Episode 8 Transcript

Positioning Your Business for Success while Avoiding Unprofitable Growth w/ Tim Williams

    Brent: Welcome again to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. I’m one of the co-hosts, my name is Brent Trimble and my guest today is Tim Williams. He’s the founder of Ignition Consulting Group and also a published author: Positioning for Professionals and Take a Stand for Your Brand. A little more about Tim before we get into it, he's a career marketing professional and established Ignition with a mission to help professional services firms escape the tyranny of an unfocused business model. He speaks internationally, presents at business organizations worldwide and is a fault leader in the metrics and the dimensions of professional services industries. Has been quoted in the Economist, Wall Street Journal, New York Times Bloomberg, to name a few. Before we dive in Tim, what I'd note is and I'd note to our listeners is we have the benefit of having worked together many years ago. But I've been a frequent adherent and I guess disciple of the practices and have recommended the books to leaders, both my peers, as well as other organizations. So it's really great to have you on the show and welcome.

    Tim: Well, I appreciate that Brent, it's great to reconnect with you. I appreciate you inviting me.

    Brent: This notion of positioning for professional services and when we think about that and we conceptualize that, it's everything from the management consultancies advisory firms. We see a lot of now customer experience type consultancies of certainly the marketing agencies. I wanted to get your vantage point and just hear a little bit about the provenance of Ignition and what led you to crystallize around this idea of positioning and found Ignition. And what was the impetus for that?

    Tim: Well as you said, I'm a career marketing professional. I spent the first half of my life inside agencies, both independents and multinationals. So I got to see firsthand the pitfalls involved with firms that lack a clear focus. I've always had a teaching streak in me, so I thought there would be an opportunity to do what only a few people surprisingly have done and focus exclusively on the agency side. I think the client organization's marketers have armies of consultants that work for them and back them up. I decided early on that Ignition Consulting Group would advocate exclusively for and on behalf of agencies. I think the great irony of our business, those agencies who do such a great job of advising and helping position their clients have an infernally difficult time doing it for themselves. So when people ask me what I do, I often will say I'm a brand doctor for brand doctors. We all need the advice of an objective, outside consultant at some point, so that's what I do. I started with positioning as a focus, believing that agencies really needed to bring more focus to their own businesses, as I say they do that well for their clients. But later I discovered that the question and practice of pricing is really the other side of that coin. They’re very linked and interrelated to the questions of positioning and pricing.

    Brent: No that's great. And for the benefit of the audience and for discussion, when you talk about focus contextually positioning, I certainly know what that means and have been a part of marketing services firms for a great part of my career. And the notion of focusing on and maybe a key business area or suite of services, but maybe give our listeners a little bit of context there. When you talk about focus, it's not so much agency operations, would it be fair to say it's the forward-facing market positioning of the agency to their target constituent?

    Tim: Yeah exactly, focus can ultimately apply to internal operations and I believe it does, but this is the external way. This is essentially your business strategy. The way you go to market, the way you prospect for business, I believe that a positioning strategy is essentially a prospecting strategy, but once you bring it to life inside your organization, then you're going to be aligning all your business practices around it. The essential question is around positioning and we can talk about this in more detail as we go. I think it consists of four very simple but important questions and they are the questions of [What, Who, Way and, Why]. The what question is what are your core competencies? What are the areas in which you're best-in-class in which you can in effect almost be world-class, no matter what your size or location? The second question of who is who is the target market? It can't be everyone. What industries, business sectors, audiences types of brands do you know best? The third question of way is how are you differentiated by the way you think about your methodologies, your approaches, your philosophies. And the final question of why, arguably the most difficult of the four, is the question around your purpose. Why do you get out of bed in the morning? Beyond making money, what's the purpose of your organization? So I call these the four load-bearing walls of business strategy or positioning strategy. And a successful professional firm has to have a good, concise, differentiating, relevant answer to all four of those questions.

