Episode  127 – Alternative Fee Structures: How and Why to Move Away from Hourly Billing – Member Case by Sonia Miller-Van Oort

Moving away from hourly billing leads to better margins, higher client satisfaction, and happier employees. Yet, many boutique founders are afraid to do it, and do not know how. In this session, member Sonia Miller-Van Oort shares how she built her 12-person law firm using alternative fee structures.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv podcast, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely on the unique needs of boutique professional services firms. My name is Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to discuss moving away from the billable hour. This is a hotly contested issue. Some might even say religious battle in certain sectors. And it’s important for us to have a point-counterpoint discussion around this, because sometimes making this move can increase profitability and client satisfaction quite a bit. And we’ve got a great role model with us today. Her name is Sonia Miller Van-Oort, and she is in the legal sector, which is rather married to the billable hour, and she’s got quite a story to share with us. So we’re very lucky to have her. Sonia, if you wouldn’t mind, please introduce yourself and tell us a little bit about your firm.

Sonia Miller-Van Oort [00:01:25] Sure. My name is Sonia Miller Van-Oort. I am the President and Principal Founder of a law firm called Sapientia Law Group. We’re located in Minneapolis, and we are a 12-attorney law firm that does a variety of work, mostly litigation, about 70% litigation and about 30% transactional work.

Greg Alexander [00:01:45] Okay. And where are you based?

Sonia Miller-Van Oort [00:01:47] In Minneapolis, Minnesota.

Greg Alexander [00:01:48] Okay, very good. So tell us a little bit about how you’ve moved away from the billable hour.

Sonia Miller-Van Oort [00:01:55] Yeah. So we started our firm 12 years ago, and prior to that I was a partner at another firm and this topic of billable hours. This is 2009, 2010 timeframe, clients, really not happy with ever-increasing billable hour rates. At that point, I was a more junior partner and there are a couple of things that I was seeing. One, clients weren’t happy with that system of billing they really wanted more budget certainty. And as a practicing litigator, what I what I observed as well was that the cost and the uncertainty of the cost to the clients became an impediment to them getting to the merits of their case. And as a litigator and advocate, that was a frustrating thing for me, trying to get the best result for them. So it was kind of a combination of those things. I participated in this about with my law school, which was kind of a big think tank about the traditional law firm model. And this issue came up and I started I heard about alternative fees, and it wasn’t so much that it was a new concept at that point people had been talking about for decades. But really very few law firms had really adopted it and were able to be successful in it. And kind of what I perceived was law firms would sometimes reluctantly do an alternative fee structure if the clients came and approached them about it, but they kind of did it kicking and screaming. And so when I was creating a new law firm model to start Sapientia Law Group, that was central to the concept of how could we deliver services differently to our clients, and trying to think how we could, instead of it being a reactionary and reluctant response, how could we lead with that as a something proactively always offered to clients, always giving them the option whether they wanted to do hourly or an alternative fee structure, but presenting it without clients having to kind of ask the question but to be upfront and say, here’s another way we can do this, which works best for your business. So that’s how it got there and how we really focused on that as a key core concept of Sapientia Law Group.

Greg Alexander [00:04:37] Okay, very good. You’ve mentioned alternative fee structure a few times, so if not the hourly or billable hour excuse me, what is the alternative?

Sonia Miller-Van Oort [00:04:47] Yeah, well, I always say the alternative is only limited by your own creativity. So we’ve developed quite a list of options. And so those can range from you can do, and I’ll just, to be clear, I’m a litigator, so that’s the world I live in. And people for years have said, well, you might be able to do alternative fees in law, but really you can’t do them in litigation. Is that way possible because there are just too many unknown factors? And I don’t believe that to be true. And so what we’ve developed are different flat fees, four phases of litigation. We’ve developed subscription fees, which would be more of a kind of that model I always liken it to your cell phone plan and paying for so many minutes a month and you can have rollovers. We do risk collars, which is another way to create some budget certainty that has a collar of risk around the price that you’re studying. And it allows some extra payment if you go beyond it, but it’s reduced and a greater payment if you come below the budget. We’ve done pullbacks, which is another way of saying we’re going to agree upfront. What are the key, key performance factors? And we’re going to hold so much back from what you’re paying us until we reach those milestones. And then one that I often use in complex litigation is the combination of a hybrid of flat fees for certain pieces of the work with success bonuses, again, around milestones or what the client defines as success at the beginning of the engagement. 

Greg Alexander [00:06:28] Hmm. Very creative. Thank you for walking us through those alternatives. And when we have our member Q&A on Friday, they’re going to ask a lot of questions about those, particularly the risk collar. That’s one of great interest to me. So if this is better for the client, better for the law firm, and maybe a way for a smaller firm to differentiate, why are founders of firms reluctant to go off of the billable hour?

Sonia Miller-Van Oort [00:06:58] Yeah, I think there’s a couple of reasons. I think the biggest impediment is the traditional law firm mindset, which is how we do business is billable hours and we’re going to, those are our metrics and that’s how we’re going to value our people and we’re going to set goals around how many hours people build. And when you get into that mindset, I will say that it is potentially contrary or conflicting with an alternative fee structure model. And the reason why is because the way I approach alternative fee structures is it’s a shared risk and a shared reward. And what we want to do is the professional services team is to be efficient in getting the results desired. That means you hopefully are using less time and working smarter to get the results. But if you’re in a firm that is going to measure and reward employees by how many hours they put in instead of the results they’re obtaining for clients, those two things get heads. And I think that is just the traditional way of law firms. And so I’ll tell you, when we first started our firm, I wondered, you know, people wanted to talk about the firm. And I was concerned about, do I really want to talk about alternative fees? You know, isn’t that the competitive advantage I’m trying to have and do I really want to be talking about so somebody else can do that. And what I finally came to is I can talk about it all day because as long as law firms won’t change their core structure and the metrics that they value people, how they value them, they can never effectively do alternative fees. And that’s effectively why I want to start a new firm, because I think it’s the whole infrastructure of how you run your business that can make alternative fees work really well. But if you got to look at what you’re compensating, how are you rewarding, how are you value your people, what are they being motivated by, all of those things. And if you don’t have that culture and model, alternative is not going to work. 

Greg Alexander [00:09:09] Yeah. And I agree with you. I mean. Talking about it and doing it. A very true two very different things for sure. So I think that’s a good explanation as to why law firms might do it. When you approach clients with this, I’m assuming maybe incorrectly, it requires quite a bit of education. Is that accurate? And if so, how do you handle that?

Sonia Miller-Van Oort [00:09:32] Yes, it does require some. So, you know, as I said, we are potentially going to be retained. We explain to our client there’s two ways we can do this. And for me to come up with an alternative fee structure, I want to talk about what’s going to be success to you. And I want to talk about what my strategy might be and how I see that playing out. The other challenge, going back to your last question, I think that attorneys and many other professional service organizations have answered the question, how much is something going to cost really when you get my bill, you’ll know approach as opposed to on the front side giving that client budget certainty. And so when you explain to the client what it is you’re trying to do, but you’re also saying but it’s up to you, you know, you decide what’s best for your business right now. Clients really appreciate that. And where I find that they’re more likely to try the alternative fee because there’s some skepticism at times if they’ve not done one before as well what’s the catch? What are they trying to do? Are they trying to get more money out of me? That kind of thing. So where it really works the best is where you have a trusting relationship. You’ve done work with the client before. You explain. Here’s how you’re still going to see. You’re going to get my bills. You’re going to see everyone who’s doing the work. You’re going to see what the work, what’s being done. So I want you to have that data. I want us to both have the data so that at the end of the day, you can look at it and decide, did you get value for it? And I can look at it and make the same determination. So there definitely is an educational process. But I will tell you that, you know, I’m not going to say ten times out of ten that might be too strong, but nine times out of ten, if a client has tried the alternative fee structure, they will do it again because they can see the real value of it.

Greg Alexander [00:11:30] And how about when you’re recruiting attorneys to your law firm, especially those that might have worked in other law firms where this is, you know, completely unconventional, do you have to sell them on why this is good for them or how does that go?

Sonia Miller-Van Oort [00:11:46] I don’t know, but I have to sell them on it necessarily. It’s always a point of interest for them when they want to understand how that works. And as I kind of alluded to before. I only think alternative fee structures work for our firm because of how we’ve built the firm. And so let me just give you an example. I’ve not practiced. I practiced in two other firms. I met a partner and other one before creating this firm, but not working environment that was as collaborative as our firm is. And the reason that is, is because that’s how you get alternative views to work. You’re able to identify your team. You can figure out where people’s strengths and you maximize where people strengths are. So on traditional firms, you might have, you know, a partner and an associate, and the clients don’t want to see more than two people on the bill because they’re afraid they’re going to be getting charged too much. But when I explain to them, what you get is a whole team and this is what it’s going to cost you. It doesn’t matter if there’s two or there’s five people. Okay. So your question is, so when I explain that to people about how we really work together, like we do a lot of roundtable brainstorms on the whiteboard, we’re coming up with our ideas and our strategy and how are we doing this? And you got this and I got this. And it’s a much different way to practice law than I’ve seen with other law firms. And so actually, when we’re trying to recruit people and we talk about that, I think they get excited about that.

