Growth

Building a Successful Consultancy in the Digital Age

Joe O'Mahoney

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000521207
• Edition: 1
• Topic: Business
• Subtopic: Consulting
• Index: Business

Nearly half of small consultancies fail within their first five years, but over 250 are sold every month. How do you ensure you are in the right group? How can you successfully grow a consulting firm? How do you maximise the value of your consultancy for an exit or investment?

This is the first evidence-based book to tackle these questions. Based upon interviews with 72 founders who grew and sold their firms, two international surveys, and a long career researching and advising consultancies, Professor Joe O'Mahoney provides a detailed, evidence-based approach to successful growth and exit for consultancy leaders.

Accessible, evidence-based and written by a leading expert in the field, this book is essential reading for anyone looking to set up, grow or sell their own consultancy business.

1Introduction

DOI: 10.4324/9781003149217-1

Why?

The purpose of this book

I originally thought this book was going to focus on how to grow and sell a consulting firm. However, when analysing the interviews and other data upon which it is based, I realised that growing and selling, although by no means easy, is not the major challenge. The challenge is doing this well. ‘Well’ means different things to different people, but here it means minimising the personal and business pains associated with growth, whilst maximising the value of the firm.

Whilst the interviewees for this book gave fantastic accounts of what they did to achieve their growth and eventual exit, the real lessons came when I asked, ‘what do you wish you had done differently?’. Most pointed to things they should have done to grow faster, accrue value quicker or sell for a higher multiple. Others wished they had not worked so hard that their family and health were affected adversely. Out of the 70 or so interviewees for this book who actually sold their firms, perhaps only three or four did so without avoidable business or personal pain.

My point here is two-fold. First, it is not necessary to do everything in this book in order to grow and sell. Indeed, if you were doing the right thing (for example, cyber security or AI) at the right time, then it would actually be difficult not to grow, whether you followed these recommendations or not. However, if attention is paid to all sections of this book, you will maximise your chances of minimising your pains. Second, this book is as much about what successful founders did not do as much as what they did. With a few exceptions, I have no doubts that most of the interviewees would achieve more profit, quicker and with less pain, if they were to go back and do it again. This book will hopefully enable new founders to learn from these experiences and avoid common pitfalls first time around.

A lack of evidence

Although small consultancies (1–20 people) represent around 97% of all firms in that sector, there is surprisingly little quality research done on the strategies and tactics linked with growing profitable consultancies. There are four reasons for this:

First, the sources of data. The few books that exist about growing small consulting firms are self-published ‘best-sellers’¹ by consultants telling the story of how they did it. Even in the best case, where the consultant in question was actually successful (and knows, relatively, how successful), what worked for them in the past is unlikely to work for you in the future. Success is always tied to the local economic conditions in which consultants grow their practice. This means that without a rigorous examination of a variety of successful (and unsuccessful) consultancies in different locations and at different times, it is impossible to understand the common factors for success.

An interesting sub-set of the self-published ‘gurus’ are consultants who sell online consultancy to ‘consultants’. I use the inverted commas because their advice is actually better targeted at coaches – if anyone. Any of you who are on LinkedIn may be inundated with offers from improbably young consultants offering FREE!!!! webinars promising 3 SECRET HACKS!!! to earn 7 FIGURES A MONTH!!! The difficulty with most (though not all) of these offers is that they are generally focused on creating a simple online sales funnel where a free CHEAT SHEET!!! or EBOOK WORTH £150!!! acts as click bait for an eventual hard sell ‘strategy call’. While there may be a market for what is fundamentally social media hard-selling, sophisticated and sceptical clients tend to eschew promises of easy wins by unknown contacts in favour of high-trust relationships generally built on recommendations from acquaintances. As I will explore later, there is a place for funnels for some smaller consultancies, but as an exclusive route to clients, these are better left to nutrition coaches in California.

Second, it is much easier to write about how to be a good consultant (see Edgar Schein, David Fields, Richard Newton and many others) than it is to understand how to grow a good consultancy. Most consultants, and indeed most managers, could probably have a stab at the former, not least because the information is ubiquitous (how to present, how to sell and so on). However, growing a successful consultancy is rarer and requires knowledge of everything from understanding what qualitative measures investors in consulting firms use and how recessions change the shape of firms, to knowing what forms of intellectual property to prioritise and how to reach the balance between service personalisation and more codified forms of knowledge.

A third reason for the lack of evidence is that academics are not generally that interested in small consultancies and their successful growth. Big brands such as McKinsey & Co., Deloitte or Accenture not only look sexier on a research report or academic paper, but these firms also have the financial and human resources to engage and influence business academics and policy makers.² Sadly, most business academics are not particularly interested in such uncomplicated terms as ‘profits’ or ‘sales’, which lack the obfuscation often required to get published in top journals.³ This is a shame, because the great thing about (most) academics is that they’re not interested in selling you anything – they do research for the genuine love of knowledge (or because no one will employ them in the private sector – joking, joking).

As a result, most books in this area are not very useful for the ambitious practice owner, covering only the very basics. There are exceptions, such as The Professional Service Firm by Mark Scott and Managing the Professional Service Firm by the consulting guru David Maister, but these were primarily written about large consulting firms. More importantly, these books were penned when the consulting industry was relatively small, before most companies had websites and before Google, Twitter and Facebook existed. In 30 years the consulting world has transformed, and so too must our strategies for profitable growth.

