The Boutique IT Service Firm's 10 Point Success Guide

The year was 1982 and the place was California. And Blackie Lawless, the leader and bass player of the heavy metal band W.A.S.P., was in search of a guitarist... yet again.

After some search in the "Beaver Hunt" section of Hustler magazine, he bumped into the name of Chris Holmes.

As an experienced musician, Blackie knew he had to qualify Chris. But he was also smart enough to know that since Chris promoted himself as a guitarist, he could play the guitar.

He also knew that his band's overall success was very little dependent on the guitarist's virtuosity, but it would be highly dependent on the guitarist's height and hair length, which add a lot to W.A.S.P.'s overall theatrics.

So the qualification phone call started...

Blackie: I hear you play guitar.

Chris: Yeah.

Blackie: How tall are you?

Chris Holmes: 6' 5"

Blackie: How long is your hair?

Chris: About halfway to my room.

Blackie: You got any zits to go to?

Chris: No.

Blackie: Ok. Come over!

Chris went over and for 12 years he was the guitarist in the best-ever W.A.S.P. line-up.

And just as Chris' long hair and over-average height were crucial for W.A.S.P.'s success, there are similar success drivers for boutique IT service firms.

But How Does Chris Holmes' Hair Length Relate To Profitability?

You see, most people make purchasing decisions based on emotion and use logic to justify those decisions. Therefore, a powerful and favourable first impression is vital to develop a foundation for successful sales engagements.

Most boutique IT service firms follow the changes in market dynamic and buying habits, but many still insist on pursuing ancient practices like, cold-calling or responding to RFPs, which usually result in over-demanding clients with over-scoped and under-payed projects.

You're a boutique IT service firm offering highly differentiated customised services to narrowly defined niche markets.

Clients come and go.

Since your work is customised, offering services with recurring revenue streams is pretty limited. That makes it triple-important to know where your next client comes from and roughly when.

Of, course, you may believe business is just great. Projects are started and completed and clients are happier than a gym bag on a tomato field.

All right, business is great.

But is it great relative to your competitors or relative to your own firm's capabilities.

Because no matter how good your firm is relative to the competition, it can always be better relative to its own performance yesterday or before.

Naturally, most IT service firm leaders want to take their firms to the next level, but don't know what that next level is and how to evaluate their progress.

Many firms use gross revenue. They increase it and call themselves successful. But, with a little exaggeration, all it takes to double your revenue is double your headcount and demand your people to work more hours.

So, let's say, in the past, your firm generated $25 million gross revenue with 50 people working 40 hours a week for 50 weeks per year (total of 100,000 hours). And now, generates $50 million revenue with 100 people working 60 hours a week for 50 weeks per year (total of 300,000 hours).

Yes, you've doubled your gross revenue, but you've tripled payroll and other aspects of your operating costs.

And your hourly revenue generation has dropped from $250 per hour to $166.67 per hour; a 33% drop.

And how long can you maintain this overdriven level of productivity? Not for long. Your best people put in a few weeks of 60 hours, but as soon as they realise this is not an exception but the norm, they quit and run away faster than a drugged-up cockroach on casters.

So, in this literary masterpiece, we're taking a closer look at the 10 tactics that boutique IT service firms can use to reach that "next level".

Before we launch into these success tactics...

Let’s Take A Quick Look At The Market In General

There were over 100,000 software and IT services companies in the USA alone, with 99% of them having 500 or fewer employees.

We can separate them in three distinct groups.

But first, as a quick detour, let's look at three important numbers.

And now on to the four groups...

Strategy-Tactics Matrix

I. The first group consists of firms with solid strategic directions and effective tactical execution. They know when to roll with the punches as the market changes and when to stand firm and demand certain criteria to bend to their wills. That is, they have good strategies and ability to execute on those strategies

II. The second group consists of firms with perfect execution of a poor or non-existing strategy. Perfect operation takes these firms in any which random direction and deeper in the hole.

III. The third group consists of firms with chronic busyness in every possible direction. There is no strategy only jumping from one tactic to the next hoping something works out.

IV. The fourth group consists of firms with solid strategic directions and a total inability to execute on them. They have world-class PowerPoint presentations and binders upon binders full of big talks about what they want to accomplish, but no one works on accomplishing them.

1: Stay Away From Bad Clients

American poet Maya Angelou once said, “When people show you who they are, believe them.”

Instead of finding ways to accept buyers as clients, look for ways why you can't work together. If you look hard enough and still can't find reasons to terminate the onboarding process, it means the buyer could become a good client.

But, and this may sound harsh, but you'll see the point.

Clients must be indoctrinated to your work practices.

Why yours and not theirs?

Because you are more experienced at dispensing your expertise and rendering your services than them.

