Does service diversification reduce risk for firms?

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Everybody knows the old saying “don’t put all your eggs in one basket.” That, of course, implies that you reduce the risk of breaking all of your eggs if you spread them out among a number of baskets, boxes and bags. Diversification is good, right?

Well, yes and no.

Most accounting firms seem to believe the best way to grow is by offering a greater range of diversified services to a growing range of customers. In fact, a recent study we conducted found that your average professional services firm expands its number and variety of services as a strategy to increase growth and decrease risk. After all, it stands to reason that if a prospect doesn’t like one service, they might like another.

No wonder diversification is popular. But is it smart?

Not if you want to grow or significantly increase the value of your firm and reduce risk. In fact, our research revealed that accounting and other professional services firms that focused their services and specialized found a faster road to success than firms that went wide and offered diversified services.

How much faster? We found that firms that specialized grew twice as fast as firms that could be described as “generalists.”

In fact, compared to firms that experienced average growth, high-growth firms offered 44 percent fewer services and were 25 percent more likely to specialize in niche services. Even more telling, high-growth, low-risk firms were 89 percent more likely to specialize in serving one particular industry.

Still, the concept of diversified services and the lure of diversification can be strong. So let’s take a closer look at some of the major benefits of specialization for accounting firms:

Opportunity to excel

Being a nonspecialized services firm can greatly increase risk because adding diversified services reduces efficiency and sucks up internal resources as staff becomes even busier producing and managing work on a variety of levels. Specialization provides an opportunity to excel. It enables you to become highly skilled and efficient in one area, creating more value for less effort.

Competitive advantage

Service specialization gives you a built-in differentiator that can set you apart from the competition. Instead of competing in a crowded, me-too market of similar firms, you can dominate a service niche with in-depth expertise and experience that is highly-valued by clients and prospects. For example, instead of being just another tax preparation and general accounting firm, you can become known—and valued—as a specialist in compliance with a complex industry specific regulation.

Targeted selling

Specialization enables you to sell to a more targeted audience. For example, you can focus on a single industry trade group rather than chasing after companies from 10 industries. This reduces your marketing expenses while increasing your exposure and ability to turn leads into prospects and prospects into clients.

The specialist’s advantage

Look at it this way. Most client problems aren’t unique. Any firm with relatively deep experience in a prospect’s industry has probably dealt with a similar situation before. That’s why specialists have a real advantage. In many situations, they can produce detailed case studies and present well thought-out solutions at the drop of a hat—because they’ve seen it all before.

Generalists, on the other hand, have to dig deep and pull out their closest comparable solution. If all goes well, it might be enough to gain the prospect’s confidence, but it’s a much tougher sell. Which approach has more risk associated with it? Exactly.

So go ahead. Keep all those eggs in one basket. It’ll just make it easier for you to whip up a bigger, tastier, quicker omelet than trying to work with one egg here and another egg there.

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