Talent & Leadership

Scaling your finance team to be an asset, not a liability

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IT services firms that want to grow and make their mark know they need to invest for future gains. Nine times out of ten, those investments are directed at the sales, marketing, and people functions. It makes sense. In a people-based business, you can’t deliver without great talent. Prospects and partners won’t know you exist without sales and marketing. Finance, on the other hand, is seen as a necessary but supporting function, often relegated to the back seat when it comes to investment.

As an investor in growth-stage firms, we’re here to tell you that’s a mistake. A sound finance function can be a growth accelerant, and a poor one can be a growth inhibitor. Investing in the function early can pay rich dividends down the road. Neglecting it until it becomes a problem can come back to bite you.

The Pitfalls of Underinvesting in Your Finance Team

A strategic finance function can help you not only with looking back but also with planning ahead. The team can bring objective, data-driven insights to ensure you are planning and budgeting realistically, as well as identify root issues in your key metrics, fine-tune gross margins and optimize cash. They can ensure you are forecasting accurately to make sure your hiring meets your demand, and that you don’t get too far ahead of your skis. They can also make sure you have your financial house in order if you’re thinking about taking on capital or pursuing M&A.

A sound finance function can be a growth accelerant, and a poor one can be a growth inhibitor.

On the flip side, underinvesting in your finance team can set your firm off course. You might end up hiring too many people too fast, miss out on opportunities for growth because of a lack of resources, or make bigger investments than you can afford (building into new geographies, product development, etc.). We’ve even seen cases of a company’s financials being such a mess (books too complicated, revenue not recognized correctly, etc.), that it resulted in investors walking away from deals.

Tercera has worked with hundreds of IT services firms over the years – firms of all shapes and sizes – and we have seen a pretty standard playbook when it comes to scaling your finance team in lockstep with your business’s growth. There are always exceptions to every rule, but it looks something like this:

The four phases of scaling a strategic finance organization from scrappy start up to the global corporation

The Start-Up Years: Scrappy Cash Management

In the early stages of a company, every employee is expected to wear multiple hats, and finance is no exception. While it would be ideal to have a dedicated finance professional, it is a luxury that most start-ups cannot afford. Which is why in this stage, finance is typically handled by a contractor/fractional employee or an employee who dedicates one or two days a week to overseeing the function. Often, this person’s other responsibilities, in addition to finance, may include handling operations or other administrative tasks. We’ve seen instances where the CEO takes on the part-time finance role, although we would argue that this is not the best use of their time.

The primary responsibilities of this fractional finance leader include items like keeping systems up to date, ensuring employees are paid, sending out invoices and establishing even a simple P&L statement. They’re also responsible for making sure that the bank account never hits $0.

Contracting or accessing a CFO-level expert even just half a day a month can help establish finance closing routines and provide valuable insight beyond just financial matters.

Even with a part-timer, getting some level of strategic finance input can make a huge difference in keeping your company on track. Contracting or accessing a CFO-level expert even just half a day a month can help establish finance closing routines and provide valuable insight beyond just financial matters. Even better if they can attend board meetings or assist with the annual budget process.

The Scale-Up: Building the Foundation of Your Financial House

As your business grows, you’ll eventually reach a point where it makes sense and you’ll have the budget to hire a dedicated finance person. This typically happens when your business is ~20-25 people or as you approach $4-5M in revenue. The finance hire here should be a head of finance who can scale with your firm and continue to be the finance leader through the next phases of growth.

The ideal candidate at this stage has either handled leading finance for another early-stage firm or has been second in command at a larger firm. While a senior hire here is nice, you need to make sure the person is still willing to roll up their sleeves and dive into the weeds, since they won’t have much support.

The ideal candidate at this stage has either handled leading finance for another early-stage firm or has been second in command at a larger firm. While a senior hire here is nice, you need to make sure the person is still willing to roll up their sleeves and dive into the weeds, since they won’t have much support.

Look for candidates with a CPA and accounting background who can balance competing demands within the firm and provide a strong voice in financial decision-making. Overall, this person will be a jack of all trades, handling the full finance function, with their title typically being anything from Director / VP of Finance to CFO.

Responsibilities at this stage include shoring up the accounting practice (moving to accrual-based, starting to measure gross margins, etc.), professionalizing the budgeting process, and starting to make sure the hiring and backlog are growing in lockstep without straining your cash. At this stage, you should also consider segregating duties and automation. For segregation of duties, consider outsourcing payroll or combining it with HR, or including invoicing and revenue recognition in the operations. For automation, there are many tools available to automate payment processes, accounts payable, and integrations to ERPs and CRMs that save time and improve accuracy.

