Should SMEs make more use of Business Advisors and Consultants?

The straight answer is almost certainly “Yes”. But I would say that wouldn’t I? I’m a consultant.

Let’s start with the rather well-worn joke about consultants.

“You engage a consultant, who then borrows your watch, tells you the time and charges you a large fee for doing it!”

I’ll be the first to admit that there is some truth in this. Business consultants & advisors can be engaged for many different reasons. In many large businesses and, particularly, in the public sector, consultants are often used to support or challenge strategies that have or are being developed. The reason for engaging them may be “political” in the sense that there are opposing factions for and against a particular strategy and the consultants become de facto adjudicators. Furthermore, if a well know firm of consultants is supportive, the strategy must be OK; mustn’t it? And, if things do go wrong, some or all of the blame can be offset. In these circumstances, the use of consultants is more about internal politics and minimising the risk to individuals’ careers rather than adding real value to the organisation; so there may well be an element of borrowing your watch to tell you the time.

However, this doesn’t tend to happen in the SME sector, which is generally much more resistant to the use of consultants for any purpose. So why are small and medium sized businesses so averse to the use of external advice and support?

In my experience, there are three main reasons: –

  1. Management dynamics
  2. Not fully recognising the added value consultants can create
  3. Cost

So what do I mean by “Management Dynamics”? Well I think that it involves several different threads. Many owners and directors of SMEs are charismatic, larger than life entrepreneurs, who have taken risks, often run by the seat of their pants, worked incredibly hard, overcome all manner of setbacks and ultimately created a successful business, of which they are justifiably proud. And they really don’t want outsiders coming into their business, picking holes in what they’ve done and trying to change it into something different. In many ways, it’s similar to an outsider trying to interfere in a relationship between a parent and a child.

However, in just the same way as a parent will sometimes overlook the shortcomings in their children, an owner or director of an SME can overlook the signs that not all is well within his/her business. But sometimes the issues presented by a child require some form of external intervention; this may involve developing strategies with the child’s school, perhaps with the GP or even a social worker. For parents, coming to terms with this can be very challenging emotionally, and acting on it can be very difficult indeed. But by not engaging in this way, the child’s future could be seriously compromised. It’s much the same with a business; and owner managers and directors of SMEs can find it very hard to accept the need for external advice and support.

For directors, who manage businesses that are institutionally owned or part of larger corporate organisations, it’s not quite such a difficult issue because the shareholder(s) will be monitoring performance, taking an external and broader based perspective and ensuring that the directors are taking appropriate action to meet the various financial targets and strategic objectives that have been agreed. The owner manager has no one to help keep him/her on track; and that can be both difficult and lonely. But it’s where a good independent business consultant can help. A consultant can’t act with the authority of a majority shareholder but he/she can bring considerable experience and a broader based perspective. Coupled with the drive and resolve of the owner manager, this can be a powerful combination that moves the business forward to an extent that could not otherwise be achieved. There are examples of where this happens very successfully, in many different sectors; it just doesn’t happen enough and, as a result, too many businesses under perform and struggle unnecessarily.

The second reason why owner managers and directors of SMEs don’t engage business advisors and consultants is that they sometimes don’t recognise what these people can actually do. Furthermore, they can often be put off by the image that consultants can sometimes portray.

At times, the image issue is not helped by consultancy firms at both the top and bottom ends of the spectrum.

At the top end, there are many stories, within small and medium sized businesses, about large consultancy firms engaged by SMEs, where the outcome is anything but satisfactory for the owners and directors. A partner, from the consultancy firm, may appear at the initial meeting, but most of the work is undertaken by bright young graduates with plenty of confidence and jargon, but little experience. In many instances this happens on the recommendation, or even the insistence, of a bank. Unfortunately, banks can add to the “borrow your watch syndrome” because, very often, all they are looking for, from the consultancy process, is reassurance; and the outcome from this type of consultancy process gives them the justification they need for a lending decision or even the appointment of an administrator. It’s not really designed to add value to the business; but the owners/directors are still faced with a large invoice, which they have no option other than to pay.

It would be entirely wrong to dismiss the large consultancy organisations as charlatans. Many of them are world class and at the cutting edge. Furthermore, many developments that benefit businesses of all types and sizes originate from these organisations. It’s more a question of horses for courses. The large consultancy firms are really geared to the needs of large projects for large clients. They are often less able to support the needs of SMEs, as effectively.

