Replicate the Secret of This Highly Profitable Consultancy
Positioning a Consultancy, Business Development in Consulting, Consultancy's Profitability
Most of the time, consulting leaders reach out to me because their firms are experiencing problems: their business growth has stalled, or they keep having to offer discounts to win projects, or they find themselves going through tedious client recruitment processes where their consultants have to follow up on their pitches multiple times.
Of course, that makes sense. I help consultancies grow their business by auditing their positioning to uncover the source of those pain points and then creating a roadmap that will allow these firms to move toward sustainable business development practices.
However, I also spend much time talking to firms that do not need my help. They are hugely successful – they have high profits, their consultants are known as experts, they have low turnover, etc.
I love listening to the stories that leaders in these consulting firms share. It’s an opportunity for me to continuously grow my library of educational content and benchmark consultancies' financial performance.
So today, I’d like to share a story of a mid-size consulting firm I got in touch with not too long ago. Let’s call it Consultancy X.
This firm’s annual revenue per full-time employee is 2-3X the market average. They constantly turn away requests from prospects because they do not fit their narrowly defined area of expertise. In fact, there is a waitlist for Consultancy X’s services. It sounds like a dream. Well, suffice it to say that they do not need my help.
The reason I’m sharing their story? Because the secret to their success is not some superhuman abilities or an immense amount of luck. It’s a straightforward strategy that any consulting firm can adopt and adapt to its context.
Consultancy X at a glance
Let me share a few details about this particular consulting firm:
- Context: It’s a highly specialized tech consultancy of around 40 consultants.
- Annual revenue: €15 million (not too shabby, isn’t it!)
- Blended day rate: 2-3X market average compared to similar consultancies in this field in this market.
- Annual revenue per FTE (consultants): €400k – that’s 2-3X the market average
- Gross margin (=project margin): 60%. Way above the market average of 20-30%
- Marketing and business development expenses: close to zero (apart from the content development, see next point)! They get invited all the time.
- Thought leadership development: 1 person, two days per week + 10% of the owner's time (sharing his leading thoughts).
It’s a truly inspiring case! By any standard, this is a very successful consulting firm. Their project margins are insane, their employees do not feel pressured to win new business no matter what it takes, and their consultants are widely respected for their expertise.
The foundation of Consultancy X’s success
This consultancy achieves such spectacular results because at its foundation is strong positioning that determines all their actions: whom they work with, what projects they take on, how they hire, how they market – everything!
Here are the foundational elements that Consultancy X is doing right (and that other consultancies can replicate).
- They have a narrow focus. Always. They are never tempted to add another service to their list of offerings to win more clients. They deepen their knowledge instead of expanding it into fields outside their narrow focus.
- They have a laser-sharp definition of the target audience and expertise domain. They do not take on implementation work that would require consultants to engage in endless back-and-forths with middle-level management. Their consultants spend 90% of their time working with C-level executives. There are no delays “for getting an approval from senior management”, there are decisive implementation strategies, and there are no delays in payments.
- Their deep expertise is in high demand. Because they were able to carve out a niche and position themselves as the ultimate experts in their narrow field, their services are expensive and hard to get. They always say yes to projects within their narrowly defined domain. Their deep expertise allows them to deliver impressive results for their clients, so prospects come knocking on their door, hoping to achieve similar results with the help of Consultancy X.
“Give people an abundance of confidence in your expertise by creating an abundance of value and share it again and again”. (Seth Godin)
- They never compete on price. Of course not. They are twice as expensive as other firms in the field. No discounts. No exceptions.
- The firm is extremely well managed. Because the positioning is clear and embedded in the company’s culture, consultants do not need to be micromanaged. Processes are efficient. Audience-education-based marketing works like a well-oiled machine. Profitability is the norm.
- The Prospect qualification process is disciplined. Does an incoming request fit Parameters 1, 2, and 3? No? Then that’s a no-go. Nobody in the firm – not senior leadership, not marketing executives, not freshly hired consultants – has a problem saying no to low-value distractions or bad-fit projects. (I was amazed at how stark the comparison was in how the leadership talked about their prospect qualification process vis-a-vis many other consultancies I speak to. No hesitation, no FOMO, just a simple “If they don’t fit these parameters, we don’t work with them.”)
“The more irrelevant you become to non-ideal prospects by turning your positioning away from them, the more relevant you become to your chosen target clients”. (David C. Baker)
- They decoupled value delivery from the effort with smart and highly systematized intervention processes. For them, there’s no direct relationship between revenue growth and headcount increase. Most consulting firms’ revenue is constricted to linear growth because the only way to increase revenue is to increase headcount. This is why so many consultancies struggle to grow, especially with the current labor market challenges.
- They are outcome-driven. Because they work in a narrowly defined field and refuse to take on projects outside of their area of expertise, they benefit from the power of repetition. They can predict the outcomes of their work with a high level of precision. When a consultancy says, “We can deliver a 30-40% increase in X and a 20-30% decrease in costs for Y,” and then actually do it, clients are stunned. Referenceable work is abundant. Past clients know exactly how to describe the value of the consultancy to their network.
- They are very visible in the market. I mentioned earlier that this consultancy consistently dedicates time to sharing its thought leadership. Combined with their outcomes-driven case studies and super specific testimonials from past clients that rave about the consultancy’s abilities, this firm achieved top-of-mind market recognition for their deep expertise.
