The unfortunate math behind consulting companies (2011)
longform.asmartbear.com
longform.asmartbear.com
I used to be in that boat, now I'm in this boat.
I'm not comfortable sharing many specific details about my business publicly, in this forum. But I am comfortable sharing them with people who are where I was and want to get where I am. I'm happy to. I'm sure you understand.
In service of answering your question anyway. I'm a hardware product design engineer. I can take ownership over an entire complex piece of hardware (medical device, IT product, etc) and architect it, design it mechanically, electrically and do the systems engineering. I'm able to deliver entire complex hardware products that work well (more than well), can be mass manufactured, and meet cost targets. I've designed surgical robotics systems, artificial hearts and other class III implanted devices, stuff in the disney parks, times square and even the Smithsonian. I have a website about myself with more information at www.iancollmceachern.com
for an individual partner we need to get to know each other first, and then that person needs to be willing to only get paid when a project is successful, because otherwise i'd face having to pay a full salary from the start before we even have the first project.
how does one find such a person?
They help with writing CV (if not flat out write them) they do cold calling, and set up meetings, meaning when I go interview with a potential client, they are almost already on board to have me. They give me access to knowledge of all my colleagues (“have you worked with using tech X to solve problem Y?”), they handle taxes and billing, office and they pay me when there aren’t any clients.
* The time you spend managing and supervising, including desk-checking the stuff they send out, because it goes out under your name and you are only as good as your last job.
* IT costs, and office space if they aren't working from home.
* Liability insurance in case they screw up. (Not certain about this: maybe you just trust that your company is a sufficient legal firewall because its only asset is you).
I remember back around 1990 hearing that for my big company employer putting a coder in a seat in front of a computer cost roughly twice their salary. That's still true today.
I feel compelled to comment because there are all these people who act like running your own business is some impossible task. it really isn’t. The vast majority of business owners aren’t super geniuses, my 60-year-old mother does it, has no formal education and couldn’t write “hello world” if her life depended on it.
The reality is that owning a business is effectively monetizing your creditworthiness (not unlike being a landlord), which is a pretty easy way to make a living, assuming you start out with a decent supply of capital/creditworthiness.
I think it's trading working on what they like vs doing admin / sales / marketing.
That said, I wish everybody were a contractor and employees wouldn't exist. (Good) Contractors are accountable exactly to what they are paid for (no more and no less). Employees are accountable to drinking coffee and it's a damn pain working around them to try to get something done.
The only exception is people with equities working in startups and dreaming big.
That's certainly one of many good reasons not to run your own consulting business. That said, it's entirely possible to hire/outsource support to do much, if not all, of the admin/sales/marketing work.
> (Good) Contractors are accountable exactly to what they are paid for (no more and no less). Employees are accountable to drinking coffee and it's a damn pain working around them to try to get something done.
In my experience, productivity tends to depend more on the "good", than on the contractor/employee dimension, and a non-trivial part of the "good" stems from how well they are being managed by the business... which yeah, a huge part of being good at managing either contractors or employees is about accountability. Sometimes you get better employees or contractors than you deserve, and that can imbue the contractor/employee characteristic with more causal significance than it deserves, but by and large, you don't.
It's not that it's too hard; it's consulting businesses aren't very profitable, don't scale well past 1 person, and if you scale, fill the owner's life with way less enjoyable work.
In the case of the Consulting company I worked for before starting my own, they expect you to get the above stuff done above and beyond your 40 hours of billable work.
Then I handle it all on the backend, you just need to make sure you are bidding enough time to get it all done. The client doesn't usually want more granularity, then they feel obliged to review it. Just get the work done, charge them what you agreed to charge them, and be jovial as you do it.
It really doesn't make sense for them to review it anyway. As a general rule in the consulting business, if you don't pay for it with expenses or in the rate, you'll pay for it in the billable hours. A successful consultant will necessarily make sure all their costs are covered, with room for profit... and you want the consultants you hire to be successful.
No complaints in over 15 years. Just be good. Keep your customer happy and get stuff done on time and on budget and these sort of things just work themselves out. Much of it relies on setting clear expectations and goals up front.
The firm I was referring to above was sold to a private equity firm and they lost all their good, longstanding talent in the process, myself included.
Take care of your good employees and the rest follows. There is a King of the Hill episode about it. Mr Strickland calls Hank his "golden goose".