At the other end of the scale, there is a large turnover of people that move in and out of consultancy and never become experienced consultants. Very often they are people who are “between jobs” or people who think they’ll have a go at consultancy but don’t make a go of it and then go back into full time employment. However, it would also be wrong to dismiss all of these people as being bogus. Some newcomers quickly establish a niche position and grow from strength to strength, providing their clients with a first class service. Some people, who are between jobs, have great skill sets that SMEs can make use of for short periods; and, of course, some of these start by working on a consultancy basis and end up as full time employees. From both the employer’s and employee’s viewpoint, it’s a great way of establishing if there’s a good fit.

But, unfortunately, there are quite a number of people within this category, who are playing at consultancy for short periods, not delivering any real value and even pulling out of projects before they have been completed. Unfortunately, they can, and sometimes do, tarnish the reputations of genuine independent consultants.

On a much more positive note, between these two ends of the scale, there are some extremely good business advisors, mentors and consultants, able to provide SMEs with high quality and effective support that adds real and significant value to those businesses. Some work within small firms, others are individuals working on their own; but they all share a professional ethic and take their responsibilities to their clients very seriously.

You can probably classify these consultants into two groups. The first is those that offer a particular skill set, such as IT, marketing, production, logistics, HR, accountancy, etc. The second group provides more general business advice; it’s this second group that I belong to.

It’s probably easier to categorise the services that the first group provide because what is written on the lid is generally in the box. In other words, the services that, for instance, an IT consultant provides, are fairly obvious. However, a potential client needs to bear in mind that many of these small consultancies may be operating within specific markets or sectors, for which they are extremely skilled but they may have less to offer businesses, in different sectors.

In practice, SMEs use consultants with specific skill sets quite routinely; but these consultants tend to work on clearly defined projects under tight control. Furthermore, the boundaries, between consultancy and outsourcing, often become blurred. For example, an IT consultant may be engaged, initially, to address a specific problem or issue but, once this has been resolved, on-going IT support may be outsourced to the same consultant. It is the consultants that provide more general business advice and support that tend to be kept at arm’s length by many SMEs. So let’s examine what it is that these consultants can provide?

The simple answer is: “Experience”. Most consultants, in this category, are likely to have had senior management experience, at an earlier stage in their careers. They understand the fundamentals of running a business. They’ve had successes and failures. They’ve seen different ways of approaching problems. They understand the pressures that business owners and directors are under and they can empathise with them. They are realistic about the restrictions imposed by limited finance, resources and skill sets. They understand the need to carve out practical strategies that can exploit market opportunities, within the limitations that exist. In addition to this, the very fact of being a consultant means that they see many different businesses, working in a wide variety of ways and can, therefore, bring a much broader perspective to the development of solutions and strategies.

Let me give you a couple of examples, with which I’ve personally been involved.

I was called in by a client, who had a sales and marketing problem. The strategy they were pursuing wasn’t delivering the level of sales they expected and they wanted some help in deciding what to do about it. I analysed, in detail, the various activities, in which they were engaged, the results they achieved and the costs they incurred. There was actually very little wrong, except that the whole process was being significantly under resourced, for the level of sales they were targeting. However, there was no cash available to address that problem; so I looked at other areas of the business and identified significant under performance in production. Both direct labour and material consumption was far too high and, if this could be addressed, it would release the cash they needed to support sales and marketing more effectively.

I was not the right person to work with this client to sort out the production problem; but my experience was sufficient to enable me to show them that this is where the route of their difficulties lay. They were then able to take appropriate action and, by introducing improved production systems, they gradually resolved their marketing problem.

My second example also starts as a sales and market issue. The client, a home improvement business, was struggling with low margins. They had screwed down their costs as much as they possibly could but their margins were still much too low. They tried to increase their selling prices but, every time the price went up, volume fell back significantly. And yet their market intelligence was telling them that their unit selling price was well below that of many of their competitors. So they were stumped. I undertook a profiling exercise of their customer base and found that their core customer profile was younger couples in their first homes. These customers were not interested in buying top of the range products but were looking for bargain basement products that would tidy up their homes, make them better to live in, in the short term, and easier to sell, when they moved on, in a year or two’s time. However, the product, the client was supplying, was premium not budget.

There were only two possible solutions. The first was to reposition the brand in the market, targeting buyers of premium products, prepared to pay premium prices. The second was to maintain the existing brand position and selling price but supply a budget product that was cheaper to produce.

On the basis that changing market position is very difficult, very expensive and would, in any case, take a long time, the solution was to change the product. This is what they did and, ultimately, it meant changing supplier.