Greg Alexander [00:13:11] And to a member who is inspired by your story and wants to give it a shot. What would be the first couple of steps you would recommend?

Sonia Miller-Van Oort [00:13:21] So I think, you know, it’s hugely important that you have data that you understand. What your costs are for what you’re going to provide and what the scope of work is. I mean, really for any potential representation, the question is what’s the scope of work? And in some ways, it’s not any different than a contractor who’s building a house for somebody. What is it we’re trying to do here? Yeah, and that’s the first piece that we always start with. What is it that’s going to need to happen? So when I talked about that strategy on the front side, that really is super important in communicating with the client. All right, here’s what I, this is what I see. These are the people who I can envision as witnesses in the case they’re going to get to close. Seems like this is the case with hundreds of thousands of documents or this seems like a case of like, you know, probably less than 500. You’ve got to kind of be able to know how you’re going to approach it. But listen, if you’re an experienced person in whatever industry it is, you do know that.

Greg Alexander [00:14:22] Right.

Sonia Miller-Van Oort [00:14:23] And if you have data, like if you have past matters that you’ve worked on, for me, it’s cases. But, you know, past deals, you’ve done whatever your industry, you glean from that. And that’s, I think, what should take away the fear of the unknown. Because you’re not just you’re just throwing it out like willy nilly and let’s see what happens. It should be based on data one and two, I think a really important thing and I think this really addresses fear, too, is defining the scope of work. And so attorneys are. That’s what they’re afraid of. But here’s the deal. These are my assumptions. So when I present the alternative to the client, I tell them what my material assumptions are. And if we go outside those material assumptions, that’s extra. Yeah, right. So I can take a package of what I can reasonably figure out my costs, what I want, who’s going to work on this, what I want my margins to be, and come up with that. I don’t have to feel like I’m going to dive off a cliff if all of a sudden we end up with twice as much because I provided for that in the agreement. 

Greg Alexander [00:15:32] Great advice. You know, I might add that when we look at our benchmarking data and you cross-reference firm profitability and client satisfaction, our power members that use alternative fee structures as opposed to billable hours tend to be more profitable and they have higher clients. And so that might be something to help people get over their fear as well. Yeah, well, listen, we’re at our time window here. We try to keep these podcasts short, but I’m so excited about the upcoming Friday session. We’re talking about this for an hour and our members will have the opportunity to ask you questions directly. So on behalf of the membership, thanks for coming today and sharing your wisdom with us.

Sonia Miller-Van Oort [00:16:11] Thanks so much. It was fun.

Greg Alexander [00:16:12] All right.  And for those that want to learn a little bit more about this, I’d give you a few calls to action. You can pick up our book called The Boutique: How to Start, Scale, and Sell a professional services firm. You can find that on Amazon. If reading is not your thing, consider joining Collective 54 Insights. And there you’ll get podcasts and videos and charts and things of that nature. You can find that also at the website. And if you want to join and meet fantastic people like our guest today, go to the Contact Us section on our website and fill out that information and then a representative will get back to you. But thanks for listening today and until next time. Best of luck as you try to grow, scale, and exit your firm.

Recruiting Employees: How to Navigate This Need as Your Firm Grows

Recruiting Employees: How to Navigate This Need as Your Firm Grows

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Pro serve founders know labor is our biggest expense – meaning recruiting isn’t optional, it’s mission-critical! But recruiting becomes more challenging as your business grows. Hiring 40 employees might require 200 interviews and 1,000 applicants. It requires a lot of time to expand your network and reach all those candidates. How can you navigate this effectively?

In this week’s video, Greg shares:

    • The 3 stages of business and employee types in each stage
    • 4 recruiting needs for professional service firms
    • The difference between an executive team and a manager of managers

Upselling and Cross-Selling: How to Sell More Services

Upselling and Cross-Selling: How to Sell More Services

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Generating expansion revenue from existing accounts is often neglected. So how can your team become more disciplined when it comes to upselling and cross-selling?

In this video, we discuss the value of upselling and cross-selling. We also offer ideas on how to get non-sales people within your organization to upsell and cross-sell, and why these functions are important if you want to sell your firm one day.

In this video, you’ll learn:

    • Why expansion revenue is critical for scaling your business
    • The power of the share of wallet exercise
    • The fundamentals of upselling and cross-selling
    • How to get non-sales people to upsell and cross-sell

A Strategy for Growth: How to Create Value for Clients

A Strategy for Growth: How to Create Value for Clients

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How do you make your firm more valuable for your clients? That’s the ultimate question. But what it comes down to isn’t as simple as X’s and O’s. Your business strategy needs to cover all the bases.

That means everyone understands the allocation of resources, your staff has a clear understanding of what’s required for customer satisfaction, and leadership knows what it takes to raise the skill level of the entire team.

In this video, we walk through the do’s and don’ts of an efficient business strategy to create more value for clients. 

In this video, you’ll learn:

    • The 3 resources a business strategy is built around
    • 4 data inputs that can help make your business more valuable to clients
    • How to create a business strategy that makes your business more valuable to clients

Episode 119 – How a Brave Founder of a 20-year-old HR Firm is Reinventing Himself – Member Case by Tad McIntosh

Running a lifestyle business can lull a Founder to sleep. The days, weeks, months, and years pass by as you are “doing just fine”. Then, one day, you are in your mid-50s, and realize you cannot retire, and after all these years, you don’t have much to show for your life’s work. What then? On this episode, Tad McIntosh, President at HumCap, shares how after 20+ years he is trying to convert a lifestyle business into something he can scale, and sell, someday.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Surf podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely on the needs of leaders of thriving boutique serve firms. My name is Greg Alexander. I’m the founder and I’ll be your host today. And on this episode, I’m going to talk to you about becoming self-aware enough to realize that you’re running a lifestyle business and more importantly, mustering up the courage to attempt to convert it into something more than a lifestyle business. And we’ve got a great collective 54 role model with us today. His name is Ted McIntosh, and he runs a very successful firm called Hubcap. He’s been at it for 20 years, which is rather remarkable because most lifestyle businesses start and end in five years. So he’s lasted four times longer than typical, but recently he’s decided to try to make it more than a lifestyle business. So he’s a fantastic example of what it is that we’re going to talk about today. So, Ted, it’s great to see you. Thanks for being here. And please introduce yourself. 

Tad McIntosh [00:01:32] Thanks, Greg. My name is Tad McIntosh and I’m the founder of Humm. Our mission is to solve companies human capital problems in recruiting and human resources with excellence. And I’m a glad to be a member of Collective 54. And I’ve been learning. Learning a lot. 

Greg Alexander [00:01:53] Okay. And as I mentioned, you’ve been around, I think it was 22 years. 

Tad McIntosh [00:01:58] It’s I. Yeah. So we started that’s about right at 22. We started in the fall of 2001. Yeah. 

Greg Alexander [00:02:06] That’s almost 22 years. Yeah. 

Tad McIntosh [00:02:08] It seems like yesterday, but Yeah. 

Greg Alexander [00:02:12] So I’d love for you. Maybe just to start at 30,000 feet. And as you explained to me, you realized that you were running a lifestyle business a little while back and you’ve developed ambition and aspirations to do more than that. So what caused you, after all these years of running a successful business, to want to make a change? 

Tad McIntosh [00:02:31] Well, part of it. We are determined to deliver excellence and value to our customers for a long time, and that’s a good thing. So the customers and the community derives value, but in some ways I just forget about the pain that it is to give them that value for a long time. And some say a glutton for punishment and maybe a little bit of upbringing and then going to West Point for what? What should have been college. And then being an Army officer, you kind of you’re taught to be tough. Be tough, be tough. And finally, I’m like, well, maybe I maybe I shouldn’t be this tough and maybe this maybe this should be easier than what I’ve made it or allowed it to become. Might be the best way to put it. I have a lot of become difficult through some level of behaviors and some levels of lack of knowledge. 

Greg Alexander [00:03:28] When you say lack of knowledge, what do you mean? So this was your first entrepreneurial journey and you were learning as you go? 

