Dr. Jeremy Sharp (00:00)
Hey folks, welcome back to the podcast. Glad to be here with you. Today I have a business episode and we’re talking about diversifying. We talked probably four to six weeks ago about expanding. During that episode, talked primarily about hiring other psychologists or testing clinicians in your practice. But today I’m talking about diversifying. So what does this mean? Diversifying means adding to your services by virtue of
say a nutritionist or a nurse practitioner or an occupational therapist, something like that. This is one of the most common crossroads, I think, for practice owners. Once you get big enough, you start to think about, okay, maybe I should add other service lines in the practice. Or you meet someone and you really like them and you want them to join you and it’s different than testing. So you think, hey, maybe I’ll add this. So it sounds like growth, but…
not all growth is good growth. hope that you’ve figured that out over the time that you’ve been listening to the podcast. But today we’ll look at why so many owners I think feel the pull to diversify and what the data actually says about financial outcomes and how to evaluate expansion ideas with clarity instead of impulse.
Dr. Jeremy Sharp (01:17)
So I’m going to start with the question of why is diversification so tempting? Well, there’s some data to back this up. Between 2019 and 2024, the number of small healthcare practices that offered quote unquote integrated services grew by over 40%. So our industry,
psychological services industry in particular saw a rapid expansion into coaching, executive functioning, training, and ⁓ telehealth kind of education programs in particular. So if you are feeling the pull to diversify, you’re certainly not alone. This is actually happening. And my guess is that it’s ⁓ mixed up in the zeitgeist, so to speak. Why, though? That is the question. Well,
Diversification, I think, feels like protection, ⁓ especially after COVID. ⁓ Many of us watched a lot of practices, especially therapy practices, ⁓ explode. Testing also exploded, but I think it was really interesting, you for those of us kind of adjacent or close to therapy practices, you know, to see the incredible growth and value within the market.
like from private equity firms for therapy practices after COVID. So we might naturally think, all right, if I add more services, then maybe I won’t be vulnerable next time, like if testing slows down. And I know that we’re currently in the middle of a little bit of a slowdown as well. And I’ve talked to a lot of testing practices who are considering adding these services just as a hedge against.
slowing business and having all your eggs in one basket, right? Like people always say diversify in terms of investments and streams of income and things like that. So it makes natural sense that you would be considering diversifying. So there is truth in that, but it’s not automatic necessarily. There is some research from 2023 that shows that professional firms that diversified too quickly saw an average of something like 15 % drop in profit within a couple of years.
And the interesting thing is that the biggest factor was not the new service itself, it was loss of focus. All right. So before you knock down a wall and start hiring massage therapists or something, let’s dig into the details and evaluate these decisions a little bit more. So the next part, we’re going to talk about sort of the hidden costs of diversification. Okay. The first one is what I would call brand dilution.
So if your core identity is being a testing specialist or a neuropsychologist or an assessment expert, adding seemingly unrelated services, I think, can confuse referral sources a bit. Now, the word unrelated is doing a lot of heavy lifting here. ⁓ I think there are related diversification services for us. OK, so executive functioning coaching is one of those. ⁓ Tutoring.