However, hiring a senior finance leader can be expensive so many companies will instead hire mid-level professionals with titles like Controller or Finance Manager to handle just the day-to-day accounting tasks. While this can work for a time, eventually you’ll need a true finance leader to help with more strategic functions. If you do go this route, be aware that tensions may arise if you later hire a head of finance to manage this person. Not always, but it happens more often than you think.

Scaling: Keeping Pace with Growth

As a company grows to between 50-150 employees and reaches $15-$25M in revenue, it’s time to start thinking about an additional hire for your finance team, but also not expand too quickly. Of the companies we’ve interacted with at the 50-100 person scale, half had one finance person and half had two. However, all companies at the 100+ person scale had at least 2 finance personnel.

If your first finance hire was a Director / VP of Finance or CFO, it’s time to start building out their team to free them up to focus on more strategic, forward-looking work.

On the other hand, if your first finance hire was more junior, you have two options. If you think that person has high potential to be the long-term finance leader, you can promote them to Director / VP of Finance and hire below them. If that’s not the case, you’ll need to find a more strategic finance leader that can take you to the next level.

During the scaling phase, the finance function will likely focus on more forward-looking initiatives such as creating recurring forecasts that help guide decisions on hiring, modeling to determine cash needs, and helping the firm align on KPIs. They should also be able to handle financials across multiple geographies if the company has started to expand globally.

During the scaling phase, the finance function will likely focus on more forward-looking initiatives such as creating recurring forecasts that help guide decisions on hiring, modeling to determine cash needs, and helping the firm align on KPIs.

The budget process here begins to undergo a change too, with the introduction of operational budgets that feed into an overall budget. Managing budgets becomes more complex with an increase in the number of salespeople, geographies and/or channels. It requires a control mechanism that allows for delegation of decision-making and approval, and moves from a centralized budgeting approach to a more decentralized one.

At this stage, you might also have an investor, and the finance team will be critical in both helping in the investment process and the investor reporting post-close. Often, the finance team is also in charge of maintaining the cap table (although this can also fall in the CEO or general counsel’s responsibilities).

The Corporation: Specialization and Strategy

As your firm begins to mature into a corporation with more than 150 people or more than $25M of revenue, your finance team should be a well-oiled machine with a clear understanding of their roles and responsibilities.

At this stage, maintaining a finance headcount of 1-2% of total headcount is the benchmark. Of all the firms we’ve observed at this stage, 70% maintained their finance headcount within this range, while 25% had a higher number of personnel and only 5% had lower. So, for a $50 million managed service provider, this might be 7-10 finance personnel, but for a multi-national digital engineering firm or global systems integrator, it could be in the hundreds or even thousands.

With a CFO or VP of Finance at the helm, you’ll be adding more specialized hires to support the growing needs of the business, such as accountants, invoicing and payroll specialists, tax experts, treasury managers, and financial planning and analysis (FP&A) professionals. The finance function should now be able to provide real-time visibility into the financial performance of the business and contribute significantly to strategic decision-making.

The finance function should now be able to provide real-time visibility into the financial performance of the business and contribute significantly to strategic decision-making.

The team’s responsibilities at this stage will now also include managing relationships with investors and lenders, ensuring compliance with tax laws and regulations, leading annual audits, exploring M&A opportunities for growth, and providing guidance and support to business leaders in negotiating contracts and other financial agreements.

When scaling up a business to a corporate level, it’s crucial to focus on factors that influence valuation. It’s important to have a finance team that understands the valuation drivers and manage the business accordingly, to maximize its value, especially if there’s an intention to take on further investment or sell in the future.

Turn Your Finance Team into an Asset

The finance team for IT services is not just a back-office function. It’s an integral part of your business that can provide insights you need – insights that grow in importance as the company scales. It may be tempting to put off investing in finance, but there are consequences.

Growing your IT services firm without scaling your finance team alongside the rest of the organization is like setting sail on a ship without a compass.

Growing your IT services firm without scaling your finance team alongside the rest of the organization is like setting sail on a ship without a compass. You’ll be directionless and prone to financial turbulence. Having a strategic finance partner, and the right team to support them, can help you keep the wind in your sails and navigate through treacherous waters.

Why utilization shouldn’t be a dirty word

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Utilization. It might not be the sexiest topic on the planet, but it is probably one of the most impactful metrics within a professional services company. For employees, utilization tends to hold negative connotations, bringing to mind visions of a cog in the wheel. But for services leaders and business owners, it represents financial health.

I’ve worked in professional services for more than 20 years, and utilization has always been a focal point. First, as a consultant who was measured by my own utilization. More recently, as a global delivery leader for companies like Appirio and 7Summits where I looked at utilization as a critical KPI for the company.

Some might say utilization is a necessary evil in the services business. Personally, I think it’s just a little misunderstood. But no matter how you feel about the term, utilization is an important topic for both individual consultants and business owners to understand.

