(Case Study) How This Consultancy Cut Back 30% of Its Services Yet Improved Profitability

Last year, I worked with a boutique HR consultancy. The consultancy approached me to help them reposition in their market. 

One of the three partners retired the year before. The two remaining partners had to go back and reassess the state of the business and decide whether the services offered by the retired partner and his team of consultants should be kept as part of the service portfolio or phased out.

They made the difficult decision to gradually eliminate the retired partner’s set of services from the portfolio. My job was to conduct a business review and help the consultancy sharpen their new market positioning.

It’s a fascinating case study where a firm actively chose to reduce its service portfolio yet came out on top in terms of profits. 

Since I see so many consultancies going the opposite direction – adding more and more services in an attempt to maintain growth – I thought it would be important to share the story of this particular high-performing consultancy that did the opposite: reducing services.

A bit of history

In 2006, the two partners founded the consultancy. Due to their similar experience backgrounds, their narrow positioning was in the field of rewards, compensation, and benefits.

In 2012, they brought on board a 3rd partner. He was an ex-CHRO. Due to his experience and network connections, he was brought into the consultancy to develop HR services as a part of the service portfolio. These included HR strategy, organizational design, performance management, and employee training and development.

By 2021, the consultancy’s size and revenue could be summarized with the following numbers:

• 38 consultants in total – 28 in rewards and compensations, 10 in HR
• Revenue was just under €6M.
• The rewards and compensations team was bringing in 70% of the revenue. The HR team – 30%.
• The gross margin was 34%.
• The net profit was 14%.

In 2021, the third partner retired. Partners 1 and 2 no longer had someone leading the HR services for the consultancy. 

So before promoting someone internally to take over this section of the consultancy, which, for many consulting firms, would’ve been the natural step to ensure continuity, the two partners decided to analyze the consultancy’s performance with and without the HR service offerings.

As they looked at the entire past 15 years, the consultancy’s revenue has clearly been on an upward trajectory. However, once the HR services were added to the mix, despite the growth in revenue, the gross margin and net profit declined.

Faced with the harsh truth of the numbers, the two partners decided to phase out the HR services from the consultancy’s portfolio by declining any incoming requests and simply wrapping up ongoing/legacy projects over the next 18 months.

Recommended reading: The Way a Consultancy Manages Its Pipeline Is the Way It Manages the Consultancy

Updating the consultancy’s positioning

Once the decision was made, the two partners contacted me. They wanted my help with assessing their business and crystalizing their new positioning.

I loved working on this project. So often in my work I am brought on board because a consultancy’s growth has stalled and I am the one who has to break the news to them that it’s due to the unfocused nature of their services. 

In this case, on the other hand, the consulting leaders already made the decision to narrow down their focus. They already did the math and, most importantly, believed the math. 

I’ve met plenty of consultancy owners who, when faced with the same numbers, would’ve still refused to actively cut out 30% of their service offerings!

Together with the two partners, we went back to the drawing board. We looked at projects that had the highest gross margins. We looked for common elements until we narrowed it down to the list of exactly what type of work completed for what type of clients yielded the highest returns. 

We collected case studies from over the years and testimonials from past clients, looking for pain points that required the most expertise depth. 

Finally, we talked to existing clients to gain an in-depth understanding of why they picked this consultancy over others – which messaging resonated the most.

Armed with this information, we created new market positioning for the firm. Upon my advice, the two partners took it for a test drive and ran it past various past and current clients as well as a few prospects.

It worked.

The new positioning significantly narrowed the focus of the offered services. It refocused on the original expertise foundation of rewards, benefits, and compensation – the field that was delivering the highest gross margins and net profits.

Old vs. new positioning

So why was the HR part of the service portfolio posting significantly lower returns?

There are several reasons:

• It had generic positioning in the marketplace. There was nothing to differentiate the services offered under the HR umbrella from hundreds of other HR consultancies of all sizes;
  
  
• All work completed in this field was project-based. That means to keep the business going, the HR consulting team had to constantly apply for projects and try to win them with no real differentiator. It comes as no surprise that the win rate was rather low, given the deadly competition in the HR consultancy space;
  
  
• Because it was so much work to win every new project, the overall cost of acquisition was high;
  
  
• This all led to an unreliable pipeline. It was close to impossible to accurately forecast the pipeline of work and revenue from this side of the business, which made resource allocation all the more difficult;
  
  
• Finally, in order to compete, the consulting leader who was heading this part of business consistently offered discounts, which contributed to the poor margins and profitability.