The article effectively references this when it starts talking about having to pay for a full-time manager once you have five employees. If you've added only one employee, this is largely a cost that is paid proportional to their billable hours, and you only need to be slightly more diligent than your client, so it's not much of a loss.
> IT costs, and office space if they aren't working from home.
For a small-scale consulting business, usually they're working remote or on-site, so you don't necessarily bear any office space costs. There is, invariably, some IT costs that you bear yourself, but you already have those when you're operating on your own, and the additional cost for your first employee is all but trivial compared to the billables you should be adding.
> Liability insurance in case they screw up. (Not certain about this: maybe you just trust that your company is a sufficient legal firewall because its only asset is you).
More often than not, customers want you to have liability insurance because you don't have a lot of assets they can grab in the event sue you, so the better your legal firewall, the more likely you'll have to pay for liability insurance. Still, it's a 1% cost, so not a big factor.
> I remember back around 1990 hearing that for my big company employer putting a coder in a seat in front of a computer cost roughly twice their salary. That's still true today.
That's what the article says. It actually argues that with consulting businesses, it's more like triple their salary.
I've seen this countless times both in both Tech and the NGO world - some roadmap is running pretty good, managers then hire a bunch of "cool looking people that come in with a big old white board to make a cool workshop" then follow the process for a short amount of time, giving extremely shitty advice because they haven't been involved in the process at all and are going to leave soon without delivering anything.
And the fact that they are often paid a higher wage than the people who have to actually clean up after their crap advice is straight up offensive. And it seems everyone i know have this impression in both softer and harder sectors.
I've only met a few "lone wolf" consultants in Tech that were nice, people often with a huge passion and knowledge for something concrete and not "passion for leadership / some bullshit organisational fad".
But maybe I am looking at this wrong. I.e. the buying manager is fine with getting a future favour or some wine and dine since it is not his money he is using anyways?
Like money loundering. You expect a bad conversation rate.
executives want to deal with other executives.
My current boss is nice in this regard. He holds the sessions himself at some sort of resort and pocket the money to buy us booze and spa time instead.
Of course finding one you trust is even harder. The vetting process itself is lengthy and tedious, so the natural tendency is to lean towards people/orgs in your trusted circles that your trusted friends can vouch for.
Or, you have one or more management team members who aren’t pulling their weight, what do you do? If there’s a chance spending $50k on a consultant will fix them you try that first before swallowing the $200k hidden cost bill of lost time, training, legal, onboarding, and opportunities costs replacing them.
The consultants come in, talk to everyone, get a list of what needs to be done from the peons, reframes that list and presents it to the middle managers, essentially laundering the peon's opinions. "Wow! Great!"
Middle management says to their boss, "Well, the consultant said ..."
It's essentially a ritual in which time is consumed and a sacrifice of cash is made to purify the unclean words of the lowers so that the high priests might hear them.
That's more than a bit unfair. They're generally taking in information from the entire workforce, including management, and they're analyzing the whole picture. Trivializing it by describing it as "purify the unclean words of the lowers so that the high priests might hear them" is not accurate. What they're ostensibly providing is unbiased and potentially more competent judgement/analysis of information that the company already has (and really, it'd be weird if the company didn't already have the information, right?). Sure, in practice the bias and competence aspects deserve an asterisk (by virtue of being compensated by an organization, consultants have many of the same biases of the people who are also compensated by said organization, and there's a Dunning-Kreuger problem with hiring either employees or consultants to compensate for competence), but consultants are absolutely in a position to provide the value they are paid for.
It's been a while, but something like eight out of my nine items listed were in his recommendations, and not much else. All of the items were things I had said before.
I am sticking with laundering, plus a dash of sunk cost fallacy ("we paid money to hear this advice so we must take it").
John Oliver did a piece on Mackensie recently:
https://m.youtube.com/watch%3Fv%3DAiOUojVd6xQ&ved=2ahUKEwjbw... w0N9I7Chg83d0utMHc4ijJU
I've been through several of these engagements from the inside. They're usually hired so the leader who is about to be fired (whether they know or not). Then when they get fired or it goes south they can just say they were doing what the expert consultants told them to do.
Management consulting is a specific subset of consulting, and while it does sometimes provide no value or net negative value, even when it seems to provide little to no value from the perspective of other employees, they often just aren't in a context where they could see that value.
For example, in our case, several consulting work could be seen as presales for other services and/or products while other companies take it as business marketing and sale expenses. If you see consulting in this way, the picture changes dramatically and from the finances/accounting point of view you are converting expenses into income.