Tad McIntosh [00:03:34] Absolutely. So I am a first time entrepreneur and and I’ve learned a lot about how to run a better company. But until I have been a part of collectivity for some of those things we lack, I have been what have been holding us behind for scale. So sometimes it’s like seeing it. Yeah, finally seeing it through a different lens. Is there certain attributes of what we’ve done that has helped us keep in business and deliver value, but have also kept us from scaling? Because in some ways we’re doing too much and to wider? Yeah, you know, wider markets and others not too much. Maybe not a niche enough. As you said, the riches are in the niches. Maybe I’m in too many niches or too wide a niche. Yeah. 

Greg Alexander [00:04:19] Okay. So Ted is graciously allowed to participate in an exercise with me today, and we’re going to use a tool that we have a collective 54 called the Tolerance Level Checklist. And this checklist is meant to gauge your level of tolerance and settling for a lifestyle business or maybe an intolerance for that and wanting to scale and remove the bottlenecks and, you know, develop a much larger business. It’s ten questions we’re not going to ask all ten. We don’t have time for that. You write each question on a scale of 1 to 4, one is acceptable. Two is somewhat acceptable. Three is somewhat unacceptable and four is unacceptable. And I’m going to ask Ted some questions. I’m going to ask him to rate it and then tell us a little bit more about why he rated it, what he did. So the first question I’m going to ask and this is one that’s going to be near and dear to everybody’s heart, is the question or the statement is I, I spend time on things I do not enjoy doing. So, Ted, how would you rate yourself on that? 

Tad McIntosh [00:05:31] I would rate it somewhat unacceptable because there are things that are, you know, second nature to me now that can be more easily done by other people. And in some ways it’s unacceptable because either the lack of having those people or enough team around me to do those things and it just gets boring. You’re doing the same something you learned 12 years ago type of thing. Yep. 

Greg Alexander [00:06:00] And this is very typical. So, you know, when you start your firm, you’re in those early years and basically you do everything and it’s not. It’s not. Intolerable at that point because it’s still new then. And then you wake up and this example 12 years later and you say Jesus is boring because you’ve been doing the same thing over and over again. And one of the things that’s required to move out of a lifestyle business into a scale firm is to build a team, delegate those things to the team, and then elevate yourself yourself up the value stack and keep your own intellectual stimulation alive by taking on new kind of pioneering work. Okay, so that was number two. Let me move to question number three, which is I rarely feel a sense of making meaningful progress on scaling my boutique. How would you rate yourself on that one? 

Tad McIntosh [00:06:46] And I’d say I’m somewhat acceptable there because the beginning of scaling our boutique is having a team around me, and I feel, you know better than I have in a long time about the team around me. And I’m finally knowledgeable that I have a big enough team in the different parts of our businesses, and I have a better viewpoint on investing back in the business on sales and marketing, which happened to be one of my strengths and in what entrepreneurial it feels like I’m overinvesting, but I’m actually based on what I’ve learned through the collective. I’m not overinvesting. I might still be under-investing. Yeah. 

Greg Alexander [00:07:25] So and that’s a great example for you because sales and marketing comes naturally to you’re really good at it. So you keep doing it, doing it, doing it, and you’re the sole right rainmaker in the organization, but there’s only one of you. So until you hire other rainmakers and build a rainmaking department, a sales and marketing department, the firm’s only going to get so big because as one salesperson, as opposed to five salespeople. And that takes a tremendous amount of self-awareness and courage to delegate something you enjoy doing and staying out of it, teaching others to do it and letting them do it. So that’s a great example. So I’m glad you make a progress on that. Congratulations. 

Tad McIntosh [00:08:00] And so it’s a work in progress, but we’re we’re on the road to success. 

Greg Alexander [00:08:04] That’s right. Yeah. I mean, this one’s one step at a time, right? And let’s go to question four. So I do not make enough money relative to my personal workload. How would you rate yourself on that one? 

Tad McIntosh [00:08:18] I think it’s unacceptable. 

Greg Alexander [00:08:19] Okay. 

Tad McIntosh [00:08:20] It’s partially because of how long I’ve been in the business and partially based on. It’s you know, you didn’t ask question one, but I was definitely unacceptably overscheduled. Right. And so that’s kind of part of the things I’ve got to help other people do those things that can be done by other people. 

Greg Alexander [00:08:42] And yeah. 

Tad McIntosh [00:08:45] Then I’ll make more money. Honestly, because other people are doing things they can do and I’m not doing things that other people can do without me. 

Greg Alexander [00:08:55] So for the listeners, there’s a concept called opportunity costs. I’m sure you’re probably aware of that, but in the context of what we do. Being an entrepreneur is hard. Being a founder of a boutique processor firm is hard, scaling. It is even harder, and you have to measure your effort and reward in relation to what your alternative path may been. So, for example, it probably would have been easier for Ted to stay in the military and he could have had a career for years and years and years and rose up the ranks. And that would have had a certain profile, a certain level of effort, you know, typically measured in hours per week and a certain financial reward, which would have been, you know, an annual salary benefits and a retirement plan. And you measure that effort slash compensation package of that journey versus the journey that he’s on. And if there’s a gap there, that’s the opportunity cost. And the problem with opportunity cost, the delta between what you’re doing today and what the alternative path would have been is that it compounds over a number of years. So as we suggested, you know, Ted’s been at this 20 years plus. So if there is an opportunity gap and opportunity cost excuse me, it’s whatever that gap is times 20 and the numbers add up. So you constantly have to make sure that. You know, the juice is worth the squeeze. They say the squeeze is worth the juice. I think I got it the other way around. Is that your workload, your personal workload is proportional to the reward, the compensation that you’re making. And there’s really only two levers to pull there. One is work less and make the same amount, and you can have a hell of a lifestyle doing that or work more. But if you work more, you’ve got to make a lot more to justify the level of effort. Those two things need to be in proportion, and when they’re not is when you know somebody who’s happily running a lifestyle business wakes up one day wanting to retire again and they say, What happened? And then they realize they can’t work into the graveyard. You know, they don’t want to work 60 hours a week when they’re 70. And and the problem is, if you wait too long to get to that point, you just can’t flick a switch. It takes a while to build teams, delegate work, build repeatable processes, etc. So that’s a really important question. I’m glad we had a chance to to discuss that, which is a logical lead into question number six or statement. Statement number six, forgive me, I’m not able to retire at this time if I wanted to. Now, Ted, I know you’re not looking to retire tomorrow, but if you wanted to retire tomorrow, could you? 

Tad McIntosh [00:11:25] That’s not comfortable, you know? Yeah. And it’s not that I can’t retire in the next, you know, if you will, about five, seven years based on a combination of age and savings. I’ve done well on investing. But the difference is, if you said to me, okay, you’re. And I’m 56. Yeah, I’m all set, this will mess with you. I’m a 56. I’m still 56. All right. So. But he said, oh, at 56, 61, do early retirement. Could you live comfortably today on what I’ve built up? And the answer? No. I still need income from the business. Yeah. 

Greg Alexander [00:12:01] So now the good news is, as 56 is, you know. Not retirement age. So you still have time to do that And based on your plans that you share with me, I’m confident you’re going to get there. But, you know, we all want the option. So, I mean, 56 is not 26. So, God forbid. You know, I don’t know, ten at health scare or something like that. If you wanted to be able to retire or if he had to retire, he could. And you want to build your firm in such a way that that’s the case. You know, when you’re a founder of a services business, of people driven business and it’s a small one, you have a tremendous amount of risk. You have all of your net worth tied up in an illiquid, small firm. A couple of things don’t go your way and you really feel it. So the reason or one of the reasons to scale beyond a lifestyle businesses to de-risk your life, you know, a bigger firm can withstand more. I don’t know. You lose a key employee. Okay. It stinks for a period of time, but you’re not in big trouble. You lose a couple of clients. Yeah, it’s not pleasant, but, you know, you can still pay the rent, that kind of thing. When you’re a smaller. The lifestyle business is way too risky. So that’s one of the reasons why we make the statement and we ask members like Ted to rate themselves. Okay, let me hit you with maybe one more and then we can summarize what we’ve learned today. So step number eight. I have not built a firm that could be sold today. How would you rate yourself on that? 

Tad McIntosh [00:13:29] It’s unacceptable as well. You know, and partially, again, to the markets we serve and how we sell them. Not having enough concentration. What I’d call in deeper, deeper, more repeatable niches of service offerings. And partially due to senior employee in my concentration of knowledge of the firm. So a lot of that succession and I would even phrase it differently. It’s unacceptable that I don’t think there’s a succession not far enough in place that if something really bad happen tomorrow, it wouldn’t be a big deal. Yeah, right. And I’d say that. So it’s about being sold as really being able to say how how much am I needed? Yeah, exactly. How much of my top 10% of leadership needed. If, if something happened, God forbid, then it’d be. It will be good. And that’s my what I’m really resolved to is build a firm that can have succession, successful succession, you know, without without me. And then that is a firm that it’s almost like you build a firm ready for succession and then it can be sold. Yeah, but if you don’t, it’s, you know, top heavy is the way I would tend to phrase it. 

