Growth Strategies for Professional Services Firms: An Interview with Michael Treacy

For nearly 20 years, Dr. Michael Treacy has been one of the
consulting industry’s leading lights on growth strategies. He has
authored two best–selling books, The Discipline of Market Leaders and Double-Digit Growth,
and has counseled hundreds of CEOs and other senior executives on
corporate strategy, product innovation and process excellence.

He is president of Treacy & Company, a boutique consulting
firm that also conceives, funds, and launches one new venture each
year. The firm’s latest venture, First Help Financial, provides auto
financing for recent immigrants. Treacy is working on his third book,
which will focus on the anatomy of sustained high performance, a topic
he refers to as "performance discipline." A company possesses a
performance discipline when the risk of sustained high performance
against a particular objective (quality, growth, safety, productivity,
service reliability, etc.) has been largely eliminated and all that
remains is hard work. Familiar examples of companies that possess a
performance discipline include Toyota (quality), Olive Garden (same
store sales growth), Alcoa (safety), GE (productivity), and FedEx
(service reliability).

Bob Buday, a founding partner of The Bloom Group, recently met
with Treacy to discuss how his ideas on growth strategies apply to
professional services firms.

Bloom Group: Professional services firms today face
tremendous competition, ever–demanding clients, and an economic
downturn. Revenue growth is likely to get much harder than it has in
the past five years. You’ve worked with a number of professional
services firms over the years. What do you see as keys to their ability
to grow?

Michael Treacy: You can break growth down into four
categories. There is base retention, which is holding on to the clients
you have. There is share gain, which is competing for new client
engagements. There’s market positioning, which is putting the firm in
areas where growth is occurring or going to occur. And then there’s
adjacencies, which is moving into areas that are related to services
you already offer.

Base retention depends on two things. First and foremost, it depends
on maintaining strong client relationships to keep the clients you
have. And secondly, it involves structuring your engagements so that
there are natural follow-ons, and creating breakpoints that are
uncomfortable for the client. In other words, you don’t want to
actually end an engagement at a phase where it’s easy for the client to
walk away. You want to end a phase with, "Gee, there’s all this stuff
still to be done."

Most firms actually tend to do the opposite. They create phases that
are at natural breakpoints, which is the last thing you want to do. For
example, most consulting engagements have a phase that ends with giving
the client a set of recommendations, with the next phase being
implementing those recommendations. That’s an easy place for the client
to say, "We can implement those on our own." But what if, instead, the
first breakpoint is halfway through the development of the
recommendations, and the next breakpoint is through the first phase of
implementation?

This makes it difficult for clients to end the project. The reality
is, if you’re really good in professional services, you never leave.
You may go up and down according to whether you’ve fully exhausted the
clients’ budgets and their patience, but there’s no reason to ever
leave. McKinsey is the master at structuring engagements so that there
are always so many issues to be addressed that you must keep the
project moving to the next phase.

Now I have to add here that this is advice that my own firm doesn’t
follow. We are a small firm with a superabundance of demand and no
aspirations to grow. We’re variety junkies and don’t want to retain any
client beyond six or eight months. Therefore, we structure engagements
to make them easy for the client to take them over. If I was running a
big firm or I had aspirations to grow, I’d think differently about this
issue, though.

BG: What about share gain?

MT: This is, I believe, where professional services companies
have an enormous deficit. They believe the same tools that are powerful tools
for base retention also can be powerful tools for entry into new accounts and
for winning business. And they’re wrong.

BG: Can you give us an example of that?

MT: Sure. Most professional firms believe the way to gain
new clients is through relationships. I disagree. I think you generate new clients
through new ideas, by challenging the client with intellectual content that intrigues
them to think differently about their business and their world. In other words,
it’s intellectual property, thought leadership, that actually drives share
gain. McKinsey, again, is currently one of the best examples of using thought
leadership to gain new clients. They have this base and depth of relationship
skills that translate into base retention, and they have the insight to realize
that that doesn’t gain you new clients. They have made The McKinsey Quarterly
a must–read publication. They are coming out with solid, fresh insights
in the publication. And they’re translating that into business.

