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.

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2 thoughts on “Should SMEs make more use of Business Advisors and Consultants?

  1. Anthony, I am a “new” MD for a recently formed Company (previous Company ceased Trading due to financial probems) and find your articles very constructive and helpful to me in this new role, to take the broader view of running a business and trying to spot the pitfalls before they happen. Your observations and comments can so easily be applied to our business stream and I will use your expert advice whenever needed to maintain our current level of success. If, at any time, we need external guidance I am sure we will be in touch.Please continue these articles as I find them thought provoking and use them to review /compare against our current business strategy . Regards

    • Kevin, Thanks for your comment; and I’m pleased that you enjoyed this article. Running a business successfully is a tough call even for experienced CEOs. You only have to look at the casualty rate of CEOs amongst institutionally owned businesses and businesses within large corporates to realsie this. It’s not quite as bad as football managers but nevertheless its very high. Owners and directors of privately owned SMEs are not under the same scrutiny and performance pressures, which makes life easier in some ways but it means they have no one to challenge them or support them and this can lead to all sorts of problems that fester and undermine the business. My objective is to try and help SMEs address this problem in a way that doesn’t impose a serious financial burden. If you want to keep in touch my email is anthony.pratt@imc-consultancy.com and my mobile is 07770 816468

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