Lean Consulting – Should You Pay For Outside Consultants?

If your company needs to implement the waste-reduction method known widely as lean, they will have a couple of different choices.  They could hire outside lean consulting professionals, or they could create experts within the organization.  Both of these choices assumes that the company doesn’t already somehow possess the expertise…inexplicably ignoring it.  So let’s take a look at the pros and cons of these two choices in obtaining any sort of lean consulting.

Outside Consultants

The first, and most immediately available option is to call in the cavalry, so to speak.  The benefits here would be how quickly you could get started, the peace-of-mind of knowing you have an expert on-board, and how rapidly you could start taking action.  In turn, the above benefits would prevent you making false-starts in implementation.

So what are the “cons” of paying for outside lean consulting?  First, it tends to be more expensive.  Second, the company is less likely to buy in and own changes in their processes if some outsider (who probably doesn’t know nearly as much about the business) came up with them.  If that second thing happens, then the company is less likely to stick to any changes long-term.  As soon as things look like their “going awry,” the old processes will come right back.

That brings me to the third potential problem with hiring outside lean consultants…lack of “continuity of care.”  Companies need to be vigilant when selecting a consultant, and ensure that they understand the terms of service.  There are a lot of lean consulting firms that will send an expert to you for two weeks to run one “lean event,” after which they leave.  Unless you company already has very strong commitment to and belief in the lean methodology, this method of “buying events” from consultants can encourage a lack of buy-in.  There is more of a feeling that you’re paying a “waste doctor” to come in and perform multiple surgeries of a period of a year or two, which will fix all your problems while you continue to operate under the same mind-set that got you into trouble in the first place.

Internal Lean Experts

The “pros” of seeking to train your own experts inside the company include an increased likelihood of buy-in.  If employees see that the changes are coming from someone who has done what they’ve done…seen what they’ve seen, someone who knows the business, they’ll be more likely to believe in and stick to those changes.  Also, when there is full-time lean expertise within the organization, the cost tends to much lower than paying outside consultants, at least initially.  Plus, management can rely on day-to-day oversight of lean implementation and activity, rather than doing it in 2-week spurts every few months.

But there are disadvantages to building an internal lean team as well.  The biggest draw-back is how long it will take to develop enough expertise in your new experts to make any difference.  The “ramp-up” period is much longer than bringing in outside help.  Next is the additional time it will take the company to “get it right” after several false-starts.  Just like learning any new skill, you will make mistakes at first.  And without an expert coach, you will make more.  And ironically, some of the same buy-in issues that exist in the outside consultant scenario can exist here.

A common scenario plays out like this.  The big boss decides to implement lean internally, so they pick the folks from the workforce who will become the experts.  The organization sets up a team and sends them to a training seminar lasting a few weeks.  Then the big boss goes about business as usual, asking for status reports from the team periodically.  Even if the team has managed to become experts in 2 weeks (not likely), they will still just be employees of the company, and their ideas will simply not carry the weight with management that the same ideas would coming from an outside consultant.  It’s the prophet in your his own country paradox.  It isn’t logical, but it is a powerful part of human nature.  Unless management has strong belief in and support for lean concepts, this approach is not likely to yield positive lasting results either.

So… what?  Am I saying you should neither hire outside an outside consultant, nor try to train up your own expert team?  No…I’m saying you should do both!  By taking advantage of the “pros” of both approaches and cautiously avoiding the cons of both, the odds of success are high.  Did you notice that there was one common factor in each approach that could make the difference between success and failure?  Strong leadership support for and belief in lean concepts and methodology is absolutely essential.  Once you have that, it almost doesn’t matter which method you choose, because you’ll have the support to get you there eventually.

So assuming proper leadership support for lean concepts, make the best use of both options above by hiring the outside consultant at the very start.  Pick your team and have them work side-by-side with the consultant for a few months.  This way you can avoid the drive-by lean event method. During this time, start training everyone in the organization in lean thinking.  Then leadership must start making changes in the measurement and reward structure of the organization to adapt to lean thinking versus traditional thinking.  Now you start you lean events/projects, facilitated by the consultant and members of your lean team.  As employees get used to participating on event teams, and as your internal team gain more expertise and experience, the consultant can spend less and less time on-site, eventually fading away entirely.

