Consulting companies: great cashflow and lousy exits

The anticipation of the trip

 Getting the Crossbolt cogs spinning again over the last few days has been exciting. It’s a bit like pulling the cover off a sportscar that’s been in storage for a while. Once the battery is charged, you pump fuel into the big carbs, say a prayer and hit the ignition. If it’s anything like my old Alfa there are other factors beyond fuel, spark and compression that come into it: the phase of the moon, the ambient temperature, prevailing interest rates (I’ve never been certain). Eventually it fires up and as things are warming up, I’m bewitched by the smell of the leather and petrol fumes. With the little Momo racing wheel in my hand it’s the anticipation of the trip that kicks in. Where will we go this time?

Enough of the analogy. Where will Crossbolt go this time? Taking a look at the school fees of the past seemed like a good idea: 

 “Consulting companies are great cash generative beasts but have lousy exit strategies“. Unless there’s solid IP in the form of products, nobody is going to buy you out regardless of your pitch on elegant processes. Consulting companies scale poorly: they can only sell a finite number of hours linked to the available skills on tap. Unless the company has a ruthless hire-and-fire policy, the growth is tempered by keeping resource numbers sustainable through economic cycles. They do well in the good times and then haemorrage cash during lean times. Some hotshot companies are able to capitalise on well run fixed-price projects but that’s hard and eventually one goes south and erodes the profits of past successes. 

Hot products still don't sell by themselves

It’s often during the lean times when there is an over-capacity of capable people that the epiphany arrives: “gee whizz, we should be building products!“. Folks climb into product R&D in earnest. The initiative takes on a life of it’s own even after economic cycles have turned and many thousands of hours are burned building the ‘brilliant product’. Then it’s done. And nobody buys it. Or worse, a few people buy it and you have to support them forever (you get the point). At this stage there’s the hard truth: making it in the product game is more about good selling than good engineering. Consulting companies have access to the latter but the former is in short supply. To paraphrase Kiyosaki: “I’m a best-selling author, not a best-writing author”.    

I did lose some money learning this. Remarkably my own lack of specialisation when I started meant that I just didn’t have the idea for a great product. So while I charged clients to build their products, I focused on learning tax law and investing strategies. As the bank balance grew, Crossbolt did invest in a few less-than-successful ventures (ok they just lost money). It was the tail end of the .com boom so it was hard to resist! The school fees here pointed me to something interesting: the power of compounded returns from the invested war-chest solved the scaling problem. There isn’t necessarily a need to scale up aggressively people-wise.

A solution: Run lean, keep costs down, leverage the strong cash generative potential to optimise the invested capital and be very wary of sponsoring maverick product development. No matter how sexy it looks at the time.   This time ’round:  I already figured one answer to the scaling problem that worked for me so no changes there. Regarding ventures – sure, eager as ever but with a bit more wisdom around sharing the risk and cherry picking. I only need one to work.

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One Response to Consulting companies: great cashflow and lousy exits

  1. Squisher says:

    Some compelling points here. For start-ups, VC’s have known this for ages that’s why they look to see if there were buyers prepared to commit at concept stage before releasing funds. No reason not to have the same vigilance with yr own cash. Didn’t you really evolve into a fund manager underneath the hood of a tech. consultancy? Why would a consulting co. expect to do any better at investing than sales?

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