Episode 98 Transcript

Brent Trimble: Welcome to the Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry.

Hello everyone, and welcome back to our third session in our series with Kennedy Intelligence, focused on scaling your professional services firm past the $30 million plateau. In this episode, we're diving into why client love isn't enough and what you need to do to build real strategic client engagements at scale.

I'm thrilled again to have Alex Klein and Tom Rodenhauser back to join us in talking through this in our third episode of the series around scaling your consulting firm. Before we dive into the topic on excessive client service that sometimes manifests itself into love, let's get some quick intros both from Alex and Tom. Alex, why don’t we just start with you for our listeners.

Alex Klein: Sure. It's Alex Klein. I have, I guess, 30 years experience in management consulting in three chapters, really. The first chapter is, at the beginning of my career, I spent seven years with A. T. Kearney and learned how the big firms do it. In the second chapter, in the year 2000, I co-founded Efficio, which is a procurement and supply chain consultancy, together with four other Kearney folks. I then stayed there as one of the founders for 23 years, and we grew that to be, really a leading player in its field with 1,200 full time employees. The third chapter is I left Efficio three years ago and then started a new career of advising small and mid-sized consultancies on how to scale and grow. That's me.

Brent Trimble: Excellent. Tom?

Tom Rodenhauser: Hey, Tom Rodenhauser here; 30 years as well, but on the outside looking in. Kennedy Intelligence does market research on the consulting industry. We've been analyzing that for the better part of three decades. It's interesting because we cover everyone from the global firms all the way to the mid-sized and boutiques and understand why buyers buy consulting and how consultancies are different. That's what we do.

Brent Trimble: It's great. As is the case in these episodes, we'll have some instructions for our listeners to go to Kennedy Intelligence and to be able to download and interact with a lot of the great research that you produce.

For today's topic, and to remind and recap where we've been on this journey, this is our third in the series, this notion of building a consulting firm that scales past this plateau mark. You note that a lot reach that $15 million, $20 million, $30 million level and then have a hard time punching past. All of our themes leading up to this one have been around that notion and breaking apart different things to help those types of consultancies both differentiate and price and everything that goes into that.

Today we're going to talk about that notion of the strength of client relationships and satisfaction. We all know in any consulting firm, whether it's management or advisory or IT services or transformative, that happy, satisfied clients are a starting point, an important one. Can you elaborate on why overreliance on this as a metric, whether it's something that's observed or something that's conveyed by the client, can be a blind spot?

In your experience working with firms and you see them as they're scaling, what are some of the key indicators that the firm might be mistaking client satisfaction and happiness for real maturity and overall sustainable value creation? Alex, I think we'll probably start with you on this. The notion of going in and interacting with firms, they're looking to scale and punch through a plateau and really begin to grow beyond, like in a previous episode, we talked about selling founder-led relationships. Those are now maybe becoming exhaustive, over relying on a couple of key clients. What do you see that are key indicators that this could be a challenge for firms and a potential blind spot?

Alex Klein: First of all, I would say of course it's important to have satisfied clients. It means that, probably your firm is good at what it does and is doing a good job. But it doesn't build long term sustainable value. I think a lot of small firms that are just starting out after a couple of years, they often wake up and learn the lesson that it's all very well that the client being satisfied, but we need to be satisfied too.

The relationship has to solve the client's problems, but it also has to make us happy commercially as a firm. That essentially means billing all the resources that you're providing and billing them at a profitable rate. Young firms often learn they've been good at bending over backwards for the client, but it may be time to get a little bit more selfish.

Part of the reason firms get stuck is in the first couple of years, it is all about hunting for logos. Firms are very proud of their first few logos for good reason. It can lead to a misplaced pride and a resting on your laurels. Your growth from new clients needs to keep pace with your growth from existing clients; otherwise, you'll never get out of that client concentration trap.

You won't scale sustainably until you have a large number of clients. For that, you need commerciality in the business. You need the business development function and all the other things we discussed in the last podcast.

Tom Rodenhauser: One of the things we see is there's a friends and family mindset when firms start out. They work with clients who are folks that they know. That's how the business starts. Those clients have a preconceived notion of what you do based on your experience and the relationship that you had with them. That doesn't necessarily define what you do as a firm.