As long as that leadership support remains, the above approach to external and internal expertise will have a huge chance of succeeding.

Valuation of Consulting Firms – A Blended Approach

Consultants News, of Peterborough, NH, is probably the most prestigious consultants news letter published and features world wide distribution. Awhile back, because they receive many questions about “how to value consulting firms” . . . . . whether they’re mid-sized firms being acquired by industrial giants, or founding partners assessing fair valuation when new partners are appointed. To deal with CN’s coverage of this topic, they asked Charlotte based consultant and valuation analyst Paul A. Halas, Jr., to outline his valuation technique as it applies to consulting firms.

Thomas D’Ufrey said: “The worth of a thing is known by its want.” For management consultants the more contemporary question might be “how much is a consulting firm worth in real dollars.”

Someone suggested at a past Institute of Management Consultants (IMC) conference that a consulting practice is really nothing more than a specialized business whose value is the sum of hard assets plus current real profits.

But its not that simple. And there’s no single formula to determine base valuation. My method, which I call the Halas Business Valuation System (HBVS) blends several protocols to valuing a business.

This blended approach allows the valuation to factor in more than just the income stream and owned assets (which, for smaller firms in particular, can be a substantial component of value). The key to this approach is to consider such things as goodwill, cyclical business factors and excess income as adjustments to several valuation formulas.

As a point of discussion, I used our HBVS approach, hard data only, no esoteric or subjective input, with three actual consulting firms of different sizes. Side by side comparisons of the three firms are shown in Table 1.

1. Micro-niche firm, $200K Revenues

In this case the present owner has built the business from the start, 30 plus years ago. With a current staff of five (part and full time), the owner has built an excellent reputation with several hundred clients and is now looking to retire. In fact a slow down has already begun and the owner prefers to be available for “guidance” rather than participating in the daily grind. The owner’s perception of business value concentrates for the most part on reputation, industry experience, the solid relationships that have been established and the real property the business has gradually acquired.

For this firm our different valuation formulas generated values ranging from $220K to $477K, with a blended value of $333K. This final value represented only a slight improvement over the business asset value, due to the modest revenues and profit. In the owner’s own words “the practice would be a great base for a new owner who was interested in business development. Its revenue could be doubled with minimal effort.”

Like many small, owner operated businesses, this firm may not have produced a valuation in keeping with the owner’s perception. This is usually due to an owner’s estimation of intellectual value to be attributed to the client list and the value of reputation and relationships. Unfortunately, as with any service business, those client relationships are only valuable to the degree that they are active and producing profitable revenue. This practice would indeed represent an excellent opportunity for the next owner, provided he/she is willing to “beat the bushes” for new assignments.

2. Small / medium-sized generalist firm, $2.5M revenues

This firm was also established decades ago and now serves several hundred of clients in a broad range of industries. With a current staff of 17, the firm’s offerings range from attitude and opinion surveys, to operational skill enhancement programs to corporate policies and culture. A true generalist consulting operation, but one which is very well managed and one in which the CEO is a practicing consultant and often on assignment.

Using the same approach, valuation ranged from $2,2M to $3.9M, with a balanced, industry-weighted value at $3.4M.In this example, the real profit is exceptionally healthy, producing excellent valuation numbers. The firm epitomizes the old investor axiom: “Is it better to buy a business that owns $700,000 in assets and produces $300,000 in profits, or a business that owns $300,000 in assets and produces $700,000 in profit?” Unlike the first scenario, this consulting group is a shining example of what can be done with proper market planning, utilization of the client list and, of course, its people resources.

3. Mid-sized niche firm, $17.5M revenues

This is a well positioned niche firm providing consulting services to a single, large industry. Present staff number 108 and many assignments are international. The firm offers a comprehensive set of services and maintains an excellent reputation in its niche. Its CEO is also a practicing consultant and becomes directly involved with client assignments. When discussing the subject of value, he emphasizes reputation and people assets. This firm has a management style that is dedicated to client service, while providing its own people with a better-than-average quality of life.

