that requires that requires some careful management, I would imagine.
Tony Mirchandani [00:04:54] Yeah, absolutely. Because we’re in the construction business, right? And anything that we design, it’s going to it’s going to take another 12 to 24 months to unwind and that can actually drag us down during that time period. But also as we’re as we’re building the internal team and we’re evolving in the marketplaces that we operate in, we’re becoming more and more sophisticated in the kind of clients that we can drive true value from. I see it is there’s there’s two kinds of real revenue out there. There’s revenue that we add value to and then there’s revenue that is just the client is required. It’s like being attacked, things permit documents. They have to hire someone to do it. Yeah, we try to avoid that type. We try to find clients that need to partner with us.
Sean Magennis [00:05:41] And that’s the key driver is finding those partners that you can truly add value to. And it’s not commoditized stuff that anybody could do what they could do internally, right? Exactly, exactly. So the next question is potential buyers want to see long term contracts with clients. For instance, the management consulting firm that performs 30 day strategy assessments. Arguably has poor fee quality. However, the boutique that performs assessments, solution development and implementation and can do 12 24 months 36 months contracts. These firms have high fee quality. What do you what are your thoughts on that?
Tony Mirchandani [00:06:22] I absolutely agree with that, and I just think in certain industries such as ours and a lot of our colleagues, it’s hard to get a consistent 36 month type contract. But by identifying the right client with the right revenue cycle, you’re able to get a project that might take 12 months, but the next project is going to start in six months. So suddenly you get these overlapping projects and the better job we do, the more dependent our client actually becomes on us, the more dependent we can become on our client. And one of the great things that Greg Alexander’s talked about is how do you reduce your internal cost as you become more of an expert with a particular client? We’re able to do that on the third, fourth, fifth engagement, especially if they have overlapping cycles.
Sean Magennis [00:07:10] That that is a brilliant point. And I’m presuming that you can train lower cost experts in order to take on that work because you’ve actually you’ve gotten yourself an expertize and then have your higher order. You know, start with clients fresh that need that additional expertize. Is that the right way to look at it?
Tony Mirchandani [00:07:29] That absolutely is the right way to look at it. And there’s another side benefit to that is we’re always looking to bring on new staff and our senior staff may get bored on the third or fourth projects. That becomes a new opportunity to train and retain new great talent, while giving the senior talent some new opportunities to pursue new challenges.
Sean Magennis [00:07:49] Yeah. Outstanding. Again, you’ve hit the nail on the head. Number three is after analyzing new versus existing clients, as well as length of contracts. Typically, when a person values a firm, they’ll look at fee predictability and a boutique who services build on one another is very attractive. And you’ve just said that in your in your previous remarks. So these boutiques often produce high fee quality due to better predictability. Is that something you’d agree with as well?
Tony Mirchandani [00:08:20] Yeah, I would I would definitely agree with that. And another piece of that is the predictability and the the avenues that you were able to actually receive that revenue. So it’s there’s the normal linear cycle. Yes. And as we’re adding a new services, we’re able to go downstream. So we’re getting engaged earlier, for instance, with civil engineering and then commissioning services, we’re on the job another six months. And that longevity with the client not only is tying into the same sales cycle, but it’s creating more opportunities for overlap and without needing to go out and have another cold sale.
Sean Magennis [00:08:59] It’s brilliant. It’s almost like going back to go forward, to go long. Right? I mean, that’s the way that exactly. Yeah, it’s it’s really smart. So number four, buyers often examine fee quality based on cash collections. So boutiques that have aging accounts receivables and they’re not collecting quickly enough. Typically, you would say that that’s pure fee quality. In contrast, boutiques that are paid up front or have really good cash collection, they have high fee quality. So free cash flow is a big positive. What do you think on this subject? I know that you have an opinion here.
Tony Mirchandani [00:09:36] Unfortunately, I do, and this is where we have really struggle and we’ve definitely not excelled as well as we have a very large collection cycle. Yeah. So as a buyer of companies also, we’ve found that anyone that we’re looking to buy that has a shorter collection cycle than us will pay a higher premium than we will if they’ve got the same or a longer cycle. And we’ve spent a lot of effort internally looking for ways to be able to shorten that collection cycle. And it’s a very hard thing to do just because of the space that we happen to be in. So I would advise anyone out there if you have the opportunity to look at revenue and pick revenue based on how long it’s going to take for the collection space or an upfront retainer, that revenue is definitely worth more. And sometimes it’s worth a slightly smaller margin. If you’re highly assured of the collection piece or you get paid part of it upfront because that’s that’s really your fuel for growth. Otherwise, you have to go out and borrow and
Sean Magennis [00:10:35] borrow and take on equity expense of capital.
Tony Mirchandani [00:10:38] Exactly.
Sean Magennis [00:10:38] Yeah. So and really a brilliant point, and I hope our listeners are taking this as a fine point because Tony also buys companies. And so, you know, please listeners, cash flow and your ability to prove your cash flow. You know, when presenting yourself to a potential buyer is critical because Tony’s just said, you know, he’ll seek out shorter collection cycle businesses and pay a premium to get those business because they’ve got their cash flow acts together. So, Tony, thank you that for our listeners, is really important to hear. So we’ve done these four things one balance four years from new and existing clients to develop long term contracts. Three Build fee predictability with add on services. And I liked your point. But going back to go forward, start, you know, and then and build it through the cycle and four critically manage your air to create key free cash flow. This will increase feed quality and as a result, convert income into wealth. Anything else, Tony, that we missed out that you’d like to bring to the attention of our listeners?
