The Business of Expertise - Part 2
Blair revisits David's new book, interviewing him on the two chapters that cover the important topic of positioning: "Distinguishing Between Vertical and Horizontal Expertise," and "Principles for the Less Exchangeable Positioning of Expertise."
BLAIR ENNS: David are you vertical for this?
DAVID C. BAKER: Am I vertical? As in laying down to record this?
BLAIR: Well that would be horizontal.
DAVID: Right. So then yes, I am vertical. Although as I get older my spine isn't entirely straight so I'm semi-vertical.
BLAIR: I think I've said before, sometimes when you're interviewing me, it's like therapy. I'm going to interview you. This is part two of our discussion on your book, The Business of Expertise: How Entrepreneurial Experts Convert Insight to Impact and Wealth. The books been in the market for a couple months now? Is that right.
DAVID: Yeah, that's right. About two months.
BLAIR: Are you happy with how things are going so far?
DAVID: I am a little disappointed that it's the second best selling book of all time on the New York Times list. I was really looking for the first place but you know, I got a few weeks to fix that.
BLAIR: Yeah, alright. I asked you about whether you're vertical, this idea of vertical and horizontal because today I want delve into a part of the book that really gets into the nuts and bolts of positioning. If you're following along at home and you have the book at home, I really want to dive into chapters eight and nine.
Chapter eight is Distinguishing Between Vertical and Horizontal Expertise. Then nine kind of builds on that. We'll talk about that in a little bit later. You're going to have to explain the title of chapter nine to all of us.
DAVID: Okay. But first can I tell you something really cool that happened last week? During hurricane Irma I got this email message from this guy. It said, "All the power's out and I'm trying to read your book but it's too dark. Could you send it to me in PDF form? Or if you're worried I might distribute it without your permission, could you just like email it to my Kindle and I want to read it during the days the power is out." I thought has anybody ever asked you about reading your book when the power's out during a hurricane? It just expresses how important this book is.
BLAIR: I want to know if you charged him $38 for the PDF.
DAVID: No. I sent it to him. I want the record to show that this is prime reading material during hurricanes.
BLAIR: Yeah and that might come in handy. I don't think the season's quite over yet. There might be more coming.
DAVID: That's right. Stock up. Water and copies of the book.
BLAIR: Yeah. Okay, so hurricane reading, we got that dealt with. When I was reading this part of the book, and I've been through the book many times. It occurs to me, I always assume you and I are on the same page about everything, especially when it comes to positioning. We've done a three day seminar. Maybe it was two days.
DAVID: Yeah three days.
BLAIR: Three day seminar together for ten years straight and we did an entire day on positioning. The first day was always on positioning. So I think we were always pretty aligned. I'm reading this and thinking there might be some subtle areas where we're not fully aligned. By that I mean, in some areas where you're wrong. So lets explore that.
DAVID: You beat me to that. I was just getting ready to say that.
BLAIR: That's why I had to hurry up to say it. I don't think we are but there are some ... I really noted some of the different ways that we might express some things. So first of all, this idea of positioning your expertise horizontally or vertically. What do you mean by that?
DAVID: So vertically, classically vertical positioning would follow a particular SIC, which stands for standard industrial classification. SIC categories kind of went out in the late '90s and now those are NAICS, it stands for something else and there's lots more specifics. Essentially it's like if you're focusing on a vertical, then you're focusing on credit unions or gas stations or health care firms or financial planners or something like that. It follows an industry classification.
The horizontal component of that would be if your focus is across all of those verticals but is identified in multiple ways. Vertical is identified by one way and that's by industry. Horizontal could be defined in multiple ways. So like a demographic. I just worked with a firm recently, a 75 person firm that focuses on the youth market. They're going to help clients in many different verticals reach the youth market. That's classic horizontal positioning.
It could be selling a particular service. So you might be doing point of purchase work or shopper marketing. You would be doing that particular service across all of the verticals. So that's how I would define the two.
BLAIR: Okay. So vertical is really the market. Is that right? Horizontal is the discipline?
DAVID: It’s the discipline or the demographic, right. Those two.
BLAIR: So it could be another form of a market.
DAVID: Right. Like Hispanic marketing is a classic horizontal marketing. If you're a horizontal marketing agency focused on the Hispanic market place, then you might be working with Maytag or GE, or you might be working with a bank or a medical practice. You're touching lots of different verticals but all reaching the same demographic, the Hispanic market. That would be a classic horizontal positioning.
