Episode 47: The Boutique: THE DOS AND DON’TS OF STRATEGY DEVELOPMENT FOR BOUTIQUES

Scaling a boutique professional services firm requires a strategy. Yet many owners have a collection of tactics and call it a strategy. Learn about how firms should approach creating their strategy.   

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

Greg Alexander [00:01:08] Thanks, Sean. This is very timely. I was looking at it from the other day who was trying to raise capital, and I asked them for their strategy doc. They sent me a spreadsheet populated with business plan assumptions. And as you know, that’s not a strategy. And this reminded me of how much work we must do in this area.

Sean Magennis [00:01:24] Yes. You know, for some reasons, there’s a knowledge gap in this area. Why do you think that is?

Greg Alexander [00:01:30] I think founders of boutiques know they need a strategy, and I feel as if they want one, yet when they look for help, all they run into is how to materials for product companies. And this leads them down the wrong path. Strategy for a professional services firm is very different. And unfortunately, there’s just not a lot out there on this topic.

Sean Magennis [00:01:50] Well, Greg, that’s what we are here for. And maybe this podcast will help. Heck, maybe there’s a new book in this for you.

Greg Alexander [00:01:57] I’m still recovering from the heavy lift of writing my last one, so maybe someone else can take that on.

Sean Magennis [00:02:03] Well, the boutique is fantastic, so let’s hope. OK, pick up on the thread on how strategy for product companies is different than strategies for services firms.

Greg Alexander [00:02:14] Sure. So here’s our strategy. And a product company gets built. The executive team builds a list of attributes that make a market attractive. These are items such as organic growth rates, number of companies, target trends and so on. This produces a list of vertical industries to pursue. This list of industries gets further segmented into a list of companies to pursue. And ultimately the data gets cut to names and accounts who might want to buy the products, including an estimate on spend potential. A debt gets created that says some version of the following. Our strategy is to target this list of clients in these industries. With these products, everybody nods in agreement. The Excel formulas are double checked and the and the goals get cascaded down to the department heads. This is a what exercise as in what are we going to do? This does not work for a professional services firm.

Sean Magennis [00:03:08] Why not Greg?

Greg Alexander [00:03:10] A strategy for professional services firms must be a how exercise. It starts with, how are we going to become more valuable to clients? Pro serve firms are better served with a how based strategy because of the nature of competition. Pro serve firms do not have the advantages present in product businesses which allow product businesses to get away with what based strategies. For instance, does Google have to ask how questions? No. How come? They have huge barriers to entry by controlling 60 percent of the search traffic. Pro serve firms do not have these types of advantages. For example, McKinsey is a top consulting firm in the world and they only have three percent market share. If they stop becoming more valuable to their clients, they are easily replaced. They do not have an install base locked into their firm. Does this make sense?

Greg Alexander [00:04:02] It does. Professional services firms need a different strategy development process built on how questions with the ultimate how question being how do I become more valuable to my clients? Can you give me some other How strategy questions that should be addressed in a boutique strategy?

Greg Alexander [00:04:23] So here are a few big ones that probably you could really think through and write many sophisticated answers to. So, for example, how do I raise client satisfaction? That’s a big macro question, huh? How can I elevate the skills in my team so I can raise prices? You know, oftentimes boutique owners don’t realize is a relationship between skill and price. Next, how can I redesign the work to improve utilization rates, you know, when’s the last time you broke out your work breakdown structure and reengineered the way you deliver the service?

Sean Magennis [00:04:57] Yes.

Greg Alexander [00:04:59] Or let’s say, how can I specialize in new ways of further differentiating us from the competitors? Because if you’re a boutique, you’re competing with generalist. So the more specialized you are, the more likely you’re going to win. So these are just a few. And they link back to the key macro question. How do I become more valuable to my clients?

Sean Magennis [00:05:19] Greg, is that it? Just switch from what to how?

Greg Alexander [00:05:25] I wish it were that easy. Each how question needs an answer and the answer must include another how. This is the how to part of the strategy, the action plans. This means a goal timeline, budget project team and accountability owners, deliverables and key milestones. This cuts through all the bullshit and gets to the action to be taken. And it is this style of strategy that that takes a pretty scale firm and scales them to a dominant player and their niche.

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

GQ Fu [00:06:33] Hi, my name is GQ co-founder and CEO of LTV Plus, we serve E Commerce and SAS businesses mainly based in North America and Europe, with some based in other parts of the world. When e-commerce and customer experience executives and directors have issues recruiting agents, training agents and expanding their coverage to meet the demands of their customers, they turn to LTV Plus to help them scale their customer service teams through world class customer service outsourcing. We solve this problem by providing highly trained, dedicated customer service agents that are selected based on the brands and industries they serve. We also provide recovery services to help generate more sales and full payment recovery services to recover lost revenue for subscriptions based online businesses. If you need help with scaling your customer service team to meet the demands of your customers, reach out to me at [email protected] or check out our website at ltvplus.com.

