Episode 93 Transcript

Brent Trimble: Welcome to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. Again, for listeners, I'm Brent, one of your hosts. Today we're kicking off a great new series in partnership with Kennedy Consulting, centered around a big theme: breaking the $30 million ceiling in professional services.

Throughout this series, we’ll be challenging some of the most persistent myths in the consulting growth journey, backed by real stories, real data, and some healthy debate. Joining me today are two powerhouse voices from Kennedy Consulting: Alex Klein, senior advisor and growth expert, and our returning guest for those who've listened in the past, Tom Rodenhauser, managing partner of Kennedy. I want to offer both of you a welcome. For Tom, welcome back.

Tom Rodenhauser: Thanks, Brent. Great to be here.

Brent Trimble: We'll put in the show notes where listeners can reach out to Kennedy and see some of the research. We've noted that in the past. Before we get into our discussion today, give me a little bit of an intro for those who are not familiar with Kennedy. Alex, why don't we start with you?

Alex Klein: Sure. My name is Alex Klein. I'm an advisor with Kennedy. I have a 30 years career in consulting. I spent the first part of my career with A.T. Kearney, about seven years there. I co-founded Efficio, which is a procurement and strategic sourcing consultancy, and we grew that to over 1200 employees globally. I retired from that about three years ago and have been working with Tom and co on helping mid-sized consultancies scale up and prepare for exit.

Brent Trimble: That's great and super relevant for our topic today. Tom, how about you?

Tom Rodenhauser: Sure. Tom Rodenhauser here. Kennedy has been around-- I have 30 years too. But unlike Alex, I'm on the outside looking in. We've been doing market research on the consulting industry over the last three decades, and I personally have been leading those efforts.

We look at the consulting market in total from a global standpoint, but then we break it down by various areas of specialty.Midsize and growing firms are of great interest to us.We also work with the big global firms.We are always talking with buyers of consulting services to understand who they're buying services from and why. Great being here today.

Brent Trimble: It's great and a great topic to kick off this series. In our work, we service the consulting industry and see many firms in their various stages of growth and ascendancy. The topic today around breaking that plateau or barrier of growth around $30 million in revenue is really relevant and will be a great source of some practical knowledge.

Let's kick off the discussion with the large topic. There has been plenty of discussion around that. Tom, in past episodes, we have talked about the notion of positioning and articulating value. In your view, breaking through that barrier of revenue and growth starts with good positioning and articulation of the value exchange between the firm and the clients. How well do most professional service firms actually understand and articulate value delivery to clients?

Alex Klein: Yeah, I think it's a critical point, value proposition. You need a strong, clear, focused, compelling value proposition. Most smaller professional services firms are just not good at this. They're good at their stuff, they're good at delivering what they do, but they're not good at articulating that from a sales and marketing perspective into the market.

When you look at a lot of these firms, their value propositions will be very broad, trying to be all things to all people.That just doesn't resonate. In my experience, one of the biggest struggles professional services firms have is that they just don't have a very focused, very strong value proposition.When you don't have a clear value proposition, then by definition, you don't have clarity on the value that you drive.

One other point I would make before I hand over to Tom is that depending on where you play as a firm, depending on the field you're in, the impact that you have on the client can indeed be incredibly difficult to measure. If you have on one end of the spectrum—my experience was in procurement and sourcing consulting—where the remit was to go in and negotiate cost reductions with suppliers, and then table a set of new supplier contracts detailing those bottom-line savings, now that's a great place to build a proposition because it can be very clearly evidenced how what you're doing flows right to the bottom line.

If you're in, I don't know, executive leadership development or leadership culture development, it's going to be much, much harder to articulate your bottom-line impact because you're further removed from the outcome.In that example, it may be impossible to articulate that in terms of valuation or dollar profitability, in which case you need some metrics that are not focused on the bottom- line outcome, but some earlier metrics, some culture change metrics, etc.The point being, you've got to come up with the best metrics that you can, but you're far better off if you're in a field where what you do directly impacts the bottom line because then it's just going to be that much easier to articulate it.

Tom Rodenhauser: Alex brings up a really good point there, which is when you're in what we would term more operations consulting where you're doing process efficiency, you're doing very measurable outcomes. It's fairly easy to demonstrate the value proposition.You spend X, you achieve Y in savings.Most consultants don't have it that easy.

