Boutique IT Service Firms' Success Guide
By Tom "Bald Dog" Varjan
Have you ever heard of keyboard players who play their instruments the other way around? That is, a reverse keyboard. High notes on the left and low notes on the right.
That's exactly what legendary jazz keyboard player, Joe Zawinul, did on Weather Report's 1976 record, Black Market.
Why did he do that?
Because it was a challenge for Joe to play such a mirrored keyboard.
Joe also regarded it as a great brain exercise because he had to perform real mental acrobatics every time he played. When it comes to growing their firms, Many IT service firm leaders also play the proverbial inverted keyboard for some reason. That is, they unnecessarily overcomplicate their operations by automating what buyers want to be personal and personalising what buyers want to be automated.
Most people make purchasing decisions based on emotions and use logic to justify that decision. Therefore, a strong and favourable first impression is vitally important to develop a foundation for successful sales engagements.
Your boutique IT service firm offering highly differentiated customised services to narrowly defined niche markets.
Clients come and go.
Since your work is customised, offering your services with recurring revenue streams is pretty limited. That makes it double-important to know where your next client comes from and roughly when.
Of course, you may believe business is just great. Projects get started and completed and clients are happier than a rat with a gold tooth.
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 capability and actual performance yesterday and before.
And lots IT service firms have a hard time with this because they believe improvement is all about doing more of the same, but doing it harder, longer and with more people.
What do the typical IT service firm leaders do when they want to grow their firms?
Yes, they hire more people. After all, wasting time and money on interviewing people is much more exciting than improving pricing strategy, evaluating clientele and dumping the bottom 10-15% or even reviewing operational systems and processes.
But before we launch into these success ingredients, let's take a closer look at the IT service market.
When you look at your buyers, we ca put them three groups...
Group #1: Know What To Do
They're strong on business development and use a healthy balance of on- and offline marketing.
I've deliberately stayed away from "digital marketing" because it's bullshit.
They also know that maniacal content creation (you know, hundreds of the 500-word blog posts written by $2 per hour "writers" in Pakistan or Bangladesh) is about as useful for client acquisition as cocaine is to a toothache. They just add to the overall marketing noise.
Those firm leaders understand that effective client acquisition lies in the lumpless blending of branding, content and direct response copy.
As marketing legend, Jay Abraham puts it...
"Branding without a direct response component is negligent. Direct response without any branding is simply naive."
And as Brian Clark of Copyblogger (excellent content marketing practitioner) puts it...
"Copy without content is hucksterism, and content without copy is charity."
What they're doing also includes knowing whom to hire as full-time employees and whom to hire as contractors.
I find it strange that many boutique IT service firms have full-time HR managers, graphics artists and even janitors, but all the tech people are contractors on an "as needed" basis.
The way I see it core work should be done by employees and non-core work by contractors.
This is how to keep your firm lean and profitable.
Group #2: Ponder And Hesitate
These firm leaders are sitting on the fence because they don't fully believe in systematic business development. They are somewhat interested and some of them even want to get sort of half-arsed involved, but they're not ready to commit.
And they spend a lifetime hiring, training and firing their business development people over and over again.
One problem is that they're not willing to make the necessary investment either in people or systems. They are obsessed with offshoring because it's the - seemingly - cheapest option.
Then they come to the same conclusion: If you want to get it done right, you'd better do it yourself.
At that point, they get so involved in tactical work that there is no time left for strategic work.
So, rather sooner than later, the firm starts shifting away from its mission, vision and core values.
But the other option is also possible.
It's possible that those firm leaders decide to take business development seriously and develop their systems.
Group #3: Know What To Do The Wrong Way
These firms know with 100% certainty that they don't want to get involved in business development and don't want to touch direct response marketing.
As far as business development goes, they prefer to rely on random referrals, cold-calling, networking and other ineffective activities that require a helluva lot of manual labour.
But they don't care because it's not them who has to do it, and as we know from Eisenhower...
"Farming looks mighty easy when your plow is a pencil, and you're a thousand miles from the cornfield."
Those firm leaders are sitting in their offices and expect others to do the heavy lifting.
