This article explains skills and activities required to start and grow a boutique consulting firm.
The economy in the US, Canada and the UK is starting to pick up again. In some parts, it is booming. Clients are spending, engagements are increasing and consultants from McKinsey to LEK are busy. What invariably happens is that some McKinsey associates and engagement managers, usually the former, will decide that the work is so easy to do, they might as well start their own small firms.
They reason that since they have been doing the analytic work for about 2 years, they can manage on their own with a lower cost structure and pocket the higher margins. And they usually succeed for about 1 or 2 assignments. Yet, they typically fail after 1 year.
Why is that? Why do obviously bright and hardworking McKinsey associates routinely fail to set up successful mid-size consulting firms? Sure, there are a handful of examples that work, but they are a mere fraction of the McKinsey associates who ultimately fail to succeed.
In this post, I will explain how partners maintain this cycle of career and firm growth. Invariably, I will discuss the skills you need to deploy to grow a professional business.
There are two primary reasons these boutique shops fail to scale. The first is about skills and the other is about how they organize themselves.
Important Skills McKinsey Associates Do Not Have
Strategy analyses: Kenichi Ohmae has an excellent diagram in his book, The Mind of The Strategist. It is the very first diagram in the book and the most important. He compares three types of thinking patterns: mechanical, intuitive and strategic.
The last one, strategic, is broken into two parts. First, a strategist needs to break down the problem and next she needs to take all the pieces and reassemble them to arrive at a new solution.
McKinsey associates and business analysts are like the wrecking crews on a construction project. Their weapons of choice are not sledgehammers or wrecking balls, but spreadsheets and focus interviews. They go in and conduct analysis to break down the problem into discrete or bite-size chunks.
Yet, McKinsey associates are not trained to put those pieces together to arrive at an elegant strategy. You need to be at least an associate principal to begin getting exposure to that skill. However, young McKinsey associates are so enamored with analyses they assume that it is the core skill.
So, off they go to start a business having just one small part of the strategy skill set.
And this is terribly ironic. This is because most young McKinsey associates or managers striking out alone assume they have the strategy skills but lack the sales skills or sales relationships.
In fact, they lack both to varying degrees, but completely ignore one.
Emotional Intelligence: EI or EQ is best described with an example. A very common example at that, which will resonate with most young consultants.
Imagine there is a consultant named Hector. Hector is very intelligent and hard working. He gets the job done no matter the issue and no matter the obstacle. Hector can be relied on to make things happen. Hector has been at the firm for about 8 months and served on 4 engagements.
Hector does not get along too well with his peers and is unable to rely on them to help him more than is required. He has not taken the time to connect with them. He is an outsider. So, when things get busy, Hector must rely on his enormous intellect and excessive work habits to get the job done. Hector will routinely stay up till 2am or 3am to finish up things.
So, 4 engagements in, Hector has done a sterling job and feels he should be receiving excellent rating.
Should he receive an excellent rating?
As a partner, I would score him quite low on how he is organizing his career to achieve his goals. I would actually caution him on his style and place him in an engagement where he has no choice but to rely on others.
And I am not being harsh. Here is why.
Consultants like Hector rarely end up leading people or rising above strategy analyses roles. And that is a bad thing. Over 4 engagements, Hector has only learned how to work harder and longer to get the job done. Hector has not learned how to work smarter, build relationships with others and farm out work.
So Hector can only be promoted to the point where the work volume in his new role does not exceed his capacity to do the work. I call this the leadership ratio. You are leader if the ratio of your work requirement over your capacity is about 2. That means you must be influencing others to help you, otherwise you could not get the work done.
If it is 1 or less, no matter your title, you are not leading anyone. In fact, there are some managers who do their subordinates work to avoid a confrontation.
Why is this happening to Hector?
Simply put, he has no willing friends to help him. This is a trap most young consultants fall into. They assume blazing intellect and hard work is sufficient. They spend so much time becoming better that they under-invest in their ability to influence others. When the work peaks, and it always does after a few years, they have failed to develop the skills to get others to help them.