Sean Magennis [00:07:34] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Number one, does your strategy outline how the firm will develop new capabilities that the competitors do not have?

Greg Alexander [00:08:45] And of course, this assumes, you know, what the competitors have.

Sean Magennis [00:08:48] Precisely. Number two, does your strategy detail why the competitors cannot match them?

Greg Alexander [00:08:55] Yeah, an often overlooked is because you develop something. If it’s easily copied, that’s a tactic. It’s not a strategy.

Sean Magennis [00:09:01] Right. Number three, does your strategy specify how these capabilities will be pushed into the market? Number four, does the strategy, explain how your resources are going to be deployed? For example, money, people and time. Number five, does the strategy specify how this resource deployment is different than your competitors? Number six is the strategy supported by enough clients sourced evidence?

Greg Alexander [00:09:36] This is a big one. So oftentimes, you know, our founders who we love envision themselves as master strategists and they say the clients don’t know what they need. Let me tell them. That’s a big mistake.

Sean Magennis [00:09:49] Number seven, does the strategy specify who oversees each program?

Greg Alexander [00:09:54] Got to have an owner for everything.

Sean Magennis [00:09:56] Number eight, has the team been properly incented to execute the plan? Number nine, does the strategy detail how the competitors plan to beat you?

Greg Alexander [00:10:07] Yeah, so a good tool there is a SWAT. Understand, where you’re weak and how you might get attacked.

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients.

If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thank you, Greg.

I’m Sean Magennis and thank you to our audience for listening.

Episode 19: The Boutique: A Smart Strategy to Make Scaling Easier

A lack of lifecycle awareness and management prevents scale. It results in expensive senior people doing junior work. Boutiques with poor cash flow and low client satisfaction do not scale.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54 a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I’ll make the case boutiques often suffer from an identity crisis, and this makes scaling harder than it needs to be. I’ll try to prove this theory by interviewing Gregg Alexander, Capital 54’s founder and chief investment officer. Greg has developed an approach to solving this problem. It’s called lifecycle management. And I’d like him to share that with you. Greg, great to see you. Welcome.

Greg Alexander [00:01:09] Hey pal, good to be with you. I think it was Aristotle that once said when asked the key to happiness, know thyself. Today I’m going to modify this quote in state when asked the key to scaling know thy firm.

Sean Magennis [00:01:24] Excellent. So why do you feel boutiques need to know thyself when trying to scale?

Greg Alexander [00:01:31] Sometimes boutiques suffer from an identity crisis. They are unsure of the type of firm they are and the types of clients and projects they should pursue. This makes the challenge of scaling a boutique harder than it needs to be. You see, conflicting client needs drive, confusing staffing models, and this leads to overly complex financials. For instance, one month there is not enough work and employees are underutilized. And yet the next month the firm is at 120 percent capacity. These violent swings between boom and bust make it very hard to scale.

Sean Magennis [00:02:09] Yeah, I can see how this can make managing the boutique difficult and frustrating. So what advice do you have for listeners who might be suffering from this?

Greg Alexander [00:02:19] So the first step is to understand what type of firm you are, in my opinion. There are three types of firms. First, we have what we call an intellect firm. Intellect firm is hired by clients to solve difficult never before seen one of a kind problems. These firms are staffed by brilliant people, very senior, with lots of experience. An example might be a think tank or something like that where there’s P.H.D.’s everywhere. Second, we have what we call a wisdom firm, a wisdom firm decided by clients because they are a been there and done that style of firm. The client problem is new to that client, but is not a new problem. Others have had it and wisdom firms have accumulated the wisdom to solve this problem. These firms are staffed in a traditional sense. Partners, mid-level managers and some junior staff examples to think about from the consulting industry are firms like Bain and McKinsey and Boston Consulting Group. Third, we have what we call a method firm, a method firm hit hard by clients because of their unique methodologies. The problem is well understood by the client, but by hiring a method firm. It can be solved faster and a lot cheaper. These firms are staffed with lots and lots of junior staff who have been trained on this highly procedurized method. Examples are the BPO firms such as Accenture and the like.

Sean Magennis [00:03:59] Got it, Greg. So three types of firms, intellect, wisdom and method. But I’m I’m not connecting the dots as to how this understanding helps firms scale.

