Firms think about how to grow their client base all the time. But many don’t have a clear understanding of what drives objective value in their firm and how to grow it. It’s time to change that.
There is some oft-repeated advice that every new managing partner hears frequently in their first few years at the helm of a professional services firm. It doesn’t matter whether they started the firm or are the next generation leader in a well established firm…they’ve heard these refrains — “Run your firm like you’re going to sell it in five years” and/or “Start spending more time ON your business and less time IN your business.”
Both of these quotes are essentially saying the same thing — work to build a firm that can perform at its highest potential with or without you at the helm. This is good advice. That said, both quotes are otherwise practically useless. They’re quippy statements that give you an idea of something you should be doing differently, but absolutely no direction on what that something actually is.
I have no idea from where these concepts originated. But after 10+ years owning and leading a professional services firm I finally have a reasonable grasp of what they mean. In short, they’re challenging all firm leaders to think more objectively about their businesses. Objectively speaking any business is an asset. Assets have value. They’re either appreciating assets (like your oceanfront property in Florida). Or they’re depreciating assets (like your oceanfront property in Oklahoma). One of the most important jobs of a firm’s leader is to build a business that is more valuable tomorrow than it is today.
Before we go further it’s important to acknowledge that value can be both subjective and objective. Subjective forms of value primarily represent what’s most important to you as the leaders and owners of the firm (examples include the type of work you do, the types of clients you work with, and the “work/life” balance you strive to achieve). Objective forms of value are those things likely to be valued by anyone who might own the business now or at any point in the future (examples include revenue, earnings, and client relationships). Your job as a partner in the firm is to focus on growing both forms of value. That said, for the balance of this article, we’ll focus on building an understanding of the objective forms of value.
Fundamentals of Objective Value
Over the course of about 18 months in the pandemic, I had the pleasure of working with an M&A consultant in developing the thought leadership and marketing efforts for his firm and for a B2B SaaS platform he was developing. In that process, we regularly came back to what he saw as three fundamental sources of objective value:
- Earnings — Every firm needs to develop the operational discipline to deliver positive, repeatable earnings. If you were looking to sell your firm (either internally or externally) the next buyer is essentially paying now for a stream of future cash flows later. Any owner (including you) would like to see that for every $1 of revenue the firm generates, it returns $0.20 – $0.50 in earnings back to the owners of the firm. The more consistent, repeatable, and healthy those earnings streams are, the more valuable the firm.
- Growth — Simultaneously, any business is more valuable when it can show a consistent and repeatable track record of growth. This includes a proven track record of consistently growing revenue and earnings in the recent past. Equally important, firm leadership needs to articulate a clear vision of how future growth will continue to be achieved. Ultimately, we probably aren’t striving for techy, SaaS, crypto growth that can get wiped out in 2 months. But we are striving to develop the ability to consistently grow the firm’s earning stream over time, and to establish a clarity of vision for how the firm can continue to grow that stream of earnings well into the future.
- Risk — In utter simplicity, risk is anything and everything that has the potential to disrupt that steady flow of growing earnings you’ve worked so hard to develop. There is, of course, risk you have little control over (i.e., a raging global pandemic that shuts down portions of the economy for extended periods of time). But there is also risk you have some or a lot of control over. In most firms, it’s this risk that owners need to focus on first as it’s within their means to influence and because it creates a clear drag on objective value. This risk includes things like owner dependency (too many client relationships hinging on the personal involvement of the leaders themselves), client concentration (too much revenue tied up in 2-3 client relationships), sector over-dependence (too much revenue tied up in a narrow market space), and lack of well-defined, well-documented repeatable processes (making it difficult for future leaders to sustain operations).
Derivative Sources of Value Unique to Professional Services
While the fundamentals of objective value tend to be fairly universal (unless you’re building a crypto exchange), there are some aspects of value that are more nuanced and unique to professional services firms. As I see it, these unique forms of value can be categorized into four buckets:
- Channel Relationships — Many of today’s fastest growing professional services firms work inside the channels of high growth technology companies (i.e. Salesforce, Workday, Anaplan, etc.). They seek out and solve unique problems for companies within those technology ecosystems. And they build deep relationships with the account service teams inside those technology companies. Growth equity firms, like Tercera, sometimes seek out firms within specific cloud technology stacks as companies for which to invest and grow.
- Thought Leadership — As we’ve said for years, the backbone of growing most professional services firms is thought leadership. At its core, thought leadership is about developing a unique point-of-view on how to solve clients’ stickiest problems and translating those solutions into repeatable methodologies. Thought leadership, done well, accelerates lead flow into the business, enables top-line and bottom-line growth, and in some instances can literally create whole new markets.
- Client Relationships — You probably don’t even have to furrow your brow to think of firms who’ve been bought simply for “access to their client list.” The best firms tend to work with the best clients. So, while the types of clients you work with may largely be a subjective decision, the actual clients that hire you are often a critical source of objective value.
- Talent — Most firms acknowledge that their people are the key to their success. While over-dependence on a handful of key individuals can pose a source of risk, attracting, developing, and retaining a high quality team of people, particularly with unique or specialized skillsets often represents a critical source of objective value.
What Should Your Leadership Team Be Doing About This?
I know what you’re thinking, “Okay, Jason, that was an interesting foray into primary and derivative sources of objective value in a professional services firm (wow that’s a mouthful)…ahem, but, why do I care about this?”
In my experience, a lot of mid-sized firms operate without a clear value creation playbook. Yes, they have strategy. They think about how and where they want to grow the business. They think about the clients they want to do business with. They think about the problems they know how to solve. And they think about the talent they need to solve those client problems and create the growth they seek.
But they don’t often think about value. When they do, they only think about it very loosely. They don’t think much about what a future leadership transition might look like until it’s almost directly upon them. They just assume that if they grow the firm, no matter how, it will be worth more tomorrow than it is today. While that’s sometimes true, other times it’s not. In fact, frequently, it turns out the firm is not worth as much as they’d like or as much as they need. And that ends up creating a lot of disappointment and a lot of stress.
As your firm walks into planning season this fall, bring value into the conversation. Get an assessment from an objective professional. Find out what your firm is worth now. Discuss what you need it to be worth in the future. Articulate why that future value matters. Work through the strategies you will need to put into place now to start growing that future value. And take the time to translate those strategies into a clear value creation plan that you can execute against over the next few years.
References:
While this post largely reflects my own opinions, much of my learning on this topic came from a few critical people:
- Dan Doran, Founder of Value Scout and Quantive, educated me deeply on the 3 fundamentals of value and the value of process in our work together in 2020.
- Jeff McKay, my professional services marketing podcast co-host, always helps shape my thinking on a given topic and opened my mind to the roles clients and talent play in the value of a firm.
- Michelle Swan, Partner at Tercera, has been generous with her time and thinking on how one of the leading growth equity firms specializing in professional services thinks about value.
