In today’s fast-evolving business landscape, the demand for fractional CxO services is growing rapidly. Join this session to learn what a fractional CxO is, how it’s different than consulting, which funcitonal areas are being fractionalized and why this model is gaining in popularity. We will explore common use cases and leaders in the space, and what to consider before using a fractional CxO. Whether you’re looking to hire a fractional leader or become one, this session will equip you with actionable strategies and a clear understanding of the landscape.
TRANSCRIPT
Greg Alexander: Hey, everybody. This is Greg Alexander. You’re listening to the pro, serve podcast. This is a show dedicated to helping founders of professional services firms grow, scale, and sell their firm. So if you market, sell, and deliver expertise for a living, then this is for you. On today’s show, we’re going to talk about a certain business model within professional services. It’s called the fractional Cxo. That can be a fractional Cfo, that can be a fractional CHRO, you know, fractional this, that, and the other thing. And we have a collective 54 member with us today. His name is Paul Tyson. The reason why I asked Paul to come on is 2 reasons: number one, he’s in his business himself, so he can speak firsthand, and number 2, I spent some time with him recently when I was out in Arizona. The amount of research that Paul has done on the fractional Cxo space really impressed me. So I’m going to ask him to not only speak about his own personal knowledge, but what he’s learned from studying this business model, because I think many of our members are either doing this today or want to do it. And he could impart some wisdom. So with that, Paul, for those in the community that don’t know you, would you please introduce yourself.
Paul Theisen: Yeah. My name is Paul Tyson. I am the owner, founder, and operator of a firm called Tag Cxo. We are in the fractional executive services space. We just reached our 5-year anniversary on August first. So we haven’t exited the growth phase yet, but we’re getting ready to move into scaling up. It’s been an incredible ride. We specialize mostly in technology executive leaders. We have branched out into other C-suite titles, mostly through customer demand and requests. That is how we’ve expanded horizontally across the C-suite. The core of our business model has been technology execs from large companies available to the middle market and smaller companies.
Greg Alexander: Very good. So let’s start with the foundational definition. What is a fractional Cxo?
Paul Theisen: By definition, a fractional executive role is just that—it’s a part-time role that’s fully qualified. The opposite of that is a full-time role that’s partially qualified. We find that a lot at our customers. What defines it differently than a traditional consulting arrangement is that it’s generally role-based. You can have goals, objectives, and even deliverables that you’re shooting for, but it’s done under the umbrella of a role. You’re fulfilling a role in the organization, and that comes with some strings attached in terms of a fiduciary mindset and an operational level of accountability for what’s going on under that domain or function within the organization. In every respect, you are an executive of the firm, except the respect that would call you full-time. It’s part-time, fully qualified, generally responsible for a role.
Greg Alexander: That’s a great definition, particularly the distinction between it and consulting, which I think confuses a lot of people. Where is it being used? Which roles are being fractionalized?
Paul Theisen: Many roles are being fractionalized today, but it wasn’t always like that. The industry goes back quite a few years. It was sort of a little bit of a cottage industry for years. Doug Tatum, who we in the fractional circles consider the father of fractional, grew and sold Tatum, an agency of Cfos and some technology folks, to Ronstadt. In the beginning, it was mostly Cfos and Cmos. Then you saw a lot in the sales arena, so Cso’s, chief sales officers. Small companies, middle market companies, and startups need revenue generation, which comes from marketing and sales, so the Cmos and the Cso’s. They also need money management. They generally start with money management and then back into marketing and sales. As a company gets bigger and has more complexity, you start to see chief operating officers who are operationally focused and need a measure of complexity to solve and sort out. Chief information officers are also operating roles, and there’s generally a lot to unravel in a firm. A firm can go a long way from startup using a credit card to do IT services, but there comes a time when a team is required. It may not all be employees, but it’s a group of individuals, consultants, team members, vendors, and suppliers responsible for executing well. That complexity requires an operating expert over that domain. There’s revenue generation, money management, and operating expertise that can be IT, any of the functional groups that need leadership.