If you are being promoted but given only work volume that you can individually manage, it is a sign that leadership does not trust or does not believe you have management skills to guide others.
Hector should be taking the time to build relationships with his peers such that he can rely on them for help and they must be sincerely interested in helping him. They would probably agree if Hector asked them right now, but there is a world of difference between helping someone you like and assisting someone you dislike. The quality of the work is different.
So EI or EQ is better defined as the ability to build relationships, which allow you to easily spread out work. Consultants with high EI almost always take some kind of leadership position because others want to work with them. In other words, they can easily and effectively outsource the work needed.
Most times, consultants striking out tend to not have this skill. It tends to take time to develop, but mostly if you have this skill you tend to be enormously popular at the firm, get placed onto choice engagements etc., implying there is very little reason for you to leave in the first place.
Political awareness: This is a skill you are unlikely to need until you are very senior and need to make direct decisions with a senior client, like the CEO or COO. Yet, it is one of the most important skills.
When a consulting firm is brought in, there is usually a lot at stake. No client is going to spend millions of dollars on a study unless the issue or return was potentially in the hundreds of millions or billions of dollars.
With those numbers on the table, careers are ultimately on the line. If it is discovered that the procurement department is under-performing by up to 30% below peers, you can be sure some hard discussions will be held with the head of that department. So while consulting firms do not pinpoint anyone, their analysis do.
With so much at stake, financially and career wise, executives go into overdrive to paint their initiatives/actions/departments as correct and that of others as incorrect. Yes, clients mislead and deceive. If you are a consulting partner who walks into a client and assumes the friendliest executive is your friend, you are in for a world of pain.
Executives can influence the study in all types of ways. Withholding data, providing too much or too little data, sharing the wrong data, sending data late and even not participating in interviews.
Political awareness is, therefore, the ability to understand the ripple effect of the study and figure who is going to be effected and how they might react, by trying to alter the study. That is the easy part. The hard part is determining a way to work with that executive without conceding anything.
It is very easy to tell a client that you want some data, but will not use it for public presentations or updates to the board. If you do that, you are offering painful concessions and eventually presenting an erroneous study.
As a partner, I worked mainly for government owned behemoths in banking, energy and mining. Government employees are perennially worried about being fired so you need to be careful about offering concessions to get things done.
The issue with the CEOs is slightly different. The CEO of a state-owned transmission company, for example, is typically a government appointee who is going to be in that role for 2 to 4 years before moving to something bigger and better. You would think these executives would be willing to share more information since they are leaving soon, but it is the opposite.
They are less willing to share information since they are afraid something will pop after they leave, and since they are no longer at the company where the bad news originated, they could not control the information and it will likely hurt their careers.
It takes a lot of skill to extract the information needed to complete the study without conceding the integrity of the study.
Organizational Skills Consulting Partners Have
Building a consulting firm requires some specific organizational attributes. At the firm, I founded and led a practice, and when I left, I led a boutique consulting firm of about 150 consultants. So, I am going to draw heavily on my experience to describe each of these skills.
To build a consulting firm of stature, you need to be able to do the following six things. Failure to do any of them may lead to the collapse of the company or, at least, becoming mediocre.
1 – Build client relationships
2 – Make yourself indispensable
3 – Deliver the engagement
4 – Hire associates
5 – Train associates
6 – Develop intellectual property
I have laid these out in the order of when you will face the problem, but the priorities are almost exactly the inverse.
Building client relationships
This is incredibly difficult to do. And not for the reasons you think. If you do not have a relationship with the CEO of Company X, it is pretty much game over for you unless you have a long runway, that is cash to burn, to build the right kind of relationship.
If you are running low on cash and desperately need a sale, you can probably get an introduction or referral, but in that case the dynamic of the relationship is going to be poisoned. When you ask a client to take a chance on you and give you the work, they have a “prove-it” mentality.