Tony Mirchandani [00:11:52] There’s one new thing that I’ve discovered lately that actually came through Collective 54, which is pricing strategy. Yes, and about 10 years ago, pricing in most industries, law, accounting, engineering, architecture was really based on your cost of goods sold and what the marketplace would bear. And that seemed like normal MBA approach to pricing. But currently we have started to see a much deeper level of sophistication and actual experts in the end in industries consulting to us on pricing strategy and different ways to approach different market verticals with the exact same service. And suddenly that that is opened up a number of new opportunities for us and a different perspective of thinking about pricing strategy. I really see that as the next true frontier for professional services. And I would say it’s it’s probably one of the most inefficient components of our business and most service businesses.
Sean Magennis [00:12:55] You know, I couldn’t agree with you more and thank you for for saying that and for bringing that to the listener’s attention. I was on a on a podcast recently where one of our members has actually adopted a pricing console within their business that they have that an internal team that gets together on a very regular basis, and then they invite a client into the council to talk to them about, you know, the ROI that they’re receiving and and they do that on a consistent basis because every client relationship is nuanced, it’s different. And then they do the cross comparison, but because they doing it and they formalized this pricing counsel, I thought that was a genius move. And it and it and it literally aligns well to your comment about this new learning. So thank you. That’s that’s really great additional input.
Tony Mirchandani [00:13:43] It’s great to hear about that other client, too.
Sean Magennis [00:13:44] Isn’t it good?
Tony Mirchandani [00:13:46] Yeah, that’s awesome.
Sean Magennis [00:13:47] So listen and I’d be happy to put you in touch with him because he’s developed it and it sounds like it’s working really well for them. So, Tony, this takes us to the end of the episode. Let’s try to help our listeners apply this. We end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm, and our preferred tool is a checklist style of checklist is a yes, no question. We aim to keep it simple by asking only 10 questions, so listeners ask yourself these 10 questions. If you answer yes to eight or more, you have high fee quality. Tony has graciously agreed to be our peer example today. And Tony, I’ll simply ask you these questions and say yes or no. If you feel like you need to add to a question, go ahead and do it. So let’s kick it off.
Sean Magennis [00:14:40] Number one, do you generate about 60 percent of your fees from existing clients?
Tony Mirchandani [00:14:48] Yes.
Sean Magennis [00:14:49] Number two, do you generate approximately 40 per cent of your fees from new clients?
Tony Mirchandani [00:14:56] No. Slightly less.
Sean Magennis [00:14:58] Yours is the 8-20 right now.
Tony Mirchandani [00:15:00] Exactly, exactly. I think the important thing is you set an amount.
Sean Magennis [00:15:04] Exactly. Number three, is the average client contract longer than 12 months?
Tony Mirchandani [00:15:12] Yes. Absolutely.
Sean Magennis [00:15:14] Number four, do your projects naturally build on one another?
Tony Mirchandani [00:15:21] Yes, they do.
Sean Magennis [00:15:23] Number five, is your service built to pull through upsell?
Tony Mirchandani [00:15:30] It is and that I’d like to put some color around. He started as a single discipline engineering firm. And as we grew both organically and through acquisition, we found that instead of adding to that single discipline, adding other disciplines that we can pull up or we can put in after our contracts are in place have become exceptionally advantageous and increase the stickiness and the repetition of client interaction.
Sean Magennis [00:15:58] Excellent, Tony. And this dovetails into the next question is your service designed to pull through cross-sell?
Tony Mirchandani [00:16:06] Yes.
Sean Magennis [00:16:08] You’ve got your upsell and you’ve got your cross-sell. Great number seven. Are your fees predictable?
Tony Mirchandani [00:16:16] No bathroom far from.
Sean Magennis [00:16:17] Hmm. OK. Number eight. Do you collect your fee in advance of performing the work?
Tony Mirchandani [00:16:25] No, this is our biggest challenge. We it’s traditional and our competitors always bill after the fact. Yeah, and that’s that’s one of the biggest downsides to the business. I mean we need to break that mold.
Sean Magennis [00:16:37] Well, we’re here to help you break that mold because that would change the game for you, right?
Tony Mirchandani [00:16:42] Oh, 100 percent, our business would be scaling three times faster if we were paid up front instead of on the back end.
Sean Magennis [00:16:49] Excellent. Number nine, can you fund your growth from free cash flow?
Tony Mirchandani [00:16:57] We have historically funded our growth, so yes, we can, but we could. Our growth is limited because of cash flow nonetheless.
Sean Magennis [00:17:05] Right. And this historical problem you have on the payment side of your business.
Tony Mirchandani [00:17:10] Absolutely. OK.
Sean Magennis [00:17:12] Number ten, can you pay the bills without using debt?
Tony Mirchandani [00:17:18] Yes. Yes, we do. We have a healthy margins where we can do that.
Sean Magennis [00:17:22] Brilliant. Tony, thank you. I mean, this is exactly it, just extraordinary. So in summary, all revenue is not good revenue. There are good fees and there are bad fees. Good fees attract buyers. When you go to sell your business, they increase the value of your firm and they improve your odds of exiting should you decide to do that. Bad fees could push buyers away. They do decrease the value of your firm, and they’ll likely prevent you from selling at a price that you would like. Tony, a huge thank you. And I know that you’ve been extraordinarily busy for sharing your wisdom and experiences today.
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