Greg Alexander [00:14:52] Yeah. Listen, small, small services firms are risky. And the reason why they’re risky for investors or potential acquirers, which is what we’re talking about here with this statement, is the founder in the firm are one and the same. If the founder goes away, there’s no firm that’s called key employee risk. And what that is talking about is succession. In other words, being able to get other people in the firm to do what he does as well as he does it so the firm can run without him. If he was if he chose not to be part of it in the future. And when you’re able to do that, then if you wanted to sell the firm someday again, it would be your option. You actually have an asset that’s sellable because you in the firm are two separate entities. A purchaser of your business would do so because the business would not be dependent on you. And that’s what that question in the tolerance level checklist is meant to surface. So, listen, you know, they say that 50% of solving a problem is recognizing that you have one. I think, boy, I would be bold enough to say the majority, greater than 50% of our members in collective 54 is struggling with this. And the reason why I wanted to come on the call today is because he’s confident enough and comfortable enough in his own skin to be vulnerable and go through this exercise and and, you know, demonstrate that he’s working on some of these things, but he doesn’t have the code cracked, so to speak, because others don’t as well. So, Ted, a great example of leading from the front of being a real role model. I’m really looking forward to the Friday member Q&A session and I’m hoping that others will open up as well as you did here today. So on behalf of all the members, thank you so much for being on the show. 

Tad McIntosh [00:16:34] Now. Happy to do it. Happy. Thanks for what you’re doing, Greg. 

Greg Alexander [00:16:38] Okay, great. All right. So let me give everybody a couple of calls to action. So if you’re a member, make sure you attend today’s Friday Q&A session and we get in a meeting and vote on that. If you want to put yourself through the tolerance level checklist, that’s all can be located on page 51 of the new book, The Founder Bottleneck How to Sell Yourself If You’re Not a Member. And after listening to this, you might want to become one. Go to collective 54 dot com and fill out the contact contact us form and one of our representatives will reach out to you and talk to you about it. If you’re not quite ready to be a member, but you want to educate yourself some more, subscribe to Collective 50 for insights and again, you can find that on the website. You’ll get three things every week Monday, a blog, Wednesday, a podcast, and Friday a chart. And hopefully that will be valuable to you. So for all out there in the world of podcasting, thanks for listening and we’ll see you on the next show.

Episode 118 – How Canada’s Fastest Growing eCommerce Agency Scaled Quickly Through Acquisitions – Member Case by Colton Hathaway

Previous sessions often revolve on how to exit a professional service firm. What if we flip the script and discuss how to scale by purchasing professional service firms? On this episode, Colton Hathaway, VP of Technology at Northern Commerce, shares how their firm was created through a merger, and how they have grown by acquiring other firms.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv Podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those who are not familiar with us, Collective 54 is the first mastermind community focused entirely on the needs of the boutique professional services industry. My name is Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to talk about growing your firm inorganically. In other words, doing some acquisitions, buying some firms. And the reason why we’re doing this today is because the world has changed. As we were recording this at the beginning of 2023. And, you know, interest rates are up. Maybe there’s a recession upon us. And what that means is that multiples have come down in the professional services space, more so in some sectors than others. And it may be an opportunity to to buy some firms. Many of our members don’t know how to do that. They’ve never done it before. And our objective of today’s call to put that issue on the table, at least get it in their consideration set. And we’ve got a great role model with us, someone who’s done quite a bit of this. His name is Colton Hathaway. Colton is a collective 54 member, and he’s going to walk us through kind of his approach and share some of his story. So, Colton, it’s good to see you. Please introduce yourself to the audience. 

Colton Hathaway [00:01:42] Thanks so much for having me, Greg. So I’m Colton, VP of Technology at Northern Commerce. We are a platform agnostic ACI, meaning that we can introduce solutions that make sense for the business, that can be retailers, B2B manufacturing, being a B2C firms. There really is a wide breadth of solutions that we’re able to provide into the market. And, and yeah, excited to talk about today’s topic. 

Greg Alexander [00:02:06] Okay. And VP of Technology, what does that mean in your firm? Is your firm a co-founders founder, CEO? How does all that work? 

Colton Hathaway [00:02:17] Sure. Yeah. I mean, my role is kind of unique given that we are a technology firm. I do a lot of different things, whether that is in sales to key accounts, leading partnership strategy with different platforms. We work with nurturing the different teams that that engage with our client base through delivery solutions, things like that. I kind of see myself as a bit of a servant leader, support to different parts of the business where I can create value. 

Greg Alexander [00:02:42] Okay, sounds great. All right. So from what I understand, part of the growth story that your firm is, is that you’ve grown through acquisitions. So maybe at 30,000 feet. Kind of walk us through your strategy there. How many deals have you done? Why have you decided to do it that way? Etc., etc.? 

Colton Hathaway [00:03:02] Sure. So I’ll take you way, way back to kind of, I guess, the founding of Northern. So Northern originally was the product of two different solution providers. There was a marketing firm and then there was a technology e-commerce firm. The the merger of those two firms created Northern backing in 2015. Those two firms independently were obviously existing before that. And so the merger and then acquisition really was kind of like the foundation of Northern that practice. Fast forward to right at the start of the pandemic, I believe it’s 2020. We ended up acquiring another firm based in the same city. So similar story, similar size. And really at that point, it doubled the capacity to the size of our team. So we ended up acquiring another firm that was essentially the same size as us. And a lot of I hate using this word, but a lot of synergies between the two teams. It made a lot of sense at the time and and that’s been part of our strategy ever since. Right. So yeah, I think it’s it’s not it’s the easiest thing to do in doubling your size through an acquisition. It worked out really well for us and a lot of the same talent that came over as part of that acquisition are still here today and really excellent team we put together. 

Greg Alexander [00:04:12] Okay, fantastic. So I’ve done some deals myself and the way that I always look at it and maybe I’ll throw this out there as a way to as an outline for our call is it’s a buy versus build conversation. Buy means can I buy a company that gives me some strategic advantage that I don’t have already, something that I need or do I build it? And if I build it, that means I’m not going to buy it. It means I want to build it internally, which is hiring people and kind of growing organically that way. And I always look at these things through the lens of three kind of criteria. First is how much is it going to cost me to buy it versus build it? How long is it going to take to buy it versus build it? And what’s the probability of success? You know, that I’m actually going to accomplish the goal goal if against those who use cases, buy it and build it. And there’s a general rule of thumb, I would buy a firm if it was cheaper, if it was faster. And if the probability of success was greater, or at least I could contain the risk is doing acquisitions is never risk free. And those synergies you talk about sometimes don’t materialize. And merging disparate cultures can be a challenge. As you know, long lost their list is long as to how things can go wrong. So how do you think through and let’s just maybe take these one at a time. First off, do you consider buy versus build when you’re looking at this, or is it or do you some other framework to think about it? 

Colton Hathaway [00:05:42] Yeah, no, I think that’s an excellent framework to consider really for us, that kind of acquisition strategy, the first year post acquisition is stabilization mode, right? Merging the two teams, making sure there’s a culture fair, seeing if anybody is not a fit, how do you accept them gracefully. And really the the year post acquisition is stabilization mode. If you can wrap it up in a year and it doesn’t drag out for three or four or five years, then I would say be the appetite to buy instead of build is there. And just if the acquisition takes longer than two years, that’s kind of the point in which maybe you could build that over that two year period, right? So that’s one way to think about it is like, how likely is this to succeed in in fewer than two years? The other thing that sometimes comes in, and this is part of the acquisition valuation and things like that, is are you buying customers that are aligned with your existing service offering? How can we cross-sell and upsell into that new client base? Right. So that’s another part of it. If if there are opportunities where you can better serve their existing client base, if we can buy those customers instead of create them on our own, that’s another part of the equation. 

Greg Alexander [00:06:44] Yep. So let’s talk about a little bit around the the those two points to stabilization. So one year, can you get things stable in one year? Part of the challenge of buying services businesses as they say all your assets you know walk out the front door every day and there’s a lot of kind of turnover when acquisitions can happen. Now, there are some things you can do to mitigate that employee contracts, etc.. But you know, what advice would you give our members to stabilize as quickly as possible? 

