Principles can be powerful constraints that push you to innovate in areas where others may continue to stick with the status quo or struggle altogether. Today I want to use the thought exercise of intentionally limiting your business growth.
That last statement was vague so let’s further define what it means by focusing on keeping your team small. For this, let’s use the constraint of 20 people.
Why 20 people? The majority of US-based small businesses with more than 1 employee have less than 20, per the SBA. Yet most service businesses grow revenue by adding headcount, which implies growth is tied to human labor. So the conventional wisdom implies that “to grow you must hire more people”.
In this thought exercise, I want to challenge your ability to grow revenue (and especially, profit) by constraining your ability to grow your team beyond a small size.
This will upset some long-held beliefs within the consulting world. For the past century, revenue has primarily come from billing customers by the hour. While this opens us to some ugly moral and ethical quandaries, that’s a topic for another day.
If I can’t hire, how do I grow? By fundamentally shifting how you perceive what you offer to your customers. With hours, you and your customers focus on effort. Yet effort is not the same thing as an outcome that will help either party. Your effort may help but a better area to focus on is the result you produce.
For many of you, this may feel quite risky. I can feel all the arguments vying for your attention right now. You are right — getting paid for your effort is less risky for you. It puts most of the risk on the customer which is why they have been trained to distrust your hours and efforts. In short, you both focus on the wrong thing.
All I can say is I’ve been in your shoes and can empathize. Yet I also know there is a better way and that’s where I choose to focus my energy. And what I’ll show you today.
I’ll use my first success story as the basis for my argument here. My last consulting firm worked with large corporations to implement software to manage their supply chain — specifically warehouse operations. When outages occurred, the bulk of the customer’s business would be negatively impacted. Not shipping orders meant not recognizing revenue. Downtime represented a 24 by 7 risk that had to be minimized, if not eliminated altogether.
When my business started, I sold my team’s knowledge by the hour, failing to see that I wasn’t aligned with our customers. As you can imagine, being available around the clock to minimize customer downtime did not align well with hourly billing. I only got paid when the customer came knocking yet needed to have my team always ready at a moment’s notice.
That’s when I evolved the business to focus on the value my service provided. We were offering assurance. Peace of mind. I discovered customers would happily pay for our ability to be immediately responsive. The hours didn’t matter. The hit to their revenue and brand was all they truly cared about. So I positioned the service as a rapid remedy for downtime, with proactive monitoring to avoid most issues before they caused pain.
I also needed to understand the cost to my customers’ businesses when downtime was encountered. There were several degrees of downtime that had to be considered. Once I understood the costs, I knew the value represented and could then price using a fixed fee with a specific scope defining what my business would offer. I did not price every customer the same — I priced according to the perceived value they received and if I couldn’t do so profitably, we parted ways.
The outcome was a scalable service that produced exceptional margins because my team focused on customer value instead of our own effort. Customers received value whether we performed work or not. We were then encouraged to eliminate and prevent as many problems as we could discover so my team could produce similar results for a growing set of customers.
All in all, my managed services team was less experienced than my consulting teams yet produced more revenue and profit per employee. All due to focusing on providing value that customers appreciated greatly. If I had offered this at an hourly rate, both my business and our customers would have been disappointed.
This type of thinking can be applied to all aspects of your business. It requires you to look at what your customers truly value and offer them that outcome. Your business will be forced to focus on delivering that result, which will allow it to innovate. The tasks you once performed (to bill hours), may now be automated or eliminated because they have little bearing on the negotiated outcome and hurt your margins.
As hinted at above, you’ll begin seeing earlier efforts and activities that no longer matter. Yet you’ll also need to better manage scope and hold customers accountable for what they agreed to do. Contracts will be key to scaling your service business.
Rule of thumb: focus on the 20% of your activities that truly impact the customer outcome and automate or eliminate the other 80%. You’ll be able to achieve so much more with your existing team while building greater rapport with your customers.
While the above may sound onerous, it’s essential for you to evolve into an innovative firm that wows customers, excites your team, and confounds your competitors. As a secondary benefit, you may develop intellectual property (IP) that attracts investors, buyers or allows you to build another business to capitalize on the innovations.
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