They question everything, check everything and will typically extract more financial and other concessions from you since they understand that you need them. Your independence is undoubtedly impaired since it is clear you need the money and will never ever say or do anything to jeopardize the relationship.
In effect, you become a yes-man. You are a consultant in name only but are unwilling and unable to offer the client clear, impartial and tough feedback.
As you can see, getting work is far less important than how you got the work. Therefore, when you see small or even large firms reporting eye-popping revenue numbers you need to carefully think about how it was done.
McKinsey associates typically have few if any relationships to use when they set up firms. Most times, a partner will have enough relationships that clients come to him, or to the firm via him. Younger consultants make the mistake of assuming that they can overcome the sales problem by linking up with senior consigliere to make an introduction for a cut of the fees.
That just ends up compounding the problem because it does not eliminate the “prove-it” mindset of the client.
Making yourself indispensable
Clients come to you and stick with you if you are indispensable. Spreadsheet analysis does not make you indispensable. In fact, mastery of any analytic tool does not make you indispensable.
The ability to frame a problem and ask the right questions to arrive at a unique solution is one thing that makes you indispensable. This is a far more difficult skill to have. It is also a far more difficult skill to explain. How do you explain it?
It is tough to do. So, in these situations your results or a client referral usually works best. In other words, it takes longer to prove you have this skill, but this skill has more sticking power.
The other element of being indispensable is trust. A client must absolutely trust you with their most pressing issues. Yet, these are broad concepts and there is something crucial we tend to forget when thinking about this concept.
Clients are different and consultants are different. A consultant’s personality and skill set may be best suited for a particular type of client in a particular situation. If you can understand that, you can increase your indispensability.
For example, I am quite a focused person and work best in highly stressful situations where a lot is at stake. My role for a large time at the firm was a troubleshooter. If a study was in trouble, anywhere really, I would be sent in to bring it back on track. In those kinds of situations you need to have a firm grasp of the fundamentals, the ability to sooth annoyed clients and the ability to raise a demoralized team’s spirits.
I have been parachuted into cost reduction studies, country strategy studies, massive organizational turnarounds etc., under incredibly short timelines and asked to help the teams on the ground. In my experience, the teams tend to be very good, but usually the structuring of the study is not useful since the questions/hypotheses raised are incorrect. And the client is tending to demand more since the study has slowed down.
So in my case, I understood the conditions under which I will be indispensable. I have tried being on engagements where profits are very high and everything is going very well and I find it difficult. The urgency and pace is missing and the stakes are frankly too low.
Moreover, it is usually private sector companies who are in these flush profitability situations and I could not care less whether this new study is going to raise shampoo margins by 5%. I feel like I am wasting my time on those things, as important as they may be to the client.
Understanding the context for your indispensability is vital. McKinsey associates generally have not been exposed to sufficiently different engagements to know when and how they are indispensable.
Delivering the engagement
Delivering the engagement is an entirely different ball game. For a small consulting firm, the person who secured the study is likely going to be delivering it alone or as part of a small team delivering the study. Let’s assume you were lucky enough to leave with 3 other McKinsey associates so you have split the sales and delivery roles.
To most consultants starting a firm, this outcome would be considered a huge success: having a diverse team and a sale. However, this definition fails to consider the true deliverable of a consulting study.
Let me explain this in a different way. It is incredibly naïve to think that a consulting study is merely a beautiful set of slides with pristine analyses. This is how young consultants, or novices, tend to view consulting since that is what they see. That is what they do. And that is what they can touch in the study.
However, this is not the deliverable in a consulting study. To understand the true deliverable in a consulting study, imagine a graph with “time allocated in the study” on the y-axis and “time in days” on the x-axis.
When the study begins almost 90% of the time allocated goes to the analysis. Analysts, associates and managers are crunching numbers to prove and disprove hypotheses. As the study progresses, there is still a lot of number crunching, but it drops to 80%, then 70% and finally hovers around 70%.