Colton Hathaway [00:07:15] Yeah, this is an interesting one because, I mean, the the acquisition that we’re we’re still kind of towards the tail end of the two years. We’re over two years now on the acquisition. But we, we signed the deal or close the deal right as the pandemic hit. So we’re merging two cultures which historically have been very familiar with in-office work, the relationships that you’re building in office and things like that. And now we are through the pandemic into that or tackling that stabilization period, right? So there were some additional challenges, which I’m sure are going to be different moving forward now. Now we’ve got the macroeconomic climate and things like that and a difference, especially in the technology ecosystem, a different the talent pool has a different perspective than what it did over the past two years. The big thing that I would say and that we focused on was key relationships, right? So it’s like who is critical on both these firms who are vocal? I come from a change management background, and so I’m trying to figure out who are going to be change sponsors, who are going to be change resistors. How do we include both of those groups as part of this acquisition? And that’s a big part. It’s all about the people that are in the service based business, right? How do we make them comfortable and included with that change? 

Greg Alexander [00:08:23] And is that done during diligence? Is that done after the deal closes? 

Colton Hathaway [00:08:29] I think most of it has to happen after, right? Like if there’s going to be a small group, it’s going to be aware of the acquisition and part of that deal due diligence. But I mean, in our case, I mean, we’re dealing with hundreds of people and you can’t involve that entire stakeholder group as part of that due diligence. I mean, there’s a subset of us that knew what was happening, key, key people in that decision. But most of those people are going to have to bring on board after the deal closes and as announced. 

Greg Alexander [00:08:55] Right. So you take it a little bit of a leap of faith there that you’re going to be able to hold onto all those people. 

Colton Hathaway [00:09:02] Yeah, exactly. And that’s part of the calculation equation is it’s wrong to lose some good people and that’s part of the process. I think it’s important to identify who is very critical to this deal, who holds those relationships both internally and externally, and how do we incentivize them to be part of the new core. Yeah. 

Greg Alexander [00:09:17] Let’s talk about the next synergy you mentioned, which is the client list and the opportunity for cross-sell. We’ve got a group inside of collective 54 called the Post Exit Group, and it’s a very interesting leadership board. I think there’s about 12 people on it now. We’ve had in three years we’ve been around. It’s been, I think, 21 companies that were in the collective that have sold either entirely or part of their firm. So now there’s this group. That’s because we talk about grow, scale and exit. There’s this fourth group, the post exit group, and most of them are still there at the new entity. A lot of them were bought by private equity. And, you know, the theory is, is that they took some chips on the table, but the next part of the apple is going to be a lot bigger and it’s going to be bigger because they’re able to cross-sell services to each others client list. That has been more challenging than many had realized. Have you seen it to be challenging or has it been easy? And what have you done to facilitate the cross-selling of each other’s client lists? 

Colton Hathaway [00:10:24] Sure. I think there’s there’s two parts to that. One is is obviously just the health of the relationship. How much do they trust you? Like, how much are you an expert advisor versus hands on keyboard? You’re just doing what the client asked for, right? So, I mean, there’s two very different types of professional services firm and there’s multiple, but those are the two that I typically try to make sure that Northern is not seen as an order taker. Rather, we are the strategic advisory role and what we what solutions we bring to the table are in their best interest and it’s a mutually beneficial relationship, right? So, I mean, if if the firm that you’re acquiring is order takers, their client base is less likely to look at the new organization as that strategic partner. They want to continue business as usual. We know what we’re doing. You are here to to execute our vision. So that’s one thing, is like how strategic or advisory was the firm you’re acquiring? And is there the propensity for that client base to see an app or have an appetite for that new service offering? The other side of the equation is around like the breadth of services, right? So in our business, we work again a lot in retail, for example. Right? And so there’s two parts of our business, one being on on e-comm or digital experiences, the other on on marketing performance and things like that. And so it’s a very natural fit when a client comes to us for either development or marketing, we can cross or upsell the other side of that equation to give them a more holistic view of it that doesn’t exist in certain types of professional services. So I think it’s the kind of the service that you’re offering as well. Yeah. 

Greg Alexander [00:11:55] And when you’re thinking about what the pay for a firm are you factoring in some dollar amount that you think you’re going to get in cross-sell or is that just all gravy deal if it happens? 

Colton Hathaway [00:12:07] It really depends on on the valuation, whether you’re buying. I really like leaders agreeing for if you’re buying the clientele. If you’re buying like a leadership group and the team is going to continue to perform. There’s certain ways to structure that deal for like a buy out period or if they continue to perform versus certain times firms that they’re just wanting an exit and they’re done with the business and they want out, in which case you’re kind of it’s a hope and a prayer a little bit around that client base if they’re going to stick around with that new firm. So I think is probably case by case basis on on the relationship, on the structure of the team. 

Greg Alexander [00:12:40] Okay. And my last question is, I would imagine, given that you’ve done this successfully before, that you have access to the capital to pull these things off. And as I mentioned in the opening, you know, the price you got to pay for these things is come down a bit. Are you planning on doing more of these deals? Are you aggressive at the moment? Are you is it a wait and see approach? 

Colton Hathaway [00:13:01] Yeah, I think and again, in this macroeconomic climate, everybody is focused on on cash and surviving the storm, so to speak. I mean, speaking in terms of like what we’re seeing on our different partners, like their pipelines are a little weak. I think in hearing with other like a 54 members, that’s pretty typical kind of heading into this type of economic climate. That said, if a deal presents itself, there’s always money to be made during this type of climate, right? This macroeconomic climate, there there will be a lot of money made and those that execute successfully against us, we’ll see that at the other end. Right. So there’s always deals on the table. We’re always watching whether or not we’re going to take action on some of those. That’s to be seen. But there’s always deals. 

Greg Alexander [00:13:42] Yeah. Awesome. Well, listen, Colton, we talk an awful lot here in Collective about selling your firm. I don’t think we talk enough about buying firms. So this was a real contribution, a net new incremental knowledge for us. So on behalf of the membership, appreciate you being here and and contributing. 

Colton Hathaway [00:13:59] Thanks so much for having me. 

Greg Alexander [00:14:00] All right. All right. So let me give a couple of calls. Action here in closing. So if you’re a member, be sure to attend the private Q&A session with Colton, which will happen on the Friday. We’ll get the boutique session meeting invite out to you, and you’ll have an opportunity to spend an hour with him and directly ask your questions. Also, if this is something that you want to do, I’ll direct you to collect the 54 as new companion courses for both the boutique and the founder bottleneck. These are online online learning programs that give you real kind of detailed how to a couple of templates in there. In particular the buy versus build template, which I mentioned earlier. And we also have a basic post acquisition implementation plan template that might help you so directly to those things. If you’re not a member and you think you might want to become one, go to collect collective 54 Adcom fill out a contact us form a representative will get in contact with you and discuss, you know whether you qualify for membership and you know how you might benefit by meeting people like Colton and getting access to these tools. If you’re not quite ready to join, but you want to educate yourself, subscribe to collect 54 insights. You get three things every week on Monday, a blog on Wednesday a podcast, and on Friday a chart. And that’ll be a way to keep track of us and educate yourself on the types of things we talk about. All right. Well, that was a lot in 15 minutes. Appreciate your attention. Thanks for listening to our podcast. And until next time, I wish you the best of luck.

Have You Structured Your Firm Effectively to Scale?

Have You Structured Your Firm Effectively to Scale?

Play Video

Have You Structured Your Firm Effectively to Scale?

The professional services org chart is unique. With labor as the highest expense in your firm, it’s critical that you get this right. In this video, Greg Alexander, Founder of Collective 54 and Capital 54, shares the common ways that professional services firms organize their teams, the pros and cons to consider, and how to decouple your rate of growth from headcount.

In this video, you’ll learn:

    • The 3 types of employees you need to structure your team
    • The Up-or-out pyramid in professional services and why it’s a go-to model, but pitfalls to watch out for
    • Professional services team structure and other considerations to preserve margins

Why Some Professional Service Firms Scale and Others Don’t

Cost to services chart

Why Some Professional Service Firms Scale and Others Don’t

Cost to services chart

Scalability is the highly sought-after holy grail of business, but not every professional services firm has scalability in its future. Understanding what scalability means for your firm is an important first step, and gaining a playbook of strategies for how to scale a professional services business will equip you to refocus your portfolio on growth.

Why and how does a service business scale?

A professional services firm is scalable if the cost of sales declines as a client buys additional services. The cost of selling two services together is less than the cost of selling them separately. The root cause of this benefit is the ability to share the sales resource across both sales. One business development person executes one sales campaign resulting in two sales.

For example, a cybersecurity service provider needs to develop a deep understanding of a client’s network. Because the activity “understanding a client’s network” can be shared in multiple sales campaigns, it is more economical to sell multiple services together. One business development person can sell remote access and Wi-Fi security rather than having two salespeople run two different sales campaigns.

On the other hand, a service is scalable if the cost of delivering it decreases as more people benefit from it. So when we imagine scaling a professional services business, the cost of delivering a portfolio of services must decline as clients buy additional services from the firm.

