Why 'Hiring to Scale' Is a Losing Battle for Mid-sized Consultancies
Consulting Leader’s Quality of Life, Consultancy's Profitability
The other day, I came across a consultancy that proudly stated to be experts in “strategy, digital transformation, data analytics and sustainability’.
My first thought was: how can such a relatively small group of people (around 50 employees on Linkedin) cover and deliver all these complex expertise domains?
Unfortunately, this is not the only small- to mid-sized consultancy that I’ve come across that offers a buffet of services across multiple expertise domains.
I audited the positioning and did business reviews for many such firms. And the reason for this diversity in offerings is mostly quite simple – they hire and diversify to scale their consulting business.
In this post, I’ll discuss why I consider a 'hiring to scale' a losing battle for mid-sized consultancies that threatens to sink even the most agile firms.
The downward spiral of the linear ‘hiring to scale’ growth model
The linear growth model is one where revenue is directly proportional to headcount.
It’s a traditional consulting growth model that, in this day and age, has become an unsustainable relic for small and mid-sized consultancies.
How so? The answer is two-fold.
First, hiring top-tier talent has become extremely difficult. Especially these days, when so many firms are taking advantage of hiring remotely. Recruiting and retaining the right consulting experts is no easy task for consultancies that do not have a strong reputational footprint in a niche field.
Furthermore, clients are more cautious than ever. They are no longer impressed by the long list of services offered by a firm. They want to maximize the value they get for their money. Big names no longer impress them.
Decision-makers on the client side are after deep expertise. They often have deep expertise themselves. From external advisors, they want transformational results, which buffet-style firms can rarely deliver or, for that matter, convince the clients of their ability to deliver such results in the first place.
On top of that, talent is scarce and the competition is fierce. To stand out in the marketplace, consulting firms need to impress their target audience with exceptional levels of expertise before they even get to the negotiating table.
Adding new services and adding more employees as a result does nothing for the profit margin. To the contrary, more often than not, those numbers take a dive. Sure, on paper, revenue often shows growth.
But that doesn’t mean that consulting leaders, owners, or employees are making any more money. And, in the long run, even the revenue risks to go downhill as the firm finds itself increasingly unable to compete against lean, specialized firms.
In the end, hire to scale - relying solely on adding more consultants to the payroll to boost revenue - can quickly become a one-way ticket to stagnation, poor profit, and bad quality of life.
Many years ago, I told myself: “Luk, you either specialize and stand out in the very crowded consulting market or you’d better start looking for a regular job”.
Numbers don’t lie
Here are a few numbers from consultancies I’ve worked with over the years.
- Gross margin difference between focus/specialized and generalist data & analytics consultancy: focus/specialized >65%, generalist <30%
- Revenue per FTE per year: spectrum from 450k (specialized) to 50k (unfocused). Amazing differences!
- Cost of sales for the focused/specialized: on average ⅓ to ½ lower compared to unfocused
- Win rates: focus/specialized >70%, generalist <25%
- Contract closing: from a few days or weeks (focus/specialized), to multiple months (generalist)
- And other substantial differences regarding team retention, client retention, client satisfaction, forecast stability, non-fit disqualification, etc.
Recommended reading: Why Variation in Consulting Does Not Sell
Adding contractors doesn’t solve the problem
“But what about adding contractors? They are not on the payroll and they allow us to scale up or down depending on the project pipeline.”
Sure, adding contractors and freelance professionals to the roster does provide firms with some flexibility, but it doesn’t really solve the problem, now does it?
- Great contractors are difficult to find and even harder to get exclusivity from. They often have multiple jobs and, due to their level of expertise, are able to charge solid rates. Why would they want to put all their revenue in the hands of a single consultancy?
- It may feel less risky to grow revenue by hiring contractors as they are not on payroll, but how does it contribute to the bottom line? All the consultancy is doing is adding a (small) fee markup.
Sure, I get it, we live in the gig economy. And there are a ton of advantages to that. Combined with the massive increase in popularity of work-from-home models, employers – consultancies included – have the freedom to hire talent from around the world.
However, counting on contractors for long-term growth is unsustainable. It’s one thing to hire a freelance professional to perform a very specific marketing function – e.g., social media management, design of collaterals, etc. It’s very different to hire a contractor to deliver a new type of service to clients.
Quality of life takes a plunge
Last but not least – the quality of life of consulting owners, leaders, and team members get negatively impacted by the ‘hiring to scale’ growth model.
The more services a firm offers and the more consultants and marketers the firm hires as a result, the harder it gets. Profit margins are not growing. In fact, more often than not, one of the services carries a bulk of the profit margins, which then get diluted when spread out across the entire consultancy.
The Jack of all trades in consulting has a dark future! (and your competitor is only 1 click away!) (and client loyalty is at an all-time low)
Due to the lack of deep expertise and established reputation on the market, this consulting business is stuck in execution mode – taking on projects that get billed by the hour.
