Why don't consulting businesses scale easily?

Quora

August 18, 2013

Running a consulting business and scratching your head on how to scale your business? It might not be that easy. Here’s why.

Answer by Lee Semel, an entrepreneur, UI designer, photographer and software engineer, in New York.

Each project is generally a one-off, custom solution, rather than a reusable technology. You will spend a lot of time building features specific to one customer, in exact way that customer demands, rather than building generally applicable solutions. You can’t say “No, that’s a feature only 1% of the public will use!” because they’re paying you to implement it, no matter how ridiculous the request is.
It is hard to win projects. Sale cycles are long, complex, and competitive, and require you to have account people to find leads, make pretty PowerPoints, fly around the country to meet prospective clients, and respond to RFPs. This is a fulltime job for several people.
Companies want to work with firms of similar size. You’ll get asked about the number of employees, yearly revenue, and other private details, and if they don’t match up with what the client is looking for, they will not work with you. It can be hard to get big projects from well-known companies if you’re not a big company yourself.
Because each solution is customized, you often can’t afford to specialize in one skill area. Let’s say you are the expert in developing Rails apps. Most web dev projects are big integrations where your Rails expertise is just one piece of the puzzle. You may have to integrate with some legacy custom system, or 3rd party software for e-commerce, CRM, email marketing, accounting, etc. You will almost always have to scramble to learn something new or find a consultant who does. This is very nonscalable as you are always forced to pick up non-core skills or spend your time as a virtual HR department and find people that do. If you aren’t willing to become more of a generalist, and aren’t working in an especially hot area of technology, you may lose out on projects.
The custom nature of the work results in a lack of self-direction. You are spending all your time serving your clients’ needs, being dragged along by their requests, instead of implementing a focused vision to a specific problem. One day you’re building an e-commerce site, the next, setting up an email marketing campaign, and the third, creating online games. Consulting firms don’t really have distinct business plans or business strategies, though sometimes the founders try to come up with one. The business strategy is to try and sell a lot and do what your clients ask for, then repeat.
You may set out to start consulting and later transition into a product business. This is possible, but very hard, and many companies think about this but fail to follow through. It helps if your company is small and you make it a priority to break away from the consulting model. 37Signals, Fog Creek Software, and Harvest are companies that have transformed themselves, and they were all very small when they made the switch. But usually what happens is that once you get used to the upfront revenue of projects, and have a payroll to meet, it becomes nearly impossible to commit to the investment to build a product, because this clashes with your existing business model of upfront billing for projects. You will not put in the 6-12 months of no-revenue work needed to create a new product from scratch, especially when the product may not be applicable to all of your future consulting clients, due to the unfocused nature of consulting.
If you do try to create a product, you may end up creating what’s known as ‘consultingware’. Consultingware is software that’s promoted as a standalone product, but in reality requires a huge amount of customization for each client. It often is used for internal enterprise software like content management systems or CRMs. Consultingware requires expensive in-person selling, followed by a big customization project, so it’s not scalable the same way as software-as-a-service. Consulting companies will sometimes say that they have developed some special proprietary consultingware as a selling point, even if it’s just a bunch of libraries or scripts they reuse from project to project.
Web dev shops don’t just do development because a successful website requires more than technology. Large, successful ones are basically full-service marketing agencies.. You need to have a full complement of professionals, including strategists, information architects, designers, HTML coders, project managers, account managers, salespeople, usability experts, branding experts, SEO experts, and the list goes on.
The most reliable recurring revenue in a web consulting business comes from running operations and maintenance on existing websites, rather than building new ones. This can be a good source of revenue but it can be exceptionally boring work that talented developers won’t want to work on. Unless you have a lot of coders and project managers at your disposal, you should accept maintenance work with rare, enlightened clients who you have a great relationship with, and whom you can work on a high-level, strategic role.
Engineers and designers often have the right skills for working within a consulting company, but the wrong skills for growing one. The true leaders of a service business are sales people and account managers, because to win projects you have to spend your time building relationships, not technology. Sales, hiring, marketing, and project management matter as much as implementation. Tech people are a cost center in a consulting business, not a revenue generator. (The best role, if you’re a tech person working on a web consulting business, is to get involved in sales. Clients really appreciate it when a tech-savvy person can explain complex technical issues to them in plain English, and they will have more confidence in your team.)
In a consulting business, you almost always charge by the hour. Even huge, fixed-fee multi-million dollar projects are broken down into line items by man-hours, and savvy clients will insist on seeing the breakdown to make sure you’re not “making too much”. But hours and value are not equivalent. In a product business, you can charge whatever the market will bear regardless of how long something took you to do, but in a service business, if something takes you an hour to do and you charge $200 an hour, then you’re getting only $200, even if it might generate $10,000 in value. This results in a disincentive for people to work efficiently, exercise judgment as to the use of their time, and engage in out-of-the-box problem solving.
You end up learning working methods and mindsets that are antithetical to building scalable products. To ensure they don’t lose money on a contract, companies are constantly working to prevent projects from growing. To do this, they resort to a heavyweight waterfall process: working on a predetermined, fixed feature set rather iterating based on real user feedback, allowing a limited number of design rounds and revisions, creating lots of documentation and written specifications, working in long phases rather than continuous small releases, collecting client approvals to preempt future change requests, holding lots of meetings, and negotiating change orders to do anything outside the predetermined project scope. To make a product you need to unlearn this mentality, and it’s difficult to do one it’s part of a company’s culture.
It can be hard to differentiate yourself from all the other consulting companies out there. It often comes down to the kind of work you’ve done before, and how prestigious your past clients were. Once you’ve done a site for the leader in a particular industry, you end up getting a lot more projects like it, and then you can become a specialist in that industry or type of project.
Unlike a startup, money alone cannot be used to scale a consulting firm absent of paying clients. With a startup, more money can be used to hire more developers to build your product, which will hopefully gain traction in the marketplace, resulting in growth that is faster than linear. In a consulting firm, the most you can do with extra money is hire additional sales people. They then need to scare up some projects, and repeat this indefinitely. This is a slow, linear growth path. If you get really big, say after 10 or more years of work, you might be able to buy other consulting firms and grow that way.
In consulting, projects are self-contained and don’t build upon themselves. In a startup, you’d build version 1.0, then build version 2.0 on top of it to get the next level, then build version 3.0 which further improves on that. In a consulting business, you build version 1.0, followed by version 1.0 of the next project, followed by more version 1.0’s of more projects, indefinitely. The most that you can take from project to project is general domain expertise, improved process, contacts, and reputation. While it’s possible to reuse code, this is such a small part of the overall project process that it’s often not valuable, and it’s hard to find consulting projects that are so similar that you can directly apply code from one to another.

This is not to say that you should not work as a consultant, that it’s inherently bad, or that you can’t make good money through consulting. There definitely are large web design and technology consulting companies, not to mention all the advertising agencies, branding agencies, and PR firms, all of which face similar obstacles. Rather, it’s important to be aware of these traps, plan ways to work around them, and to accept that it’s not easy to grow from a 1-person firm to a 100-person firm.

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