Five Strategies for Profitable Services Growth

In today's era of Professional and IT Services competition and consolidation, some small to medium-sized companies are proudly delivering 20%-50% annual growth.

Unfortunately, the vast majority of firms have experienced two consecutive years of fee erosion, commoditization, client defection, and company identity crises. We set out to discover where the growth opportunities exist in today's economy, and to share our findings.

The Study

Our ten-month study uncovered the major gaps between the top performing and bottom performing companies. Our interviews with 53 CEOs across North America were designed to help leaders in this industry achieve three goals:

1. Identify the most common barriers to company expansion;

2. Learn what investments will positively affect their 2004-2005 growth;

3. Compare their operating model and areas of focus against their peers.

We spoke with companies across six major sectors of the IT and Services market, including hardware and software support, business and process consultants, IT outsourcing firms, integrators, and BPO's (business process outsourcing). BPOs had, by far, the most rapid growth rates of any other sector.

More than three-fourths of our interviews focused on understanding the dynamics within the small to medium sized organizations (50-500 employees).

We compared and integrated our findings with IT research firms and trade groups. These included ITSMA, AFSMI, Gartner Group, Culpepper and Associates, and the New Client Marketing Institute.

The Top Frustrations-and Hype

When we spoke with CEO's, three common frustrations surfaced:

· "Our target market does not understand what we do." (1/3 of respondents)

· Today's economic downturn is creating fewer inbound leads and longer sales cycles. Several CEO's in the bottom performing category mentioned that their companies are experiencing 18-24 month selling cycles.

· Profitability is eroding due to the commoditization of IT services. Although we asked whether they attributed the erosion to offshore development, only two respondents concurred.

In spite of the media focus on outsourcing, only two of the CEOs we interviewed mentioned concern with offshore development. We also learned that only 7% of all outsourcing revenues are generated by offshore firms, according to Joe Blumberg, CEO of Specifics Inc. (www.specifics.com). As of this writing, we can infer that offshore development may be worth watching, is more hype than a present threat to successful services firms.

The Impact

From a marketing awareness standpoint, we found that the 80/20 rule applies. IBM Global Services has become the "Kleenex brand" in IT Services. ITSMA's most recent branding study claims that IBM GS now has a threefold brand equity lead over other firms. This makes it increasingly more critical for small to medium sized firms to create and communicate unique positioning statements.

We also learned that the companies who designed their business around a time and materials model are experiencing the greatest profit erosion. The time and materials- based firms told us that billing rates have declined by 15%-20%. Companies who position themselves as problem-solvers, trusted advisors or BPOs did not report any concern with their profitability.

Four of the key areas where bottom performers struggled included market positioning, staff attrition, long sales cycles, and poor self-management. CEOs with flat or declining revenues consistently expressed concern with balancing their own personal and professional lives.

The Top Performers' Five Common Strategies

How can you best capitalize on the lessons we learned from the successful companies? First, consider how to invest your 2005 budget. The top performers who participated in our study typically invest at least 2%- 3% of gross revenues in five areas:

· Attracting, hiring, and retaining great people. These companies ensure that leadership development and self-management are part of the fabric of their company.

· Positioning their company clearly within a specific, well-defined niche

· Creating a lead generation machine, and experimenting with new lead generation approaches. One company sponsors small-scale CIO breakfasts with great success and has scaled back on printing brochures.

· Creating a world-class sales process and scalable sales "machine." Top performing CEO's knew they were on the right path when they found themselves less involved in closing sales, and more time using their CRM automation tools to coach team members from the sidelines.

· Invest in client account management models. One of our participants saw their services revenue from Microsoft grow from $2M to $11M within two years and attribute their success to their commitment to formal account planning.

Scott Testa, CEO of MindBridge in Norristown, PA, has the commitment to building a winning team. "We have become part of the '200 rule' with CIOs. On the average, CIOs receive 200 email, direct mail and phone messages each day." He continues, "This is the time to grow and invest in sales and hiring-when we come out of this economy, we can turn on the light bulb again."

We also learned that the bottom performing companies are over-investing in three areas:

· Replacing sales and marketing talent due to high attrition

· Software and hardware training for their technical staff

· Participation in technology trade groups (e.g. Java and Internet standards)

You don't need to be an IT Services firm to learn from these secrets. In light of these findings, ask yourself these questions. Is your company ready to be a "top performer" in 2005? What initiatives will your company be willing to let go? How will you surround yourself, and your key executive team, with a top performer operating model?

Lisa is President of Nirell & Associates in Del Mar, CA. She leads the "Profitable Growth Series" workshops and audio series for leaders who want to accelerate top-line growth by retaining their best people. In addition to having 23 years experience in software, consulting, and sales, Lisa has served on 3 Boards of Directors.

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