I’m always giving consultants a hard time. It’s not that I dislike consultants. It’s not that I think that consulting is a bad business model. It’s that a consulting model is very difficult to get exponential growth. You know that hockey stick growth curve, well it’s actually an S-curve but early it looks like a hockey stick, that is so important. I’m talking about real numbers, not projections. Revenue. Users. Customers. (Need help figuring out what you should be tracking? Go read Dave McClure’s AARRR! Startup Metrics for Pirates). And go read Mark MacLeod about why compound growth changing your funding requirement.
Consulting is a linear growth business. It grows based on:
- # of consultants billing
- # of billable hours
- hourly rate
Unfortunately, all of these are limiting variables. There are examples of very profitable firms and corporate structures that enable a very profitable model. I’m not discounting the profitability of the Big5 consulting firms. Consulting firms are generally limited to the number of consultants. Corporate culture are defined by the people.
The number of billable hours is a limiting factor. There are only 8760 hours in a year. You can’t work every hour. You can’t bill every working hour. It’s just not possible. Billable hours are the currency of consulting and legal firms. Many firms require 1700-2300 billable hours/year. Just think about this: 2300 hours/year = 46 billable hours/week + 2 weeks of vacation. If you assume a 80% utilization rate, i.e., 80% of your time is billable and 20% is on overhead/email/meetings/etc. To achieve 46 billable hours you need to work 57.5 hours per week.
Hourly rate is generally set by the skill set and the market. Flippa. Rentacoder. 99designs. crowdSPRING. Elance. There are others willing to do it for less.The market determines a consultants hourly rate.
So for an independent consultant billing at $200/hour on a 57.5 hour work week at 80% utilization would have revenues of $460,000/year. This is an extremely high rate. Looking at the NASDAQ 100 using Cognizant averages $35,892 versus Apple ($1,014,969), Ebay ($551,049), Microsoft ($663,956) and others. This might be a little extreme. Don’t believe me, Hoovers.com suggests that IT/software consulting has average revenues of $160,000/employee (MarketResearch.com has this closer to $100,000/employee). Realistically the easiest way for a consulting firm to achieve exponential growth is to grow to the number of consultants working. And the risk of exponentially growing the number of consultants is that you kill the culture that attracts many people in the first place.
“But isn’t the consulting company itself startup? No, not generally. A company has to be more than small and newly founded to be a startup. There are millions of small businesses in America, but only a few thousand are startups. To be a startup, a company has to be a product business, not a service business. By which I mean not that it has to make something physical, but that it has to have one thing it sells to many people, rather than doing custom work for individual clients. Custom work doesn’t scale. To be a startup you need to be the band that sells a million copies of a song, not the band that makes money by playing at individual weddings and bar mitzvahs.” – Paul Graham
That said, consulting is a great way to take the risk out of a startup. The best consulting projects are the ones where you can build the software you want to sell as a product. This assumes that you have necessary legal agreements where you retain ownership of the intellectual property created during the consulting gig. This is often referred to as “bootstrapping” (read Paul Graham’s Fundraising Survival Guide to understand the tradeoffs).
There’s nothing wrong with consulting. It’s a perfectly viable career. It’s a perfectly viable business model. But do the math, it doesn’t scale like a product company.
Your math is why I quit consulting for a big firm after I worked my way up to a senior level over a decade.
I work (a lot) less now as an independent consultant, make a decent living, but revenue I earn is not going into overhead and partners’ pockets. And .. I enjoy myself one hell of a lot more.
Your math is why I quit consulting for a big firm after I worked my way up to a senior level over a decade.
I work (a lot) less now as an independent consultant, make a decent living, but revenue I earn is not going into overhead and partners' pockets. And .. I enjoy myself one hell of a lot more.
You can have a hockey stick growth in consulting. We managed to be doubling the company size over 7 year period at my previous job – it was quite a hockey stick.
It does not necessarily have direct impact on culture. Exponential growth kills quality of the service – and this impacts morale directly. This is one of the reasons we have started up fresh.
You can be a startup in consulting business as well, I believe. The problem is with scalability, I agree. It just takes the first company to tackle this issue. I trust we are well on our way… There were times when people assumed they can not really fly, while few stubborn folks kept trying ;)
You can have a hockey stick growth in consulting. We managed to be doubling the company size over 7 year period at my previous job – it was quite a hockey stick.
It does not necessarily have direct impact on culture. Exponential growth kills quality of the service – and this impacts morale directly. This is one of the reasons we have started up fresh.