BG: But for every McKinsey, there are dozens or hundreds
of firms that struggle to develop compelling ideas that generate growth. Why
is that?

MT: There are lots of people in professional firms who come
up with novel ideas, because quite frankly, in professional services your clients
force your best consultants to come up with some novelty. But the real issue
is, how many firms are able to take that novel idea, industrialize it, institutionalize
it, promote it, and then translate it into engagements? Far fewer. The typical
progression for thought leadership is from an expert mode, where the person who
came up with the idea is the only one who can apply it, to a craft, where you
have a bunch of apostles who know how to do it. Then it quickly industrializes
and ultimately becomes a commodity. And a firm has to know how to ride that curve.
When [CSC] Index created reengineering back in the 1990s, it went from expert
to craft. But when reengineering became industrialized, Index lost control of
it, lock, stock and barrel.

BG: This brings up a very important point for us. Do you
think most professional firms still regard thought leadership as a marketing
gambit as opposed to something that should lead to new service development?

MT: Yes, that’s all it is for them—a thin veneer
disguising the same humdrum services that all the other consultancies provide.
But firms are going to need thought leadership to be more than this if they are
to ride out the coming downturn in the market. A firm needs to have both little
innovations that keep its core offerings fresh, and it needs big innovations
that open up entire new service lines. Most firms are pretty good at adapting
the little innovations, although they have a little trouble making sure they
go across the whole firm so everyone’s using the updated approach. But
they’re just terrible at launching a new service line effectively in their
organization. And it’s because of one very simple fact: salespeople in
a professional services firm are typically the most senior members of the firm
and are the most set in their ways. Because they’re so good at selling
the old stuff, they think they don’t need the new stuff. It’s that
simple. And, by the way, new service innovations typically don’t work satisfactorily
the first time out of the gate.

BG: Say more about that.

MT: You need to invest in a new service offering in the early
stages of its use. That means struggling with the first few clients all the way
through the engagement, so you advance up the learning curve in parallel with
them. But that’s difficult for senior professionals, who aren’t used
to exposing to their clients that they are learning on the job. I’ve found,
though, that if you’re forthright with the client and explain to them that
you are pioneering a new approach with them, clients are generally enthusiastic
and understanding of bumps along the way.

BG: So it’s the partners who won’t take that
risk?

MT: To make a new offering successful, the senior professional
services partners have to admit that there’s a lot of stuff they don’t
know, and have to invest time in learning the new offering so that they can sell
it more effectively. Most aren’t willing to take the time.

BG: We know from our own research that thought leadership
is critical to generating new business. But is having novel ideas, a compelling
value proposition, enough on its own to break into new clients?

MT: No, you also need the other half of the equation, which
is market coverage. This is no different than dating in college. Two kinds of
guys get dates. One’s the guy who’s either rich or handsome. That’s
called having a value proposition. The other guy’s the guy who asks out
all the women. That’s market coverage. And that’s the other half
of share gain.

BG: In your experience, how well do consulting firms cover
their markets?

MT: Most big professional services firms have pretty decent
coverage of the market, but not nearly as much as they should have. Do they really
have presence in all the executive corridors of all the big companies that could
potentially buy consulting services? It’s pretty hit or miss. In fact,
you tend to find is that one firm or another dominates the corridors of most
of the Fortune 1000 firms. As someone who gets to go into a lot of those corridors,
I typically see that one company is a McKinsey shop and another is a BCG, and
another is a Bain shop.

Could there be more market coverage? There’s no doubt in my mind
there could be, and where it should be is in the enemy’s clients. Firms
tend to have great coverage in their own accounts—in other words, good
base retention. What they don’t have is great coverage in the enemy’s
accounts. You know why? Because they don’t have much ammunition to
shoot at the enemy. They don’t have sufficient thought leadership.
What’s the point of approaching a competitor’s client if you don’t have
a different story to tell?