Typically, such work does not allow firms to charge premium fees. Again – on paper, revenue grows. But margins decrease.
So what is the outcome? Everyone is stressed.
- Consulting owners keep trying to add more and more services or re-shuffle employees (which most of them dislike), or constantly worry about getting more clients in the super competitive consulting ecosystem.
- Consulting leaders are constantly pressured by owners to deliver more work, to get it done faster, to get it done cheaper, to chase new projects without strict disqualification.
- Team members – both consultants and support staff – have to deal with the pressure coming from consulting leaders. They are overworked, resources are stretched thin, they feel undervalued. Turnover is at risk. Consulting owners get stressed. And the vicious loop is now complete.
How to grow a mid-sized consultancy in a sustainable, truly profitable way
A lot of the diversification hassle in consulting firms is just a legacy problem of thoughtless adding new services in the past because the leaders believe they can make more money, fish in a bigger bowl, say yes to almost everything, and protect themselves from economic risk.
However, high-performance consultancies have created a blueprint to achieving growth in a sustainable manner and increasing their profit margins over time.
Yes, they grow their headcount over time as well, but it is done to keep up with the demand for their work – not to add more revenue streams through service diversification.
Mid-sized consultancies still reliant on selling downstream work (‘activities’) in a multitude of expertise domains need to rethink their consultancy model from the ground up.
They’d better shift their focus towards selling comprehensive problem resolutions instead of order-taker services.
The non-linear growth of high-performance consultancies
High-performance consultancies sell transformational outcomes – not availability.
In my experience, they are known for a very narrow expertise domain and they are known as being the best at that. I’ve seen it many times, they are able to charge 2x, 5x, 10x more for their work because the results they deliver are exponentially more valuable.
Within their scope of expertise, they are able to diagnose a problem with laser-like precision, show how that problem impacts their clients on a larger scale, provide expert advice on what needs to change and how in order to resolve the problem, and show how this transformation can impact the business KPI’s of the client.
They deal with C-level executives as opposed to exchanging hundreds of daily emails with middle management and getting measured on hours performed Instead of delivered outcomes.
And why are their margins so high? In addition to the premium fees that increase revenue, they are able to significantly decrease their costs.
Repetition is the key to optimization. Working within the same narrow expertise domain day in and day out allows them to set up highly efficient systems.
Due to the reputation they are able to establish on the market for excellence, they tend to have their pick of the top talent. They are also better at retaining that talent because the work environment does not have the same level of stress as at non-specialized firms (and if it does, they are able to at least compensate their staff at a MUCH higher rate).
Their client acquisition costs are low – their reputational footprint does most of the heavy lifting.
Recommended reading: (Case Study) How This Consultancy Cut Back 30% of Its Services Yet Improved Profitability
Making the transition
For mid-sized firms that want to step away from the linear growth model and transition into the expertise-driven model of high-performance consultancies, I recommend the following:
- Productizing or ‘packaging’ repetitive consulting projects (creating IP). This will enable firms to optimize processes over time, develop deeper expertise, and reduce the client acquisition time.
- Setting up attractive pricing models where fees are more determined by the value or the measurable results achieved. This would require thoroughly analyzing past work and determining the types of projects that deliver most tangible results for clients.
- Switching to retainer or even subscription-based agreements, providing ongoing support for a fixed fee. This will take much of the revenue-generation pressure off and add predictability to pipeline forecasting and management.
- Selling outcomes as opposed to projects or (hourly paid) availability. It’s a nightmare for marketers and consulting leaders to sell all sorts of projects – business development and marketing are totally inefficient, the sales cycle tend to be longer, the win rate are much lower, and it’s resource-draining. Selling outcomes, on the other hand, is about selling the overall value of work and its transformational impact. When backed up by social proof in the form of case studies, word of mouth and thought leadership pieces, that’s an easier sell!
I urge mid-market consultancies to rethink the traditional ‘hire to scale’ consulting model and embrace non-linear growth. ‘Hiring to scale’ is an outdated model that may fool consultancy owners into thinking the firm is growing but, sooner or later, will negatively impact the revenue and profit margins.
If a consultancy can effectively decouple value delivery from headcount increase, it’ll be much easier to position itself as a competitive force in the crowded mid-sized consultancy market.
A new era – where business growth, monetary success, and quality of life are determined by the demand for highly specialized services that deliver transformational outcomes and tangible results.
Hello, I’m Luk Smeyers, and I’m helping mid-sized consultancies become high-performing consulting firms. I have been in the consulting businesses for more than 20 years, in very different roles: as European CHRO in a global consultancy, as a founder of a mid-sized analytics consultancy, and as a leader in a 'Big 4' consultancy, post-acquisition of my consultancy. I had the privilege of achieving global visibility as a consulting leader, 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 advising consultancies in the past years.