That is the point of this blog: to highlight why delivery leaders care so much about this metric and how businesses can do a better job of managing it so utilization isn’t a dirty word.

What is utilization and why should I care?

In its simplest form, utilization reflects how much billable time an employee generates in a given period, based on the total time available. People have different philosophies on what “total time available” means inside a firm, but for most it’s based on a year comprising 2080 hours. Using that 2080 number as a baseline, some firms will remove holidays, PTO, and development time.

The reason why utilization is so important is quite simple: services firms make money based on selling (and delivering) people’s time so there is a direct connection between utilization and revenue.

The reason why utilization is so important is quite simple: services firms make money based on selling (and delivering) people’s time so there is a direct connection between utilization and revenue.

Let me give you an example: If you have a 200 person delivery team and you raise utilization by one single point, at a $200/hour bill rate, that translates to an $800,000 annual impact to the bottom line. If you raise by five points, the impact is more than $4 million annually.

However, utilization also has a direct correlation to employee satisfaction and burnout. Which is why you need to get this metric right.

How do I set the right utilization targets?

Like most things in services, setting the right utilization target is both art and science. However, getting that target right – where it can be held up as a positive for both employees and employers – is one of the most important things a services leader can do.

Industry benchmarks for most project-based services firms put “best in class” utilization at between 75-85%, however there are a number of considerations to take into account when setting targets. Including:

The profile and makeup of projects or programs. If a company is selling smaller projects at higher volumes, staff will likely be working on multiple engagements at the same time. In this case, utilization may need to be adjusted down to reflect the headspace required for context switching. If it’s larger ongoing engagements, it’s reasonable to expect utilization to be higher.

The way services are sold. In an environment where people are fully dedicated to a project, such as staff aug or through dedicated project teams, those individuals have the ability to achieve consistently higher utilization levels. However, if staff is fractionalized across multiple engagements (where hours may ebb and flow weekly, from project to project), it may be more challenging to achieve goals.

The company or practice’s pace of growth. If a company is growing fast and furious, they may need to hire ahead of plan in order to sell an engagement. In highly competitive environments, where another similar partner is right around the corner, telling a customer they have to wait 4 months to start may not fly. In this case, firms may need to account for some bench time as projects come to fruition, which will lower utilization.

The skills needed and the labor environment. If companies are having a difficult time finding the necessary skills, or are building capacity in a new area that requires significant training, just-in-time staffing likely won’t work. Firms will need to schedule in time for onboarding new employees and training or cross-training before a person can be fully “utilized”.

Analyzing the profile, makeup, and resource allocation models across deals will help a company determine the right utilization targets for them. Along with this, determining organizational models to deliver the services, and having a variety of approaches in place for how teams are structured may assist in hitting higher goals.

How do rates and margins factor into the equation?

While utilization is a measure of employee efficiency, utilization alone will not drive profitability. The cost of labor, bill rates, and deal margins are equally important. You could have an employee utilized at 100% and still lose money if that employee is expensive, and rates are too low.

This is where sales and delivery need to work together. When solutioning a new opportunity, having the right estimating tools and models can allow sales and delivery to see the direct cost of labor by role, apply that to rates, and determine overall margin for the opportunity.
From there, a services company can set deal margin thresholds, and make decisions based on these data points. Identifying a healthy margin and holding to that during sales cycles will help improve profitability.

How do I effectively manage utilization?

For many employees, utilization targets come off as negative and can create undue stress. Missing targets may create fear, while working toward unattainable targets can create burnout. This is where effective management and communication comes into play.

Once the targets are set, leaders should clearly articulate:

  • Why these targets are in place
  • How managers will help in the achievement of targets
  • What to do when targets aren’t met (or seem unattainable)

Employees will argue they can’t control their utilization achievement because of staffing and client behavior, while management tends to gravitate toward the belief that highly skilled, in-demand employees will naturally be highly utilized. The truth here lies somewhere in the middle.

Employees will argue they can’t control their utilization achievement because of staffing and client behavior, while management tends to gravitate toward the belief that highly skilled, in-demand employees will naturally be highly utilized. The truth here lies somewhere in the middle.

Management should be accountable to forecasting demand, ensuring their team is right sized, and supporting performance management. Companies need to provide clarity on what level of bench time is acceptable and sustainable too.

Employees on the other hand should be proactive when the work isn’t there by communicating to their manager, raising their hand, and when all else fails, taking advantage of the time to develop skills or support internal initiatives.

But ultimately, it’s on the company to understand what level of utilization is required, and for managers to ensure they are bringing in the right talent, enabling them, and staying in front of demand.

Utilization is at the heart of a healthy services business

Utilization can be one of those metrics that can hurt or help a company, depending on how you evaluate, set targets, and support the team in their achievement.

