[Vizzini has just cut the rope The Dread Pirate Roberts is climbing up]
Vizzini: HE DIDN’T FALL? INCONCEIVABLE.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.

- from The Princess Bride

Normally being an “expert” – one who has acquired expertise – is a good thing.  Generally I recommend that people strive to develop deep expertise in a few areas of interest.  Become an expert.

But there are times when it works against you – Jason Cohen has some great anecdotes in a blog post about when being an “expert” can be harmful.  These cautionary tales show how people who have expertise might not take full advantage of it, by assuming their expertise leads to the answer – instead of assuming their expertise would give them avenues for learning…

As BPM practitioners we have to remain open to the idea that we don’t know what we think we know… I think we’ve all both participated in this, and seen it happen to others:

The worst is when you’re an “expert” because then you’re even less likely to challenge your assumptions.

As an “expert” you’ve devised your own laws about what makes your market different from other markets, and what makes your company unique. Even with prior experience, this knowledge based largely on feeling, not fact.

In BPM in particular, we have to set aside what our “expert” voice is telling us inside our head.  We have to listen to what we’re hearing from our customers.  Similarly, we need to help customers set aside their assumptions about what software will do for them, about what their real processes are, just to name two topics. We’re on a journey together with our customers and that requires learning and listening.

Sometimes being an expert conflicts with listening – but only if you think being an expert means you have all the answers.

Jason Cohen, a local Austin startup hero, paints a bleak picture for consulting in “The unfortunate math behind consulting companies.”  The basic thesis is that it is really hard to ramp up from a single-person consultancy to a bigger company that makes money.  He’s right. It *is* hard.  But it is also harder to be an individual consultant than he lets on:

• Most independent consultants have a hard time relaxing when they’re “off”.  They get enough time on the bench or on vacation to live a good life, but when they’re on the bench they’re worried about when the next project starts. It makes it hard to truly enjoy time off.
• Lack of camaraderie.  There’s no team as an independent.  At first that is liberating, but later on it is frustrating for those of us that are more social.
• Lack of vision.  Being an independent consultant does lack a certain vision.  What are the goals? What are we building toward?  What gets me excited about getting up in the morning to do this work?  You know, besides paying the bills?
• Not to mention, your income is clearly a function of hours worked * billable rate.  Not everyone likes that.
• You have to do it all: sales, contracts, insurance, delivery of the project, project management, QA, etc.

Most happy independents that I know offload at least a couple of these things:

• Having a spouse with insurance.
• Having another company produce most of their leads/business, while they just focus on delivery.
• Paying other independent consultancies to do things like accounting, benefits, and other bits that aren’t in the sweet spot.

So this leads to the question:  should you hire?  Should you try to grow your consulting firm to a bigger practice?  Jason writes:

Consulting can be a great way to fund a startup or make a bunch of cash. It’s easy to start; Just pick an hourly rate and jump in.

But someday soon you’ll notice there’s only so many billable hours in the day, and you’ll be tempted to expand. Maybe hire an employee for $30 per hour and re-bill them at $60. Easy money, right?

Unfortunately the math doesn’t work that way.

Jason is right. It isn’t that easy.  But it isn’t quite as bad as he makes it out to be either.  First, let me lay out some of the ground rules you can use as assumptions if you’re building a consulting company.

1. Base your budgeting on 2000 hours in a year.  It is a nice swag (2 weeks off), and it also makes the math easy!
2. Expect 80% billable as your realistic maximum, though some of your people will do better than this.
3. A good rule of thumb is that your minimum billable rate is 2x the hourly cost.  At 80% billable this is better than break even.  But at 50% billable you’re losing money. This isn’t a good billable rate, but it is the minimum billable rate. Because you do have costs: Medical benefits, 401k contributions, office space, vacation, downtime, sales & marketing, etc.  But there’s no reason to settle for the minimum rate.
4. If you are using a contractor (1099) in the US, you shouldn’t expect to markup their rate by more than 50% (ie, 33% margin for you at most).

