Why you should care how consultancies are run

Why you should care how consultancies are run

Faiz Hussain

Why you should care how consultancies are run

Thinking about thinking #8 4th June 2022

You've heard of Design Thinking, here's Private Equity Thinking

Received wisdom on organisations over the last few decades is heavily influenced by “core competency" – that organisations of every kind (business, non-profit, government) should stay in their lane and only do the things that they are good at. Anyone who has taken a strategy course in the last 70 years, or in its trickle down, will be exposed to this due to the ideological allegiance of Michael Porter, Peter Drucker and Harry Igor Ansoff.

It's a seductive narrative that commingles with the ideas of liberalisation – selling/renting public assets or taking a company public – and meritocracy – that 'if we were only good enough at this thing then everything will come our way' – and if we are the best, we are wholly deserving of taking the market for ourselves. The truth is neither meritocracy, liberalisation nor core competency translate to organisational/individual performance or intelligence.

It also shapes what organisations are bad at – it makes it harder to hire different kinds of people based on protected characteristics, expertise or life experience, and to procure systems even slightly out of scope of the organisation. Or, to recorgnise there’s a problem because the reporting infrastructure and hierarchy deliberately and tacitly hide problems, especially related to harassment/power abuse and normalising attrition rates.

The ‘allowed domain’ of expertise becomes narrower every day as budgets are cut, and organisations are hollowed out at the denominator (cost level) to produce healthy creatine-pumped returns for stockholders or dividends for a dwindling tax base. This idea is core to 'pay to play', where capital determines what happens over every other criteria. But it also makes all organisations incredibly fragile, reactive and valueless. Leaving them vulnerable/correlated to wider structural issues, without a loyal bench strength or client base to weather the storms. And weather systems are to be expected.

Enter Consultant

With this idea of core competency comes the consultant – people like me who are thrust into the seat of power to provide expertise that has drained from the organisation, or compartmentalised to limit its affect on the business model and profit motive.

The consultant's value lies squarely in perspective – we don't have to abide by the same rules as an internal stakeholder (employee, executive), we don’t have any of the baggage/context of history, we have a greater level of access to information that's deliberately held up by bureaucracies/hierarchy and we have outsized power to influence decisions, whether that be telling people what to do or framing the choice to the exclusion factors that we deem unnecessary (a design decision).

Consultants have poor reputations partly because we are the scapegoats for problems, we (do) stir shit up, we are rarely held responsible or accountable for the problems we create, we haven't cultivated great places to work, and many operate on traditional buy-in equity models that are pyramid scheme exits/parachutes/retirements for older stockholders (just like crypto). In the public sector, we seem dislocated and out of touch with real problems of 'the people'.

Consultants can’t replace organisational intelligence, even at our best. We can’t replace an organisation being able to solve their own problems through participation and leadership and ownership. Where a government can solve real challenges through an assembly rather than running committees with reports they can ignore years later. I'm bitter about this point in particular because conservative politics is a self-reinforcing philosophy: surrendering institutions while in office to create the conditions of greater liberalisation – and consultants are in co-pilot.

At its laziest, consultants provide respelled versions of the core competency discourse – 'hey, double down on this and cut everything else’. At its greatest, consultants are an organisational hack to codify the nuances in an organisation that are dynamic and living, harnessing power for good.

I’ve been exposed to some really really dumb consulting project requests over the years:

  • Consultants were asked to write emails for Google because the marketers didn’t know how to write basic HTML that could have been learned in an afternoon.
  • Consultants were tasked with customer support as interference to stop work order tickets.

How consultants usually work

Consultants are considered expensive and generalist, despite the notion that they are a utility (read: affordable) and called to solve specialist problems. Consultants are given vague instructions by organisations to meet vague outcomes in a vague time frame. A consultant doesn't know before work begins what the work will actually entail, what assumptions have been made, what data will be provided and/or missing to create business requirements (the shopping list that an organisation uses to decide whether or not to engage a consultant).

Because of how vague these aims and goals are, the consultant needs to make a cost calculation to hedge the size of the problem and what can be promised in a time frame. The cost calculation is based on:

  1. Specialist Mix: how much expertise is required for the engagement? how much of it do we currently have in-house? who do we need externally (at variable cost)?
  2. Seniority Mix: how do we give our senior stakeholders the right amount of visibility, and take advantage of the large pool of junior staff (at fixed cost) we 'can throw at the problem'.
  3. Time Factor: turning (1) and (2) into a cost allocation unit so that we can bill by the hour or day.
  4. Management Overhead: how do we measure, track and control time as a resource to leave a profit margin?
  5. Chargeable Rule: what can we charge the client directly other than time (i.e. materials and expenses)? What other parts of our business can be lumped into client fees (like HR and Business Development)?
  6. Payment Terms: what can we get away with from a billing standpoint so that we have enough cash to cover our variable costs?
  7. Land and Expand: what can we do to extend the engagement?