It gets to this notion of you have client satisfaction because you did the work with the initial set of clients, but did you really define what your expertise is and then going forward, how does that translate to a new set of clients? We always cared about it's not the referral or the referral of the referral. It's the referral of the referral of the referral. When you get to three entities past the initial set of clients, you've achieved a level of expertise that's recognized beyond just that initial set.

I think that's where a lot of firms do struggle. They get caught in that rut of what are we just based on that initial set of clients.

Brent Trimble: That's really interesting, the third of a third of it, or that third degree of separation of referrals. That sounds like a really great takeaway for a sales strategy, an expansion strategy, something that a consulting firm, maybe it's still managing director or partner led sales or perhaps they've brought on a sales team and they're doing some mining.

I think in one of our previous episodes, Alex talked a lot about that, putting in sales structure, CRM content in the market that's differentiating. That sounds like it's a healthy indicator. If you're getting logos that are third degree of separation, that's a really good point to ponder.

Tom, you talked a little bit about this notion of it's friends and family and working with people that you know which is a great way to start. We're not disparaging that in any way. Overreliance on that can often lead, it sounds like, to a one-way relationship or one party in the relationship is giving a lot more, and the other is potentially taking maybe unconsciously. We're not turning this into a relationship podcast, but I think there's some good analogs there.

There's this notion that we instinctively want to please this client, but realistically it can lead to erosion in profitability. There's discounting. There's exploration work, free consulting, maybe absorbing an overrun where a scope of work went a little bit sideways and we just say, you know what, they're a great client. We're just going to overlook this for now. We're going to write that off.

What are some practical frameworks, communication strategies that leaders can use and operationalize with their teams to really confidently box out and put frameworks and good fences around statements of work, effectively say no to client requests that undermine profitability, but still have that balance of maintaining that high trust relationship?

Tom Rodenhauser: I would say it starts with what are we doing for the client? Having a clear understanding of what that scope of work is, because I think in a lot of cases, firms start out by not saying no. They're saying yes to something. It's sometimes a vague statement of work or an open statement of work that leads to outcomes that maybe don't have hard measurables attached to them.

I say this: it's not necessarily a bad thing, but what it does is it doesn't define what you actually did for the client. The repeatability of what you do for clients is ultimately how you measure the success of a consulting firm. You have to be able to do that work consistently, profitably, but consistently over the course of many client engagements.

I think Alex would point out one of the things that is a hallmark of that is you have a very laser focus from day one of what you seek to accomplish for the client, not just an open-ended we're going to solve your problem. Because the problem isn't really defined, you're just going to be there. I think that's part of the issue. It is having a very clear statement of purpose, and everybody in the organization knows that.

Brent Trimble: Alex, in your experience, and you've talked about this in a previous series, what are some of the steps around deals and some reciprocity in relationship, the way clients perceive fees, for instance? What are some tactical but practical steps you think that firms should really operationalize as they engage in these long-standing, deep, affectionate, initial relationships?

Alex Klein: I think the first thing people need to understand is that everybody likes to negotiate and everybody likes to get a good deal. They will keep pushing and negotiating essentially until you say no. I think a lot of it is about learning how to say no.

For some reason, people perceive consultancy fees as being incredibly fungible. They feel that it's reasonable to ask for, I don't know, a 50% discount. On top of that, if you're dealing as a professional services firm with a professional services buyer at your client, that professional services buyer probably has had not much joy in dealing with the likes of McKinsey and BCG because those guys don't give discounts. Their price set is take it or leave it, and that buyer has to take a chunk out of somebody. If it's not going to be McKinsey, maybe it's going to be this little niche firm. They'll come after you aggressively.

At the point at which you say no, if you've given one concession or given two concessions, you need to say this is our final offer. We've bent over for you, and here you go. More likely than not, your fees are already much more attractive than some of the big guys. More likely than not, you've already reached a point where they'd be happy to go with you. You just need to politely learn to say no.

Another tip is, to some degree, to take the pricing power out of the hands of your senior practitioners, out of the hands of your client partners. Those people want to make the client happy and will happily give concessions in return for the revenue. If you centralize some of the pricing power and if that client partner then has to say, "I can't get it through, the buck doesn't entirely stop with me, our pricing committee has said no more," then it helps protect the relationship while still saying no because it comes from an outside authority, if you like.

