How to scale professional service firms

My latest report attempts to identify common factors that influence scaling in professional service firms (PSF).

The sample draws from small and medium (up to 100 people), UK-based firms who deliver services to UK clients.  We interviewed a sample of professional service firms using a structured list of interview questions and this data was then analysed to discover themes, trends and comparisons made between the companies that scaled and those that did not. Below is a summary of the key findings.

Findings

Our findings corroborate widely held industry views that successful PSFs scale when they select and leverage resources (particularly people) and intellectual capital for optimal competitiveness and growth.

Based on our finding we developed the Phased Scaling Model which attempts to encapsulate the scaling stages of a Professional Service Firm.

We identified several key factors that determined successful scaling:

• Human Capital.  This is a firm’s principal asset, which should not be diluted.
• Management Decoupled from Delivery. Firms cannot grow effectively if management are concurrently deployed on client projects.
• Management Team. Quality and individuals’ networks are essential for early success.
• Financial Management. New methods of reducing fixed costs de-risk and support focus.
• Brand Management. Required to scale beyond known networks and relationships.
• Differentiation and CVP. Differentiate in saturated markets with low barriers to entry.
• Building Networks and Relationships. Form the initial sales and reputation-building platform.
• Industry Diversification. Expanding into new markets to de-risk against an industry downturn and to access a larger customer base.
• Timing and Luck. Are key factors in either a positive or negative outcome.

Human Capital

All interviewees stated the most important scaling factor was the ability to find and retain key talent. People are a PSF’s main asset and without a continuous pool of talent to match the organisation’s growth aspirations, the business will be constrained.

• To keep a consistently high quality of hires a template of new hire is required e.g. Employees must have Big 4 experience, a Masters Degree, Prince2 and MSP as a minimum.
• The mix of full time versus associates is also critical.  A 30:70- split between full time associates (contractors) and employees enables downsize flexibility if growth is not on plan; full time employees give you client consistency and are critical to building culture.

Management Decoupled from Delivery

To coordinate growth senior management should focus on the wider strategic growth issues and should not be involved with the day-to-day operational issues.

• Senior management focusing too heavily on billable work can restrict growth.
• In order to facilitate senior management detachment there needs to be an investment in the delivery teams to give senior management confidence to step back.
• Senior management detachment from operations makes the business more attractive for an acquisition.

Management Team

The chemistry of the management team, their networks and risk profiles have a significant impact on growth.

• Early customers were won from their professional networks or previous clients.
• It can be several years before any work is won from pure marketing.
• This means that scaling in the early years is dependent on the quality and depth of the professional networks and whether previous clients have realised value from the engagements.
• Managers should have similar tolerances for risk or relationships may become strained.

Brand Management

To scale, the business must move beyond personal networks and attract customers from the wider target market by building a well-regarded brand.  Building a PSF brand involves more than just delivering excellent work and customer service:

• Targeting industry awards.
• Hosting thought-leadership events..
• Hiring a marketing manager early in the firm’s life.

Differentiation and CVP

In a congested Professional Service market with low barriers to entry, differentiation, demonstrating value and successful execution are key.

The firms we interviewed focused on a specialist area of consulting and using an employee template that allowed it to offer ‘Big 4’ quality at much reduced fees. It also proved its CVP with its first clients before it scaled.

Building Networks and Relationships

All of the firms interviewed used relationships to build an initial platform and expand their network.  However, it was the mix of other scaling factors that determined the ongoing probability of success.

Building networks seemed linked to the proximity from the end-client’s ecosystem. Locating offices close to the client makes project delivery and account management easier and also means you are close to clients when new projects arise.

Industry Diversification

Most firms start their business by focusing on one industry, as this is where they had the most experience, contacts and knowledge.  This seems intuitive as it gave them the best chance to access early customers and leverage their individual credibility from previous professional engagements.

However once the business model has been tested with early customers the firm needs to quickly duplicate their model into new industries/ markets. This is essential to de-risk their reliance on a downturn in their core market and has the added benefit of increasing the potential customer base to support the rapid growth phase.  However the firm should not dilute their industry competency too widely and should aim to expand to five or six industries.