Healthy margins are the most critical element of a successful services business. Every portfolio, client, and every single project, needs to turn a profit for your firm.
And, your firm needs to grow. The first place you typically look is organic growth, pinpointing the most promising cross-selling opportunities for additional services from your firm. Firms can also grow through opportunistic client acquisitions. These opportunities seemingly fall in your lap — one client relationship leads to another, or you may respond to a RFP that came in through inbound marketing.
This ad hoc approach isn’t inherently bad for business, but to really get ahead you need a cohesive growth strategy. A growth strategy typically involves gaining traction and building a reputation in a completely new market. So while profitable clients will make up the core of any healthy business, it's also important to have strategic clients that provide significant future value for your business. This article will help you determine what types of strategic clients you should consider, and provide tips on how to manage them successfully.
Know the Cost of a Client
Before you jump in, you need to have a very good understanding of the costs of all the work you are doing. All too often firms have no idea what clients are making them money, and even worse they don’t know which ones are costing them money. Do not confuse margins with topline revenue. A client sending large checks does not mean you are making money on the account. If you are going to take on strategic clients in exchange for future value, it’s critical you have a very good sense of the economics. A lot can go wrong. You will waste time, money, and possibly your reputation.
Three Types of Strategic Clients
While margins are critical (and I am intentionally being repetitive), a client is more than a revenue stream. New clients can be the key to opening doors that will lead to substantial growth. The right clients will attract other desireable clients to your firm. They can also attract great talent. There is absolutely the right time to take on low-, or even no-profit clients. Our experience has taught us there are the three types of strategic clients worth considering:
1) Clients that add brand cache and credentials.
One of the most appealing reasons to take on client projects that may be lower margin is to grab a marquee client. There are clients whose brand adds recognition and trust to your firm. Very rarely does this scenario work out if you take a single brand name client on. This needs to be a portfolio play. For example, if you believe it's a strategic growth opportunity to move into the FMCG industry, you may consider taking on low-profit work from P&G or Coca-Cola. However if you only plan on serving high-growth tech companies, the Coca Cola name does very little for your own brand. Be careful you don’t confuse the market.
- Plan appropriately. Marquee brands are usually very demanding. Experience shows that they can take up a lot of senior resources. Plan appropriately before you jump in so you are aware of the true cost before you agree to take the work on.
- Leverage the client's brand as much as possible. Request in the contract before you begin that may use their logo where appropriate, and possibly even agree to a case study.
- Don’t over commit. If possible, start small with a few projects. If you embark on a large, multi-year engagement with these firms you may be in way over your head with no rip cord to pull for emergency exit. What is a strategic client today, does not necessarily mean it will hold the same strategic value in a year's time. Things change fast.
2) Clients that allow you to develop new capabilities.
You may also be seeking clients whose projects will help your staff break into a new area. Taking on a client as a platform to develop services and skills means you are doing something completely new. Perhaps it’s a new technology you are working with, or you are breaking through into a new service area. The first few clients you take on will be stressful on your organization—you will make mistakes that require rework, you will underestimate time and costs, and it can burn your team out.
- Be confident, and ask to share the risk. Go into these relationships with a high level of confidence — they need you, as much as you need them. Clients actually really, really need your services. If a client decides to work with a firm that has no experience in a particular area, they realize they are getting a deal. Many times these organization will agree to a profit share. If you are going to put your margins on the line, they should too.
- Find the right people. This might mean bringing on an experienced contractor to help your organization, and even if it's a new type of consulting work or project at the very least ensure you have people working on it that have experienced they are scrappy, problem solvers.
3) Clients that help you expand into new geographies.
Today, there are no boundaries to business. Regardless of your size—5 person shop, 5,000 person multinational—you are increasingly being asked to deliver work in new geographies. In the 2017 State of the Services Economy, we found that 68% of services firms are reading into new geographies, and 38% said they are doing so because clients are requesting work in new geographic areas. Today, your business is global, and your growth strategy should include new territories and markets where you can be successful.
- Ask the right questions. How do you know if thats a strategic market for you? Simply put, you plan on doing more business there. While there are some obvious expansion opportunities, for example other countries that speak the same language, not every market will make sense. You need to consider how successfully you can deliver on work in that region. What will your cost be to deliver work there— are there taxes or fees applied to out of country businesses conducting work there, what would the cost of opening a physical office be? What are lease costs and employment costs? Do they use the same technology? If you plan to support from the US, can you cover their key time zones?
- Utilize subcontractors. Until you have enough reliable business in your pipeline to officially open operations, find a trusted partner to help you deliver work in that new area. The added benefit is they may bring in new opportunites to your organization as well. The critical element here is trust, so make sure you find people you feel confident you can put in front of the clients. At the end of the day, they are your relationship and these contractors represent your brand.
Word to the Wise — Set Clear Expectations
So, you just signed your first new strategic client. Congratulations! I know it's exciting to hit the ground running, but you NEED to start with a thorough expectation setting process. Even more so than your typical engagements. This may feel difficult because this is new to you as well, how are you going to know how long building this new whizzywig might take? However this is a critical starting point — on both ends. If you need more advice about how to kick off a healthy client relationship, check out this ebook: The Definitive Guide to Writing a SOW.