Would these two companies have reached the solutions without my involvement? Possibly; but nothing like as quickly and the costs of delay would have been considerably more than the fees they paid me.

These are practical examples of ways, in which a business advisor can help. They are both project orientated, where the consultant (me), was engaged for a specific project, at an agreed fee, went in, did the work and then withdrew. However, business advisors and consultants can often be retained to provide on-going support on a regular basis; a day or, perhaps, two days per month. This enables them to maintain an on-going involvement with the business, review performance each month, help identify problems, develop the best solutions and look for opportunities and ways of exploiting them. All of this can be very difficult for owner managers and directors of SMEs because they tend to be immersed in the day to day activities of the business with very limited opportunity to stand back and take a wider and objective view. And this is why so many SMEs fail to optimise their performance and why some eventually fail. The consultant provides much of the external perspective and objectivity that an institutionally owned business or a subsidiary, within a group, would gain from its shareholder(s).

Another advantage of retaining a business advisor or consultant is that, if specific projects emerge that require a consultancy input, the consultant is already there and has no learning curve to go through. This means the project can be completed quicker, more effectively and at a lower cost.

We’ve looked at one off projects and on-going support. But there is a third area, in which a business consultant can help. Remember that these people have invariably run businesses in the past; so they can step in, where necessary – short term – in an operational role to manage the introduction of a change programme or stand in for a senior manager/director, who may be sick, have resigned etc.

In my view, the best and most effective consultancy, of this type, derives from building relationships, based on mutual trust and respect. A consultant, who is retained for a day or two a month, builds up knowledge of the business, which steadily increases the value of his/her work and provides an additional skilled resource that can be deployed, as and when required.

The third and final reason for SMEs resisting the use of business advisors and consultants is cost.

Consultancy costs vary enormously from a few hundred pounds a day for the casual consultant, at one end of the spectrum, to a few thousand pounds a day for a partner of a large consultancy firm. So it’s fairly meaningless to talk about average costs. However, most good independent business advisors and consultants are probably positioned at £1,000 per day or below. My own fees are significantly less than that.

Because you only engage a consultant for a one off project or for just a limited number of days each year, your annual consultancy costs should be modest, predictable and controllable. Furthermore, most responsible consultants will not try to leverage up their fees to a level that becomes a burden on the business. Most will structure the consultancy so that it is affordable. After all, they have no interest in giving you a cash flow problem and not getting paid!

So the issue really comes down to whether you think you are getting some value in return. I would argue that an effective business advisor or consultant, working two days a month, in most SMEs, would add considerable net benefit to the bottom line.

The problem for most owners and directors of SMEs is that, at the outset, the costs of a business advisor or consultant are defined, whereas the benefits are, to some extent, speculative. In addition, most business owners and directors become more risk averse in tough times. So a speculative punt on a business advisor becomes much less likely.

The irony is that the skilled business advisor or consultant can often make a larger positive impact on the bottom line, when times are tough, than when they are buoyant. And to illustrate the point, I’ll recount a piece of work I’ve done recently.

For obvious reasons, I’m not going to publish any clues as to who the client may be; all I’ll say is that it is a £5m T/o business that has been trading for about four years. So it’s done well to achieve that level of growth in a comparatively short time. Its directors are intelligent, skilled and very industrious people, with high levels of integrity. I was approached by them in the last quarter of 2011 because they had cash flow problems. They were very open and honest, with me, about their position and I worked, with them, to establish why they were in their current predicament.

They had never made big profits because they had been funding their impressive growth. However, during the latter part of 2010 they started making losses and during 2011, they implemented a cost cutting programme to try and stem those losses. But it didn’t work because, although their overheads fell, their margins came under pressure and their gross profit declined, by more than the reduction in overheads.

I undertook some detailed analysis and found that the margin erosion was due to two factors. Firstly, they had started chasing volume. They cut their prices and took more risky work. As a consequence, their margins fell and their bad debts increased. Secondly, by cutting their overheads, they had taken away some of the key controls in the business, without replacing them with automated or more efficient systems. Consequently their procurement process was out of control and material costs increased significantly.

I worked with them to review, restructure and properly resource their systems and processes in order to regain control. We also introduced more effective credit control and stopped chasing volume.

When I first became involved, the business was, in all probability, heading towards administration. It’s now back in profit and starting to generate cash. There is still a long way to go; but it’s out of intensive care and the prognosis is now for survival and long term sustainability. Without my involvement, that would not have been the case.

