Here's a question for every consultancy founder or partner: Why might an oil company drill oil at $90/barrel, even though the average total cost is $100?
Those who are somewhat familiar with economics know that this may happen in real life. The oil company might drill oil at $90/barrel even though their average total cost is $100 in order to keep their marginal cost low. The company gets to keep a higher profit (or reduce losses) by increasing production.
But what does it have to do with consulting?
While most boutique or solo practices keep a lean cost structure, many of you have built your firms just like an oil company: With high fixed costs.
These 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.
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.
Increasing fixed costs may be efficient. But it makes saying "no" more and more painful for you. You might see yourself in the same position as an oil company: Selling your work for less than what it costs.
This analogy doesn't mean you should charge based on cost. For me, the lesson is that every consultant would benefit from taking your cost structure seriously. And, most importantly, investing some time to at least consider the benefits of staying small.
Now, it’s important to also talk about the other side of the issue.
Many consultants are reluctant to sell new projects - even to the point of sabotaging business development tasks - when they're not sure the firm can deliver more work.
This is more common with solo consultants, who completely shut down any business development initiative when they're fully engaged in projects. This poor habit leads to the famous "feast and famine" cycle, the number one driver of stress, anxiety, and poor decision-making.
But even boutique consulting firms face the same challenge. Sometimes partners openly recognize that the fear of not keeping up with demand is pushing them to slow down prospecting efforts. Other times, there's a silent resistance - no one hits their targets anymore, and "lack of time" becomes the favorite excuse to focus exclusively on delivery.
The fact is that, if you want to sell more and bigger consulting work, you and your team need to believe you can deliver your marketing promises on every new project signed. Even when you're incredibly busy.
So I want to finish this by listing different ways you can deliver more work. Some will be better for short projects with a narrow scope, others for bigger projects that require expertise in different areas. Some will require you to invest money or time in it, or maybe you will need to get creative and look for ways your clients can help.
Here are the most common solutions you can use to increase delivery capacity:
The goal is to enhance your delivery capacity while maintaining quality and profitability.
Remember: Profit comes from excess opportunity. If you don’t have the capabilities to sustain a bigger pipeline of projects you will struggle to feed a bigger team. It’s probably wise to limit your capacity and reduce the supply of your services voluntarily, instead of putting yourself in a position where you need any project to keep the business alive.
Here David talks about marketing firms, but I believe the point is valid for any micro consultancy:
"The goal, folks, is not how big your firm can get but how profitable and impactful you can be. And size is not that relevant to either goal. Having more capacity (i.e., a bigger firm) brings additional management pressure, additional financial risk, and additional pressure to keep the sales machine humming. The right size is always this: slightly smaller than the amount of opportunity within reach. That ability to say no - and really be okay with it - is one of the most precious things about running a marketing firm. It’ll keep you sane, more in control, and most importantly it’ll help you exercise that power that comes from withholding your expertise, which is really the only power you have.”
Source: David C. Baker
Whilst firms with a bias towards associates grew marginally faster, firms using a fully employed model made 24% operating profit last year versus an average of 18% for those with an associate model.
Using associates minimizes risk and can be a highly effective way to scale up quickly. However, it comes at a cost. Employees are more likely to have a long-term positive impact on the growth of your business, contributing to both business development and internal projects. The impact on profitability is clear with better margins to be made on employees.
Source: Consultancy BenchPress 2022
Are you ready, willing, and able to quickly bring in contractors or associates to sustain growth? If yes, under what circumstances would you make it happen?
Few consultancies have a clear resourcing strategy - most are reactive and focused on short-term projects. It’s easy to agree how absurd that is once you remember that, in consulting, most of the time the people are exactly what buyers are hiring.