The percentage of CPA firm revenues coming from consulting services is on the rise. More and more, firms are seizing opportunities to deliver difference-making consulting services in areas including state and local taxes, business valuation, outsourced CFO and controllership, IT security, financial planning, internal controls consulting, international tax, M&A due diligence, and human resources, among many others.
Firm leaders increasingly see the potential of consulting services to provide additional value to clients, creating new and larger revenue streams in the process. But I’m afraid that many firm leaders are making the mistake of managing their consulting services as if they were compliance services, sometimes leading to the “starvation” of the consulting practice and the frustration of the consulting leader(s).
The plain truth is that consulting differs from compliance, often significantly, and you cannot manage these diverse practices the same way. In this month’s column, let’s first explore three significant differences between consulting and compliance practices. Later, we’ll discuss eight strategies for building consulting services that reach their maximum potential.
Three areas where consulting and compliance differ include:
- Business models: Each consulting practice has a unique business model with different metrics and measures. For example:
- Many consulting projects do not recur like traditional compliance projects such as annual audits. This is especially true of consulting services such as M&A due diligence, succession planning, and litigation support (to name a few). Firms must regenerate these services each year. Firms that run a compliance practice may not realize how challenging it can be to grow a consulting practice when its fees “reset to zero” each year. The lack of recurring revenue can make it difficult to predict revenue cycles or compare year-over-year revenue by month.
- Because many consulting services do not recur, the practices experience peaks and valleys in utilization as team members roll off current engagements and leaders focus on selling new ones. In addition, some consulting services register lower utilization based on the nature of their service cycle. An example of this would be outsourced client accounting and financial statement preparation services, which are typically loaded into the first half of each month with less utilization the second half of the month. It is more applicable to evaluate overall fees per professional and/or person, versus utilization percentages, for practices of this nature.
- Consulting services that are sold as a factor of hours typically command a higher rate per hour and higher realization than traditional compliance services sold the same way.
- Some consulting services are sold as a monthly service, or as a factor of value delivered—and not based on hours worked. In these cases, it may not make sense to use a rate-per-hour metric as a measure of success.
- Consulting services are often delivered with less leverage than compliance services. For instance, your HR consulting practice may employ higher-level consultants, not staff associates, to provide HR assessment and strategic-planning services. In that case, it might not be fair to hold the HR consulting practice leader accountable for achieving the same leverage ratio you use to measure your traditional audit practice.
- Staffing: This differs for consulting in many ways, including:
- The type of people you hire. CPAs who excel at consulting do not always excel at compliance (and vice versa). Those delivering consulting services must think outside the box, often starting with a blank slate to identify client needs and define the services offered. Among the skills of a great consultant are a flexible, almost “off road” mindset, the ability to innovate and generate solutions to complex problems, and the ability to research, write, and develop deliverables. Your firm’s current hiring and screening practices may not isolate and identify those attributes.
- The level of people you hire. Most small and midsize CPA firm consulting practices, especially as they are forming, cannot find work for entry-level team members. As a result, the staffing strategies for those consulting practices must produce more experienced hires.
- The pay for people you hire. Consultants often are specialists in their field, and, as a result, they can command higher overall compensation than their compliance counterparts.
- Sales and marketing support: This differs for consulting in several ways. Consider the following:
- Because many consulting practices have a low percentage of recurring fees, your senior consulting leaders must possess strong lead generation and closing skills.
- Because most consulting practices have to generate more new business than their compliance counterparts, these practices require more sales and marketing administrative support to drive the promotion, lead generation, proposal development, and pipeline management needed to grow business.
- Many consulting practices rely on third-party relationships to support service delivery. These relationships can be with, among others, your firm’s own compliance partners, attorneys supporting forensic and litigation support, investment bankers supporting M&A due diligence, and technology vendors supporting an IT security or outsourced accounting practice. Consulting practice leaders must be skilled at cultivating and nurturing third-party relationships, and firms must allow these leaders the nonchargeable time to do so.
With the differences between consulting and compliance in mind, consider the following eight strategies to fuel the growth of your consulting practice(s):
- Hire the right consulting practice leader(s). In addition to expertise in a specialized area, these leaders need to have entrepreneurial ability, experience forging and managing third-party relationships, and strong business-development skills.
- Work with each consulting practice leader to define the business model for the practice and help the firm’s leaders understand how that model differs from your traditional practices.
- Work with your consulting practice leaders to identify the right metrics and key performance indicators you’ll use to measure success. Avoid applying traditional compliance success measures to your consulting practice (or trying to get your compliance practices to achieve the same measures as consulting, for that matter), especially when compensation is tied to the measures.
- Define the necessary characteristics and competencies for your consultants and identify recruiting methods to spot those, including personality, critical thinking, and other assessments. Use these assessments and screening tools to identify internal and external candidates who are predisposed to consulting. Avoid “making do” with people you already employ who may not be the best fit.
- Don’t think that you have to hire only those with the CPA designation for your consulting team members. Employ a mix of CPA and non-CPA consultants to ensure you have the broadest business perspectives and specialties present.
- Allocate the right level of HR recruiting resources to make the key experienced consulting hires needed to fuel your practice.
- Avoid using traditional utilization statistics to make head-count decisions. Understand the revenue-per-professional and revenue-per-person metrics for your consulting practices and make key hires based on those or other applicable metrics, including the health of your sales pipeline. When you find consultants with the right mix of characteristics, competencies, and expertise, hire them!
- Dedicate the appropriate marketing, sales, and administrative support resources to your consulting practice to drive growth and avoid significant peaks and valleys in fees. Most traditional practices minimize administrative resources. Doing so in your consulting practice could overtax your practice leader, who has a significant marketing and sales role in addition to leadership and client service duties. Even worse, not resourcing this important sales and administrative support role could slow growth.
Consulting’s business model, staffing, and sales and marketing approach differ from those of traditional compliance practices. In addition to the differences discussed, expect to identify other differences as your firm’s consulting practice evolves. Embrace those differences and swiftly adapt your firm’s leadership and management strategies to address them. When you do, you’ll position your firm to experience real growth and success in the difference-making, differentiating realm of consulting.