My total fees and expenses amounted to a little over £6,000 plus VAT. I leave you to consider the added value that this expenditure created.

The directors of this business took a leap of faith by engaging me, I ensured that the fee structure was manageable and, between us, we got the result we wanted.

It goes without saying, that you must be very clear about why you engage a business advisor or consultant and that you are careful about whom you appoint; but if more SMEs would take the leap of faith, taken by my client, there would be many more strong balance sheets and considerably fewer casualties, particularly when market conditions are tough.

Market Share – One Critical Leg of a Three Legged Stool

Here’s a quote from BBC Business News on 31st January 2012: –

“In the 12 weeks to 22 January 2012, Tesco’s market share dropped to 29.9%, the lowest since May 2005, research firm Kantar Worldpanel said. Tesco has described its Christmas trading period as “disappointing”, after like-for-like sales fell 2.3%. In contrast, Sainsbury’s and Iceland both gained market share. Sainsbury’s edged up from 16.6% a year ago to 16.7%, its strongest hold since March 2003. Iceland’s share rose from 1.9% to 2.1%, its best share for 10 years.”

One of the key measurements of success for supermarkets is market share. In this quote, we see Tesco under pressure because it has lost market share during the last Christmas trading period; and Sainsbury’s and Iceland glowing because they’ve gained market share.

Supermarkets allocate large budgets to researching market shares and they have very sophisticated data capture systems to provide them with detailed market share information. They look at market shares by product, by time frame, by region, by store and probably by many other criteria as well.

They don’t do it for fun; so why do they do it?

There are, no doubt, a myriad of reasons ranging in importance; but there are really three key measurements of business performance and sustainability. These are: –

  • The Profit & Loss Account (P&L)
  • The Balance Sheet
  • Market Share

The P&L tells us how much money was made or lost over a specific time frame; a month, a quarter, a year etc. By implication, it tells us how effective and efficient we are as a business and it helps us identify areas of operational strength and weakness.

The balance sheet tells us how strong we are financially; our working capital, our gearing, our net worth etc. If we’re making profits our balance sheet is building and we can use it to help us make decisions about future investment, growth, development etc. If we’re losing money, it helps us understand how long we can sustain those losses and what financial resources we have to help achieve a turnaround.

Market share tells us how well our business strategy is working. If we’re losing market share, we lack competitive advantage, our competitors are outperforming us and our strategy clearly isn’t working. If we’re increasing our market share, we have created competitive advantage, we’re outperforming our competitors and our strategy is working.

Sales growth or decline and market share should not be confused. If the market is growing and your business is also growing, you will still be losing market share, unless your growth is equal to or greater than that of the market. If you’re growing but losing market share on a rising market, you’re benefiting from the growth of the market, but you’re still under performing, relative to your competitors and, as soon as the market turns and starts to fall, which it will do at some stage, your rate of decline will be greater than that of the market; and, as I’ll show later, this could be catastrophic.

Similarly your sales could be falling but, if the market is falling even faster, you’re still in a position of having competitive advantage; and this could put you in a strong position, when the market stabilises or, in extreme circumstances, it could give you more time than your competitors to develop a diversification strategy.

Strategically, the relationship between the P&L, the balance sheet and market share is all important and the messages coming back from each need to be considered together, if you’re going to make the best decisions for your business.

If you have a strong balance sheet, your P&L is showing very healthy profits and you’re gaining market share, then your business is in pole position; but realistically only a minority of businesses achieve this and maintain it for very long. At the other extreme some businesses have very weak balance sheets, are incurring significant losses and are losing market share. Realistically, many of those are heading for collapse. Most businesses lie somewhere between those two extremes; but in tough trading conditions, businesses are pushed down the scale and in buoyant conditions, they are pushed up the scale.

Consider a few scenarios.

Scenario 1: Take a business that has a strong balance sheet and is very profitable, but which is losing market share on a rising market. Its P&L suggests that, operationally, it is efficient and well managed. Its balance sheet suggests that it has plenty of resources for investment and development. However, its loss of market share suggests that its strategy isn’t delivering; so, despite a strong financial performance, all is not well. No business can survive indefinitely if it continues to lose market share. But because it has a strong balance sheet, this particular business can afford to invest in a detailed review of its strategy as well as the development and implementation of a new or reconfigured strategy. And that is what it should do.