If the goals and targets are too aggressive or unattainable, employees may not feel supported and that’s where attrition will rise. Burnout is real, and employees have options – even in a tight economy. On the flip side, if the targets aren’t right, companies won’t have a healthy, growing business with profits to invest back into the business (and the people).

Evaluate your overall financial plans, look at costs, project profiles, organizational delivery models, rates and margins and then make a decision(s) that will best support the financial health of your organization along with the well being of your team.

Mental health requires more than a hotline

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A Personal Call to Action for Leaders to Support Mental Health

It was April 2011 when we got the call. One of our colleagues, let’s call him Jake, had taken his own life and was no longer with us.

When I got that call, I was the CEO and co-founder of Appirio, a 5-year old, 400-person services firm in the fast-paced world of cloud computing. Jake was one of our technical consultants who, like most of our team at that time, worked remotely. Because of this I didn’t interact with Jake all that often, but knew him as a smart guy on the quiet side who was tight with his team and had a surprising gift for poker and juggling. I witnessed the latter at our annual company meeting where he got a standing ovation at our “Appirio’s Got Talent” show.

His wife told us that Jake had struggled with depression for a long time, but all I could think about was how happy and full of life he seemed when we last saw him. It was a stark reminder that you never know what’s going on behind the scenes.

That’s the thing about mental illness and what makes it so hard – it’s all too often hidden from view.

That’s the thing about mental illness and what makes it so hard – it’s all too often hidden from view. It’s not visible like a broken arm or a physical illness that tends to elicit a natural sympathy from even the most oblivious person. Mental illnesses can live in the background and are too often a silent struggle that is misunderstood and easily dismissed by those who have never experienced it personally.

The truth is, more and more of us are experiencing it personally. I’ve gone through it with immediate and extended family members, who battled the range of minor short term bouts to major long term situations. In some cases, there were trigger or catalyst events. In other situations they were, and still are, long running. Luckily they’ve been managed with the right combination of awareness, therapy and medication.

Most notable, and shaping for me early in my career, was a situation where I needed to unplug for two months to take care of what could have been perceived as a non-issue. I quickly realized that the tax and toll of trying to balance my personal and professional life was too material. I needed to go all in on the family, and I was fortunate enough to have a company and colleagues around me that understood. I had a manager and co-workers who covered for me and allowed me to help manage this invisible illness that was impacting our family.

The role of a CEO in supporting mental health

My personal experience with mental illness has had a profound impact on me, but the Jake situation changed me as a CEO.

It’s one thing when you’re dealing with a situation personally, but how you handle sensitive issues as a leader has an impact far greater than just yourself. After we got the call about Jake, we talked as a management team about how we wanted to communicate the news to the company. How could we support his family and celebrate Jake’s life, but also talk about this as a real issue? How much should we say? I’m sure we didn’t handle everything perfectly, but we did our best.

It’s one thing when you’re dealing with a situation personally, but how you handle sensitive issues as a leader has an impact far greater than just yourself.

It’s been more than ten years since Jake’s death, and luckily mental health is on the radar of far more people. What used to be a topic of conversation reserved for healthcare professionals and those struggling with it, is now talked about in boardrooms, educational institutions and government bodies across the world.

What was once a personal issue has now become a business issue. And for good reason.

Depression alone accounts for $44 billion in lost productivity, and as I’ll explain below, providing support for mental health is now an expectation from employees.

A catalyst for the conversation

Mental health awareness has been increasing for years, but the pandemic made the conversations more urgent. COVID disrupted our lives in so many ways and continues to rear its ugly head even to this day. Add into the mix racial tensions, war, political instability and a deepening environmental crisis (just to name a few), and it’s no surprise that depression and anxiety are off the charts. Especially within the younger generations.

Consider these stats on Gen Z, which will soon make up more than a third of our workforce:

  • Gen Z adults (18-29ish) report the highest levels of stress of any generation (American Psychological Association)
  • 60% of Gen Z employees say that mental health resources are important in selecting an employer (McKinsey)
  • 41% of Gen Zers think mental health benefits will become a legal requirement for all employers in the next five years (Forrester)

Like other generations, Gen Z has seen a lot. The difference is they are digital natives and have been raised on a steady diet of social media which pushes these issues (and in my opinion, other bad behavior) front and center.

They’ve also come of age in an era where mental health isn’t a taboo topic. An age when going to a therapist is as common as visiting an orthodontist, and where mental health and meditation apps abound. A large number of Gen Zers have also attended universities and colleges where counseling is now offered as a free service, so it shouldn’t come as a surprise when they leave those environments expecting the same level of support from their employers.

Businesses seem to be rising to the challenge. According to the same McKinsey study referenced above, 70% of employers report they plan to invest in mental health resources by starting, continuing or expanding benefits.