Greg Alexander: Okay. you know, a million years ago Doug, Tatum and I were speaking at the Inc. 500 conference. Msnbc was there, and they were filming it, and he and I were on a show together, and I remember him explaining the fractional CFO. And like an idiot, I said to him who would ever hire that? Well, Aaron.
Paul Theisen: A lot of people. Yeah.
Greg Alexander: Here we are all these years later. So how did we go from Doug and his peers pioneering this, and it being unheard of, and not understood to it being so popular now? What caused the popularity?
Paul Theisen: I think there’s two things that primarily maybe have driven this. I could tell you that there is a lot of scuttle in the let me just say it this way. There’s a number of fractional firms that are out there that came out of Payton. After the sale of the company, many of those people are my friends now, and I can name some of those firms. So that’s one thing. There was a big exit there for Tatum, and many other professionals that were practice builders in that firm went and started their own firms. And harvest those. That’s one thing. I think another thing that’s really pushed this up to the C-suite, because I call this gig work for the C-suite, or I say, gig work has now reached the C-suite. Covid is responsible, I think, for opening up the eyes to people about what if I think this is possible? It used to be that if you wanted to do a consulting engagement you would get on an airplane, and you would go, and unless they saw the whites of your eyes they didn’t trust you. You gotta integrate. You have to be part of our team, etc. Well, an executive is an expensive proposition to go do that. But that’s how it was done, like literally right up to 2019. And then, all of a sudden, businesses in the fractional space started to grow in 2020 and 2021, and they were doing significantly less travel. We’ve actually done engagements with zero travel that were not local. But what we find now is that companies want to engage for a relationship. So travel for the kickoff and the relationship building, which is extremely valuable. But then don’t travel unless you have to come to major meetings, and that’s really it. So I think Covid allowed people to work remotely, and it allowed executives to work remotely, and it allowed executives to work across geographies, because the one thing that’s common about executive roles, especially full-time roles, is they want you to move to wherever the headquarters is. Now you can have a whole portfolio of clients and not have to move to the headquarters and half of that work. 75% or more of that work you can do in your home office.
Greg Alexander: Yeah.
Paul Theisen: Which is a wonderful thing for society. I mean, when I had my firm, which was a consulting firm, we would leave Sunday night. Come on Thursday night, because if you weren’t on the client site they didn’t think you were producing. That’s how projects and program management was done. And that burned a lot of people out, right? So it made that profession unattractive for many. Now given the new environment post-Covid, there’s a wonderful opportunity to have this profession and not have to deal with that.
Greg Alexander: Yeah.
Paul Theisen: At one point to that I think Covid gets pointed to for a lot of things. I think that downstream from Covid was the great resignation. There’s a lot of people evaluating what’s important to me in life, and I think there’s a lot of senior people out there in executive roles that said, I want a better work-life balance. We’ve converted that idea at Tag Cxo to be work-life harmony. We don’t think they’re separate things to be balanced. It’s basically all integrated. And it’s up to you to have a harmonious life. So we actually teach that here to our executives and I think that’s a big part of it. People are looking to get back to some semblance of harmony and delight in the work that they do.
Greg Alexander: Yeah. Amen to that. When you were introducing your firm, you mentioned middle market companies which put a question in my head, which is, are there any areas where this is being used more than others? Certain size of company? Maybe certain industry verticals? Tell us a little bit about that.