After answering just 4-6 initial qualification questions to your satisfaction, get buyers on the phone and pay close attention not only what they say but how they say it.

The tone of voice can be an open book if you learn to read it.

By the end of a 30-minute call you can determine fairly accurately whether or not you want to work with certain buyers.

I like playing down on my expertise and use lots of self-deprecating humour, giving buyers repeated opportunities to try to get the upper hand on me.

Good buyers remain at a peer-to-peer level but bad buyers take the bait and start flashing their superiority over me.

Then I just tell them that our styles are drastically different and I don't see a good fit to work together.

Point #2: Take Good Care Of Your Suppliers and Contractors

Many firm owners believe in squeezing their suppliers and contractors for the lowest possible prices.

It's a big mistake because both groups can give you a hard time when you get into a tight spot.

One huge lesson that I've learnt over the years is not to haggle with suppliers and contractors. If you find their prices unreasonable, tell them that the given prices don’t work for you and you have to find someone else. But don't string them along with bogus promises that if they lower their prices, you'll have lots of work for them.

For top-notch contractors, this is a red flag and they will run for the hills.

It's common practice in many industries that that main firms that have the contracts with clients, hire subcontractors, mark them up and put them to work for their clients.

What's important to know that top-notch professionals don't tolerate intermediaries between themselves and their clients and don't like their services to be marked up by people who can't do the work themselves.

Imagine that a bookkeeper needs a tax attorney, so he hires one at a discounted rate, marks it up and puts her to work on his client's project.

This sounds good, but no top-notch tax attorney would ever accept such an arrangement.

So, if you want to work with top-tier talents, refer them to your clients and let them hire them. Stay out of the hiring process.

Point #3: Optimise Your Systems And Processes

I know this can be a fiddly and time-consuming procedure because optimising several variables is way more complex than maximising one single variable at the expense of everything else.

As a skydiver, I can maximise my chance of survival by carrying several emergency parachutes with me. But what is several? Two, four or 10? It's just not practical.

But then is it worth doing at all?

Well, Gartner Group reports that a 5% reduction in operating costs has the same impact on a company’s P&L statement as a 30% sales increase.

McKinsey reports (McKinsey Quarterly February 2003 The Power Of Pricing By Michael V. Marn, Eric V. Roegner, and Craig C. Zawada) that a 1% fixed cost reduction leads to as much as 2.7% increase in operating profit and a 1% drop in variable costs leads to as much as 7.3%. And that's not chump change.

But what is more shocking is that a 1% sales volume increase leads to 3.7% profit increase and 1% price increase leads to 11.7% profit increase.

Yet, 99% IT service firms cry out for more clients.

Revenue vs. Cost of Sales

And when more clients show up at their doorsteps, they accept them without any serious qualification.

Every business system can be optimised either for "more" or "better".

For instance, you can optimise your lead generation/conversion system either for "more clients" or "better clients".

If you optimise it for more clients, you increase your sales, but you also increase your cost of sales, and at one point, your cost of sales starts growing faster than your sales.

... when you optimise your systems?

The majority of IT service firms are obsessed with optimising their systems to increase sales and reduce fixed costs; the two lowest profit contributors, while grossly neglecting the serious contributors, like reducing their variable costs and increasing prices.

Point #4: Understand Your Target Market

Many moons ago, Sun Tzu wrote in the Strategic Arts...

"It is said that if you know your enemies and know yourself, you will not be imperilled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperilled in every single battle."

It basically means that even if you have sketchy service knowledge but have full market intelligence, you can be highly successful.

And now I'd like to add another question. How can you be successful if you have a truckload of target markets?

A few years ago, I was almost hired by a firm to write some web copy. When I asked the marketing lady about the target market she sent me 71 buyer persona profiles.

Eventually, I walked away because I didn't know how to write engaging and persuasive copy for 71 different buyers when they are lumped together.

Maybe smart people have already figured that out, which shows that I'm not exactly smart.

My main problem with buyer personas is that it's one single person. It means you have one single person in the whole world that you want to sell to.

I prefer the perfect client concept. You can create a perfect client profile (perfect buyer, perfect client company and perfect engagement) and Bob's your uncle.

While the buyer persona is one single person, the perfect client profile is a set of attributes that apply to a group of people.

And as you learn about your target market, focus on its psychographic attributes.

Point #5: Have A Long-Term Vision Supported By A Strong Overall Business Strategy

For far too many IT service firms, life is all about tactical flailing without a definite strategic direction. And it especially applies to generalist firms that can change their target markets on an almost daily basis.

And when you ask them to describe in detail the kind of business they expect to have in three years, they have no idea.

The other red flags these firms exhibit...

But every one of the above none points are effects not causes. And when you look deeper, you can discover that that cause is the missing strategy. There is the daily busyness but that busyness doesn’t take those firms in any specific direction.

