Running a Professional Partnership

Interestingly, few consultants I meet, even some of those who run their own companies, have a good understanding of what a consultancy needs to be successful. Given that the archetype for a consultancy is a partnership, rather than a PLC, what should the partners focus on doing to achieve success? Indeed, what should the measure of success be?

Running a Consultancy: A Case-study from Joe O'Mahoney on Vimeo.

In a PLC, the measure of success (rightly or wrongly) is usually take to be the return to investors, measured by the share-price. In a partnership, however, the investor is not a shareholder, but a partner, so the measure of success is normally taken as the Profit Per Partner (PPP) So how is this calculated? The easiest way, is to simply divide total profit by the number of partners (of course), but this doesn’t really tell us what generates that profit. A more sophisticated equation is:

Margin x Productivity x Leverage, where:

• Margin is profits divided by the fees
• Productivity is fees divided by the number of staff
• Leverage is the staff divided by the number of partners

The video below provides a case study illustrating the finances of a consultancy.

Running a consultancy from Joe O'Mahoney on Vimeo.

The important consequence of this is that, contrary to what many consultants believe, the size of your consultancy has little to do with your profit per partner. If you take on another X consultants, but need another Y partners to manage them, then you are not increasing your PPP. In fact, what we find is that increasing your PPP is very difficult to achieve. It can be achieved in five ways:

1. doing the work with fewer consultants (which risks poor quality work)
2. paying consultants less (which risks you ending up with weak consultants)
3. raising the fee rate (which risks making you uncompetitive)
4. reducing the no. of partners (which risks fewer sales and less mentoring)
5. increasing the productivity of consultants (which risks burn-out and churn)

Given the difficulties involved, what can a company do to improve its PPP? Two strategies are commonly attempted. The first is to commodify a service so that the work can be done by less qualified and experienced consultants without increasing the risk of failure (see 1 above). Companies such as Accenture or IBM achieve decent margins by ensuring their junior (cheaper) consultants can do higher level work by giving them detailed methods and tools.

The second method is by attempting to move ‘upmarket’ to do higher quality and higher value work. Consultancies specialising in implementation, for example, frequently try to move ‘upstream’ to do more strategy work (see 2 above). Bit such a move is difficult, often involving higher pay for better talent, more training, lower utilisation levels and lower leverage rations. Also, as many companies are trying to do the same, it can easily become a white elephant.

In my view, however, there is a third strategy, and this is to focus on innovation. An innovative consultancy can generate services that enhance its reputation, put it ahead of the competition and build stronger relationships with clients. Ideas and research to help us understand what works with innovation can be found here.