Yesterday I was discussing the concept of specialization with a friend of mine who is a very astute public relations consultant. He asked me why a firm would “take the risk” to apply a narrow vertical specialization to its business. I thought about it for a second, and countered by asking, “Why would a firm take the risk of remaining a generalist?” As I see it, there are 3 significant reasons that remaining a generalist is a risky business proposition:
Risk #1 – The Platform Is Warming
Late last year, I wrote an article outlining a variety of indicators that imply the supply of professional services exceeds the demand for their services. This trend appears to be most pronounced in the legal professions where the number of graduates entering the workforce appears to outweigh the available opportunities in the market. What happens to this excess capacity? Some probably pursue careers in industry or other occupations. Others, probably think about starting their own firms. Most will fail. But, a handful of talented entrepreneurs figure out very quickly that it’s quite possible to specialize in a narrow niche of the law, and build a growing, thriving small practice that carves business right out of the larger, generalist law firms. Often, they can even charge more by doing so.
In the last 6 months I’ve found a variety of specialized professional firms that validate this belief. Below are a few examples:
- Law Firms : Specializing in condominium and homeowners association law, investor claims and stockholder class actions, default litigation, and even bicycle law.
- Technology Consulting Firms : Specializing exclusively in Salesforce integration, implementation of select open-source software platforms only for Universities, and analytics insight solely for healthcare companies.
- Engineering Firms : Specializing exclusively in water-related engineering or designing healthcare facilities.
Imagine your firm as a platform floating in the middle of the sea. These specialist firms are lighting the first matches under the platform of the generalist firm. They’re either commoditizing over-priced, inefficient services or building a deeper pool of talent and expertise such that they’re charging more for the service. Once the platform is burning you’ll be forced to build a new one while trying valiantly to avoid drowning. Wouldn’t it be better to start building a new platform before the current one is torn asunder? While it’s difficult to say when our midsized generalists will feel the pain, I tend to believe it looks something like this:
- Engineering Firms and Law Firms : Some are feeling it now, most will see the effects within the next 5 years.
- Technology Consulting Firms : There’s still such a large swell of demand for talented technology people, that most firms are struggling to find the talent they need to serve the demand. Larger firms may not see or feel these effects for as much as 8-10 years.
Risk #2 – When Consultants Leave, Clients Often Follow
One of the biggest fears of most consulting firms is the risk of losing a highly talented consultant. Clients often build deep trusted relationships with a technology firm’s project manager, a law firm’s lead attorney, or an engineering firm’s program lead. Leadership fears, rightfully so, that if one of these key people leave, their clients are likely to follow. A client’s business relationship with any consulting firm is a highly personal one so there’s no doubt that often this is the outcome of a key loss in talent.
Unfortunately, the mistake most firms make is pre-assuming that this is the only logical outcome. As a result, firm leaders feel more comfortable with a broadly diversified business — one that serves a wide range of industries and/or is providing a wide range of services. It FEELS less risky when an associate leaves. After all, we now have less resources tied up in a single client or a single line of service.
However, the reality is that a specialized firm actually reduces the risk of client loss in this situation. The specialized firm has a deeper bench. It has more talented, capable expert practitioners available to quickly step-in and assume the client relationship. It thereby positions itself with a higher likelihood of client retention when a key consultant leaves. Regardless of your business strategy, you’re going to have some consultant attrition. It makes sense to increase the likelihood that you’ll retain a client when this happens due to the very structure and deep expertise of your firm.
Risk #3 – It’s Simple Market Segmentation
Pursuing a narrow vertical market FEELS more risky to firm leaders because we’re narrowing our field of vision. If we can spread ourselves across more industries, we feel like we have more viable opportunities to sustain and grow our business. The reality is generally when we spread ourselves out we preclude ourselves the opportunity to build the deep, meaningful expertise we need to reach beyond our geographic markets.
Most generalists end up operating inside of a defined geograhic reach that is “driveable.” So, in essence, the generalist has just segmented his or her market to include clients within a constrained geography while making it more difficult to serve them. On the other hand, the specialist has chosen to carve out a vertical niche to serve a set of like-kind clients wherever they are in the country or in the world. Hence, they’ve segmented their market first by client type and second by geography.
Let’s compare with an example:
Imagine a 20-30 person web development firm that works primarily in open-source technologies with clients of all shapes and sizes from a wide range of industries. There are many development firms in any market that could probably fit this description. As a result, 90% of this firm’s clients probably exist within its local geography. If this firm were operating in Columbus, it would easily have a potential market of 75k-100k potential clients (according to Manta Media, there are 75k businesses in Central Ohio). It’s basically overwhelming for a firm to focus its business development and marketing efforts to over 75k different companies with all ranges of wants, needs and desires from a technology firm.
By contrast, our specialist, described above, consults Universities on the implementation and support of three key open-source technologies. There are roughly 7k Universities in the United States. While the needs of each institution are clearly unique, it’s much more efficient for our specialist firm to build deep understanding of client needs, to focus its marketing and business development efforts, and to create a bench of talent to create value for its clients.
So, in reality, where’s the risk? For a firm with 50-100-200 employees, building specialties and narrowing focus into select markets just makes business sense.