(Case Study) How This Consultancy Cut Back 30% of Its Services Yet Improved Profitability

Last year, I worked with a boutique HR consultancy. The consultancy approached me to help them reposition in their market. 

One of the three partners retired the year before. The two remaining partners had to reassess the business's state and decide whether to keep the retired partner's services and his team of consultants in the service portfolio or phase them out.

They made the difficult decision to remove the retired partner’s services from the portfolio gradually. My job was to conduct a business review and help the consultancy sharpen its new market positioning.

It’s a fascinating case study where a firm actively chose to reduce its service portfolio yet came out on top in terms of profits. 

Since I see so many consultancies going in the opposite direction – adding more services to maintain growth – I thought it would be essential to share the story of this particular high-performing consultancy that did the opposite: reducing services.

A bit of history

The two partners founded the consultancy in 2006. Due to their similar experience backgrounds, their narrow positioning was in rewards, compensation, and benefits.

In 2012, they brought on board a third partner, an ex-CHRO. Due to his experience and network connections, he was brought into the consultancy to develop HR services as part of the service portfolio. These included HR strategy, organisational design, performance management, and employee training and development.

By 2021, the consultancy’s size and revenue could be summarised with the following numbers:

• 38 consultants in total – 28 in rewards and compensations, 10 in HR
• Revenue was just under €6M.
• The rewards and compensation team generated 70% of the revenue, and the HR team 30%.
• The gross margin was 34%.
• The net profit was 14%.

In 2021, the third partner retired. Partners 1 and 2 no longer had someone leading the HR services for the consultancy. 

So before promoting someone internally to take over this section of the consultancy, which, for many consulting firms, would’ve been the natural step to ensure continuity, the two partners decided to analyse the consultancy’s performance with and without the HR service offerings.

The consultancy’s revenue has been on an upward trajectory for the past 15 years. However, once HR services were added to the mix, despite the revenue growth, the gross margin and net profit declined.

Faced with the harsh reality of the numbers, the two partners decided to phase out the HR services from the consultancy’s portfolio by declining any incoming requests and simply wrapping up ongoing/legacy projects over the next 18 months.

Updating the consultancy’s positioning

Once the decision was made, the two partners contacted me. They wanted my help with assessing their business and crystallising their new positioning.

I loved working on this project. So often, in my work, I am brought on board because a consultancy’s growth has stalled, and I am the one who has to tell them that it’s due to the unfocused nature of their services. 

In this case, on the other hand, the consulting leaders had already decided to narrow down their focus. They already did the math and, most importantly, believed the math. 

When faced with similar numbers, I’ve met plenty of consultancy owners who would’ve still refused to cut 30% of their service offerings!

Together with the two partners, we went back to the drawing board. We looked at projects with 1) the highest gross margins and 2) the ideal client profile, looking for common elements until we narrowed it down to exactly what type of work was completed and for which type of clients yielded the highest returns. 

We collected case studies from over the years and testimonials from past clients, looking for pain points that required the most expertise and depth. 

Finally, we spoke with existing clients to understand why they chose this consultancy over others, which messaging resonated most.

Armed with this information, we created a new market positioning for the firm. Upon my advice, the two partners took it for a test drive and ran it past various past and current clients as well as a few prospects.

It worked.

The new positioning significantly narrowed the scope of the services offered. It refocused on the original expertise foundation of rewards, benefits, and compensation, the field that delivers the highest gross margins and is closest to the original ideal client profile.

Old vs. new positioning

So why was the HR part of the service portfolio posting significantly lower returns?

There are several reasons:

• It had a generic positioning in the marketplace. There was nothing to differentiate the services offered under the HR umbrella from hundreds of other HR consultancies of all sizes.
  
  
• All work completed in this field was project-based. To keep the business going, the HR consulting team consistently pursued projects and tried to win them with no real differentiator. It comes as no surprise that the win rate was relatively low, given the deadly competition in the HR consultancy space.
  
  
• Because winning every new project was so much work, the overall client acquisition cost was high.
  
  
• This all led to an unreliable pipeline. It was close to impossible to accurately forecast the pipeline of work and revenue on this side of the business, making resource allocation all the more difficult.
  
