Episode 99 Transcript

Brent Trimble: Welcome to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. Hey everyone, I'm Brent. Welcome back to our fourth session in our series with Kennedy Intelligence, focused on scaling your professional services firm past the elusive $30 million mark. In this episode, we're tackling one of the most persistent illusions in the industry: the talent illusion, hiring stars versus building systems. To tackle this potentially thorny topic, I'm thrilled to have back Alex and Tom to walk through this with us. For those who might not have been privy to our previous episodes, how about you both each give a quick introduction. Alex, I'll throw it to you first.

Alex Klein: Thank you, Brent. Alex Klein. I have a 30 year career in consultancy. First part of my career, I spent seven years with A.T. Kearney. Second part of my career, I co-founded, along with four other Kearney folks, a specialist procurement consultancy called Efficio. I was there for 22 years, and we grew that from literally five of us to over 1,200 full time employees. It was super successful, mostly because we had a very strong value proposition. I did that for 22 years. A couple of years ago, I left Efficio. I am now focused on helping consultancies grow and work towards an exit.

Brent Trimble: Tom, how about you for our listeners?

Tom Rodenhauser: Sure. Tom Rodenhauser here. I'm Managing Partner of Kennedy Intelligence. We do market research and advisory services on the consulting industry for consultants. I’ve been doing it for 30 years as well. We're always on the outside looking in, trying to understand why buyers buy consulting and who's doing what out there. I’m glad to be a part of it.

Brent Trimble: Excellent. As in our previous episodes, we’ll have links where listeners can download and access some of the research on the consulting industry that Kennedy provides. Let’s dive in.

This notion of talent and the topic of rainmaker—growth catalyst versus building from within—often appears in formative stage consultancies. Firms frequently believe that a handful of star performers, rainmakers, or high-profile hires from big consultancies will drive their growth. We discussed previously that this perspective is fallacious.

Why is overreliance on talent a blind spot? What are the signs that a firm may be too dependent on hero talent instead of scalable systems? Alex, perhaps you can start with your background and insight here.

Alex Klein: No, it's a good question. Of course, to some degree, you do need and want some star performers/rainmakers. If you have a couple of those then you certainly want to hang on to them. If that's all you've got, then there's a finite limit to what they can do. They only have 24 hours of the day; they can't be scaled up. These people are far and few between. You have to pay them a pretty hefty salary. You have to potentially give them equity. It's difficult to grow with just a couple of individuals like that.

The question then becomes how can we systematize our business development process so that we're less reliant on those individuals? That means having great offerings, having a great value proposition, having very good proposal collateral, having standardized methodologies, standardized pricing. All of those things will help the non-star performers to generate more revenue. At the end of the day, you likely have more non-star performers than star performers and they probably cost you less

The name of the game is to have a few rainmakers but to spread the effort beyond those individuals, making sure that you've got significant revenues coming also from the non-stars. If you're doing it really well, then you'll actually be using your rainmaker stars to coach and guide the non-stars. Essentially you're getting more mileage out of a greater number of people.

To your question on what’s the sign that a firm is too dependent on a couple of individuals, at the end of the day it's obvious. It's that all the revenue comes from two to three people, and it's not spread across the team. That's a problem. Then you can't scale up.

Brent Trimble: That super high concentration that you've discussed in previous episodes may focus on one client. Conversely, to the team, it could be focused in one individual.

Even with advancements in AI and all the tooling and methodology available to us, there still has not been a way to extend 24 hours in the day; the sun rises and sets. That’s an unmovable fact.

Tom, when you produce research and elements pertaining to this and some of the firms that you index or consult with, and maybe even in the buyers of consulting services, does this topic ever come up? Is it conceptual or dimensionalized by the buyers of professional services, or is it not really germane to the end client?

Tom Rodenhauser: It comes up all the time. What we see when we're looking at especially firms that are in that startup to growth mode is they reach a plateau. The founders have divvied up responsibilities. They've divvied up client relations. Usually you have a couple of the founders that have more proclivity to do business development. They think about bringing in someone from the outside, whether it's an old colleague or a star, quote, unquote.

