What Unpredictable Project Demand Really Costs You, and What You Can Do About It
Unpredictable project demand. It’s the nature of consulting. It costs consulting firms and other organizations a fortune in lower utilization, but the true cost is even more than you know. But that doesn’t mean the symptoms of variability are unmanageable. We’ll first examine the true cost of variable project demand, and then explore hiring strategies for mitigating both the explicit and hidden costs.
The true cost of variable project demand
In economics, true cost calculations are intended to measure not just the sticker price, but also other hidden costs that are not priced in. For example, the true cost of electricity derived from fossil fuels includes the impact of pollution, climate change, stranded assets, and volatile commodity prices. Because those hidden costs not priced in, we often make sub-optimal choices in our national energy strategy. OK, so why should your consulting firm care?
Cost of Lower Utilization: When it comes to variable consulting demand, the true cost is much higher than it may initially appear. Most if not all consulting firms track the impact of variable project demand through a utilization rate calculation (total hours billed/total available hours). Utilization shortfalls are applied to fully-burdened salaries to arrive at the cost of lower utilization. Depending on the level of the under-utilized resource, the annual cost of lower utilization can easily exceed $20K for every 10% utilization reduction per employee.
Beyond lower utilization, we argue that at least 5 additional costs that should be considered when assessing the damage from project demand that swings both up and down.
Cost of a Bad Hire: What do you do when 3 projects land concurrently and your staff is flat-out? Well, first you high-five your Partners. Then you may look to hire so that you can deliver on those projects. If you follow a rigorous hiring process, this reactive hiring might work out well. Too often, however, firms rushed to deliver on signed projects circumvent a typically rigorous hiring process, and can wind up making a bad hire. In addition to the costs of re-hiring and re-training, the cultural toxicity that can accompany a hire that just doesn’t fit can be damaging. According to a CareerBuilder study, “need to fill the job quickly” was the single biggest driver of hiring mistakes, costing many companies well over $50K/year for each bad hire in internal churn and lower morale.
Cost of Turnover of Good People: Consulting firms know all about losing great people due to the rigors of the consulting lifestyle. Long hours and frequent travel drive many consultants away within 18-24 months. There is a flip-side for many firms, however, where consultants that are “on the beach” get bored when not intellectually engaged and frankly have more time to search for their next opportunity. When good people are lost, the firm once again incurs cost of interviewing, training, and recruiting. Inc. Magazine suggests that cost could be as high as 150% of salary.
Cost of Layoffs: While some firms are in hyper-charged growth mode and perceive a lower risk of work slowing down, most firms have more ups and downs. When those downs are sustained, a fiscally-responsible firm needs to consider layoffs. Again, Inc. Magazine weighs in on the real cost of layoffs, suggesting short-term costs of severance packages and internal churn can be overwhelmed by long-term risks of lower morale and upset clients.
Cost of a lost project: Some firms’ approach to a stretched staff is to defer projects where possible. A highly differentiated firm with less time-sensitive projects can successfully use a deferment strategy. For the majority of mission critical projects that need to be done yesterday, any deferment will typically result in a lost project, the value of which can easily exceed $200-500K.
Cost of lower-quality deliverable: Wait for it…priceless. When staff is stretched well beyond 100%, the quality of the deliverable can suffer. Period. This leads to lower Lifetime Customer Value and reduced brand equity, upon which the entire firm depends.
How a smart hiring strategy can improve financial performance
Not all of these costs will be incurred by every firm, but the likelihood that some combination will impact yours could easily double or triple the impact of lower utilization rates alone. How can these oft-hidden true costs be avoided?
A hiring strategy that utilizes well-qualified consultants on project basis will not flatten your project demand out, but it will help you manage it in a way that dramatically lowers your true cost. Best-in-class firms are increasingly restraining hiring during growth phases, meeting incremental project demand with experienced contractors. Rather than hiring to meet peak demand, or even average demand, firms can comfortably maintain near 100% utilization when they can rely on a network of top talent to flex up when project demand spikes.
Now, this flexible strategy can also have its hidden costs. What if the contractors aren’t able to meet the standards of the firm? What if preferred contractors aren’t available when you need them? Well, that’s exactly why you need access to a robust network of independent professionals with a history of leveraging a consulting toolkit to drive results.
To learn more about how a smart hiring strategy can improve firm economics, reach out to our team to think through how Talent Response’s network of professionals might be able to help your firm change the way work gets done.