Three reasons why consulting companies fail

By Jane on 21 November, 2017 • ( 0 )

Hey – where’s everybody gone?

Consulting is a great business. It’s fun, it’s profitable, and it helps people. Evidently, many people agree with me, because they set up small consulting companies. I’ve worked for a good many of them over the years, either as an employee or, more recently, as a sub-contractor. Some of them work out well. A good few are still going strong, 10 years down the line under their original ownership or in their original form. A more common story is that after a period of between five and ten years, the founder members sell the business and make their million.

But many of these small consulting companies fail, and are gone without trace, which is a pity. This article is about why they fail. Here are the three main reasons I’ve seen:

1. Thinking you can be all things to all customers – with just ten consultants.

It’s so hard to focus. The temptation is to list all the skills of all your consultants. And since we have all been round the block a few times, all our consultants have at least three skills. That makes about 30 offerings right there. And the more skills we list, the more likely we are to get work – right? Wrong. If you are ten consultants, or even if you are 100 consultants, it’s not credible to specialise in 30 things. Potential customers have got to know when to pick up the phone. Decide what you want to be known for. One thing. This one thing is what you do. This is what you sell. What people end up buying will, of course, be the multi-talented and adaptable people you are, with your wide range of skills. But unless they know when to pick up the phone. they won’t even be calling you.

“Now he was in business on his own account. He was high end. He didn’t advertise. He was hard to get. He was expensive. He was a true specialist. He only offered one service. All he did was find missing persons.” Description of Terry Bramall, in “The Midnight Line”, the latest Jack Reacher novel by Lee Child. End of Chapter 6.

What happens to consulting companies who try to do it all? They become agencies, selling their people body-shopped by the day. Then the people leave, because why would I want to offer my services through your agency rather than any other? You don’t want this. You want to sell a coherent service which you are known for. Be a true specialist.

2. Having overseas pretensions – “we haven’t managed to corner the market in the UK, so let’s try the USA!”

This is amazingly common. Why do small companies do this? I guess it’s fun to get in aeroplanes and go and set up offices in Tokyo, Chicago or Brussels. If you are a small company director and your fellow board members are talking like this: beware. Try to work out why they are trying to sell consulting services in a country where we don’t have any staff and we can’t speak the business language. Are they bored? Do they simply want to see “London – Paris – New York” on the headed notepaper? The fact that we have one client in Milan is NOT a good enough reason to establish an Italian Office. Overseas expansion is fine as part of a plan, when there is sales effort costed in, a stream of clients in the pipeline, and the legal situation thoroughly explored. But too often I’ve seen setting up the office as “Step One” of the expansion plan. Don’t do that. Get clients, more than one. Get fee-earning staff out there. Service it from the UK if at all possible, for as long as possible. Then, and only then, consider if you really want to go to the trouble and expense of an office, a legal presence, and infra-structure.

One medium-sized consulting company of my acquaintance wanted a ‘presence in Europe’. They set up an office in Brussels, complete with secretarial staff and a Managing Director. The idea was that this MD would sell work and generate a whole new income stream from European clients. Well, he had been very good at selling himself to the consulting company. He was very bad at selling the company’s services to his compatriots. No business came in. After a while the company had had enough, and decided to let the MD go. Then they discovered what they should have known before. It is almost impossible to dismiss staff in Brussels. Belgian employee protection legislation is formidable. That MD stayed on, drawing a salary, and doing nothing, in Brussels, for years. About four years if I remember correctly.

The moral of this story is do everything possible to build a strong business in the UK. You know the regulations. You pay tax you broadly understand. You have the networks. You have income and costs in the same currency. If you are 10 people, the UK is a huge market, almost infinite. You really don’t need overseas clients. Not for the first ten years or so. Focus on the UK until you can afford to lose a lot of money.

3. Hanging on to the ownership – I started this company, it was my idea and no-one else is entitled to have any of it. Hey – where’s everybody gone?

If you are a small company, something to consider is “What is my value proposition to my staff?” The work might be its own reward, but usually that doesn’t quite do it. Consultants, and particularly consultants who can sell, are people who know their own worth. If someone can both sell and deliver business, they can, in principle, manage perfectly well without the company. They can sell and deliver their own business. Or they can go and do that for someone else. So you have to offer them something additional. As the company grows, this might be an equity stake in the company: shares.

At a certain critical size, a consulting company’s success depends on the founder members plus about 2-5 principals, who know the clients, manage the projects, bring in the follow-on business and are trusted by the other fee-earning staff. If these critical people leave, the company fails. So if you are a founder member, you might want to look hard at your business model, and consider how you can stabilise it, so that important staff members have a slice of the financial action, and stay with the company to contribute to its success.

What do you think? What advice would you offer to a small consultancy?