Junior consultants and someone looking in from outside will conclude that analyses is the main activity and the main deliverable. It is not, because what matters is what the client is being exposed to. Initially, he is exposed to lots of analyses. However, as the study progresses, while the analyses component remains high, the client is exposed to the 30% the junior consultants do not see.
That 30% is a leadership discussion the senior consulting partners are having with the client to help him understand how he could possibly execute the change.
In other words, McKinsey associates assume a consulting study is about what they can see, ignoring what the client is really exposed to.
In a real study, from around the 60% to 70% of the time into the study, most of the discussions with the board are about executing the change. The analyses are needed merely to help the discussions by providing markers, context and an approximation of the impact.
I have led many CEO or board updates and I can assure you that if I referred to the analyses continuously or made it the centerpiece of the discussion, I would loose credibility. At that level, I needed to take the findings and think about how they impacted the leadership discussion.
That is the true deliverable of a consulting study: movement and action for the client organization.
Hiring consultants is one of the most mishandled areas of young consulting firms. To understand why, remember that hiring is the sister of training and they go everywhere together. So when a hiring decision is made, it is done by considering the training implications.
Hiring is costly. Just doing the interview is time taken away from one of the other five areas. Background checks etc., all cost even more time and money.
By this stage, young consulting firms are usually so burnt out they go for the easy path and hire an experienced consultant since they believe he or she can hit the ground running. Sometimes, they “merge” with another 2-person consulting firm.
The inherent problem with hiring someone because they can do the work, is that it is code for we are hiring them to get as much revenue as quickly as we can. They are de-prioritizing culture. And this is a huge problem.
McKinsey and BCG take a heavy hand to even the hint of ethical breaches. The standards are painfully high from an ethical and quality standpoint. We assume that people who stay at these firms and rise to partnership tend to have accepted these elements as a part of their culture.
That would be a bad assumption to make. The reality is that when the majority of consultants leave, they actually see their BCG-burnished resume as an opportunity to make money! They feel they have served the time needed to prove they are smart and ethical, and now need to go out and earn what they deserve.
Firmsconsulting only uses senior ex-partners. It is our defining characteristic. I can assure you that it is very difficult to find former partners who keep such a strict adherence to ethics and values. It is that difficult a trait to find. That is why we are so small.
The reason why this matters to smaller consulting firms is because they are hiring people for the wrong reason. They are hiring people who have the skills but tend to worry more about their salaries than the well being of the new consulting firm. In fact, if they received a better offer they would leave.
In economics terms, small consulting firms have high-operating leverage. Their cost base is spread out over fewer revenue-producing assets and revenue-producing clients. Firms with high operating leverages face disastrous consequences when a large client or major revenue-producing asset chooses to leave. One hit could kill them, and usually does.
This is crucial because we think of operating leverage only from the client side, and never from the person creating the revenue – the employee. The principle is just as applicable.
Training associates & intellectual property
These two points are linked so it is worth discussing them together. When consultants leave McKinsey or BCG, they invariably take a lot of the firms’ intellectual property with them, implicitly and explicitly.
So they hit the ground running with new ideas, new concepts and some fancy power point templates. That works for about a year. Over time, the ideas they took with them start to fade in value and begin looking outdated.
The young consulting firm looks at what they have and compares it to the hundreds of new ideas McKinsey is churning out. What initially looked like an intellectual treasure chest begins to look old and faded. It actually looks embarrassing.
The young consulting firm also realizes that the fancy ideas mean next to nothing unless a CEO is willing to listen to them. Alas, pretty slides are what consulting is about. Although, it is too late to do anything about it now for the young consulting firm. A painful and costly lesson has been learned.
A consulting firm must invest in intellectual property to constantly renew itself. If ethical and smart people are heart then intellectual property is the blood of a consulting firm.
When I ran the boutique consulting firm, I took the painful and unpopular step of cutting partner bonuses by 70% to ensure we did not curtail our training or our investment in research. I can still remember taking calls in my car outside my house from irate senior partners who did not support the decision.