Finally, and perhaps as a consequence of the points above, many founders avoid growth, pursuing a ‘business as usual’ strategy, remaining very small or taking on one or two people, whilst only a minority seek to grow, often with a view to selling the firm in the future.⁴ In some ways, this avoidance is a pity, because many of the lessons for growth are also those for running a successful consultancy. It is not much harder to grow a consulting firm into a sellable asset than it is to run a successful small firm.

The world has changed

Although every week someone tells me that ‘consultancy is dead’ or that their business model will ‘replace the stale advisory industry’, the Professional Services business model has been relatively immune to disruption for 100 years. Most of the Big Four and the dominant strategy firms can trace their lineage back over a century. The primary assets of the firm are the same as always: valuable client relationships, specialist technical expertise and a strong brand. Whilst increasingly challenged, the basic business model is also still dominant: expert employees are hired out to clients for a price that equals their salary plus overheads and margins, and the profits are divided between the partners of the firm. The benefit of this model is its simplicity: so long as utilisation and project margins can be maintained, profit per partner is all but guaranteed. Yet the simplicity of the old model is also its downfall. This is because the growth in margins in this business model will only ever be linear: profit margins increase in direct proportion to headcount. Even worse, if (as is good practice) a firm wishes to maintain its leverage ratio (the number of fee earners for every partner), then after a certain size is reached, increases in consultants require increases in partners, thereby limiting additional profits for other partners.⁵

The digital revolution enables consultancies to break through this constraint. Most studies of ‘digital’ in consulting firms have focused on the services they sell, and it is true that digital offers clients huge value (even if they do not always deliver this in practice). Out of the 30 top consultancies listed in the Financial Times’ ‘Fastest Growing Companies’,⁶ only one is not focused on digital and 83% of consultancies see growing demand for their digital services.⁷

Yet, as with many bricks and mortar companies, the real impact for consultancies is in their internal operations. For example:

• Digital separates expertise from people, thus breaking the link between the employees and revenue. Increasingly, clients are paying recurring fees for access to knowledge assets such as software, apps, databases and multimedia resources. Once these are built, then – in the words of one founder I interviewed – ‘they print profit because there are virtually no costs’.
• Digital has vastly reduced marketing costs and improved targeting. You can now ensure that your ads are only seen by your niche audience, paying only for potential clients that actually show an interest in your marketing. It is now possible to capture audiences of thousands of potential clients using 280 Tweeted characters. The decades-old advice that formal marketing should be saved until a firm has 500+ employees now looks particularly odd.⁸
• Contractor marketplaces have collapsed the cost of administration. Using Fiverr or Amazon Turk, you can build a website for £50, integrate eCommerce for £100 and find the email addresses of 100 leads for £20. Some would-be coaches repeat this process dozens of times just to find a promising niche.
• Professional Service Automation (PSA) means that firms can spend less time and money on administration. Used well, PSA systems such as Avaza will help increase project margins, increase day rates, reduce non-billable headcount and increase utilisation rates.

The speed of change is evident in how quickly previous consultancy guides have aged. One excellent 21st-century book, How to Succeed as an Independent Consultant,⁹ contains a whole chapter on writing brochures, but only one paragraph on emails. The book’s small section on IT focuses on modems, facsimile machines and tape drives. Alan Weiss’ introductory book on consulting contains the phrase: ‘you can’t pay the mortgage with numbers of links, followers and friends’.¹⁰ You might want to tell that to Vlad and Nikita who earn £240,000 for every YouTube video they make.¹¹ Or closer to home, Cardone, Vaynerchuk, Ramsey, Tracy, Forleo and countless other business advisors, who have become multimillionaires primarily from clicks and followers. This may not be traditional consulting, but the lines, as we shall see, are becoming blurred.

When Maister and Scott wrote their books, the global consulting industry was six times smaller than it is today and the primary focus of the authors was big strategy partnerships. It was reasonable for Maister to write ‘few large consultancies have tapped into the power of the microcomputer’ (p. 202). The consulting world and its clients were vastly different:

• The Big Four (then the Big Six) hadn’t started doing consulting work in any significant form.
• Procurement departments bought only office supplies and hadn’t started hammering down prices on professional services.
• Many clients were still relatively naïve in their use of consultants and there was little competition for their attention, thus little need for service differentiation and business development efforts – ‘sales’ was a dirty word back then.
• Founders of consulting firms were generally experienced (what Maister called ‘grey hairs’) ex-partners from large firms, and there were not that many of them. In contrast, the average age of my interviewees when they founded their firm was 40.
• Small firm marketing targeted its local vicinity and grew only as regional offices began to emerge.
• The ‘grow to sell’ business model was rare for consultancies. Maister, for example, argues the primary reason for firm growth is to meet the promotion ambitions of junior consultants rather than for founders to retire early (although it is debatable whether this was ever true).

Unsurprisingly then, many of the lessons that Maister and Scott provide are now out of date and there is little modern, evidence-based help for small consultancies that want to successfully grow their firms.

The consulting world has also changed in ways that are unconnect...