I just hope these companies don’t re-evaluate these plans as cash gets tighter.

5 ways to start addressing the issue today

There is no one size fits all solution to this problem, but there are things that every CEO and founder can do to elevate awareness, empathy and support for those dealing with mental illness. Here are a few places to start:

1. Evaluate your existing benefits. Mental health support requires more than a hotline. Understand what the options are, and think through how your benefits and culture can support people struggling with these illnesses personally or those they love. An Employee Assistance Plan (EAP) is a good start, but it’s just that, a start. What else can you do? For example, can you afford to offer paid time off in addition to unpaid leave?

2. Communicate what’s available. Make sure new and existing employees understand what they have access to and how to access it. All too often companies make a benefit available and shut it down because people didn’t know it was there and didn’t use it. People might not pay attention to the fact you have a substance abuse support program when they join, but when a spouse or child has an issue, they’ll take notice.

3. Focus on access. Awareness might be up, but discovery is hard and the supply of mental health professionals is low. Explore partnerships with organizations like Project Healthy Minds, a group I’m involved with that is making it easier to find professionals and peer support groups.

4. Treat mental illness like a physical illness. Acknowledge that mental illness is real even if you can’t see it. If someone comes to you and says they need time or support, treat them the same as you would if they told you they were struggling to control their diabetes. If your brain isn’t working, how is that different from another part of your body not working?

5. Coach team members. Talk about how managers and co-workers can help people in these situations. If an employee comes to a manager and says they are struggling with anxiety or depression, how can managers help isolate certain things that are causing the anxiety and minimize them? You can’t remove every stressor in a job, but if 8 out of 10 things are causing anxiety, can you cut a few of them out? When should they escalate to human resources or to a professional? Do they need some extended down time to reset like I did early in my career? Start with the leadership team so it filters down and sets the tone with their teams.

This is a complicated issue and these tips just scratch the surface of what we should be doing. But avoiding the topic is no longer an option.

Know the why behind your investment

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This is the fourth post in our series about how to prepare for funding. If you haven’t seen the first post, which provides an overview of the entire process, start there.

You’ve decided to add fuel to your company’s growth and take funding. Check.

You’ve gotten your financial house in order. Check.

You have a compelling and differentiated story. Check.

Now comes the fun part – exploring where, how and when you would use an investment.

This is where you get to step away from the details of the business you’ve been building to date, and think about what the future could hold. To think beyond today’s limitations to what’s possible if only you had enough time, money and resources. It’s also one of the first questions a potential investor will ask you in the funding process.

Any good investor will have a perspective on where capital will help, but no one knows your business and what has limited your growth potential better than you. Which is why it’s important to come to the table with a point of view on what you’re looking for in an investment (and investor).

This blog provides a framework to help you identify your biggest areas of need to take your business to the next level over the next 2-3 years.

A framework for growth

Because all investments are bets on the future, it’s smart to work backwards. Where does the company want and need to be in 2-3 years? What will it take to get there?

To answer that question, you need to think through:

  • How the market and competitive situation are evolving
  • Current weaknesses or risks within the business that could prevent you from capitalizing on that evolution
  • What is most needed for rapid and sustainable growth

If you’ve already considered this in detail, great! If not, Tercera’s 5 Elements of Scale methodology might help. We created the 5 Elements based on 20+ years of building services firms from the ground up, and it can be a useful tool to help you understand what levers you can use to drive scale and growth.

Corporate Strategy

Many people start seeking funding to pursue M&A, and for good reason. Acquisitions can help a company grow quickly, add much needed talent, and fill gaps in offerings. However, M&A is only one component of a growth strategy. You also need to focus on organic growth. M&A takes time, and in services, it’s not always the easiest path.

M&A is only one component of a growth strategy. You also need to focus on organic growth. M&A takes time, and in services, it’s not always the easiest path.

Is it time to expand internationally? You may decide to move to a new region to broaden customer support or to increase revenue. Or to open a new delivery center as a way to access new talent or lower the cost of your labor pool. It could also be to mitigate risk. The situation in Eastern Europe has caused a lot of companies to rethink their operations, and consider diversifying into other regions like Latin America.

Should you go deep into a particular industry vertical? Having an industry-specific approach to the market, with dedicated marketing campaigns, accelerators and even fully productized solutions is increasingly important in the third wave of the cloud, especially if this is the sales motion for your primary partner.

Is it time to pivot to a new market, or expand into a broader segment of your market? If so, does your corporate brand and positioning need to evolve in order to be relevant in this new area? Repositioning a brand might sound easy, but it takes time, expertise and money.

Leadership and Talent

This is often the number one area where services firms want to invest — especially in today’s labor market where recruiting and retention is a huge limiter to growth. Investment capital can help you recruit for new leadership roles and/or upgrade talent across the board. If you’ve been taking a “just-in-time” approach to talent, funding can also free you to hire ahead of demand and proactively go after talent you couldn’t attract before.

