Speaker 1:
You’re listening to Rattle and Pedal, divergent thoughts on marketing and growing professional services firms. Your hosts are Jason Mlicki and Jeff McKay.

Jason Mlicki:
All right, Jeff. So today’s episode is going to be the first in a long multi-part series that we have planned around growth. And when we conceived of this series, we said we were going to really go deep into growth across maybe 10, 15 or more episodes. The first thing you asked me was why should a company grow? Why do they need to grow at all? And I think it kind of was a really great question. So today, we’re going to make the case for growth or the case for anti-growth? Not growth?

Jeff McKay:
Yes.

Jason Mlicki:
So, I made a list. I’m sure you did as well. It was interesting doing that exercise because I think firms talk about growth all the time. They’re always talking about, “Oh, we got to grow, we got to grow.” Sometimes they’re more sophisticated in planning how they’re going to grow. Other times, they’re really not at all, but really does anybody ask that question? “Well, do we need to grow? Why do we want to grow? What are the reasons that we’re pursuing growth?” I think firms just mindlessly pursue growth is good and they go after it. So do you want to start on I guess that the debits or the credits?

Jeff McKay:
Well, I think in a capitalistic society, everything is predicated on growth. We don’t even question it, which is interesting to me from a psychological and spiritual perspective that we think growth for growth’s sake is good. And we look at things like GDP and it’s important that those are always going up, but I don’t know that people always understand why. In a capitalist society, growth is predicated on people buying more stuff. And I think that this COVID crisis in particular has been a catalyst for a lot of people to step back and think about why they’re doing what they’re doing. So I get why people ask that question. Outside of that kind of background around capitalism and our current environment to me growth and growth in professional services versus a technology company are, they’re different types of growth.

Jeff McKay:
And I think there’s very different reasons for growth, but both share the same central catalyst and that would be growth provides opportunity and opportunity is defined any number of ways, but growth is an indicator of success, I think, bottom line. If you’re not growing, you’re not successful. I don’t know that I fully agree with that, but that is the main driver. Now there are firms and a lot of firms that just grow for growth’s sake, and it’s almost trite to say that that’s the mindset of a cancer cell and it can be a cancerous mindset that really is dysfunctional if it’s not managed right. But I do think there are some really good reasons for growth and we should delve into them.

Jason Mlicki:
Well, you made a lot of interesting points in there. The one on the case for growth. And one of the things I had on that list was that it was just hardwired into us to your point of as humans in capitalist societies, we just seem to always want more. It’s never good enough for a lot of people. And so the idea that we can grow, maybe we can get more profit per partner or more profit or more revenue or whatever that mountain is that they see in front of them that they want to climb, some of it is just the nature of the human condition in a lot of ways. And I do agree that that is one of the reasons that companies pursue growth. Although, I don’t think it’s a strong reason to pursue growth to your point. So I made a list.

Jason Mlicki:
I know you did as well. I mean, one that I just mentioned is more profit per partner. So if growth is going to actually generate more profit for the owners of the firm, because maybe the firm hasn’t achieved a certain level of scale in order to get the right profit out of the organization. And that’s certainly a reason. I had also on the list, just this idea of kind of tied with that is this idea of just creating more leverage for owners and partners. So the idea that, on some level, an organization needs a certain scale in order for the partners and the owners to let go of certain parts of what has to be done and that leverage enables more profit, right? So I think that’s part of maybe a reason that you’d want to grow?

Jeff McKay:
Yeah, I think those are good ones. Number one on my list is increasing returns to ownership and returns, I think, can be defined any number of ways. I mean, we get into business. We become owners of firms for multiple reasons, but a big part of that is to make money and the more revenue that we drive, the more opportunity we have for profit and by having more profit, that leads to more financial freedom, you would hope, if you’re building the organization properly. And then really the ultimate outcome of financial freedom is entrepreneurial self-determination, if you will. It creates options for you as a consultant, an accountant, a CEO of a startup that now is interested in doing something else, right? So the growth gives you a strategic flexibility, right? And I think that’s why it’s really important is that there’s a longer term goal in your life generally, that you’re trying to achieve. And a lot of people don’t even know that. It’s just more and more and more, but I think healthy companies know when more is enough and what they’re going to do with the more once they get there.

Jason Mlicki:
Yeah, no, that’s interesting because I think tie with that, the other one I had on my list was liquidity events. So to your point of there is increased value with certain levels of scale, right? So if a firm ownership team wants to exit and sell the firm at a certain revenue level, it might sell at four or five times earnings and another revenue level might sell at six or seven times earnings, and those thresholds are real and they’re tangible and you can identify them. And so that’s another reason to pursue growth. The ownership of the firm is saying, “Well, hey, to your point, the goal is really to scale this thing to a certain level, and then we’re going to sell it purposely, like you said, for financial freedom and to do other things and to move on to the next path of our careers, whatever that might be.”