is one of those, or academic support. ⁓ Therapy, I think, is an adjacent service, but we’re really talking about more like allied health providers for the sake of this discussion. And reason here is that I think referring sources, especially like pediatricians, schools, but really anyone, I think people want clarity. ⁓ They need to know exactly what you do best, okay? And when they see a website that says, assessment and therapy and nutrition and coaching and massage,
⁓ it makes it really hard to know who you are. Okay. The second component here is, ⁓ operational complexity that comes with diversification. So every new service that you add, I think is essentially going to add a mini business. ⁓ it’s going to have different billing codes, marketing language, outcome measures, maybe different software, even, ⁓ and probably different software. Just being honest, if you are, ⁓ using something like therapy notes or simple practice,
There are some EHRs out there that are a little more generic, I guess is the right word, or maybe inclusive of other fields. ⁓ again, some research has shown that each additional service line in a solo to midsize practice will increase the admin time by about 22%. So that’s a lot for an additional service line. And we saw this ⁓ firsthand when
We added a medication prescriber. This was probably, gosh, five or six years ago at this point. I think it was pre-COVID. And ⁓ many of the things that I’m sharing here were true for us. So this individual was fantastic. And it was a great addition to our practice, just superficially speaking. ⁓ Being able to refer for medication, it was great. And ⁓ that particular individual didn’t
fit our EHR very well. So we adopted a new EHR just for that person, for example. And that of course increased the admin load and the billing codes. There was a ton of research we needed to do there. So operational complexity is a real thing to consider. And for me, that was just medication management. That was something that I was vaguely familiar with at least. If you were to expand into ⁓ speech or occupational therapy or massage or something like that, the
unfamiliarity is probably quite high. A third component here to consider is financial lag. What does that mean? It means that many add-on services don’t reach profitability for at least, I don’t know, six to 12 months. there’s tons of variation here, right? So you might be able to fill someone really quickly and be off to the races, but typically you’re going to be fronting the rent and the equipment, which is a thing for allied health
professionals, and the marketing long before the cash flow stabilizes. And you might say, well, I’m not going to be paying this person unless they are making money and we’re seeing appointments. And that may be true, ⁓ but don’t get wrapped up in that. Paying the person’s compensation is only a component of this whole equation. And then there’s the psychological impact, I suppose.
independent of the financial lag of, what is this person doing if they are not full for several months? The last piece I’m going to talk about here is culture confusion. So, you know, this is just the idea that teams often feel disoriented when you pivot too fast. You know, if you built, say, a testing first culture, then suddenly like bringing in a coach or a wellness provider, you’re going to create like implicit competition for time and attention.
even if it’s not direct competition for referrals necessarily. So we again saw this firsthand. Now luckily I talked to my team before adding this practitioner, but you know, was approached, this is a couple years ago, by an executive functioning coach and was moving pretty quickly down the path of adding this person and was able to talk with my staff and figure out that, you know, they
We’re actually pretty invested in keeping our team relatively small and wanted to continue to focus on getting better and better at testing. And for me, that was enough culture feedback to hold off on that decision. And it turned out to be a good thing. So all this to say, diversification has real costs, but it is not all doom and gloom. There are certainly some situations where it can work and times when it makes perfect sense. So let’s talk about that a little bit.
When does expansion actually work? I’ve got three situations where diversification tends to succeed. The first one may be the most important one. Maybe not, second one’s pretty important too. But the first one is what I will call a shared client journey. So if you are adding a service that extends support for your existing clients,
This is kind of what I talked about earlier. Examples will be executive functioning coaching after an ADHD evaluation. That seems like a really natural fit. You already have the demand, and the referral flow is internal. So hopefully, you’re not going to have to do too much external marketing for something like this. Other examples might be medication management. It might be therapy. Otherwise, I know folks that have like,
dyslexia tutoring service lines in their practice. That could be a good addition. If you’re working with adults, it might be like a cognitive rehab or something like that. So if you have that shared client journey, that’s a great sign that it might work. The second component, also pretty important, is high margin, low overhead additions, right? I mean, this is the Holy grail. This is what we’re always going for. So services like
virtual consultations, CE workshops, school consulting, ⁓ that kind of thing often requires very little infrastructure but can offer pretty strong returns. So there’s some information out there that suggests that professional service firms that added some kind of like education-based product had the highest margins ⁓ than those that expanded into new clinical lines.
And I think the reason for this is just, again, overhead pretty low, especially if the services are virtual. So it takes a little creative energy, I think, to figure out what that might be. But it could be digital courses or virtual coaching or something like that or virtual consultation. I love the idea of consulting with schools and other entities if you can.
The third component to talk about here in terms of when diversification might work well is when it’s a strategic partnership instead of ownership. Okay. So what does that mean? It means that sometimes the right move in these situations is to collaborate rather than hire. So maybe you partner with a nutritionist or an occupational therapist or a speech therapist through some kind of referral agreement rather than making them employees. All right.