Paul Theisen: Yeah, I think absolutely. Yes, from an industry vertical perspective. I hate to give a generic answer, but I really think it’s across the board. Our particular customer concentration is more in healthcare, manufacturing, construction, retail, consumer packaged goods, and utilities. So we have a set of diversified industrials and then some other professional industries like Fintech, tech, and SaaS. Those are all great. Every industry, anybody that has a leadership role, can benefit from this. So I don’t think it’s any respecter of specific industries. I haven’t seen that. I think where is it being used? That’s a really interesting question because it took me 4 years maybe to figure that out. What’s the answer to that? But I was trying to solve for where technology executives are being fractionalized and where they are most valuable. What I found out was the people that I was hanging out with at all these other fractional firms, we figure we can all share customers as long as we’re doing different functional duties within that customer. But what I found out in many situations is their client was not my ideal client. And why is that? Because most of their clients were smaller than we would prefer. So if you go from startup to early stage to small businesses, to lower middle market, middle market, upper middle market, that’s sort of how we stratify this. In the smaller startups, early stage, and small companies, help me gain revenue, help me manage my money. Those positions are CMOs, CSOs, CFOs, right? It’s lead generation, closing sales, and counting money, right? And it’s managing all of that. And then, of course, the CFO is pivotal to funding rounds and all the other complexities of things like tax advisory. All the things that have to happen that somebody that founds a firm is not going to be a specialist in. So those are critical. And those positions aren’t necessarily hired for the complexity of things. It’s hired because nobody else does it that well, and their fundamentals. Other roles demand more complexity. So as you move up market, what you find out is there’s a lot of CXOs that are chasing small companies and startups. And here’s what they all have in common. They are equity-rich and revenue-poor. They can’t afford it. It’s a risk model. I’m not going to spend $15,000 or $20,000 a month on a fractional executive when that money could go to 18 other things that I’ve already identified. It’s too much risk. It’s not that they don’t value the contribution that person could make, but the cost-to-risk model is too hard for them. So as you move up into a $100 million firm and beyond, they have a lot more complexity, and they have a lot more monthly cash flow, and a $15,000 or $20,000 a month executive on their payroll is not threatening to them.
Greg Alexander: Yeah, interesting.
Paul Theisen: So hopefully that sheds some light on your question.
Greg Alexander: Very much so. I wasn’t thinking about stratifying that way, and it makes total sense to me, given the affordability at different stages of a company’s maturity. If I’m a member and I’m listening to this, and I’m not in the fractional space now, but I’ve been seeing it all over the place. I mean, it’s everywhere, and my clients might even be asking me for it. So I’m thinking about getting into it. Knowing what you now know, if you were to wind the clock back 5 years. By the way, congratulations on your 5th anniversary. What advice would you give those people before they jump into it? What should they know?
Paul Theisen: I’ll tell you. Number one is, know who your buyer is because you need to dial in your ideal client profile, and you need to dial it in with some measure of precision. If I could do it all over again, I would spend my first year figuring all of that out and paying people to help me answer that question. But I didn’t. I didn’t have the wisdom to know that. I was happy to have revenue. I didn’t care where it was. That wasn’t my problem. But as you start to gain more clients and you start to have some frustrating situations, and you start to lose some bids, and you go through all of these cycles, you start to pay attention to different things. So if I could spare you all of the what do we call it? The dumb tax? Just dial in what you do well, what sort of delivery executives you want to have in the marketplace, and you need to start to be serious about who is the ideal client for that in stratifying the size of the business and the industries. Maybe specialties that you want to go in. That’s important because you’ll spend a lot of cycles without doing that. So you need to know who your buyer is. I think the other thing that you need to know because of the buyer is who are your referral partners. Because I wasted 2 and a half years networking with referral partners and developing deep relationships with people that couldn’t refer me business.
