How does the consulting business work? And how can you apply this to Venture Capital firms activity in managing people? This question came up when talking to a friend working on partner level in consulting business while also looking into how Sequoia is running its CRM/dealflow system.
Step 1: The money mechanics in Consulting
Utilization and rates.
In Consulting, everything starts with a partner that is both an expert in a particular expert and an individual that (a) has or can build a network, or (b) can leverage this network to place consulting projects. Once a partner arrives at the firm where he – for simplicty we assome – he/she owns a new sector practice. First of all, he had some prior experience indicating he is the man for the job, his salary will be similar to a partner at another firm. On top of that, the consulting business requires a certain level of polishedness. He will require a decent car, a decent IT set-up and a secretary or someone to call whenever he needs something in the moment. Be it coffee, a new flight booked, etc. So we already have a total cost of the partner for €0.5 – €1.0 million. Typically, the successfully deal-sourcing partner will not have the time to do a lot of nitty gritty work and he will hire one or two more consultants on different levels each costing around 100k in base and a total of 180 – 200k. With shared services to the new team, we talk about 2-3 million in annual cost for them existing and include travel, get-to-know, marketing efforts.
From this perspective, the partner has one prime goal: to make money. And the only means to do this is to increase the billable hours or days to a level of as much as 100% utilization of himself and his staff. In an ideal case, everyone works overtime beyond the maximum allowed working hours in the country of jurisdiction and people will spent an additional amount of 20 – 40% sourcing deals, polishing marketing materials and going the extra miles for getting their clients happy. So the partner has to utilize his team. With 250 working days and a daily partner rate of a mere €1000 and consultant rate of €400, the partner will generate 2.5 mill and his consultants another one million, totalling to 3.5 million. With 3 million in costs, he made 0.5 million for the company and will take a rough 20% of the profits for himself, which is his incentive to perform apart from being let go if he doesn’t even break even in the first 2-3 years.
The only other way to increase his profit is to hire and utilize even more consultants or to increase daily rates by becoming more and more dominant and superior to alternative practices.
So all in all, utilization management and increasing billable rates run the business model, profit share is giving the incentive. Understood? Good.
The core problem of client acquisition and retention
The problem now is that the time acquiring new clients is not billable, neither for him, nor his consultants. Every day or hour not on a project hence directly cuts into the revenue stream. In an ideal world, the partner has clients at hands and immediately utilizes, and his team and his skills andthe materials at hand are strong enough as to require no knowledge and polish work on presentations or time spent with clients.
If every acquisition of a project leads to a single project with no follow on projects, there will be no scaling effects over the life cycle of the partner and his practice apart from potentially negible increase of referrals and brand reputation effects lowering the customer acquisition costs. This is bad. To keep a steady high utilization and increase rates, the partner has to have a consistent flow of request for projects that is strong enough to solve the following problems:
1. Reduce the acquisition costs by having a client and project ready whenever another one is completed.
2. Have so many requests for new projects that he can choose the project and use this to increase the rate at which he is billing the working hours.
3. Have such good client selection and retention skills that saying no a few times due to over-utilization and as an effect having competitors take the projects will not hurt his chances to again have a project in the pipeline from exactly the neglected companies. This is a skill that requires selection of clients that are willing to pay more, are overall either not in urgent need to run to competitors or are so trusting in his abilities that they will hire him again next time in any case when he is available. The saying no problem fades if the partner is capable to hire new talent for his practice and hence have the resources to accept more projects and he has senior employees that are as good as him to deliver a “partner level” experience, while at the same time being unable or unwilling to acquire new clients themselves as to stay loyal to him, etc. etc. Tough.
4. And lastly, depending on employment contracts and legal environment, he also has to ensure that he will not scale up the team size and run into under-utilization when the market runs bad. (by the way, there is no real incentive to not simply scale and leave the company once the market demand turns down and hence some opportunity hoppers that are not committed to the firm per se might use this strategy and provide career opportunities to their successors.)
But to not become too complicated at this point, the core idea is that knowing the best clients and retaining them successfully is a key skill a partner must have apart from simply being able to acquire projects and place skilled people on them.
Step 2: The client retention game in Consulting
The importance of managing every customer touchpoint correctly: hotness
Every interaction of the consulting firm with its clients must be polished and represent the brand of the company. People must look energetic, be sharp and quick in thinking and have the experience in the sector they are operating in. That is the basic prerequisite.