If you’ve been taking a “just-in-time” approach to talent, funding can free you to hire ahead of demand and proactively go after talent you couldn’t attract before.

Bringing on new talent might be top of mind, but retention matters more than ever. Take a fresh look at your compensation and benefits — before key employees leave. Do you need to uplevel total rewards or employee engagement programs as you look to scale?

Do you have the right team, structure and training processes to develop talent internally? When it comes to hiring disruptive tech skills, there is a serious skills shortage and companies looking to scale recognize they need to grow talent, not just buy it.

Sales, Marketing, and Partnerships

Is your growth engine powering on all cylinders? Are you being proactive when it comes to winning new logos and expanding existing accounts? If you aren’t growing faster than the competition, you may be ceding mind and marketshare to someone else.

Remember what got you to $5 million in revenue won’t get you to $50 million, and a dedicated sales, marketing or alliance function is almost always required. If you’re lucky, you can uplevel or expand an existing team. But you may need to build these functions from scratch, and that requires an experienced leader and a bigger budget.

Remember what got you to $5 million in revenue won’t get you to $50 million, and a dedicated sales, marketing or alliance function is almost always required.

Services companies often underinvest in marketing, but an investment here pays dividends in the long term. It not only builds a stronger pipeline for sales, it helps close deals faster and can lead to higher bill rates. It also helps you attract better talent if employees feel like they’re working for a company that is bigger, smarter, and more successful than the competition.

Are you well positioned to win and deliver quality work to bigger customers? As a company matures, account management and customer experience must become a bigger focus area.

Could your channel relationships yield more revenue? At the beginning, partnerships can be managed in the cracks, but eventually those relationships will need dedicated attention and investment.

Solutions and intellectual property

Funding means you can turn the best ideas on your roadmap into real offerings, instead of just fighting fires. Many firms get stuck in the pattern of moving from one project to the next, delivering on individual customer needs and moving on. That doesn’t work at scale, and it won’t work in the cloud’s third wave.

Many firms get stuck in the pattern of moving from one project to the next, delivering on individual customer needs and moving on.

Look for ways to create stickier relationships and create a more efficient delivery team. A differentiated and documented methodology can support both scale and sales. Accelerators and productized solutions can automate repetitive tasks, add value, or add revenue.

Perhaps it’s time for a more formalized product management function. If you consider yourself a tech-enabled services firm, do you have the right team, processes and tools in place to evolve the technology that your teams and your customers rely on? How are you capturing and using customer insights to guide the future direction and roadmap for solutions? Is it time for a formalized Customer Advisory Board?

Operations/Processes

Accelerated growth will break processes that once worked well. Beyond a certain point you can’t drive revenue reliably if you don’t have process scalability. Operations, especially in a services company, always matters.

Accelerated growth will break processes that once worked well.

Will the volume and scale of customer engagements exceed what you’re currently managing in Excel or Google Sheets? Are your tools and processes hindering your ability to effectively predict and manage staffing requests? If so, it might make sense to invest in a real Professional Services Automation (PSA) system, or hire someone who specializes in project staffing and workforce planning. When will you need a dedicated delivery operations team?

At a certain size, companies find they need to upgrade their current financial systems, or their Customer Relationship Management (CRM) systems. Have you reached that point where QuickBooks or Zoho just isn’t cutting it any more?

Be specific, but be flexible

The best plans are specific about direction but flexible about execution. Develop a plan with your leadership team that you’re excited to share with your investors, but stay open to change.

Investors like Tercera who have real-world operational experience can ask you the tough questions you need to hear to help refine or even expand your plans to reach that next level of growth. They can also help you understand hidden dependencies that might not be obvious at first. If you think we can help, get in touch!

Not ready to engage an investor in this process? Use some of the questions above to think through where you might apply a round of capital.

Next up is our final blog in the series: How to pick the right advisors.

We need more women leaders in IT services

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Today we celebrate International Women’s Day, a day dedicated to celebrating the achievements of women and raising awareness about the need for gender equality. We’ve been celebrating this day since 1911, and while a lot has changed in the last 111 years, we still have a ways to go. This is especially true when it comes to women in tech and women in technical consulting.

The problem

Today, nearly 40% of consultants are women. My guess is that number decreases significantly when you get into technical consulting, although I have yet to find a good data source there. However, that ratio of women declines quickly as you move up to leadership levels. Only 17% of those at the partner level are women, and we’re heading into the single digits for women who hold the top job.

As investors in growth-stage IT services companies who understand the importance of diversity to both society and a company’s overall performance, we wanted to see if these general numbers held true in the companies that Tercera sees. So we analyzed 60 investor presentations from banker-led deals we had seen in the last year (IT services firms between $8M and $100M in revenue).