So, even with all that, Jason paints a pretty bleak picture for your prospects of making money as a consultancy.  The primary issue is scaling the size of your business so that you can (a) reduce risk, and (b) make more profit.  If you talk to friends at startup software companies, they’ll spend lots of time discouraging you about the scalability of consulting companies (something investors and software folks are pretty convinced of).  Here are my thoughts about how to address scale, risk, profit:

Start with a co-founder.  If you don’t have one, find one who is also a specialist in the same area, or who has a tightly complementary specialty.  Make sure that you have enough skills overlap that you can cover for each other in a bind, but that you also have some different skills to augment each other in unique ways.  Starting as a company of two partners is easier than being the sole founder with one employee.  (Who wants to be your first employee, anyway?).  It allows you to reduce your risk – and if you charge correctly you can be break-even if one of you is billing.  And you’ll have more flexibility to chase leads, take vacations, etc. – without company revenue declining to Zero while that is happening.

If you’re going to grow, you’re going to forgo profits.  The independent consultants I talk to don’t want to admit that, but it is true.  At BP3, Lance Gibbs and I certainly could have had a more profitable first 3 years of operation if we just ran a two-man shop.  But we saw an opportunity to grow a bigger business.  We hired great people – and held on to the team through lean times in 2008 and 2009 – taking lower salaries ourselves and paying people when they were on the bench for long periods of time.  That scrappiness and determination got us into a great position to grow our team in 2010 and 2011 – from a bigger base.  But remember – every time you hire, you’re investing profits – reducing your cash flow for 60-90 days (or longer if training is required).  A good way to think about it is that people you hire in 2011 will add materially to your business in 2012 – it makes you plan conservatively around what you can afford.   Now that we’re a little bigger, it is easier for us to hire when we come across the right person – we don’t have to work as hard to time each hire just right.

This also means that it is better to not grow, than to hire the wrong people.  If you take this approach, when you can’t find enough talent to grow, you’ll be more profitable.  When you can find those people, you’ll grow the business at a little lower margin, and with a little tighter cash flow – but with your future baseline performance at a higher level.

Those early hires are really important.  See the previous point.  Early hires in a consulting firm set the tone: culture, discipline, follow-through, work-ethic, reputation, skill.  Don’t hire someone on reputation alone – better to hire someone whose reputation hasn’t caught up to their real performance than to hire someone whose reputation exceeds their real capability. If you hire the right people at the beginning, it actually gets easier to attract the right talent later on.

Forecast next year’s revenue based on your current staffing.  Don’t fall into the trap of building a consulting-based business plan that depends on hiring people in the same year that they contribute to your bottom line.  I’ve seen a lot of these “plans” before: “we’ll hire 3 people in Q1, 4 people in Q2, 6 people in Q3…”  To which my response is typically “which 3 people? which 4? which 6?”  If you don’t know who they are, take that out of your plan.  A better way to write it would be:

Based on our forecast we can afford to hire 3 people in Q1, 4 people in Q2, 6 people in Q3.

Point being: there’s a difference between what you can afford, and what you can actually execute.  Given how important each person is to the growth of your company, are you going to hire the best 3 people you can find in Q1, or will you only hire 2 if you can only find 2 you’re excited about?  Intellectually we all know what the right answer is but it is important to actually act on that knowledge.

Get Financing.  You may not think you’ll need it – but as soon as you can, get it.  When you’re a small consulting company, usually one customer has an outsized influence on your cash flow.  Having a line of credit or a loan can give you some cushion against the vagaries of their accounts payable.  Word of warning: it is very difficult to get a traditional bank to do this until you have 3 years of history as a business.  Second, you’ll be referred to operations that do receivables factoring, but I would recommend steering clear of those companies because their contracts are horribly one-sided and may make it difficult to get traditional financing later on. If you and your partner have the capital for it, it may make sense to put some money into a corporate savings account – to be tapped only in certain situations that all the partners agree upon.

Have a sharp focus.  You have to know how to say no to work that isn’t in your sweet spot.  Saying yes to all the opportunities that come your way will cause the following problems:

• You won’t build the necessary depth in your chosen area of expertise, or any particular area at all.
• Your win rate will be a lot lower – because you’ll be competing with people who specialize in each area, whereas you are essentially presenting yourself as a generalist.
• You can’t effectively partner with other people or companies because you always feel like you could be competing with them for business.  Ask yourself what kind of work you would refer to the partner firm, and what kind of work the partner would reasonably refer or sub to you.  If you can’t answer that question, one or both of you is lacking focus.
• You won’t build a reputation in your niche.  Reputation in the age of twitter and blogs is really powerful.  Lack of one is similarly powerful in its absence.  Start blogging, get on twitter, and learn your niche and who the experts are.  Those experts are rarely wanting for work.