    Brent: That's excellent. And I think we've all kind of experienced, maybe as marketing services professionals, maybe leading organizations, I guess the tyranny or the notion of where the shark that continually has to swim, to stay alive and feed kind of the revenue beast. So conversely, there's that notion of gosh, we've gotta be able to take on all types of projects, even those that are maybe on the periphery. Describe a little bit in your experience, the complexion, maybe the size, different dimensions of a typical marketing services firm that comes to Ignition for an engagement. Have they arrived there with a point of exasperation? Have they started to think very deliberately as they reach a certain size about some form of positioning and specialization?

    Tim: Yeah, there are lots of triggers for that. I've thought a little bit about this question. I do think there is a common factor at play here because the firms that I've worked for and worked with range in size from very small independents to the largest multinational agencies that have tens of thousands of employees. So what do these different types of firms have in common? I think that there is always this thread of what I would call unprofitable growth. Successful firms are going to grow just based on business cycles, most achieved some form of growth, but a lot of firms end up at a point where they just stop and take account of where they've been and where they're going. And they realize that yes we're growing, we're adding people, but we're not improving our margins, we’re having a more difficult time attracting and retaining the kind of talent that we need to do the kind of work we want to do for our clients. And so this unprofitable growth is in effect that vicious cycle in which they are earning less revenue for the same work, which provides less money to pay good talent. Which means they're going to create less effective work for their clients. So they're trapped in a vicious cycle and the only way out is to address their revenue model because I think the sub-optimal and their positioning strategy are interrelated. Very often, an organization will come to us with the problem of helping us improve our pricing, when in fact, we discovered that the real foundational underlying problem is that they don't have a clear business strategy. So we've got to go back and start there before we can talk about the pricing. But having a clear positioning strategy, a way to showcase your expertise, helps you with the pricing. Because obviously, you can command premium pricing if you've got the kind of expertise that is scarce and hard to find. Versus claiming to do the exact same thing every other agency does, which gives you no pricing leverage whatsoever.

    Brent: It's a really interesting concept. And I know in some of your exercises, in the book and Ignition blog and some of your thought leadership, you've sometimes shown side-by-side comparisons of what a marketing services firm or an agency or a consumer experience consultancy would say about themselves. And maybe it's the homepage of their website or their LinkedIn blurb, which is a lot of times the entryway into their brand and their first potential clients, may be the first glance at them in their brand essence. And you often will put them up next to each other and just see the sea of sameness around that. Would you consider differentiation an out and outcome of positioning, is that a good way to think about that?

    Tim: Yeah, definitely. Positioning, unfortunately, some people, even in professional service circles, immediately jumped to this idea of oh well you mean a tagline, something that we're well known for, an underlying theme that gives us something to talk about as you say on our website. But it goes much deeper than that, it's really to this question of business strategy. What do you do that is both relevant and differentiating? And those are two key questions because it's easy to do something that is highly relevant that clients need and are willing to pay for, but every other firm on the planet also does it, so it's not differentiating. You've got to define your core competencies at the intersection of those two things. So that's the what in the what, who, way framework that I described. But an equally important question is the question of who's your customer.

    Peter Drucker famously said, that's the first question of any business, who is your customer and the answer can't be everybody as you said a few minutes ago. Most firms desperately want to appeal to everyone and they feel like the way to do that is to broaden their services to create the impression that they offer every kind of service to every kind of market. Well I would say that there's not a single client or prospect on the planet who is looking for a wide range of services. What are they looking for? They're looking for experience and expertise in their business and their category, the ability to solve their problem. When agencies, law firms and accounting firms, any variety of a professional service firm, when they insist on talking about. And here are some of my least favorite words used to describe professional firms and these will sound familiar: Full service, integrated wide range of service. Well that's the absence of a positioning strategy. The concept of full service doesn't exist and what's the alternative, like half service, partial service? It's a term that's completely lost its meaning, there's not a firm on the planet that could be considered full service and to say wide range of services, again, not what your prospects are shopping for. They're looking for experience and expertise in their category. There are plenty of studies that are done by associations that seek to understand what are the key criteria that marketers are looking for when hiring a partner. A marketing partner and the number one answer in various surveys over the years is always the same, they're looking for best-in-class expertise.

