From utilization stress to a flexible and profitable hybrid

From an economic theory point of view, consultancy is a strange breed. Consultants deliver a service that consists basically of one ingredient (consultancy hours) that is also perishable: once a day is gone, consultants can not recuperate the hours lost. And, we explained why rate pressure is so annoying: you need that average daily rate of $1,000 to cover all the overhead and make some profit. And why consultancy firms like to have juniors doing senior tasks: it moves the average personnel cost of $600 per consultant downward. Plus, there is utilization stress. With 60% utilization, there is no margin left to cover any other overhead. Rate cards limit the upward mobility in terms of revenue while the abovementioned handicaps (perishable, no stock, utilization pressure) continuously drive costs up.

Selling digital assets changes this game altogether. With only a little bit of scaling, the consultant partner recoups the digital asset’s production costs, and the added margin eases the pressure on the utilization. The partner administers the idle hours and the margin on the digital assets on the same client. Then, in the longer term, it is up to the partner to balance the revenue mix between hours and assets. There, we see three phases.

The first phase is reactive: using the additional margin on the digital asset to ‘pay’ for the lost hours. It’s a defensive and opportunistic, but welcome move. The technology is very likely entirely from a third party.

The second phase is systematic and develops when consultancy practices start to scale. After all, the partner has recouped the initial production investments, so one additional ‘unit’ of scale equals one unit of margin. Pattern recognition adds to knowledge and prestige as well as extra income. The consulting practice has added much experience and insight into the digital asset and, thus, making it truly a product of their own. The fundament is third party technology that the consulting practice has fully customized and, probably, branded under the firm’s name.

The third and last phase is proactive: digital where possible, hours when must. This phase requires central coordination among practices and intense collaboration with one or more technology vendors. The entire firm supports the focus on digital assets.