Monday, October 01, 2007

Economics of Professional Services 6 - use of associates

Most small firms use associates or other subcontractors to fill capability gaps and to leverage performance.

The costs associated with subcontractors represent a disbursement, the costs directly involved in doing a job. From the perspective of the individual business, the critical questions are:

  • the impact of subcontractors on net fees, fees remaining after disbursements.
  • the way subcontractors are to be treated for business planning purposes.

Answers to both questions depend upon the role subcontractors are to play in the business and the precise financial relationship between the subcontractor and the business.

Traditionally, small consultants use subcontractors as an add-on to gain specific jobs. Because the focus is on net fees to the practice from their own time, subcontractor issues are generally ignored. The sub-contractor is paid their standard rate, the client is charged that rate.

The Ndarala model is different in that it is specifically based, among other things. on cross-selling and work sharing. If the model is to work, marketing targets have to be increased to cover not just direct net fees but also a specific minimum allowance for work to be placed with other Genesis members.

The exact impact of this upon the business plan and firm economics depends upon the nature of subcontractor relationships. Note here:

  • the firm gaining the work has to receive a return from its marketing efforts. This has to come either from cost recovery or from cross selling
  • time, costs and risks are involved in managing other people in a job. As a simple example, if sixty per cent of work is subcontracted, then the prime firm bears 100 per cent of the risk for 40 per cent of the work. A reward has to be received for these risks and costs.

In the Ndarala case we have tried to accommodate these issues through an internal system of fee discounts - generally twenty per cent - combined with marketing commissions on work brought in of up to twenty per cent.

In theory, this should allow a practice to build a solid business based around the conscious use of fellow Ndarala professionals. While this has encouraged cooperation, it has not delivered the results we originally hoped for for two main reasons:

  • First, management of associates is a business and management skill in itself, one that has to be consciously acquired. From experience, while most independent professionals do have project management skills, they lack management skills. Mind you, that is not unique to them!
  • Secondly, building a business around the conscious use of associates or other subcontractors requires a shift in business thinking. Without this, associates will always remain an add-on.

I make this point based on our own experience because I find that many professionals are still interested in leveraging their returns from the use of others. So they do need to think through the issues.

The contracting firms themselves that have extended their reach in recent years are themselves an example of leverage. Generally they take a far higher proportion of the fee charged to the client - up to two thirds - but they also find the work and take care of the paper work, something that can be very attractive.

So associates can work in increasing your yield, but you need to think the issues through.

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Note on copyright

This material is copyright Jim Belshaw. It may be reproduced or quoted with due acknowledgement.

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