    Brent: That's an excellent point.

    Tim: So your job as the leader of a professional firm is to define what are the areas in the markets in which we could build a reputation as best in class. As I say, no matter what your size or your geographical location because some firms equate best in class, well that means we've got to have offices around the world and we've got to have thousands of people. That's not true. You can be a very small firm, in a very small city and be best in class in something.

    Brent: Particularly in today's new business environment where the world's suddenly flattened and geography is no longer a real prevailing need or table stake to get into the business. You noted about different types of research, there was a great book I read that came out a few years ago, Beyond the Hockey Stick against the growth analysis that some authors from McKinsey did. One of the primary attributes of the business in any category that outperformed its peers in terms of profit was of course they managed to profit, but was differentiation and specialization. Firms that did that overwhelmingly were more profitable and led their category. We talked a bit about positioning, specialization, your cornerstones of business stress. It's interesting when you think about enlisting professional services, maybe even personally. I have a CPA who seems to me to be very competent. In my household, either my wife and I have had lots of international business travel, we've had residencies outside the country at times, you know, a rental property or two. And he always kind of gives me expertise or really great advice that would take me hours and days to assemble on my own. And interestingly, I never questioned the price, if he raises his rates, I want that expertise. Marketing services firms seem to be under really acute pressure and around notions of rates. Even media companies down through what we think of as our more creative communications type firms. You have a really strong position around pricing and you touched on it a little bit, but I'd love to hear a bit around helping firms establish that pricing strategy once they've gone through that positioning exercise and you have a notion of pricing value, not necessarily pricing hours.

    Tim: I would say that most firms actually don't have a pricing strategy, we lack a revenue model in professional services. We have a cost structure, but that's not the same as a revenue model. Most firms and this is unfortunately still the majority of professional service firms, take what time that was logged by the professionals in their firm and they turn that into an invoice. So in effect, they're just turning their cost into their price. Well that's not pricing and an economist would look at that and say well, that's accounting only for your internal costs of delivering the service. It's not reflecting at all the value or perceived value to the buyer. If you look at the clients of professional firms, you know, marketers, how do they price? They look at the potential value of the product or service and they set a price based on that, knowing what their internal costs are, but they do what's called top-down pricing instead of bottom-up costing. So the hourly rate is the absolute wrong way for professionals to be capturing the value they create for their clients. Because what we're really selling and what our clients are really buying are not our costs and our efforts and our activities, but they're buying our expertise. And our expertise is the result of the 32 years that you've spent solving similar problems.

    So you can come in with a perspective that's going to effectively solve a complex business problem in a matter of five minutes, should you put five minutes on your timesheet. Or then pad your timesheet and say well, I solved it in five minutes, but it was worth a hundred times that. So this is why the whole time tracking system creates a lot of dishonesty and is a sub-optimal way to capture the value. Because no client is interested in buying our costs, they're interested in buying solutions to business problems. And the time we spend solving a business problem does not correlate at all to the expertise or the value of the solved problem. So what we need is a revenue model in professional services that can more effectively capture that value and there is no one right way to do it, there are lots of ways. There's licensing their subscription, there are royalties, there's usage, there are a lot of different ways that we can capture revenue that helps us diversify our pricing portfolio rather than one single way, which is let's add up our hours and send the client an invoice.

    Brent: It reminds me of an interesting cartoon meme that goes around and consulting circles. Sometimes the notion of the public school that has an aging boiler heating system and after calling in a few service firms, they can't figure out how to get it working. So they went back and found a repairman who probably has 30 years experience in a boiler that's no longer manufacturing. He comes, listens to the boiler, pulls a hammer out of his toolbox, wax it and the thing kind of springs to life and presents them with a $5,000 invoice that says, a hundred dollars for the whack of the hammer and 4,900 to nowhere to hit. It's that notion of accumulated knowledge and expertise. So you think of the ecosystem of professional services and the notion of winning a client, acquiring a new client, maybe organic growth within an existing client and running up against sort of the buzz saw of a procurement. Are you seeing some success in shifts over time where there are some great firms that are taking that kind of stand and saying we are pricing value and outcome versus simply hourly and enabled to adapt to that?

