Practice management – Inside-out sourcing

Consultancy leaders rightly focus most attention on their operational practices, and the revenue and margins they generate. They may also spend time trimming costs by outsourcing functions: the car fleet, say, or facilities management. But all that may still leave in-house some service departments (personnel, perhaps, IT or finance) which don’t get much attention, and which remain sheltered from the winds of marketplace reality.

But if those departments can’t be outsourced, it may be worth looking at ways to bring the great commercial outdoors indoors. Whether you call it in-sourcing, or turning a cost centre into a profit centre, the aim is to challenge each department to prove its value to internal customers.

The effects can be remarkable.

Once upon a time I worked in such a cost centre, an internal training department in a large professional firm. We had a couple of problems that may be familiar:

When we tried to drum up support for a new idea, we got shuffled off to staff committees – because operational bosses wouldn’t spare the time to talk about it. Result: we spent time in meetings which remained inconclusive because nobody at them had sufficient clout to make things happen.

When we tried to win funding or staff resources for a new initiative, senior executives would ask us to write a proposal for approval, then ignore it for months. Result: by the time we got a decision, most of our enthusiasm had evaporated.

We had operational problems, too:

Line colleagues who agreed to help out – by instructing on a course, say – got pulled off at short notice by their bosses, because they had “paying work” to do. Result: last-minute scrambles, inadequately prepared replacement instructors, and disgruntled audiences.

Staff who signed up for courses were told to cancel or switch dates at the last minute, creating administrative tangles, hotel cancellation fees, a half-empty course and boxes of spare materials. Result: the department acquired a reputation for lacklustre delivery and daft mistakes.

Since most of the department’s costs were fixed (rents, salaries etc), managers tended to have to focus on relatively small issues, such as photocopying costs for course materials and how many drinks instructors were allowed to buy participants during off-site courses. Result: admin staff and instructors got irritated by apparently pettifogging constraints on their discretion.

When my then boss sold the firm on making our cost centre into a profit centre, he scared the hell out of the staff. In practice, it meant giving up his claim to a share of the central budget and, instead, charging operational departments a market rate for the use they made of us. In effect, we became simply a commercial supplier of services to the firm. An internal supplier, but otherwise no different from any external rival.

Despite the initial nervousness, staff rapidly swung behind the idea because, almost at once, it gave them much greater control over their own destinies. It solved the problems, too:

When course numbers dropped below the budgeted level, for instance, we cut prices to fill the gaps – like airlines using stand-by passengers.

If we wanted to start a new course, we marketed it to the firm at large.

No takers, no course. But no waiting around for approval, either.

Our course managers learned to listen very hard to what the market wanted – because their jobs depended on the revenue they generated – and operational chiefs suddenly took a personal interest in our work because they were paying for it directly from their office budgets.

In any fee-driven service organisation, brownie points accrue to people with a high proportion of chargeable time. Being a profit centre meant we could afford to pay line colleagues their full charge-out rates to instruct on courses. Since the courses lasted anywhere from two to five days, instructing boosted their utilisation figures painlessly. So they queued up to help – and we could pick the best. Their bosses encouraged them, too: the money they earned by instructing cut the costs of training others from their office.

Course by course, we kept running totals of the department’s earnings pasted up around the walls. Trainers and secretaries began to compete to see who could run the most profitable events. The per diem record – for a one-day course in speed-reading with one instructor and an audience of 75 – was #10,200.

That didn’t mean piling courses high and selling them cheap, however.

Future revenue depended on the department’s ability to send audiences back to their offices happy and better at their jobs. And if that meant working groups into the night – or buying drinks – that was what happened.

The people on the spot had the responsibility and the authority to deliver results.

Over three years, the department grew a reputation for responding to practical business problems rather than theoretical training needs. Instructors were called in to run one-off events for individual offices, or to coach teams on client presentations, or to advise partners on proposals. Best of all, the training staff learned and kept on learning how to do things better.

Why do I believe it was the profit-centre idea that made the biggest difference – not company culture or management quality? Because a year later, in an access of centralising fervour, the firm ordered us to revert from profit centre to cost centre. And most of the old problems came back.

Tony Scott, an independent consultant, specialises in business communication issues.

Related reading

HMRC banknotes