Episode 61 – Yield: The Ultimate Measure of Productivity – Member Case with Aaron Levenstadt

Yield is the ultimate measure of productivity for professional services firms. On this episode, we interview Aaron Levenstadt, Founder and CEO of Pedestal Search and discuss how he uses yield to manage his firm.

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 yield is the ultimate measure of productivity. I’ll try to prove this theory by interviewing Aaron Levenstadt, founder and CEO of Pedestal Search Pedestal, is a marketing technology company and data driven search engine marketing platform founded by former Google employees. Pedestal create systems and processes to help businesses better leverage internet search engines as a growth channel. You can find Aaron and his business on pedestalsearch.com. Aaron, great to see you and welcome. 

Aaron Levenstadt [00:01:17] Thanks, Sean, it’s good to be sharing this conversation with you. 

Sean Magennis [00:01:21] Likewise, it’s great to have you. So today we’re going to discuss one of the most often looked at metrics in all of professional services, yield. A reminder to our audiences that the definition of yield is simply the average fee per hour, times the average utilization rate of the team. For instance, if a boutiques average fee per hour is $400 and the average utilization rate is 75 percent, then the yield is $300 per hour. Aaron, let’s start with an overview. Can you briefly share with the audience an example of how you think about and manage yield? 

Aaron Levenstadt [00:02:02] Yes, certainly. So we keep track of yield, but we don’t obsess over it. And by keep track, I mean, we look at utilization for our team members individually as a collective, as a company. Yes. And also on a per account basis, we think of yield attributed to an account. And although we know that it actually should be the most looked at metric, I want to start off on this piece, we don’t obsess over it. Rather, we focus on and we think a lot about how to source technology and actions from our team members that are value drivers for our clients. So that yield becomes less of a focal point. And we’ve found that over time, focusing too much on yield can lead to some inherent scalability gaps. On the other hand, If we can shift our focus to where we can open up value, that can allow us to create a significant gap between each counts of utilization. Yes, and value created. 

Sean Magennis [00:03:08] Outstanding, I mean, that makes a lot of sense to me. So what I’d like to do is get your thoughts on some of the best practices that we recommend in this area. So there, four specific things, I’ll walk you through and then have you share your thoughts on each. So the first one is the typical boutique runs of an assumption of a 40 hour workweek, a 48 week year that equates to nineteen hundred and seventy two hours per employee, and using our early example at $300 per hour. The boutique will do five hundred seventy six thousand in revenue per employee, a 100 person firm. Let’s say with this yield, we’ll do fifty seven point six million in annual revenue. So understanding yield means you understand how much you can scale to. It establishes a ceiling. What are your thoughts on this concept Aaron? 

Aaron Levenstadt [00:04:00] Yeah, so that exactly where we last left off on the ceiling, so the way that we think about it is instead of sort of focusing on the ceiling, which is defined exactly by the yield equation, if you think about it from that perspective, yes, we think instead of us deploying program stocks as opposed to hours or manpower that generate value, tech driven by great people. And in that way, yield becomes less of a focus and we shift the focus to how to drive value throughout our engagements. 

Sean Magennis [00:04:39] I like that. So deploy program stack and shift to the value rather than exclusively focus on yield. Have I got that right? 

Aaron Levenstadt [00:04:49] That’s exactly right Sean. 

Sean Magennis [00:04:50] Excellent. So the second one is we contend that most firms, when they try to scale, they’ve reached a point of sort of diminishing returns on utilization rates. And we feel this way because there’s only so much juice to squeeze out of the 40 hour workweek and the 48 week year. What’s your opinion on this? 

Aaron Levenstadt [00:05:12] So I think I think, you know, you’re exactly right in how how we’re thinking about this, because the economics and the way that we think about it is the economics around what we do in the way we’re working with a client. They have to work for the client. Most importantly, they also have to work within our our rubric, and we think about it that way. They can allow for scalability. Yes. In a different way than thinking about yield on the, you know, hours and then and then person in the equation. So there’s that, you know, there’s that parable of the chemist that gets called into the factory, right? The factories sprung a leak. Yeah. And the chemist walks in and looks around. He’s taken a look at the machines and he scratches his chin and he thinks, you know, he sees where the leak is coming from. He sees it. He identifies the problem. He quickly creates a chemical compound, using his knowledge to patch the leak in the factories, able to resume production. And then the factory owner calls the chemist, you know, some time later, and he says, Hey, I got your invoice here. It’s for thirty thousand dollars, but you were only here for ten minutes. And the chemist replies, Yeah, that’s right. That’s $10 for my time. And 29 990 for knowing how to fix your problem in 10 minutes. Beautiful. We try to apply that same philosophy. 