Greg Alexander [00:04:13] OK, so let me explain. So imagine you are in Method’s firm in one of your BD people sell an intellect like Project, a never before seen one of a kind problem. How will this project be staffed?

Greg Alexander [00:04:27] Well, it cannot be because a method firm does not have a bunch of gray haired P.H.D.’s lying around. This forces them to go outside the firm and either rent some contractors or hire some new talent. Both approaches come with different salaries and utilization rates, and this will blow up staffing in the financial models. Or let’s say imagine you are a wisdom firm and one of your BD guys goes after a method style project, one where the work can be off-shored or completed with junior staff. Well, in this instance, there will not be enough junior staff to do the work. So what happens? Senior expensive staff now must perform cheap junior level work. This destroys margins in the financial model.

Sean Magennis [00:05:10] Okay, now I get it. So the advice is to collect the type of client and the project to the type of firm you are. Only go off to work that the firm is staffed to handle based on skill level. By doing so, an owner, one of our listeners can predict the skills needed to perform the work. And with this understanding of required skills, the owner can forecast labor costs and utilization rates. And then, with precision on labor costs and utilization rates, the owner can more easily scale the firm. He or she can match the demand coming in with the supply on the org chart. Did I get this correct?

Greg Alexander [00:05:53] Yes, you did. You are about to ask me why owners do not do this. And the answer is because they lack discipline. They think all revenue is good revenue and they take any deal that comes their way when in fact some deals, if taken, can destroy a firm’s ability to scale. Adopting lifecycle management, which is what this is called, requires prudence to go without today for the promise of a better future. Greg, I get the concept, but I’m struggling a little to get the name. The lifecycle management. Can you explain it? Sure. So boutiques like humans have a lifecycle. For instance. They are born. They grow. They scale an exit much like a human is born. Comes of age, matures and dies.

Greg Alexander [00:06:50] And firms like humans are different based on where they are on the life curve. For example, is very common at birth, a firm is an intellect firm. The partners have some secret sauce to a brand new problem. Then as time passes, the secret sauce gets out.

Greg Alexander [00:07:10] Others have it and eventually it becomes a commodity. Well, an owner manages a firm very differently when it is an intellect firm than a wisdom or method firm. Everything is different from the pricing of deals to staffing, utilization, salaries, etc. So lifecycle management refers to the active management by the owner of the boutique as it scales through the lifecycle stages.

Sean Magennis [00:07:36] Okay, now I get it. And it does make a lot of sense. So this is an illustration as to why there are only about 4000 firms out of about one point five million that have actually reached scale. It’s hard to do. And it takes an exceptionally skilled owner to pull it off. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Rich Campe [00:08:24] Hello. My name is Rich Campe. I’m the CEO of Pro Advisor Coach. We serve executive and leadership teams. We partner with organizations to create high performance team cultures of ownership and radical honesty. Our key is gamification. It’s about leverage versus effort. What if every player in your team knew if they were winning or losing both personally and as a team in 10 seconds or less? If you’re part of the collective 54 family, please reach out to me directly at 704-752-7760. Check us out at proadvisorcoach.com or [email protected]

Sean Magennis [00:09:05] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective54.com. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple. By asking only 10 questions in this instance, if you answer yes to questions one through three. You are an intellect firm. If you answer to questions, four to six, you are wisdom firm. And if you answer yes to seven to nine, you are a method firm. And lastly, if you answer yes to question, ten lifecycle management should be a top priority.

Sean Magennis [00:10:10] Let’s begin. Number one, do your clients hire you for never before seen problems? Number two, do you employ leading experts in the field? Number three, do you have legally protected intellectual property? Number four, do your clients hire you because you have solved their problem before? Number five, do your clients hire you because you have direct, relevant case studies? Number six, do your clients hire you because you help them avoid common mistakes? Number seven, do your clients hire you because they are busy and need an extra pair of hands? Number eight, do your clients hire you because you can get the work done quickly? Number nine, do your clients hire you because you have an army of trained people to deploy immediately? And number ten, does your service offering start out as leading edge and over time become a commodity?

Greg Alexander [00:11:26] OK, so just a quick recap there. So yes, to one through three, your intellect. Yes to four to six, you’re wisdom. Yes to seven and nine, your method. And then obviously, number ten is regarding lifestyle management. So does your service offering start out as leading edge and over time become a commodity? If you answer the questions that answer, that question is yes, then you should prioritize lifecycle management.

Sean Magennis [00:11:48] Great. Thank you, Greg. So in summary, a lack of lifecycle awareness can make scaling more difficult than it needs to be. It can lead to poor cash flow and unhappy clients and employees.

Sean Magennis [00:12:01] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a professional services firm. I’m Sean Magennis. Thank you for listening.