Consulting Firm, Insulting Firm...

Consulting firms.

Ah, yes…the dream employers of 50-75% of undergraduates everywhere. And 75-90% of graduate business students. And why?

Good salaries. Benefits. Frequent flyer miles. Hand-holding. And the all-important “experience on a résumé”.

But have you ever thought about the sheer nature of what a consulting firm provides? Or how they are able to become the shiny employer on the hill for America’s best and brightest?

Salaries? Easy. High billing rates, paid for by the client. Benefits? High billing rates, paid for by the client. Flights and hotels? Travel expenses, paid for by the client.

And hand-holding and experience? Paid for by the…client?

Interesting conundrum, isn’t it?

Think about the business—say it’s a print shop—that hires the consulting firm. What do we know about it? Well, it must have some income history, if it can afford the consulting firm’s fees. And it must have a founder, who must have some kind of expertise in his field. And some moxie, to found the company and partake in an entrepreneurial venture. And some business savvy, to sustain the company to the point at which it hires the consulting firm.

So facing a short-term cash shortage because of overstaffing and a problem in accounts receivable, they put the retainer fee on the table and bring on the consulting firm. Who gets staffed on the project?

A couple of 22-year-old Business majors who just graduated from JMU, a 40-something mid-level manager who has spent the past 16 years with the firm and, for PR purposes, a junior partner in the firm who has an MBA from NYU and has spent 25 years consulting.

Let’s break this down. The two Business majors, while bright, have no experience in the printing business, and no experience running, or even managing, a business. And they are being paid a high billing rate, travel and four-star hotel expenses to tell the print shop business owner with 20 years of experience in the printing industry and the experience of founding and sustaining a business venture (or two) how to run his business.

The mid-level manager has been with the firm for 16 years, working in a variety of practices, but has been staffed on this project to focus on the staffing side. He is ultimately the one who’s going to tell the business owner which positions, and individuals, he can eliminate, even though he has never actually spent any sustained period of time at the company to see who has been playing around online all day, who has contributed the most innovative ideas, and who has the best work ethic. Not the business owner, who has a sample period of several years to make these evaluations.

And the junior partner (with the same concept applying to the mid-level manager) has 25 years of industry experience. What does it say about his business “savvy” to have that much experience, and yet still have the company take 80% of what his work alone earns for the company (since most individual consultants only take home about 20% of the revenue from their billable hours). If you have that much experience, and do not have the business sense or contacts to be able to build your own client base, you most certainly should not be in a position to advise anyone else on how to run a business. It wouldn’t take any start-up capital to go into business as an independent consultant, and with that much experience, it shouldn’t even take any income lapse (as you could be setting up the clientele for your individual break-off even while working for the firm).

Besides these personnel issues, the loyalty of the consulting firm itself is to itself. It is in the best interests of the firm to sustain the greatest amount of business for the longest period of time. So there is no incentive for the firm to try to resolve the issues as quickly and efficiently as possible, as this is costing the firm billable hours and sustained revenue generation.

Just seems like an interesting dynamic. The 20 year business owner paying high retainer fees, billing rates and travel expenses so that the 22-year-olds can get “real life” business experience and frequent-flyer mile-inspired vacations, and the 16- and 25-year consulting firm veterans can continue to rest on their laurels, which aren’t based on any business expertise, as if they had that they would be working independently on similar business. Consulting? Or Charity?

Is there a tax write-off for fees paid consultancies?