Tuesday, 1 February 2011

The Consultancy Business Model – Does it need reforming?

Consultancy is big business. I'm not just talking about IT Consulting, the sector I work in, but consultancy in general. Finance, marketing, IT, social media – the consultant is king. Consultancy firms charge huge fees to bring in their expertise, previous experience and support structures to help companies with new projects, restructure their organisation, cut costs or integrate new purchases.

I've only been working with Srijan Foundation for a couple of months, but I'm already wondering whether this business model is scalable. And for once I'm not talking about scaling up. How do you scale consultancy down to the smallest businesses and still make it relevant?

I want to point out straight away that I don't think big consultancy is perfect. Far from it. The charge rates for some people are far too high and there is a lot of wastage, but I think that is true for all large organisations and is unlikely to be a solvable issue. What I think is non-debatable though, is that there is no way a scaled down version of the same model would work at the lower end of the scale.

For one thing, the pricing model is all wrong. Small companies cannot and will not afford the luxury of paying for graduates learning their trade on the job. In large consultancy firms, these graduates are charged at 4x-5x times their cost, to recover the cost of their training. They are the “do-ers” while the higher grades are the decision makers. On smaller projects, the ability to “hide” these graduates becomes much lower.
Large consultancy firms also have large fixed costs to cover. HR, finance, legal, etc. all projects have to contribute to these departments and the associated costs of these rise proportionately.

On large projects there is high consultant turnover and members of the same team have often not worked together before...all introducing additional costs.

Is it surprising then, that most small businesses either forego the luxury of consultants altogether, or simply employ one individual on a short-term basis. While I'm sure these individuals are extremely capable, they cannot possibly have the range of resources and skills that a larger firm could.

So with this in mind, I'm wondering if there is a middle-ground. A small, lean group of consultants (all 5yrs+ into their careers) who work in teams of 3-5 at a time. Projects would be short (3-6 months only) and supremely focussed. The smaller size of the organisation should lower fixed costs allowing the charge rates to be significantly lower than the “Big Consultancy” firms – bringing them more into line with the spending power of smaller organisations. The profit margins on these projects can also be lower than required in the bigger firms.

The central resources, such as finance, etc. will work across all projects, instead of having one per account, allowing costs to be cut there too. The nature of the work reduces the need for large office spaces and the whole venture could realistically be run as a virtual organisation.

There is undoubtedly likely to be an element of “cookie cutter” solutions about these projects. While in larger firms the processes tend to be documented and then ignored, in smaller enterprises these processes are either non-existent or unable to be described.Hence the requirement for short, decisive and focussed projects.
Partnerships with other firms, such as recruitment, market research, etc. would enable cross-selling of services where those are required and outside the domain of the consultants.

I don't know if this is feasible, or even already being done, but I think it's an interesting idea. There must be thousands of small businesses looking for “expert” advice but unable to afford the huge cost of an IBM or a PWC (and let's face it, the profit from these projects wouldn't cover one of their expense bills!). At the same time, the “lone-ranger” consultant model seems to lack a number of the benefits of a consultancy firm.

Something for me to consider when I get back from India ;-) Comments and thoughts, as always, very welcome...

1 comment:

Naveen said...

Hi Tim,

Hope things are great at your end.

I was searching on the business model of Consulting firms and there I got your article posted in 2011. In fact, we have started something which matches with your idea, a business consulting firm targeting small & medium companies in India. We are team of 4 people right now and searching for more people to join us. I'll appreciate if you could share your skype id/gtalk id, so that we can discuss further.

skype: naveen.sisodia