Hi everyone. In today’s episode, I would like to talk about the cost and value of a sterling reputation for a consulting business or any other type of organization. This would apply to any industry, but it is a little more subtle than that. It is not an absolute statement. I will talk you through what I mean as I progress with this episode. I am going to cover this in this episode, and I will dig in further in a follow-up episode.
So, whenever I talk to the leaders, founders, or owners of a consulting business, they tell me the same thing. Their consulting business has a poor reputation, which is the ultimate arbiter of the margins and fees they are getting in the market.
Now, I will say something that is very important but is also very counterintuitive. The reputation of your consulting business is probably not the problem. I am going to unpack this a little bit in this episode, and I will unpack it further in a follow-up episode.
When an owner or a leader of a consulting business says their reputation is a problem, what they are saying is that given their reputation, the market segment, or the clients they are pursuing, do not value their reputation or do not think it is that important or that helpful to them. And because of this lack of perceived value, clients are going to discount the amount of money they pay.
The key words there are ‘the market segment your consulting business will target”, because no matter what your reputation is if you target the right market segment, you can earn incredibly large margins and fees. I know that sounds counterintuitive, but it is true. I will explain this a little bit in this episode, but in the follow-up episode, I will go through it in more detail and talk about the cost.
So, what that means is that when a consulting business owner or leader comes to me and says ‘well, my reputation is in tatters’, I am going to say that is probably not the case. The problem really is that the clients your consulting business is targeting are not appropriate for your reputation. And if you kept your reputation the same and changed either the clients you are targeting or the issues you are targeting within the same clients, you could probably dramatically increase your margins and fees.
In a simple way, if your consulting business has a reputation for only doing pricing work and doing it amazingly well, and you go to clients and start talking to them about operational improvement, of course, your reputation will be in tatters because you are not an operational improvement person. In that situation, a bad strategy would be to make dramatic changes to become known for operational improvement and the right strategy, to abandon everything else and double down on being known as a pricing person.
Now the common response I get to that is, “Michael, there is only so much you can do in pricing. It is a ‘very narrow niche’.” That is absolutely untrue. Your job if you are going to stick to pricing will be to reinvent pricing, and to find out new work you can do in pricing, the new value you can deliver for clients.
Even when I was just an associate, I was one of those people who felt that he wanted to specialize very early. I knew I wanted to do corporate strategy work, but I did not just want to do it like everyone else. I wanted to focus on the risk side of strategy because most strategy partners you talked to, in fact, everyone you talked to, wanted to focus on the growth side of strategy. How do you grow? How do you become bigger? How do you raise your margin?
So, I was looking at the risk side. When I came in risk, it was like a sleepy backwater whereby most of the work was non-risk management. A lot of partners asked me, “Why are you looking at risk? It is such a boring piece. No strategy partner looks at risk management. If you do risk management work, there is a real danger that the financial institutions group will be the only home you can have at the firm and it will be a very narrow sub-segment of work.”
But I stayed in risk and I worked with some very talented people to develop new ways of thinking about risk in strategy.
If you are picking an area, a niche, it is only up to you how you are going to interpret the way the work is done, the kind of new thinking, and the impact on your consulting business. It is up to you.
Think about how IT was 20 years ago. If you went to a client and said to them that the most important thing in your future is thinking about IT strategy, let us assume you went to a client in 1999 and told them that. They knew IT was important, but it was never a CEO issue at that point. But today digital and IT is a CEO issue. It is all about the way it is presented.
Any niche can be constantly developed to be important to the client.
So, if you are having a reputation problem with a client, remember that your reputation may not be the problem.
If you are an FC Insider and want to see this in more detail including how we mapped it, you can see the program whereby we help a consulting boutique firm to analyze their reputation but do not change their reputation. In fact, discard certain things they were doing to double down on being known for only one thing.
So if you have a reputation and there is a mismatch in what you are talking to clients and the clients you are seeing, given the reputation you have, this is what you are going to face:
Everything goes up in price and obviously your free cash flow decreases and the available time you have decreased because you need to spend more time developing a reputation that you do not have.
So, there are a couple of important insights:
When I say improving your reputation, I do not necessarily mean that your reputation is wrong. It is most likely correct for you. What I am referring to is the fact that you may have a reputation for X but you are trying to do Y. In that situation, your ‘reputation’ is weaker.
It is wrong relative to the market and the issues within the market you are positioning yourself for. I see this very often and I will talk about it more in the follow-up episode.
But oftentimes it means abandoning things you want to expand into, but which is unrelated to your core. It basically means profit from your core. To quote Chris Zook from Bain & Company, “Stick to your core”.
If you do it right, you will always have ways to grow in your core. You will need to be creative, but you can grow in your core.
When I ask what the cost of your reputation is, I mean what is the cost if you are trying to do work outside your nexus or your sphere of influence of your reputation. Then you have a cost. How will your cost change with a different positioning of your consulting business? This assumes you want to change the positioning of your consulting business. I have never advised a client to change their positioning because if it takes five years to develop X positioning, it is likely going to take you an equal amount of time to develop a new positioning. It is painful.
This is it for today’s episode. I hope you enjoyed it as much as I enjoyed doing the episode. Finally, I want you to remember that the only way to get access to our special offers, get our special pricing, and get samples of our content, is to join the list on firmsconsulting.com/promo.
It is the only way to get access to our unique advanced content that we make available to FC Insiders. So, if you want to take a sneak peek of things, test it out and see what is in there, this is the place to go.
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