How do you earn the right to charge premium rates?
In reply to a recent blog post, one of the 5YE Community Members (Ian) raised the following question …
What I would be keen to get your perspective on is how you feel you go about differentiating your professional services firm, which is ultimately selling professionals’ time under a brand banner, from a firm that places contractors in a similar field.
By this I mean, what is fundamentally the difference in added value, and therefore, day rate, that a professional services firm provides over and above a firm that just provides interim contractors?
This seems to me to be one of the key challenges in building a professional services firm; since unless one is able to find a way of successfully charging professionals out at a day rate that is greater than they would otherwise get as contractors, then one will struggle to be profitable.
It is such a good question,… I decided to devote a whole blog post to my answer!
The reason why this is such a good question is it goes to the heart of what a professional service business needs to do to be commercially viable/profitable. In Guide 02 (Fundamentals of Value), I cover, in some detail, a number of stratagems for growing profitability (specifically the key metric: profit-per-owner). One of the ‘rules of thumb’ you should take heed to, in this regard, is the target objective of achieving a gross margin of 50% (40% as a minimum). To build a successful practice, with supporting infrastructure and investment back into the capabilities of the company, an indicative financial template could/should then look like this:
Cost of Sale 50 [Gross Margin 50%]
EBITDA 20 [Net Margin 20%]
If your gross margin is lower than 40%, then with the type of overhead cost you typically need to build a successful firm (marketing, finance, HR support etc), you are unlikely to make sufficient net profit to make the effort sustainable/viable.
So, Ian is right … this is one … if not THE … key challenge of growing a professional service business. If you are using associates (contractors) as part of your staffing model, you will only be successful if you have paying clients who value the fact that an associate supplied by your business is worth more to them than a singleton going to them directly. Indeed, potentially worth twice as much! The point is even more emphatic when it comes to employed staff as, clearly, your business also carries the un-billed cost of such colleagues.
So, where does this premium come from? This requires some unpacking as the answer is – as is often the case – multidimensional. The following aspects certainly contribute:
1. Recruitment and Continuous Professional Development (CPD)
Leading professional service firms will take very seriously their recruitment filter. Whereas an interim agency may do little more than a CV scan and, possibly, a quick telephone chat, serious professional service firms will often have involved, multi-stage filters and ‘higher-bar’ minimum criteria. Similarly, such firms will invest heavily in the on-going professional development of their staff (and associates); as a guide, at least 10 days/annum can be spent in continuous up-skilling. Whilst a client may not be interested in the detail of this, they will quickly get a sense of those providers that provide them with a consistent type of capable person cf. the often variable provision of interim provision (excellent resource one week, complete charlatan the next).
2. Delivery Ownership and Quality Management
Often the client has a need for team-level support. In such an instance, over and above the capable resources provided, they are looking for a company to really ‘own’ the solution provision (and delivery of the benefits being targeted). They will not want the ‘overhead’ of managing a disparate set of singleton contractors regardless of how competent they are. Even in the case of a single, provided resource they will want some security that if things aren’t working out (and sometimes this just becomes an issue of personal chemistry), they can quickly get access to a replacement. An interim agency may be able to promise such a replacement service (clearly, a genuine ‘one-man band’ cannot) but this too misses the point. Good professional service firms will have a Quality Management System (QMS) in place that really minimises/mitigates this circumstance and certainly picks up any quality variance at the very first instance. Most interim agencies ‘deploy and forget’. A discerning client will quickly detect and value the difference of a true professional service offering (i.e. consistency of service, attention to quality monitoring etc).
3. Team Collaboration
Closely related to point 2, the best firms will have a delivery style/brand that means the client receives and perceives a service whereby 1+1 equals more than 2 in terms of the efficacy of any supplied team. Their common heritage, training and ‘one-team’ culture means that they work super-collaboratively. This will be a function of the leadership of the firm, the recruitment criteria, investment in staff development etc. Again, a discerning client will appreciate the difference this makes. Over and above technical expertise, such teams have the unspoken, ethereal attribute of ‘we will deliver this for you or die trying’. The point also applies to supplied singletons from top firms as, even in this instance, they will often be leaning on their colleagues ‘back at the ranch’ to provide additional value to their clients. Additionally, such ‘one team’ firms may just be more enjoyable to work with. All other things being equal (technical competence, delivery ownership, teamwork etc), a client’s purchasing decision may come down to this; especially so, if the engagement is going to involve many weeks of shared, close working.
4. Methodology and Intellectual Property (IP)
This is a really important aspect of the premium value. You will never gain a client’s permission to charge more than the ‘unit’ resource cost if there is no intellectual substance to back it up i.e. no depth to the approach you take, the tools and knowledge at your disposal to meet the client’s requirement. The more you invest in this aspect, the more valuable your corporate offering becomes because clients will recognise that it is an important enabler to your service consistency and differentiation. By way of example, at my old firm Moorhouse, we invested – literally – £millions (in terms of invested internal time) in the development of our programme management methodology and tool-set It became a structured repository of hundreds of person-years of experience and ‘best practice’. When we demonstrated it to clients, they could see the value in (a) how it would guide us through a client problem/situation and (b) the value the embedded tools/templates/reports/guides would be to them also. No interim resource would get anywhere close to having a similar intellectual resource.
5. Knowledge Management
This aspect may be more of an indirect benefit from the client’s perspective but it will, undoubtedly, be a key contributory factor to their assessment of the two points above – team collaboration and IP. Leading professional service businesses facilitate exemplar collaboration by ensuring that knowledge is optimally shared across the firm. If a provided resource doesn’t have the answer immediately to hand, the route to the colleague (or artifact) that does is optimally oiled. Knowledge management strategies tend to have two-faces: (1) a person-to-person connecting objective (recognising that knowledge is often tacit and idiosyncratic); and (2) a person-to-artifact connecting objective … think smart taxonomy and an ICT-enabled store-and-search portal. I always advocate asymmetric-focus on the former but the best companies will build in both and, again, discerning clients will recognise and value this.
If there is a ‘binding’, final quality it is that of ‘brand’. This takes years to build but if you get all these other aspects right then new clients will soon become trusted relationships who value the service you deliver over and above the competition. If there is a subjective, emotion-based dimension to this assessment you can build on it by any additional value-add over and above the direct client engagement; for example, you may produce relevant thought-leadership, surveys, facilitated introductions to peers in their industry sector, sector insight, invites to relevant topic seminars etc. Finally, marketing will have a role to play in building upon this premium-perception but only as a reinforcement to actual value and never a surrogate for it. In final analysis, permission to charge more than the ‘unit’ resource cost – up to twice as much even – is a hard won privilege earned over months and years but potentially, through complacency, lost in a day.
As a final aside, all of these aspects have focused on the client perception and your ability to command top-end, charge-out rates. The other lens to look at this through is the supply-side lens. You will also attract the best people if all of the aforementioned elements are in place. Indeed, skilled resources will even make knowing concession on the rate they seek (in consideration, maybe, of the singleton contractor alternative) if they are joining a ‘one-team’ firm, with evident IP and training, a collaborative/fun culture and a great brand in the market. So, you actually attack the 50% gross margin challenge from both ends!
Hopefully that is helpful. If you have any more suggestions as to what defends this charge-out premium (true professional services cf. interim contractors) please reply below.