Advice for technology services firms climbing the hard road from $10M to $50M
Scaling a professional services firm is a challenge. Unlike product companies, most services firms – even tech-enabled ones – receive the bulk of their revenue through people and customizable projects, rather than a tangible piece of technology that’s easy to package and can easily scale. People and projects are unpredictable and can be difficult to manage. Software subscriptions less so.
People and projects are unpredictable and can be difficult to manage. Software subscriptions less so.
There are things that leaders can do to make their businesses more predictable and scalable. Things like managed services, investing in packaged IP or AI to deliver work more efficiently, or using data and tooling to predict and smooth out the ups and downs inherent to customized services – just to name a few.
As a former founder and investor who talk to hundreds of services firms every year, I can tell you that there is no one-size-fits-all playbook that works for every company. However, you do notice some patterns. Common points in a firm’s life cycle where leadership teams struggle to get to that next level.
We call these the plateaus of growth. We use the word plateau because these are the inflection points where firms get stuck, and growth slows or flatlines. This happens because what got them to that size simply doesn’t work at the next phase.
The plateaus of growth
Each growth plateau has its own challenges, and all are hard in their own way. However, we witness companies struggle the most in the jump from $10 to $25 million in revenue, and from $25 to $50 million. Think about how many “lifestyle” services companies you know in that $10 million range. Now think how many you know at the $200 million range.
Each growth plateau has its own challenges, and all are hard in their own way. However, we witness companies struggle the most in the jump from $10 to $25 million in revenue, and from $25 to $50 million.
Before we get to why that is, and what to do about it, let’s talk about the different plateaus of growth and the challenges inherent to each one.
Plateau 1
Plateau 1 is the build phase – the climb from zero to $10 million in revenue and approximately 100 employees. This phase is all about setting the foundational elements: putting together the founding team, crafting the vision, curating the culture, determining what kind of customer and market you’ll go after, hiring the right people to service them, and driving awareness among the partners and influencers that will help you reach those customers.
During this phase, founders tend to tap their existing networks for both customers and the people they hire. This can help create a level of trust in early teams, although it’s not always the best for diversity or customer concentration. This is something to be conscious of during this phase, as it can ultimately impact your ability to scale.
Plateau 2
Plateau 2 is the transition to approximately $25 million in revenue, or about 250 people. This is when founding teams start expanding beyond their known universe, when team structure and processes become far more important. Companies start to look more like companies, with different levels of leadership, at this phase. They have plans and plays, and operate less like a pee wee soccer game where everyone swarms the ball and more like a team with specific positions.
Priorities during this phase include building out go-to-market (GTM) teams (sales, marketing and alliances), managing cash flow as the timing of payroll and collections starts to matter more, and usually fundraising and building out a more formal board of directors.
Plateau 3
Plateau 3 is the push to $50 million in revenue or about 500 employees. This is when refining and scaling a company’s GTM team, strategy and processes becomes even more imperative – especially for growth-oriented services firms looking for an eventual exit. Growing 30-40% YoY on a $30 million revenue base requires more support than growing that much on $10 million in revenue.
In this phase, building out the delivery pyramid with entry-level or offshore/near-shore consultants becomes more important, especially if you want to improve margins and be cost competitive for larger projects where global firms are in the mix. Recruiting, onboarding and learning and development (L&D) programs also become much more vital.
Plateau 4
Plateau 4 takes you to $100 million and 1000 people strong. This is when global expansion, partner diversification, and mergers and acquisitions (M&A) start to play a bigger role in corporate strategy. Revenue predictability, and the capabilities of your systems and process governance rise in importance as well.
The makeup of your workforce and how you incentivize them also evolves in this phase. Larger companies don’t compete on the same things as smaller ones. Employees that gravitate toward larger companies might be more specialized and expect certain benefits, like training, formal career tracks, and larger spans of control. Services firms in this phase also tend to lean into larger customers with bigger programs, and may begin to specialize in specific verticals (if they haven’t already). This too will shape the types of employees you hire and skills they require.
Plateau 5
Plateau 5 stretches beyond $200 million and 1,500+ employees. Whether it’s taken a few years or a few decades to reach this point, the company and leadership team at this phase typically looks very different here than it did in Plateau 1. It’s no longer about defining the culture, it’s about scaling and orchestrating progress across different regions, customers and industries. There are likely hundreds of projects and multi-year programs happening concurrently. As the business grows, and layers inside a business expand, it becomes harder, but also more important, for leaders to stay connected with customers and employees.
