MANAGING CONSULTANTS

The 'Make or Buy' Decision

As with any other business, a consultancy is faced with a 'make or buy' decision. The major elements of expense are likely to be salaries and office accommodation. There will be other expenses, some of which are directly recoverable from clients, and the development and maintenance of a support infrastructure, but salaries are likely to be the biggest element of expense. The costs in a consultancy practice are therefore mainly fixed. (This was vividly illustrated in one consultancy firm that made about 10 per cent profit; 'Our profit each week is earned only on Friday afternoon', I was told.)

If costs are to be made more variable, therefore, the consultancy firm has to consider whether to employ people or take them on only on a project by project basis, as subcontractors or associates. The greater expense arising is compensated by the fact that in recessionary times subcontractors can be laid off, while the core team of consultants remains intact. Other considerations in using subcontractors include:

• How should they be badged? Should the client be told that they are using subcontractors?

• Will key learning and experience of value to the consultancy practice be lost by using subcontractors?

• How will subcontractors be integrated into the project team? If the consultancy operates a particular methodology, will the subcontractor be able to operate within it? Does the consultancy add value to the subcontractor's services or is it simply acting as a broker?

This last question relates to the level of investment a consultancy practice makes in each of its subcontractors. If they are trained in the consultancy's methodology, this represents an expense and a possible dilution of the practice's differentiation through its methodology. What some firms do is to keep in contact with 'graduates' - consultants who, having been trained by the firm, have left to start up their own practices. They therefore form a pool of trained resources that can be called on when required.

Remuneration

The cost of consultants is also related to remuneration policy. Consultancy practices are not exempt from the general rules governing remuneration, that is, that the fairness of a consultant's remuneration package will be judged by external comparisons (what they might earn if they performed a similar job elsewhere) and internal comparisons (their remuneration in relation to that of others in the practice).

Where consultancy differs from many other employments is in the career patterns of employees. Often, people who enter consultancy plan to spend only part of their careers within the profession, say four to five years, before moving on to further employment as executives in businesses other than consultancy. There is thus a higher staff turnover rate at junior levels in a practice than at senior levels, the latter being populated primarily by those who have chosen to make their career in consultancy. This pattern of staff turnover has the advantages that it enables new people with fresh ideas to be brought into the firm and those who leave will do so with (we hope) a fund of goodwill towards their former employer, and become clients in their new role.

What this means is that there are two classes of employee in a consultancy practice: those who are doing a job as a stepping stone to something else and those who see consultancy as a career. Most people entering consultancy start in the first category and there is thus a transition point when they move into the second. It is important that both the consultancy firm and the individual consultant share the same view of which category the consultant is in. Misapprehensions on either side will result in disappointment. What some consultancy firms do, therefore, is to have career reviews with consultants at significant points in their careers at - say - intervals of three to five years. These reviews elicit the individual's career aspirations and potential and plan how they can be best met within the practice, or whether a move outside would be better.

The relevance of this to pay is that it points to different pay policies for the two categories. The pay package for the former will consist of primarily short-term elements, for example, basic pay, profit sharing bonus, company car. The pay package for the latter will, in addition, have long-term elements, such as pension and stock options or another form of capital appreciation plan. This distinction is perhaps most recognizable in firms that are partnerships, where being made a partner of the firm has traditionally been an indicator of being offered a long-term career (although this has not always been the case in recent years).

At an operational level, pay is significant because, as a large fixed expense, it can create problems in cash flow. The firm has to pay the consultant before the client pays the firm. It can also create problems in volume sensitivity. If fee revenue goes down, the firm still has to pay the same salary bill. Actions that can be taken to deal with these are as follows:

• Defer payment by paying salaries later in arrears. This will provide a (one-off) reduction in cash requirements.

• Defer payment by paying a low monthly salary, but adding an annual supplement (a bonus) that brings it up to market rate.

• Relate the size of the bonus to business profitability. This will make salary a partially variable cost; when profits are low, bonus will be smaller, thereby reducing employee costs.

Obviously any action on pay must take into account market practice and the probable response of the consultants to the changes proposed.

Attracting and Retaining Talented People

In the same way that they compete for clients, consultancy practices compete for talent. Often they are seeking recruits with similar backgrounds, abilities and experience and, for the most part, talented people are in short supply. Consultancy practices have therefore to consider how they market themselves to prospective recruits, and how to continue to offer an attractive prospectus to their own consultants. Employment conditions have to be right, but beyond this a key element of the prospectus for existing and prospective employees is the opportunities for personal growth - the value added to individual employability by working in a particular practice.

Consultants wish to practise, maintain, refresh and increase their technical skills. This they can achieve in part by working on consultancy assignments. They will also need to keep their technical skills up to date by attending appropriate courses and conferences, reading specialist literature and so on. Besides technical skills, however, they need to know how to deliver their skills in a client environment and how to effect change in organizations as a consultant.

Many people learn their technical skills as an employee and have learned how to discharge them as such. Working in a client environment as a consultant is different. Many topics covered in this book, for example, would be irrelevant to the specialist employee. The commercial environment in which the consultant works, the needs for marketing, selling and client care, the importance of project management, are all peculiarly relevant to a consultant.

A management consultant is also an agent of change. If consultants are to fulfil this role effectively, they must understand the pathology of organizations so that they can interact with them to achieve change.

There are therefore specific consultancy skills to be added to the specialist expertise of a new consultant. To a large extent, consultancy is a craft: skill has to develop through practical experience, as much as, if not more than, through formal training. Every consultancy business can therefore provide at least the practical part of the training component. Whether it provides formal training may be a function of size. The reasons for training consultants are:

• Training may be needed to bring new staff to the standards of operating required.

• Training may be needed to maintain and develop the skills of experienced consultants.

• New skills can be imparted and developed by training.

• Offering structured approaches to personal development may help the practice to attract and retain good quality staff.

Given that consultancy is a craft skill, the apprenticeship model is a helpful one in developing skills on the job. Skilled consultants can supervise or act as mentors to those less experienced. In the early stages of a consultant's career, he or she may keep a log of activities in which they have been engaged. Their project work could then be selected to fill in gaps in experience, extending their skills, or improving in areas of weakness.

The individual consultant gains much by working on client assignments. Personal development occurs not only through the development activities organized by the consultancy firm, but also through the consultant's assignment experience.

A benefit of working for a consultancy practice is that it enables you to work at the periphery of your expertise. Under the umbrella of the firm, you may work in a project team in which you can learn as much, if not more, than you contribute. Personal development is therefore helped at an operational level by assigning consultants to projects that help them to grow. This is something more difficult to do as a sole practitioner, where clients employ you in the centre of your expertise, and there is less scope for working in areas where you have little previous experience.