Episode 8: The Boutique: The Real Reason Revenue Growth Flatlines inside of Professional Services Firms
Transitioning away from a partner-led sales model to a commercial sales engine is key to creating wealth for owners of professional services firms. In this episode, Sean Magennis and Greg Alexander discuss why boutiques find themselves in this position and how they can overcome this inflection point.
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Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners
of professional services firms. My goal with this show is to help you grow, scale and sell
your firm at the right time, for the right price, and on the right terms.
I’m Sean Magennis,CEO of Capital 54 and your host. In this episode, I will make the case that transitioning
away from a partner-led sales model to a scalable commercial sales engine is key to
creating wealth for professional services firm owners. I’ll try to prove this theory byinterviewing Greg Alexander, Capital 54’s chief investment officer. Greg is truly one of the
world’s leading experts in sales effectiveness. Greg, a pleasure to have you again today.
Why is this transition point a key milestone for professional services firms?
Why is Transitioning Away From a Partner-Led Model a Milestone?
Greg Alexander [00:01:14] It is a key milestone. You know, kind of the natural
progression of a professional services firm is a startup that becomes a growth firm then becomes a scalable firm and eventually sells.
This transition point usually happens in between that growth and scale stage, and let me kind of walk the audience through this, and I point out that kind of evolutionary track, if you will, to really highlight the word here milestone. So this is something to shoot for, and it’s something that has to happen if you truly want to create an investable asset.
Startups become boutiques by having the partners generate referrals, and boutiquesbecome market leaders by building a commercial sales engine. That’s the difference.
Sean Magennis [00:02:00] Yes.
Greg Alexander [00:02:01] You know, when you’re kind of a lifestyle boutique, you’ve got
some partners. They have great personal networks, and they’re able through positive word
of mouth, to generate business. So what’s different between them and a high-growth professional services firm that can become a market leader? It is somebody who builds the commercial sales engine.
And investors like Capital 54 and others want to see a maturing commercial capability before they make a buying decision and the sales and marketing process has to be proven capable of scaling. Otherwise, you’ll be a natural kind of limitation on the size of the market.
So there’s an inflection point that all professional services firms run into head-on and this is when sales generation happens by employees and not by the partners. These kind of young pre-scale firms did not invest in building a professional commercial sales engine. They don’t have to.
The partners are experts. They have very large personal networks, and these networks expand as they gain exposure to their niche. Then partners harvest these networks with businesses, and successful projects lead to more happy clients, and happy clients lead to positive word of mouth.
And on and on it goes… You know, and the partner can really, with a group of partners, can really kind of carry the firm. I’d say for good five years, and then all of a sudden, it flatlines.
Why Does Revenue Flatline For Professional Services Firm Owners?
Sean Magennis [00:03:35] So why does it flatline, Greg?
Greg Alexander [00:03:38] So there are 52 weeks in a year, and each of those weeks has five business days and a hardworking partner is going to put in roughly a twelve hour day. Folks in professional services, particularly the partner level, work their tails off.
Sean Magennis [00:03:53] Yep.
Greg Alexander [00:03:54] This means that each partner has about three thousand one hundred and twenty hours to produce. If you subtract some holidays, a few sick days, a vacation or two, it’s more like, let’s say, twenty five hundred hours. And these twenty five hundred hours are not spent entirely on sales activity. After all, the partners are running the boutique, and as the firm scales, partners have only about half their time available for business development. So, therefore, once each partner is tapped out, sales flatline.
Sean Magennis [00:04:30] The obvious question is: Why not just add more partners?
Greg Alexander [00:04:34] Well, most professional services boutiques are very reluctant to do this, as I was, and I don’t blame those that are reluctant to do this. This is a for-profit business. We’re here to make money.
So the profit pool is distributed to the partners. Dividing the pie by, let’s say, three partners are better than dividing the pie between ten partners. So if the sales engine requires adding more partners, it doesn’t scale. The current owners and partners end up making less, and even worse, their equity gets diluted. That’s why it doesn’t happen. That’s why they don’t just add more partners.
Sean Magennis [00:05:14] Yes, I can see how this is an inflection point, Greg. So follow-up question, what options are then available to the owners?
How Can Professional Services Firm Improve Revenue Growth Decline?
Greg Alexander [00:05:23] Yep, so the owners have to ask themselves. They’ve got to
choose between really two approaches to sales. Let’s call them option A and option B.