    Tim: Yeah absolutely and much more so now than 5 or 10 years ago, there is a tremendous amount of momentum behind the change away from input-based pricing to output or outcome-based pricing. So many success stories there early on, it was mostly the smaller independent firms that were willing to experiment and do a little test and learn in this area, but now the multinational agencies are all engaged in this. We're working with multinational agencies from all the major holding companies right now, in addition to some of the smaller midsize independence. So it's happening on a global scale, I can finally say, which we're happy to finally make that statement. And let's keep in mind that procurement is simply reflecting back to us a model that we created and that we taught them. I mean, it's our system. 30 years ago and I'm speaking specifically to the advertising business now, but 30, 40 years ago, the timesheet did not exist inside agencies. Don Draper, Mad Men did not do a timesheet, no one in the 1960s or 1970s agencies did time sheets because they didn't exist. Agencies earned a commission as their revenue source.

    It wasn't until the mid-1980s when agencies began unbundling their business model and it was David Ogilvy, founder of Ogilvy & Mather who famously took credit for being the father of the fee system. He looked at law firms and said well let's do that, let's bill by the hour, which he later regretted. So we fret about procurement playing back to us, well they want our rates and they want to see our costs, but why? Well because they're simply, as I say, reflecting back a system we taught them. And so now it's the job of the seller to innovate their pricing and to educate the buyer on how we price our services. It's not the job of the buyer to price our services. Too many professional firms have seated way too much power authority to influence the seller or they believe that they're no longer in control of their own pricing, which is ridiculous of course we are.

    Brent: No, that's a great point. It's interesting, we see that at Mavenlink, maybe some of that trend that you're describing, finally taking root. We have several hundred extremely valued agency clients within our space. Some will not log time, some will not log time and some will do it in a kind of a hybrid fashion where they want to understand where talent is spending their time, but maybe the actual revenue commercial model is separate from that. So we are seeing that shift a foot in and it sounds healthy, but when it comes to professional services in marketing services, in particular, there's ink spilled almost daily about the challenge for talent. Attracting the right talent, retaining the right talent and being able to nurture talent in a challenging business model. And from our vantage point, we're encouraged by just the resilience of particularly marketing services through the early days of the pandemic and most are now bursting at the seams that we're working with. And the constant refrain of course is we need more of the right people and you have an interesting vantage point that talent and the economics of the business model are really tightly linked.

    Tim: Yeah definitely. The problem with the hourly rate structure is it creates an unscalable business model. You can't scale a business that's dependent on labor that has a one-to-one relationship. So if you get more business, then you need to hire more people. You haven't solved your problem, you're just pouring gasoline on the fire. So back to this question of could we have a revenue model that's not dependent on people logging time on a timesheet? That's a treadmill that you can never get off of. That's work a million hours to make a million dollars. So if you introduce other revenue models into your business and when we say value pricing, we're really just talking about modern pricing. We're talking about pricing as practiced by the rest of the business world. Nobody in client organizations generally does the timesheet, they don't build their customers by the hour. None of the product manufacturers are dependent on it, so if you look at one of the calculations that I think is a useful metric inside professional firms to measure financial success is revenue per employee.

    This is done and reported in the trade press, most agencies do this, it's a simple calculation. That's your total revenue divided by the total number of FTEs. So if you look at the average for most agencies, it would be somewhere around $150,000 revenue per FTE. You know what it is on Google, 1.3 million, so why do you suppose talented people are leaving agencies and going to work for Google? Because it has the money to pay them and we don't. And the talent drain inside our business is our most essential pressing problem, I believe, in professional services at large because we have a business revenue model that doesn't scale. And we have a self-imposed profit ceiling. I mean here's another dumb idea, our maximum revenue for the year is a calculation of the number of people, times the number of billable hours and that is our total maximum possible revenue for the year. What other businesses would do that? What other business would give themselves a ceiling on their revenues and profits?