BLAIR: Gotcha. Okay, so it's a way of kind of segmenting or identifying the market. It's either a vertical market or horizontal market. Is that correct?
DAVID: Right. It's handy to do because how you think about positioning happens to align very differently. If you're vertically positioned firm, there are very specific advantages. If you're horizontally aligned very specific advantages and they're all very different too.
BLAIR: Okay. Before we get into the advantages of either, is it possible to be both vertically and horizontally positioned?
DAVID: It is. When that's true of your firm, you're going to have a very, very small target audience of potential clients. The advantage of that is like a bullseye, right with the horizontal and vertical so you are going to like kill it there.
BLAIR: No one can touch you, so to speak.
DAVID: Yeah, in the cross hairs. That's also the disadvantage because some firms will have a vertical positioning and they feel like, "Ah, if I narrow it too much more then I'm not sure there's going to be enough opportunity." If there's enough opportunity with both the vertical and the horizontal like in that bullseye thing, then it's very, very powerful. It's untouchable.
BLAIR: Okay. So let’s talk about the advantages first of positioning the firm along vertical expertise. The first one that you see in the book is it's easier to find prospects when you're vertically positioned. Why is that?
DAVID: It's because most of the business world is oriented around vertical positioning. For instance, if you're going to buy a list and it doesn't matter if you actually buy a list, but can you buy a list. If you can't buy a list then you're going to have trouble finding your prospects in many different ways. Almost all the list building is built around verticals. That's the primary advantage. Most firms are drawn more to horizontal positioning for different reasons but they default to vertical positioning because they can't find their clients with horizontal positioning. So vertical positioning fixes that and it's the default because of one thing: it's so easy to find your clients.
BLAIR: Yeah, you have this clarity. I find you go through this decision making process and often a lot of pain around deciding the market to focus on. Once you make a decision after a little while there's some fear and then there's some euphoria. The euphoria is you finally know the answer to who do you call and what do you say.
DAVID: Yeah, right.
BLAIR: How do you find prospects and then what do you say to those prospects? The euphoria comes from the realization, that oh, my god there are lists of these people that you need services like this that I could go out and buy.
DAVID: Yeah and why are there lists of these people? It's because they suffer from something that other people have realized and decided they need to gather all these people on a list or at the same conference or reading the same journal or same blog because they suffer from the same things. Those are the things I can help them fix. Like it just solves so many things.
BLAIR: Yeah. You're second benefit of a vertical positioning, something I'd never really thought of before, and that's the vertical positioning benefits from decision makers who change jobs frequently.
DAVID: Yeah and there's a very interesting study that came out. It was fueled by LinkedIn. What the study surfaced is that folks in the marketplace used to stay at the same job for a long time and that's how they made more money. They got raises and so on. That's changed on its face. It's just so different now. You don't make enough money by staying longer at the same job. You jump up fairly incrementally by just staying but you take huge steps in your compensation by changing jobs. So people are changing job more frequently than they ever have in history.
When they do, what kind of a firm do they go to? Typically nowadays, there are exceptions, they go to another firm in the same vertical. So if your positioning is tied to a vertical the chances are much better that you're going to follow your contact, your decision maker to their new job and you may retain the current client and also pick up the new client because you're following this decision maker. They almost always change jobs within the same vertical.
BLAIR: I'm sure you've seen this pattern where you have clients who their primary business development strategy is just that: they have one client who just moves every two years and brings them with them.
DAVID: Yeah, exactly.
BLAIR: What's the ultimate mistake that that firm makes?
DAVID: Just not doing their own new business much or pissing off that one client.
BLAIR: Or they hire that client and bring them in house.
DAVID: Killing their new business lead.
BLAIR: The third primary benefit for positioning the firm's expertise vertically is you benefit from common venues that spread the word about your firm. So you're talking about conferences primarily?
DAVID: Conferences for sure. That would be the primary one but also publications, associations, newsletters, blogs. I think of it as like the water cooler effect. Most water coolers, if they had a sign hanging over them, would be a vertically oriented sign. That's not always true. You will find a conference out there for companies who want to be mission driven, for instance. Or who want a certain culture but most of the industry ... Or even a DreamForce (the SalesForce conference) would be horizontal conference. Those are rare. Most of the water coolers out there are vertical and so that's a benefit in terms of just spreading the word. No matter how good your new business plan is, you are still going to get a lot of organic traffic, I don't mean just web traffic, but organic traffic in terms of lead generation because of the word spreading in good ways.