Here, the four valuation methods produced a range of values from $6.6M to $9.8M, with the balanced, industry weighted value at $8.7M, roughly 0.5 times earnings.

Implications

This exercise highlights the down-to-earth usefulness of a non-subjective business valuation system, as a consistent and comprehensive approach to determine the market worth of consulting firms. Financial performance and assets pull no punches. In the context of this article for these three firms, their most recent performing period contributed to the final value of these example firms. After assessing thousands of firms for more than 20 years, we find the blending approach to be best, because financial valuations aren’t necessarily linked to a firm’s size. One might consider using a multiplier of 4 to 7 times earnings if you must apply a broad brush, all-encompassing method. But getting to the real income can often be difficult and frustrating. Generally, P&Ls do not offer the complete picture.

Conclusions

In many cases, management consulting firms are blessed with unique attributes, such as intellectual assets, quality client lists, and an in depth knowledge of key industries or markets. These factors are important and can be used by either the seller or buyer to possibly adjust the base valuation.

An information based system, as a baseline, centers on factual and insightful data. Subjectivity can come into play, but only after the financial inputs have produced a price level that seems fair to both a motivated seller and a willing and qualified buyer. Put more simply, its hard to get excited about market presence when the P/E ratio is in the teens. Need we say more.

10 Reasons Why Consultants Fail

Why Do Consultants Fail to Deliver Successful Results to Their Clients? This article offers ten reasons that should be obvious but are all too often overlooked. Whether you are a consultant or an employer, read on.

1. Not Understanding the Business.

A lethal and all too common mistake consultants make is that they don’t understand their client’s business. It’s not enough to know about the business or industry, or to offer up boilerplate solutions. It’s imperative to know the history, mission, goals, competitors and stakeholders related to the organization.

2. One Size Fits All?

When it comes to processes, people, communications, strategies and solutions–one size does not fit all. Let best practices be your guide, but always put your intuition and expertise to work in defining each component, and their impact on the complete solution, along the way.

3. They Don’t Listen.

You can’t have a “know it all” attitude and expect to discover and understand critical pain points that will allow you to provide relevant analysis. By not listening, or by ignoring what your client says, you will miss key factors stunting your ability to make the best and most profitable recommendations.

4. Improper Connections.

Failing to recognize the value in identifying and connecting with the right players is like playing cards with a partial deck. For example, consultants too often misread the inner workings of an organization by catering only to the top level. The failure is in not realizing the significance of those who are most responsible for the frontline work. If you miscalculate here, it will throw off your entire solutions algorithm.

5. Tunnel vision.

Adjust your lens. It is critical to see the whole picture–that includes processes and people. Once you have identified all relevant components and dynamics, you will be able to start outlining how things fit together and begin to work toward formulating successful solutions.

6. Lack of Value.

No one will care about your list of accomplishments, your perfectly crafted proposals, or how articulate and persuasive you are if all you have to offer is a repackaging of what they already knew. It’s all about adding value and offering real solutions for their pain.

7. Bad Fit.

Like any successful relationship, it takes two… and not just any two. There needs to be a complementary fit in order to achieve agreed upon outcomes. Not all consultants are cross-functional. If an organization requires someone with an understanding of cutting edge technology implementation in the public space–they probably don’t want someone who has a perfect track record in the private non-profit healthcare services arena–but absolutely no technical prowess.

8. Poor Communication.

This can be a real deal killer. Your communication needs to be clear and relevant. You need to be an expert listener and be able to have open useful dialogue. Be prompt with responses, reports and feedback to all of the appropriate players. And, you need to be able to articulate the pain, goals and solutions.

9. Sloppiness.

This should be a given but unfortunately it is not. You need to respect the client by coming prepared to meetings, being organized, communicating clearly, showing up on time, interacting in a respectful and prompt manner and making sure to deliver on your promises. If you don’t pay attention to details, it will show.

10. Lack of Integrity.

Credibility, trust and respect are important in all healthy relationships. By ignoring the importance and impact of integrity, you risk failure. You can’t be dishonest, manipulative, deceitful, abusive or negligent and expect to be rewarded. There is only one keeper of your reputation–you!