What tends to happen is from their standpoint, it upsets the culture of the firm unless they're really, really careful, because you don't know what you're getting. You may get what looks good on paper, but really doesn't translate into business development. You flip that over to the client, and what happens is the client looks at this and thinks, well, who's this person? What do they bring? Especially when they bring credentials from a big firm that may look good but doesn't necessarily translate the same way to a more boutique or specialist firm, you really run the risk of upsetting the culture of the firm that you're trying to build. Clients are very savvy about this.

One of the misconceptions is we’ll hire a rainmaker that's going to bring a book of business over to the firm. The book may not translate; it may not transfer. What ends up happening is that individual had a great relationship with company X, but company X is not interested in working with the new firm. There is this misguided notion that all this business is transferable when it is not.

Brent Trimble: That's a really good point. This idea of, using a data term, the Rolodex partner and that Rolodex may not always be panning out and not completely portable.

Tom Rodenhauser: It's relationships. Everyone talks about relationships; relationships aren’t portable. That's a good way to put it.

Brent Trimble: That's a good point. You talk about the foundation and this idea of culture, the connective tissue, the glue between the firm's offering and its people. Alex noted in his intro and talks about this in his experience—that really precise value proposition that's narrow and focused.

Why does that matter so much when you want to build a cohesive team? How do firms anchor their culture in something more lasting? Particularly, I think back and I think, Alex, you said in a previous issue when we were talking about pricing that clients and buyers see hours as fungible. Do they see the firm as very fungible as well? How do you build that and make it lasting?

Alex Klein: To me, the firm's offering really unites the team behind a common cause. The team knows this is what we do, what we stand for, and the value we drive. It is very clear, and everybody shares that message. That engenders a sense of pride.

The firm has a body of knowledge that's shared across the team. You don't have everybody constantly winging it because they're doing something new or from left field. Instead, the team is focused; they know what they're doing. Since they're all working on a narrow set of offerings, the're all going through the same client challenges, and they tend to collaborate much more.

At my firm Efficio, we had and still have a strong culture rooted in strategic sourcing, which is a whole language. Everybody speaks it fluently, creating collaboration. Everybody can help one another, and it feels good to help. Finally, it drives a virtuous circle where, by doing the same proposition repeatedly, you become more expert.

You're then able to publish more content to show your expertise and develop more intellectual capital. You can much more easily train your people in your proposition, so they can deliver more quickly over time. It becomes a snowball effect. Once we've done 500 strategic sourcing engagements, the cumulative learning was incredible, and our credibility went through the roof. That is good for the firm commercially, but it is also more satisfying for your people.

It's Malcolm Gladwell's 10,000-hour rule: if you practice something for 10,000 hours, you become unbeatable.

Brent Trimble: Really good point. That shared purpose aligned to a refined business proposition seems really, really key and a continuous thread that we've pulled through these talks.

Taking off a bit on the culture play and then the notion of bringing in rainmakers, key principles is that part of culture of developing employees and talent. For consulting firms, that traditional start as an analyst, get up to director, become principal, partner level track still is very well trodden and desirable to a lot of people.

The need for these firms that we're discussing, driving to that $30 million, $35 million plateau is to build principal, director level talent who can both manage relationships, eventually drive revenue, but many firms struggle to build that middle management tier for a variety of reasons.

I'd love to hear your take on that. What are the consequences of maybe ignoring that, potentially trying to bring that in externally? What are the unintended consequences down that growth journey?

Alex Klein: Yeah, that's a very good point. The principal position is inherently difficult to fill for small firms. Most small firms really struggle with this because you need people who have a lot of relevant expertise. You have to pay them probably upwards of $200,000. Most importantly, it's an incredibly rare skill set to find.

These people have to be excellent consultants. They also have to have excellent domain expertise in your domain. Then they have to have the soft skills to manage the client relationship by themselves. On top of that, they need to be commercial and push for revenue. This is a very difficult combination to find because it combines a lot of hard skills and a lot of soft kills.

The result is that a lot of firms have principals who are essentially just senior project managers who've been promoted up the ranks. They can never make that transition to partner because they don't have the soft skills or they don't have the commerciality. You end up with a bunch of very senior folks that have plateaued, and you can't promote them anymore.