BLAIR: Yeah. So a vertical example of a conference would be pharmaceutical marketing or credit union marketing or anything. I mean pick a million of them.
BLAIR: The fourth primary benefit or advantage of a vertical positioning is it's usually more highly compensated. Why would that be?
DAVID: Yeah, and there are some exceptions and they're notable. IR, investor relations would be an example. Or crisis work, which are horizontal but are still very highly compensated. The reason vertical positioning is highly compensated is because vertical positioning usually carries an assumption of an agency of record, AOR. Agency of record firms are going to make the most money. If the average Fortune 1000 has about 19 agencies kind of sucking at the teat, the one making the most money is the AOR. Vertically oriented firms are usually the AOR relationship driver, so they get paid the most.
BLAIR: So the horizontally focused firms tend to be more niche specialist who come in and do specific work.
DAVID: Right, exactly. So like I'm in Atlanta right now, for instance. Here’s the headquarters for Coca-Cola. So whoever is the AOR for Coca-Cola is making boat loads of money but there's also going to be a Hispanic and a shopper marketing and there's going to be these horizontal agencies who are also serving Coke. They're usually smaller and they're obviously not AOR relationship driven and their not making as much money. The one making the most money is the AOR side.
BLAIR: So we could explore a little bit more. A friend of mine who owns a bunch of agencies, who is buying a bunch of agencies, the way he explains it to me is he says, "The AOR is more like the general practitioner right. They control the budgets but their margins are actually pretty slim. The benefit, if you look at the holding companies, the benefit of having your firm in there as the AOR, is you can direct the highly specialized, highly profitable spending to other firms under the banner in the same network." His argument is the dollar volume is there in that relationship, the margin isn't there the more horizontally focused specialist are ... Even though the budgets are a lot small, their margins are higher. Would you agree or disagree with that?
DAVID: That's generally true. That's why the holding companies have so many agencies under them so they can direct that work to another agency like your friend just said. Omnicom, for instance, I think they has 250 agencies. So they're going to have an agency where work from AOR can be driven to them. So while the margins are smaller for the huge agencies, there's a lot of margins in there. So multiply a smaller margin by 1,000, there's boat loads of money, especially on the media side.
BLAIR: Yeah. If you had to advise a client ... If you didn't know what the choices ... I have choice A and choice B, and you didn't know what the details of the choices were, other than A is vertical and B is horizontal, would you come down on one or the other and say, "I think you'd be better off with vertical over horizontal?
DAVID: Well, if was me, I'd do vertical but for my client I would start with horizontal because I know that 85% of them desperately want a horizontal positioning. I would just gut check it really quickly. Are we able to find our clients? Let's lead with this horizontal positioning. Can we find our clients? If we can, let’s keep going. If we can't, lets switch over to vertical. So that's how I would think about it because most folks in the creative industry are so much more drawn to horizontal positioning.
BLAIR: Well let’s talk about that. It's probably the advantage number one, which it brings more variety. Is that what's driving it?
DAVID: Yeah. The idea of being focused on healthcare, for instance and they're going to vomit at their desks thinking about using another stock photo of mother and daughter running hand in hand along the beach. Doing one more pharma ad or something but absolutely. That is the primary advantage. There are other important advantages but that's the biggest one, variety. They don't want to be pigeon holed in a particular vertical. So they're drawn to horizontal. To go back to your question just a minute ago, so that's why I would start with horizontal. I'd gut check it and say, "Can we find our clients?"
In fact, often I'll flip these things around. So we talked the four advantages of vertical. We could flip those around and we could say, "Those four things are the disadvantages of horizontal." It's hard to find your clients. The comp isn't as high. You're not going to move as frequently when somebody changes jobs. Your prospects don't gather round the same water coolers and so on. The primary one is for sure variety.
BLAIR: I can imagine agency principals ... They're thinking of themselves so it'll be the death of me if I specialize. But they're also thinking about their people and attracting high quality creative people because they think, and I think quite rightly, you know the best creative people, they don't want to be focused in a niche.
