Let’s do a thought experiment. Let’s try on outrageous success by moving to the outer range of what you have already proven is possible for a firm like yours.
Let’s Start With Your Clients
Let’s begin by looking at your best clients and the value you create for them. If you rank your clients by revenue, profit or the value that you create for them—whatever you see as the most relevant metric—it’s likely that you will easily be able to draw a line that separates your very best clients from the rest. That line is probably somewhere between clients two through five. After that the quality typically drops off quickly.
Ignoring the clients below this line, let’s rebuild the firm around your best clients only. Right-size your client roster by imagining having around ten active clients at any one time (between eight and fifteen is fine for a typical customized services firm), but with each client as high quality as your top two are today. That starts to look like a great business.
Now look at the value you might create for such an elite client roster. Think of the highest value work you did for your best clients last year and estimate the economic value that you helped to create for such a roster. (Unfortunately, this exercise doesn’t work if, like a residential architect, interior design firm or almost any firm serving not-for-profit clients, the value created by your firm isn’t economic. In such firms “willingness to pay” is rooted in other factors that we won’t address here.) As an example, let’s say you estimate that your work helped to create $15m in net new profit for your two best clients, generating $7.5m in profit per client. Multiply that value creation per best client times a right-sized client roster (e.g., $7.5m x 10 = $75m in profit created).
With this sense of the economic value an optimized firm might create in the world, you can begin to glean the revenue that you might generate with the right pricing model.
Profit isn’t the only measure of economic value. Maybe you work with early-stage companies and a more appropriate metric is increase in enterprise value. Whatever your metric of value is, try to estimate how much you could create in an optimized roster filled with clients that look like your best today.
What’s Your Cut?
Now, with no regard for the costs incurred, what do you think is fair compensation for your role in helping to create this net new economic value across a properly sized roster of great clients? Is it 20% of that value? Is it 50%? Five percent, maybe? There is no universally “correct” answer, but consider if the profit created is one-time or recurring. And consider your role in that value creation—are you a major driver or a mere bit player?
Continuing with our example of $75m in new profit created for our client roster, I’ll use $15m, or 20% of the total value created, as what I think constitutes fair compensation for our example firm. Don’t read too much into that ratio. Like I said above, it can vary greatly depending on variables. To me, 20% represents a firm that is a good contributor to lasting economic value creation, uses value-based pricing often but not all of the time, and only occasionally puts some compensation at risk, choosing to lower fees for a chance to participate in a larger upside maybe a couple of times a year. Change any of those variables and that 20% number could go up or down.
In our example we have a firm that we know based on past experience could create $75m in profit for ten good clients and for which we think $15m in revenue is fair compensation. So we can see this firm scaling to $15m in revenue if we can get a few more clients that are like our very best ones, and we can improve our pricing skills.
Headcount and Profit
Now I’ll assign some constraints based on your new target revenue number. The first is headcount. Take your new revenue number and divide by $500k to get your full-time equivalent (FTE) headcount maximum. This is a difficult one to try on, but we want top line revenue to convert to bottom line profit. Something needs to change here, doesn’t it? Yours needs to be more of a consulting or advisory firm and less of an implementation firm if you’re going to hit this new revenue number with this constraint of so few people.
The good news is the next constraint I’m imposing on you is profit. I want you to assume 50% EBITDA as the minimum satisfactory number. Think of this number as tied to headcount. To get to this one you have to hit the other.
So in our example, we have a firm that generates $75m in profit for its clients and earns $15m in revenue for that result. It does this with just 30 people and it earns $7.5m in pre-tax profit.
What numbers did you come up with?
Three Steps to Reinvention
Whatever your numbers are, I imagine you’re contemplating them, thinking “How would I ever make this happen?” But you already have the answers.
- Focus on client quality over quantity. You probably have too many clients of poor quality. See every new client as a step toward this new vision of your firm. The new business function moves from a volume game to one of selection and precision as you add a small number of high quality clients and you Do Not Compromise.
- Think about pricing as a skill rather than a model (e.g., cost-based or value-based). Build that skill in yourself and your team. It’s likely that you are already creating the value that should see you get paid a lot more, but collecting your fair share requires different mindsets and conversations. I hear people reject value-based pricing like the model “doesn’t work” in their business but the model is rarely the problem, the lack of skill is. There is no higher ROI skill than pricing. Formalize how you will grow it and commit to the plan.
- Reevaluate your headcount and delivery model. Do the exercise of imagining how you would hit your new revenue and profit targets with your new headcount constraint. What got you here won’t get you there. You will have to let go of some things and fully reinvent others. Your labor arbitrage model is a mental prison cell from which you need to bust out.
You could choose to lower your revenue and profit numbers to what still constitutes a big jump in success. Likewise you could soften the headcount constraint ($400k/FTE?) and you could target 40% EBITDA instead of 50%, but there is greater value in pursuing the more ambitious numbers. They force reinvention (if only on paper at first), causing you to let go of beliefs, measurements and practices that helped get you to where you are today but are now impeding further progress. These ambitious targets and constraints are the source of the creative energy required to reimagine your firm at much higher levels of impact and reward.
You’ve already proven most of these numbers possible. In this new version of your firm you are simply scaling the best work you are already doing to more of the best clients you are already serving, while getting paid for your contribution to the value you are already creating. It’s not such a stretch.