Brent Trimble: You have some experience in one of the firms you scaled. You were negotiating with chief procurement officers whose entire remit and professional justification is grinding firms down for discount. How did you counter that? That's a really stark but good example because a lot of firms will negotiate with procurement.

Alex Klein: No, absolutely. Chief procurement officers, yes, they like to negotiate and they have to negotiate. They have to lead by example in their corporations, by tendering the thing out to the market and negotiating with various players. They have to play their own game.

I guess the first thing we realized was, you do have to give concessions. You can't not give a concession to a chief procurement officer who's asking for a discount. We would build that into the price from the get go, that there would be a little buffer there that could be negotiated away to make the client happy.

That wouldn't be enough. The client would come again and again, and typically there'd be four or five requests for lowering of rates or various other concessions. We just learned that we had to say no after one or two concessions. We would draw the line and say that's our best and final offer.

It's really about making sure that your senior practitioners are aware of what you're trying to do with your pricing, are aware of your price points, and are aware of your discounting guidelines, so that they know how to stand up to the client.

The other point is to take some of that pricing power away from your senior folks and centralize it in a, call it a pricing committee. Then you can go back to the client and say, sorry, I tried, but the pricing committee said no. It's out of my hands. They maintain that relationship.

At the end of the day, it's really about putting the firm's needs on the same level as the client's needs. Unfortunately, in the early years when firms are starting out, they often put the client first and foremost and subjugate their own needs, which you probably have to do for a little while, but you have to get to a point where you say, okay, enough of that now. Now we need to equalize and we need to be making profits here.

Brent Trimble: Absolutely. We've referenced this a couple of times in our previous sessions, but this notion of client concentration—firms that are over-indexed in a handful of clients for the majority of their revenue—let's define that a little bit for the listenership. I'm sure it's a common challenge for a lot of consulting firms as they scale.

When you go in and look at a firm that you're helping guide through this journey of scale and break through that $30 million plateau, how do you define that? What are key risks with the limited client base? Most importantly, what are the two or three strategic steps? We hit on, I think, anecdotally, maybe one of them, which is expand that referral base to those three-steps-removed types of growth.

What can leaders do to really actively diversify the portfolio, mitigate risk? I think I see this with a lot of firms caught in the tyranny of the now: business is good, we've got this handful of clients—this work is going to continue ad infinitum, and therefore this is not urgent.

Alex Klein: It's impossible to avoid client concentration in the early years of a firm's life. By definition, you start out with your first client and then you'll get another client, you'll be overly concentrated in those first couple of years. It's unavoidable. The thing not to do, of course, is to scale down the big existing clients. The thing to do is to grow your way out of it by amassing growth outside of those clients.

Yeah, it's a real risk that you get to a point after three years where you have 10, 15 clients, that came from your network and you have nothing else, and you have no capability to scale that up. In short, the answer is that you need a business development function. You need a sales and marketing function that can proactively go out and look for new clients to make sure that your growth is balanced by new clients and is no longer coming from the existing clients.

There's one other, I guess nuanced point when it comes to client concentration. A lot of medium sized firms are permanently concentrated where they at any point in time, they'll have three, four, five, six big clients that make up the majority of their revenue. If those client names keep rotating over time, then it's not as big a problem as if it's three clients. Those are the top three over a 10-year period. That's when you really have a problem.

What I see quite a lot is successful mid-sized firms that do have concentration but they'll quickly point out those top clients flip over every year. Then it's not nearly as risky.

Tom Rodenhauser: One of the things we've seen in our research is there's no magic formula, but roughly 30% of your business comes from core clients, 40% comes from referrals, and then 30% comes from what we would call new new business.

To Alex's point about having a business development engine that's constantly out getting new new business is fundamental because the core and the referral, yes, it constitutes potentially 60%, 65% of your business, but you can't rely on that forever, obviously.

Also, I think it’s the type of work. To Alex’s point, one of the things we look at is the type of work you're doing for your core clients. We've had instances where a firm will be working with one client, but they're doing multiple things across that organization. They have a larger footprint and they're not as exposed. If it were just one client, one relationship, that person's gone. Something happens, then bad things happen to the firm.