- They do not have recruitment problems. Because of their market reputation and lucrative remuneration packages, they are profoundly attractive to specialists. Consultancy X has no problems attracting the best candidates. Because of their work-from-anywhere approach, they are not bound by their immediate geography and can recruit top talent from anywhere in the region.
- The consultancy’s leader sets the example. The owner of the consultancy practices what he preaches. As a leading thinker, he prioritizes the education of the target audience. He starts his day with a 30-minute reflection, writing, and sharing inspirational insights.
“Our 60% gross margin target isn’t that difficult to achieve, after all. As long as we keep our narrow focus, repeating similar projects with similar type clients, reducing the variability in process and outcomes, we can remain extremely efficient. (The owner of Consultancy X)
The owner of consultancy X receives acquisition requests at least once per month. Based on everything I’ve shared in this article about their positioning and results, I suppose that shouldn’t come as a surprise.
Recommended reading: With a Recession Looming, Consultancies Must Revisit Their Positioning Right Now
Why can Consultancy X achieve this and so many others struggle?
I know that Consultancy X sounds too good to be true. But that’s because I shared this firm’s journey's results and their laser-sharp positioning – high profits, low turnover, etc.
Getting there requires courage and much determination. Only some have the guts to do that. They put all their eggs in one basket and stayed true to that vision despite others warning them of the risks, despite the temptation to get distracted by quick wins, and despite it taking time to build up the visibility they currently enjoy. They clearly defined and stayed true to their positioning.
This consultancy was able to grow – both in terms of its size and its profits – because the owner had the unwavering belief in what I call ‘the glorious loop to heaven’:
- A narrow focus is the path to the repetition of similar projects.
- Repetition of similar projects is the path to deeper expertise (and more project efficiency and little variability in outcomes).
- More profound expertise is the path to irresistible value for the client.
- Irresistible value is the path to premium pricing.
- Premium pricing is the path to sustainable profit.
- Sustainable profit builds the self-confidence to protect the narrow focus and the funding for continuous investment in developing leading thoughts.
It takes focus, specialization, and authority to stand out in an crowded, highly competitive consulting market with risk-avoiding, impatient buyers who can find anything in seconds. I keep telling my clients: your (focused) competitor is only one click away.
P&L statements reveal the ultimate truth of consultancies’ positioning
It’s possible to ‘blindly read’ a consultancy P&L in the context of positioning, narrow focus, specialization, and value delivery. I’ve done it many times.
Without knowing anything about the consultancy, margins of the well-positioned, narrowly focused, and deeply specialized consulting firm are (with very few exceptions) substantially higher than consultancies trying to be everything to everyone.
The latter consultancies believe that opening their arms wide to everyone can get more business. Unfortunately, consultancies cannot be successful by targeting multiple expertise domains, keeping the options open to protect short-term revenue!
Because of immense competition, there’s too much saturation and too many competitors doing the same thing. It’s a losing battle in profit levels because these ‘jack-of-all-trades’ consultancies are playing in the low-level rate game, beaten up by procurement.
In my experience, if a consultancy hasn’t achieved an irresistible go-to expert positioning in its market, the overall project margins are between ⅓ or even ½ lower than the expert firm high in demand.
As Florian M. Heinrichs, Founder, and CEO of client friendly, points out in the comments section of my LinkedIn post on this subject, the benchmark gross margins for the industry are currently at around 54% based on CSIMarket data – “a number far, far above what "not-so-in-demand" consultancies can reach”.
That’s because of high-in-demand consultancies:
- Charge 2 to 3 times more (they add a lot of premium value)
- Achieve revenue per project substantially higher compared to similar consultancies in similar projects for similar clients
- Earn revenue per FTE of 2 or 3x compared to market averages
- Obtain higher than average project margins (>60) because of premium pricing in combination with extreme efficiency because of repetition of similar projects for similar types of clients)
That’s easy to ‘discover’ in a P&L.
In conclusion: short-term pains for long-term gains
Profit is the ‘side-effect’ of this consultancy’s rock-solid positioning. They stay in their lane. Always.
Sure, it’s easy now when clients are knocking on their doors. But starting out, that meant saying no to paid opportunities instead of drilling down on their expertise.
This is challenging. It meant passing on lucrative projects to stay the course. And that’s why many consultancies choose not to go this route. And that’s why they don’t win big. They just stay afloat.
It’s time for consultancies to face up to the harsh reality. Firms cannot be everything to everyone and hope to be successful.
Trying to target multiple expertise domains (or audiences or industries) will only lead consulting firms down a path of mediocrity and considerable profit erosion.
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Hello, I’m Luk Smeyers, and I’m guiding consulting firms through the journey of growing their business by helping them transform into go-to experts in their market. I have been in consulting businesses for almost 20 years, in very different roles: as European CHRO in a global consultancy, as a startup founder in an analytics consultancy, and as a leader in a 'Big 4' consultancy, post-acquisition of the startup. I had the privilege of achieving global visibility as a consultant and I never had to sell, persuade, or negotiate as a result. I have now bundled all those experiences, expertise, know-how, research, reading, successes, struggles, and failures from managing and growing that visibility in the past years.