Jeff McKay:
That’s one side of that equation is the selling, but I also think growth provides a stronger position to acquire. Depending on the ownership structure of the firm, the valuation of that firm, the share price gives you flexibility for how you do deals as well. So if you want to acquire another firm or firms that growth rate and profitability, i.e. shareholder value enables you to do more deals and acquire through different types of channels and transactions. So I think those are important dimensions of growth as well.

Jason Mlicki:
Yeah. And that’s a really great point just for the idea that some level of organic growth creates the opportunity for inorganic growth because without the first one, it’s hard to have the second, unless you’re just coming into the game with a whole pile of capital, which a lot of entrepreneurs certainly are not. So, essentially we’ve talked a lot about the financial sides of this, but I think there’s also human elements that are worth talking about. Growth creates the opportunity to create more client value. So you think about, I’ve interacted with a lot of firms where they’d like to expand the firm to introduce new services, new offerings, because they think that there’s bigger problems that they can solve on behalf of their clients or there’s more value they can create for their clients. So there’s some sense that there is value creation opportunities in the client base that growth would unlock, which would be useful both for the firm and then for the clients that it serves.

Jeff McKay:
That is an excellent one. And we’ve talked about this several times out of your thought leadership summit of thought leaders falling in love with the problem. And that is an excellent example of opportunities to attack that problem in different ways for different types of clients. And that’s what really motivates the thought leaders, I think. It’s not the money, it’s the solving the problem and growth just gives you more opportunity to solve problems. I have a SAS client, their whole driving ambition for their market is solving big problems. They run their company and help their clients run their companies in a very simple fashion of building a better business by improving revenue and improving profit and improving quality of life.

Jeff McKay:
The way they do that is solving the biggest problems they can for that market. They’re just actively going after them and attacking them and in their enthusiasm is just so contagious. The improved revenue and improve profit is just a result of the problem solving. Yeah, they look at it, they know they need it because the profit gives them more opportunity to attack bigger problems, but it also provides a buffer for them because they’re in a cyclical industry to still support their clients during no cyclical times, but they live for that. I mean, that’s the only reason they’re growing.

Jason Mlicki:
It’s interesting because I think you actually just stuck your thumb on a really interesting nuance between professional services firms and SAS firms and what’s so radically different about the two types of organizations. On the one hand, you think about services firms are built to solve the same problems over and over again. In fact, that’s the whole idea of positioning is to build deep intellectual capability to solve problems that you see routinely and do it in the most effective way possible. Software companies are built to solve the problem once.

Jason Mlicki:
The whole idea is to not solve problems that have already been solved. If someone else has already solved that problem with technology, we’ll just [inaudible 00:10:39] our solution onto that and then we’ll solve the next problem, we’ll solve the bigger problem. And it’s really interesting in that it makes you wonder, we’ll come back to this in future episodes, I’m sure. Just to what you said, this idea of the bigger problem you can solve, the more valuable that problem is. Then of course, revenue and profit growth follows that. Just the way you said it. So I think it’s a really interesting cultural distinction that a lot of professional services firms could probably learn from the SAS companies around us.

Jeff McKay:
Well, in another episode, I might push back on that because I think there are quite a few professional services firms who approach the market that way and those tend to be the people that are leading their industries.

Jason Mlicki:
It depends. I mean, I guess you could look at it as when they’re developing IP, that that’s what they’re trying to do is to create a solution to the problem that is governed through intellectual property and then use that to solve it again and again and again, so maybe I’m framing it incorrectly when I say that. The other thing on the positive side for growth, before we run out of time, is just the employee retention side of it. The idea that employees want to grow their careers and they want to develop themselves and they want to work on more complex problems and more interesting things. And it’s hard to keep employees on a career ladder when a firm is stagnant or not growing. So to some extent, if you want to develop your people and retain them and grow them and turn them into future senior leaders, you need some level of growth to make that happen.

Jeff McKay:
Yeah. And I would say that you need it to attract the best talent to start with, not just retain them, but to get the best people into the firm to start with. Because I think high performers recognize that growth does create opportunities and they want to go to firms that are growing rapidly because that tells them my career could grow more rapidly. Some firm growing at 5% means your career is probably going to grow at five or 10%, but a firm growing it 25 or 50 or 100 percent, your career is going to grow rapidly in those types of firms. So it’s a great way to attract talent. The other thing, and this I think is particularly true of partnership structures. I mean, if you’re not growing, you’re not going to have a lot of room to add partners. I think that kind of goes hand in glove, growth and partnership. So that’s both opportunity to attract and retain the best partners as well.

