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. Consulting businesses typically are run under a fee-for-service premise. Common business models include fixed price, time and materials, and retainer.  To deliver value, consultants need to interact with clients and do the actual work. So, consulting businesses naturally have a cost basis that scales linearly with the amount of work you sell. You can definitely grow consulting businesses – but the cost will grow with the revenue.

To make things more efficient, sometimes consulting businesses develop bespoke internal technical systems (often software based) to automate processes, make better decisions, and generally help their staff get their work done more effectively than if they were to use other solutions on the market. Sometimes these systems are so powerful that they can power a product business all by themselves.

We have seen case studies of this happening in all sorts of sectors – from hospital IT systems to apparel product design and development software, to underwater pipeline inspection using underwater drones, to land surveying services for the construction industry, to platforms helping developers develop conversational AI interfaces for their customer support front end.

The transition from consulting using technology tools to a technology based product business is very exciting, as the latter can demonstrate exponential growth without a corresponding increase in operating cost. It can also pose new challenges, as the founders need to transition from one mental model to another – and tackle fundamental changes in the nature of their business.

Here are some things that they should think about.

  • Target market and customer. The service business may play well in a particular market segment inside the industry vertical that it plays in. When you switch to a product business, selling, say, a software solution, you will need to rethink where in the value chain your solution plays best. For instance, if your service business brings value to a particular class of organization in the value chain of their business, your software solution could target the same class of organization, OR it could target other consulting businesses who used to be your competitors. Primary market research will help you understand where to go.
  • Go to market strategy. You may have succeeded with direct sales for your consulting business, but 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. The good news is that you could reach a whole different segment of the market with a self service model for a lower priced offering.
  • Business model. You will need to move to a completely different pricing strategy and business model – and 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 $5000/month SaaS model. You will need to be ok with letting go of short term revenue expectations in order to build the new business, which promises to be vastly more valuable over time.
  • Standard product features versus customizations. This one is counterintuitive but predictable. When you run a consulting business, you work closely with your client to understand needs and wants – and 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 be a lot of customization. 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 product, you need to draw that line in the sand – separating product features from customizations – and work hard to contain customizations. This will go against your natural instincts – but is a necessary step towards building a scalable product business, as maintaining too many customizations will decimate your ability to scale.
  • 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 – who is chartered with 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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