Hauke Burde

I spent the first five years of my career in consulting. In that time two perceptions about my job followed me: (1) you must work a lot, and (2) isn't your business just billing expensive hours for marginal value?

I got hung up on this again reading Jon Gjengset's "40 hours" post. He discusses the "work a lot" idea and argues you should optimize the area under the curve, i.e. output per unit of input. A commenter objected that some industries like consulting have another idea. Basically, optimize billable hours regardless of output. That is observation (2).

I thought about where this view comes from, and I think there is a reasonable explanation. Let me write it down. For me to remember, and for you to challenge. It rests on three pillars: sales, hiring, and incentives.

Every consultancy runs the same playbook: build relationships with companies, understand their business, and sell them work packages where they lack the knowledge or the people. For that, there are generally two channels.

Pull is the bigger one. It builds on an existing relationship. The goal is to ride in the client's car with a network in the company's senior management. The destination is their vision, the route is their strategy, the fuel stops are the work packages needed to get there. As a passenger you can see all three long before the competition standing on the roadside can.

Push is bolder. You grab the wheel to change the route suggesting you have spotted a shortcut, maybe from working at a competitor who is already ahead. This channel has a higher failure rate, it is more costly since it requires the client's conviction and is therefore smaller.

However, every lead enters the same sales funnel, while most leads never make it through. The conversion rate is low. Unremarkable on its own, that holds for most industries, but hold onto it. It matters later.

Sales are very volatile. Predicting what the market wants and needs in the future is the responsibility of the senior senior leadership. So you are selling packages you cannot fully predict. How do you keep the right people in stock without knowing in advance what will sell? What you will see in consulting is that roughly three types are looked for:

• Client experts: seniors or industry leaders preferably with existing client relationships. They pull leads through the funnel and bring an upfront trust advantage.
• Technical experts: deep domain knowledge, when the work needs a specific skill regardless of business context.¹
• Energetic generalists: fast learners and sharp communicators who are happy to take responsibility and care for quality.

The usual mix you will see is a few senior leaders, some domain experts, and many generalists.

And here is where observation (2) feels confirmed. Some experts and many generalists? I thought consultants are the "experts" that know what they are doing? Knew it! Expensive hours for generalists makes marginal value.

Not so fast.

This is where everything comes together, so let me put the conclusion up front: incentives are why consulting is in demand and on average delivers competitive results.

An incentive is anything that nudges an employee toward a goal. The firm's goal is revenue growth, so it needs a function that maps sales into rewards potentially with psychological weight.

Money is the obvious one. Everyone signs a base salary plus a significant performance bonus. Early on the bonus is small. It grows fast as you climb and take on sales targets measured against your peers. Note, that everyone has a bonus negotiated. Consequently, everyone has her own reference point. "If I do well I can earn this and that this year!". If you see a slow Q1 it's rather "I need to do better otherwise I will miss a substantial part of my bonus". Want more money? Work harder. Want a promotion, a team, projects? Show me your sales. Don't have them yet? Invest more. Hello, observation (1).

But not everyone chases money. My own utility for it flattens quickly. What gets me is maybe worse. I need to believe people smarter than me think I am clever. That need is easy to satisfy in consulting, because the hiring buckets above fill teams with sharp, driven people. Other rewards are travel, good hotels, dinners on the company, low hierarchy, fast processes, modern tech, the chance to make a visible impact quickly. Money is the biggest lever, but perspective of maintaining an interesting lifestyle attracts people who tend to generate sales even when sales isn't what they live for.

Now the part maybe most people miss when they bomb observation (1) or (2). A contract has two sides, and the client has incentives too. The project manager wants a big project to show responsibility, and wants credit for success and cover from failure. Client's procurement runs on inverted sales KPIs. The cheaper the deal, the bigger the bonus.

For overbilling to happen, incentives on both sides have to contradict badly. To illustrate what I mean by that: Take value-based contracts. The idea is that we implement a solution and get paid on success, e.g. a fraction of the extra sales generated due to the solution. This is high risk, high return, and it aligns us perfectly with the client's interests. Should we build a worthless solution, no additional sales are generated and the client has to pay almost nothing. These are rarely popular. Yes, partly because billing hours is safer for us consultants, but also because procurement has KPIs. How do you convince someone to wait two years for a payoff when a fixed-price deal below target moves their bonus this financial period?

Now drop all of this onto the actual playing field: a competitive market. Many vendors, broad and specialized, multiple rounds of technical assessment and price negotiation, each trying to keep a margin. As said before, wins are rare and every bid costs substantial time and effort. Lose, and that time is gone maybe your targets with it. So you want to win, and you will very likely take margin hits to do it.

Once you have won, you want to stay and build a relationship with the client. For that you need to deliver excellent quality, build a reputation in the hope that the pull channel brings the next package to you and your team.

Do the opposite, bill a lot, show little progress and you are out. Clients notice when you are expensive per unit of output and move to another vendor. You lose the account, you are back to networking from zero, off-track on your KPIs and the recognition you potentially care about.

Hence, it is very difficult to optimize for billable hours. In the mid-run you lose badly. It happens only as an exception, when bad incentives on both sides interlock.

I noticed the second comment, the one assuming bad intent, bothered me quite a lot. After some reflection I know why. Saying you must work and bill a lot not only carries an accusation of malintent but also conveys the message that you do not really care about what you do. And I think that has some truth to it. Important was to think about the next (sales) opportunity. This happens because a financial year goes by very fast and satisfying KPIs within that span often requires going where the money flows. I have seen many clever and curious people riding the sales wind going from doing X to doing something fully orthogonal. I have noticed some sort of energy drain, because I was starting to move and think in the same vein. What I feared was giving up curiosity, technical depth and putting in a lot of energy to build the best solution I can because I deeply care for the solution not for some year-end goal.

In summary, I think consulting firms have a very lean and efficient business model that (on average) yields high quality outcomes. At the same time it can be very hard to align the incentive structure with personal goals. Right now, I have something that I want to work on, which I prefer over choosing from a tablet of (for me) second-best options. I will try my best to make it work.