In Tech Services businesses the temptation to deviate from your core is even bigger than in product businesses. You build great relationships with your customers and then they ask you: What else can you guys do for us? They’d ask you if you perhaps have access to somebody who can do X, or somebody who can do Y. And you think to yourself: This is a real opportunity, this could be the beginning of something big. But, as Steve Jobs said, “People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things.”
For the purpose of this discussion we’re defining a niche as a specialty within a specialty. E.g. Human Capital Management (HCM) is not a niche per se. However Oracle HCM is considered a niche. Similarly, an industry is not a niche. For example, Mining is not a niche, however Production Planning for mining companies is certainly a niche. Also a large software vendor cannot be a niche on its own, Salesforce/SAP/Oracle/Microsoft/AWS, none of them are niche specialties, they’re too broad. If you have a Salesforce firm and you ask a Salesforce employee about your brand, what will they say… “Oh yes that is just another Salesforce shop, we have hundreds of them”. I know someone who runs a Salesforce firm for non-profit organisations. Now that is a niche. He employs over 100 consultants, and is growing fast. Salesforce knows exactly when to call them and they know what to expect. Do they have opportunities for growth… you bet they have. With their offshore offering in place, they can expand into any region they desire. They can also expand into other CRM products. Their specialty in non-profit is what makes them famous in the Salesforce ecosystem, and this fame can be transferred into other regions and products.
If you’re seeking evidence that niche players do better in the tech services space, you don't have to search far. Not only do they get better EBIT multiples when they sell to their bigger counterparts, but they grow faster, have happier employees, and last but not least, happier owners. SPI Research, a Professional Services research company., has researched thousands of companies. Their finding is that the niche players outperform the generalists as a rule. One of SPI Research’s findings is that these top performers spend less money on sales and benefit more from referrals.
Can Generalists do well?
For a generalist to do well they need to be really large, such as an Accenture or DXC. They consist of practices or divisions, each is basically a niche business within a business, and each practice eventually reaches a critical mass ideally. These large firms can create new specialty practices organically, and when they fail at that, they acquire the specialists in trade sale deals. Their business model clearly works, but only because of the scale. Do not try this on a small scale. To become a generalist at a small scale is a sure way of having a terrible time.
If we’re talking tier 1 (e.g. Accenture, Deloitte) then Yes, niche (as we define it) is probably not on their agenda. But in the tier 3 space, the niche players will generally outgrow their generalists. A niche business can grow to hundreds of consultants and even reach 9 digit revenues before they run out of growth opportunities. Here are some examples: Eagle Creek Software Services (CRM, 250 employees at time of exit), SEC Consult Group (Cyber Security, 200 employees at time of exit), Presence of IT (SAP and Oracle HCM, 600 employees at time of exit ). EpiUse (Large Enterprise SAP HCM, 1000 employees at time of writing), Performance Labs (Software Testing, 180 employees at time of writing).
The challenge with a services business is that saying “Yes” to everything can help you boost revenue and profit instantly. The gain is instant and the pain is long term. It's like eating fast food. Short term gain, long term pain. If you switch gears and say No to work outside your niche, you’ll have short term pain and long term gain. When Steve Jobs returned to Apple in 1997 he killed 70% of Apple’s products. This had an immediate negative impact on revenues, but suddenly the employees knew what to focus on and one year later they made a whopping $309m in profits.
The temptations to diversify are often very appealing. However once you fully understand all the benefits of a strong niche, it becomes easier to say No.
Here are the benefits of a niche business:
Strong Capability
When a niche firm wins a contract, they don’t have sleepless nights about the delivery… they know exactly what they proposed and they know exactly how they’re going to deliver it.
Employee Magnet
A customer of a specialist SAP BI consultancy once accused them of being “industry gangsters”. He said they hired all the good SAP BI consultants and there was nothing left for the rest. But that’s not quite what happened. They merely stuck to their niche, invested in their people’s careers, and eventually everyone who worked in that niche wanted to work for us. Talent acquisition became a lot easier as time went on.
Retention
The best things you can do for IT professionals are: Help their careers and give them relevant projects to work on and gain experience. As a niche player you’re in a much better position to give your staff the exact training they want, keep them informed about fresh-off-the-press changes in their industry, and have meaningful discussions about their careers. But it's not just the skills that are good for their career… The fact that they work for you is good for their career. Your good reputation enhances theirs. Niche professionals who work for niche firms always find it hard to leave, they have too much in common with the business and with their peers.
