Clients give knowledge-intensive services firms such as consulting, IT services and media agencies difficult and constantly evolving problems to solve. Markets change, competitors emerge and macroeconomics shift, all of which have an impact on what’s hot and what’s not when it comes to M&A.
That means buyers are attracted to firms with a clear value proposition that transcends service offerings and the capability to respond and deliver a relevant service portfolio in a changing environment. Simply put, a firm is worth more when it is bought for its strategic capability rather than just offering the buyer additional service capacity.
Achieving a relevant and effective service portfolio means more than investing in new service lines, because it’s also important for consulting firms to phase out what is no longer working for the future value of the business.
David Ogilvy explained in his “principles of management” (which took his firm from a start-up to generating billions) that dropping services that have become unprofitable must be driven by management:
“To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always adding. If the initiative for barnacle-scraping does not come from management, barnacles will never be scraped.”
The Main Point
Implementing a service portfolio management process allows you to ensure that your services are aligned with current and future market demands and the firm’s competitive positioning.
There is often tension between what the sales team believes they can sell, and what the delivery team can deliver profitably. This cuts both ways.
Given that, leadership teams should work together to dispassionately and quantitatively review and update the service portfolio annually to ensure that value is being created for clients and shareholders.
What is service portfolio management?
There needs to be a process for dealing with the planning, forecasting and marketing of a service or offering at all stages in the lifecycle. The IP lifecycle has four stages – create, communicate, monetize and retire.
At the firm level, there are three key questions that need to be answered:
- What new services should we invest in?
- What existing services should we retire, and when?
- Has adequate investment been set aside to support phased transitions?
To do this, the firm needs a decision framework that ensures:
- ROI on investments are optimized and realistic
- It’s good practice to ring-fence a certain amount of non-billable time for IP creation, and the leadership team should understand that this time is creating value for the firm.
- You can’t replace deeply entrenched services, people, practices, methodologies or client base overnight without a P&L and cash shock and so investment in and time for new offerings to gain traction is required.
- There’s a balanced portfolio of offerings
- You may currently have the first-mover advantage, or there may be exceptional demand in a sector, but market shocks and economic downturns are inevitable so risk-proofing your portfolio makes sense.
- Investments in service lines and offerings are aligned with the long-term goals of the firm
- If the shareholders plan to sell the firm in less than 24 months, they’d be less inclined to invest than if their exit goals are further down the road.
- Current and future revenue projections are supported
- Only when the firm has confidence about client demand for new and existing services, can informed decisions be made on where to invest and which barnacles to scrape.
There are a number of considerations to take into account before, retiring, keeping or adding a service line:
Your service portfolio should deliver profits and value to shareholders once you have invested in innovation to respond to a changing environment. How firms invest is also of vital interest to buyers when they are evaluating acquisition targets capable of delivering future sustainable revenue synergies.
We therefore recommend applying these concepts to the annual business planning process and, given that it’s the half-year, now would be a good time to collect the data in case there is a need to scrape some barnacles.
This blog is part of a Principles of Maximizing Profitability series. You can read a full overview article here.
If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.
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