Al Switzler, the CEO and Co-Founder of VITAL SMARTS was recently a guest on my peer-to-peer on line talk show (9 year archive: www.GrowthStrategistShow.com). Their international corporate training business has been on the FORTUNE 5000 list of the fastest growing companies for 9 straight years and “haven’t experienced the plateaus that are so common with B2B service firms.” Switzler emphasized “the importance of developing an approach and products to produce recurring revenue.” Another recent guest and CEO of an international B2B service firm, Rod Walz, confirmed that “investing in a system and technology helped $50+ Mil/yr WALZ GROUP “process breach and default documents for 15 of the 25 largest mortgage servicers.” They too have long term commitments.
Roz Alford, CEO of ASAP SOLUTIONS emphasized corporate culture during her talk show interview, but behind her comments was the premise that long term contracts and predictable recurring revenue provided situational permission for her to focus more of her time on the attraction and retention of top talent. They learned a long time ago that “if an IT services company still relies on providing services on demand it rides the roller coaster of billing time and materials. Gross profit drops whenever employees/subcontractors don’t complete time sheets completely or project managers don’t control scope creep.”
Drew Morrisroe, President of CTN SOLUTIONS, Inc. provided some of the most convincing responses to my questions about making the move to recurring revenue. His firm invested a full year transitioning from T&M to value pricing and from projects to maintenance contracts. “A few employees just weren’t up for the change and we had to let a few clients go; but this has been THE most important change in our business…EVER”, said Morrisroe. Other guests from the IT industry, (Phil Jaurique – CEO of SABRE SYSTEMS and Micheal Lacey of DIGINEER) agreed with Alford and Morrisroe.
Private investor, Michael Lackland, of LACKLAND INVESTMENTS, starts with recurring revenue. A service firm that is still over dependent on a few key leaders and relies on short term projects doesn’t get past the first round in his due diligence process. The company that acquired HR411 from CEO Michael Pires, they clearly said that they would not have been interested if he hadn’t turned his T&M human resource service business into a software-as-a-service (SASS) firm.
These investors are not alone. When I screen growth financing requests for THE SERVICE INDUSTRY FUND®, I look for recurring revenue. Our investors only want information about truly scalable service firms. Scalability requires recurring revenue, a core process/methodology, resilience based on little dependence on a few top people, clear standards for training and quality assurance. Frankly, investors and funds aren’t the only entities demanding all of that. Corporate level clients look for the same elements and expect consistency.
During interviews with leaders of midsized service firms, it’s fun to ask which ratios have been the most important for the growth of their firms. The funny (ironic) part is that they answer that the mix of services and products is the most important ratio … and then they start to talk about something else.
They can’t resist the urge to tell stories about how they spent the first several years trying to achieve a reasonable gross profit as labor intensive businesses. They had to learn about billing multipliers and capacity utilization to determine what their company should reasonably expect from each client-focused role. Should consulting team leaders be 80% billable? Should the firm realize 4 times the cost of an entry level engineer in the form of fee revenue related to his/her work? What are the right ratios for architects who also serve as account managers? What hourly fee is needed for partners in an advertising agency? What’s the dollar value of mentoring for high potential IT professionals?
If you believe the examples from television dramas, you might think that all lawyers have fees of $500 – $1000/hr., get in trouble if they don’t bill more than 2080 hours/year, and bring in a minimum of $1.5 Mil in revenue for their firms each year. Yeah…right!
It’s true, the leaders of service firms need to learn how to consistently generate gross profit. It’s fragile. There might not be enough client work available and the owner doesn’t want to lay off talented billable personnel. The firm may not yet know how to prevent “scope creep” as customer expectations go up and up and up. And some people STILL don’t understand the connection between timesheet entries and billing. But once the leaders of a service firm are on top of all of that, they recognize the value in creating a system, a program, a methodology, an approach. A service firm needs some clear standards for training and quality assurance. The clients look for consistency. It’s time to productize!
An IT company may find that they have resilient growth when they see 50% of their revenue from fees, 30% from maintenance/management contracts, and 20% from products. Leaders of an international training company may conclude that 35% product (instructor manuals, videos, books, assessments), 35% licensing, and 30% professional fees is their optimum service/product mix. The service/product mix evolved for my firms as we expanded geographically and focused more and more on midsized B2B companies.
Have you discovered your optimum service/product mix?
When WPP purchased the Ogilvy Group in 1987, Ogilvy employees George Sard and Paul Verbinnen left to create their own PR firm. Today, Sard Verbinnen includes 110 spin masters and is the #1 PR firm in mergers & acquisitions. They have been involved with an astonishing 45 M&A transactions that totaled $71 Bil during the first half of 2013.
An article by Nick Summers in the August 12- 25, 2013 issue of BLOOMBERG BUSINESS WEEK reminded me where I had heard the name “SARD”.
Think about famous court cases involving Wall Street moguls. If you look closely at press photographs, you’ll see George Sard in the background behind Fabrice Tourre of Goldman Sachs, Stephen Cohen of hedge fund, SAC Capital Advisors, people from DELL Computers re. a possible takeover, and folks from AIR Products and Chemicals when they responded to hedge funder, Bill Ackman’s $2.2 Bil investment. That’s just this year!
There was Dick Fuld of Lehman Brothers in 2008, Nelson Peltz from the Heinz proxy battle in 2006, Martha Stewart’s insider trader charges in 2004, and Joseph Jett of Kidder Peabody in 1994. Sard & Verbinnen know enough about the Wall Street M&A community, they became THE experts in M&A crisis and reputation management.
Your company’s favorite target market might not be as contentious or volatile as Sard and Verbinnen’s. The stakes might not be as high in your favorite industry niche, but we can all learn from their journey. What would your company need to do to become THE TOP EXPERTS in your favorite industry niche? And would you dig, invest, and commit enough to become THE GO TO company for that industry? PR isn’t the only service niche industries need. Could your company excel at sourcing or transporting products? Should your company recruit or train hard to find employees?
Founding The Service Industry Fund™ several years ago was one of those experiences for me. Our idea surfaced from frustrations expressed by the owner/partners of growing service firms. Investment bankers are reluctant to do non asset based lending plus they have difficulty evaluating the scalability of service firms. Think about it, in the 1990s, most bankers would not have recognized Sard Verbinnen’s growth potential.
Are you looking for pain points in your favorite industry and stepping up to be the solution?
“Forty Under Forty” awards have been around for a long time to shine a light on “future leaders.” These days it feels like we need “Thirty Under Thirty” or “Twenty Under Twenty” awards instead.
The National Speakers Association recognizes the trend. One of the keynote speakers at this year’s NSA convention was 17 year old Philipp Riederle. When Riederle was 13 years old, he hacked into his iPhone® to see how it worked and started a blog…which is now read by over 1 million subscribers. These days, large corporations pay Riederle good money to teach them how to reach teen aged and young adult buyers.
NSA has committed to stay ahead of its members and keep embracing new technologies and trends. That’s good because it is important for our professional societies to do what is needed to be as relevant as possible. NSA’s apps provide value. On line education keeps improving. And conventions are colorful, lively, multi-media events.
There’s a relatively new special interest group within NSA for young members (generations X and Y and millennials). A core group of these members sit together with their heads down as they busily thumb their smart phones during main stage presentations. They text ideas, tweet what comes to mind, and friend one another.
What would happen to your product development or marketing if it had to be relevant to millennials today? By the time some companies figure that out, the millennials will be older and folks can meet one another half way. Maybe not.