We stop at Plateau 5 because so few companies make it to this level before they are acquired, but there are plenty of different inflection points beyond this. All of which have different challenges and opportunities.
Leadership and mindset are key to navigating growth plateaus
A number of factors influence whether firms successfully make the journey from Plateau 1 to Plateau 5, and how gracefully they do so. However the two biggest factors we’ve seen come down to leadership and mindset.
As Jim Collins highlights in his seminal book Good to Great, the best performing companies focus on getting the right people on the bus, then figuring out the strategy. We couldn’t agree more and it’s why we spend so much time with company leadership when we’re evaluating investment opportunities, and supporting and coaching after we make an investment.
A number of factors influence whether firms successfully make the journey from Plateau 1 to Plateau 5, and how gracefully they do so. However the two biggest factors we’ve seen come down to leadership and mindset.
The leaders you have in place during each phase make all the difference. The CEO is the most critical role during each plateau as they’re the ultimate decision maker, and often the biggest influence of culture. However, the leadership team below her or him is almost as important (more on the Starting 5 leaders below).
The company may retain the same CEO throughout the different plateaus of growth, but many do not — and that’s okay. When we analyzed the CEO profiles of more than 100 services firms, spanning $1 million to $200 million in revenue, we found that 80% of companies in plateaus 1 and 2 were led by the original founding CEO. That number dropped to 70% for companies bringing in over $25 million in revenue, and it continued to drop as the companies got larger.
The company may retain the same CEO throughout the different plateaus of growth, but many do not — and that’s okay.
This is because, as a company grows in size and complexity, the job requires different skills AND a different mindset. In the early days, a founding CEO does it all: hiring, payroll, marketing, sales, the list goes on. But as the company increases in size, scope and complexity, vision setting, delegation and communication become more important. At a certain size, the CEO has to decentralize decision making and give autonomy to others so that they can run their parts of the business. They need to find people who make them better, and be less “player coaches” and more of a head coach. Otherwise, they can’t get out of the weeds and see the future. That’s when the business stalls and…you guessed it…plateaus.
Data, controls, governance and shareholder management also become more important at scale. For many entrepreneurs who love the build phase, this isn’t their passion or natural skill set. When this happens, some choose to hire people around them to manage these areas. Some step into new roles to shepard the company to that next plateau. And some cash out and build their next business (or go on a silent meditation retreat to decompress from thinking about their business and people every waking moment).
The starting 5
No matter how great a CEO is, without a trusted, aligned and well functioning team behind them, they simply won’t be successful. At Tercera we often refer to this second level leadership team as the “Starting 5”, which typically includes the company’s:
- Head of finance and/or operations
- Head of sales
- Head of marketing
- Head of HR/people
- Head of delivery
These are your playmakers. In larger, global companies this team may be larger and more regionally aligned, but for simplicity we like to put it in basketball terms because having the right people on the court, working together as a team on offense and defense, is what wins championships. Assembling the team is the first step thing, but if you want to keep winning, it’s equally important that they remain the right players, running the right offense.
No matter how great a CEO is, without a trusted, aligned and well functioning team behind them, they simply won’t be successful.
The experience level and profile of these individuals will shift throughout the different plateaus, and how well capitalized you are to fund future growth. If you are only $5M in revenue and boot-strapping the business, you probably don’t need (nor could you afford) a big name CRO. Instead you’d likely want to invest in account executives on the ground driving revenue directly.
Our advisor, Jeff Smith, wrote a blog recently on how sales in professional services evolves at scale. Sales is just one role that changes as you scale. Being the head of a global sales process across dozens of people is very different from being an amazing salesperson at a start-up. Tasks like sales forecasting and having a handle on how the quarter is shaping up matter a lot more than they used to.
There are plenty of other things that evolve and grow in importance as a company scales – things like legal, systems and infrastructure, and internal communications. However, if you have the right people in the right seats, those things tend to get prioritized at the right time.
Looking for help?
If you’re an IT services leader stuck in a growth plateau, and are looking for inspiration on how others have made the leap, we encourage you to subscribe to our monthly newsletter with content, case studies and advice from our extended team. Or if you’re thinking it might be time to bring on a capital partner, please reach out to the team at Tercera directly.