When I was brought in, a lot of senior partners could not understand why we had committed 5 associates to work with a business school in the US to produce a massive study on transportation sector. Most initially ignored the study. They felt it was a bump in their lives that would eventually disappear.
To them, putting together a few slides would have been enough. They failed to understand the psychology of intellectual property renewal.
Putting together a costly study of this size, directly under the managing partners purview, and working with a top business school, sent a clear message to the stakeholders and potential clients that this study was worth waiting for.
Intellectual property is how consulting firms advertise without advertising. Without new ideas a consulting firm can only do push advertising by forcing itself on clients. With high-quality studies, we have pull advertising since the clients come to the firm.
When we rolled out that study, we had no problems meeting the most senior government officials, CEOs of private sector companies who would be impacted and even unrelated large businesses who wanted to talk to us. By coming out with such a sound analyses, we could set the agenda for the discussion on the pending changes. We became the go-to firm on the topic.
Intellectual property development is serious business. In most firms, the weakest people are sent to the beach to work on mediocre studies just to pass the time or show some progress. I insisted that only the top people in the firm should be on the study and had them report to me. In this way, you are using the study as a way to train people who deserve to be trained.
It should be a matter of pride to be working on a study of such significance.
The other important step I took was to code the study as a revenue-bearing engagement and not a cost center. My reasoning was that the study would lead to numerous new engagements in the transportation sector and we needed to measure the net impact over the next 12 months – the overall cost to enter the sector via the study against the client work done.
This may seem like a minor exercise but it is not. The last thing you want going around the office with just 150 people is that the firm is working on a big cost-center study. I wanted to change the discussion to the value research could create. It was not even about the profits. It was about the value.
The study was enormously successful and enormously costly. We had 5 associates working on it for about 5 months full-time and partnering with a business school for additional data. We also began meeting key stakeholders 2 months before the main release to prepare them for the findings and think about the impact on their business.
It is a little bit like a tent-pole movie launch, because it was designed that way. A firm can do a lot of mediocre studies or do one of enormous substance. That is called a tent-pole study.
We also rolled out the results at a fancy hotel for an invite-only audience.
It is also a way to build a massive barrier to entry. If another firm wants to be the go-to firm on this topic, they would need to spend a small fortune and replicate all the elements we had spent a year preparing. Most firms would not do that.
In developing new ideas, ownership is crucial. In the final presentations, rather than placing the names of the team on the first slide, I had their signatures scanned and inserted. It is a more personal touch since they are effectively signing-off the work.
Morale spikes if this is done right. I recall the excitement around the office when the Prime Ministers office called asking if we could arrange a briefing for his energy advisory team. From avoiding internal studies because they were a holding pattern for mediocre employees, consultants wanted to be on these important studies with very specific and glamorous outcomes.
Pursuing research programs like this matter enormously in a culture where everyone is treated equally. At McKinsey you cannot force any consultant to do anything. They must want to do it. You cannot attract anyone with mediocre studies.
And if you cannot attract the best people, you cannot produce the best insights. If you cannot produce the best insights, you cannot serve the best clients.
I would hope this piece allows young consultants plan better as they embark on their own consulting endeavors.
There are two things to keep in mind. First, all six items listed about must be done simultaneously. That is incredibly difficult to do. If you just sell a lot of work, and do not build intellectual property than the value you bring to clients slowly falls and your margin drops. In other words, there is no tradeoff.
Second, the sequence matters here. You have to be very careful about deciding which initiatives you start and when. If you start developing intellectual property too soon and run out of cash to finish it, you do not get 50% of the value if it is 50% completed. It tends to be completely wasted. Every firm will have its own critical path based on its unique assets, skills and weaknesses.
However, to thrive, you need the three skills listed and simultaneously engage in the six activities listed at the end. Miss any one and the consulting firm will not succeed.
Michael Boricki is a partner and director, based in Firmsconsulting’s Toronto office.
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