Back to Jason’s Post:

Jason terms it “unfortunate” math for consulting… but the real problem is that consulting is an EQ business, rather than an IQ business.  It requires more emotional maturity and awareness, and the smartest guy in the room is not necessarily the best consultant.  Ideally you’re both high IQ and high EQ.  But don’t forget which one will get you further in consulting – EQ.  If you don’t have a high EQ, partner with someone who does!  There’s no one “right answer” to how to succeed as a consultant.  But there are definitely higher or lower risk plays on the business.

Jason points out in his post a series of problems a small consulting firm will face.  There are remedies to the problems Jason points out, and he offers a few himself.  But as you ramp up your team, in my experience when the firm is ~5 people is the hardest phase in growth.  At that stage you need everyone billing as much as possible, you can’t afford to pay for overhead (a non-billable person working for your company), and somebody (hello, founder) has to work a lot of extra hours to get things like invoicing, sales, and recruiting done – because customers don’t pay you to do that work with billable time, you don’t want to pay someone else to do it for you, and it has to be done right.

As you head north of 10 people, the math starts to work more in your favor.  You can hire non-billable help with administrative or sales work, or one of the knowledgeable billable people on your team can explicitly spend less time billing.  Another thing I’ve often heard from bigger companies is that getting past 15 people is a tough barrier – that you run out of “people you know” to hire, and have to get your operations in much better order than you required as a smaller company. I agree that somewhere between 10 and 20 people, the nature of your firm changes and you need to change with it.  I’m sure that is true at many inflection points further on as well.  If you just look at this as another interesting business problem to solve, you’re in good shape.  If someone tells you there’s a glass ceiling to how big your services business can get, just ask them if they know how big IBM’s professional services business is.

Jason’s thought on running the business at smaller sizes:

• None of these new tasks are fun or creative. It’s drudgery, and it’s on you. Congrats, you’re a business owner.

Well, don’t go down the path of building a business unless you enjoy being a business owner and running or building your business.  If you enjoy doing this sort of thing, it won’t feel like drudgery – it will feel empowering and gratifying*.  If you don’t enjoy this sort of thing… partner with someone who does, or get a job!

His other recommendations are in bold, my comments in regular typeface:

Recommendation: Charge more.  Well, this one is a bit obvious.  If you have too much demand for your services, you generally need to raise your rates or hire more people (increase supply).  Figure out which one you can do.  The basic issue is, pricing is incredibly important in consulting businesses.  Mimiran is a great resource for better pricing techniques.  But regardless, you have to understand that your consulting value is worth more than the hourly wage you put in.  You have uniquely differentiating value.  You’re likely committing to provide your customer with an outcome or else lose your “job” (contract) – which is something their own team may not be putting at risk.  An hour is not what you are truly charging for, you’re charging for the output you produce, and dividing it by the # of hours. There is a difference.

Recommendation: Bill more hours.  Generally consultants bill more than what Jason was describing in his post. While this is true, so long as you bill by the hour, I’d phrase this differently:  provide more value.  That might mean billing more hours.  Or it might mean that you will either raise your rate or the demand for your services by providing “better outcomes”.  Focus on the value.

Recommendation: Build a product.  I’d be very careful with this one.  Most consulting companies don’t make the transition.  The product you’re going to build has to be something that will get a lot of your attention and TLC – and likely something that earns money for you right away.  What you don’t want to do is take a profitable consulting company, plow the profits into a product that isn’t profitable (most products aren’t), and then find yourself with a less valuable enterprise overall.  Make sure the product is truly something you want to invest in, and make sure you understand how it will yield revenue.

Recommendation: Use subcontractors instead of employees.  This is lower risk, but lower reward – and I don’t just mean financially.  This choice comes down to what you want to be when you grow up. Is this a business or a body shop? There’s a difference.  If you’re building a business, you use contractors as a minority of your business or to augment specific skill sets or deal with variability of demand.  But if you’re building a business, it is your team, your employees, that will really build it with you.  You need to hire those people – contracting them won’t cut it.