    Brent: Yeah, I think the key in germaneto the conversation we were seeing, I'd say from our vantage point, we're seeing some really interesting tender shoots, I guess of different emerging modalities, agencies that are providing services as well as some interesting platform expertise. Prepackaging types of outputs and outcomes, that are repeatable, that are highly valuable, extremely sought after, but don't require maybe the same amount of just hourly tonnage, right? It's more a function of their expertise and building a repeatable process and business, so this is extremely provocative and very forward-thinking. What advice would you have for that emerging, ascending, maybe independent agency that is reaching that crossroad and says gosh we've grown probably by virtue of the quality of our work and our insight and our expertise. We’re delivering solutions for clients, but we want to scale and we think there's a better way, but to scrap maybe the model completely initially seems very daunting. What are some advice or a couple of next steps, other than reading the books?

    Tim: Yeah, well you've kind of articulated it in the sense that I'm a fan of the idea that professional firms ought to engage in some productization. If all you do is offer the same bullet point list of services at an hourly rate as the other firms down the street, first of all, that's not very differentiating. It's never going to be very profitable, it doesn't scale. To take those services and re-imagine them as solutions or solution sets and better still to reframe them as programs or products that as you say are repeatable, then you do start to bring some scale to your business. Because you've got not just a social media service, but you've got a social media program and the program consists of these various elements. And we've got a version A, version B, version C of this, which one would work best for you. You deliver the program and as you get better and better at delivering these programs, you can deliver them in less and less time. It's like a surgeon who gets better and better at heart surgery. Instead of 13 hours, it's one hour, but he's paid the same fee because the patient's paying for the expertise of a successful surgery, not the number of hours in the operating room, so that's the value of having programs. And then there are some things inside agencies that qualify as pure-play products. Software platforms, digital applications, research products that are money while you sleep. There are things that don't require any labor, but they're generating some revenue for the agency.

    And so this goes to your question of where to start and can you go cold turkey and just say well, we're gonna kill timesheets starting next week. Well actually I do think you can do that, but what will make you feel more comfortable with making the transition is what we're talking about is a diversified pricing portfolio, so that your sources of revenue come from lots of different places. Some of your models are going to be a higher margin and more profitable in some years than others. I'll give you an example. If you think about how you invest for retirement, we as individuals put some money in high risk, high return, medium risk, medium return, or low risk, low return. We think of professional firms pricing portfolio in a similar way, you should have some higher risk higher return slices to that pricing portfolio. Some of which are going to pay off in a very big way and some aren't, but so what? At the end of the year, you're going to make a better, higher profit margin than you would have just doing the seemingly safe, but low return billing by the hour strategy. The agencies and professional firms that earn instead of a 15% net profit, they're earning a 30 or 40% year in net profit. That's how they're able to do it, by placing a series of bets on themselves, not just adding up their time and sending the client a bill.

    Brent: Well that's a great insight. And what we'd leave the listeners with too is some analogies to that that you can see at scale, the large management consulting firms, huge service components. They'll sell extremely high price strategy, they’ll sell certainly tonnage managed services where they're using arbitrage globally for lower rates, but lots of software integration, unique connectors that license some of these things and really get embedded with clients.

    Tim: And this is what you're saying, most of the large consultancies make more than half their revenue from IP in one form or another, it's not billing by the hour.

    Brent: Tim, this has been great and we could keep on going, it's a fascinating discussion. It's very relevant, I think, to a core constituent of our customer base and we are always looking for ways to help our marketing services or consulting organizations, our agencies. But I want to leave the users with your website where folks can go. It's ignitiongroup.com and within there, I think you've got the condition blog, correct?

    Tim: Yes, it's called Propulsion.

    Brent: And the two books are Positioning for Professionals and Take a Stand for Your Brand. For us at the podcasts, it's always great to have our listeners join in. You can reach out to us at podcastatmavenlink.com. If you have any other questions for myself or for Tim, we'd love to hear from you. And Tim, thanks again for really stimulating a deep and relevant conversation.

    Tim: Well thanks Brent, you asked some really insightful questions. I appreciate you inviting me.