Here was what we found:

  • The median percentage of women on leadership teams is 20%
  • 28% had no women on their leadership team
  • Only 1 company had a woman as the CEO

There are many different schools of thought for why this is the case – the glass ceiling effect, family demands, pay inequity, lack of role models and representation at the top, bias, etc.

Whatever the reason, we need to do better.

Diversity matters

Diversity matters for a whole lot of reasons, but one reason leaders and investors should care about quite a bit is the impact on financial performance. McKinsey research shows that those businesses with a systematic approach to diversity consistently outperform those that don’t focus on diversity. This applies to both ethnic diversity and gender diversity. (Graph below)

 

It’s one of the reasons why diversity has become a significant focus area for venture firms, those covering them, financial analysts covering public companies, and most companies that have their sights on growth.

So what do we do about it?

Gender equity isn’t something that’s solved overnight. There’s a reason why we’ve been celebrating International Women’s Day for 111 years. However, there are things we all can do to make a dent in those numbers mentioned above.

Given Tercera’s specialization and history in the IT services space, we are fortunate to know and have worked with some of the best consulting leaders in the tech industry. So we asked them: “What can consulting leaders do to improve gender equity at the top levels of an organization?” Here’s what they said.

Fill the funnel. Every CEO starts somewhere. Focus efforts on filling the top of your recruiting funnel with more women. Spend time in your university recruiting efforts and your own families to educate young women why tech consulting is an exciting and lucrative career. Explain why consulting plays well to strengths that are often inherent to women like empathy, diplomacy, creativity and relationship building. Encourage people who might not be an engineer or developer to try it out as a career – consultants have many different interests and backgrounds. And then teach them to learn the language of business. Everyone should know how to read a P&L statement.

Treasure what you measure. Measure how you’re doing on gender diversity across roles and levels. Even if you don’t like what you see, you can’t change it unless you know where you’re starting. Then set realistic goals for the organization. If you don’t have any women on your leadership team, start by hiring one and go from there.

Rethink your policies. The life of a consultant is not easy. While the pandemic has taught many companies and customers that you don’t have to be in-person to be effective, there is usually an expected level of travel. That can be hard, especially for women who are often the caregivers at home or may be planning to start a family. Make sure your organization’s policies support the right level of maternity or family leave, time off policies and travel requirements.

Support women leaders. Whether you believe in bias or not, it’s not easy to be the only one who looks like you in a room. It puts a level of pressure on you to perform that others don’t feel. Make sure their voices are heard and use inclusive language. Recognize the different challenges that they might be facing, even if they’re different from your own.

Be a mentor. If you are in a leadership position, people look up to you no matter what gender you are – take the time to encourage and mentor those coming up in their career. This is equally important for women in leadership roles. As we’ve established there are fewer of us in those top roles, and it’s our job to reach back and pull more women up. Remember, most leaders are developed and promoted through their networks.

There are nearly a half a million IT consulting businesses in the world today. Imagine how much opportunity that would open up for women if we could reach gender parity at the top of these firms, and how many better performing businesses there would be in the world.

This is why diversity and gender equality is such a big focus for us at Tercera. We’re proud that 40% of our partners are women and women make up more than 50% of our organization today (a rarity in tech, consulting and investing). It’s a big area of focus for us within our portfolio companies, but there we too can do better. We have not achieved our goal of investing in a female-led firm (yet!), but we are encouraged to see more female founders in our pipeline.

Why Salesforce is acquiring Traction on Demand

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Salesforce is not known for flying under the radar when it comes to acquisitions. However, last Friday the $26B cloud juggernaut quietly announced the acquisition of Traction on Demand, the largest dedicated Salesforce consultancy in North America.

For those like us that follow the Salesforce ecosystem closely, the news probably wasn’t much of a surprise. Traction and Salesforce have had a close relationship for years, and Salesforce recently invested in the company. Traction was often tapped by Salesforce as an early partner for platform investments and initiatives, and was seen as Salesforce’s go-to partner in the mid-market. With over 1200 employees, Traction was also one of the few remaining Salesforce pure play consultancies at scale.

Which begs the question, what does this mean to Salesforce’s partners? Is Salesforce getting into the services game?

This is the same question many asked when Salesforce acquired Acumen a little over a year ago, and the same question we at Appirio asked when Salesforce acquired Model Metrics in 2011. The answer is still a resounding no.

Salesforce has long understood the value of professional services to customer success. It’s why the company has invested millions over the years to build out a thriving partner ecosystem – an ecosystem which IDC estimates created $308B in new business revenue last year. It’s also why they have invested in an in-house professional services team. Successful enterprise software companies need both.