Sean Magennis [00:06:34] I mean, that really hits the nail on the head. I mean, and you know, how have you learned that lesson? I mean, you know, that’s a great parable. You know, give me give me a practical example of how you’ve done it. 

Aaron Levenstadt [00:06:47] Yeah, we’ve learned this lesson the hard way. So like, you know, I think like how a lot of us, maybe all of us learn through experiencing pain and a lot of it. And early on in the life of our business, we accepted some engagements where our clients asked bill by the hour and we we took those on those early stages of our company. You know, from a financial perspective, they weren’t. They were great. They were not great. But they also, more importantly, they were not great from an internal morale perspective because the conversations with our clients shifted to, you know, our teams were talking to our team members or talking to clients about why sixteen point three minutes was spent on that and an hour and 12 minutes was spent on this. And they just they weren’t productive, fulfilling conversations. So endured some pain learned the hard way, and we don’t do that anymore. 

Sean Magennis [00:07:46] And to your point, earlier, when you focus on value, you know, when you’ve created this, you know and deployed this program stack, you don’t have to get into that nickel and diming conversation, which is soul sucking. I agree with you, it’s it’s just not productive. So let’s turn to fees. The key to scaling in this context is to figure out how to become more valuable, which is what you’ve said. And remember, this is an equation with only two variables. Utilization rate dollars per hour. So owners of boutiques have a lot more juice to squeeze out of the dollar per hour. And in your case, maybe the value of the dollar value per stack and then impacting the dollar per hour variable. It’s just not as easy as raising prices. Clients will pay more for boutiques that bring more value to them, and this is because they turn to boutiques for specialization. What do you think about this? 

Aaron Levenstadt [00:08:45] I think it resonates very well with our experience in the sense that it resonates so much that today what we do when we’re first meeting with the client, when workers starting that conversation before we’re engaged and working with them, we try to have this conversation openly and candidly at the outset. So very early on and speaking to a potential client, we will communicate and that we’re we’re a specialist, we’re not a generalist and we are going to do the way that we think about our engagements is really by how much value we can drive. 

Sean Magennis [00:09:19] Yes. Yes. Excellent, and then, you know, I guess there’s a lot of things that come into that in terms of variability. You know, and it’s really working to change sometimes the client perspective, right? 

Aaron Levenstadt [00:09:35] Yeah, you want to. You want to change the client perspective, and I want to do it early on in this conversation, so it will we’ll see things in these conversations. You know, like what we do is we help you generate more productive traffic from search. Yes. As importantly, will also say what we don’t like and we’ll say things like, We don’t make pizza, we don’t shoot.  

Sean Magennis [00:10:02] Right? Yeah. Your expertize are search and by the way, with the resume of of you and your team. I mean, that would appear to be, you know, a no brainer. But reminding them of that specialty is key to creating the kind of value that will drive the fees and drive the recognition and obviously get you more business. I get that. That’s really great. So the fourth aspect in our experience, we see five forms of specialization that translate to higher fees, and they are industry specialization, function, segment problem and geography. And in our view, if you’ve got at least three of those, you truly are a specialized firm. So in your case, where are your areas of specialty? 

Aaron Levenstadt [00:10:54] Yeah. So this is an area that we give a lot of thought to. I it’s an area that we’re continuing to refine as our business evolves and grows. And there’s the three that I think that stand out at sort of top of mind would be the function of the problem and the segment go function. Having worked at Google and worked on the search engine algorithm itself, we really understand that world and that’s the functionality that we want to be operating on and what we specialize in. Yes. The problem in a kind of stemming from that. So the second prong problem is really about how to unlock search discoverability, and we’ll see if things are going our conversational, the clients we don’t we’re not here to help you solve 50 different kinds of problems. We we are going to help you solve the problem that we specialize in. We know how to do how to solve for. Yes. And then the third one on our world is is segment. And the way that we think about this segment is really in terms of a profile, psychological to a certain degree, in the sense that our potential client, our partner who needs to know what they’re looking for and know that they have had some success with search and they really want to invest in building and bringing systems and processes to drive that search engine optimization motion more. 

Sean Magennis [00:12:16] Outstanding and that’s again for our listeners. You know, take this from from Aaron. When building your your firm and thinking about your specialization, be really clear, like Aaron is in terms of what what your service can offer the specific problem and don’t try and be all things to all people, I think is the ultimate lesson. Would you agree, Aaron? 