Option A is a partner-led model, and this means more sales but less wealth for the owners. It requires more partners to scale, as I previously discussed.
Option B, which is my recommendation, is a professional sales model. This means more sales and more wealth for the owners. It does require investment, but it does not eat into the equity, and that is the most important piece.
Sean Magennis [00:05:58] Critical piece.
Greg Alexander [00:05:59] Yep. The partners/owners invest budget dollars in hiring a professional sales force. The partners no longer sell; the sales team does the selling. Now, investors typically want to buy boutiques that have made it through this inflection point. It indicates to them that this boutique actually has the sales capability to scale.
It’s important for the listeners to keep in mind that acquirers are buying the future growth of the boutique. They’re not buying the past – they are buying the future. So the more likely a boutique is to grow, the more they will want to buy it. Boutiques that can generate sales without the owner’s involvement are simply more likely to grow, and boutiques that take this approach can grow sales cost-effectively. A commercial sales team is less expensive than adding partners.
Greg Alexander [00:06:58] When I look at firms, and I see them either just completing this transition or in the process of this transition, I get very excited, and it makes me want to invest in the firm.
Why is this? Number one, they become aware of the need, which is not obvious to many. Number two, they had the guts to pursue it, which is the type of people that I’d like to invest in.
Sean Magennis [00:07:22] Me too, Greg.
Greg Alexander [00:07:23] Now, I should point out that building a commercial sales team inside a boutique is not easy to do, and this is one reason why so few owners become market leaders and fail to pivot away from the partner-led sales model results in many lifestyle businesses. And as a result of that, potential acquirers are not interested in these lifestyle businesses. And I might add just one more thing if I can.
You know, I’m making a comment that it’s not easy to do, and here’s why. When a client meets with a partner and the partner is selling the work, they say to the partner that “you’re going to be involved in the project.” And when the partner says, “yes, I’m going to be involved in the project, he or she says that because they’re trying to close the deal.
Now, that’s the worst thing you could do because now you’re stuck. You can’t tell the client you got to be involved in the project and then be MIA for every key meeting. But partners are very reluctant to say “no, I’m not going to be involved in the project, and that’s a mistake.”
And what I recommend, they say, is, “Mr. Client, no, I’m not going to be involved in the project and oh, by the way, that’s a good thing for you. My ability is not in delivering client work. I’m the worst project manager in the firm. My knowledge is in creating the methodology, hiring the staff, training the staff, and running the firm. I’m going to introduce you to my team who are about ten times better than delivering this work than I am.”
And then you bring the delivery team into the sales call and then the client gets to experience your exceptional engagement manager and your analyst, et cetera, and they say, “yeah, I agree, you don’t have to be involved” and then the client, the partner, can move away. So that’s the key thing that stands in the way. Most owners of boutiques feel they have to remain committed to the project after selling it.
Sean Magennis [00:09:13] Outstanding advice. This is a big milestone, and I can also see why so few make it through this transition. That’s a challenge for businesses and for partners that are so hands-on.
Greg Alexander [00:09:24] Yes.
Sean Magennis [00:09:25] But to scale, it makes total sense, and I can see why why those professional services firm owners that are successful at doing that really become wealthy.
Greg Alexander [00:09:33] Yep.
Sean Magennis [00:09:37] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field.
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Jon Jones [00:10:20] I’m Jon Jones, CEO of Anthroware.Anthroware makes beautiful digital products. We do this by studying people, your customers. We put them in the center of our process to make tools that they both need and love to use.
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Sean Magennis [00:10:49] Please get to know Jon and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success.
Questions to Ask When Transitioning Away From the Partner-Led Sales Model
Sean Magennis [00:11:09] So, in an effort to provide immediate take-home value for you, I prepared a ten-question, yes or no checklist. Ask yourself these ten questions. If you answer yes to eight or more of these questions, you’ve made it through this inflection point.
Number one: Are the owners removed from the sales process?
Greg Alexander [00:11:31] So let’s talk about that. So with diligence, when I pull the sales report.
Sean Magennis [00:11:36] Yes.
Greg Alexander [00:11:38] Typically, from a CRM system, every opportunity of business has a name associated with it. If that name associated with that client record is one of the owners, I’m not in. I become less interested in making an investment in that business because that tells me the owners are driving the business.