These firms very often suffer from staff enlargement (vs. growth) with lots of unnecessary job functions on the payroll. They have large executive boards with lots of yes-men and yes-women to grovel at the feet of the top dog.
You know which group you fall into and how you want to handle the next few years of your business.
With that in mind, let's look at a few ingredients that can help Group #1 and Group #2 firms to reach the next level.
10 Success Ingredients For Boutique It Service Firms
Many boutique IT service firm leaders make the mistake of building and growing their firms based on success strategies and tactics that that have been created for factory type businesses (low-margin, high-volume) that sell mass-produced bits and bobs to the unwashed masses.
Selling a limited range of high-priced and highly-differentiated and collaborative professional services to a narrowly defined target market is a totally different ballgame.
Here I've listed 10 ideas especially for the "premium" (high-margin, low-volume) business model.
Ingredient #1: Understand Your Target Market Real Deep
There is a difference between knowing and understanding your target market.
Many people know the musical scale. Mozart, Beethoven, Mike Oldfield and a few others understand music.
I know how to cook. I can follow instructions in a recipe. Gordon Ramsay understands cooking.
Knowing is a cerebral thing. Understanding is a visceral thing.
The deeper you go into your target market, the farther away you move from knowing and the closer you get to understanding.
And this is where generalist firms are in trouble because they don't have specific target markets. They know many industries superficially, but don't understand any of them. They are like doctors who operate on different body parts every day. One left ear, two triple bypass and a root canal for Monday and a broken leg, a glaucoma and a dislocated shoulder for Tuesday.
Would you like to be treated by one of those doctors? Neither do I.
Ingredient #2: Keep Trimming Your Clientele
Revenue may lie in having more clients, but profit certainly lies in having better clients.
You simply can't clog up the shop with cheapskate Ebenezer Scrooge type clients.
Look. In your line of work, you can work only with a limited number of clients. And those clients had better be top-notch.
For instance, when restaurant owners contact us at one of my joint venture farms, showing interest to buy meat from us, first we ask them about the per person price of the typical dinner. If it's under US$350, it's a red flag and we usually reject them right away because they most probably don't generate high enough revenue to warrant the quality of meat we have to offer.
Yes, I know you can buy - most probably "select" (bottom 43.4% of the market) grade - beef in supermarkets for as low as $10 per lb or even less, but you can also buy a 777 Burger - most probably "prime" (top 2.9% of the market) grade beef - at the Le Burger Brasserie in Las Vegas for only $777.
IT is the same.
Using Pareto's 80/20 is scary enough, but if you realise that in the IT sector the real money is in the top 0.5-2% of the market, you look at your clients totally differently.
Being generous, we can say, perfect clients lie in the top 5-7% of the industry.
And to land this segment of the market, you have to trim your current clientele.
As time goes by, you increase your MEL (Minimum Engagement Level) and lighten the trigger force that pulls your client-dumping lever. That's the moment when you say to the buyer, "I think we've just found a reason for not working together. Would you agree?"
I'm not saying you should increase your rate because you shouldn't have them. You provide custom-tailored "artisan" services, and there are no standard rates for such services.
Ingredient #3: Develop Effective Systems And Processes
At certain points in their lives, most IT service firm face the dreaded scaling problem. They maximise their revenue-generating abilities and unless they change something, they get stuck where they are.
So, there start scaling.
There are two ways to scale a business: 1) through systems (high tech) or 2) through manual labour (high touch).
And while you provide highly customised services, you should reserve your manual labour (high-touch work), you can freely fiddle with system-based scaling. You can read more about this system thingy in Sam Carpenter's books, Work the System: The Simple Mechanics of Making More and Working Less and The Systems Mindset: Managing the Machinery of Your Life.
I know when it comes to business systems, the E-Myth is the most popular, but while the E-Myth is full of stories and anecdotes, Sam's books are full of strategies and tactics to build systems.
Obviously, the big prestige and big profit lies in being high-tech, high-touch. In this quadrant, you let your system do the heavy lifting of business development and all you need is a tiny team to tweak the system.
When you look at the Decision-Making Spectrum diagram below, you see that high-touch interaction is required only at the last 10-20% of the sales process. And that's a rather generous assumption. It's more like 5-10%.
