How Boutique Consultancies Capture Value
The importance of reviewing your revenue model and cost structure.
This is the last post exploring the components behind the Boutique Consulting Canvas. So far, we've covered:
- The value proposition, your promise of value to clients that highlights how you differ from competitors and alternatives;
- The key resources every consultancy needs to deliver value: your people, IP, market assets, and relationships and partnerships;
- The key processes that leverage those resources: Business development, offering delivery, IP management, and team alignment.
Today, it's time to look at the third and last component of this framework. After creating and delivering value, your consultancy needs to capture part of it. Without this, your business will be neither profitable nor sustainable.
There's no real secret behind financial management. The BCC uses the same components as many other business model frameworks: Your revenue model and cost structure. They are the two drivers of profitability in any business.
The most important questions to ask here are "what" and "how": What are you charging clients for? And how exactly are you charging them?
For consultancies that follow a traditional revenue model, the answers to these are one-off projects and hourly pricing, respectively. Your revenue comes from consulting engagements. And they are priced based on time and materials, or assigned a fixed price based on an estimate of the number of hours.
Of course, this has changed in the last couple of decades. Innovative revenue models are continually brought to market. Some find client adoption. Others end as an experiment.
Now the best-performing boutique consultancies have multiple revenue streams. They go beyond selling consulting, and add training, software and digital products, books and market research, licensing of their IP, and much more. They understand most clients pay for results, no matter how you deliver them.
As for the "how" question, such products naturally led to more opportunities to generate recurring revenue - which in the past was restricted to retainers. Dozens of publications have also attested to a growth in the use of performance-based and value-based pricing in consulting. Of course, every choice has its pros and cons.
We can even find challenger firms in the market experimenting with non-monetary fees, where rewards may also take the form of learning or marketing exposure. These are, however, foreign practices for most consulting clients. If you're interested in exploring those, I highly recommend you tread carefully and hire specialized advisory to discuss how changes can impact the rest of your firm.
Consultants must take their cost structure seriously. I've met several partners who neglect it, and don't even know what their monthly expenses are. As I wrote before, it's basic economics - and that means problems here are largely predictable.
The heart of it lies in the trade-off between increasing fixed costs and building capabilities.
Fixed costs might include full-time employees. Long-term office rent and equipment. Or even your own compensation, if you withdraw a predetermined amount of money from the business every month.
This overhead might be the basis of your competitive advantage, what differentiates your firm from others. But as you build more and more capacity, the pressure to feed it also increases. And now you're tempted to accept any opportunity that comes your way just to keep that machine working.
To sustain premium prices and high profitability, you should always aim for a disproportionate amount of demand when compared to your capacity. How to make this work? That's one of the goals of performing a business model review.
I hope the last posts exploring the Boutique Consulting Canvas were helpful to you. Now it's time to cover new topics and ideas here. If you're planning to perform a major change to your consultancy and need specialized support, feel free to reach out.