Jason Mlicki:
Yeah, no. That’s absolutely true. I like the way you described that too. The idea of my career is going to go faster if I’m [inaudible 00:13:15] a rapidly growing organization.

Speaker 1:
You’re listening to Rattle and Pedal, divergent thoughts on growing your professional services firm. Your hosts are Jason Mlicki, principal of Rattleback the marketing agency for professional services firms and Jeff McKay, former CMO and founder of Strategy Consultancy, Prudent Pedal. If you find this podcast helpful, please help us by telling a friend and rating us on iTunes. Thank you. Now back to Jason and Jeff.

Jason Mlicki:
Let’s look at the other side. So I don’t know if this is… I lose track of what’s a debit and what’s a credit. So we’re going to look at the cases.

Jeff McKay:
Hey, I have, I have one that you didn’t put on your list and I think it’s an important one.

Jason Mlicki:
Oh, really?

Jeff McKay:
Yes.

Jason Mlicki:
If it’s not on my list, it’s probably not important. We’ll just pass it on and keep going.

Jeff McKay:
I think revenue growth and very visible revenue growth is key to building a strong brand. Without it, building a brand is tough because growing revenues demonstrates to the market in your buyers an acceptance of what it is you’re selling, what’s your offer. If you’re growing, that means lots of other people are buying this. So you must really be providing a lot of value. So I think our buyers equate growth with acceptance of what it is that you offer. That’s something that’s really, really important. And it’s why those lists like the top 100 accounting firms or top 100 SAS firms or the term unicorn for SAS companies. If you achieve that certain of growth, people say, “Man, there must really be something good happening there.” So I think it’s really important.

Jason Mlicki:
That’s an interesting one because at first I was about to push back on you and say, “Well, do I really need to grow my brand?” I mean, really isn’t the end of the day as the ownership, but do I care about that? Or do I really care about revenue or profit growth? I think the way you’re describing it is interesting in the sense of, in a way it makes it easier to continue growth because you’re reducing resistance in the buying cycle. You’re making it easier for clients to buy and you’re making it easier for them to make you the preferred choice as you grow, because it’s sort of a flywheel effect.

Jeff McKay:
Yes.

Jason Mlicki:
Between the revenue of the brand and the buying experience, whatever. That’s interesting. I can’t believe you’re talking about brand of all people. You of all people saying [crosstalk 00:15:34]. So the other side of the coin, so it’s easy to jump on the grill with bandwidth, like you said, and then say, “Well, growth is good and every company should grow,” and that’s certainly what business school tells you and that’s what any financial model will tell you, but there are reasons not to grow. And I think it’s worth talking about those. So there are situations where there’s really no need to grow at all. So let’s talk about what those are.

Jeff McKay:
So the first one I would put on there is you are a very finite niche player. Your market is very small. You love that market. That market is incredibly loyal to you. And in serving it, you can do it as a small organization. I think this is what’s behind the whole artisan type of positioning of companies, of going really deep on a particular service or product and representing the craftsmanship of it, provide you an opportunity to really specialize and not feel the same impetus to grow that you are an artist, if you will. And I understand that. It’s about the art, not the growth and the art becomes more valuable. So you are, in essence, growing, but you don’t have all of the pains of growth. You’re just getting a higher return on the amount of work you’re willing to put into a particular offering to the market.

Jason Mlicki:
Yeah, it’s interesting. I mean, I think dovetail with that, the implicit assumption that the financial returns on that business are good enough, that the owners are completely satisfied with the return that they’re getting from that service they’re providing, whatever it might be, and they don’t need more or feel the pressure to chase more. They’ve found some sort of happy existence between what they want and need from life and where they are as a business. And so they don’t feel that that pressure. I think you’re right. I mean, you said at the outset of this, that there’s sort of a cultural pressure that if you’re not growing, you’re dying. And I think it’s the rare individual that says, “Well, no, I have exactly what I want and I don’t need anymore and I’m comfortable with this business where it sits and I’m not going to go chase growth because it doesn’t serve me well financially.”

Jason Mlicki:
And for maybe other reasons. The other one I lumped in there was, and this one actually came from the management consultant, David Baker, who serves the agency community. He always talks about this idea that you really have no business growing if you’re not willing to manage people. If you don’t want to manage more people than you manage currently, then you really don’t have any business growing because with growth comes the need. At first manage more people and then eventually probably manage differently and start moving decision-making down the organization. And if you don’t want to do those things, then pursuing growth strategies, aggressive growth strategies, probably isn’t fair to people because you’re not giving them the experience that they need as an owner and a manager.