Aaron Levenstadt [00:12:38] Yeah, 100 100 percent. Even on going back to a little bit about what we were talking on earlier is will remind the client when we’re talking to them both before we work with them and while we’re working. Yes, there are lots of things that we are not good at. And if you ask us to do those things, we’re going to say, no. We will fuel you with those things. I think by reminding the client of that, it reaffirms the fact that we’re not a generalist. We’re not just going to do anything that the client’s willing to pay us for. Yes, we’re nationalist and that’s what we’re here to help them with. 

Sean Magennis [00:13:18] That’s such a key point. And I’m I’m assuming that during the course of your journey, you found that at some point it was difficult to say no to client coming you for two for business, right? So scoping is important and really having the professional integrity to say no is key. What do you think about that? 

Aaron Levenstadt [00:13:36] I cannot agree more. Also learned through enduring pain and pain. 

Sean Magennis [00:13:45] Exactly, you learn. That’s how we learn. 

Aaron Levenstadt [00:13:48] Yeah. So yeah, we’ve taken on some work that you know early on that we should not have diverged from our land of expertize from, you know, the thing that we’ve done hundreds of times in doing successfully. And now we’re more careful about that. 

Sean Magennis [00:14:03] Outstanding. And this is so helpful. Thank you so much for spending time with us today. I’ve learned several additional aspects to the importance of managing yield. I like the way you presented your business in terms of the technology and the value aspect. 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 or no questionnaire. We aim to keep it simple by asking only 10 questions. And in this instance, if you answer yes to eight or more of these questions, you’re running a tight ship with excellent yield. If you said no too many times you have a yield problem and this will be an impediment to scaling. Given the proprietary nature of Aaron’s business, I’m not going to put Aaron on the spot with these, but I am going to read off the questions for the benefit of our listeners. 

Sean Magennis [00:15:09] So the first one is are your average utilization rates above 85 percent? Number two, senior staff above 70 percent? Number three, mid-level staff above 80 percent? Number four, junior staff above 90 percent? Number five, are your average fees above $400 per hour? Number six, are your senior staff above $750 per hour? Number seven, mid-level staff above 500? Number eight junior staff above 250? Number nine are you assuming a 48 week year and 40 hours per week? And number ten, are you distinguished from the generalist with three to five forms of specialization? 

Sean Magennis [00:16:04] So in summary, yield is the ultimate measure of productivity for professional services firms. Watch out for the trap of over rotating to utilization rates and under indexing the second variable in the equation, which is dollars per hour. Drive up your fees like Aaron, by becoming more valuable to your clients by becoming hyper specialized. If you do so, the sky is the limit on your scale potential. Aaron, a huge thank you for sharing your wisdom with us today. It’s a pleasure having you. If you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell a Professional Services Firm. Written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening. 

Episode 21: The Boutique: The Ultimate Measure of Productivity

Yield is the ultimate measure of productivity. In this episode, we discuss how professional services firms scale faster by thinking about different ways to improve yield. 

TRANSCRIPT

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 will make the case that yield is the ultimate measure of productivity. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has helped owner’s scale faster by thinking about different ways to improve yield. Greg, good to see you and welcome.

Greg Alexander [00:01:03] Hey, pal. Good to be with you. Appears today we are going to discuss the most often looked at metric in all of professional services.

Sean Magennis [00:01:11] Yes, we are. Yes, we are. To begin. How about you provide us a working definition of yield?

Greg Alexander [00:01:18] Sure. So yield is simply the average fee per hour times the average utilization rate of the team. For example, if a boutiques average fee per hour is 400 dollars and the average utilization rate is 75 percent, then the yield is three hundred dollars per hour.

Sean Magennis [00:01:37] OK. That is really easy to understand. And why is it relevant to our audience, which consists of owners of professional services firms who are trying to scale beyond the lifestyle business?

Greg Alexander [00:01:49] Huh. So it is mission critical to those trying to scale. And here’s why. The typical boutique runs off an assumption of a 40 hour workweek and a 48 week year. This equates to 1972 hours per employee using our earlier example at 300 dollars per hour. The boutique will do five hundred seventy thousand dollars in revenue per employee. So a 100 person firm, let’s say, with this year will do fifty seven point six million in annual revenue. Understanding yield means you understand how much you can scale to. It establishes a ceiling and therefore it is so important for our listeners to understand.

Sean Magennis [00:02:32] Got it. So the suggestion to listeners then is to do the math and determine the scale ceiling. Let’s suppose we don’t like the answer. Greg, we want to scale past the ceiling. What can they do then?