One only has to look at the ratio of services to product revenue in Salesforce’s business to see that Salesforce is still very much a product company. The percentage of Salesforce’s revenue coming from professional services in 2012 was 6%. That ratio has not changed substantially over the last 10 year — it’s just the top line that’s going up.

When you are a $24 billion company growing 24% year over year, you need to add a LOT of people just to keep that proportion of services the same.

When you are a $24 billion company growing 24% year over year, you need to add a LOT of people just to keep that proportion of services the same. Hiring thousands of skilled consultants isn’t easy, especially in today’s Salesforce talent ecosystem, and acquiring firms that have done the hard work to hire, train and develop great talent makes a lot of sense. Which is why in the last year alone more than 30 Salesforce consultancies have been acquired.

This is why the Salesforce ecosystem is an investment area for us, and why we seek out specialized high growth consultancies like Zennify. We believe Salesforce still has a ton of market potential. Even if growth slows a bit, this is still a massive market.

Why did Salesforce select Traction on Demand?

After spending two years advising Traction and another two years on the board post its funding by Guidepost, I boil Salesforce’s decision down to 7 primary things:

1. Scale. There are 1800+ consultancies in the Salesforce ecosystem, however, very few reach a scale that is appealing to a company the size of Salesforce (or even another large services firm). Acquisitions are costly and they require a lot of dedicated focus and investment to succeed – especially services firms where people are the product – which is why there is a sweet spot for most acquisitions. It’s interesting to note that Acumen, Salesforce’s last services acquisition, was approximately the same size. It’s far more efficient to acquire one 1000 person firm than ten 100 person firms.

2. Focus. Traction was all in on Salesforce, which meant they had fewer distractions and could harness all their resources into this one area rather than spreading themselves across multiple areas. Focus = a bigger impact, faster. Traction wasn’t focused on any one specific industry or platform, but it was focused on a particular market segment: the commercial mid-market. And while Traction, like many third-wave cloud consulting firms, developed some material and differentiating IP, it ran, organized, funded, marketed, and accounted for it independently. It never diluted Traction’s focus on services. All of this made it an easier, cleaner acquisition for Salesforce, something that any acquiring company is looking for in a potential asset.

3. Region: Traction has a global footprint, but its center of gravity in Canada and India was likely a big selling point. The company was founded in Canada and has always had a strong recruiting focus across the country, and had grown its Jaipur delivery center in India to north of 250 people over the last few years. Both these regions have a lower cost but highly skilled talent pool, providing significant labor arbitrage for Salesforce.

4. Culture: CEO Greg Malpass, President Mike Epner and the entire Traction team had built a truly culture-forward organization. You could tell a Tractionite at Dreamforce from a mile away. They were the ones wearing the Canadian-approved jean jackets and having a blast in the booth! Traction, like Salesforce, was also very philanthropic, focused squarely on stakeholder capitalism. Its Traction for Good initiative gave millions of services grants to non-profits, and included a workforce development program for immigrants and indigenous people. However, the most impressive to me was how Traction was able to scale that culture, which I believe was due in large part to its “squad” teaming model where each squad was empowered and had its own identity. That made the company feel small even while it got larger.

5. Channel: Traction never took their eye off who its biggest customer was – Salesforce. That close connection kept them visible with Salesforce execs and AEs even as both companies grew and expanded globally. Salesforce EVP John Durocher, who joined Traction’s board as an observer after Salesforce’s investment, was also essential in helping the company scale. His ability to provide strategic advice from Salesforce’s perspective was a game changer. For example, during the pandemic he helped steer and coach Traction in the right direction – to lean in like he knew Salesforce was doing when many firms struggled or pulled back. This is why founders who are tightly aligned to a specific partner should seek a senior leader from that partner to be a board member or strategic advisor.

6. Talent: Traction had built an incredibly talented team over the years (perhaps I’m biased because hundreds of Tractionites were former Appirians). However, it was the company’s proven model for building vs. stealing existing talent that was perhaps most appealing – a focus area that also set the company up well to compete when the labor market got tight. There is simply not enough talent in the Salesforce ecosystem and Salesforce knows it. It wants partners who can build, not just buy talent.

7. Marketing: Traction had built a brand that was well known, and well respected in the space (a huge shout out to Traction’s CMO Chris Peacock). Every person in the company knew what Traction was, what it wasn’t and what it stood for, which helped across everything from sales and recruiting to employee engagement. Its investment in brand and marketing was a big factor in the company’s growth. We look at a lot of firms and their positioning and marketing is often a weak spot, but Traction understood the power of a good story.

I wouldn’t be surprised if Salesforce looked at more services investments in the future as it tries to reach that goal of $50 billion in revenue over the next few years. The question is who? There aren’t a ton of Salesforce partners left at scale, and one fewer now. Who are the next set of cloud consulting leaders that will step in to fill that void?

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