DAVID: Especially earlier in their career. They're still exploring and the idea of deep competence is not as important as variety and trying lots of things. Then in their mid to late 30s they usually have a change of heart there. The principal’s age gap, to the median age of employees, remains the same over time. What drives that older principal is often very different than what drives the people working for him or her, but that changes over time as both age.
BLAIR: So what you're saying is even the creative person at some point in the middle of her career might decide, "I'm tired of flitting across all these different challenges. I would really like to feel like an expert. I'd really like to build the ..."
DAVID: They taste competence at some point and they've also tasted incompetence. I remember when that occurred for me. I tasted incompetence many times. When I tasted competence the difference was so staggering to me, I just made this pledge to myself. I'm never going to go back there. I'm tired of that. I look stupid.
BLAIR: The second advantage of horizontal is really interesting and nearly eliminates conflict of interest. You break it down. You say if you have one client in a space in a certain market, then you're learning about that space. If you have two clients in that market, then it's seen as a conflict of interest. Once you get to three, you're an expert. Once you get to four, all conflicts evaporate.
DAVID: Right. Yeah, somebody else said something like that. I couldn't find the original statement, so I couldn't really credit them. It's absolutely true. This is usually an objection that a creative agency has early in their thought process around positioning. They're drawn to horizontal because of the variety and they think, "What about this conflict of interest thing?" So it's true that all conflicts of interest are largely eliminated if you're positioned horizontally, but I don't think that's a very strong argument honestly. That's what your quote really is relating to because as nervous as clients are about conflicts of interest, they are flat out terrified of incompetence.
They recognize that any agency that's going to help them is going to have to have worked in their space. Now larger agencies, they don't call that specialization. They call it category experience. That's just how they phrase it. When a Fortune 1,000 chooses an agency, the first issue is not category experience, it's not specialization. It's something else. They have to check that category experience, unless and this is a rare and very new situation, I think the world might be moving more in this direction unless they just simply, like CapitalOne for instance will tell you, "We simply do not want to work with an agency that specializes in financial services." Underneath in sort of low volume, they'll say, "They need to have category experience," but they don't want somebody ... We've learned what we need to learn there. We want somebody who knows UX in another field and so on.
So generally, it's kind of a smoke screen. I remember in my own practice, I've worked with hundred of agencies and every once in a while, once every three or four years somebody will ask me about that. "Well, who have you worked with in our town?" Frankly they don't care anymore. They have to trust me but they would rather I have worked with a bunch of firms like theirs so I can notice those patterns and guide them through it.
BLAIR: Yeah. Okay. Benefit number three of horizontal is greater protection from a downturn.
DAVID: This is a pretty big one.
BLAIR: Is it universal?
DAVID: It's almost universal but I would flip this around and ask you this question and then I'll answer it. How many vertically positioned clients have you had over the decade you've been in this business who have been devastated because their particular vertical niche hit a downturn? Let's say the oil industry in maybe the '70s or whenever that was or banking at a certain point.
BLAIR: A small number, almost all in real estate marketing but if they make it through the one downturn they figure out how to survive the next one.
BLAIR: And you know people who kind of dabble in luxury goods too. They can be hit too. I find real estate marketing, in a downturn everything stops.
DAVID: Right. All the people that supposedly believed in marketing on the client side don't believe in it anymore.
BLAIR: Yeah. But other than that, it's usually the, what I'm fond of saying, it's the generalists that get whacked in the downturn, not the specialist. Again that's not making a distinction between vertical or horizontal. So you're saying a horizontally specialized firm is far less likely to feel the negative effects of a downturn. They can ride it out longer.
BLAIR: Why is that?
DAVID: So horizontal firm is more likely to be okay because if a particular vertical is hit, you know that may only represent 5% of their client base. They have the other 95% of their client base that is not getting hit by some particular downturn.
BLAIR: So you're saying that downturns ... So verticals are more susceptible, certain verticals are more susceptible to ... So if you're in a more susceptible vertical, you're more likely to be affected. There's a spectrum of them, in some of them you're less likely to be affected. Sorry to cut you off but are there verticals that are just impervious to downturns, where spending always happens?