If their name is nowhere near any of those records and there’s somebody else in the firm who doesn’t have an equity stake in the firm who’s the person that owns that client, has sold the work, and is delivering new work – that’s a real positive. Now, if you lined up ten owners of professional services firms right now and you asked them what their forecast was for the next 90 days, they could recite it.
And if I told them all that they could not go in the next sales call, the next five sales calls, the close of business, what would they tell you? We’ll lose the business as a result. So they have to have the courage to step away.
Sean Magennis [00:12:33] Absolutely.
Greg Alexander [00:12:34] And trust your employees that they can get the deal done.
Sean Magennis [00:12:37] Brilliantly, said Greg. So question number two: Are there are employees generating all the sales? Number three: Is business being generated from scalable sources in addition to referrals? Number four: Have sales increased consistently without adding partners or new owners? Number five: Are your financials able to handle the expense of a commercial sales team?
Greg Alexander [00:13:12] Yes. So let’s talk about that. This is another obstacle. The cost of building a commercial sales team goes into the overhead bucket. Those aren’t billable resources. So partners have to be willing to make the investment, and very often boutiques come to us at that moment in time because they don’t have enough free cash flow to do this. So they need an outside investor to help them.
Sean Magennis [00:13:33] Excellent. And that’s where we provide the growth capital, the stimulus. And by the way, your extraordinary experience in building these commercial sales teams.
Greg Alexander [00:13:42] Correct.
Sean Magennis [00:13:43] Question number six: Have the sales results from the commercial sales team been consistent over time? Number seven: Have the win rates with the commercial sales team been on par, and I’m going to throw in or exceed the partners?
Greg Alexander [00:14:00] Yep. So some advice to the owners out there. The first time you do this, the win rates will drop substantially. Just hang in there.
Sean Magennis [00:14:09] Hang in.
Greg Alexander [00:14:09] You got to go through that period. You got to give the employees a chance to improve. Eventually, their win rates will be as good as yours, but there’ll be a difficult transition there. So just buckle up for that transition.
Sean Magennis [00:14:21] Well said, Greg. Number eight: Have the deal sizes with the commercial sales team been on par with the partners?
Greg Alexander [00:14:28] Same thing. Originally, the non-partners are going to sell smaller deals, or they may cave under price objections, et cetera. You just got to hang in there and get through that period.
Sean Magennis [00:14:39] Great. And number nine:Have the sales cycle links with the commercial sales team been on a par with the partners again?
Greg Alexander [00:14:46] Correct.
Sean Magennis [00:14:47] Good. And then finally, number ten: Can the commercial sales team be expanded significantly without breaking the boutique?
Greg Alexander [00:14:55] Yeah. So this is a really interesting component. In fact, this one can be a show in and of itself. So for every quote, sales head you have you’re going to have an assumption for the amount of revenue that they can bring in. And that’s going to be impacted by a lot of things linked to the sale cycle, win rate, the size of the deal, is the salesperson generating their own leads or the leads coming from another source.
There’s a lot of factors that go into that. But in the end, you’ll get to a point where you’ll know plus or minus 10 percent with the revenue production, per sale said is. Now, you’ve got to think through how that impacts your service deliver, because, in theory, if you go out and hire ten salespeople, you’re going to generate a lot more business. Can the back end handle it?
Sean Magennis [00:15:42] Exactly.
Greg Alexander [00:15:43] So, figuring out how to tie the delivery engine of the back of the house to the front of the house is really important. And this question number 10 is really important because sometimes that’s overlooked. They hire all the salespeople, they generate all the new business. Everybody’s excited, and next thing you know, the delivery team is 120 percent capacity.
Sean Magennis [00:16:04] And you can’t deliver the business.
Greg Alexander [00:16:05] Can’t deliver it, and then clients sat falls, employee sat falls and you actually create a problem for yourself.
Sean Magennis [00:16:10] Yep.
Greg Alexander [00:16:10] So don’t forget the downstream impact of this.
Sean Magennis [00:16:13] Outstanding, Greg. Outstanding. So the path from a boutique to market leader results in creating a viable, superb commercial sales engine. Potential buyers would rather wait until you have made it through this inflection point. Jumping in prior to this is simply too risky for many.
If you want to sell your firm, invest resources into developing a scalable sales and marketing engine. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.