Concluding Thoughts…

Jason’s conclusion:

It’s always hard. Most consulting companies don’t make much profit, and it’s one in a thousand that has the discipline to launch a successful product during off-hours. If you’re going to make it happen, you yourself need to be serious, disciplined, and relentless.

The idea that small consulting companies don’t make much profit doesn’t ring true.  A well-run consulting business is a good business.    Of course, for many consulting companies their margins may look lower because they do certain things:

• Provide generous benefits, from vacation to medical insurance, to 401k or profit sharing.
• Pay generous salaries & bonuses.
• Buy the latest and greatest hardware gadgets and software tools.
• Keep overhead (non-billable head count) low.

These tend to reduce margins in the short run, but retain top contributors in the long run.  Usually a tradeoff worth making.  But the biggest question for the independent consultant moving toward a small consulting firm:  What’s next?

Is the goal to build a big consulting firm?  To make some money?  To solve a particular problem in your industry or specialty?  To have a boutique firm of good friends and rock star specialists?

It really is up to you.  But the answers will help dictate what makes sense as you build your business…  For BP3 it is to be the best business process firm we can be – which is compatible, for now, with being a growth business.

*  Author’s note:  One of the things I enjoy about building the business, as a consultant, is the opportunity to practice our craft (BPM) internally.  As we get bigger, there are real payoffs to improving processes. And we have time to actually think about our business and improve it.

** Another note: Perhaps the title should just be “Consulting Math” since we didn’t discuss Software Math… but I think the prevailing public opinions about consulting businesses largely come from people with a software background – primarily that they don’t make much money and can’t scale, and are inherently riskier.  But, most people don’t mention the fact that these days, most software companies are probably less profitable than consulting companies.  There are really significant exceptions (e.g. Google, Microsoft) which is what people focus on.  But in enterprise software most of the money is in consulting these days.

Actually, my least favorite seat on a certain model of plane that flies in and out of Austin is 27E.  Some planes manage to pack the lavatory, the kitchen, the divider wall right behind you (no reclining!), and engine noise all in one truly fantastically bad seat.

Jason Cohen asks the question: why?  Why not spend time either improving the worst case experiences for your customers – or better yet, eliminating them entirely?  Would it be such a bad idea for the airlines to eliminate a few of these bad seats?  To put more insulation in? To offer some freebie or consolation prize for the bad seat?

Eliminating these worst-case experiences doesn’t mean radically changing your business. It just means saying no to customers or projects that aren’t a good fit:

Bill impressed them and they were ready to begin, but Bill decided this was too far outside his experience and so told them, while it would be interesting and fun for him, and he was confident in his abilities, he isn’t comfortable accepting this job, because he wants no chance that they’ll have a bad experience.

Of course this only won the customer over still more. Bill won’t do this particular gig, but I guarantee that when something else comes up in six months, he’ll automatically be offered the job. As for me, I’m going to continue connecting customers with Bill because there is no seat 32B with Bill.

Saying “No” requires that you know yourself- or your firm – well enough to know what you’re not going to do.  Buried in the example is the fact hat Jason’s startup is referring this consulting business to a consultant – rather than doing it in-house.  Another example of knowing when something is outside the suite spot.

Now I need to go think about how to eliminate seat 32B for our customers at BP3!  Looking at this from a BPM/process perspective, however, I’ve often see customers look at this the wrong way – focusing on all the exceptions before they have the average case nailed down tight.  What Jason has described here isn’t handling every exception, it is recognizing a bad situation and either avoiding it (saying no), or figuring out how to make it not feel like seat 32B. A precursor to this is actually getting the average case nailed down and sorted out.

Because the founders give up.  Jason Cohen has written a great piece regarding the #1 reason that startups fail.  The founders give up and pack it in.  This isn’t quitting, to me – sometimes there are good reasons to quit your startup:

• Financial obligations are real – if the startup isn’t producing the income you need to live, you have to find other sources of income (aka a Job)
• Startups can be hard on family life – the work life balance isn’t…balanced… Sometimes people have to choose family or business – can you blame anyone for choosing family?
• A better startup idea/opportunity comes along – this might mean your startup pivots or it might mean a completely new business.

Jason relates a tale of how, even 4 years into a startup, the founder(s) can still be slugging it out with purchasing managers or trying to just get paid a reasonable (or regular) salary – all while paying employees and trying to retain them.  It’s tough to get the emotional energy up to keep everyone else motivated when you’re personally feeling defeated.

