Q/A: Tackling the Final Burning Issues

Here's the final installment of unanswered questions from a recent webinar. The questions we didn't get to were also excellent, and so here you go. This follows Part 1 and Part 2.

If a firm’s new business success is due to the growth of a single client, is that firm actually in a healthy position?

No, but of course it’s relative. First, a definition. All related sources (i.e., different departments) are rolled up together in the calculation. That’s because you don’t lose a client because you don’t serve them well—in fact, you’re likely to over-serve a large client. No, it’s because of an acquisition of the entire entity or a vendor review, neither of which you have any control over or even advance notice. So if that bundle of related work represents more than 25% of your fee billings, you are at risk. You don’t turn that work down, but you do set aside a thicker operating cash cushion, you spin up the marketing machine, and you steel yourself to act decisively when/if you lose that client. But the point I was making in that statement is that most firms that are growing quickly these days are doing so on the back of a single client that’s demanding more and more of them. That’s unusual.

David, our research shows that agency leaders are very concerned about the impact of AI on their relevance/value in the eyes of clients and prospects—but the vast majority of agency clients don’t see agencies as going away, and in fact want their agencies to be experts in AI and help them learn how to use AI effectively for marketing. How much of the worry from agencies you’re hearing from is related to this issue in particular, vs. broader economic factors?

It's really a perfect storm of economic malaise, chaotic political decisions, and the uncertainty brought about by AI and the implications for this industry. It doesn’t help that the head of OpenAI and Meta are predicting the very dismantling of the advertising industry. But to answer your question, politics and the economy have always been with us, and we are accustomed to their cyclical impact. AI, though, feels more like an existential threat for which we have no reference point. So I’m going to say that it’s the gravest of the three in our psyche. Not so much for branding and creative firms, but definitely for dev shops and SEO providers. Should we be this worried? I think we should be early adopters of AI, but I think the industry is overreacting.

When you’re strongly positioned but you’re impacted by today’s political situation, how do you stay focused? Our new biz inquiries are still very focused on our positioning, but the budgets are tiny and our win rate seems low.

What I would not do is change my positioning, though I would compromise a bit on pricing…as long as I was comfortable knowing that I would never raise that particular client back to a normal pricing level (in other words, assume it’s forever). But the most important reaction? Do not retain staff hoping the dam will break soon. The calvary is not coming to rescue you and you cannot safely predict when opportunity will open up again. Better to scramble around finding people than crying in the dark over missing the next payroll.

We’re seeing a TON of decision paralysis for both new clients and new scopes of work for existing clients. Do you have any suggestions for (politely) getting clients to move faster?

No, and I would be really careful about sending any weird panic signals. What I might do is break things into smaller pieces and be more flexible on payment terms.

How do you know if you’re one of the better firms and not going to get thrown off the merry-go-round?

I take it your referring to my statement that sometimes an environment like this can have a “clearing” effect in that weaker competitors fail. In that spirit, the strong firms don’t have operating debt, are tightly positioned, have a modest marketing plan always running, and sometimes (not always) have a variable workforce that scales with demand.

What are your thoughts on companies that are merging out of desperation? I feel like two sinking ships will only sink faster.

I would disagree with that assessment, but of course it depends on why they are merging. In an ideal world, one firms brings a strength that the other firm doesn’t have, and that would work both ways. The best reason is because the combination strengthens their new business capabilities, but there are often operational advantages. Where it can fail is if executive decision making is even slower. Having said all that, you don’t see two weak companies combining as often as you see one stronger company “acquihiring” a weaker one.

As a firm that's just starting out, how can we differentiate between challenges that are inherent to being a new business and those that are a result of the current business climate?

The easiest way is to compare your struggles with well-run firms who have been around awhile. If they are struggling, too, it’s not just you. And you really ought to work at having transparent relationships with other principals, including newer ones and established ones.

You stated that we shouldn’t be spending more than 45% of our free base on unburdened comp. Is unburdened comp the same as cost of labor? How are they different?

“Unburdened” means before taxes, benefits, and bonuses. So you just add up the salaries people make, including your own, and that total shouldn’t exceed 45% of your fee base.

How should we be thinking about new client outreach and filling the funnel in this time of uncertainty on the client-side?

I wouldn’t think about it any differently now than during normal times, but times like these highlight the best practices that we should always be following. That means being there to help your potential clients and not sell them things. It means making it as easy as possible to start working with you, including some prepackaged offering that delivers real value, and quickly. It means sharing a perspective about your industry that sets you apart as an expert who consistently delivers value. It means focusing on a more interactive engagement that helps leaders migrate to a shared perspective that invites action (like an on-site workshop).