Greg Alexander [00:02:45] Good question. And that is how we want all of our listeners to be thinking, how big can I get? Most boutiques can quote you their utilization rate from memory. This is a well tracked metric and it should be boutiques that have made it past the startup stage, have already optimized for the utilization rate. They would not have survived otherwise. Therefore, an improvement in utilization rate does not lead to scale. The point of diminishing returns has occurred unless, of course, you’re going to ask employees to work on Christmas Day. The scale owners need to turn to fees.

Sean Magennis [00:03:23] So, Greg, just before we jump to fees, let me make sure I recap what was just said. You contend that most firms, when trying to scale, have reached the point of diminishing returns on utilization rates. And you feel this way because there’s only so much juice to squeeze out of the 40 hour workweek and the 48 week year, is that correct?

Greg Alexander [00:03:43] Yes, it is. So have a look at the U.S. business calendar. It is tough to get more than forty eight weeks. Employees need a couple weeks vacation. There are sick days and there are dead periods, such as the week between Christmas and New Year’s and Thanksgiving week, etc.. It is easier to get more than a 40 hour week, especially in the work from home setting as a line between work and life had blurred. Many people routinely work 50 plus hours a week. But in my experience, most of these extra hours are non billable. So they did not move the revenue line that much.

Sean Magennis [00:04:18] Okay, so let’s assume the 1920 hours per employee assumption holds as there’s not much one can do to improve it. Now you say it’s time to turn to fees. Why is that?

Greg Alexander [00:04:31] Yes. So remember, this is an equation with only two variables utilization rate and dollars per hour. Owners of boutiques have more juice to squeeze out of the dollars per hour variable and impacting the dollars per hour variable is not as easy as raising prices.

Greg Alexander [00:04:48] Most boutiques are in competitive markets. The intense competition drives downward pressure on fees. So if this is true for our listeners, what can they do to impact dollars per hour? So key to scaling in this context is to figure out how to become more valuable to clients. Clients will pay more for boutiques that bring more value to them. This is because clients turn to boutiques for specialization. These clients have moved away from the huge generalist firms. They are willing to pay more for highly specialized expertise.

Sean Magennis [00:05:27] That makes total sense, Greg. So it appears the key to higher prices is more specialization. Can you give the audience some ideas on how to increase their specialization?

Greg Alexander [00:05:38] Sure. In my experience, there are five forms of specialization that translate to higher fees, and they are, so number one specializing by industry vertical. Number two, specializing by function. So I serve the CFO or I serve the CTO. Number three is specialize in by segment. So I call on large enterprises or I call on consumers or I call on small business owners, etc. Number four is specializing on problem. So cyber security risk is a problem and I specialize around that. Number five, I specialize in geography. So here we are in Dallas, Texas, and I serve clients in Dallas, Texas. So let me give you a hypothetical example of a highly specialized firm. Clients would pay a premium for a consulting firm that helps product managers and enterprise software companies in Silicon Valley move to the cloud. To notice the five forms of specialization, we had the industry software companies, we had the function product managers, we had the segment enterprise, we had the problem moved to the cloud and we had the geography Silicon Valley. This firm’s yield, if it existed, would be high because it could charge a lot more.

Sean Magennis [00:06:56] That’s an excellent illustrative example. Thank you, Greg. 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 their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Tony Mirchandani [00:07:30] Hello. My name is Tony Mirchandani. I’m the owner of RTM engineering consultants. We’re a national engineering firm focused on the built environment. We provide civil, mechanical, electrical, plumbing and specialty services around the country. Our growth has come 50 percent through acquisitive growth and 50 percent through organic growth, as well as partnering with architects and developers. If there’s anything we can do for you, please feel free to reach out to me. I can be reached at To[email protected]

Sean Magennis [00:08:04] 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 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 a 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 eight or more of these questions, you are running a tight ship with excellent yield. If you said no too many times, you have a yield problem. And this will be an impediment to scaling.

Sean Magennis [00:08:59] Let’s begin. Number one, are your average utilization rates above 85 percent? Number two, senior staff above 70 percent? Number three, mid-level staff above 80 percent? Number four, junior staff above 90 percent? Number five, are you average fees above 400 dollars per hour? Number six, senior staff above seven hundred and fifty dollars an hour? Mid-level staff above 500 dollars an hour? And number eight, junior staff above 250 dollars an hour? Number nine, are you assuming a forty eight week year and 40 hours per week? And number ten, are you distinguished from the generalist, with three to five forms of specialization?

Sean Magennis [00:10:19] In summary, yield is the ultimate measure of productivity for professional services firms. Watch out for the trap of over rotating to utilization rates and under-indexing the second variable in the equation, which is dollars per hour. Drive up your fees by becoming more valuable to your clients, by becoming hyper specialized. If you do so, the limit on your scale is the sky.

Sean Magennis [00:10:52] 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.