Despite the perennial assurances of the Obama administration that a robust economic recovery is right around the corner, small and mid-sized professional services firms face a challenging economic environment. Consider the following economic realities that we're facing for the foreseeable future.
In the 2014 Heritage Foundation/Wall Street Journal Index of Economic Freedom, the United States is ranked 12th. In 2008, it was ranked 6th. Economic freedom in the United States has decreased in each of the last seven years.
Businesses face an uncertain economic environment where laws that impact them significantly are changed on a whim as a reaction to political events. As a result, they’re reluctant to invest: “Business investment in equipment, software and structures grew by only 0.5 percent from 2000 and 2011 compared to an average of 2.7 percent between 1980 and 1989 and 5.2 percent per year between 1990 and 1999."
Despite a drop in the rate of employment, prospects for job-seekers are dismal. The drop in the unemployment rate is almost completely due to a reduction in the number of people looking for jobs. “Back in 2007, 66 percent of Americans had a job or were actively seeking work. Today, that number is at 62.8 percent — the lowest level since 1977.”
Unless you’re part of the too-big-to-fail crowd or you’ve donated in a large way to politicians in power, times are tough.
How has the down economy affected buying behavior?
Simply put, buying decisions are far riskier for corporate executives than they were before the great recession. If an executive makes a bad buying decision, she could lose her job. Executives are no longer buying from their golfing buddies, Decision-makers seek broad consensus among parties with a stake in the purchase decision before buying. Risk aversion is a key element in today's buying process.
You used to hear the old saw, "you can't go wrong buying IBM." In other words, buying from a large, well-known vendor minimizes risk. For SMB companies purchasing professional services today, this is not necessarily true. If an SMB company purchases from a global professional services firm, they're likely to be serviced by a young, inexperienced practitioner.
Just when that young practitioner gets up to speed, they're hired away by a smaller regional player who offers them more visibility and money. High-performers that stay at the global firms move into management or business development roles. They'll be there during the sales process, but will disappear like the wind when it's time for the work to be done.
The down economy has upsides to growing your professional services firm
One of the upsides of the down economy and the increasing regulatory burden on hiring new employees is that many SMB companies are outsourcing non-core functions to third-party consultants. Just as there is risk in buying decisions, hiring a full-time employee comes with its own elements of risk.
As a result, rather than hiring staff accountants, attorneys and other professional service employees, businesses reduce risk by outsourcing these functions to professional services firms. The trick in getting this business is to reduce the perceived risk of doing business with you in the buyer's eyes.
Here are three ways for professional services firms to reduce the perceived risk of doing business with them.
1. Tie compensation to performance
One way to reduce perceived purchase risk is to tie your compensation to the attainment of performance benchmarks. For example, an insurance broker might tie its compensation to a percentage of negotiated savings in a renewal package. An attorney may put some of her compensation at risk contingent on a desired outcome.
This is the least desirable of the three strategies because you simply take on the risk that your buyer perceives. I would only recommend this approach if you feel like you have a high level of control over the variable on which your compensation is based. Rather than put your whole compensation at risk, I recommend structuring arrangements with bonuses or discounts tied to performance.
2. Take on small projects to build trust with important prospects
A less risky strategy to minimize the perceived risk of doing business with you is to offer and take on small projects that give you the opportunity to establish your bona fides with your customer and position you to take on bigger jobs. Many times, a lower-cost project requires lower levels of purchasing scrutiny because they present a lower level of risk to the buyer. This is an excellent opportunity to start small and do a fantastic job for your client. Once they're comfortable doing business with you, there's a much lower level of perceived risk associated with placing larger projects with your firm.
For example, my company offers an online marketing strategy development service to help professional services firms set a course to generate leads and new customers. It's a low-margin service for us, but it's a great way to show our customers we can help them with an outsourced inbound marketing retainer arrangement. We deduct the cost of the strategy development from ongoing retainer fees if we're hired to do more work.
In my opinion, this approach is better than taking on a large project where you put your compensation at risk based on the achievement of target goals.
3. Demonstrate your expertise with content marketing
If you're in the professional services industry and you're not using content marketing to grow your business, you're missing the boat. Content marketing is the practice of using blog articles, videos and premium content offers like eBooks, whitepapers and webinars to enhance your reputation as a trusted advisor within your field and to generate qualified leads for your business.
For professional service firms, content marketing is like sharing free samples of your expertise to entice potential buyers to do business with you. If you have a library of good content that is relevant to your target audience and addresses their pain points, you're reducing the level of perceived risk in doing business with you.
Another benefit of content marketing is that each piece of content serves as your salesforce, generating interest and leads for months and years after it's published. Make it good and promote it with your social media networks and you will be rewarded with search engine rankings that generate web traffic and leads well into the future.
It's a difficult environment for professional services firms to generate new business, but we still need to grow our businesses. There are two consequences of the down economy for professional services firms to consider in their growth strategies
Buyers are less likely to hire full-time employees to handle non-core business functions. Outsourcing these functions to professional services firms is an attractive alternative
Because buyers are more careful with purchasing decisions, you need to take steps to minimize the perceived risk of doing business with your firm.
Use the three strategies outlined in this article and you will position yourself to minimize the perceived risk of doing business with you and to start on the road to generating long-term, high margin business for your professional services firm.