Even more important, they have to understand the correct powers at play. Most consulting projects must deliver the right result – which does not have to be the best possible, but the best as perceived by the client – and it has to deliver it to the right people while also not delivering or harming the right people. In almost all consulting projects, someone wants something that furthers his own interests and agenda and hurts the interests and agenda of someone else. Consultants must not only provide quality work and be polished and energetic, they also must understand the political agendas and environments in which they operate. And always deliver the right information at the right time to the right people while supporting their agenda by sabotaging or hurting the opposing parties without being too obvious about it. A tough game.
On top of quality level and service and appearance, and political finesse, the consulting company has to constantly display attention of the partner and seniority that matches the client as to give the feeling of really being there and interested in the client.
All these factors combined define the hotness of the relationship that is being built. Being scarce and out of competition, being successful in supporting agendas and getting the things done the right way creates the brand value that makes the company desirable. If the hotness is high, the partner can focus on maintaining the relationship longer term and create new hot opportunities.
The importance of managing every customer touchpoint correctly: Coldness
There is of course another agenda coming into play. By offering superior knowledge, dominance, self-confidence and never giving the feeling of being desperate, worn-out, unpolished, and being vulnerable in any sense, the consulting practice remains professional and desirable. This latter feature is necessary to maintain prestigue, scarcity of the service offered which also underlines the price needing to be paid for the service and to maintain a strong bargaining position for follow on projects. It also matters, if combined with excellent results and hotness, that the company can pull of better rates in the future. If this is done well, the practice does not have the incentive to place more consultants to increase total hours billable, but will stick to fewer high quality individuals. The impact from service and admin overhead in costs will be zero for extra hours pulled, and the salary increase for top consultants will not match the increase in billable rate. Thereby increasing profits for the partner. If nobody burns out and people have more hours to learn and play the game, the seniority becomes higher and the overall customer satisfaction will, too, if consultants are well trained and developed.
Step 3: Moving to Venture Capital
TO BE CONTINUED
All talk to all clients and the tool helps them coordinate (never say the same thing twice)
and they are steered to have a few touchpoints with everyone (“We all care about you…” / “Crowd Intelligence”)
The goal is to track the hotness and coldness of the relationship (who is closest and has the best vibe and how can this be leveraged to have a hot relationship?).
Similar to consulting projects where all touchpoints during a project and touchpoints after the project determine if there is an inclination to have another
project assigned. Thinking about the relationship business as an unbilled consulting business where every relationship needs to lead to a joint project that generates
the promised and expected value.
In consulting, the client is paying for the outcome and chooses the (a) the sufficiently good, (b) that can be sold as best, which (c) serves the paying agents best interest – politically and outcome wise.
In the venture business, the venture firm is the service provider and has this mentality, too. But the relationship also requires a steady validation of the client by his own commitment to the relationship. The entire goal is to keep stakeholders in a hot commitment stage.
> When they deliver late or underdeliver after committing, they are getting very substely threatened to no longer be able to transact.
Any means viable and necessary is used to communicate power and value without being actually threatening to the client.
So even when the VC firm is clearly having an ask, it has to frame it like it does so from a power position and that the other party must feel entitled to deliver
> Every give by the client must be a transaction that the client perceives as valuable (not a “I give you and you have to give me back”), so the experience has to be
enriching and value-adding. If it is not on a rational side (clear benefit), it should work on the soft side, e.g.
> giving acceptance to someone challenged by third parties,
> giving confirmation to someone uncertain,
> giving protection when in doubt and obviously ill informed.
Since VC is not an advisory business, the ideal VC strategy makes people ask for such advice only when it can be framed as a “I give”. Let it be insider information,
let it be a unique market insight, let it be a deal intro or company introduction, etc-
> When clearly asking or “paying” for someone – e.g. Board placement, C-Level placement, advisory contract, it has to be framed clearly as “Hey, we have options, but you
are a great guy and we give you the chance”. And not so much as “We need someone like you to make it work.”
To manage these touchpoints and the life cycle of such relationships, Sequoia is using the wall system where basically every activity in the company is running through a twitter like micro feed that takes all company wide updates. The filtering then allows to drill down and zoom into a subset of the stream, and the graph-like nature of connections is used to connect to the deeper layers and views on particular data in the system to perform an analysis. The focus in this system is relationship managemend and early detection of leads from the activity or the identification of resources when in need and search for a particular resource.