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Scaling Professional Service Firms

While there has been a lot written about scaling product businesses, there hasn't been as much effort put into detailing how to scale a professional service firm, which requires a lot of different skill sets.

Most PSFs (Professional Service Firms) are started by one or several founders who were doing the original service at another PSF, or who were freelancing and then got busy enough as freelancers, to turn their activity into a full blown business.

Whichever the case, there are fundamentals that apply across all stages of growth, and these are the following:

  • People
  • Management
  • Financing
  • Brand Management & Differentiation
  • Building Networks & Relationships
  • Diversification
  • Building a Flywheel

However, there will be a different focus depending on the phase of scaling that the PSF is currently going through.

  1. Initial Scaling Phase (up to 25 people)
  2. Mid Scaling Phase (up to 200 people)
  3. Late Scaling Phase (200+ people)

People

People are the most important part of any PSF, because they are the ones who actually service the client. Ideally, you want to maintain a strong culture that values entrepreneurship, bias to action, and high standards.

Having the right governing structure in the firm allows scaling seamlessly from a handful of people to an entire office of people.

Our recommendations are:

  • Transparency - This really depends on management. Enabling transparency has a whole host of benefits, but mostly that it enables teams to fully understand the direction of the company and make decisions that are aligned with that direction.
  • Ownership on Decision Making - Giving team members ownership of decisions that fall under the team is key. This provides a true sense of ownership over the work involved, and allow management to hold team members fully accountable for results.
  • Freedom & Responsibility - Giving team members as much freedom as possible in your industry, and then simultaneously give them exceedingly clear responsibilities and performance indicators, as results are the only thing that really matters.

It's also important to get the right mix of contractors vs full-time employees.

The risk with hiring too many full-time employees too early is that you do not grow as quickly as projected and then you end up with extremely high costs compared to your income.

The risk of relying too much on contractors is that you do not build in-house expertise that allows you to build a knowledge and skill library that can be taught to future employees, as well as develop a consistent set of values and a great culture.

A 70/30 split between full time-staff and contractors appears to be ideal. This allows for cutting the contractors if certain large projects end before new ones begin, and so keeps you nimble in the case of a small downturn, and yet this provides enough full-time employees to get the great benefits that come from working with the same people day in, day out.

Management

It's important that the role of management is clear. Their job is to work on the business, not in the business.

This means that the management team should be decoupled from the delivery of projects, so they can focus on ensuring that all the other aspects of running and growing the company are looked after.

The individual members of the management team have a multiplier effect. One member can help five, ten, twenty other people work more effectively.

Advising on the strategy and executions for projects - i.e. helping project staff make the right decisions or view it from a different perspective - is where we draw the line at management involvement in projects.

It is tempting to place senior management on projects. They can command a premium billing rate, and often will do an excellent job on the projects, making the client very happy. However, this stifles further growth because it means that investment in the delivery team will be cut, because the management team is always available to step in and help out.

One last point is that if the senior management is detached from operations, it makes the business as a whole more valuable, because a potential buyer can buy it as a "turn-key" business than essentially runs itself. This can command a multiple compared to the valuation of a firm that requires heavy involvement.

Financing

Running a busy PSF involves having a lot of fixed costs, and a variable income depending on the number of simultaneous client projects.

The key factor in ensuring successful financial management is to have a deep obsession with FCF (Free Cash Flow) instead of accrual accounting.

This is because the majority of costs that are incurred, such as office rent and wages, are due right away, while many clients will tend to pay their bill several weeks or months after they have been issued, which can mean that the PSF actually has to fund client projects if they are not careful.

Building Networks & Relationships

Something that many people starting out forget is that you don't sell to businesses: you sell to people who work in businesses. This is why relationships, networks, and trust is so important.

You are significantly more likely to win a proposal that came from a referral than from a cold call, as there is already some trust flowing to you.

That said, in the long term, you cannot rely on networks and relationships only. The reason why many PSFs fail to significantly scale is because they rely purely on the known networks and relationships of their senior management, and this has serious limitations.

Brand Management & Differentiation

Building a brand enables scale in a way that is not immediately obvious. Think about how Google and Facebook operate with their sales teams. They hire smart, but otherwise not that experienced graduates, and these graduates are able to make sales of hundreds of thousands of dollars a quarter not because they are geniuses, but because they are part of a great brand, that makes selling their products so much easier.

Being able to generate a machine that regularly produces referrals and word-of-mouth leads (i.e. inbound leads) takes a long time, but then it starts to feel like magic. Prospects and customers are coming to you - you are no longer chasing them.

In addition, it is relatively trivial (compared to manufacturing or product businesses) to launch a Professional Service Firm, and so this means that the market is flooded with many options for clients to choose from. This hints at the fact that creating key differentiation between yourself and the competition - along with communicating this - is of the utmost importance.

The key question you should be asking is:

How are we different, and why should customers care?

Diversification

Building industry-specific services has some great advantages in that it makes your marketing and communications really tight, and also allows for the services to be honed to a really high quality. It also means that all past case studies are very relevant to new customers.

However, the issues happen when you have either sold to everyone that will buy from you in a particular industry, or that you have some of the major players already in your client list, which prevents you from working with their competitors. This can prevent growth to the level that may be expected.

Another subtle issue is that of group-think. If you only work in one industry, you may not see a wide enough spectrum of view points as a firm that works across industries. You may start to apply the same solution to every problem, instead of thinking in the client's best interests.

Putting it all Together - Building a Flywheel

We've previously published our thoughts on our own flywheel.

This can be a really clear way to communicate strategy across the entire firm, as well as giving the management team a clear understanding of the priorities that they should be working on.

Emanuele Faja

Emanuele Faja

CEO at Mäd. Emanuele brings on board a passion for minimalist Italian design and a 21st-century management approach. He consistently helps clients create and maintain market leader positions.

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Scaling Professional Service Firms
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