If product companies are smart, they might put this role under costs to acquire customer vs services and then have it as a fee for onboarding. I can’t remember the details, but I’ve been told having really profitable services can really complicate VC/fundraising.
Regarding your second paragraph, investors looking for the the YC startup definition don't like services companies because they couldn't scale at the pace of product companies but they are specific investors oriented to these companies because they have a more secured cashflow.
BTW, some people like Michael Cusumano [1] argued about hybrid companies to better handling economic cycles.
[1] https://mitsloan.mit.edu/faculty/directory/michael-a-cusuman...
Basically the argument is that there are business cycles when companies are spending more money on products and less on services and in some crisis with services you can compensate that. There is no general advice for all companies.
It was more to clarify it was proserv work than anything.
In the context of SaaS/tech, typically professional services is implementation, maintenance or break/fix of specific products or technology. Advisory work is supposed to be independent work where you are being paid for (what is supposed to be) unbiased opinions and strategy.
It's the difference between staff augmentation / project work and strategic / planning work.
One way around some of these issues is to pay employees by the hour. At the places I worked, there was a large pool of folks who loved that arrangement because of the ability to work in bursts and take more time off in between. The problem then became scaling beyond that pool of labor (many of whom were independent contractors with other commitments).
This math is also why, for years, I've recommended people avoid investing in companies like Palantir. Sure, they can be successful companies, but they'll never achieve the sort of hypergrowth that companies like Google or Meta can due to the scaling issues.
Overall, I loved my time in the services industry. It had the dynamic quality of being a consultant (except for one 5 year long, mostly continuous project where I was staff augmentation for a large company) but someone else handled the sales and negotiations for me.
The unfortunate math behind consulting companies - https://news.ycombinator.com/item?id=2189166 - Feb 2011 (125 comments)
"Consulting doesn't scale"
"Sure it does, just look at Accenture!"
No, Accenture is big because consulting is not very profitable and it's easy for Accenture to accumulate smaller shops for the bodies. Sooner or later, people running smaller shops get bored and sell to companies like Accenture. Big companies can also more easily leverage foreign, low-cost labor and provide a complete solution. It's hard to provide a complete solution, including QA/testing, test writing, documentation, etc if you are a small body shop with 10x engineers that you need to bill out at $400/hr.
Accenture will never come close to the profit per employee of a company like Google or Meta due to the poor scaling.
Again, I believe you are presuming an exponential scale. Yes, if you invest in a consulting business, the rate of return isn't likely to grow exponentially, but it will grow, and it's entirely possible profits will grow proportionately with the investment.
Saying a business doesn't scale, from an investment perspective, means that the business can't leverage the investment to increase profits. That's certainly true of some businesses, and certainly true of some consulting businesses, but observably not true for any sector Fortune 500's are in.
We’ve assumed an 8-hour work day, but any owner of a consulting company will tell you this rarely happens. Oh sure, founders work 60-80-hour weeks, but not employees.
You're confusing max pay with working more hours, whereas in reality no one actually wants to put in more hours, and in many cases those employees that put in most time is a negative signal showing their inefficiency.
The sort of folks that like high pay and poor work/life balance end up at big valley companies in my experience.
If you can do that you can be very successful. If you can't, don't try, get good first on someone else's dime.
- Having better than average engineers. Not "10x", just better than average.
- Having a project manager required for nearly all projects. The customer was billed for this and it was worth it. The PM managed a Gantt chart and periodically chatted with the engineers to keep the schedule accurate and the project on track. No daily standups. No agile.
- Unless the project was for staff augmentation, the project had a clear set of goals and success criteria was defined up front. Feature creep was strongly discouraged.
Is this a business model that will scale to billions of dollars? Most likely not. But it can be a good business that provides you with enjoyable work. Consulting companies are the first to be fired in a downturn, but they're the first to be hired when things get going again because companies are short-staffed and need to react quickly.
Consulting businesses are generally seen as "sweatshops" because they are really more a like a logistics business, where your profit comes from the marginal efficiencies.
I've found they're great things when they're run like studios, with one or a handful of principles at the top that are there for the long haul and then folks that come in and out as needed and available working for them. This is what I've modeled my product design consultancy around. Then there are the other ones that are often owned by private equity folks, or run by manager types that can't do the work themselves. These in my experience are not built around passion for the craft like the first bucket. These usually end up being sweatshops.