  
• Finally, to compete, the consulting leader who headed this part of the business consistently offered discounts, which contributed to the poor margins and profitability.

Their reward business, on the other hand, held significant growth potential. Here are just some of the indicators:

• It allowed the firm to transition back to specialist (narrow) positioning and capitalise on its strong reputation.
  
  
• A retainer business model delivered a large chunk of revenue. This made it significantly easier to forecast revenue, which, in turn, translated into revenue stability, staffing predictability, and a less stressful business context.
  
  
• Due to the firm's strong reputation in rewards, prospects were reaching out to the consultancy – new business was predominantly inbound and organic and existing clients stayed with them for multiple years. As a result, the cost of acquisition was negligible.
  
  
• The deep level of expertise in the field enabled the consultants to deliver high-value outcomes for clients, which in turn allowed them to charge premium fees, resulting in strong gross margins and profits.

In summary, the rewards business had been subsidising the HR business for years, and it was time to end this practice.

"Achieving a laser-sharp, differentiating proposition as a consultancy isn’t easy to achieve and it can feel really scary. Because, in the consultant’s mind, it seems ‘safer’ to be just like everyone else. Let me challenge you with this logic: if your consultancy resembles all other consultancies, it is more likely to fail. If you really want the ‘safest’ option, just go get a job."

The outcome of eliminating 30% of the services

As explained earlier, the two partners decided to phase out HR services by completing only ongoing and legacy projects and not taking on any new clients in this field.

Within 18 months, they managed to eliminate this function almost entirely.

This, in turn, opened up resources to allocate towards the consultancy's rewards, compensation, and benefits practice. They added a subscription-based product offering and salary benchmarking to clients.

Due to this internal restructuring and shifting gears, the consulting firm’s revenue decreased by €850K in 2022.

“Oh no! That’s a 14% revenue drop, how terrible!” some may think. 

That is until we get to the numbers that show the real picture:

• Gross margin end of 2022: 43%.
  • that’s a €200K increase (€2M in 2021 → €2.2M in 2022)
  • this is a 10% improvement
  • the ‘23 target is to get it >50%
    
    
• Net profit end of 2022: 19%
  • that’s a €138K increase (€840K in 2021 → €978K in 2022)
  • this is a 16% improvement
  • the ‘23 target is to land around 25%

Despite substantial revenue loss, margin and profit improved considerably in 2022! 

This is the truth about high-performing consultancies. It’s not about the number of clients or the number of services they boast. It’s about the ability to charge premium fees while significantly reducing costs. 

And for consultancies with a narrow focus, costs will inevitably decline over time. 

Repetition allows for the creation of efficient systems, processes, and automation. Project completion time is reduced. The depth of expertise grows, and so does the value to clients. New hires are trained more efficiently. Client acquisition costs decrease as more work is delivered by returning clients and referrals. It’s a glorious loop to heaven! 

"What consultancies need is the confidence that "the void" that is created by saying no, becomes an opportunity to do things that bring them further and closer to what they want to do. And with that comes the confidence that something else will come along, because they're worth it". (David Ducheyne, founder of Otolith Consulting)

In conclusion

As consultancies strive to grow, most are tempted to add new services to their offerings. I get that.

However, service expansion can quickly dilute expertise, increase costs, and reduce margins and profits. I’ve seen this repeatedly. 

That’s what happened to my client, too. While the addition of new HR services in 2012 attracted new clients and revenue, the consultancy learned it could not charge premium rates for those services and had to continually chase (not 'attract') new business. 

Luckily, they were able to return to their foundational expertise and reposition the firm, solidifying its trajectory toward becoming a high-performing consultancy. 

I have no reason to doubt that they will achieve the margins and profits they target in the coming years!

Let me close with an early 2024 quote from the co-owner of this consultancy:

“At first, reducing our services felt like taking a big risk, especially with a 14% cut in revenue. But our re-commitment to what we truly excel at, was unwavering. After 18 months, the results speak for themselves: a 16% profit increase, and our clients recognise us again as the go-to experts in our original field. By cutting back on services that diluted our value, we’ve improved our financial performance, deepened our impact, established a better quality of life for us and the team, and discovered that saying ‘no’ to distractions is the key to realizing the full potential of our expertise.”

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