So, you can scale your firm using technology-based systems and processes 80-90% of the time.
Obviously, the low-tech, low-touch option is a disaster, so we'd better avoid it.
The sinister area is the high-touch, low-tech option. Many of those firms consist of business experts who want to make some quick buck but without "wasting" money on technology and technical people. A good example is many content- and website mills.
They contact contract some companies, land some contracts and then hire some cheap junior tech people on Upwork to do the technical work.
But since they get what they pay for, most of their projects are in trouble, and spend most of their time apologising to their clients and trying to fix problems.
The good news is that the high-tech, low-touch firms can improve by adding to the touch element. Those companies have potential because they already have great technology.
They have to humanise those parts of the sales process where buyers expect human interaction and also have to touch up their C-suite English realising that clients hire them for business solutions NOT for technical solutions. Technology is the means but business improvement is the end.
With technology-based scaling, you can also reduce operating costs, and as we know from a march 2016 Gartner study, a 5% reduction in operating costs has the same impact on a company's profit & loss statement as a 30% increase in sales.
Ingredient #4: Treat Your Suppliers And Contractors Well
We all know that "big box" retailers, like Walmart, Target and many others, are notorious for repeatedly "beating up" their suppliers for lower prices. After all, they sell at low prices, so the lower prices they get from their suppliers, the more the wholesalers can sell and the more they can make.
That's why there are no two years when you can see the same products in big box stores. Suppliers come and go (often out of business thanks to the box stores' predatory business models).
As the leader of a lean firm, you have employees for the core job functions, but you're likely to work with contractors in support functions.
By support functions I mean HR, web development, graphics design, bookkeeping, accounting, office cleaning and many other functions. There is no need to have these people as full-time employees.
But since, as contractors, these people have other clients besides you, so they can easily dump and replace your firm with better clients. That's why it's a good idea to build great relationships with your contractors and suppliers.
A few weeks ago, a cybersecurity client of mine was working on a client's system in the middle of the night when the server's power supply went up in smoke.
Being Friday night, the earliest day when she could order a PSU was Monday, but, because of the good relationship and the type of "24/7 emergency retainer" agreement, she could call her hardware supplier's 24/7 support desk, and the hardware supplier couriered her brand-new PSU within one hour.
So, if you offer any kind of emergency services, make sure you have emergency suppliers as well, so you can really provide your services.
Ingredient #4: Develop a Strong Vision For Your Firm
Habit #1 in Steven Covey's Seven Habits Of Highly Effective People is to start with the end in mind.
How do you want to end your career?
Do you want to sell your firm when you hit retirement age or do you want to build a lifestyle business that you can run until you kick the bucket?
They require different approaches right from the start.
Do your people understand what your long-term plans are for your firm. Yes, the firm is yours, but all those who work with you want to know what feature to expect.
Do you lay it out in your business plan?
And it's one thing to have a vision, the harder part is to communicate it to your people.
If they don't know what the future holds for them working with you, then they'd better bugger off right now.
Ingredient #5: Become A Lifetime Student Of Leadership
I know, I know. The bookstores are full of books on leadership.
I also know that most of those books are written by college professors who've never lead anything and anyone in their own lives but have merely re-written what other professors had written before them.
When it comes to leadership, I like learning from military leaders because they became leaders in an environment where everyone starts at the same level: Crawling in the mud and being yelled at.
Yes, once upon a time, during boot camp, even Private Patton and Private Eisenhower were screamed at and were called pathetic excuses of a human being.
Contrast this with thousands of corporate leaders who graduate from Harvard, Stamford or Yale straight into the C-suite of Fortune 1000 companies, but never have bothered to fully understand who they are leading and what their companies are actually producing.
The other group is the armchair leaders (Ph.D. in leadership) who've never really have lead anything. They live in their faculty little offices and read "highly respected and recommended" books written by other armchair leaders.
They are breathing each other's intellectual exhaust.
As General Patton said so eloquently a few years ago...
"You don't know shit unless you've experienced flying bullets."
Of course, you don't have to take this literally, but good leaders must understand what's happening on the "production floor" and how the "sausages are made".
