Growth Strategies for Professional Services Firms: An Interview with Michael Treacy
For nearly 20 years, Dr. Michael Treacy has been one of the consulting industry’s leading lights on growth strategies. He has authored two best–selling books, The Discipline of Market Leaders and Double-Digit Growth, and has counseled hundreds of CEOs and other senior executives on corporate strategy, product innovation and process excellence.
He is president of Treacy & Company, a boutique consulting firm that also conceives, funds, and launches one new venture each year. The firm’s latest venture, First Help Financial, provides auto financing for recent immigrants. Treacy is working on his third book, which will focus on the anatomy of sustained high performance, a topic he refers to as "performance discipline." A company possesses a performance discipline when the risk of sustained high performance against a particular objective (quality, growth, safety, productivity, service reliability, etc.) has been largely eliminated and all that remains is hard work. Familiar examples of companies that possess a performance discipline include Toyota (quality), Olive Garden (same store sales growth), Alcoa (safety), GE (productivity), and FedEx (service reliability).
Bob Buday, a founding partner of The Bloom Group, recently met with Treacy to discuss how his ideas on growth strategies apply to professional services firms.
Bloom Group: Professional services firms today face tremendous competition, ever–demanding clients, and an economic downturn. Revenue growth is likely to get much harder than it has in the past five years. You’ve worked with a number of professional services firms over the years. What do you see as keys to their ability to grow?
Michael Treacy: You can break growth down into four categories. There is base retention, which is holding on to the clients you have. There is share gain, which is competing for new client engagements. There’s market positioning, which is putting the firm in areas where growth is occurring or going to occur. And then there’s adjacencies, which is moving into areas that are related to services you already offer.
Base retention depends on two things. First and foremost, it depends on maintaining strong client relationships to keep the clients you have. And secondly, it involves structuring your engagements so that there are natural follow-ons, and creating breakpoints that are uncomfortable for the client. In other words, you don’t want to actually end an engagement at a phase where it’s easy for the client to walk away. You want to end a phase with, "Gee, there’s all this stuff still to be done."
Most firms actually tend to do the opposite. They create phases that are at natural breakpoints, which is the last thing you want to do. For example, most consulting engagements have a phase that ends with giving the client a set of recommendations, with the next phase being implementing those recommendations. That’s an easy place for the client to say, "We can implement those on our own." But what if, instead, the first breakpoint is halfway through the development of the recommendations, and the next breakpoint is through the first phase of implementation?
This makes it difficult for clients to end the project. The reality is, if you’re really good in professional services, you never leave. You may go up and down according to whether you’ve fully exhausted the clients’ budgets and their patience, but there’s no reason to ever leave. McKinsey is the master at structuring engagements so that there are always so many issues to be addressed that you must keep the project moving to the next phase.
Now I have to add here that this is advice that my own firm doesn’t follow. We are a small firm with a superabundance of demand and no aspirations to grow. We’re variety junkies and don’t want to retain any client beyond six or eight months. Therefore, we structure engagements to make them easy for the client to take them over. If I was running a big firm or I had aspirations to grow, I’d think differently about this issue, though.
BG: What about share gain?
MT: This is, I believe, where professional services companies have an enormous deficit. They believe the same tools that are powerful tools for base retention also can be powerful tools for entry into new accounts and for winning business. And they’re wrong.
BG: Can you give us an example of that?
MT: Sure. Most professional firms believe the way to gain new clients is through relationships. I disagree. I think you generate new clients through new ideas, by challenging the client with intellectual content that intrigues them to think differently about their business and their world. In other words, it’s intellectual property, thought leadership, that actually drives share gain. McKinsey, again, is currently one of the best examples of using thought leadership to gain new clients. They have this base and depth of relationship skills that translate into base retention, and they have the insight to realize that that doesn’t gain you new clients. They have made The McKinsey Quarterly a must–read publication. They are coming out with solid, fresh insights in the publication. And they’re translating that into business.
BG: But for every McKinsey, there are dozens or hundreds of firms that struggle to develop compelling ideas that generate growth. Why is that?
MT: There are lots of people in professional firms who come up with novel ideas, because quite frankly, in professional services your clients force your best consultants to come up with some novelty. But the real issue is, how many firms are able to take that novel idea, industrialize it, institutionalize it, promote it, and then translate it into engagements? Far fewer. The typical progression for thought leadership is from an expert mode, where the person who came up with the idea is the only one who can apply it, to a craft, where you have a bunch of apostles who know how to do it. Then it quickly industrializes and ultimately becomes a commodity. And a firm has to know how to ride that curve. When [CSC] Index created reengineering back in the 1990s, it went from expert to craft. But when reengineering became industrialized, Index lost control of it, lock, stock and barrel.
BG: This brings up a very important point for us. Do you think most professional firms still regard thought leadership as a marketing gambit as opposed to something that should lead to new service development?
MT: Yes, that’s all it is for them—a thin veneer disguising the same humdrum services that all the other consultancies provide. But firms are going to need thought leadership to be more than this if they are to ride out the coming downturn in the market. A firm needs to have both little innovations that keep its core offerings fresh, and it needs big innovations that open up entire new service lines. Most firms are pretty good at adapting the little innovations, although they have a little trouble making sure they go across the whole firm so everyone’s using the updated approach. But they’re just terrible at launching a new service line effectively in their organization. And it’s because of one very simple fact: salespeople in a professional services firm are typically the most senior members of the firm and are the most set in their ways. Because they’re so good at selling the old stuff, they think they don’t need the new stuff. It’s that simple. And, by the way, new service innovations typically don’t work satisfactorily the first time out of the gate.
BG: Say more about that.
