There are certain advantages and disadvantages to consider when planning to build a service or a product business.
For example, It’s typically easier to start and grow a service business than a product business. However, it’s typically easier to scale a product business than a service business.
In this article, I’m going to dive further into some of the reasons why it can be challenging to properly grow a service business. In particular, I’m going to cover what I refer to as the growth trap in greater detail so you can know what to look for and how to best be prepared to avoid it.
Professional services firms typically go through a few stages of growth to get from one level to the next. Once they’ve established themselves in the industry the primary objective is typically to grow.
When considering how to grow, there’s a particular phase that is concerning for professional services firms. It occurs around the $10mm-$20mm in annual revenue range. At this point, a firm may have between 50-100 employees.
Why this phase is so scary is because of how many companies never get past this level. In fact, many grow to this level then actually start to decline. Some inevitably get acquired, but it’s typically a forced choice and for much less than they would have hoped. Not a great situation. Especially when your goals were to grow your annual revenue well beyond $50mm.
So why does this happen to so many firms on this promising growth trajectory? Let’s talk about that next.
The Growth Trap
Many companies fail to scale their revenue beyond this $10mm-$20mm annual revenue range for several reasons. One of the biggest reasons is because they expect the same strategy that got them to this level to carry them forward to the next level. Spoiler alert – this doesn’t work.
I’ll use a car racing analogy to explain. What’s happening here is when competing in a more junior race you may be able to win with the car you have, but that same car when placed in a more competitive class won’t be able to keep up which will leave you outmatched. The cars are bigger and faster plus the teams, processes and strategy are more sophisticated and advanced.
In that example, you were winning in the less competitive class, but to get you to the next level, you need to make some serious upgrades. Unfortunately, many firms either don’t see this or fail to believe it until it’s too late. This is why they start to decline then become ripe for acquisition for much less than they were previously worth. Unfortunately at this point the firm becomes desperate and feels like they have no other options.
So now that we know more about the trap and why it happens, let’s talk about what a healthier growth trajectory looks like instead.
Healthy growth comes in phases. On the early side you are in build and sell mode. You are testing critical foundational elements to your business such as branding, positioning and your value proposition. However, once you establish your footing and start securing wins with clients, typically all of the focus and intensity is on growth.
This is where the growth trajectory starts. Most firms hire help to boost their chops in business development and sales during this phase. Eventually these investments have the desired effect and the firm’s revenue grows. Obviously the revenue is growing because you sold more engagements which means more work and now you need to deal with that influx. This is where one of the first critical mistakes tends to happen. If you haven’t made upgrades to your service delivery this increase in demand can stall your growth efforts and cause you to reverse your progress.
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However, if you have made the right investments and properly built your professional services firm to scale then the investments will pay off right about the time when the wave of demand hits your service delivery department. As you grow you also become more efficient which means as your revenue grows so does your profitability.
Most professional services firms measure growth relative to revenue. However, in business terms revenue is more of a vanity metric. You can’t spend revenue on anything. What your firm should really be focusing on is growing profitability. A telltale sign that you may be experiencing the growth trap is if your revenue is growing, but your profitability is frozen or shrinking.
Managing Your Timeline
To manage effective growth you must also pay attention to when you should make certain investments to propel you through to the next phase of growth. I want to talk more about when you should be looking to make these investments so that your firm won’t reverse course, but accelerate throughout this growth phase.
Once your firm becomes established and you set your sights on growing to the next level, the majority of the focus is in expanding business development and sales operations. This makes sense because your focus is on growth. However, what you also need to consider is how you will improve your operational efficiency as well.
Most firms are unaware that they need to make these investments. They feel they can just ‘throw bodies’ at the problem by hiring and expanding their team. I can assure you that this doesn’t work and actually sets you up to experience some major problems at a later stage.
So what you need to be doing instead is focusing on improving your capacity and operational efficiency as you grow. Making these investments early means that they will be ready when that new wave of activity arrives. If you wait until the growth arrives to build this it could be too late and that’s when your firm is likely to reverse course in the wrong direction. Don’t let this happen to your professional services firm.
Avoiding the Trap
At a minimum, you need to plan for making investments in capacity by upgrading your firm’s operational efficiency along a timeline to match your growth.
To be more specific, I’d like you to focus on the area between client acceptance and service delivery for your professional services firm. This is where you need to improve.
I’ve written another article that talks about some exercises you can conduct to be more prepared for planning growth more effectively. You can read that article here.
If your professional services firm is currently in a growth phase and you haven’t made investments to improve your operational efficiency, read my article here that talks about some tactics you can use to start preparing right away.
I focus on helping professional service firms like yours grow profitability exponentially without adding headcount. Find out more about how I can help by emailing me at firstname.lastname@example.org.