Focus and Diversification
post # 492 — January 21, 2008 — a Strategy post
Hereâ€™s a question from Mike Spack in St. Louis Park, Minnesota:
â€œI was talking to a colleague about his employerâ€™s strategic plan. They are a 120-person science/engineering consulting firm located only in Minnesota. They are 100% employee owned. Their plan says that no more than 10% of the firmâ€™s receipts should come from any single sector. This strategy blossomed from a time 10 years ago when the firm only worked in three sectors and almost went under when one of the sectors dried up.
â€œThey now work in about 25 different sectors, many of which donâ€™t even have potential for cross-selling. The interesting thing is they are attracting talented people in a broad range of specialties to work for them. Many of whom have come from firms that have a small niche. The idea of having a broad client base appeals to many engineering / science types, who are not naturally risk takers.
â€œThis seems to strongly go against your beliefs on developing a consulting firm. You seem to advocate having a deep, but narrow focus which requires strategically choosing who you will consult for. Am I missing something? Is this a viable business strategy for them since they are 100% ESOP and they are â€œall in it together?â€ Can they make this work or are they doomed?â€
Mike, I donâ€™t have an absolute distaste for diversification, but I *do* believe in â€œdepth, then breadth.â€
If youâ€™re going to have a portfolio of client sectors that you compete in, you still have to make sure that you are a credible â€œspecialistâ€ in each. Itâ€™s not enough to say â€œwe can do that, too.â€ If youâ€™re going to attract clients, you usually have to convince them that you REALLY know the special circumstances of their sector, and are not just one more generalist.
So, this raises the question of how many sector specialties you can have and still be seen as an informed expert in that sector. I donâ€™t know the details of the engineering / science business (since itâ€™s not one of MY specialties, ha-ha), but the numbers you give do make it seem like your friendsâ€™ firm has swung from one extreme to another. You say they have 120 people, competing in 25 sectors. That seems like â€œa thin layer across a lot of thingsâ€ to me. Iâ€™d guess that, in many of those sectors, there are more focused competitors who might persuasively convince clients that they have a special interest in their sector and a special capability to serve them.
I donâ€™t disagree that many professionals like to work across client sectors (itâ€™s fun as well as risk-diversifying), but you have to balance what the provider would like to do with what the clients will pay for.
Does anyone else out there have a perspective on this?
Jim Donovan said:
By operating in so many sectors, they are unlikely to be anything other than a generic group of clever bodies – selling inputs rather than outcomes, and competing on price with employees and contractors Its also harder and more costly in time and effort to sell in a diversified customer base. Unless they have a clear advantage in some hard-to-gain expertise, I suspect they’ll be earning lower rates than genuine specialists. It’s a common failing to think that spreading sectors is better value for the owners It’s not – you’ve just swapped cyclical risk for lower everyday earnings.
posted on January 21, 2008