Point #6: Change From Selling IT Solutions To Selling Business Solutions

No matter what the Association for Pet Loss and Bereavement, the Association for Pet Obesity Prevention or even the National Association of Professional Pet Funeral Directors says, your clients don't hire you for better technical solutions.

They've discovered some C-suite-calibre business problems, like dropping sales, excessive operating costs, etc. and need a business solution for those business problems.

And at this moment, RFPs go out and IT firms start bidding, leading the charge with their technical capabilities.

And while sellers are busy presenting their technical capabilities, buyers are sitting there, pretending to watch the presentations while stressing our over how to solve those business problems because none of the sellers offers business solutions.

Many IT service firm leaders, maybe you too, mistakenly believe that clients hire you because they understand what you do.

And to make sure buyers clearly understand what sellers do, instead of solving expensive business problems, sellers over-sell their technical features, methodologies and solutions, thus turning themselves into lukewarm "my cousin can fix that" type technical commodities.

But...

... buyers hire you because they know you understand their problems. This is why specialists are paid way more than generalists.

Also, buyers hire you because they believe you can help them to solve expensive business problems, not merely mumble about bits, bytes and gigahertz and sell them more technical bits and bobs.

Point #7: Become A Specialist

You can specialise in five different ways.

  1. Vertical specialisation – Specific industry sector. E.g.: Funeral homes, homestead farms, etc.

  2. Horizontal specialisation – Specific discipline. E.g.: logistics for any industry

  3. Umbrella specialisation – Focus on a common denominator. E.g.: steel industry, including machine shops, sheet metal shops, automobile body shops, etc.

  4. Platform specialisation – Specialist in a specific technology. E.g.: Mathlab Magician, Photoshop Prophet, PowerPoint Princess, Windows Wizard, etc.

  5. "The way you work" Specialisation – Focus on specific aspects of the service. E.g.: Domino's Pizza: Fresh hot pizza delivered to your home in 30 minutes or it's free. So, it's fresh, hot and in 30 minutes.

In my experience, the best bet is to combine #1 and #2. Narrow down your target market and offer just a very few and very specific limited services to that target market.

A few years ago, at the 70,000 Tons of Metal heavy metal festival, I met a guy in his late 20s.

He was a gay guy following the Goth fashion. He was a hairdresser and his target market was exclusively professional gay guys who dressed Gothic.

I reckon, it's perfectly normal that his prices are 10-times or more of generalist barbers' prices.

If you combine #1 and #2, how do you know you're properly specialised?

Look at your whole business geographic where you conduct business. If you have fewer than 10 competitors, your specialisation is too narrow. If you have more than 200 competitors, it's too broad. The sweet spot is between 10 and 200.

The other criterion is the target market.

A well-specialised firm can handle about 1% of its target market. Under 1%, the specialisation is too narrow and above 1%, it's too broad.

Now take the number of clients you can handle at any one time. Let's say, 10 clients.

If 10 clients represent 1% of the target market, then you need a target market of minimum 1,000 and maximum 5,000 buyers.

Point #8: Keep Improving As A Leader

Regardless of the talents in your firm, the market conditions, demand for your services and other obvious factors, your firm's overall success comes down to the firm's leadership, and you, it's leader.

Your firm has two major factors that determine its success: It's inside reality and outside perception.

Inside reality is the culture and outside perception is the brand.

The outside perception is the outside world's view of your firm, which, as your brand, your market hangs around your firm's neck.

But what determines the outside perception?

The firm's inside reality, that is, its culture. And creating the appropriate culture is the leader's responsibility.

Outside Perception vs. Inside Reality Poor Alignment

Outside Perception vs. Inside Reality Mediocre Alignment

Outside Perception vs. Inside Reality Good Alignment

And the better the alignment is between inside reality and outside perception, the more stable your firm's position is.

Obviously, as a firm leader, you can't control the outside perception, but you can control the culture, the inside reality. The more real the culture is, the more stable outside perception it creates.

Phoney culture leads to phoney outside perception, that is, a bogus brand.

Think of Porsche. Porsche's brand used to be a sports car.

Then someone came up with the idea of the four-door Panamera, the Macan and the Cayenne SUV.

And today, people don't know what to make of Porsche. In people's minds, it's a bit of a sports car (718 Boxster), a bit of a family car (Macan), a bit of a slightly sporty family car (Panamera) and a bit of an SUV (Cayenne). And, of course, no one ever knows who owns the company.

Contrast this confusion with Ferrari. Brand: Very fast and very expensive sports cars. And as for ownership, Ferrari has been standing on its own feet in Modena, Italy, ever since Enzo Ferrari founded it on 13 September 1939.