Although BP3 is not the traditional notion of “startup” – we’re primarily a consulting company – if your goal is to grow your business you will face all of these same issues no matter what the business is.  We’ve been through those lows – and I’ve always been thankful to have a co-founder in Lance, to lean on – but beyond that, to have a team to lean on that I can trust.  Jason’s cautionary tale of his conversations with a purchasing manager are… highly relate-able, let’s just say:

It’s about sticking through the tough parts, whatever your personal foibles or weaknesses.

Living through it, not beating it. I never have, to this day, “beaten” that PM, not emotionally, not if I’m being truly honest.

I’m not saying tenacity is all it takes. Just that without it, you’ll stop. It’s so easy to stop. There’s so many reasons to stop.

Jason persevered and succeeded – even though he never felt like he “won” the encounter with the purchasing manager.  I’ll just say this: Courage is not lack of fear.  Courage is doing what you know is right, even when you fear the outcome.  Courage is doing what you know is right, even when it may not be in your own best interests.  In business, this translates to running your business with integrity even when you fear that it may cost you business, or the opportunity to grow.  Risking the business outcome to know that you’re “living within your means” in an emotional, business ethics sense.  A good co-founder and good partners will help you remember that yardstick when you need reinforcement.

Getting through these tough troughs in a startup isn’t easy.  But it does make you appreciate the rewards on the other side even more.

There is one question one should always ask in software, and in particular when designing a BPM solution:

How do you do that now?

In Jason Cohen’s blog, his framing is “What did they do before you came along?” – which is the way I would phrase the question to one of my colleagues at BP3 if they were describing a BPM solution to me without explaining the current approach to the process first. But when I’m speaking with customers, the framing I ususlaly use is “How do you do that now?” And you really do get interesting answers.

Jason’s post mostly discusses how to apply this question to the expert users and niche users within a market segment – the folks who can become real evangelists for your product if you make their lives better – and who can give you a beachhead into selling to the masses.  But the point of understanding how things work today is critical in BPM:

1. Often BPM implementations are asked to do things that are nice-to-haves – not directly related to the business process nor to business value.  For example, “This process needs single sign-on.”  The appropriate response: “How do users sign in today?” If they use single-sign-on today, then you probably have a user expectation to either manage or live up to.  If they don’t – do they have SSO for other applications, or is this the first application with SSO?  (You don’t want to be first).
2. Often BPM projects are asked to implement an existing process exactly – with the technology platform being the only change.  But this misses the chance for really leveraging software to provide process benefit.  By asking how they did this before BPM came along, you can tell whether they’re just papering over an existing process, or whether they’re really re-thinking things.
3. If an integration can’t be completed on schedule or under budget, a BPM practitioner might legitimately ask “well, how do they get this integration done today?” If it is manual, or swivel chair, then continuing that approach at least is no worse than status quo, and can buy some time (via Process Debt) for the right solution to be built.

Just a few examples…

Love this post by Jason Cohen on vetting a startup, in which he reveals the process he went through to vet two startup ideas in succession, and describing how the process turned out differently for the two ideas:

Let me dispose of any lingering ideas that WPEngine was a great flash of insight, born perfect from conception like a Greek God emerging from the ocean, a once-per-decade occurrence sourced from unsystematic inspiration. Let me also dispel your doubts that you can’t produce similar ideas with similar results using a similar process. You can, because there’s nothing magical in how I got to this point.

Like the mighty sudoku puzzle, there might actually be a process to this startup thing…

Inspiration and luck play important roles at the beginning, but turning a bright idea into a real business where strangers come to a website and part with money is an intentional process. A process you can learn and get better at.

Of course, some prefer the “luck” and “inspiration” theories.  It is convenient to think that you just need an idea. Read on in his blog for the details.

All too often I see conclusions based on observable data, where the conclusion does not necessarily follow the data presented.  This doesn’t mean that the conclusion is wrong on the face of it, but that it can’t be made based on the facts presented thus far.  Sometimes the conclusion is presented as causal when it is only correlated, sometimes it is extrapolating from a really small sample to describe the whole population (over generalizing).