You stand the risk of losing those individuals whom you've probably been nurturing for five to ten years and are now real assets to your firm. I've seen a number of niche firms where management, looking top down, is saying they don't have a good enough principal level. The employees looking up are saying they're all stuck and not able to get to that level. It's a difficult situation.

Tom Rodenhauser: We actually have a pretty simple measure when we're talking to clients. We ask them about a firm, and when they say, "Well, Alex does a great job. Alex is the partner," that right there is a red flag. It's the firm first and foremost.

When they talk about Dominique, that's the project manager, the one who's leading the engagement, that's where we start to say, "Okay, where does she fit in in this?" Then you find out that she really is the one driving the engagement, driving the client relationship. You go back to the firm and you say, "What's the plan for her? Is she going to be a partner?" You will hear a hemming and hawing of they haven't really thought about that because they get so engrossed in the project management piece and they just assume that's enough.

It's one of those things; we always call this a mentoring or apprenticeship kind of business. Not all firms follow through on that. They don't really develop a very systematized approach to the development of partners, and as Alex mentioned, all the skills that are involved with being a partner.

Alex Klein: Brent, to your question, what are the consequences of ignoring this principal level issue, the first consequence is you don't have enough BD resource because you don't have any principals. The knock-on effect is if you don't have good principals, then the partners have to be much more hands-on involved in client projects, which reduces their time for business development.

When the partner has to do business development and write proposals, they don't have a principal who can help with that, which again constrains their time. That's the real issue; it's not that the principals are doing the selling yet. It's the partners doing the selling, but the principals have to be there to free the partners up. If you have no principals, you have no selling capacity at the partner level

Brent Trimble: To your point, Tom, around your diagnostics when you're talking to firms contemplating M&A or taking on a capital partner, you mentioned this idea that you have some tells or red flags around who's really either driving the revenue or what's the plan. How soon, I guess, do you advise or really counsel firms to put in some ascendancy career development tracks in place?

On the one hand, the cost of entry to become a consultancy is fairly low. You've got a few people with some really key expertise hanging out the proverbial shingle, get a client or two, and grow maybe organically from there. Suddenly, there's $15 million and you’ve actually built a sizable company. Now there's some time to double down.

Do you think that some firms who are in a race to a capital event overlook this? Do you counsel them to build something that’s sustainable for the future? Even with an exit, you're still going to be tied to an earnout for three and a half to five years. You should do that. I really don't know, how do you approach that?

Tom Rodenhauser: Unless you're running a lifestyle consulting business and you have no intent on really growing it, we advise from day one you should be thinking about this. The telltale sign for us is, and I'm thinking of a firm that we worked with where there were four founding members, they’d achieved about $15 million. They had a good operation going. We asked them about what their roles were. They talked about doing all the management piece, the HR, the marketing, as well as business development. They also were 100% utilized, meaning that they were billing out most of their time as well. Obviously unsustainable.

We then asked about how they were developing the talent that was coming up to become associate partners and ultimately partners. They thought about it, but they hadn't done anything because they were so busy doing all these other things. What ends up happening, I know we're going to talk about this in future episodes, but how you run the firm, the operations of the firm is critical, and partners need to offload the management piece so that they can focus on not only the business development, the client relations, some element of consulting, but developing the people, and then be willing to cede some levels of control to those people.

I think that's the hardest. The hardest job for a partner is to give up some of that control.

Brent Trimble: Keeping on this thread of talent, there's a really interesting analog here in the business we’re in as well, which is much different than consulting with software. This idea is that as a firm or a platform grows, you reach a state of maturation, of being able to maybe afford top tier talent or be an attractive enough entity to top tier talent who's coming from a bigger platform or firm that can help you then push through this plateau.

We see firms bring in talent from top tier consultancies. Everyone, I find in the software business, wants to work for a startup at some point in their career. There’s something very alluring about it, unconstrained by bureaucracy, and you can really set your own path. The same is true in consulting.

Many times these top tier acquisitions don't work out on paper and in performance. These are impeccable resumes, great stories. They reach a firm that's looking to punch through this growth and those don't translate. They just don't work out.

