Three Key Principles of Business Design

Applying the principles of scalability, diversification and cost management to build a thriving and resilient business.

5 min read · Written by Grant Rayner on 17 May 2023

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Two weeks ago, I provided a brief introduction to business design. I followed up last week by sharing some insights into how you can define your niche.

This week, I’m going to focus on three key principles to consider as you design your business.

  • Scalability
  • Diversification
  • Cost management

These principles are not just generic concepts; they are particularly relevant and tailored for independent security professionals.

Scalability

From the outset, you’ll need to design your business so that you’re able to scale. As an independent security professional focused on services, one of the most significant challenges you’ll face is that there’s an annual revenue ceiling. This ceiling is your day rate multiplied by the number of days you’re able to work in a year. Let’s say you have no shortage of work (unlikely), you’re able to sustain working 5 days a week (also unlikely) and you don’t work weekends or public holidays (let’s say there are 10 public holidays a year in your country) and you take 10 days off a year. That’s a total of 241 available work days. If your day rate is $1,500 a day, your maximum annual revenue is $361,500. To be clear, that’s not a terrible business, and many people would be happy with that revenue. However, even if you were able to bill for 241 days a year, it’s going to be challenging to increase revenue beyond that ceiling.

To grow your annual revenue further, you have two levers to pull. First, you can add billable days by working over the weekend and not taking holidays, which will increase your maximum annual revenue to $547,500 (365 x $1,500). That’s good revenue from a single person business, but there’s a 99.99% chance you’ll burn yourself out in the process. Second, you could increase your day rate. If you worked 241 days and increased your day rate by $300 to $1,800 a day, your annual revenue will be $433,800. However, increasing your day rate will likely have an impact on your ability to win new work, and you can only increase your day rate so much before you price yourself out of business. I’ll get into day rates, and whether you should even be using a day rate, in later articles.

The lesson here is that a pure services business is naturally limited by the amount of time you’re willing or able to work, and the amount of money you’re able to charge for that work. Therefore, you should avoid focusing your entire business on delivering services where you’re trading time for money. Sure, you can do okay by doing that, but you’re not going to reach your full revenue potential.

More importantly, I would argue that you shouldn’t go into business as an independent security professional to work yourself to death.

I’ll be spending more time on how you can scale your business in later articles when I explore different products and services.

Diversification

The second principle that you must apply when designing your business is diversification. By consciously diversifying your business, you’ll be able to increase your business’ resilience. You’ll also be able to accelerate your learning as you gather more information about your target market and their receptivity to your products and services.

You can diversify your business in several ways:

  • Diversify across clients. It should go without saying, but you should have multiple clients. In an earlier article, I highlighted the risk of relying on one or two clients. Don’t do this. Instead, aim for at least six clients and build on that foundation.
  • Diversify across client types. Broadly, there are two types of clients: companies with whom you work directly, and other security consulting companies to whom you subcontract your services. If you’re subcontracting your services to other security companies, try to subcontract with at least three different security companies. Don’t rely solely on these subcontracting relationships. Ensure that you also have revenue coming from direct client relationships.
  • Diversify across services. Have multiple services you can offer clients relating to your niche or specialty. Work on providing a complementary suite of services, for example evaluation, planning, training, and exercising.
  • Diversify across products and services. In addition to diversifying your services, also incorporate products into your business. Products are also the key to scaling your business.

I’ll be delving into products and the productisation of services, in more detail in future articles.

Here are a few examples of some of the risks I’ve faced by not diversifying enough over the years:

  • I worked with the same client for nine years, delivering crisis simulation exercises in 8 cities across the Asia Pacific region. This single client provided a major percentage of my annual revenue. The program was great. We were receiving excellent feedback from participants and were continually improving the quality of the exercises. Then, the work just stopped. The client had changed their priorities and took the program fully in house.
  • I worked with another client, delivering crisis simulation exercises across their offices in the US and Asia. All was going well and the program was set to expand. Then, a new manager, who had a different background and didn’t understand crisis management, came in and the work stopped.

I’m sure many of you reading this will have similar experiences. The lesson here is not to avoid such projects. In fact, these types of regional projects are ideal and are exactly the kinds of projects you should be trying to win. Instead, the lesson is to ensure you have multiple irons in the fire and are able to withstand the loss of major sources of revenue.

In addition to focusing on revenue growth through scalability and diversification, you’ll also need to focus on cost management.

Cost management

You will struggle to be successful in your business if you’re unable to effectively manage your costs. As you design your business, be very conscious of the costs you introduce and how those costs contribute to the profitability of your business.

Here are a few practical techniques you can apply to more effectively manage your costs:

  • Be conscious of all of the costs that you bring into your business. Don’t take on new costs without understanding the alternatives and how what you’re paying for will increase your productivity and effectiveness.
  • Avoid large recurring fixed costs.. Major fixed costs such as office rental places unnecessary strain on your business and should be avoided where possible.
  • Track your costs. Maintain a detailed record of your expenses by category.
  • Evaluate your costs. On a quarterly basis or at the end of each year, review your costs and evaluate their relevance and effectiveness. Rank your costs from highest to lowest. Determine whether you’re able to eliminate any of the higher cost items. Pay particular attention to recurring costs, such as software subscriptions.
  • Don’t be afraid to spend money on things that improve your productivity. For example, spending money each month on ChatGPT (or similar applications) would provide a high level of leverage because it can save you a disproportionate amount of time when completing tasks. However, while a few dollars here and there each month isn’t much, software subscriptions can quickly add up. When purchasing applications, be careful to select the right software plan for your needs. If you find you’re no longer using an application, close your account.

Cost efficiency and cost effectiveness are important concepts to understand. Cost efficiency is about achieving the best possible output for the minimum expenditure. Cost effectiveness, on the other hand, refers to the balance between the level of resources used (costs) and the impact of the outcome. Both concepts are important.

While cost-cutting in a products business can have impacts on product quality and customer satisfaction, cost-cutting in a services business–specifically a single person services business–is unlikely to have any visible impacts. For example, you don’t need to spend $1,000 on a microphone for Zoom calls when a $100 microphone will do an equally good job (noting that your client is very unlikely to detect the difference in audio quality between the two devices).

Maintaining a low-cost base has another advantage: it will enable you to be more competitive with your pricing. If necessary, you can lower your price to win a particular project, confident that you’re not going to jeopardise your profitability in the process. Even if you reduce your price slightly, it’s likely that you’ll still be earning far higher margins than your larger competitors, even though their day rates may be considerably higher than yours.

Perhaps most importantly, minimising your business costs will alleviate some of the stress and anxiety that’s inevitable when running your own business.

If you’re running a services business, it should be relatively easy to minimise costs and maintain a lean operation. Embracing and maintaining a lean business model is a good practice.