A management consulting firm that helps a client size their target market offers a highly scalable service. The labor cost to deliver the first market sizing is high; however, the labor cost increases only marginally when the client wants a quarterly update. The incremental cost of refreshing that market data is relatively low. Therefore, the market sizing service provided by a management consulting firm is a scalable service.

Lead generation services are another great example of a scalable service, even though they often require significant up-front costs in the campaign design process. The first few leads generated are expensive, but as the number of leads generated increases, the cost per lead declines. The upfront costs are amortized across a greater pool of leads, so lead-generation services provided by marketing agencies then become highly scalable services.

What gets in the way of professional services firms’ scalability?

Beyond the initial challenge of understanding what scalability means for professional services firms — and for yours, in particular — other variables can intrude on a firm’s ability to scale successfully.

Some firms simply aren’t suited to scale. A business’s scaling strategy is sometimes only as powerful as the firm’s natural inclination to scale. Focus your professional services on proprietary, client-specific knowledge, and you will only be able to scale so far because increasing the volume only increases the cost.

An architecture firm is one such example, as they tend to not be scalable. Architectural projects depend on a unique relationship between practitioner and client — one-off assignments, plus crafting plans and designs that wouldn’t be replicable anywhere else. The knowledge and experience required to deliver these projects often belong to a brilliant, senior, and expensive architect. One brain. Thus, why 264,000 architecture firms exist in the US, and most are sole proprietorships and unscalable.

Complexity is another hurdle to scalability for professional services firms. Offering multiple services increases administration needs and can bloat overhead costs. So while a broad portfolio of services is good, if these services are each customized, growth will move linearly rather than exponentially. A custom software development firm trying to scale via geographic expansion can struggle to do so. This firm will grow as 200 billable engineers produce more revenue than 100 billable engineers. However, the growth is linear, not exponential. Scaling suggests costs increase just as quickly as revenue does.

Prioritize in order to scale your firm successfully

Remembering this one crucial fact will be integral in leveraging your firm’s ability to scale: Services scale when the cost to deliver decreases as volume increases. By understanding this core truth of scalability, you can start to craft your services and your firm as a whole to refocus on more scalable strategies.

1. Design your service lines with scale in mind.

Help your clients buy additional services from you — but without your firm spending the equivalent in extra administration, materials, and time. This could mean designing services with more upfront costs but with lower ongoing overheads. Digital, repeatable services are also great scale boosters. Your service lines should be able to compound to be necessary for your client’s needs while decreasing the overall cost of the work to deliver those services.

For experienced insights from Cynthia Klint, a Collective 54 member and CEO at BRC, take a listen to our podcast.

2. Construct the firm with room for scalable growth.

Scalable professional services firms choose broad service portfolios, enabling demand for one service to increase the demand for others. With a portfolio of services that clients can pick and mix, you can design and reform your firm to focus on scaling, but time is money. If your firm is going to be scalable, it needs to take less time for it to do more. It needn’t be drastic.

For example, if your client purchased one of your firm’s services and now is adding on another service, you don’t want your employees to have to spend just as much time as they did on the original service. But for your growth to not be linear, your compounding services will need to take less time each time a client adds a service.

How to scale your professional services business? Founders must design their services and their firms with scale in mind, ideally from the beginning. A founder who designs for scale is one who has mastered their craft. A founder who fails to design for scale is one who needs to grow in their role.

Looking for more hands-on support from an experienced community? Reach out to Collective 54 now to schedule a call.

Episode 100 – How A Communications Agency Is Beating The Recession Today By Focusing On Key Clients – Member Case with Todd Rapp

Have you defined your growth strategy to build a sustainable firm? On this episode, Todd Rapp, Owner and CEO at Rapp Strategies, Inc., speaks on how the firm continues to grow and flourish by focusing on their key clients.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serve podcast with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and someday exit your professional services firm. My name is Greg Alexander. I’m the founder of this wonderful group and I’ll be your host today. And on this episode, I’m going to talk to you about strategy. And I’m careful with that word because it’s the most often used word in the business lexicon, I guess. But at the time of this recording, it’s early November and we’re getting ourselves ready for 2023, which by all measures looks to be like an interesting time. So it’s a good it’s a good time for us to have this conversation and we’ll define it, and we’ll discuss what to do with it, how to build it, etc.. And we’re very lucky that we have an exceptional role model with us. We have Todd Rapp with us and he’s going to share about things about his firm and and how he has built his strategy and how he uses it to achieve the success that he’s had recently. So, Todd, welcome to the show and please introduce yourself. 

Todd Rapp [00:01:33] Well, thanks, Greg, and I appreciate the kind words. I’m Todd Rapp. I own a public affairs firm, which is really a specialized public relations company in Minneapolis. We are it’s been a company that’s been in existence for 40 years. But in in my case, I’ve been an owner of this only since 2008 and the sole owner since 2017. Our focus is on helping clients basically in two different areas. The first area is that we help clients with a significant number of either public issues or maybe they’re involved in, say, public construction projects and we help them with strategic communications. And then the second type of client, or those who who also are fairly public facing and they’re really focused on reputation management and risk mitigation. And so we provide strategic counsel and communications services for them. 

Greg Alexander [00:02:27] Okay, fantastic. You know, one part of your journey that I really love and I’d like to spend a moment on, it’s slightly off topic, but we don’t get a chance to speak as often. So I want to put this out there. You know, we have members of Collective 54 that have done what you have done, meaning that there is an original founder, a group of founders, and they start the firm and that’s kind of the first generation. And then somebody takes over for them initially, partially, and then eventually in totality becomes the founder. That’s generation to to use the academic terminology, and then they carry the firm forward. I’d love to hear from you just briefly kind of how that happened with with your company. And if you have any advice for people like you maybe a few years ago that are working for a firm, want to own it someday. 

Todd Rapp [00:03:16] Well, first of all, Greg, how long do you have? Because this is I mean, you know, I think, you know, for for me, I mean, this was a firm that was really highly successful in the marketplace. But I think you could also argue that the reputation maybe exceeded the footprint, if you know what I mean. That is that it was a lifestyle firm for the two owners, and they brought me in 20 years ago to be the managing director. And one of the first things I decided was that I better learn pretty quickly about how the financials work, how we drive revenue, how we build efficiencies inside the office and and try to capitalize on those. And that may have been more of a lucky choice than it was a strategic choice, but it really helped as I got to the position where I became president. And then, you know, eventually I was in a place where I could succeed. Each of the owners at different times. Yeah. It was also really a siloed business and all that stuff. Something we talked about, Mark Collective 54, that you really have to owners who have their own business operations, but then they shared a staff, administrative services account, team, things like that. And the and it worked really well for them. But as I took over the firm and started thinking about things, I decided we needed more of an integrated strategy, that if it was okay to have people become part of the firm who have their own book of business, obviously, but we still needed the firm to be well connected in terms of the mission and in terms of everybody’s alignment on what the financial success would look like. 

Greg Alexander [00:04:56] Interesting. You know, we people ask me sometimes, what does Collective 54 do? And if I’m at a cocktail party, I give them a single sentence. And that is the business of expertize. And what I mean by that is, is that our members are all experts in their domain and they’re brilliant, but sometimes they could use help on the business side of that. You know, for example, today we’re going to talk about strategy. You mentioned understanding the financials. There was an equity event that that happened. There’s all these business components that are just as important as the expertize. So and it was maybe a topic for another day, but I just I knew that about your journey, and I just wanted to ask you about it. Okay, let me frame up our conversation regarding strategy, and I’m going to use an old kind of framework to position this. So the literature on strategy would say that a company or firm of any size has four options of a strategy. So the first is they can choose product differentiation. So in our case, that would be service differentiation. And therefore all their resources, their time, money and people are dedicated to towards being different, maybe, maybe not even bigger, but just different. So that’s one strategy. The second strategy is I’m going to win on price. So I’m able to operate my firm at a cost structure that’s lower than my competitors and therefore I can charge less to my clients. And I went on pricing. There’s lots of examples of great companies that do that. For example, Wal-Mart in the retail industry. The third one is service. So I’m going to overinvest in the client experience, and that’s how I’m going to differentiate, you know, a company that comes to mind. There would be maybe the Four Seasons hotel chain. They they sell a commodity product, a 500 square foot hotel room. But because of the the guest experience that differentiate it and in the fourth one is called the focus strategy. And this is where a firm picks a an industry and a segment within that industry. And they understand the needs of those customers better than anybody else. And they tailor their entire. Company and value chain, if you will, to meeting the unique needs of that particular customer segment. And because of that, they win. So put you on the spot here a little bit. What of those four? If I forced you to choose one, which is an unfair thing, but I’m going to do it today anyways. If I forced you to pick one, which one does your firm embrace? 