DAVID: Well the three over the years were always tech, financial services, and healthcare, but all three of those have been hit. I don't think there's any that's like built so high that no flood can hit it. We are also such a global economy anymore that even a downturn in a particular country doesn't impact us as quite the way it did. One of the advantages of horizontal is that if there is a downturn in a given vertical, it's less likely to take your firm down because it represents a pretty small portion of your overall business. That's the point here.
Like you said, I asked you that question and you said only a couple had been hurt badly and even then not that badly. I would answer the question the same way. I only know one firm that went out of business because of that. The rest of them just thrive so it's not a huge issue.
BLAIR: The last primary advantage of a horizontal positioning is you can work for a larger, more sophisticated clients. I think we kind of touched on that when talking about vertical.
BLAIR: Anymore you want to add to that?
DAVID: No, that's the point. Horizontal expertise, there's never an expectation on the clients part that you are going to be the full service agency of record. That allows you to work for much larger, more sophisticated clients with money because you are going to exist alongside other agencies who are going to be their full service agency.
BLAIR: You mentioned the phrase that you hear from agency principals from time to time that they don't want to be pigeon holed. I've always loved that line because my response is, "What people don't know is pigeon holes are stuffed with cash." It's a great visual metaphor. Do people see vertical positioning as more of a pigeon hole, like a constrictive, narrow focus than horizontal?
DAVID: They do. Absolutely they do. When you get them to think a little more about it, usually it opens up their horizons a bit. I usually try to get them to think about all the verticals, up and down within that particular niche. All the side industries that also serve that and how you could do things differently. You're right, that's what slaps people in the face. That's the largest hindrance to positioning is people's reluctance to be vertically positioned. They're not even aware of how powerful horizontal positioning can be. As long as you can solve that main issue of finding your clients, then horizontal positioning is a great solution.
BLAIR: Okay. So you like both and your default position would be, if you could identify your client base, if it's easy enough to find clients, you would start with horizontal. If not, you would go to vertical. Is that correct?
DAVID: Yep, that's right.
BLAIR: Okay. So that's out of chapter eight of the book and it helped me clarify some of the things. I'm kind of like, when you were up in the stage at the new business summit talking about positioning, I would pretend to listen and go, uh-uh. So it was nice to finally read it in your book. Oh, that's what he meant, I should have paid more attention.
DAVID: Yeah. I'm just dumbfounded. I don't even know what to say about that because I did listen to you, which is ...
BLAIR: I'm kidding.
BLAIR: We've got a few minutes here. I really like chapter nine but you're going to have to explain it. So the title of chapter nine, and there are some key points here that some of them are really profound. We don't have a lot of time but I want to talk about them fairly quickly. Explain to me the title, which is Principals for the Less Exchangeable Positioning of Expertise. What do you mean by that? You went on to say, "Okay, I almost invented a new word for this title but I didn't.
DAVID: Yeah. I didn't really know. I remember typing all kinds of words into the thesaurus online thinking, "What's a better word here?" The idea is that when a prospect is thinking about hiring you, how many available substitutes are there? So I'm redefining that notion ... Not redefining so much as re-captioning that notion of availability of substitutes that you talk about so much. That's this idea of your positioning not as a creative firm, not being interchangeable with others because to whatever degree your positioning is interchangeable then you don't have that much power in the marketplace.
In the previous chapter, chapter eight, the one we just talked about, I'm getting people to understand what the options are for positioning. Then if they buy that argument and they want to craft their own positioning, then what are those principles to make it work. One of them that I talk about in there, is that it has to be public. You can't just have private positioning. That's the idea. Over the years, all the ways my clients have tried to snooker me and try to tell me that they came up a positioning and saying, "That's not a positioning. Come on." So the primary ways I caught them, are what I list in chapter nine.
BLAIR: I'm recalling dozens of conversations you and I have had often in airport lounges, on trips back home comparing notes of what a client tried to pull off in terms of a fake positioning.
DAVID: Am I an idiot? No that's not a positioning.
BLAIR: Okay. Just some principles here around the articulation of your positioning. Positioning is public and it must be declared. We just joked about the fact that you have clients who say, "Oh yeah, we're experts. We're specialists and this. We're known as specialists in this area." And you go to their website and you look at the keywords they're using and it's advertising agency San Diego.