A lot of boutique firms are essentially generalists.They do what their clients want them to do and align their services accordingly.They may think of themselves as being experts in particular industries or functional areas, but when they're working with a Boeing, it doesn't mean they have an aerospace industry practice.It means they're doing work with Boeing in a variety of ways.

Consultants tend to have blinders on in terms of what they're actually doing and the value they're bringing to the client.As a result, when they articulate their value proposition, it's "We work with Boeing, therefore we're valuable." It becomes a mixed message of exactly what they are doing and what value they are creating.

As a result, when you get into areas like strategic alignment or change management where the measurements are difficult to pin down, the client thinks of you as having a great relationship with the consultant.They are a trusted advisor, but the client does not care about measuring the value. Ultimately, that is problematic because we are moving into a more value - based mindset with consulting.

Brent Trimble: It can be very transactional and, frankly, easy to discount, easy to pause. The relationship is not as embedded or seen as essential by the clients.

Tom Rodenhauser: What ultimately happens is the client, the client executive leaves, goes to another organization and brings the consultant with them.However, you wonder why you can't stay with the old client, with the old organization, because the value was never connected. It was connected to the individual relationship.

Brent Trimble: Along this theme of breaking through that $30 million plateau, you both work with quite a few firms who are going through that. They're going through positioning and alignment and crafting their value proposition. You have a lot of wisdom and experience around this notion that there are telltale signs, practical tells or signals that a firm is flashing when the value proposition isn't resonating and potentially isn't real. They may be generalists.

Tom, to your point, there's a lot of portability based on relationships. What are some of the key things you look at when you're examining a firm and helping them discern this ? What are some of the symptoms ?

Alex Klein: The first thing I do when I look to talk to a firm is take a quick look at their website, and that can be very telling.If their proposition is a laundry list of 20 unrelated things, to Tom's point, that's the experience they have across their history, across their client base, but that's not necessarily a proposition. The more those 30 things are unrelated, the less credible you become.

I think the website tends to show very quickly that, often the issue is simply that the offering is too broad.We need to be more focused on a set of industries, a set of problems, or a functional issue.It is simply too broad.The founders are afraid to strip away at the proposition for fear of losing potential work.In reality, they should sit down every few years and refocus on what they are really good at.Determine where they really have a right to win, and focus on that.

The other thing you can pick up fairly easily from the website is the quality of their differentiation.The issue a lot of firms have there is that their differentiation is very soft.It's "We put the clients first. We have high levels of integrity. We're a pleasure to work with.We strive for the best solution." None of that means anything. Those are bare minimums that clients require before you can even step through the door to pitch.

A lot of firms are not very good at differentiating themselves because it is inherently difficult to differentiate a professional services firm.At the end of the day, there is not a tangible product.It is very difficult, but there is a lot that can be done.A lot of it is just a case of articulating and writing and rewriting it in a very crisp manner.Many people do not have that skill set.

Tom Rodenhauser: We kid about a lot of consulting firms are shades of gray.What ends up happening, to Alex's point, there's a lot of euphemisms that you'll read. There are a lot of self-congratulatory assertions that are made, both in marketing collateral and websites. Some of those are necessary for credibility's sake.

But what we look at when we do our market research on why buyers are buying services from certain firms, the question we ask is, what gaps do you have where you bring in consultants to help fill those gaps? That points to roles, R - O - L - E - S, that the consultants play on behalf of the client to fill gaps.

We've identified essentially six roles that all consulting firms play, sometimes a variety of those, but primarily there's a singular role.It could be domain expertise, technical expertise, strategic alignment, getting everyone to row in the same direction, even project leadership and change management.

Now, the key is a lot of consulting firms don't understand the role they play. They think they're being hired for their domain expertise.What they're really being hired for is to be a change management agent.

When working with boutique firms, especially, they all have a variety of things listed that they do, a variety of industries that they're in, but they can't articulate what exactly they do.Why is the client hiring them ? That role issued to us is the real differentiator.

When you start talking capabilities, everybody's got capabilities in this business. If you don't, you shouldn't even be at the table. We don't look at the capability articulation as the differentiator.Many firms do; they think, "We're in healthcare consulting. We know the healthcare industry." You shouldn't be in it if you don't know the healthcare industry.Firms have a challenge sometimes articulating why they're hired.

Brent Trimble: That's a really interesting vantage point and a different lens to look at it.