How can we tell if a drop in sales means we need to retool our business, or if we can stay the course and wait it out?

The only safe way to “wait it out” is if you are only burning excess cash that you’ve set aside for a time like this. Once that operating cushion drops to a specific level (often 3-4 months’ worth), you should act quickly and decisively. Excessively “waiting it out” is what kills firms, and I can safely say that no principal has ever said: “I wish I had waited longer to adjust my staffing expenses.”

What are your thoughts on why the current climate is particularly challenging for dev shops?

Because dev shops are notoriously poorly positioned, tied to platforms that yield more of an “implementation outlook,” and have already been under pressure from near- and off-shoring. Slather the unknown impact of AI on top of that and you have your answer.

If a firm is looking to choose a single vertical to narrow their positioning, and they have broad experience across most industries, are there specific industries in this current climate that are a better option than others?

We live in a developed economy that economists call an “efficient market.” That means that the low spots are quickly filled in because of our business friendly climate and entrepreneurial outlook. So the answer to that is “no.” Having said that, all things being equal, I would gravitate to the boring industries where the typical creative can’t stomach the work. That’s where you’ll make money. Obviously the rapid growth of AI will provide opportunities to consult with your clients about implementing AI, but that’s already getting quickly flooded and soon it’ll be like “digital marketing” in that everything is digital.

Receiving pressure to broaden the offering to accommodate Strategy > Branding > Production … Advice for reminding Clients of the value of each distinct activity. (A common theme, I know!)

You really don’t want to focus on the value of each, but rather on the value of the combination. In fact, an important component of great service offering design is this: don’t add it unless you plan to have most of your clients use most of those services most of the time. Think “Prix Fixe” menu and not buffet. In the former, the price isn’t broken out for each. They buy the whole thing or they don’t, and if less than most of your clients don’t want to purchase the whole set, don’t offer it. (This is less important if your people are flexible enough to move between the offerings and don’t sit with nothing to do when the client doesn’t purchase their particular skill. So front-end and back-end coding might apply, where SEO and design wouldn’t.)

In this climate, how should expert firms think about pricing—lean into value or play it safe?

Compromise where you must, but do it privately…and be willing to “waste” that client over the long term. But still, it can make sense to compromise.

What are the characteristics of a good M&A buyer/target for services firms considering that route?

I would prefer that you sell to a firm with money.  But seriously, a “strategic buyer” is one that’s motivated by a specific, important reason, but those reasons are all over the place. If they want what you have, it’s a good option. That might mean a new expertise, EBITDA, access to a specific market, a growth pattern, and a half dozen other reasons. If you haven’t read my newest book, check out “Selling Your Professional Service Firm: A Primer” (also available on Amazon) or reach out to Jonathan, who is Practice Lead over that part of our work.

We’ve been hosting free public events the last couple of years, but are moving into paid workshops. I’m curious if firms are doing paid events as a profit center, or call it lead gen and try to break even? Any advice how events can help position firms as experts and make profit?

I think that the two parts of your question are actually related, in that part of being viewed as an expert is charging for your expertise. We see a large movement back to IRL events, concurrently with a move away from Zoom-like conferences online. Keep in mind that time is more precious than money to most of your prospects, and so spending time in an event is a seriously important signal, but whatever you charge should complement that message. Unless making money from events is an ongoing part of your business plan, though, I would try to at least break even, as long as you’re taking your time (and not just hard expenses) into account. Here’s a bonus idea: attendees will value the connections they make with each other just as much (or more) than whatever insight they pick up from the stage. So work hard to shape the event so that attendees can have a reasonable expectation that fellow attendees will be worth spending their time with. And never do a room block; that’s the easiest way to lose money on events.

This is more of a frustration than anything: I soak up and apply the advice that I get from David and Blair via 2Bobs. But honestly, it doesn’t seem like many prospects are responding the way I’d like them. It’s like they’re almost thrown off, and not always in a positive way. Sorry if that doesn’t make sense. I wish prospects were also following those guys as much as I—the seller—am.

Ain’t that the truth! But if they were listening as carefully as you are, they might be learning about the tricks you’re employing, too, which might work against you! Remember that most of the stuff we talk about doesn’t make much difference unless you have an appreciable amount of lead flow, and you aren’t going to have much lead flow without a marketing plan, and a marketing plan is really hard unless you have a positioning that yields an addressable market. But even when all those elements are aligned, qualified prospects are always going to be a minority of the prospect pool. There is one inalienable principle to make this work (beyond what I outlined above), and that’s this: determine, as quickly as you can, whether or not the prospect is marriageable. If they are not, then quit dating them. But go into each prospect engagement with hope, with an outlook of service, and with a rock-solid confidence that “I am the prize” (as Blair says).

