In Consulting, Human Capital Matters More than Financial Capital

When was the last time a technology consulting company had an Initial Public Offering (IPO)?

Exactly.  It rarely happens, and when it does, it is the exception, rather than the rule.

However, back in the pre-dot-bomb era, you had these things all the time.  Remember Scient, Viant, Sapient, MarchFirst, and a plethora of other companies that either ceased to exist, or significantly scaled down during the tech downturn of 2000-2003?  Boy, how things change.

So what changed?  Well – we have to imagine why companies decide to do an initial public offering.  In theory, it should be to get a large source of capital with which to quickly expand and gain marketshare.  Of course, we know the real reason, in a lot of the cases, was simply to get the founders very, very rich… but lets play along for a bit.  Anyone investing money in a company like one of those aforementioned consultancies was based on the premise that a consulting company can leverage the additional money to hire hordes of programmers and bill them with large margins – creating truckloads of profit.  Of course, it didn’t work, and the rest is mostly history.

One of the things we learned is that there is a constraint on how fast a consulting company can grow.  Simply put, in a well run consulting firm, your growth will be more constrained by the speed at which you can acquire human capital far more than the speed at which you can acquire financial capital.  Put another way – if you had a billion dollars, you could not create ThoughtWorks out of thin air – in a year, or probably even in five years.  Why not?

There are a couple reasons.  Even if you wanted to, you could not immediately hire 1000 great software developers who work well together, have decent client skills, and are smart enough to command the rates required to make consulting work.  You also could not simply hire 50 top partners/client principals/or “rainmakers” at once (or if you did, without massively overpaying and killing your margin).  And even if you did all that, you would not build an instant cohesive culture that creates the kind of cooperation across groups that are required to compete.

This is not to say financial capital does not matter.  It clearly does, especially on the 1st and 15th of the month when you need to make payroll.  But that said, the right combination of human capital is much harder to nurture over time and create than simply writing a check.  Put another way, MarchFirst had financial capital – lots of it, and lasted barely a year.  On the other hand, companies with Human Capital will generate the financial capital to keep things going.

This, of course, has important implications, which I will explore in the next post…

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