Alex, to your point, we’ve had Tom on in the past, we've had other authors, like Tim Williams with his positioning for professionals and this notion that the consulting websites, their collateral, the way they position themselves to the market

Isolate website, for instance.It's always on. Someone at the client's site could say, "Gosh, I need a domain expert in XYZ industry. Let's see what's out there." There's this sea of sameness. It's what we do: the superlatives, a catchy name, a brand, verticalized industries, horizontal practices, usually a bit of a cluster of strategic partners.You have to be doing technology at the bottom, maybe a hint of some kind of proprietary framework.If you've seen one, you've seen many.

That notion of understanding why you were hired beyond just capacity and capability, what role are you really there for, what's the real business you're in at that client, is a really great takeaway.

Tom Rodenhauser: It also points to value - based billing.From an industry standpoint, we're moving away from strict time-based billing. We're moving into an era of value - based billing.How you do that is very challenging for firms that can't articulate their value. You really have a conundrum there.

What happens is if I'm the firm, I'm challenged to find the right measurements and to apply those measurements consistently with my clients so that I then have the data that says, this is what we actually do, this is what we deliver.We understand why it's challenging because it really pushes you into a corner to frame the delivery. As Alex pointed out, on the operations side, you can look at measurements that are very hard and fast, but there are measurements on the strategy side as well. There are longer play and growth. Change management has a lot of measurements there that I think firms are sometimes reluctant to go after.

Brent Trimble: There's so much muscle memory built up over time in the billable hour strategic consulting augmentation capacity and work that resolves in an output. Maybe it's implemented, maybe it's not at the client site. It does seem that we're at a tipping point, and there is more embracing of value.

Let's dig into that a little bit. You had shared with us these 3P indicators that good firms, or as you go in and engage, are talking about breaking through this plateau for growth of the three P's being there: the proposition, the positioning, and pricing.In a firm that's performing at a high level, how do those three P's - proposition, positioning, and pricing - really influence each other ? What's the outcome for that firm when those are in alignment?

Alex Klein: I can probably take that one.I do think of it in my mind as the three P's: the proposition, the positioning, which is the differentiation, and the price. I think they are very closely related. The degree to which a firm has a good handle on those three things is a good predictor of their success.

To command a healthy price point in the market, you need to have a good proposition.You need to be good at something and deliver something that has a measurable output.We've talked about that. The next point then is the positioning, because in professional services it's likely you're not the only firm offering that proposition. Probably all the big guys are offering it, along with a smattering of smaller guys.

Having the proposition itself is not enough.You need to show why I would buy from you and why you are better at delivering this proposition than everybody else.Ideally, tell me how you are better than the big firms and how you are better than the specialist firms.It stands to reason if you have a very strong proposition and are very well positioned in the market regarding your ability to execute on that, then you can command a much higher price point.

I see a lot of professional services firms that actually do have good propositions and positioning, but they're still not commanding a good price. You wonder why, when in the consulting world, a McKinsey is at $4,000 or $5,000 a day, we see a lot of specialist firms down at around $1,500 a day. Surely there's a lot of room to move nearer in price to the McKinsey model if you can articulate the proposition and the price.

A lot of firms that do articulate the proposition and the positioning well, their pricing doesn't keep up with that. All firms start arguably as a small underdog, and the founders have that underdog mentality where you need to fight and scrap for every piece of work. As the firm matures and becomes more credible in its field, the founders can't shake that underdog mentality.The pricing is forever lagging behind.

Tom Rodenhauser: I'd weigh in there to say that sometimes there's confusion between proposition and positioning.What happens is when we look at any particular consulting landscape, the intersection of an industry and a function, let's say, and we're looking at 30 to 35 firms in that space, you have the big firms which do everything for everybody, and then you have specialists and mid - tier firms.

The positioning that we're measuring is what we call engagement value. How much does the client value, not just the relationship but the delivery of what the firm's providing ? Then how much spend, what's the density, if you will? Across the board, how much of the wallet are you getting?

What ends up happening is you have a very high relationship value.You are highly valued by the client.To Alex's point, you have this notion that the only way we can compete against the big guys is by undercutting on price. We can do it for a third less. That becomes part of the value proposition, not the value.

I think what ends up happening there is firms again box themselves in where they say, "We're just as good as the big guys. We have the best people." I would argue that firms should not try to compete head to head, people to people, with either the big guys or anybody else.