That way, I mean, you extend your ecosystem without absorbing all of their overhead. Another way to do this would be if you are in a shared office situation and you can each maintain your own leases and businesses, but you get to operate out of the same suite and presumably increase the comfort and closeness and familiarity that would facilitate referrals back and forth. Okay. So what do we do with all this? Let’s talk about kind of a
framework to evaluate new services and figure out if they’re going to fit. And I like to run potential ideas through this little three-part lens that has to do with alignment and margin and capacity. So we’ll talk about alignment first. So alignment with your mission or purpose. This is where you can ask, does this new service move us closer to our mission or create a new one? All right. So if you are
like us, and your brand promise is clarity through assessment, for example, adding, ⁓ say, nutrition arm to that would kind of muddy that message. But executive functioning coaching or parent consultation could fit really well. So that’s the first one. Does it align with your mission? And if you find yourself kind of doing mental gymnastics to make it align with your mission, it’s probably a sign that it doesn’t.
The second part of this three-part lens is margin and revenue potential, of course. I think a business has to be profitable. There are some situations where certain service lines can sort of overshadow or compensate for low margin service lines, but we’ve to be really careful with this in our types of business, which are already relatively low margin anyway. So you’ve got to estimate your profitability pretty honestly. ⁓
By all mean, mean, look up the reimbursement rates and market pricing for the services that you are thinking of adding. ⁓ This is going to involve potentially some heavy legwork to look up CPT codes, reimbursement rates, facility versus non-facility, things like that. So APA services data from 2024 show that the average hourly gross for testing is about $185 to $200 while therapy,
averages 130 to 150. Wellness services on the other hand, coaching, massage, et cetera, are more around the 90 to 110 range. So if you’re to be replacing testing hours with lower margin work, the expansion might reduce your profit per hour overall. The third piece to look at here is your capacity to manage all of this. So again, every new service line requires management attention.
And if you don’t have the bandwidth or systems to support it, then the cost is not financial. It’s it all of a sudden becomes emotional and cognitive as well. So when you go through this three part series, if the, you know, if the idea scores high on all three, then by all means go for it. Like do a pilot, do a six to 12 month pilot and see what happens with it. But if it fails two out of three or even, I don’t know at this point in my career, I’m like,
If it fails one out of three, they’re all pretty important. So I don’t know that I would push it to try to stretch and make it fit. All right. So let’s start to close by talking about diversification that doesn’t work. Okay. Let’s be brutally honest about some of these pitfalls. ⁓ One, adding therapy to a testing only brand without marketing support will often
fail. So conversion rates will stay pretty low because referral sources already associate you with assessment. Now I did this in my practice, but it took time. Okay. It took at least gosh, a year, 18 months, maybe even 24 months to truly launch a therapy service line in my practice. And this was back probably 10 years ago when I first started to add therapy, maybe 12.
All right, another example, medical services. So nurse practitioners can ⁓ add a lot of time and energy. Okay, I’ve talked about this before. ⁓ There’s a lot of compliance requirements. And I mentioned the EHR component. ⁓ Our prescriber wanted to have a medical assistant as well. So again, there are practices where this works. Don’t get me wrong. I know it can work. And I know that there are some of you out there saying, my gosh, like we’ve had a prescriber and it was great.
That’s fantastic. ⁓ But just go into it eyes wide open, knowing that it can add a fair amount of complexity. The third component that is not going to work here is if you are rushing expansion during a referral slowdown, that is very risky. And that is often where this idea comes from. ⁓ Now, sometimes people think about expansion from a place of abundance, right? And everything’s going great. And you’re like, hey, let’s diversify. That is cool.
But right now, we are in the midst of a little bit of an economic downturn, which I’ve talked about in the last couple of episodes. And if you are thinking about diversifying in the middle of a slowdown, I feel like that’s risky. Slower referrals, it is tempting to try to fill the gap with something new. just remember, this is not like a Band-Aid. This is a big strategic move that you’re going to have to invest in. right. Profitability is important, so let’s do a little bit of a numbers check.