The extent of your relationship with your core clients is really important. What you're doing, again, this goes back to what are you known for. You do have to have areas of specialty. What we look for is whether you're doing something at a functional level and then you're doing a cross-functional across the organization. For example, you work in customer experience and you're touching on marketing and sales. You're touching on the whole customer experience at the front office level, for example. Those are the things that make you more sustainable as opposed to more vulnerable when it comes to client concentration.

Brent Trimble: Those percentages in that breakdown of what should be aspirational because you're gleaning these insights from research and healthy firms which you’re analyzing is really key. Having said all this, over indexing on too few firms, spending too much time with a client relationship that's in some ways maybe doesn't have healthy boundaries and the firm suffers profitability as a result.

Client satisfaction is essential and measuring the satisfaction and maybe the healthy receptiveness, how critical the client relies on the outputs from the firm, how essential they're perceived, those are, I would presume to be key data points to track and analyze. However, how do you codify those? From your experience in helping these firms scale, what client relationship data should firms be tracking and how do they ingest that data, analyze that data, and use it to drive retention and then ultimately cross-selling services?

Tom Rodenhauser: In most cases, we see client satisfaction as a post engagement. Did we do a good job? When you're dealing with clients, by and large, you really have to screw up to get a bad client satisfaction score. In other words, you didn't solve the problem. Most consultancies will work till the day never ends to solve the problem.

The client satisfaction, we actually look at that as something that firms don't necessarily do a good job of. I think it's because a lot of times they're just seeking the validation, not the data, to make themselves better. The data, Brent, to make yourself better is not only what did we not do? Where didn't we deliver? You don't ask the question about how good of a job we did; it's where can we improve. It goes all the way down to team members.

Everyone uses the term 360 when they do these evaluations, but it's a true 360 evaluation. I think for most firms, it's time consuming to do that. It's post engagement and most consultancies are on to the next engagement. They leave it as a task for others to do. The engagement team actually has to do it. You also have to have an outside—we use the term ombudsman or an arbiter—you have an outside voice that is also part of this, so it keeps the engagement team honest in the post engagement evaluation.

Alex Klein: Yeah, I agree with everything, Tom, that you said there. The quality survey at the end of the engagement tends to be, like you say, it's hard to get a negative score, and it's something that's done right at the end when the team is already moving on and often there's no actions coming out of that.

What we did very well at my firm and what I find firms not doing, as well as asking the client how satisfied were they, is to do a bit of a commercial postmortem. How did we do out of this? What were the day rates we gave? What level of discount did we give? Then beyond that, how many free resources did we throw in? Did we swallow overruns? What did it all mean? What was, at the end of the day, our gross profit contribution? What was our net blended realized rate that we made on this engagement? If it was too low, then why was that and how would we do that differently? An honest evaluation of the commercials is, in my view, often what's missing.

Brent Trimble: Absolutely. These principles and this notion of what data really matters when analyzing client satisfaction, go back through the ideas around pricing fidelity and pricing principles. I think it is really important to the listenership taking maybe pricing autonomy out of the hands of the individual sellers and either forming a pricing committee or things like that. These are really practical and hard-hitting types of operational metrics and guideposts to put in place to help firms on their journey to break through the $30 million.

As always, in these sessions in this series, we really appreciate the listenership and we appreciate Alex and Tom for your insights. I think this series has really shaped up to be a great one for a lot of firms who have started with a compelling proposition, have started with some great client relationships where they've mobilized and moved maybe out of a big consulting firm, started their own, but now are really beginning that journey or are at a point in the journey where they want to break through.

A lot of really action-packed insights in these sessions—I appreciate the collaboration. For our listeners, thank you always for listening. If you have follow-up questions for myself, Alex, or Tom, we'd love to hear them. Send us an email at podcast@kantata.com. We're always happy to hear from you and will get back to you promptly.

If you're interested, our listeners importantly receive exclusive preferred rates on Kennedy's market research, strategic advisory, performance improvement, benchmarking, and M&A services that are tailored to leaders of professional services firms. Reference Kantata, you would receive some preferred pricing on any of Kennedy's assets or services. You can go to kennedyintel.com to learn more. That's kennedyintel.com to learn more. I think we'll put the link in the episodes as well.

Again, Alex and Tom, thank you. This has been great.

Tom Rodenhauser: Thanks, Brent.

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.