Every time you make or about to make a major decision, think about how that decision can impact your firm's inside reality and in turn, its outside perception.

Point #9: Develop Some Recurring Revenue In Your Firm

This is not easy for firms that provide custom-made solutions, but it's not impossible either.

There are clients that want to retain your firm and have access to its collective smarts. That's good. Remember, there is no physical work involved.

But keep the numbers low, so you can offer open access with quick response to those clients and charge accordingly.

One big mistake IT service firms make is that they regard retainers as prepaid labour.

It's not.

Retainers work like insurance. When you need help, it's there.

Craft your retainers for minimum six months and offer three options in your proposals.

For unlimited (phone, text and email) access and response within 12 anytime hours, the retainer fee is $5X.

For unlimited (phone, text and email) access and response within 24 office hours, the retainer fee is $2.2X.

For limited (email only) access and response within 48 weekday hours, the retainer fee is $1X.

Point #10: Build A Real Team Not A Work Group

There are lots of IT service firms out there that are not really firms, but one single person and a couple of subcontractors.

But I believe, a firm's core services must be performed by employees with single-minded dedication to that firm.

Would you go to a hospital where all the doctors are contractors and it depends on their client loads at other hospitals and availability whether or not they can operate on you?

Based on contractors, you can build a disjointed work group but you can never build a cohesive team.

In comparison, look at you open palm with five fingers pointing in five different directions. Now make a tightly closed fist and look again.

If you've practised martial arts or military unarmed combat, then you know what I mean.

The open palm with five fingers pointing in five different directions represents the work group. The tightly closed fist is the team.

10 Differences Between Contemporary Teams And Traditional Work groups

1. Competition: Work group members compete internally with each other. Teams compete with other teams.

2. Agenda: A work group has many individual task-focused agendas. A team has one goal-focused agenda.

3. Winning: What happens when work groups win? Usually nothing. No celebration; no recognition. Teams celebrate success.

4. Structure: Work groups run on independency. Teams run on interdependency.

5. Work groups thrive on avoiding risk and ambiguity. Teams thrive on challenge and ambiguity.

6. Work groups have no sense of urgency to get the work done. Teams do.

7. When one member justifiably gets pissed off with management and quits, the rest of the work group breathes a sigh of relief. The rest of the team is likely to follow that person (team cohesion).

8. Work groups little or no redundancy: Segregated silos of narrow specialists. Teams have significant redundancy: Deep generalists with multiple skills each.

9. Work groups consist of hierarchies of people. Teams consist of networks of people.

10.Work groups have superior-subordinate dynamics. Teams have peer-to-peer dynamic with a "first among equals" (Patrick J. McKenna, David H. Maister: First Among Equals: How to Manage a Group of Professionals) type leadership.

And one idea that may help. A team of merely good subject matter experts will always outperform a work group of IT geniuses.

Why? It's the mentality. Guy Kawasaki describes it in Rules for Revolutionaries...

"Speed vs. Looking professional: When Sam Walton noticed some good practice, then he got it implemented within days or even hours at Wal-Mart. He was on the fifth improved revision by the time the MBAs and the other suits at the competition just finished the fancy report with the colourful charts and detailed appendices to present the basic idea to the CEO in a 'professional' manner. And this is only after the time it took to negotiate and research the 'project' and hire the suitable reputable consulting firm to carry out the work."

Point #11: Keep Business Development An Ongoing Function

The majority of IT service firms are either in full-tilt project delivery mode or client hunting mode and the two modes are totally separated.

When the firm is in project delivery mode, most of the usually contract-based business development people are sitting at home unpaid because there is no need for their expertise.

But when the project ends and the firm goes into 100% client hunting mode, that’s the time when the business development people are pressured to get clients as soon as possible, while the technical people sitting by their computers twiddling their thumbs and dangling their feet. They have nothing to worry about because they get paid no matter what.

While you can save some money in the short term, you lose much more by not having an ongoing business development initiative in place.

The cost of acquiring new clients goes up and the effectiveness of acquiring them goes down.

Your firm also becomes a desperate, project-hungry predator that is likely to accept just any project, including the ones your competitors have already rejected.

To shorten the famine part and lengthen the feast part of the feast and famine cycle, you better run business development on an ongoing basis. And instead of a massive sales force, all you need is a small business development team. But make business development a daily function, so at the end of the day, you can write down some documentable accomplishments.

Summary

Of course, there is more to success than the above 10 points, but they can be good starting points.

Since some are easier to implement than the others, start with the easy ones, so after some wins on the easy techniques, you have some momentum to deal with the more difficult techniques where you may experience some setbacks.

But no matter what happens, just charge forward. Remember Hemingway's words from the Old Man And The Sea, "Man can be destroyed but not defeated."

At least, that's how I've heard it.

[an error occurred while processing this directive]