I recently read Theo Priestley’s post on why Six Sigma doesn’t work in the real world.  In it, he relates a LinkedIn posting from someone attempting to do six sigma analysis on a call center process.  From reading the LinkedIn posting, it is clear that the person posting is not experienced in Six Sigma or other  related process improvement technologies that would be helpful to the cause.  This person is trying to figure out how to get a bell curve from a formula related to rate of defects in the call center process, where a defect is defined as a call response being over 60 seconds.  Theo extrapolates from this that it is an example of why Six Sigma doesn’t work in the real world, and why black belts are not needed (all that is really needed, he says, is a pragmatic approach).  And he quotes a response he advocates:

“…at the end of the day if you produce a bell curve telling me the USL and LSL for my call centre, along with the number of defects per million and a sigma value of 1.727, is this really a useful measure? More to the point, what can I – as a business person – do with it?”

Well, look. The response (quoted) asks the right question – is this a really useful measure, and what can I, as a business person, do with it?  In other words, are you wasting our time trying to figure this out in the first place?

But here’s the rub.  A good Six Sigma practitioner would not need to post to linkedIn (hardly the font of six sigma knowledge in the first place) to ask how to plot a bell curve to show USL and LSL.  So the poster hardly represents the “failure of Six Sigma in the real world”.  And a good six sigma practitioner could tell the respondent quite nicely:

If we can plot the response times of your call center, we can understand whether the process is “in control” or not – by which we mean, is it predictable and does it vary in a “normal” way from the median behavior.  If it *is* in control, then we can endeavor to improve the process by decreasing overall response time if too great a percentage of responses are exceeding your 60s window.  However, if your process is *not* under control, then this means that there are one or more special cause conditions causing the process to be more volatile. Therefore your first effort has to be on stabilization before you effectively focus on ratcheting down the long-term variation (i.e. drop the average of the process down as a whole).

Not that Six Sigma is the only tool available.  Lean has several tools that are well suited for call-center style efficiencies, and so does 5s (the Japanese concepts of organizing the workplace to keep things consistent and orderly in order to keep the process consistent as well) and keep in mind just like BPM, Six Sigma is continuously evolving with new tools and techniques and while the statistics is certainly an important part it’s not the alpha-omega that many who haven’t learned Six Sigma believe it to be; certainly not the Six Sigma of the 1980′s.

My problem with the post:  using one example of someone struggling with the concept of Six Sigma, to challenge the whole notion of using Six Sigma – a bit like challenging the concept of a 100-meter dash after watching me run it, instead of Carl Lewis – at least look at how experts apply the techniques!  Six Sigma is not a religion (or at least it doesn’t have to be!)- it is simply a set of tools that can be used to pragmatically improve your process by focusing on unemotional data rather than exposition based on anecdotes.  Not all the tools are even statistical, which was a surprise to me when I first studied material at the green belt level -but even those tools are very practical process improvement tools.  The biggest problem with Six Sigma in the past has been the C in the DMAIC moniker (Define, Measure, Analyze, Improve, Control).  BPM really helps address C by putting the controls in software (call center software can help with this as well), and it helps with the M by helping measure the process even when no Six Sigma blackbelts are paying attention.  This makes it a lot easier for them to drop in, interpret the data, and devise new improvements based on the data, rather than spending so much time collecting hand measurements.

Here’s a great post by Jason Cohen (of Smart Bear software) that illustrates that humans are terrible at making gut decisions that can be disproved with statistics, and how to help yourself avoid sample size errors at least when dealing with A/B tests (as in, which is better, A or B?).  Better yet, it has a cute video of Hammy the Hamster to assist.  It cuts to the point about how much data you need to get a reasonable sample size to draw conclusions, and I think it makes clear why data sets of less than 10 are just generally problematic.  Um, also, there are formulas involved, so if you don’t put much faith in mathematics, Mr. Cohen’s article may not be much comfort to you, but I promise the math required to evaluate your sample size will be easy to do!

In my view, the real problem with applying Six Sigma is usually people.  Turns out it takes skill and  judgment to apply Six Sigma tools in a way that helps the business answer questions the business cares about.  This isn’t that much different than the kind of challenge one confronts getting a business to adopt BPM, or a software package.  Let’s not condemn a whole professional practice with proven successes just because we have one example of someone who doesn’t understand how to apply it (or even 10 examples of such people).