If You Chase Two Rabbits, Both Will Escape

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This post forced itself upon me repeatedly during many late nights banging away at the keyboard (is there an equivalent phrase for the world of tablets/touch screens? Somehow, “touching and swiping the screen” doesn’t have the same effect) categorizing consultancy firms in the customized taxonomy I developed for the Ridgecrest CRM database. While going through many hundreds of companies and characterizing each of them according to services model (e.g. Project-Based IT Consulting, IT Outsourcing, etc.), horizontal services offering (e.g. Custom Application Development, Enterprise Performance Management, etc.), product vendor expertise (e.g. IBM, Oracle, etc.), product vendor product expertise (e.g. IBM WebSphere, Oracle EBS, etc.), industry vertical focus (e.g. Life Sciences, Utilities, etc.) and geographic focus (e.g. New York City, US Offshore-China, etc.), I was struck by how many firms spread themselves thin without having a clear focus within any of these parameters. This “all things to all clients” approach can work reasonably well with very large firms that enjoy brand power but it’s a losing strategy in building enterprise value among middle market-sized consultancies.

Lack of business model focus adversely impacts enterprise value on two levels. First, the average operating performance of these types of firms falls far short of their more focused peers. This should be obvious when you think about the challenges of building sales messaging with prospects. What exactly is being pitched, aside from perhaps low pricing and/or personal relationships? Think about it in terms of restaurants. My wife is a steak lover (I can’t stand steak but love hamburgers and hot dogs…figure that one out) and when we go to a seafood restaurant she’ll sometimes be unable to resist ordering a filet, only to invariably be disappointed by the quality compared to that at a great steak house. Straying outside of core expertise breeds mediocrity and firms that go this route tend to have slower growth rates, lower bill rates and poorer margins. This relatively poor operating performance alone drives down potential enterprise value.

However, the more important impact is upstream from this and is digital in nature. Before enterprise value to be offered by a buyer may be degraded by subpar financial results, there must be a buyer willing to actually make an offer of any sort. And this is the real problem with this model: there is very, very little (if any) demand from consultancy buyers for unfocused, undifferentiated business model firms. There was a time when purely financially-oriented roll-up buyers roamed the landscape looking to aggregate revenue with little regard for clarity of offerings but those days are long gone. The current species of buyer is looking to fill specific gaps or deepen thin coverage within its portfolio. For the firm looking to acquire a project-based consultancy focused on the Oracle Hyperion suite of products, the target company doing a smattering of Hyperion work mixed in with dashes of network integration and retail training in desktop apps will be of zero interest. Similarly, the buyer looking for a consultancy specializing in cloud migration strategy for the energy vertical will ignore the firm that does work scattered across eight different industries.

This does not mean that a firm must be hyper-specialized to generate high enterprise value. In fact, one can take the idea of focus too far and become such a niche player that obtaining sufficient scale to be attractive to any buyer becomes nearly impossible. The firm tightly focused on being the world’s best open source-based custom app development shop serving the chimney sweep industry within the city of Peoria may have a great story for its target client base but will never be able to move beyond a few valuable consultants to scale-based enterprise value. What I mean instead is that consultancies should find some dimension among those I described above to serve as the center of its marketing message, to both clients and, eventually, potential acquirers. Some firms achieve this by providing many services, across many technology domains and an extended geographic market but doing so largely within a single industry. Others work across all industries and multiple geographies while being domain experts in a particular technology. Still others provide a limited number of services entirely to clients within a particular city, marketing to consultants based on lack of required travel and to clients based on having the best people and attractive rate structures not burdened by travel cost reimbursement. There are many approaches to building a focused value proposition to clients. Pick one of them, execute well and enterprise value benefits will follow.


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