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This is a story of a clinical psychologist who followed his nose and experience based business education into leveraged services, became reacquainted with his “core” discipline (pure psychology; measurement and prediction) and who now runs a web-based police selection business, while struggling to figure out how to manage it, now that it has grown into a national enterprise.

When I started my career, (Ph.D. 12/72 Kent State University), I did not know very much about business, and I really did not have to. At that time, most non-academic clinical psychologists were employed by public mental health centers, State Hospitals, Veterans’ Facilities, and Public mental health clinics. Many of them had part-time private practices, seeing a handful of patients, often working out of their homes or within the physical facilities of their employers. Bottom line, you did not need to know a whole lot about business to see a few patients after work and send out a few bills. This was before “freedom of choice” laws were widely enacted. Most psychologists could not accept 3rd party payments for their “private patients” although their employer (clinic, hospital, psychiatrist, etc.) could be reimbursed. The result was that a lot of psychologists who described themselves as working in “independent practice” were really working for (employed by) other people. After a year of working in a mental health center, and subsequently becoming licensed I became one of them (an employee of a psychiatrist). I thought I was in private practice but, in reality, I was an employee. All my work was billed through my employer, who had a nice little deal going; I did all the work, and he made all the money. All I needed to worry about was making my car payment, and everything else was his problem. Then a little twist of fate changed my life.
The psychiatrist that I was working for decided to build a private hospital. All of a sudden I was “in business.” This is where I was first exposed to some operating measures and benchmarks of business entities. I learned these things because my money and my future were on the table, and these were the items that our investors wanted to know. This little venture worked out, but not because I was particularly smart (or even reasonably skeptical). More importantly, this experience was rooted in the medical economics of the time, (if you build it, they will come), so I came away with a very narrow view of what it took to establish and run a business.

The list of things I learned about did not include marketing. The primary investor was a health and life insurance company. The average length of stay for patients then was eight weeks, and it was easy to keep 50, then 65, beds full. We were shooting fish in a barrel. Luckily, we sold out just as the world was changing. After the hospital experience, I went on to work in North Carolina, with a colleague who directed a non-profit center for leadership training and also had a “for profit” consulting firm. This provided my introduction to the consulting business. I learned about service profitability and fee structure (listserv search keyword: profitability = 1/3 salary + 1/3 overhead + 1/3 profit), when I started bidding jobs and developing new business for this firm. I consulted to a lot of banks, a couple of retail operations, and a manufacturer or two. One of my consulting clients was a large international management consulting firm, full of MBA’s. I made some friends there and ended up working on corporate strategy project teams (as an independent contractor), as well as being their internal psychologist. As a consultant, my specialty was organizational design and implementation, a primarily quantitative and measurement-based discipline which I found I really enjoyed.

Working on these comprehensive corporate strategy projects was my first real exposure to marketing concepts. I was spending about half time at home in clinical practice and the other half consulting. I was operating in “solo” mode and learned some very important business lessons. The first thing I learned was when you are in “solo mode,” it is very hard to DO the work AND market new work at the SAME time. I had only so much time, so I had to manage it carefully. When I did not do that well, I noticed that I spent a couple of months working very hard, followed by a (disheartening) period of low productivity. The “feast or famine” nature of practice was burning me out. I needed some stability.

The Quest for Stable Income: I learned my next lesson while working on one of my consulting engagements. I was engaged by the consulting company to work on an internal strategy study (the company was reviewing its own strategy). As is customary in a strategy study, our team gathered as much competitive information as possible. In this regard, we focused our efforts on learning as much as we could about other successful management consulting firms. One thing we learned was that the most financially stable professional service firms are those that sell and deliver services with three fundamental attributes. First, at least some component of the service is mandated, rather than discretionary. Second, the services are delivered on an annuity (continual/repeating) basis, rather than on a discretionary basis. Third, the services are leveraged, meaning that revenue and profit is accelerated through delivery vehicles (people, products and/or processes) that either cost less per service unit, or multiply volume (more units). Firms that sell discretionary, “single shot” services typically experience mercurial cash flow and higher professional employee turnover (e.g. law firms and management consultants). They also have a harder time maintaining profitability when there is a lot of price pressure (or competition) in the market because they have to keep raising prices to cover increased costs (e.g. yearly raises for professional staff). Similarly, if they sell their service by the hour (instead of by deliverable product) they have to constantly hire new people to maintain their “inventory” of available hours. Lastly, if they sell single shot services they have to invest a lot of money in sales and marketing in order to keep their people busy. This (listserv search keyword: cost of sales) increases their overhead and further erodes profit. Mandated services are easier to sell, because you can position your offering in terms of “why my service is better/cheaper/faster than X.” Similarly, services that have to be delivered on a recurring basis (e.g. my tax return) are an easier/quicker sale than a project that has to be re-sold every year, so cash flow is more stable (and cost of sales is decreased). Lastly, a service that is “leveraged” means that you can “scale” your practice and increase profitability by delivering a product/service packages that multiply revenue and do not, necessarily require you to invest in more people.
Eureka! I applied this knowledge to my own “solo” practice. No wonder my cash flow was so mercurial. I was selling discretionary services (strategy consulting). Once a project ended, I was through. If I was going to build a stable business, I was going to have to find a mandated annuity service that does not have to be re-sold. But what about profitability? I was now 10-15 years older, and working 60 hour weeks while traveling all over the world was starting to wear on me. I needed to figure out how to make as much (or more) profit without working at this pace.