How do you counsel firms to align to some sort of criteria or assurances to mitigate this notion? We talk to firms and certainly hear this a lot. I have seen the analogy even in software. You hire someone who is extremely successful at Oracle, Salesforce, or SAP and they come to a smaller operation and it just doesn't work for them.

Alex Klein: I've seen this a couple of times myself. You hire either a principal or a partner-level person from one of the big firms like you say, they look fantastic on paper, and it just doesn't work. In my mind, there are a couple of reasons for that not working.

The first reason is that these individuals might not be able to generate revenue when they don't have a big brand like McKinsey or PwC behind them. When you walk into a CFO's office and try to sell a million-dollar project, especially as a specialist firm without the big brand behind you, it's a challene. When you do it from one of the big firms, the credibility that the label bestows upon those individuals is massive. Without the credibility of that brand, you have to make an impact in different ways. If I'm from PwC, it's much easier for me to rebut most client challenges with, "We're PwC, we're huge, we have every angle covered. We cover every geography." That's very hard, obviously, to do for specialist firms. The fact is, it's much easier to sell from out of a big firm than if you're coming from a specialist firm. The bar is set higher for specialist firms because they do not have that big brand guarantee behind them.

The second problem, Brent, that I see is an ego issue. These individuals will come into the firm guns blazing and rub the existing team the wrong way. I watched this a couple of times, and it dawned on me that when these individuals leave the fancy big firm to come to a much smaller, unknown, non-branded specialist firm, the trade-off they make in their heads is, "I'm going to lose all the prestige of being associated with being a McKinsey consultant. In return, I'm going to be a big fish in this small pond. I have a superior pedigree. I'm going to assume a leadership role, and I'm going to make a big splash in this little outfit." When they come in with that mindset and meet the incumbent team, it does not go down well at all. I have seen that play out several times.

In the case of my firm, Efficio, we tried three or four times to bring in external senior hires from the big firms, and we almost always struggled. In the end, we gave up and reverted to a system of purely promoting to principal MVP from within. That worked extremely well because they were raised in our culture. We knew them, they trusted us, and they knew how to operate within the firm. It's a much more gradual process when you promote the internal team up rather than bringing someone in, parachuting them in from the outside. That was our conclusion: it will work much better if you have the scale and the internal talent pipeline to give you those people from within your ranks than to hire them externally.

Tom Rodenhauser: One of the things too, just to add to Alex's point, it's like Rocky IV where you go back to your roots and do all this training in the snow in Siberia and all that stuff. A lot of times when you're hiring stars from another firm, the allure of, oh, they want to get back to their roots or they want to get back to consulting, you have to be really careful as to the motivation, because if you're hiring them to be a business developer but their motivation is to actually be in front of clients doing the work, there's a mismatch. We've seen this a lot both from the client perspective when we talk to clients and when we're dealing with firms where the hire was made for one purpose but the motivation of the person coming on board was different. What ends up happening, to Alex's point, it rarely works out if you don't have that kind of alignment, both operationally and culturally.

Brent Trimble: That's an excellent point. Some partners, principals excel at net new logo acquisition, building out new practices, raw selling power where others achieve great revenue numbers through organic nurturing, going longitudinally, building out new capabilities within a client relationship. Those are often very different skill sets; that's a really good point.

This is, I think, the second to the last episode in this series. Certainly, it wouldn't be the second to last time we all talk together. For our listeners, we appreciate you and thank you for listening. If you have follow-up questions for myself, for Tom or Alex, we always love to hear them. Send us an email at podcast@kantata.com. We’d be happy to get back to you.

As I noted at the top of our session, if you're interested, listeners receive exclusive preferred rates on Kennedy's market research, strategic advisory, performance improvement, benchmarking, and M&A services tailored to leaders of professional services firms. Reference Kantata and you’ll receive preferential pricing engagements on any assets or services. You can go to kennedyintel.com to learn more. I encourage you to do that. Download some of the materials, see some of the quarterly updates that they produce in the market. It’s really great stuff if you're in any dimension of the consulting business.

Appreciate it. Tom and Alex, thank you so much again, and look forward to wrapping up this series in our next episode.

Tom Rodenhauser: Thanks, Brent.

Alex Klein: Thank you.

Brent Trimble: 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.