You can be a startup in consulting business as well, I believe. The problem is with scalability, I agree. It just takes the first company to tackle this issue. I trust we are well on our way… There were times when people assumed they can not really fly, while few stubborn folks kept trying ;)
I’m sure I read somewhere that the Big 5 and/or lawyers actually aim to bill out more than the physical number of hours available. That said, they may take the number of hours to be something like 365*10=3,650 then bill out at more than 100%, after all there is the rounding up of 7 min intervals ;-)
I'm sure I read somewhere that the Big 5 and/or lawyers actually aim to bill out more than the physical number of hours available. That said, they may take the number of hours to be something like 365*10=3,650 then bill out at more than 100%, after all there is the rounding up of 7 min intervals ;-)
Ivan,
You doubled company size? Or you doubled revenues over 7 years? Was it exponential growth (x < 2x < 4x < 16x < 256x < 1024x) or linear revenue growth (x < 2x < 4x < 8x < 16x < 32x)? What were the margins?
Ivan,
You doubled company size? Or you doubled revenues over 7 years? Was it exponential growth (x < 2x < 4x < 16x < 256x < 1024x) or linear revenue growth (x < 2x < 4x < 8x < 16x < 32x)? What were the margins?
I thought it was 6 minute increments that way you get 10 bill chunks per hour.
And seriously, Big5 firms assume a 100% utilization? Yikes.
I thought it was 6 minute increments that way you get 10 bill chunks per hour.
And seriously, Big5 firms assume a 100% utilization? Yikes.
I was referring to headcount. It was linear for first years and spiked towards the end. Did not last long though.
Can not tell for the revenues, but I guess margins were dropping synchronously within period of exp growth.
Discl: it wasn’t in Canada and the market was growing as fast back then. So, for me the difference between product and services companies is that product ones create the demand, whereas the latter follow it.
I was referring to headcount. It was linear for first years and spiked towards the end. Did not last long though.
Can not tell for the revenues, but I guess margins were dropping synchronously within period of exp growth.
Discl: it wasn't in Canada and the market was growing as fast back then. So, for me the difference between product and services companies is that product ones create the demand, whereas the latter follow it.
I think there’s a different growth curve for consulting. Might blog this. But it’s very easy for a consulting company to get to 100-500K/yr in revenue in a few months. It’s VERY hard for a startup to do the same.
Realistically, the ideal scenario for a consulting company is to do 1.5-2.5MM/yr with 5 employees and the CEO/MD pulling in roughly 500K-1MM/yr personally on a 40-60 hour work week. It’s not bad, and it’s something most startups would kill for, but it’s not a 100MM exit either.
Granted, a 100MM exit where the founder owns 5%, and only walks away with 3MM after taxes after 5 years of work is… well, about what the above MD would get in his own consulting shop.
I think there's a different growth curve for consulting. Might blog this. But it's very easy for a consulting company to get to 100-500K/yr in revenue in a few months. It's VERY hard for a startup to do the same.
Realistically, the ideal scenario for a consulting company is to do 1.5-2.5MM/yr with 5 employees and the CEO/MD pulling in roughly 500K-1MM/yr personally on a 40-60 hour work week. It's not bad, and it's something most startups would kill for, but it's not a 100MM exit either.
Granted, a 100MM exit where the founder owns 5%, and only walks away with 3MM after taxes after 5 years of work is… well, about what the above MD would get in his own consulting shop.
I can’t say I know for sure about the Big5, however how long before the 6
min billing period moves to per second? !
I can't say I know for sure about the Big5, however how long before the 6
min billing period moves to per second? !
Now that’s a very look on this. How many young consulting firms have CEOs/MDs pulling in $500k-$1M/yr personally on 40-60 hr work weeks? I’ll sign up to run that firm.
Now that's a very look on this. How many young consulting firms have CEOs/MDs pulling in $500k-$1M/yr personally on 40-60 hr work weeks? I'll sign up to run that firm.
Was more saying that’s the ideal growth curve. The “young” shops, though, will get to a “reasonable revenue” point typically faster than a product company will (call it 500K/yr).
But product shops will eventually eclipse the consulting company… though the owner normally gets diluted in the process. A services business is almost always a lifestyle business anyways, it’s about what you bring in for how much you work. And if you can jiggle it so you earn enough that you’re more than happy by working less than you would in a startup? It’s not a bad deal, until you get the itch to build again ;-)
Was more saying that's the ideal growth curve. The “young” shops, though, will get to a “reasonable revenue” point typically faster than a product company will (call it 500K/yr).