One of the worst things you can do to a consultant is to constantly throw them onto projects where they have to figure things out from scratch. They inevitably run over time, over budget, and cop abuse from the customers.
Staff of niche firms enjoy their work more….. They fulfil their promises to customers, receive compliments for their services, and win awards for the multitude of project successes.
Confidence
It feels so much better to go into a sales meeting knowing that your capability is rock solid. Your customer and your competitors are now standing on your terrain, and you can be confident and authentic.
Cost of Selling
If you stick to your niche long enough and become confident in the abilities of your firm, you will find that you don't need that super expensive rainmaker sales person anymore. Niche companies have less sales people and therefore spend less money on sales. Each proposal takes less time since you don't have to redesign the wheel. More people step up to help with sales. It’s a lot easier to convince a consultant to take on sales responsibility if they know that they’re selling something they know, and they know the odds of winning are good.
Better EBIT Multiples
Large Tech Firms buy small tech firms because they need your specialist skills and they don't have time to grow it organically. If you’re not a specialist, then you’re nothing more than a set of financial numbers. They will pay a mediocre EBIT multiple because their offer was made without emotion or desperation. The big firms are always bleeding in certain departments. They might have lost some big deal because of their lack of capability in one specific area, and now they want to fix it. If your speciality solves their problem, you’re in a good position to negotiate a high EBIT multiple.
Better Sales Funnel
One of the problems with one-stop-shops is that sales opportunities cannot be qualified effectively. So the customer wants to do an Oracle upgrade for 200K. We only have two Oracle employees… they’re on the bench… we’re a bit desperate… but the two consultants are so technical, they have no idea of commercials.
On the other hand, if you’re an Oracle specialist, you’ll know exactly what questions to ask and you’d be able to qualify the deal in a matter of hours. And once you’ve qualified out of the deal, you can move on to focus on better things, or you can confidently go back to the customer, manage their expectations on price, win the deal and make good profit.
Less Escalations
Two more benefits of a niche firm: 1) Escalations are rare because your people know what they’re doing, and 2) If there is an escalation, there is probably somebody inside the company who can fix it. The reduction of escalations also contributes directly to the growing reputation of the business.
More profit
When you’re niche you’ll notice your customers complain less about price. They are more likely to pay your price, because their ultimate goal is to get value for money. If you’re twice as effective as your competition then a 20% price difference is simply not a problem.
Access Large Accounts
Small generalists are doomed to dealing with small stingy customers. Large enterprises will tell you in so many words that they only deal with Tier 1 suppliers with the exception of specialists. Furthermore, as a specialist you can work on massive contracts as a sub contractor and still charge full rates.
Effective Marketing
In Marketing language the “Effective Frequency” is the required frequency that your customers should hear about your offer before they’ll buy. For the effective frequency to work, your customer should hear one consistent message repeatedly until they buy. But what if you have plenty of things on offer, what happens then? Basically nothing. Any money you invest into marketing pays little dividends unless you have enough marketing money to throw at every single offering you have.
Brand Permission
Brand permission is when your customers start talking to others, about your firm, in clear positive terms. They know what you do and they know you’re the best. But if you have plenty of things on offer, what do they say to each other? They might say John is a nice guy, but they cannot really figure out what your brand stands for and what your firm’s claim to fame is. The more focused you are, the more likely that you’ll get brand permission.
To be honest, there’s at least ten more benefits we can mention why a niche firm works better than a generalist firm. But we’ll wrap it up here. You get the message: Choose one thing, become good at it, and find growth opportunities within that niche.
So how do you make the leap and narrow down on focus? Not everyone has the confidence of Steve jobs to cut 70% of products instantly. Furthermore the 70% of products that he killed were not his products. He did not launch those products and he did not hire those people. So killing it was an easy thing for him to do. What if you’re the one who has driven the diversification in your business and now you want to reverse it. You don't want to kill your own babies.
Our recommendation is to follow these guidelines:
If you decide to narrow down on focus, those parts of the business that are not your core will either fade away slowly or become self sufficient. If they survive and become self-sufficient then that is a real good outcome since it makes money, takes up little of your time, and does not dilute your marketing message.