This brings me to “leverage”, the third (and most important) component of a stable professional service business. A service that brings in $100 in revenue and requires one hour of time will always yield a “flat” profit curve (actually a decelerating curve; costs never stay flat), because time (as we know it) is finite and costs always escalate. If you want to have more profit, you have to sell more units (hours). , One way to leverage profit is to hire service providers and pay them less money than the sale price of the service. That works for a little while, but, in my experience, everyone wants a raise sooner or later, so the profitability pressure continues and accelerates with time. A smarter way to stabilize/maximize profit is to figure out how to multiply the amount of revenue/unit of time that a given service generates. This is what I call leverage (or scalability).
LESI® and my search for Leverage… On the clinical side of my practice, I had invested in an expensive mini computer (before PC’s) so I did not need a strategy study to show me that I needed to find some clients that did a lot of testing . When home, I marketed pre-surgical consults, and some pre-employment assessment for a handful of local police departments. Pre-employment assessment for police officers was not exactly “mandated” in 1982, but it was consensually supported by most law enforcement agencies of any size or sophistication. As the years went by, more and more states passed statutes mandating this service, and it is pretty much standard now. This is also an annuity service: Police departments usually turn over at the rate of 10% per year, due to both retirement and resignations. Although staffing levels may ebb and flow due to budgets, and hiring may be postponed for a few months, sooner or later most departments must hire new officers. Targeting the law enforcement market gave me the opportunity to market mandated, annuity, services but I still had to figure out how to create leverage.

In the mid-1980’s I worked with the NC Attorney General to draft a statute that made pre-employment assessments mandatory in North Carolina. At the same time, many other states were doing this as well, and I became kind of a “traveling expert” for a number of states in the southeast. Due to this visibility I ended up with a number of assessment contracts. My spouse (Ellen) joined the business at that point, and she proved to be very talented in sales area. (Today we sell products and services to over 900 client agencies all over the country; without Ellen the number would probably be closer to 9). I stopped strategy consulting, closed my clinical practice, and the mandated/annuity characteristics of this service created some stability but there were still problems with leverage.

Instead of flying all over the country doing strategy consulting, I was driving all over the South doing testing and interviews. On top of that, this was a price-sensitive business. Due to the visibility and consensual validation that comes with being known in a marketplace, we found we could sell our services pretty easily, as long as we did not go above a critical price point. When we tried to go higher, we met resistance. Once I used up all my available hours, to increase profit I needed to increase volume by hiring another professional to do interviews and/or I was going to have to raise the price to cover the additional cost. Since I had no leverage, my only other alternative to increase profit would be to pay myself less. Why would these agencies be willing to send their applicants 100, sometimes 200 miles to my office and/or hire me to travel to them, yet they reverted to “local talent” if I tried to raise the price? Lowering the price would not sell more product, but raising the price would lose the account. In a word, our demand curve was not “elastic” (listserv search keyword: demand elasticity). We were busy, and we had a steady demand for our services, but we were not going to be able to grow our bottom line without working harder for less money.

Mastering my mini computer (and later my PC) was the start of my leverage. I began by storing test data along with simple demographics in a database. As the years went by, I collected more and more data. Meanwhile, I kept doing pre-employment evaluations. My clients kept hiring officers. Many of them worked out well, and some of them did not. I started doing research on the ones that did not. I combined my core knowledge of statistics with some tricks I had learned from insurance actuaries while consulting and, with the help of an I/O psychologist and a quantitative psychologist, I started building classification prediction models. In addition to simple demographics and test scores, I had also collected a lot of life history data. so I started developing decision trees and neural network models which resulted in an actuarial classification model for predicting specific negative outcomes (failing training, various types of discipline, termination) among police applicants. Interestingly, I found that both life history and test data were predictive, but since the domains themselves were independent (not highly correlated), putting the scores together produced nice increments in prediction (and decreases in error). The nice thing about this is that it was actuarial. Once the numbers were available, they could be put together more or less mechanically. This was the start of our “leverage,” but it was not the whole solution. Once again, we hit a limit.