BLAIR: It's not declared at all. Your SEO strategy around your website really pays off, really states how you see your firm. So you might be saying to the consultant or at your friends, "We specialize in UX." If you just go look at the keywords that are being used in the meta description, then you're pretty much out of there. Another point you make is positioning is semi-permanent. What do you mean by that? Semi-permeant. It's not carved in stone.
DAVID: It's not carved in stone but it's ... I don't know the image I came with in my head as I was writing that, I was just thinking about a restaurant. You know they put a lot of money. They think carefully about the name of the restaurant. They put it prominently out front and maybe it's really ornate or carved, it certainly is lighted. It's beautiful. It's not going to change every year but the specials every night change and they’re just handwritten or they're printed out of a laser printer on paper. That's sort of the idea is that you want to make a positioning decision that will last years and year and years. Ideally it lasts 20 or 30 years. It's hard to imagine that being the case in our world which is changing so quickly. At least five years. That's what I mean by semi-permanent.
BLAIR: Don't you feel like the idea for the permanence of positioning is one of the things that keeps principals from making the courageous decision around positioning? I'm going to make this decision then I'm stuck with it forever.
DAVID: Yeah. Exactly. The technology has changed so much as well. Before the days of PowerPoint or color printing, you didn't have that luxury. You were going to spend a lot of money to get offset printing. You made a specific choice. Nowadays, you can change your positioning every time you go and make a pitch to somebody. So we do that. It kills positioning.
BLAIR: Yeah. I worked in new business development in a small ad agency in the pre-web days. I was doing outbound work and I would pick up the phone and I could make whatever claim I wanted because there was no website to which somebody could go to validate or invalidate that claim.
Listen we're almost out of time. There is one more really interesting point here in chapter nine. Here's the point. The less impressive your locale, the more important positioning will be. Now I'm reading this as somebody who's launched a business in a village of 976 people in the middle of nowhere. The less impressive your locale, the important positioning will be, why is that?
DAVID: So using you as an example and let’s say it's a blank slate, you haven't decided what you're going to do for a living, what you're going to charge people money for. If you're going to draw from the local audience, then you have choices but they're limited. There's how much money do they have and what's the size of the audience, so on. So immediately you dismiss that. You say, "No, I'm going to have to draw from not just Canada and North America but all over the world." Which you do now. Then you say, "Why would somebody in London hire somebody who lives in a little village in BC?" Ah, it's because of positioning right?
Or flip that around. Let's say I'm in a huge metropolitan area like Atlanta, like where I'm sitting right now with five and half million people. It's hard to make a bad positioning decision if I just want to exist because there's going to be enough work around here that's falling off the trucks. If I want to get a premium from my work, I'm going to have to be viewed as an expert that draws people in from like San Francisco. A company in San Francisco wants to use me in Atlanta, why? Because even San Francisco doesn't have what I can provide.
You can get away with sloppy positioning easier if you're in a larger metropolitan area because the work's falling off the truck but if you're going to require clients to use you in lesser locale then you're going have to have a very tight positioning.
BLAIR: Yeah. Another way to express that would be your geographic trading area expands as your expertise deepens. The way for you to deepen your expertise is to narrow your focus. So the more narrow your focus, the boarder your geographic trading area. You're right, that's something I thought about deeply when I started this business many years ago. There isn't a client within maybe 300 miles of me.
DAVID: Exactly. The first time I heard you speak, you used an illustration, I'll never forget it. I referred to it actually in an article I wrote recently and gave you credit.
BLAIR: Thank you.
DAVID: You stood up there and you said, "Picture a fixed amount of water and you're pouring this in a deep champagne glass that's narrow and deep or take the same amount of water and pour it into a shallow cake pan. That's the difference between deep positioning and shallow expertise." It always stuck with me.
BLAIR: It works better with beer and then I drink the glass of beer.
DAVID: Oh, up front?
BLAIR: Yeah. This has been great David. The book is called The Business of Expertise by David C. Baker. How entrepreneurial experts convert insight to impact and wealth. I think we're going to do one more talk on parts of this book. I'm pretty excited but I'm not going to give away details. It's going to be a little bit different, isn't it?
DAVID: Apparently. Yeah, I guess so. I'm a little nervous already.
BLAIR: I just snuck that up on you. It's going to be live in London.
DAVID: That will be fun.
BLAIR: Yeah. Yeah. Okay. Alright, I'll see you in London.
DAVID: Alright, thank you Blair.