When you start looking at resumes as a way to judge who you're going to hire as a firm, that's a no - win proposition.The MBB firms or whomever can always point to more resumes.They can point to all kinds of credentials.If you can start measuring the value that you're bringing and you can say relative to what you're paying one of the big firms, we deliver this amount of value, therefore our price is this way.

We're willing to use value-based pricing as opposed to just charging you a higher hourly rate because you're not going to win that battle.You're not going to win the battle of the higher rate. This is where positioning and the proposition get co-mingled, and pricing is the orphan out of this.

Brent Trimble: You touched on the notion, Alex, and Tom really, we’re on this theme of breaking through that $30 million plateau. The firm started small maybe from some principals who split off from a large firm, brought a client or two with them, have built over time with relationship.

Then to your point, using price as a differentiator.We do really good consulting too, but for less because we're small. Go with us. As they start to ascend and mature to this plateau that they've been wanting to break through and go beyond, how is the over - reliance of principals and client relationships ? Is that something that is too heavy, they index too heavy on that, continue to undercharge for risk of losing because they began the relationship in that type of proposition and positioning.

In your view of these firms, you go in and you consult with them in helping them articulate differentiation, pricing, positioning and so forth.How harmful or to what extent does that carry through ? Have you seen examples of that ? How would you then help them pivot out of that orientation and begin to build a pricing and value model that can respect a long - held, very valuable relationship, but still reflect value for the firm ?

Tom Rodenhauser: We've been working with a variety of mid-sized firms. One in particular stands out to me because they got some investment money but they were undergoing this crisis of confidence, like, what are we going to be? Many firms suffer from this where they grow up in a meritocracy, the founding partners bring in other folks, and the practices get built based on more of the personal agendas of partners.

It goes back to, are you building an industry practice ? Are you building a functional practice, or are you building it at the back of a client relationship that you have ? Then you create power centers within the firm, and all of a sudden the practices are unbalanced because of the relative importance that's being played by individual partners.

A firm can get away with doing that for a fairly long time.When they hit that threshold, 30 million is a good number.You have to have the discipline to focus in certain areas.In other words, you become less of a meritocracy and individual partners and more of an institutional meritocracy. Alex's experiences point to how a firm he grew was laser focused, and everybody that they brought in was laser focused.

Firms have challenges when they grow from the founding partner phase to that next level, and they start having to decide what they're really going to do and not do everything.

Alex Klein: I agree, and I would add to that.A lot of specialist firms are really just low - cost body shops at the end of the day.You don't want to be in that place, and they don't want to be in that place, but that's where they've evolved into.

We always say the place you don't want to be is where you're chosen purely based on the strength of your relationship and the fact that you're cheap. But for a lot of firms, that's why they're chosen. Oh well, I've got this guy Alex—he's got 30 guys, they're good, I trust him, and he can bring me some guys a lot cheaper than Ernst and Young.

I recently worked with a firm that had that model, and they were very successful.They were around the $30 million mark.When we lifted the covers, it became apparent that there was no differentiation.There was not even a core of, this is what we're good at. It was purely we have these relationships and we'll do whatever the client asks.

That is very hard to scale because, for one thing, you are not repeating the same proposition and project over and over.You are doing a collection of random things, so you never really develop that depth of expertise in two, three, or four key things that you then train your people in that enables you to scale up.

This really does happen.It's a real thing even for successful firms. It is very difficult to turn it around because they've been successful on the basis of being very broad.They'll do whatever the client asks. You then have to corral them into focusing more.

That's very scary for them because they're potentially turning down revenue streams and saying no to certain pieces of work.The collective wisdom and the research shows over and over again that it's the focused firms that are successful. Being broad-based in most instances is a nonstarter. The broad-based providers, Deloitte, EY, the top legal firms, they have the breadth. If the client wanted the breadth, they'd go there, and you're never going to compete with those guys on breadth. Specialization is really your only option at the end of the day.

Tom Rodenhauser: I think Alex touches on a great point, which is how to define success.You can be very successful in a model that also has a ceiling or a cap.You cannot grow beyond that, because you created the treadmill or the hamster wheel where all you're doing is trying to get more projects, competing more on price. It's a model.It's not necessarily the model if you want to get beyond a certain scale.

Brent Trimble: This is again, the first of our series on topics like this; scaling, scaling firms breaking through the plateau and growing beyond. Your experience here is really invaluable because you're on the ground with firms like this helping them differentiate, reposition.

