The Scott report – Bigger isn’t always better.

Consider a consultancy firm. The typical assignment in its marketplace requires a director to hold the client’s hand, an on-site project manager, a couple of junior consultants to dig up data and do raw analysis, and a support person to hold the fort. Let’s suppose your team does well. It attracts more assignments with the same sort of profile. You need to grow. But you can’t add only one person at a time without making your existing team lopsided or cutting its utilisation figures. You have to add another complete team more or less all at once. Now your firm can handle twice as many assignments as before. Your revenue is twice what it was. But are you any better off? Probably not, and especially not if you’re set up as a partnership. In a people-intensive business, there are few economies of scale, unless you’re large enough to make hot-desking practicable, in which case you can save something on office space. So if you have to hire more people to handle extra work, and if the patterns of work remain the same, then the profit per director or partner is likely to remain more or less static. No matter how much you grow, the ratios stay the same. Of course, there are some advantages to size. Your cost of sales may shrink, because a high profile should mean you win work more readily, on the “nobody-gets-fired-for-choosing-IBM” principle. Your people will waste less time chasing unproductive leads. Profit per partner may also rise, because you should be able to win larger jobs, so that each partner/director can lead a broader pyramid of staff; that’s mostly been the business model of the Big Five consultancies. On the other hand, coordinating more people requires internal management. So now you have to get bigger to pay for the non-chargeable central management team. On the other hand, at the small end of the league, firms can make money by demanding premium fees. One strategy boutique I’ve worked with has three main charge-out bands, all of which may make large firms drool: £2,000 a day for senior consultants; £4,000 for directors; and £6,000 for the chairman. So, whichever end of the tables you are, the intriguing question is: What makes the difference between success and failure? And although there is no single right answer, long observation of success and failure among professional firms of all sizes suggests some general principles that may help: 1. Focus on what makes you different. It’s always tempting to rush after the latest fad – business re-engineering, telephone-based services, outsourcing, internet trading and all the rest. But that way lies wasted marketing effort and discounted fees. The best strategies are built on what makes you special, not on what makes you indistinguishable from the rest. One strategy firm’s leaders ran into a triple whammy when they tried going after more revenue. Chasing more invitations to tender (ITTs) simply meant that the firm’s average job size shrank. Spreading themselves across more leads meant their hit rate fell. And more time on marketing meant utilisation rates dipped. The fix was to focus on quality, not quantity, to check ITTs for value and fit before deciding to respond, and to restrict directors to what they did best: handling prospects that were worth at least £75,000 a year. In three months, profitable growth resumed. 2. Play to your strengths. One large economics consultancy is superb at modelling marketplaces, especially regulated ones. It now advises most of the utilities on how to allocate spending for maximum return. And its activity has spread into providing tactical advice for non-regulated industries, and it helps other regulated firms argue their case with regulators. Its understanding of market economics has given it an edge both in its core area and in related ones. By contrast, there is a small strategy consultancy built primarily on the expertise of its chairman. As the former chief executive of a large UK construction company’s Far Eastern subsidiary, he has two key strengths: he knows a lot about civil engineering projects and he has a network of high-level contacts in Asia. But he wants to get into other markets. So he’s trying to sell to non-construction chief executives – and in Europe, not Asia. Not surprisingly, he’s finding assignments hard to come by. 3. Beware pat answers. They’re most often wrong. By the same token, beware anything that purports to be a rule of success. Roger Enrico, the US chief executive of PepsiCo, captured this thought: “Somewhere along the way, we either told people or they surmised that it was a paint-by-numbers system. That if you use these tools in this sequence in this way, success is inevitable … If it were that easy, I wouldn’t need a manager. I’d have a machine.” 4. Get used to being wrong. Nobody knows for sure what will work without trying it. That’s the secret of Silicon Valley. It’s full of entrepreneurs who know they don’t know and don’t mind getting things wrong. They try anyway. If they fail, they learn something and try something else. And they keep trying until something works. As Edward de Bono, the founder of lateral thinking, put it: “The need to be right all the time is the biggest bar to new ideas.” Tony Scott is an independent consultant who specialises in business communication.

Related reading