The journey of a consulting firm

6 min readAug 21, 2022

The life-cycle

The firm starts unassumingly — A consultant works on an interesting project and gets paid for their time. They do something that challenges the way it’s been done. It’s is fun. It’s liked. They do more projects.

Patterns start to form. It finds more people who think the same way. It’s become a firm with an expertise in an area — a style it is known for. It gets more of similar work. It’s also fun. Different challenges, different fun.

One day the firm realises, many firms are doing the same thing. It is so busy doing the different thing well, that the different thing is not so different anymore. Clients are now looking for lower prices. Or are looking for something different someplace else. It’s takes a step back to reflect.

On industry and craft

It’s focused on one product with one client at at a time. However, clients inevitably leave and new ones come by. In the longer term its business is with an industry not with a client.
It’s believed that craft sells. However, a craft without an industry dies quickly. And it’s in the perfect place to evolve the craft to be relevant to industry.
Industries are like rivers. What is new and bespoke today, will in a couple of years become a service, and by the end of the decade be automated. This cycle takes between 5–10 years based on the industry.
Firms settle at different points in the river: The leading edge of the industry, the expert middle of the industry, or the automating end of the industry.
Firms need to swim upstream, to stay at a point in the river. The partner looking ahead to upcoming work and preparing the firm for it. The leads anchoring delivery in their teams. The team honing their skills.

On profit and growth

Unlike a product company, a consulting firm doesn’t create products that can create disproportionate value. So the metric of the health of a consulting business is margins and profitability. It’s a challenging one.

There’s 4 factors to Profitability — partners, fees, team, and time. And three ways to increase profitability — Increase fees per project, reduce cost of teams, or increase volume of clients.
Increasing fees per project can be done by adding more valuable capabilities or services in the team and upselling them. This helps the firm be relevant in the industry in the long-term as well.
Reducing cost of teams can be done if the partner and leads are able to spend lesser time on execution and delivery of work. Since their time is more billable, when their hours are spread across more projects, the cost of a team on each project reduces.
Increasing volume of clients without increasing team size is the hardest of all. Consulting is a resource constrained business. It doesn’t have the scaling properties that digital products have. Innovating tools internally that may help automate significant parts of the teams work. Although if this is done, it is better off as a product business than as an internal tool.
Firms are two-sided market places. They need to attract good talent into their teams, and well paying clients who value it. If either side doesn’t work well, the firm starts a downward spiral.
Increasing team size does not help make a consulting firm more profitable, without changes to project fees, team cost or clients per team. However a larger firm is more resilient to economic downturns and buy-outs. And a good brand helps attract talent and clients.

The decision

So at this point, the firm has a couple of choices to make. Which river does it want to swim in? Where in the river does it want to swim? There’s no right or wrong choice. It’s equally important for all industries that there be firms at all these points along the way.

A — End of river

The firm in the story at the moment finds itself near the automating end of the industry. It can choose to be here. The waters are slower and calmer.

Clients/Industry [10–100]: Clients are able to do it themselves. They know what they are building, and are looking to increase bandwidth rapidly or boost velocity at low cost. They are trying to save money.
Partners: What processes are companies trying to make efficient? What new frameworks and templates have been created that can be applied more efficiently?
Leads: How do I anchor multiple projects at the same time? Compete with internal teams on efficiency.
Team: Teams without a lot of expertise or experience are able to work on the projects and deliver at quality and speed.
Fees: Low profit margin, high volume, highly leveraged teams
Compensation: Based on efficiency

B — Middle of river

The firm might choose to swim upstream to be at the expert middle of the industry. The waters may look calm but will be quite chilly and flowing fast. It will need experts to swim through them.

Clients/industry [1–10]: Might have seen something new work in the industry and need help with applying it to their context. Scale Product, building internal teams, looking for a brand or partners with reputation to unlock scale. Augment internal teams. They are trying to save time.
Partners: What capabilities are client companies and products trying to build internally? How do we build those capabilities in the firm? How do we demonstrate new capabilities to new clients?
Leads: How do we anchor delivery? While improving quality and speed of delivery?
Firm: A well known bran with 20–200 people. A partner will head smaller teams of 10–20 people divided into pods. Multiple partners or directors together lead the larger brand. Each partner anchoring a different capability / office / vertical for the firm.
Fees: Moderate profit margin, moderately leveraged
Compensation: Based on experience, quality and brand building
Examples: Pentagram, Mckinsey

C — Start of river

For a firm to be here, it will need to reinvent itself quite a bit. The waters are quite choppy and dangerous. It takes mastery and courage to swim through them.

Clients/industry [0–1]: Clients are hoping to reinvent industries and need similar master navigators to support them through high ambiguity, and chaos. They are trying to make money.
Partners: What whole new technologies or products are companies trying to build? How do we get new clients? Are involved in strategy and diagnosis for the client and may be involved in a large part of execution.
Leads: Operate autonomously, at speed, and quality, be multi-disciplinary
Team: Often quite small — 5–20 people. This helps the firm be agile and be able to adapt quickly to changing circumstances.
Fees: High profit margin, low leverage
Salaries: Profit sharing
Examples: AJ&Smart, Clearleft

Resources

This is my current understanding. Very little is original thinking here. This writing is me connecting the dots for myself. Through borrowed concepts from many readings, googlings, and conversations: