Converting a consulting business to a product business

posted in: Entrepreneurship, Strategy | 0

The practical challenges and rewards of running a consulting businesses are very different from that of a product business.

Business models for consulting businesses

Consulting businesses typically are run under a fee-for-service premise. Common business models include:

  • Fixed price
  • Time and materials
  • Retainer.

To deliver value, consultants need to interact with clients and perform tasks. This scales with time spent doing the work.

So, consulting businesses naturally have a cost basis that scales with the amount of work you sell. You can definitely grow consulting businesses. However, the cost will grow somewhat linearly with the revenue.

Monetizing technologies developed to support the consulting business

To make things more efficient, sometimes consulting businesses develop bespoke internal technical systems (often software based). These systems automate processes, help people make better decisions, and generally help people get their work done more effectively than off-the-shelf solutions. Sometimes these systems are so powerful that they can conceivably power a product business all by themselves.

We have seen case studies of this happening in all sorts of sectors. Examples include:

  • Hospital IT systems
  • Apparel product design and development software
  • Underwater pipeline inspection using underwater drones
  • Land surveying services for the construction industry
  • Platforms helping developers develop conversational AI interfaces for their customer support front end

Why product companies have a more attractive growth pattern

The allure of converting a consulting business to a product company is immense. While the former business model has a linear growth pattern that scales with headcount, the latter can have an exponential growth pattern with a relatively slower growth in headcount, and therefore, operating expenses.

For this reason, product businesses can deliver much better margins and a greater upside than consulting businesses. At the same time, making the transition is not easy. Founders need to transition from one mental model to another, and they must tackle fundamental changes in the nature of their business.

Here are some things that founders making this transition should think about.

Points to ponder in converting a consulting business to a product business

Target market and customer

The service business may have earned respect in a certain part of the value chain in its target market. The founders and senior leaders of the business will have deep knowledge of the stakeholders, buyer and user personas as well as the buying process for consulting solutions. In the transition to a product business, selling, say, a software solution, all that can change. While the industry sector and target market segment may remain the same, where the product will end up on the value chain – and therefore the types of companies and the stakeholders involved in buying decisions can be very different.

For instance, your service business brings value to the customer service department for, say, financial services companies. Your software solution might make it easier for service providers to deliver bespoke software for customer support. In this example, you will no longer be selling to the leaders of customer service. Instead, you may be selling to the IT department – or you may even find yourself selling to your former competitors that are delivering the same service your consulting business has been offering.┬áPrimary market research will help you understand where to go.

Business model and pricing strategy

You will need to move to a completely different pricing strategy and business model. It will look like you took a perfectly profitable business and make it start losing money.

An example is when you go from a $250,000 one-time service contract with an annual $100,000 maintenance contract to develop custom software to a $1000/month SaaS model. You will need to trade short term revenue expectations for long term growth for your new business, which promises to become vastly more valuable over time.

Go to market strategy

You may have succeeded with direct sales for your consulting business. However, depending on the pricing level and lifetime value you can extract from typical customers, your long term go to market strategy could very well end up with different channels with lower customer acquisition cost.

For instance, your average deal size might be in the $250-500k range. At that price, your customers would expect personal service. You can afford to deploy a direct sales force to sell the service. Your technology offering, on the other hand, might end up netting only $24k a year for an average organization in a different market segment. Under this lower-priced, higher-volume model, you will need to build a completely different sales organization and go to market strategy. In the long run, you will likely need to sell through channels or self-service portals to achieve a good ratio between the life time value and the cost of customer acquisition.

Standard product features versus customizations

When you run a consulting business, you work closely with your client to understand needs and wants. Then you develop a custom solution to solve their problems. You are solving for a focus group of one. You may draw from a technology platform that makes it easy for you to customize. But there will likely be a lot of customization, and that is rational. The system architecture and design of your technology stack may also not be very modular regarding where product functionality goes versus where customizations go.

When you start selling standardized products, you need to draw that line in the sand. You must separate product features from customizations or configurations. You will then need to work very hard to unlearn the learned behavior of building custom solutions. This will go against your natural instincts. But it is a necessary step towards building a scalable product business.

Strong product management discipline

Organizations that successfully make the transition from a consulting business to a technology product business are laser focused in product strategy and product roadmap development. This comes from strong leadership in product management. Product managers are entrusted with the task of building knowledge about multiple players in the market, and distilling the common needs and wants that support the company’s core strategy. This is a different skillset than what it takes to solve a specific customer’s problem in a custom manner.

The founders need to embrace this idea and either learn to be fabulous product managers, or bring in talent who already are strong in this discipline.

As a business owner of a consulting business, if you keep these things in mind, you will be well equipped to run fast in the journey to build a high growth business with a great product at the center. Good luck, and enjoy the ride!

 

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