Jeff McKay:
I love that. And you do see that. If you look at the life cycle of a company or the growth of a company, there are very clear demarcation points where the organizational complexity begins to build out and you start building out these functional areas within the organization and the organization reaches a point and you see this all the time with founders, startups and elsewhere where the growth and the sophistication of the company has outstripped the capability of the owner. And that could be leadership or managerial or operational complexity, but also the psychological. And I saw this with my dad in the family business when I was in high school, early college, I can’t remember. I couldn’t understand why he wasn’t adding more stores to the many that he already had because, to me, it achieved all those positive things. It’s about scale, increasing profitability, giving people opportunity.

Jeff McKay:
And his answer to me was very straightforward. “Why would I want to add more headaches to my life?” And in back then, I had a perspective on it. But as an adult, I look at that and I understand what he’s saying. It’s about, “Hey, I’m already good where I am. It’s meeting the financial requirements of what I need,” for your first point. But I think the other point was that giving up control to other people was just more than he could deal with. And he’s just, “I don’t want to give up control.” And it came out as, “Oh, I don’t want to manage a larger team and have more headaches,” because I think the effective managers or leaders make their subordinates solve those problems and those headaches. So your headaches are primarily people things, but that really is an important one. And you have to have a mindset for letting go, both control and dealing with people instead of things.

Jason Mlicki:
Yeah. I really like that story and I think all of our listeners will be able to relate to that because everybody has that story in their life of someone that they’re, maybe a parent or even themselves, where they’ve just said that either the complexity of that I don’t want, or maybe the risk with that I don’t want either. I think because there’s a risk associated with them. You think about your dad, if he opened all those stores and then this pandemic hit, wow. Talk about the unexpected risk that he would now face in trying to figure out what to do. And so I think that’s another element of this is [inaudible 00:21:16] what’s your risk tolerance? At some point, there’s a certain amount of tolerance to risk that many people have that they just can’t take [inaudible 00:00:21:22]. I have one more and then we have to wrap, and this is this one actually I just stumbled upon this morning. I hadn’t really thought much about it, but I was talking to a prospective client this morning.

Jason Mlicki:
It’s a small, I’ll just say engineering firm. It’s not really an engineering firm, but it’s sort of in that genre and what he was talking to me about was that they had grown really well. In fact, he had taken this business from zero to three, $4 million in revenue in about six or seven years. So he was doing pretty well, but he’d never done any marketing. And he said to me, he’s like, “My biggest concern has always been that I don’t want to grow faster than I can deliver quality services. So I want to make sure I can sustain the quality of our services. And if I grow too fast, I’m really, really scared that our service delivery is going to suffer.” So it’s not really a case to not grow at all, it’s more a case to throttle growth to say, “Well, maybe we don’t want to grow as fast as the market will allow us just because we’re not comfortable that we can deliver the level of service we want. And I think that’s perfectly okay.

Jeff McKay:
Worked for Amazon.

Jason Mlicki:
Yeah.

Jeff McKay:
It worked for Amazon. You hit on something really important there. Growth, and it brings us full circle, really. Growth needs to be deliberate, right? Your environment is going to want to dictate a certain amount of growth to you. And that could be industry growth rate. You have to keep up with the Jones’ in terms of that. Investors will be demanding a certain amount of growth rate. Your own psyche will be demanding one, but the key to growth is to understand why you’re growing and what works for your organization in terms of the rate and approach to growth in order to achieve what’s at the end of that journey. Otherwise, everybody’s just frantic.

Jason Mlicki:
That’s a great way to end this episode because in our next episode in this series, we are going to dive into that because not all growth is uniform. The idea that you’re going to grow revenue in lockstep with profit or employees or market share or enterprise value is false. And even the idea that you’ll grow any one of those things in a uniform pattern, which you see a lot of firms say, “Well, our business plan says we’re going to grow 10% a year for the next five years.” Well, that never happens. Growth has never uniform. So it’s not uniform in pace, nor is it uniform across all the dimensions of things you’re growing. When we get back together on our next episode, that’s what we’re going to dive into is all those different dimensions of growth and really talk about what you’re growing. So this was fun. Thanks for another interesting conversation.

Jeff McKay:
All right, buddy, have a good one.

Jason Mlicki:
All right, man. See ya.

Speaker 1:
Thank you for listening to Rattle and Pedal, divergent thoughts on marketing and growing professional services firms. Find content related to this episode at rattleandpedal.com. Rattle and Pedal is also available on iTunes and Stitcher.