Scenario 2: Let’s take an almost identical situation except, this time, let’s assume that the balance sheet is much weaker. The problem is the same. The strategy isn’t working; but the ability of the business to fund a major strategic rethink and change programme is much more limited. If no strategic change is brought about, the business will ultimately fail; that’s inevitable. But the weak balance sheet means that the resources available to fund the change programme are much less, as is the room for error within the change process itself. The rate, at which change can be achieved, is also likely to be much slower. So the risk to the business is much higher than is the case in scenario 1; and, although it doesn’t mean this business can’t be returned to long term sustainability, it’s going to be much more difficult than it will be for the business in scenario 1.

Scenario 3: Consider a business that has a reasonable balance sheet, is gaining market share but is delivering very low profits. Is this the “busy fool syndrome”? Is this business buying business? Is it simply selling too cheap? If it didn’t know what was happening to its market share, how could it answer those questions with confidence? The answer to this last question is that, “it couldn’t”.

These three scenarios illustrate how the P&L, balance sheet and market share data can be used together to understand the performance of a business and help identify if and where strategic change is needed.

I now want to describe two real examples. These are based on fact; although I am not identifying the businesses for reasons of confidentiality.

I’ll call the first business “Company A” and will describe it as a significant player in the home improvement market. It was very profitable and operationally well managed. It also had a strong balance sheet. I undertook a market share analysis and found that, for a number of years, it had been gaining market share on a rising market; so during that period its strategy was working well. However, its increasing market share then reached a plateau, after which it started to fall. But, for a time, the decline in market share was masked because the market continued to grow and Company A also continued to grow, but at a lesser rate than the market. During this period, the business continued to make healthy profits; but the warning signs were there. The strategy that had worked so well in the past was no longer providing the competitive advantage that the business needed to stay ahead of its competitors. At this point there needed to be a fundamental strategic review and the development of a new strategy, capable of recapturing the lost market share and then gaining further share beyond that. This didn’t happen; the market then started to fall and Company A found itself losing market share on a falling market. Despite its operational efficiency, sales volume fell, to the point where there was insufficient critical mass, and the business eventually went into administration.

The real point of this story is that the main focus was on the P&L and balance sheet, both of which remained strong for a considerable time, while market share was declining. The business was balancing on a two legged stool that eventually toppled over, rather than sitting on a three legged one, which would have had a much greater chance of remaining upright.

My second example is another home improvement company, which I’m calling Company B. Company B is a successful and profitable regional player. The business had been using local radio as a means of advertising for several years. However, its trading area didn’t fit easily into any of the broadcasting areas of the available local radio stations. This meant that it had to utilise several local radio stations rather than just one or two; and furthermore, there were large gaps with no radio cover at all. The costs were high and the cover not complete; as a result, Company B decided to analyse the sales that it could attribute to local radio advertising. Its conclusion, based on this analysis, was that local radio advertising wasn’t cost effective. However, before the business withdrew from radio advertising, I was asked to consider whether there might be other ways of measuring the results.

I used published market data and found a way to calculate Company B’s market share, based on relevant postcode delineation. I then overlaid this with the local radio stations’ broadcasting areas. The results were interesting because, whilst the original sales analysis showed relatively few sales directly attributable to radio advertising, Company B’s market shares were much higher in those areas covered by radio advertising than those that were not. In principle, this wasn’t unexpected but the differential between the hotspots within local radio broadcast areas and the cold spots, where there was no radio advertising was substantial.

In this example we see market share information being used more tactically than strategically; but without it, the wrong decision could have been made. In the event, Company B continued to use radio advertising.

Now let’s go back to the supermarkets. They put so much resource into market share analysis because they need to be able to measure the effectiveness of their strategies and tactics at very regular intervals. They can then make informed decisions at an early stage and, by so doing, optimise their financial performance and identify problems at the earliest possible opportunity.

Most large FMCG organisations rely heavily on this type of analysis and research. But as businesses move away from FMCG, there tends to be less emphasis on market share research and analysis. In the SME sector there is often very little. However, for the reasons I’ve outlined, most businesses need to have a reasonable fix on their market shares and, if they are to optimise their financial performance and remain sustainable in the medium and long term, they need to respond to the messages that are conveyed.

In many markets, where market research is much less sophisticated and much less frequent than is the case in FMCG markets, it is usually possible, with a little thought and ingenuity, to use published market research data to provide a reasonable basis for market share calculations. It won’t be as detailed or as sophisticated as that used by the supermarkets, but it will be enough to keep the business secure on a three legged stool rather than falling over on a two legged one.