We’re to talk about how to model the ROI here. So for anything that you bring on, you’re going to want to aim for a, I mean, at least 20 % net margin. Gosh, I think it should even be more than that. It should be 30%. If your model doesn’t hit that, then it’s probably not worth launching yet. All right. And to get your net margin, you essentially just look at the amount of
gross revenue that you’re going to bring in. let’s say it’s a hundred dollars an hour for coaching services. And then you subtract essentially your expenses from that and figure out what’s leftover. Okay. So if you are not in that range of gosh, 20, 25, 30%, then it’s probably not going to be great unless you are in kind of a unicorn situation and find some way to offset that.
lower margin with another higher margin service in your practice.
All right, let’s see, what else do we have here? We could talk about non-financial factors in this whole decision. So financials matter, of course. I think they’re very important. But I’m also a big proponent of feeling joy and the energy that you get from the work you do. So this is a place where you can ask yourself, will this new service line bring me more joy and make me more excited to come to work, or will it just make me busier?
I love that distinction. Will this make me excited to go to work or just make me busier? And of course, there’s research for this too. So in 2024, Gallup’s entrepreneur well-being report, it sounds official, found that owners who pursued expansions aligned with personal interests were 40 % less likely to report burnout a year later. So profitability and personal meaning both count, of course. OK.
So let’s see. Start to tie it all together here. I love a good decision matrix. I already presented this three-part lens that you might look through, but this is a little bit more of a matrix, I suppose. So you’re going to look at each of these different ⁓ criterion, I suppose, and then you’re going to rate it from 1 to 5, with 1 being low, 5 being very high. So the first one is alignment with the mission of your practice. Is that a 1? Pretty low. Or is it a 5?
Or is it somewhere in the middle? Then you’re going to look at the financial margin potential. So something like a 30 % margin would be a 5%. 20 % would be probably a 3%. And then anything below that would be a 2 or 1. You’re going to look at ease of implementation. Rate it from 1 to 5. You’re going to look at referral fit and demand. Look at that from 1 to 5. And a good way to look at referral fit and demand is just to go back to your evals over the last
several months, I would do probably a year, and look at the most common services that you referred out for, and that should give you a good idea of referral fit and demand. And then the last thing you’re going to rate on this ⁓ matrix, feels fancy, is personal energy and excitement for this project, rating on a score of one to five. OK, so let’s say you find something and you want to do it. How do you pilot it? Start it as a beta, first of all.
offer to your existing clients first and then track demand. Okay. Before you pay for any external marketing, offer it internally and see if your clinicians get on board and see if your existing clients get on board.
Second factor, if you can use contractors initially, this will limit your quote unquote fixed costs. So you’re not bringing someone on board like on a salary or anything like that. You’re also not paying benefits and the other infrastructure that comes into play with employees. So if you can use contractors for this ⁓ beta, then go for it. You definitely want to measure all the data. So measure conversion and
profit margin and utilization and all those things to see if this is actually taking off. And then the last thing, we don’t want to think about this, but committing to a kill date of sorts can be helpful as well. if it’s not profitable or energizing within six months, then you nix it. Maybe it’s six months, maybe it’s a year, but you can make that decision.
And that’s just a simple way to think about testing ideas before you bet the farm. OK, wrapping up, takeaway here is that diversification and expansion isn’t necessarily always better. More isn’t always better. Better is better, if that makes sense. So ⁓ diversify only when it deepens your mission, not when you’re bored or scared. And when in doubt,
Double down on your niche because honestly, clarity sells better than complexity, I think the vast majority of the time. Testing practices are already pretty unique and you don’t need five side services to grow. You need a clear message, excellent client experience, and consistent referrals. Those all go a really long way.
So that’s it for today. ⁓ A little deeper look into when to diversify and when to refocus. So if you would like some structured support or want to talk through some of these ideas, you are welcome to book strategy session. You can do that at thetestingpsychologist.com slash consulting. All right, until next time, stay focused, stay creative, and keep building practice that works for you.
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