Todd Rapp [00:07:32] I would say more likely the fourth. And that is that we provide a very what I think the market understands is is a pretty clear value to our clients. And we work through a lot of different industries. We’re fortunate to work for the the largest health system in the Twin Cities, the largest health insurance company in the state, several of the largest electric utilities of the upper Midwest. I mean, we we’re fortunate to be in that space with the market for that type of customer where they really value what we provide in terms of strategic advice and and communication paths. It’s interesting you talked about that. You know, starting off, I immediately thought about, well, how can we use price as a better differentiator? And what I learned was it’s about value, right? People will make an investment in a partnership with a firm if they if they know that that you’re focused on their business results, first and foremost. And we’ve been really lucky in that way. I would say that a majority of the revenue that we receive, probably a substantial majority, is from relationships that we’ve had more than ten years. And and those are those with organizations who will consistently need to be in the public space, in some cases at smaller firms, so that they were on a growth path. And they needed somebody like us to come in and just and be good counselors and advisors for them. And, you know, one of the relationships I’m proudest of, there’s a small engineering firm that grew up to be large enough that they attracted the interest of Blackstone and and ended up being acquired. Yeah, I know. We played at least a modest role in that as we helped them position themselves in the marketplace. That’s what’s kind of fun, but I think it ends up therefore being the last category that we’ve differentiated ourselves and the services we provide is different than, say, pure public relations and really focused on reputation and also our business growth in a highly public setting. 

Greg Alexander [00:09:37] So tell me about reputation, and I’m interested in that as an area of your focus, because professional services are what is what known as Credence Goods. And what I mean by that is when clients hire a professional services provider, they they have to make a leap of faith. They can’t test out the service usually before they buy it. You know, sometimes when you buy a product, maybe you can have a sample. You know, you go to a restaurant, you look at the wine list, you order a bottle of wine and the waiter pours you before you commit to the entire bottle. With services, you don’t really have an opportunity to do that. And so it’s called the credence good. So therefore it’s largely bought on reputation. And the reputation of your firm is what moves through the word of mouth channel and leads to the growth. So since you’re an expert on reputation for our listeners, your peers, founders, leaders of boutique professional services firms, what should their what should the basics of their reputation management approach be? 

Todd Rapp [00:10:45] For their own firms. Obviously, number one, I think above all, the rest is integrity towards client goals. I mean, I think that’s the if you understand the what your client needs and understands the uniqueness of them, then you can apply your experiences and your knowledge in ways that help them out. And that’s really that’s what we do. It’s value add. I think a second thing that’s that’s really important is is a level of honesty. We’ve told our clients that we are we are passionate advocates, but we’re dispassionate advisors. And by that, I mean we have to be able to tell the clients when they’re going down a path that that’s not going to be successful. And we have to have their trust that the that the advice that we’re giving is based on what their needs are and not necessarily what the financial needs are of my firm. I think the one other issue about reputation is that you have to know what it is you’re trying to do. I, I do a lot of information, interviews with students, and I tell them that we’re not here in this market because we can help target sell stocks or we can help them open stores. But we’ve been fortunate enough that at times when a company like a Target has had some significant reputation challenges, they call us and say, Let’s talk through them and let’s figure out the best path. I think if you’re going to have a solid reputation, you better know exactly what you do well and be willing to accept. There’s other things out there that you don’t do well and don’t just chase contracts because you want to you want to grow immediate revenue. That’s not going to help you, I don’t think grow long term orbit. 

Greg Alexander [00:12:31] Interesting. Okay. One more question. My team, in preparation for this interview, told me that you’ve had a banner year here in 2022 and congratulations on that. And in your already prepared for 2023, with two months left in the year to go and you’ve got your strategy laid out. So a lot of firms right now, given the uncertainty of the economic environment that we’re in, aren’t doing as well as you’re doing. And in they’re reacting to what their strategy is going to be in 2023 and making lots of changes to their original assumptions, which strategies are filled with assumptions? So what were the drivers around your success for 22? And and what is the source of optimism for 23? 

Todd Rapp [00:13:18] Well, Greg, honestly, I don’t know if I started 2022 with the right plan. I was thinking I was focused on geographic expansion and I started down that path. And after a few months and a couple of failures in doing that, I stopped for a second and I just said, you know, the market that we’re in right now still has a lot of room for growth. And coming out of COVID, there’s going to be client demand for services just because know the nature of public issues, the client demand was going to grow. And so I rethought how, both in terms of my staff and in terms of my time, how we should spend that time. And it worked out. It’s been it’s been a successful last, say, eight or nine months of the year. And I now see I’ve got a pretty clear vision as to the client work we have going into 2022 and where I think the growth is now in saying that I haven’t put away that geographic strategy in any way, that’s still going to be part of the growth in 2020 324. But I think what I concluded was that our firm was in a position where we needed to make sure the home base was as strong as possible before we started looking at either partnerships or acquisitions or that are outside of our direct market and it’s been working. 

Greg Alexander [00:14:40] It’s interesting. Congrats on being able to pivot. You know, that’s a key component of strategy formulation. You know, in Todd’s example, he went into the I think in geographic expansion, that was probably a lot of energy and effort around that and passion around that. And then, you know, the market reacted differently and there was an opportunity to stay closer to home and double down on that. And the strategy has to be flexible enough to be able to make those changes. So I could talk to you about this forever. Thank God. We’re going to have our member Q&A on Friday on an upcoming Friday. So we try to keep these short. So unfortunately, we’re out of time here and I’m going to have to bring this to a close. But on behalf of the membership, you know, the way these things work is we we make deposits in the knowledge bank. That’s why it’s called the collective. And then and then therefore, we were able to do kind of withdrawals from the knowledge bank because the knowledge bank is so robust from all the partners. And you made a huge contribution today and it was wonderful to hear your story and and congratulations on all your success. And I wish you the best in 2023. 

Todd Rapp [00:15:43] Greg thank you. Thank you. Not just for this opportunity to thank you for the support that you give entrepreneurs and professional service firms and the great work of your staff. This has been one of the better decisions I’ve made in the last few years as joining the collective. 

Greg Alexander [00:15:57] Well, thanks for saying that. I appreciate it. My staff and I love to hear those those feedback. Okay. So if you’re a founder of or a leader of a boutique professional services firm and you would like to belong to a community of peers and meet great people like Todd, consider joining Collective 54 and you can apply for membership at Collective 54. Com And if you want to educate yourself some more on topics like this and others, think about subscribing to Collective 54 Insights, which you can find at Collective 54 dot com. And this provides a chart of the week which is our expression of benchmarking data, a weekly podcast like this one, a leading blog in the industry, and lots of other things. Like I’ve got an Amazon eBook that was a bestseller on Amazon called The Boutique – How to Start Scale and Sell Professional Services Firm. So if you want to educate yourself what’s great resources out there and consider, consider subscribing to Collective 54 INSIGHT. So to the audience, thanks for listening and I look forward to the next episode.

Episode 95 – How the Founder of a Customer Experience Design Firm Scaled Himself by Building a Team – Member Case with Jeff Pruitt & Ed Borromeo

Profits take a big hit as a result of under-delegation. Many leaders of boutiques would rather do something themselves than delegate it. This destroys morale and leads to high turnover. On this episode, Jeff Pruitt, CEO & Ed Borromeo, President of Tallwave share how they built a powerful leadership team by focusing on replication.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54 podcasts for founders and leaders of boutique professional services firms. For those that are familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your pro search firm. My name is Greg Alexander. I’m the founder and I’ll be your host. And today we’re going to talk about building an executive leadership team around a founder and a CEO and the impact that can have on the scale of a firm. And we’re really lucky today because we have two guests. We have Jeffrey Pruitt and we have Ed, and I always mispronounce your last name, but let me give it a shot. Borromeo. How’d I do? 

Ed Borromeo [00:01:02] You did great. Great. Thank you. 

Greg Alexander [00:01:04] All right. Very good. And Jeff is the CEO and founder. Ed is a high potential employee that has been grown up in the organization. He started off, as I understand, as the EVP of Ops, and he got promoted, the CEO and then the president, and he’s the president of the firm now, which he’s been doing that for the last for the last almost two years. And that’s what we advocate for. We have a case for a grow your own approach to scaling executive leadership, because in pro serve, we’re a collection of people. Culture matters and success. Probability of success goes up when you grow your own. And that’s the role model that we have today. So I can’t wait to jump into it. But before I get into my questions, which I have many, I thought, Jeffrey, I would throw it over to you and have you do a proper introduction of yourself in your firm and then added love for you to do the same. 