But product shops will eventually eclipse the consulting company… though the owner normally gets diluted in the process. A services business is almost always a lifestyle business anyways, it's about what you bring in for how much you work. And if you can jiggle it so you earn enough that you're more than happy by working less than you would in a startup? It's not a bad deal, until you get the itch to build again ;-)
Good post and nice chart. It’s worth adding that exponential growth is hard to get anywhere in anything. I agree it’s impossible for consultants given your math, but it’s also improbable no matter what your startup is or does.
The growth curve for consultants is ponzi-scheme-y. You hire more junior consultants, take money off the top, and grow your wealth that way. It’s not exponential either (again, exponential growth is fucking rare) but it does have a trend line with characteristics very different than one consultant working alone.
The thing about consulting is the odds of making a decent living are probably better than forming a startup. It’s less risk and more predictable, and along for the ride is smaller growth and no probability of being set for life :)
Good post and nice chart. It's worth adding that exponential growth is hard to get anywhere in anything. I agree it's impossible for consultants given your math, but it's also improbable no matter what your startup is or does.
The growth curve for consultants is ponzi-scheme-y. You hire more junior consultants, take money off the top, and grow your wealth that way. It's not exponential either (again, exponential growth is fucking rare) but it does have a trend line with characteristics very different than one consultant working alone.
The thing about consulting is the odds of making a decent living are probably better than forming a startup. It's less risk and more predictable, and along for the ride is smaller growth and no probability of being set for life :)
While I agree with most of what you say, it is possible to attain more revenue than the limit on billable hours. I frequently quote jobs on a value for finished product, ( business plan, sales plan, investor ready plan etc) and not on time billed. I find it keep me focused and the client likes to get something for a fixed price ( especially start-ups with limited cash flows). I find I can then handle more clients and actually bill more than my hours. It get into being paid for what you know and not how many hours you spend. Both the client and I win.
That being said, there still is a finite sum I can earn which is far below a product model.
While I agree with most of what you say, it is possible to attain more revenue than the limit on billable hours. I frequently quote jobs on a value for finished product, ( business plan, sales plan, investor ready plan etc) and not on time billed. I find it keep me focused and the client likes to get something for a fixed price ( especially start-ups with limited cash flows). I find I can then handle more clients and actually bill more than my hours. It get into being paid for what you know and not how many hours you spend. Both the client and I win.
That being said, there still is a finite sum I can earn which is far below a product model.
There are ways that consulting firms can productize their offerings. AdaptivePath and NielsenNormanGroup run events and conferences (this doubles as marketing and brand elevation). They also sell reports.
Optimizing your time by using fixed bid pricing for services also works. The model presented above does not allow for any other creative accounting like an equity for services swap when working with early stage companies. There are ways to change the slope of the growth curve for consulting shops, but it probably doesn’t change the scale (y = mx + b).
There are ways that consulting firms can productize their offerings. AdaptivePath and NielsenNormanGroup run events and conferences (this doubles as marketing and brand elevation). They also sell reports.
Optimizing your time by using fixed bid pricing for services also works. The model presented above does not allow for any other creative accounting like an equity for services swap when working with early stage companies. There are ways to change the slope of the growth curve for consulting shops, but it probably doesn't change the scale (y = mx + b).
Amen! Having been there, done that, I would say that David got it perfectly.
Amen! Having been there, done that, I would say that David got it perfectly.
Agreed. Exponential growth should not be discounted for anything. Consulting. Sales. Revenues. Users. All very difficult to achieve.
Agreed. Exponential growth should not be discounted for anything. Consulting. Sales. Revenues. Users. All very difficult to achieve.
I worked at the Boston Consulting Group in Toronto and I can tell you they don’t aim for 100% utilization. A good rate in good tiems is more like ~75%. The way to scale is to charge more and more and turn your consultants into “stars” through business books and high visibility (and successful!) assignments with the largest companies.
I now started my independent consulting firm focused on tech ventures only (plug: http://www.growthroute.com) and I completely agree with David that to scale exponentially, you need to productize, and productizing in consulting is tough although not impossible: books, workshops (with large or wealthy audience) and software solutions (think Salesforce). So you start as a consultant, grow your expertise, and then package it into something whose cost doesn’t grow linearly with sales.