What that means in practice

This default business model (known as 'time and materials') creates these perverse incentives:

  1. Outcome Averse Time Dilation: Consultants will spend as much time as we can to fill the container and earn more money. Because the deliverables are not necessarily time-bound, a consultant can bill based on whether or not something has actually happened. This erodes trust between client and consultant.
  2. Functional Precariat: Expertise rarely exists within Consultant firms, and subject matter experts end up being freelancers who command high rates, but are generally precarious, selling less than 80 days of their time per year and jerked around like zero-hour contractors working a hospitality rota, with the weakest payment terms (often as high as 180 days later) and bargaining power.
  3. Limited Sample Size: The billing rate does not have room for primary research or deep/thick data collection – so most engagements will set a strict sample size for analysis, that limits both the problem domain and the solution codomain – essentially the types of decisions that can be made.
  4. Margin Risk: As the work is unlikely to be well scoped, and the amount of time is difficult to estimate, the constructed profit margin is always at risk. Managers hold an outsized role in driving cost-cutting procedures and hero-moves.
  5. Meat Market: In order to protect the profit margin, and to spend as much time as possible, junior staff are tasked with most of the production work – so that the margin comes from the disparity between the quoted cost unit and the actual cost unit. This leads to a culture of burnout at consultancies and agencies where late nights are the norm.
  6. Rigid Sales Organisations: The thin class of senior executives are chosen and developed based on their sales numbers and their client relationships rather than the value they add. Expertise and domain knowledge are marginalised as commodities.
  7. Customer of One Data Point: The sales relationship is usually 1:1-3 and very fragile, so the client is likely to be lost the moment someone retires or leaves. Keeping these few stakeholders happy creates tension with other stakeholders who aren't catered for.
  8. Derelict Backoffice: Most consultancies lack a true commons or clear processes for delivery. A lot of it runs on Excel and Email.
  9. Black Box: Consultants need to demonstrate that we are all knowing and all seeing, so they spend a lot of time gilding the lily and producing very labour-intensive slideware (reports delivered on PowerPoint equivalents) that overwhelm with information to show how intensely intelligent we are.
  10. Jack in the Box: The slideware are usually a surprise, as there is minimal collaboration, socialisation and scaffolding of how to take findings forward. There's no environment created for the work to change the organisation.
  11. Like attracts like: The more we do this model, the more everyone else does it too.

Doing this right

I'm actively trying to break this model using these levers at mito.coop and our clients:

  1. Value Engineering: Clients never pay more than the quoted (value-based) price that's attached to a specific outcome, with target costing on the back-end to solve problems in the most efficient way, not the most laborious one. No hidden fees either.
  2. Contingent Rewards: With my smaller clients, I'm offsetting the upfront fees with a conditional structure where they only pay once a milestone is hit using gross revenue sharing. It means that we have to believe that what we do actually works and stand by it, and to be open to experimentation. We have 'skin in the game' for the client to grow sustainably and irreversibly and to fundamentally own the change.
  3. Removing the line of visibility: Opening up all of our work to collaboration so there's nothing the clients can't see. It means painting behind the fence (so that front and backoffice are as smooth) and being accessible/inclusive to divergent occupational needs. It goes hand in hand with full data transparency on both sides.
  4. Codes of Ethics including Time: Never ever referencing time as a cost measure, and being generous with time. Each practitioner sets their own commitments on whatever cycle they want (weekly, monthly, etc) and the relationship adjusts to meet the supply.
  5. Mutual Cooperation: Sharing all the contingent fees so that we are incentivised to send the best person for the task forward – even for freelancers we work with. We will eventually open up decision making to clients as well.
  6. Symmetrical Commitment: The clients have to commit to certain rules about what they need to do (homework) every week to make sure that we move forward.
  7. Subscription First: Using a recurring billing cycle to optimising for relationship depth rather than trying to bill them as much as possible. They can leave at any time, and stay because it’s still delightful. When we find a problem we can solve it in days rather than having a delay of pitching new work and going through a procurement cycle of 6-9 months.
  8. Honorary Titles: Being an executive officer doesn't carry any extra benefit, it's a responsibility among equals.

I'm also thinking about how to train practitioners from 0, and how to support primary research/ foresight. It's an uphill battle in client education to make the case for a more ethical and shared value approach.

(Breathes out)

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