Revenue Segmentation: A Framework for Transformation
Reprinted with permission from Accounting Today.
“Gale, our firm needs to grow! What technologies should we bring to market? And how will we acquire the skills to deliver those offerings?” These are among my favorite—and most frequently heard questions. Why favorite? Because unlike some conundrums firms face, there actually is an answer, an achievable framework for making these decisions.
It’s known as revenue segmentation, and by the time you’ve completed this article, I’m confident you’ll be nodding your head saying, “Yes we can do that! When can we get started?”
I’ve long advocated innovation, specialization and the move away from individual contributors. For firms entrenched in the “my book of business” model, this type of pivot can be daunting. And mistakes can be costly.
Revenue segmentation facilitates the shift, transforming a loose confederation of book-of-business oriented CPAs into a focused team of leader-driven specialists. Identifying revenue opportunities in this way lays the foundation for exploration by market which, in turns, leads to discovering the precise services your target markets want and need.
Here’s How It’s Done
Imagine a kind of spreadsheet-in-the-sky, with industries listed across the top, service lines down the side and, comprising the body of the spreadsheet, the revenue contribution of each of these rows and columns, with their totals representing firm-wide revenue. Now bring the image back down to earth, get it on a spread sheet and you’ve got revenue segmentation. The next step is to identify revenue segment leaders for each row and column total. These are the key people in your firm who will be responsible for the strategic direction and financial health of their row or column. As they take on this responsibility, they transform beyond book-of-business partners to a mindset of business unit leaders.
Your revenue sources are a reflection of where you’ve had market success. Now it’s time for the leaders to explore each market to identify which innovative, technology-based services, in what industries, hold the greatest potential to drive profitable growth. They do this through diligent discovery, interviewing key individuals and determining the “hot spots” for innovation and growth within the indicated segments.
Without a robust scaffolding to support your growth, you’re left grasping at the flimsiest of supports. Like assuming that the innovation du jour, the one the firm down the road is pushing, just might work for you. Or choosing a technology-based service because someone in the firm has relevant experience. These methods have just about everything wrong with them. Especially the fact that they involve looking at the market “from the inside out” rather than from the outside in. That is, perceiving the situation from your perspective, rather than from that of a potential buyer.
A revenue segmentation-based approach permits you to deploy human capital and other resources where the possibility of success is greatest. It lets you align leadership with service lines and industries—existing, retooled or new—that reflect the market.
Consider the example of data analytics. Sure, it’s a hot topic, but how do you know where it will be valuable for your clients and profitable for you? Too often a firm will pursue a service line based on a non-market factor, like the presence of a team member with relevant experience, in this case data analytics in manufacturing.
Compare this with a focused approach that uses revenue segmentation to expose market-level opportunity. Rather than data analytics, the exploration might lead you to conclude that cybersecurity in healthcare is the technology-based service with the most upside potential. You got there by looking from the outside in.
Warning! Danger Ahead
As well, revenue segmentation permits you to avoid costly mistakes—racing down blind alleys and throwing investment dollars at initiatives that are not backed by solid market indicators and supporting investigation. I know this benefit personally, having had to unplug several once-promising initiatives over my consulting career. In each case I had the advantage of being able to get off the path in time, without losing excessive time and resources because I persisted too long in the wrong direction.
At the end of the day, the market always wins. And failure to listen to the market can cost you dearly. Try revenue segmentation. It’s a superhero of an approach with the power to lead you into strategic growth choices and resource development, essential in a world as fast-moving and technology-driven as the one you and I inhabit.