My advice- hire a firm that you know the owner(s), and they're people, not a board. It's the same for Vets, doctors offices, hardware stores, etc.
Suffice to say, they constantly wanted to push me towards managing without offering any of the value.
https://longform.asmartbear.com/consulting-company-accountin...
I did this math back in 2001 when I was moving furniture to support my side business making shareware games. The warehouse charged $34/hr and paid us $10/hr. For the life of me, I couldn't figure out where the other $24/hr was going, because that's more like $50/hr in today's money. Even though I was doing literally all of the work with the other lumpers, someone else was basically making $100k/yr for standing on my back. Especially considering that the warehouse and trucks had been paid off for decades so fuel was probably the next most expensive overhead!
I later realized that the profit went to the office staff and salespeople who landed the moving contracts. And the owner (who was a millionaire) skimmed the rest.
That experience shaped me into the antiestablishmenter I am today. Because that pattern repeats across all industries. Loosely the harder someone works, the less they keep of the gross vs the time and effort they put in. And digging into the history of that reveals how the concept of the corporation evolved during colonialism and slavery to extract as much capital as possible from workers and investors. Leaving us with the capitalist system we have today where one guy can extract most of the wealth from thousands of employees as majority shareholder or CEO.
We can get into the virtues of capitalism vs socialism and communism, but I feel that those are red herring arguments post-pandemic and with the return of labor unions. What this is really all about is whether workers, owners or society should keep the lion's share of the fruits of their labors. The US currently gives the most to owners. Europe arguably pays a large amount into its societies (its commons). No country has ever given the most to workers, although Central America and Southeast Asia tried it after WWII, so the West blew them up for trying to go "socialist".
In my own life, I've found it basically impossible to get ahead working a job and making side projects after trying for almost 25 years. And for every success story, we don't hear about the 9 out of 10 businesses that failed their first year. To a first order approximation, success is simply not attainable now outside of roughly the top 10% of income earners. The US is on the verge of losing its middle class.
You can probably see where I'm going with this. If the status quo can no longer provide the essential infrastructure and policies for the people to sustain themselves, then it becomes something to be challenged by the majority. When The Conservative Mind was written in the early 1950s, there was a fear that when the US middle class reached 50% of the population, pure democracy would kick in and voters would pass socialist policies (reparations) to reclaim the profit that had been stripped from them. Which could align them with communists in the East to form a dystopian New World Order.
To stop that, wealthy financiers installed Reagan in 1981 to dismantle unions and collapse the middle class back below 50%, which succeeded beyond their wildest dreams by the end of Bush Sr's administration. Clinton frayed the last of the social safety net to close the hatch and lock in the new normal. Post 9/11 has been an experiment in social engineering to see how long people will put up with living under a captured government that only passes legislation popular with a wide majority 10% of the time.
The fallout from that is that blue collar workers now blame liberal elites for their problems instead of white collar workers and company owners. Because conservative elites ARE white collar workers and company owners ("job creators"). This misdirected rage is so high that the next election is still very much in contention despite what everyone saw with their own eyes in the capitol deaths last time.
The really crazy thing is that the harder the wealthy and powerful close their grip on the rest of us, the more likely a violent revolution becomes. That's been proven time and again throughout history, even today with the two main proxy wars happening, which I won't get into because they're just too sad.
To me, the answer to all this is fairly obvious. If it takes such an enormous expenditure of time and effort over many years to maybe kinda sorta squeak by, even when charging $100/hr, then maybe we can justify trying anything else at all. My heart is with solarpunk and shifting the focus from capital to resource production. In literal terms, that looks like energy-positive solar homes and vehicles for everyone on the planet, along with hydroponic and community gardens creating an excess of food to collapse the price towards free. More self-sufficiency for individuals equals less leverage for corporate price gouging and inflation. With the eventual goal of automating all essential labor with AI and robots so that it can be taxed to pay for UBI. Returning leisure time to humanity so that it can explore human endeavors like art, philosophy and creating heaven on Earth as it ventures out into the stars.
For what it's worth, the wealthy and powerful can continue making huge profits alongside UBI. The only difference is that we'd have a healthy and happy populace instead of one endlessly struggling to survive. Which is why I think that this is something that red and blue can agree on, with the main barrier being the two entrenched political parties.
This makes me doubt the realism of the other assumptions on this essay.