For those listeners that are maybe in an ascendant firm potentially looking to expand, maybe bring on a capital partner, maybe bring on some MDs, build out a new practice area, whatever the dimension of growth means to them, what's a great place to start for them as they evaluate the value prop, differentiation, pricing strategy?

If they did nothing else, what are the two or three key precepts they should really think about ? To your point, Alex, and Tom to an extent, the notion of growing by relationship and going broad just makes you very fungible.If you're a firm and you're on this journey of growth, maturation, laddering up and ultimately breaking through these plateaus, where would you start ? What key two or three elements would you really turn that lens inward and decide to change ?

Tom Rodenhauser: I would say two things.One, get an honest assessment from the outside of who you are, what you stand for, and what your value proposition is.I know many firms that do essentially client satisfaction and characterize it as market assessment.This tells us who we are.It is literally the feedback loop of unless you did a horrible job, no client is going to say negative things about you.They are also going to reflect on what you do relative to what you have done for them.When you just talk to that close circle, what you end up getting is, "Wow, we're doing great. Let's continue doing what we're doing because we're doing great."

Surprisingly, a lot of firms don't do outside market assessments. They'll do it if they're thinking about growing into a certain area, but not in the context of whether they have brand permission. Are they allowed in that space? It's more about how big that space is.They can grow into it if they hire a few supply chain experts if they're going to be in supply chain. An honest market assessment is necessary for firms who are looking to do this.

We've been harping on this for the duration of our talk, but specialization. When you're doing your strategic planning, determine what you want to be based on what you're really doing. Specialization can be functional. It can be industry. It can be geographic, any combination of those. Focus on an area. Be the expert, and then you have opportunity.

Alex Klein: Yeah, I agree with that.It's easy to be deluded about the caliber or positioning of your firm if you don't have that external input periodically.Beyond that, I would say every few years, if you have been successful, sit down and say, why have we been successful ? What are we really good at ? Where do we really excel ? Where are we better than the other guys ? Let's hold our proposition around that, and let's cut out the outlier pieces of work that are not core.

I think that's a logical starting point and that's relatively easy to do.It just requires a bit of courage.

Tom Rodenhauser: To add to the courage bit, I would say if you're really committed to the value you provide, then do value-based billing. Do something that will allow a prospect to take a chance on you. That is where we see when we talk to buyers of consulting services, they're willing to give the newcomer a chance.The way to demonstrate that is: okay, we talk about skin in the game, what if you put all your skin in the game and we guarantee our outcome.

I know that is a scary proposition for a lot of consultants because you've crossed the Rubicon from being an advisor, but you cannot use the term "we partner with our clients" and also be an advisor at the same time. If you're going to partner, partner and go all the way.That’s the advice we give, and it is something that I think firms grapple with.We are moving into an era where value - based billing will become the norm, so better to be the first ones there.

Brent Trimble: Absolutely. I think being courageous about turning down or stripping and refining that positioning to a point where you're not just as purely everything horizontal-type firm takes some courage.

What if everyone operates in that ? What if that prospect or that previous relationship stumbles onto our positioning and doesn't see what they're after reflected there ? Do we lose out on that revenue ? That's a huge negative motivator. It does take courage. In some of our upcoming episodes, we’ll dive into value-based pricing quite a bit in some detail.

But this has been a great conversation.Just to recap, the proposition, positioning, and pricing are foundational elements to really turn that lens inward, get some external, sometimes hard medicine, evaluation and consulting help to really help you orient to those and then be courageous about what it is that you bring to market and the value you deliver for clients, putting that skin in the game.

This has been a great episode to look forward to our follow - ups.It is really relevant to so many firms in our listenership, importantly, who are on that journey or have just come through that journey and are looking for that plateau.

I want to note that for listeners, you can find a lot of really great data and anecdotes.I know, Tom and Alex, that Kennedy puts out different pulse checks on the market.You can sign up for those at kennedyintel.com.

Thank you both for joining.We look forward to the follow - on episodes as well.

As always, thanks for listening.If you have any follow - up questions for myself, Alex, or Tom, we'd love to hear them. Send us an email at podcast@kantata.com. We'd be happy to get back to you.

If you enjoyed this podcast, let us know by giving the show a five - star review on your favorite podcast platform and leaving a comment.If you haven't already subscribed to the show, you could do so anywhere you get podcasts on any podcast app. To learn more about the power of Kantata’s purpose-built technology, go to kantata.com. Thanks again for listening.