No, she doesn't have to be the best "sausage maker", but must understand the process.
Otherwise we end up in a situation that Monty Python's John Cleese explains so well here.
Ingredient #6: Develop Recurring Revenue Sources
Many experts believe that you can't mix customised and productised services within the same firm.
I think it's possible.
For instance, all of your entrée services are customised, but you just can't start an engagement with proposing and high-5- or 6-figure engagement for new clients.
It only makes sense to start every client on a paid discovery session at a price point of 5-10% of your average engagements. Now, this service is productised or standardised.
After this service, you do your normal customised services.
But many customised services require post-engagement monitoring or licensing agreements that mean recurring revenue for firms.
For instance, when you sell custom software, it is 99.999% that it has bugs in it when you hand it over to your clients.
And don't tell me your software doesn't have bugs. After a quarter of a century, Microsoft products still have a good number of bugs. For instance, the master document function still doesn't work properly. And there are some more.
But if clients buy the VIP option of your software development service, you are available to deal with bugs as they come up during the software's daily application.
And clients can have access to this debugging service in three-, six or 12-month chunks. You can offer price breaks on longer durations.
Ingredient #8: Pay Attention To Your Team
Many moons ago, Alexander the Great said, "An army of deer led by a lion is more fearsome and dangerous than an army of lions led by a deer."
The same applies to building your team.
But what you need is not a bunch of IT rock stars (offering them groupies would be illegal anyway), but rather solid, reliable and pretty good professionals who can effectively work in small teams.
I suggest my clients that they form four-person engagement teams.
Why four?
A long time ago, when I was studying for my horse and cart driving licence in the UK. I was working at in a cemetery as a gravedigger and I had an opportunity to be promoted to be hearse driver).
Anyhoo.
I learnt that the ideal number of horses to pull a cart is four. That's when the pulling power of the horses and the difficulty level of handling them are at optimum.
Five horses give you slightly higher pulling power and significantly higher difficulty level of handling the horses.
With three horses, you have 25% less pulling power, but only a tiny bit lower level of horse management.
By the way, I've read somewhere that the word manager comes from old French, meaning "handler of horses".
Then later I learnt about Price's law, which states: 50% of the work is done by the square root of the total number of people who participate in the work.
Four is the only number whose square root and 50% are the same. And if two people do 50% of the work two people do the other 50%. So it's all perfect and all the work gets done.
Mind you, even with four people, you still need a team leader.
Ingredient #9: Polish And Fine-Tune Your Business Development
Business development is each and every function related to getting and keeping clients. Some people talk about marketing and sales, but if you do that, you end up with two separate departments rivalling with each other.
The problem is that you can have either internal or external competition. Your people are competing either with each other or your competitors' people.
So, as a firm leader, you have to eliminate internal competition before it starts eroding external competition.
Now you may say, you don't believe in competition. That's fine, but your competitors do, and if you lose focus, you get run over and knocked down in your industry's pecking order.
The other point is that business development today is not what it was in the past.
Today, it's harder to reach the point of an in-person meeting with buyers. On average, buyers are 57% deep in your sales funnel and completed in their buying decisions when they are first willing to talk to sellers. And that 57% is rapidly getting higher.
And as the percentage goes higher, buyers are less willing to talk about their problems, so you can't even diagnose their situations and craft the best solutions. The higher the percentage, the more hellbent buyers are on their own home-cooked solutions and the less they are willing to listen to you to present your solution.
They are just looking for the cheapest implementers for their - in most cases flawed - solutions.
This is why it's vital to connect with buyers when they are still problem-conscious.
That's when they are ready and willing to be fully involved in diagnosing the situation and work with you shoulder to shoulder to develop and implement the best solution.
Remember, the worst clients say, "Do it FOR us!" They want you to solve their problems FOR them.
And as they say in the world of medicine, doctors can treat their patients, but only patients can heal themselves. Healing and treatment are two different things.
The best clients say, "Do it WITH us!" They want you to facilitate the solution with their full participation. They want you to do the treatment but they're willing to do the healing.
They are smart enough to know that, after the engagement, you leave but they have to live with the solution. So, they have a vested interest in participating in the creation and deployment of the solution.
