Shrink to Grow: Counterintuitive Strategy for Professional Services Firms
We all know about the stunning success of Google. But there is a firm that has outperformed Goggle in the stock market after coming back from the death bed. And it all started by shrinking. This is a tale with a lesson for many professional services firms.
Most professional services firms seem to believe that the best way to grow is by offering a greater range of services to a growing range of customers. After all, isn't diversification a good thing? We don't want to have all of our eggs in one basket, do we?
In a recent study of high growth and average growth professional services firms, we found that average firms tend to expand their services offerings as a preferred growth strategy. Further, over 80% of firms, across all industry segments, tend to characterize themselves as not highly specialized. So “diversifying” is at least popular. But is it a smart strategy?
Not if you want to grow or achieve a premium valuation for your firm. You can make a strong case that focus, not diversification, is the easier road to a high growth, high value firm. That's exactly the conclusion we came to after synthesizing the results of four separate studies of professional services firms and their strategies. (You can download our free, just-released book in which we make this case). Here's how it works.
The curious case of Web MD
I came across this story in a blog post by Kaihan Krippendorff writing for Fast Company. Web MD had gone through a near implosion during the Dot com bust. Wayne T. Gattinella took over as CEO and has led the firm through an amazing comeback. Nearly worthless when Gattinelia took the reigns, the company's share price has since outperformed Goggle by a nearly two to one margin. So how did he do it?
The first principal was focus.
You see, like many firms Web MD had become a victim of it's own early success. They made the classic mistake of overextending into so many lines of business that it diluted both their brand and their management focus.
The solution was a radical diet that shed all of the non-core businesses. They were trying to be too many things to too many people. Sound familiar?
Now, giving up lines of business or shedding customers can be a very scary proposition. Not only are you losing revenue, you may also feel like you are losing face. But this sort of strategic move can pay big dividends and set the stage for much greater and more valuable strategic growth. Listen to how Krippendorf explains it.
Like water withdrawing before a wave, great expansions often begin with contractions. To grow requires that you understand this natural principle, that you appreciate the strategic value of a retreat and not blindly associate it with defeat. By withdrawing your energy from low-potential priorities and redirecting it to stronger parts of your businesses, you then have the real potential to create a disruptive dynamic. What may seem as an apparent retreat is actually a smart offensive move.
Amen. Could not have said it better.
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