As a growth-oriented start-up, David is right again, you need to keep sight of the goal: if it’s exponential growth, then you can start with consulting contracts to fund and refine your product and find your sales formula. Once you found it, you need to productize it and that means finding the core of what drives the sales in a large (and/or wealthy market) and mass-producing and distributing it. If you keep acting as a consultant and have to customize things for every new sale, your costs grows with your revenues and you can’t “explode”.
Btw, this is nothing new in start-up theory, but I’m surprised how many don’t get it. Quoting Crossing the Chasm (1991):
“The winning strategy is built around the entrepreneurs being able to “productize” the deliverables from each phase of the visionary project. (…)
The goal should be to package each of the phases such that each phase
1. Is accomplishable by mere mortals working in earth time
2. Provides the vendor with a marketable product
3. Provides the customer with a concrete return on investment that can be celebrated as a major step forward”
Start-up gameplan: build your product through consulting with visionaries/early adopters who are ok with your shortcomings because they want an edge at all cost, and then productize it for the early majority. Have a formula that keeps cost growth linear even when your revenues grow exponentially.
That’s why so many VCs like the web and biotech. The jury is still out in cleantech – and I’ve wondered on my blog in the past whether there wasn’t a new play here that involves growing less risky start-ups more linearly rather than seeking to supercharge one showing early promise.
I worked at the Boston Consulting Group in Toronto and I can tell you they don't aim for 100% utilization. A good rate in good tiems is more like ~75%. The way to scale is to charge more and more and turn your consultants into “stars” through business books and high visibility (and successful!) assignments with the largest companies.
I now started my independent consulting firm focused on tech ventures only (plug: http://www.growthroute.com) and I completely agree with David that to scale exponentially, you need to productize, and productizing in consulting is tough although not impossible: books, workshops (with large or wealthy audience) and software solutions (think Salesforce). So you start as a consultant, grow your expertise, and then package it into something whose cost doesn't grow linearly with sales.
As a growth-oriented start-up, David is right again, you need to keep sight of the goal: if it's exponential growth, then you can start with consulting contracts to fund and refine your product and find your sales formula. Once you found it, you need to productize it and that means finding the core of what drives the sales in a large (and/or wealthy market) and mass-producing and distributing it. If you keep acting as a consultant and have to customize things for every new sale, your costs grows with your revenues and you can't “explode”.
Btw, this is nothing new in start-up theory, but I'm surprised how many don't get it. Quoting Crossing the Chasm (1991):
“The winning strategy is built around the entrepreneurs being able to “productize” the deliverables from each phase of the visionary project. (…)
The goal should be to package each of the phases such that each phase
1. Is accomplishable by mere mortals working in earth time
2. Provides the vendor with a marketable product
3. Provides the customer with a concrete return on investment that can be celebrated as a major step forward”
Start-up gameplan: build your product through consulting with visionaries/early adopters who are ok with your shortcomings because they want an edge at all cost, and then productize it for the early majority. Have a formula that keeps cost growth linear even when your revenues grow exponentially.
That's why so many VCs like the web and biotech. The jury is still out in cleantech – and I've wondered on my blog in the past whether there wasn't a new play here that involves growing less risky start-ups more linearly rather than seeking to supercharge one showing early promise.
One more thing you might want to consider. I think the traditional consulting model is evolving into something else.
Paying someone for the effort as opposed to the results is becoming less “the norm”. Correspondingly, as a consultant for start-ups, part of my commission is often in the form of equity. In that case, you can argue this is not a pure “consulting” model as for the Big 5, and I would agree, but the important thing is that you can grow a consulting company on that model, and over time share into the exponential success of some of your clients. Reversely, a lot of employees are now delivering the same work as consultants, and so the frontier of what exactly a consulting model is are blurred. There are more opportunities to generate exponential revenues because “consultants” participate increasingly into the success of their clients.
I bet new models will emerge to package and scale this activity into “start-up consulting practice” and I certainly am working hard at this very objective.
One more thing you might want to consider. I think the traditional consulting model is evolving into something else.
Paying someone for the effort as opposed to the results is becoming less “the norm”. Correspondingly, as a consultant for start-ups, part of my commission is often in the form of equity. In that case, you can argue this is not a pure “consulting” model as for the Big 5, and I would agree, but the important thing is that you can grow a consulting company on that model, and over time share into the exponential success of some of your clients. Reversely, a lot of employees are now delivering the same work as consultants, and so the frontier of what exactly a consulting model is are blurred. There are more opportunities to generate exponential revenues because “consultants” participate increasingly into the success of their clients.
I bet new models will emerge to package and scale this activity into “start-up consulting practice” and I certainly am working hard at this very objective.