This brings up another sin that, I believe, most firms commit:
overemphasizing vertical industry structures in their market
coverage—e.g., we have our consumer goods group, our financial services
group, etc. Why is this a mistake? Because they convince themselves
that having context knowledge—knowing what the client knows—is enough.
That model works well for base retention but poorly for market share
gain. Strong context knowledge may be the ante to the game, but it
isn’t going to win you a lot of hands of poker.

BG: What about market positioning?

MT: There are two dimensions of market positioning that matter
in professional services. One is, indeed, which vertical industries to heavily
focus on, because industries go through swings. They buy lots of consulting or
buy very little consulting. Boston Consulting Group for some years back in the
1990s had a large portion of the market for pharmaceutical firms, at a time when
the pharmaceutical industry was booming. BCG had positioned itself as the go–to
firm among a cluster of clients that were spending a lot of money on consulting
services. That helped BCG grow rapidly. But all good things come to an end, and
the pharmaceutical industry went into a slump starting in this decade that it’s
now coming out of.

So one way to play the game is to say, "How do I place bets on which
market sectors are going to need a lot of help?" But the reality is

that’s a really tough set of bets to play, and if you’re really that
good at making those bets, maybe you should be in investment
management. There’s more leverage in investing money than there is
getting consulting work.

The second dimension of market positioning is around which class or
category of problems to focus on, and shifting your thought leadership
to areas where the action is going to be. McKinsey, for example,
positioned itself early on globalization issues and gained a lot of
work as the thought leader on this bundle of issues. Right now there is
very hot market for anything having to do with the innovation of a
product or service. Creating a good and novel idea that’s applicable to
a big and growing market segment can have a huge impact on a firm’s
growth. And, in fact, great thought leadership can actually create new
professional services market segments. Witness reengineering. It didn’t
exist before as a category and it’s a multi–billion dollar category
spend today. So really great innovation actually creates new categories
of spend.

BG: And it could also redefine a category, right?

MT: Exactly. But good thought leadership can also not create
demand. Witness Good to Great [by Jim Collins]. I don’t know
how to do a good–to–great "project." I’m sure there
are lots of little ones throughout the country. But who’s going to generate
$10 million out of a good–to–great project? I couldn’t even
figure out how one would take those recommendations and turn it into an effective
program of change.

BG: Why do you think that happens, where it’s a great
concept but little potential for a substantial professional services firm to
implement it?

MT: Whenever a concept has to do with soft issues, clients
just do not have a propensity to spend on it. So thought leadership should deal
with the hard issues of process, systems, structure, and strategy—all the
stuff that you can just see dollars flowing to. It’s that simple. You
have to impact where people spend their money, not where they spend their thought
time.

So, that’s part of positioning. And that’s a very tough game to
play, to be thinking ahead to what I want to be known for as the market
keeps evolving. There are obviously some old chestnuts that are going
to be around forever and ever—such as market–entry strategy and
industry structure analysis. But I’m talking about the hot new topics
that come and go. And those are hard to figure out.

BG: And what about the fourth aspect of growth, adjacencies?

MT: The thing about adjacencies is that so much money has
been thrown away by professional services firms trying to get into adjacencies.
Lots of examples were seen during the Internet bubble, when firms were getting
into venturing and entrepreneurship. Every firm had some sort of market capital
play. And they were all abject failures. I can’t think of a single success.
And even when they succeeded in getting into adjacencies, regulation forced them
out. Remember the Big 5 accountancies? They moved into outsourcing or consulting
and then, with the exception of Deloitte, were forced apart. It’s really
tough to find adjacencies that work.

BG: Why is that? What makes it so difficult to be successful
in an adjacent market?

MT: It’s simply because when you peel back what any
kind of professional advisor knows, he generally knows only 5 percent of what
it takes to be successful in the adjacent market, but thinks he knows more. And
firms are dismissive of the skills they don’t have. "Oh that’s
just an execution problem." "Oh, that’s just a leadership problem." Those
are big problems. So if they want to grow strongly, I would urge professional
services firms to stick to their knitting.