MT: You need to invest in a new service offering in the early stages of its use. That means struggling with the first few clients all the way through the engagement, so you advance up the learning curve in parallel with them. But that’s difficult for senior professionals, who aren’t used to exposing to their clients that they are learning on the job. I’ve found, though, that if you’re forthright with the client and explain to them that you are pioneering a new approach with them, clients are generally enthusiastic and understanding of bumps along the way.
BG: So it’s the partners who won’t take that risk?
MT: To make a new offering successful, the senior professional services partners have to admit that there’s a lot of stuff they don’t know, and have to invest time in learning the new offering so that they can sell it more effectively. Most aren’t willing to take the time.
BG: We know from our own research that thought leadership is critical to generating new business. But is having novel ideas, a compelling value proposition, enough on its own to break into new clients?
MT: No, you also need the other half of the equation, which is market coverage. This is no different than dating in college. Two kinds of guys get dates. One’s the guy who’s either rich or handsome. That’s called having a value proposition. The other guy’s the guy who asks out all the women. That’s market coverage. And that’s the other half of share gain.
BG: In your experience, how well do consulting firms cover their markets?
MT: Most big professional services firms have pretty decent coverage of the market, but not nearly as much as they should have. Do they really have presence in all the executive corridors of all the big companies that could potentially buy consulting services? It’s pretty hit or miss. In fact, you tend to find is that one firm or another dominates the corridors of most of the Fortune 1000 firms. As someone who gets to go into a lot of those corridors, I typically see that one company is a McKinsey shop and another is a BCG, and another is a Bain shop.
Could there be more market coverage? There’s no doubt in my mind there could be, and where it should be is in the enemy’s clients. Firms tend to have great coverage in their own accounts—in other words, good base retention. What they don’t have is great coverage in the enemy’s accounts. You know why? Because they don’t have much ammunition to shoot at the enemy. They don’t have sufficient thought leadership. What’s the point of approaching a competitor’s client if you don’t have a different story to tell?
This brings up another sin that, I believe, most firms commit: overemphasizing vertical industry structures in their market coverage—e.g., we have our consumer goods group, our financial services group, etc. Why is this a mistake? Because they convince themselves that having context knowledge—knowing what the client knows—is enough. That model works well for base retention but poorly for market share gain. Strong context knowledge may be the ante to the game, but it isn’t going to win you a lot of hands of poker.
BG: What about market positioning?
MT: There are two dimensions of market positioning that matter in professional services. One is, indeed, which vertical industries to heavily focus on, because industries go through swings. They buy lots of consulting or buy very little consulting. Boston Consulting Group for some years back in the 1990s had a large portion of the market for pharmaceutical firms, at a time when the pharmaceutical industry was booming. BCG had positioned itself as the go–to firm among a cluster of clients that were spending a lot of money on consulting services. That helped BCG grow rapidly. But all good things come to an end, and the pharmaceutical industry went into a slump starting in this decade that it’s now coming out of.
So one way to play the game is to say, "How do I place bets on which market sectors are going to need a lot of help?" But the reality is that’s a really tough set of bets to play, and if you’re really that good at making those bets, maybe you should be in investment management. There’s more leverage in investing money than there is getting consulting work.
The second dimension of market positioning is around which class or category of problems to focus on, and shifting your thought leadership to areas where the action is going to be. McKinsey, for example, positioned itself early on globalization issues and gained a lot of work as the thought leader on this bundle of issues. Right now there is very hot market for anything having to do with the innovation of a product or service. Creating a good and novel idea that’s applicable to a big and growing market segment can have a huge impact on a firm’s growth. And, in fact, great thought leadership can actually create new professional services market segments. Witness reengineering. It didn’t exist before as a category and it’s a multi–billion dollar category spend today. So really great innovation actually creates new categories of spend.
BG: And it could also redefine a category, right?
MT: Exactly. But good thought leadership can also not create demand. Witness Good to Great [by Jim Collins]. I don’t know how to do a good–to–great "project." I’m sure there are lots of little ones throughout the country. But who’s going to generate $10 million out of a good–to–great project? I couldn’t even figure out how one would take those recommendations and turn it into an effective program of change.
BG: Why do you think that happens, where it’s a great concept but little potential for a substantial professional services firm to implement it?
MT: Whenever a concept has to do with soft issues, clients just do not have a propensity to spend on it. So thought leadership should deal with the hard issues of process, systems, structure, and strategy—all the stuff that you can just see dollars flowing to. It’s that simple. You have to impact where people spend their money, not where they spend their thought time.
So, that’s part of positioning. And that’s a very tough game to play, to be thinking ahead to what I want to be known for as the market keeps evolving. There are obviously some old chestnuts that are going to be around forever and ever—such as market–entry strategy and industry structure analysis. But I’m talking about the hot new topics that come and go. And those are hard to figure out.
BG: And what about the fourth aspect of growth, adjacencies?
MT: The thing about adjacencies is that so much money has been thrown away by professional services firms trying to get into adjacencies. Lots of examples were seen during the Internet bubble, when firms were getting into venturing and entrepreneurship. Every firm had some sort of market capital play. And they were all abject failures. I can’t think of a single success. And even when they succeeded in getting into adjacencies, regulation forced them out. Remember the Big 5 accountancies? They moved into outsourcing or consulting and then, with the exception of Deloitte, were forced apart. It’s really tough to find adjacencies that work.
BG: Why is that? What makes it so difficult to be successful in an adjacent market?
MT: It’s simply because when you peel back what any kind of professional advisor knows, he generally knows only 5 percent of what it takes to be successful in the adjacent market, but thinks he knows more. And firms are dismissive of the skills they don’t have. "Oh that’s just an execution problem." "Oh, that’s just a leadership problem." Those are big problems. So if they want to grow strongly, I would urge professional services firms to stick to their knitting.