Oh, and in case I haven't mentioned it yet, the earlier in the buying process you catch buyers, the more they value your solutions and the more they are willing to pay you.
According to Aberdeen Research, connecting with buyers at an early stage can result in as much as 47% higher prices and 64% higher closing rates.
Ingredient #10: Understand Your Metrics And KPIs
This can be confusing but there are some differences between metrics and KPIs.
Metrics are single numbers of absolute measurements that track the status of a specific business process.
PKIs are equations consisting of several metrics and they are relative numbers.
Gigahertz and seconds are metrics.
Gbit/sec, the speed of data communication is a KPI.
Revenue and number of employees are metrics.
Annual revenue per employee (ARPE) is a KPI.
KPIs are based on four principles
1. Every KPI must have an objective
2. Every KPI measures something over a period of time
3. The best KPIs are attainable with a "stretch" effort, that is, it takes an "outside the comfort zone" effort.
4. Every KPI must be measured against specific goals.
KPIs take three forms...
1.Leading performance indicators help us assess where the business is headed. They are the proverbial canary in the coal mine. Sadly, more often than not, they get ignored.
2.Coincident performance indicators tell us about the strength or weakness of the business right now. Coincident indicators occur at roughly the same time as the conditions they signify. In miner lingo, this is when gas leaking into the mine shaft where the miners are working. Some decide to run away, but some decide to ignore it and continue working.
3.Lagging performance indicators help us assess where the business has been. In miner lingo, this is the number of dead and injured after an explosion. Many IT service firms are run on lagging indicators, which means, they can never catch up with their shortcomings.
And one more important point that may make you re-evaluate your accounting software and decide to setup a few spreadsheets as well.
Look, accounting is based on GAAP (generally accepted accounting principles), a collection of accounting rules.
The problem is it looks at your business through the rear-view mirror. It documents where the business has been. In the words of Ron Baker of Verasage Institute, it's like timing your Sunday roast with the smoke detector.
That's why I find it rather strange that firm leaders use their accountants as CFOs.
CFOs plan ahead and forecast where the business is headed. Accountants merely document where the business has already been.
Your CFO can warn you not to do certain things because you may go bankrupt. Your accountant will tell you at the end of the accounting period that you've gone bankrupt. So, be careful.
Summary
Every industry has its own business model. And every business model has lots of moving parts.
But contrary to the 1976 Black Sabbath song, All Moving Parts Standing Still, they are not.
Moving parts are moving around pretty as fast as a doped-up cockroach on casters. And those moving parts can cause serious damage if their movements are not monitored.
Imagine that the above 10 factors are 10 moving parts, and if they get neglected, they can wreak havoc in your firm.
Consider only #10, metrics and KPIs. You have to monitor the right KPIs.
In retail, sales per square foot is a common KPI. In manufacturing, mean time between failure (MTBF) is a common KPI.
They are vital KPIs in their own industries, a.k.a. business models, but in your business model, they are about as useful as a pantyhose for a fish. Although it may be a pretty sight.
In your "high-margin, low-volume" business model, you have different success factors. Most industries focus on increasing sales volume (1% sales volume increase adds 3.2% to the bottom line ~ McKinsey & Co. study).
In your business model, you have to focus on increasing the price of each engagement (1% price increase adds 11.7% to the bottom line ~ McKinsey & Co. study) and reducing variable costs (1% reduction => 7.3% profit increase).
Yet, far too many IT service firms have been stuck on the same price for years and when it comes to cost reduction, they focus on reducing fixed costs (1% reduction => 2.3% profit increase). They neglect the two most profitable factors.
Review these 10 factors and see how every one of them can relate to price increase and variable cost reduction.
It's all well and good, but to apply it all, you need to know how your target market perceives your firm.
Is it a fungible IT vendor or a respected IT authority?
It's the market that hangs your brand around your neck based on the outside perception of your firm.
But you can also influence the outside perception by tweaking your firm's inside reality, that is, your culture, by consciously transforming your firm from vendor to authority.
In this peddler quiz, you can check whether your firm is more of a fungible IT vendor or a respected IT authority.
In the meantime, don't sell harder. Market smarter and your business will be better off for it.