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?
Known as The Growth Strategist®, Aldonna Ambler built and grew a suite of companies to help midsized B2B companies achieve accelerated growth with sustained profitability® A Certified Speaking Professional (CSP), Ambler has addressed over 2000 audiences and hosted a syndicated online talk show about growth strategies for 9 years. As a growth financing intermediary, Ambler raised over $1 Bil dollars for midsized companies. The winner of over 2 dozen prestigious national and statewide "entrepreneur of the year" awards, Ambler is available to speak about “profitable growth during any economy” and/or serve on the board of a growth-oriented privately-held company.