Can Fat Cats Get Fatter?
Reprinted with permission from Accounting Today.
How big is too big? I’m frequently asked this question by firms that have successfully grown a particular niche. “Can we expect the needle to continue to rise, or are we relegated to low growth and thin margins?” they wonder.
My answer is unequivocal. “You bet that Cat can get Fatter!” The key is knowing how to manage this unique stage of growth. The model I espouse describes four stages in the lifecycle of a product or service – Early, Diamond in the Rough, Cash Cow and Fat Cat.
As it advances through the stages, a product or service contributes an increasingly higher percentage of firm revenue. For example, a brand new service line that does not yet generate revenue (perhaps a cybersecurity offering) might be in the early stage. A Fat Cat is an established offering (like audit) that yields significant revenue and margins.
The problem, however, is that once Cats become Fat, they tend to become sluggish and commoditized. Their place in the market is fairly predictable, but so too is the predictability that their margins will decline.
For example, a firm with a construction industry audit niche in the Fat Cat stage knows from year to year the percentage of revenue the service line will deliver. Competition and buyer behavior fall into a predictable pattern. It seems things will go on this way forever.
The danger of complacence
But they don’t. Nothing stays the same, at least for very long. New competitors appear as firms merge and acquire one another and focus more on a specialization, including the one that for so long looked like yours and yours alone.
Without taking proactive steps, that comfortable Fat Cat will whither into a painfully skinny kitty.
Case in point is a firm that had built a solid niche among credit unions. Revenue and profitability were reliable and a dozen partners were working to Fatten the Cat. So far so good. The problem was, nobody owned the specialty – no individual was responsible for the strategic direction of the niche.
As a result there was no one keeping a cautious eye upstream to anticipate changes in the market and sniff out emerging competitors. The partners who had created the specialty began to retire. Interest lagged. Then one day the niche was no more.
Do this, not that
I was asked to help this firm wrest its once Fat Cat from the jaws of the competition. We had to start from scratch (pun intended) by conducting research calls to learn all we could about market conditions.
We learned that the firm’s formerly industry-leading offerings had weakened substantially. Competitors had gained a strong foothold, winning business once considered a slam-dunk.
I asked this client some tough questions – the same ones I recommend to you to ensure that a vibrant niche continues to grow rather than slip out from under your grasp.
Have you put artificial borders on your thinking? Are you limiting your vision of what your service line or industry can become? Artificial borders can be geographic (“We only serve the Midwest”). They can address sector (“We don’t work in highway construction, only commercial construction”). And they can be just plain ridiculous (“We don’t do contract compliance audits because our business has always been in financial statement audits”).
Customize by buyer group. Tailoring your offerings to the needs of your clients shows that you “get” them more than the competition does. It leads you away from generic, commoditized service and toward customization and client-centric problem solving.
Innovate. Innovation is a natural outgrowth of customization. In order to thrive – and survive – you should be bringing new services to market on a regular basis. A complacent Fat Cat will simply lie in the sun and – struggling to keep one eye open – lazily watch the world go by. Your job is to plump her up with highly relevant products and services and keep her moving.
Because ‘good enough’ just isn’t
Imagine for a moment that Apple had introduced its revolutionary iPhone in 2007 and deemed it “good enough.” Consumers would never have known the enhanced functionality of the four subsequent generations – from video recording to faster processing and a larger screen.
But that’s not the half of it. Apple would not have realized extraordinary profits and investors would have missed out on historic returns.
The takeaway? Don’t be complacent with your Fat Cat. Keep your offerings fresh. Make sure that they anticipate and respond to client need. It’s true – nothing lasts forever. But by actively managing your high-performing niche you can extend its life, maybe indefinitely.