Jeffrey Pruitt [00:01:57] Ed, thank you. So, Jeff Pruitt, founder of of Tall Wave Customer Experience Design firm, and we’ll get into a little bit of what that company is. But background was Arthur Andersen, Big Six, accounting to CFO and then president of a pro sort of digital marketing firm that that grew into a, you know, from 15 people to about 600 people and then started tall wave. As a customer experience design firm, we’re focused on helping brands increase net retention revenue through looking at the experience that they deliver, deep journey mapping of that experience, but also looking at the people process and system to deliver that experience. We’ll go in and do deep assessments and mapping of how you can transform that experience over a period of time. And then usually we’re part of product design, product management, product strategy, potentially program management of those workstreams and driving outcomes, which also include the digital acquisition or digital marketing side as well. 

Greg Alexander [00:03:01] Okay, great. Ed, how about you want don’t you tell us a little bit about yourself. 

Ed Borromeo [00:03:06] Yeah, thanks, Greg. So I’m an engineer by training and ex-military officer doing a lot of operations while I was in the service. And then I went into the utility space where we ran operations for utilities, but then started off spun out a technology company that did both SAS work as well as managed service work and sort of my skin into my beginnings of stint into professional services. Today I’m the president of Paul, where I oversee our day to day in the business, namely the growth side of the business as well as our practice areas. 

Greg Alexander [00:03:41] Okay, very good. So Jeff has been a member for a while and I’m happy to report that he’s one of our ten featured role models in my upcoming book, The Founder Bottleneck How to Scale Yourself. And the subject of that book is it’s how somebody like Jeff understands who is high potentials, are high potential employees, how to delegate them, delegate to them, what to delegate, which allows the founder to reimagine what it is that he’s working on and amplify his contributions to the business. Jeff, let me start there. How did you identify Ed as a high potential employee? 

Jeffrey Pruitt [00:04:21] And he identified that to me personally. He would come in when we were a little bit different of an organization that we are today. At the time, we’re an innovation consulting firm that said, in a holding company that also was spinning out some of our own companies. So we’d spun out four companies, separate C Corp and and some of those companies were growing well, some has since sold. And in the meantime, he came in as a contributor as he was looking at wanting to get into the innovation technology space different from where he was a little bit prior. And so you’d come in and he was working for a direct report of mine and I noticed his potential. But he also came in and said, Hey, I recognize you’re struggling with some stuff in and around operations. I can help you. And needing the help, I said, Well, let’s sit down and talk about it. And so at the time I had flattened the organization and had everybody reporting to me as I felt I needed to get closer to what some of the issues were. When Ed came in and and took on some initiatives for me, I immediately realized that he could he could probably take on a lot of the reports and run the operations of that business. He he did come in. He did so he got us to profitability. And then we had an opportunity to merge that business innovation consulting firm with a customer experience digital marketing firm. When we combine those two, it made a ton of sense to me to move him to CEO of that merger and of us both ride together in this journey of building tall wave as a customer experience design firm. 

Greg Alexander [00:06:09] Very good. So, Jeff, let me stay with you and ask a follow up to that. And then I got a couple of questions for you with bear with me. Sometimes when I work with founders and they’re struggling with this concept of kind of delegating and replicating themselves and others, there’s a trust issue. They are self-described control freaks and maybe perfectionists. Sometimes they they they don’t think about progress. They think about perfection. And they’re reluctant to delegating and give up key strategic components of running the business. You clearly did that with Ed. So did you ever struggle with that and how did you get over it? 

Jeffrey Pruitt [00:06:51] Well, I think from large part, I have an idea of where I want the company to go, and I have an idea of how I want to enter the organization. And I always look like 12 months out, and I ask myself, how do I want to enter the organization when I walk through the doors? What are the things I’m doing? And part of that is a progression of how does the company progress beyond where it is today. So getting a little bit of that vision of understanding where the company is going and then what is my role in it? How do I show up and and progress the business more? The conclusion of that is you’ve got to give up what you’re doing and rely on individuals like Ed to be able to to manage a good portion of the organization. We’ve had iterations of that, and I think we’re stepping into our next iteration right now and it feels great. I can tell you that I’m not perfect, and I would say I don’t know if I’m a control freak from an ego perspective, but but I have an idea of what works sometimes and I feel like, Hey, I know what works and I need to inject or insert myself in that process. And I hope Ed would say in the last 18 months, I’ve gotten better at staying out of that process. And he’s doing better also commanding, controlling and reporting up to me on those things where he might need me. 

Greg Alexander [00:08:16] Okay, very good. So let me come to you and look at it from your perspective. So, you know, it sounds like you’re an execution machine as a lot of ex-military are, and you’re the perfect partner with Jeff, who is probably more visionary. And that’s me commenting on that, having had the pleasure of getting to know Jeff. So you guys are really good match and you could work anywhere. Why did you decide to partner up with Jeff and and take on this role of president? 

Ed Borromeo [00:08:47] Gosh, that’s a good question. So first of all, just a notion of this space, I was pretty intentional in getting into the innovation and experience space, having sort of gotten a taste of that my prior life. So I felt like, like Jeff, Jeff is the kind of founder that also likes to surround himself with a team and doesn’t want to go it alone. And I think that’s a big part of his persona. And that was really welcoming for a guy like me to come from the outside and to be part of that. And I think I’m super grateful for that opportunity. And so I think that sort of sets the stage in terms of just just a partner. I think you said it. You know, it’s a good it’s a good compliment, I think, to your point of how to how do we make it work? It’s not without a lot of communication, sometimes healthy tension, sometimes, you know, the how versus the what and struggling between that. But it’s about wanting to desiring to grow a business and knowing that it takes different perspectives and complements. And I think Jeff adds that. He adds that he has a clairvoyance and a vision that, you know, it’s not like I wake up with that. I think that’s innate. But, you know, getting getting stuff done and really understanding how to spread that through the organization while bringing people along is something that I bring to the table. And so us working through that in partnership has been has been really beneficial for us. And it takes it takes the good hard work of talking about it and talking about it and, and and then holding one another accountable. 

Greg Alexander [00:10:14] Something that struck me regarding the way that Jeff talked about your story and how you came to him proactively saying, hey, I see these particular challenges. I think I can help you with them. I can contribute more. It was really enlightening to hear that from you. And I think many of our members who join is a team that are power members with the founder and his or her team. Sometimes they’re they’re hoping that their right hand or left hand, so to speak, would be proactive with that type of guidance. So what would you say to members of Collective 54 that aren’t the founder but are on the executive leadership team? What advice would you give them to inspire them to raise their hand and say, Please give me some more to do? I think I can solve this problem or that problem. 

Ed Borromeo [00:11:08] Yeah, that’s a good question. First of all, that struggle is real, right? Because as a growing business, you go through these, as I’ve mentioned, these iterations of having to evolve the version of the business, but then the version of oneself as you get to sort of the next level of leadership. And I think that if we’re all line of what we’re trying to do here, I think I think just having that sort of holding one another accountable for the next leg up to to evolve to the next stage, I think also causes that, you know, for us, we’re wanting to grow and we know we sort of innately believe and inherently believe that we have to evolve ourselves as individuals. And that means having a vision for where we want to individually go as professionals, as partners in the business, which means by definition having to let go of some things. And so you have to believe that these things can’t be roadblocks, that it’s necessary to evolve. And then, you know, talking about those things very deliberately. So I think Jeff and I always talk about a year ago, Hey, as president, this is where I want you to go. And as a result of that is what you need to let go of and where you need to be thinking. And and that is always a North Star that we revisit. When or are we at least, I mean, monthly, but certainly quarterly to every four months we sort of reset and we say, where are we on our journey of, you know, you coming to fruition as a president and coming to fruition as a CEO in this next stage of our business. So it’s a very intentional and deliberate move that keeps us accountable to to to having to reach and grab more. 

Greg Alexander [00:12:40] Now, you know, it’s just exhibit A on how to do this correctly. We’re so lucky to have top wave in our membership, but it’s not surprising that your firm has scaled the way it has and its button up on 100 people now, which is really a great success story. I could go on and on and on, but I’m going to save some of my questions for the live Q&A session we have upcoming on Friday. So let me let me conclude it there and just say, on behalf of the membership, the two of you are role models, inspirations for everybody else, and it’s represents how to do it in this particular area. So thanks for being here today and for contributing. 

Jeffrey Pruitt [00:13:15] Thank you, Greg. 

Ed Borromeo [00:13:16] Thanks, Greg. 

Jeffrey Pruitt [00:13:18] Talk to you soon.

Greg Alexander [00:13:19] Okay. So for those that are in professional services, who want to belong to a community like this and learn from really bright people like Jeff and Ed, continue to instruct. So you should consider applying to Collective 54 and being a member and you can do so at collective54.com if you want to read about this subject to replicate yourself and others, there’s a whole chapter on that in the book. The book is titled The Boutique How to Start Scaling Solo Professional Services Firm. You can see that on our website to pick it up on an m on Amazon. So listeners, thanks for listening and I look forward to our next episode.