Paul Theisen: And here’s what I can tell you about that. We were referring probably 10 times the amount of business back that we were getting because we were finding all kinds of different opportunities to forward on. We had a more specific ICP, so it took us now. If you know that, now I can do my advertising better, my lead generation better, my networking better, my referral partners are better, everything is more focused, more precise. I think the third thing I would tell you is to understand who you’re recruiting to be on your bench. This is one subtlety that I think is a hard lesson learned, but it’s so important. Don’t match. Don’t go into the marketplace. Don’t go into your little network, you know, in your little black book of network relationships and pull out an executive when you have a customer that’s willing to buy. Okay? I mean, you have to do that to survive. You’re a matchmaker at some point, but you’ve got to move your firm to recruiting people that you want on your bench ahead of the revenue that you have to offer them. Which means that’s an interesting situation to find people that want to take on a portfolio career and sort of retire from their corporate career. That want to join a firm instead of just hang their own shingle, that want to be around a tribe of their peers, and not just by themselves, right? That want to contribute to a community, that want help in the sales and lead generation process. So, what I’m selling you on right now, Greg, is what does it mean to come to a firm? You have to be able to define what is the value proposition for joining your firm, just like what is the value proposition for hiring your firm? Who is my client? Is it the person that pays the bills? Or is it the person that delivers the work?
Greg Alexander: It’s probably both.
Paul Theisen: Yup, and don’t forget. So just like you need to have an ICP, you need to have an ideal executive profile. Maybe we call it an IEP.
Greg Alexander: Very interesting. So three great tips to share with people that are thinking about this. One last question and then we do need to wrap this up. But, as you know, you mentioned the pioneer Doug Tatum. There’s lots of other firms out there. So if I’m someone who’s thinking about this and I want to study, are there other firms that are doing really well in the CXO space that you would tell everybody to look towards?
Paul Theisen: I think the most impressive firm in the whole lot of them is Chief Outsiders. Just their marketing people. So they’ve got the marketing engine, they’ve got, I don’t even know how many, 140 maybe north of that executives that are curated and on their bench. They are lead generation and proposal writing themes. They regularly have 150 active engagements going on all the time. They’ve probably had 1,700 or 1,800 clients in the time that they’ve been in business over the last 14 or 15 years. It’s just, you know, but they’re chasing a lot of rabbits. It’s a rabbit business that way. So that’s very, very impressive, and I know the owners and proprietors of that, really wonderful people. I’ve learned a ton from them developing that relationship. 40 that did not come out of Tatum. 40 and Partners is another Texas company that came right out of Tatum. They do a lot of technology leadership work, like a lot of project work. They have been running for a long time, they learned and cut their teeth in the Tatum model. So it’s a repeat of that. It’s a very well-established firm with a good reputation. Hardesty is a firm in California that came right out of Tatum, and it’s pretty much CFOs and finance people. I know the Hardesty family, great people and run a wonderful business. I think right here in C12, you’ve got the CEO’s right hand. If you want a CFO company, you’ve got to look to William Lieberman. There’s a guy that’s figured out a formula on how to productize, offer a consistent and reliable service, develop a portfolio of clients for each of his CFOs. He really has studied this model too and is doing a really good job. There’s a bigger national company called Now CFO that’s very popular here in the West. There’s tons of those. What we see oftentimes, here’s something to look out for when you’re hiring a firm, is are they really executives, or are they program managers? Are they really just in title, and they’re really program managers, or are they really executive level material with a sort of a tenure in an officer role within a company where they learned the trade.
Greg Alexander: Interesting. Great names. Thank you for sharing those. We’re gonna end here. But, Paul, you really are an expert in this CXO space. You’ve studied this more than anybody that I know, and your wisdom today is much appreciated. Thank you.
Paul Theisen: You’re welcome. It was a pleasure to be here. Thanks, Greg.
Greg Alexander: Alright. So some calls to action for the listeners. If you’re a member and you want to learn more about this fractional executive business model, please attend the role model session where Paul will be our role model. You’ll be able to ask your questions directly to him. If you’re not a member, and you want to become one, go to collective54.com and fill out an application, and somebody will follow up with you. If you just want to learn a little bit more, I would point you towards my book, The Boutique: How to Start, Scale, and Sell a Professional Services Firm, which you can find on Amazon. But until next time, thank you for listening, and I wish you the best of luck as you try to grow, scale, and someday sell your firm.
Note: This transcript was generated by Zoom.