Are you seeing any trends with increasing competition from off-shore/near-shore players? Are there things that just might not be done in the US all that much moving forward, especially at a premium price point?

The movement to arbitrage labor marches forward with no end in sight, and I don’t see any slowing on that front. The firms that are winning in that game, though, incorporate  certain elements, it seems. They work directly with the individuals rather than via a staffing agency, relying on recruitment through friends and family; they keep the time zone differential at a minimum; they make sure that the AM team speaks English flawlessly and may even locate them in the same country as the firm; and there is an equity partner located in that remote center. This movement is here to stay, although the labor cost arbitrage will become less significant as the standard of living and resulting pay expectations rise with the demand.

Can you give some high-level heuristics around current M&A buyers in this current market? Min rev/ebitda, multiples, earnouts, etc.?

Rather than summarizing it here, be sure catch the specific webinar focused on that.

Any thoughts on prioritizing retainers over projects with clients or vice versa?

I’ve always thought this insane focus on recurring revenue is a tad misguided. Yes, I know it can make your forecasting easier and buyers will often favor that in an acquisition setting, but most of the advantages of recurring revenue accrue to you and not the client. Retainers can also hasten the loss of an account when things begin to tip in the wrong direction. Still, there is a place for retainers and they are perfectly suited for some situations. Having said that, there is a massive tilt away from them and toward project-based relationships, and I think you should embrace that.

If a firm is doing well in these times, would it makes sense to do an acquisition to take advantage of where the overall industry is? A chance to level up even faster while the rest of the market is relatively flat? Or would that be an unnecessary distraction. Let’s assume the acquiring firm is at or ahead of their long term plan.

You’ve hit on a strategy that many firms are employing, and in fact—for the first time ever—we are conducting as many or more buy-side searches as we are conducting sell-side searches, for exactly the reason you mention.

if a book we’ve published is not about our core offering, but a side one we’re currently doing, does it still make sense to promote that on our website?

Probably, but just put it in context. Very few people have written a book, and if you’re in the camp, you should yell about it from the rooftops. Remember, too, that the rule of thumb for a business book like that is to give away one copy for every two that you sell. In most cases, the point of writing a book isn’t about making money from the book directly, so promote it widely! If it’s not a good book, though, then don’t. 

Has anyone ever had success selling a diagnostic?

Yes. And that’s a very big yes. Think of it as something that’s easy for a prospect to grab off the shelf. It should yield quick and reliable answers in a predictable sort of way. Another way to think about it is this: a diagnostic beats the heck out of putting all of that great insight into an unpaid, 90-page proposal! It also helps the client peel off 5-10% of their budget…and in so doing, spend the remaining 90-95% and get so much more for that money. Wherever you can, too, incorporate some workshoppy sort of things IRL with the client.

Value appears to be subjective in this climate. What is the right approach to navigate (and let’s be honest—retain) clients whose C-Suites are choosing cost over quality work? We had at least two long-standing clients pull work in-house or to other teams to save budget, even when they communicated their current team was either inefficient or incapable.

Rather than giving you an inadequate answer in one paragraph, I’d recommend that you read Pricing Creativity and The Four Conversations, both by my podcast partner, Blair Enns.

If we start an offshore team, aren’t we just training up our future competitors in our methodology/process/etc.?

Never give a second thought to that shit. Just keep looking forward and reinventing yourself while all those people work hard at emulating your wonderful self. Being “protective” is a good way to die. Instead, be unguarded, transparent, trusting, expansive, and authentic. That’s exactly how you project confidence.

If clients feel like they are not getting enough traction on LinkedIn (considering that’s where most of their clients are), does it make sense for them to add live appearances and recorded video on LinkedIn itself + maybe YT content to cater to their audience that way? Or is that a waste of time?

I think it depends on the specific audience and how they consume content, as well as what you enjoy. Your particular flavor of lead generation needs to flow from your positioning, your personality, and whether or not it’s a simple enough plan to stick with over the long term. Ideally you do both, because while it’s true that a lot of people love video content, another large contingent finds it a waste of time and too difficult to “skim” quickly. This is where experimentation should give you the answers you’re looking for.

Can positioning ever be too narrow? How can you identify it as such?

Yes, absolutely. Your positioning choice should never yield less than 2,000 viable prospects or less than a handful of competitors (I start to twitch when there are fewer than 10,000 prospects). Too fewer prospects and you’ll start compromising to fill your client roster, and too few competitors means it’s not viable.