Life history data (biodata) are a key component of our prediction model, but incorporating this data in our model created some operational problems. We had a list of predictive life events we were looking for (see Sarchione, Cuttler, Muchinsky, Nelson-Gray; JAP December, 1998; Cuttler and Muchinsky; Criminal Justice and Behavior, 2006) but we had to walk through paper questionnaires by hand, in order to extract the data to put into our classification formulas. (We tried a simple yes/no questionnaire, but applicants left answers blank, particularly for negative events). It was slow and tedious work. After we did the coding we had to turn out a report. We could do many more per hour than I was doing in the old way, and we were making more profit, but the physical limit was also apparent. Since we still had the non-elastic price/demand curve to deal with, our scalability (business word for exponential growth) was not robust. My first attempt at solving this problem turned out to be a “dry hole.” We designed an optically scanned personal history questionnaire and invested in a software and scanner solution that was supposed to be able to capture graphic (hand written) data and translate it into a database. Our end of the software system worked but the vendor’s end (scanner and scanning software) turned out to be very unreliable. That’s when we turned our attention to the internet. In 1999, the idea of requiring an on-line form for a civil service job seemed advanced. Although it avoided the problems we had with earlier scanning solutions, I was reluctant to try it, because I felt that some applicants would not be able to access the form. Nonetheless, in March 2000, we gave it a try. One of our client agencies sponsored a beta (good client relationships pay dividends) and we have been using it ever since. Since the original beta, we have processed more than 40,000 applicants, and not one has been unable to get to the internet (the world changes fast).

Finally, we had achieved leverage. Our online application (onlinePHQ®) generates the biodata we need for our model, without requiring tedious manual effort, and it also generates background investigation reports that are helpful in other facets of our client’s selection process. Our Multi Domain Screening Reports (combination of biodata with test scores) are automated, so we can sell them at attractive, yet profitable, price points.

Food for Thought: This story is about searching for ways to make the independent practice experience stable and sustaining in economic terms. Independent practitioners should develop a vision as to what they are trying to accomplish with their practice. What is the engine that drives your practice? Where are its vulnerabilities and what can you do about them? Here are some things to think about:

1. I think that one corollary to leverage is the need for focus. Our products (see the website www.LESI.com ) ask and address a very narrow question. Our follow-up research continually monitors accuracy and, in that way, makes our focus more and more narrow. I guess because clinical psychology is about people (instead of competence/suitability, which is what we do), psychological evaluations typically attempt to say as much as possible about the “subject” (person). In the face of complex clinical issues, this approach certainly has value. However, as all of you know, it takes a lot of work and a lot of time. If you interview a job applicant for an hour, after administering and interpreting a couple of tests, you are going to derive a lot of information. It may be rich and potentially valuable information but it may also not be necessary to answer the question(s) at hand. It will also be very difficult for you to sell at a low price while continuing to make a profit.
2. You learn psychotherapy by thinking about your interventions in psychological terms, you learn business by thinking about what you are doing, and what has happened in business terms (at least that’s the way I learned).
3. Revenues and profits must grow and not remain flat because expenses always grow and unforeseen things always happen. Is your business/practice sufficiently profitable? You should constantly and objectively examine your efforts with these questions in mind and look for answers.
4. Don’t be afraid to make mistakes...I tried to write this story to show that I didn’t have the answer from day one and that I made plenty of mistakes and that I just kept moving forward trying to create stability and growth; accepting my mistakes and trying to deal with the problems at hand. There were plenty of times I was discouraged and angry and lost the road. It’s easy to look back now and write a story that sounds like it was all “a stroll in the park”; it was not.
5. Psychology is a scientific discipline that can form the basis of a self sustaining business. Use the basic science you learned in school as a foundation for development of new applications. There are tons of opportunities out there right now. If, like me, you are a primary breadwinner, achieving stable growth and income are pretty important. There are a number of mandated annuity, leverageable services out there begging to be developed. These may be pre-surgical consults, cosmetic surgeries, addiction workups, vocational rehabilitation, or others. Think beyond your current situation, collect relevant data, and persevere.

(The author gratefully acknowledges the editorial assistance of T. Richard Saunders, Ph.D. who contributed substantial effort and guidance towards the construction this article.)

References:

The Prediction of Dysfunctional Job Behaviors Among Law Enforcement Officers; Sarchione,
Charles D.; Cuttler, Michael J.; Muchinsky, Paul M.; Nelson-Gray, Rosemary; Journal of Applied Psychology, 1998, Vol. 83, No. 6, 904-912

Prediction of Law Enforcement Training Performance and Dysfunctional Job Performance with General Mental Ability, Personality, and Life History Variables; Cuttler, Michael J.; Muchinsky, Paul M; Criminal Justice and Behavior 2006 33: 3-25.

If any member of Division 42 is interested in my sending you this DVD, please send an email to me at <kspope@kspope.com>. There is no charge—it is completely free. Some may wish to make a donation to one of the Holocaust museums or to a program that provides services to Holocaust survivors.