Why Many Technology Consultancies Will Never See $100M Revenue

Consider two hypothetical technology consulting organizations.  One has 50 people and 10 million USD revenue, another has 500 people and 100 million USD revenue. Is one just a larger version of the other, with more geographic expansion?

Obviously not.  There are many differences.  For one, it is harder to manage 500 people than 50.  The latter allows you to probably know the names, histories, likes, and dislikes of each of your people.  The former, you might pick up only if you are Rain Man or otherwise have some sort of amazing photographic memory.  That alone is a significant challenge.  However, there are bigger challenges that I think deserve a good deal of attention.

Lets first consider the ways two different organizations like this will look at a comparatively small deal, valued at $200k.  All other things being equal, $200k is 2% of the revenue of a $10M company, whereas it is 0.2% of the revenue of a $100M company.  While all companies will pursue the deal, it is probably more likely that for the smaller company, the $200k deal will get more attention from the founder or senior executive officers than it will for the larger one.  Having see operations in consulting organizations that range from single digit millions revenues to billions in revenues, one truism is that typical deal size is around 1-3% of revenue.  Note that I am not talking about client size – as some clients may have many deals in that range… but single deal size tends to congregate around that number.

A big implication of this, of course, is that with larger deal size, comes longer deal duration, especially for projects.  Lets assume we are selling teams, we are not selling mere staff augmentation, and that the team size is somewhere in the 4-8 range.  Lets assume rates go from a low end of $50 per hour, to a high end of $200 per hour.  This gives us a range of $8,000 per person-month to $32,000 per person-month.  With team sizes going 4-8, you can then expand to team-months of $32,000 per team-month to $256,000 per team-month.  Given these assumptions, a $200k deal will range from 1 month given a very large, high-end team, to 6 months, given a small, low-end team.  The actual deals in this space tend to come in a bell curve shaped distribution, with  $200k deals typically being in the 2-4 month range.

What is funny about that number, 2-4 months, is that is typically where Waterfall style deals tend to really start falling apart.  At sizes below 2-4 months, you start to be in the neighborhood of the predictable.  A great team of otherwise skilled people, working under Waterfall methods, can probably come in under the terms of the contract if you have a 3 month or less duration.  Agile will still probably do better, but a shorter time frame does give you a better chance of success, regardless of method used.

So what happens?  Well – let us just for a second focus on what is easier to sell, in the world of small deals.  First, let me go out on a limb and say that it would be far easier to sell the certainty of Waterfall, with it’s “fixed” budgets and hubris, than the fuzziness of Agile, where you have to admit the truth and concede that you don’t know what you don’t know.  If selling Waterfall is easier, and your typical duration is 2-4 months, one could reasonably conclude that a small consultancy selling certainty will grow faster than a small consultancy selling honesty.  This is especially true in a world that frequently throws out ethical concerns, quality concerns, or any other concern that isn’t “get the deal done”.  The most important growth factor in such organizations is perceived to be sales, because sales people bring in the deals, and at this level of deal, a perception is often that you can get there with commoditized delivery.

But what happens on the way to $100 million?  Well, first of all, we have to multiply everything by 10.  If your typical deal size is $2M, rather than $200k, your duration is also probably longer – 8 months to a couple of years.  You have moved from the world of single projects and into the world of complex “Programs” (i.e. in the “Program Management” sense) that involve a different kind, and number of stakeholders.  At this point, hubris can’t win, because Waterfall utterly fails in the land of long, multi-month projects.  The key skill of the traditional “deal-maker” hunter type who cuts the deal, gets the signature, and moves onto the next one is far less valuable than the farmer “engagement-manager”/client partner type who lives or dies by delivery.  This is why you see so few technology consultancies get to $100M of revenue without the help of either:

  • Being tied to a software product company (i.e. IBM Global Services, etc.)
  • Having a relationship through other means, such as an accounting firm
  • Being an outsourcer who sells on a pure “cost cutting” premise.

Some companies have made it.  I am proud to say ThoughtWorks is one of them.  But for that to happen, something has to shift on the way from $10M to $100M:

  • Delivery matters much more than sales.  Great delivery is your sales engine.  You still need sales – demand has to be generated.  However, much like how a retirement account you contribute to over time hits a point at which the earnings from prior investments exceed new principal contributions – at some point – earlier than you think, delivery is far more important to growth than sales.
  • Reliance on Waterfall as a sales tool has to end.  Waterfall works for deals in the small, sometimes, about as much as Agile, and for some, is easier to sell.  In the large, it does not work very well, and hinders your ability to deliver.  At some point, if you are in the business of doing multi-month, multi-million dollar deals, you have to deal with the realities of software development.
  • The larger you get, the more that workforce engagement matters.  A dynamic delivery organization that feverently acts in the interest of the client and the company is a key differentiator in a space where delivery is the key to growth.
  • You have to be differentiated.  The companies that spend millions of dollars on multi-year programs are not going to select you because you took the executive to a really nice steakhouse and a good round of golf.  There has to be a reason why a large audience of stakeholders will understand why you are different than the thousands of smaller and less expensive companies are going to get the contract.  Saying you have great people or a great process isn’t enough – those are mere “table stakes” to the table.
  • You have to be global.  It is simply a reality of our business that, to compete for the multi-million dollar deals, you have to be able to have great talent all over the world.  Most companies you sell to at this level have global operations.  To service them, you need to be global too.

In other words, what got you here won’t get you there.  Many, many companies get stuck in a rut at some point between the 10 and 100 million dollar revenue mark, and fail to recognize what they have to do in order to break through.  If you are a consultant, it is something you need to think about – especially if you are the kind that wants opportunities to have a larger impact doing important work.

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Comments

  • Ty Turner  On December 23, 2009 at 3:17 pm

    Great Article!

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