The four kinds of consultancies

Four kinds of consultancies

Broadly speaking there are four types of consulting companies. To avoid unnecessary friction, it’s important to align your marketing, sales, management, and delivery to the type of practice you have. 

The four types of consultancies are:

• Commodity
• Procedural
• Gray-hair
• Rocket Science

Each type of practice differs in how it operates, the fees it charges (and how those fees are structured), and understanding which category you’re in (and aligning your team on that) drives many downstream decisions about how your business should run. 

Commodity Consultancies

The vast majority of consultants work in a commodity practice. There’s nothing negative about working in a commodity, and within the commodity space there’s a wide range of cost and margin possibilities. I worked as a commodity software engineer for decades, and was positioned at the top of that market and did quite well; other businesses serve the bottom end of the market and are also profitable. 

The main characteristics of a commodity business are: the client defines the work they need done, that work is standard and is served by multiple competitors, and the client is mindful of the price they’re paying. Internally, commodity practices scale well, as the client is managing much of the decision-making about work to be done, and so there’s a high ratio of delivery personnel to overhead. The margins of commodity practices are lower than the other types, but the utilization is much higher, so a well-run organization can grow to a significant size. 

The challenges commodity practices face are typically around price and differentiation, both of which come with commoditization. Every company wants to get the higher rates of the top of the market, but they struggle to do so. Too often commodity marketing looks like, “our people are really smart,” itself a commodity message that does nothing for the prospective customer since they hear it all the time. 

While they will always struggle to command higher rates, the best way to prove their worth is for commodity practices to demonstrate it. Producing thought leadership, speaking at conferences, and highlighting client success stories (from the client’s point of view) are all effective strategies. 

Procedural Practices

A procedural practice is brought in to apply a repeatable process to the client’s business. Strategy firms, Agile/Product, and certification practices are all in this space. I’ve also worked in an Agile/Product practice. 

Unsurprisingly, clients turn to procedural practices when they want to change how they're perform a process. The engagements are typically medium length (though some can be quite short), and while clients are somewhat sensitive to price, procedurals should command higher rates than their commodity partners, as they are charged with changing the practices of the client’s people with little to no support from the client. Both the skill of the practitioner and the value they produce is higher (as is their compensation). Procedurals managers are typically less leveraged than commodities, which erodes some of the gross margins. Utilization can be highly volatile, and fees need to account for that. 

The challenge of a procedural is maintaining a product offering that is consistently able to fill a pipeline. Changes in the market will often affect procedurals first, as new technologies and cost-cutting measures often strike these kinds before stopping programs that contribute to the bottom-line. Rate pressure is less significant than in a commodity, but the market volatility requires procedural firms to use much more disciplined cash flow management. 

Gray Hairs

Gray-haired practices are based upon converting the value of the practitioner’s past into the client’s future. As a practicing gray-haired consultant, I can tell you that these are fun, interesting practices to be a part of. As the name suggests, you really can’t participate in the space until you’ve had some experiences to leverage. Engagements with gray-haired practices are negotiated between the client and consultant; the client is relying on the consultant’s ability to recognize difficult situations before they arise. 

Gray hair practices are high rate, low-utilization practices. They are reputation-oriented, and typically experience little to no pressure on price. Value-priced engagements are the norm here (as opposed to hourly or SOW engagements of commodities and procedurals), and the practitioner spends far more time in sales and marketing. There is little to no leverage in these practices (they’re most often solo), and although the delivery needs very little in the way of management or career development, the sales are typically tied to them specifically rather than a larger corporate brand. 

Typical challenges surround acquiring the necessary skills to fill the pipeline: plenty of gray-hairs had little need to develop sales and marketing skills in their former careers, and so learning to listen to the market and respond accordingly takes some time. The practices that can survive the wash-out rate do quite well (plenty of gray haired people who find themselves unemployed think turning into a consultant like is like finding a job), and successful practitioners can throttle the job to suit their lifestyle choices. 

Rocket Science

There are very few rocket science practices out there. A rocket science practice works at the leading edge of their field, developing the concepts and ideas that have yet to become commoditized (and may never). Early in my career when Java was new, I worked at a boutique rocket science company; it has since evolved into a commodity practice. 

Rates at rocket science practices are almost never an issue. Their clients are betting the company, and the ROI typically justifies whatever rate the practice charges. Utilization is very low, and a lot of non-billable effort is required to maintain the cutting-edge status and to market the firm, and there are by definition very few companies who need their services. Leverage, as with gray-hairs, is very low, although often the practitioners at rocket science practices are young and need a fair amount of oversight to insure quality delivery. 

Not starving is the first challenge most rocket science practices face (plenty are formed to serve markets that don’t pan out); maintaining relevance is the second. Most practices that start out in rocket science move into commodities as their practitioners age; the smart ones sell just before that happens. 

Misalignment

One of the challenges I see in a practice is when one part of the organization wants to be type x, and the rest of the practice is type y. This results in the company placing obstacles in its own path as it hires, manages, and markets in ways that are simply confusing. When I engage a practice I’ll often survey the leaders to see if this kind of misalignment exists, and highlight the challenges it creates. 

Another challenge I see is an organization struggling to bridge multiple types. It’s possible to do this, but care must be taken to avoid confusing the customer with wildly varying engagement styles, marketing, and (most of all) pricing. Having a separate brand within the company is most common, and customers quickly recognize this and can understand it. Spinning out the divergent practice is another common resolution. 

I work with all four types of consultancies to drive strategy, growth, and value. Which type do you have? Reach out today to schedule an initial consultation and let’s see how we can grow your practice!