How to start a profitable consulting business

A friend recently asked me if he should add a consulting unit to his business. He thought consulting could have high profit margins and add value for his customers.

I gave him the following advice, having seen the full spectrum of consulting practices – ranging from startup firms making millions in profits, to languishing firms losing money.

Although there are many factors involved, two simple questions come immediately to mind:

  • How big are the clients (and consulting budget available)
  • How long will it take to deliver results?

Typically, smaller companies have smaller budgets, and the largest budgets are available only at the Fortune 500 level (though exceptions include VC-backed startups).

If a consulting firm’s project requires more time than the budget allows, then consultants will cut corners, clients will be unhappy, and the consulting firm will still have poor profit margins. Although high margins are often attributed to custom, strategic consulting – profitability at the low end of the market dictates “productizing” the deliverable to reduce time spent on each project. That’s not to say that all clients should receive the same report – rather that a standard approach based on some pre-arranged templates should sufficiently add value (given price and scope of project).

Techniques that can be used to accomplish this include focusing on an industry, focusing on a functional problem/process, and developing a standardized methodology that simplifies the consulting engagement.

Although many consultants seek larger clients and longer projects, there’s plenty of room to be successful even serving small businesses.

2 responses to “How to start a profitable consulting business

  1. You do a great job of identifying the external factors that lead to a successful and profitable consulting business. But there is one thing you missed – be good at what you do and always have the customers best interest in mind. If you do this, you absolutely cannot lose.

  2. Thanks for the comment! You’re absolutely correct that being good at what you do is a necessary precondition toa good consulting practice. But truth of the matter is that most consulting firms (even the best) but aren’t so good at managing their own firms. It’s hard to have an “outsider’s perspective” and see strategic opportunities when as a consulting you’re just trying to maintain utilization rates and sell projects. This is as true at the big name firms as it is for the little boutiques.

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