Their reward business, on the other hand, held significant growth potential. Here are just some of the indicators:

• It allowed the firm to transition back to specialist (narrow) positioning in the market, and capitalize on the existing strong reputation in the market;
  
  
• A large chunk of revenue was delivered by a retainer business model. This made it significantly easier to forecast revenue, which, in turn, translated into revenue stability and staffing predictability;
  
  
• Due to the strong reputation of the firm in the field of rewards, prospects were reaching out to the consultancy – new business was predominantly inbound and organic and existing clients stayed with them multiple years. As a result, the cost of acquisition was negligible;
  
  
• The deep level of expertise in the field allowed the consultants to deliver high-value outcomes for clients, which gave it the ability to charge premium fees – resulting in strong gross margins and profits.

In summary, the rewards business was subsidizing the HR business for years. And it was time to put an end to it.

"Achieving a laser-sharp, differentiating positioning as a consultancy isn’t easy to achieve and it can feel really scary. Positioning your service is deciding what your service is, for who it is, what prototypical problem you solve, and what specific impact you can have.

But apparently, in the consultant’s mind, it seems ‘safer’ to be just like everyone else. Let me challenge you with this logic: if your consultancy resembles all other consultancies, it is more likely to fail. If you really want the ‘safest’ option, just go get a job."

The outcome of eliminating 30% of the services

As explained earlier, the two partners decided to fade out the HR services by only completing ongoing and legacy projects and not taking on any more clients in this field.

Within 18 months, they managed to almost completely eliminate this function.

This, in turn, opened up resources to allocate towards the rewards, compensations, and benefits side of the consultancy. Within this space, they added a subscription-based product of offering salary benchmarking to clients.

As a result of this internal restructuring and shifting gears, the consulting firm’s revenue decreased in 2022 by €850K.

“Oh no! That’s a 14% revenue drop, how terrible!” some may think. 

That is until we get to the numbers that show the real picture:

• Gross margin end of 2022: 43%.
  • that’s a €200K increase (€2M in 2021 → €2.2M in 2022)
  • this is a 10% improvement
  • ‘23 target is to get it >50%
    
    
• Net profit end of 2022: 19%
  • that’s a €138K increase (€840K in 2021 → €978K in 2022)
  • this is a 16% improvement
  • ‘23 target is to land around 25%

Despite substantial revenue loss, margin and profit improved considerably in 2022! 

This is the truth about high-performing consultancies. It’s not about the number of clients or the number of services they boast. It’s about the ability to charge premium fees while significantly reducing costs. 

And for consultancies with a narrow focus, the costs will inevitably go down over time. 

Repetition allows for the creation of efficient systems and processes, as well as automation. Project completion time gets reduced. The depth of expertise grows and so does the value to clients. New hires are trained with stronger efficiency. Client acquisition costs reduce as more and more work is delivered by returning clients and referrals. It’s a glorious loop to heaven! 

"What consultants need is the confidence that "the void" that is created by saying no, becomes an opportunity to do things that bring them further and closer to what they want to do. And with that comes the confidence that something else will come along, because they're worth it". (David Ducheyne, founder of Otolith Consulting)

Recommended reading: (Case Study) Replicate the Secret of This Highly Profitable Consultancy

In conclusion

As consultancies strive to grow, most of them are tempted to add new services to their offering. I get that.

However, service expansion can quickly lead to a dilution of expertise, increased costs, and reduced margins and profits. I’ve seen this time and time again. 

That’s what happened to my client too. While the addition of the new HR services in 2012 attracted new clients and revenue, the consultancy learned they were unable to charge premium rates for the HR services, had to chase new business all the time or deliver the same level of expertise as their core reward service offering. 

Luckily, they were able to get back to their foundational expertise and reposition the firm, putting it solidly on the trajectory of turning it into a high-performing consultancy. 

I have no reason to doubt that the margins and profits that they target in 2023 will be achieved!

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