best practices in consulting - kennedy 2014

Best Practices in Consulting:Effectively Managing HR Administration1

©2014 Kennedy Information, LLC

Best Practices in Consulting:Effectively Managing HR Administration

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Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Driving Consulting Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Case for HR Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Driving Points in Growing a Consulting Firm . . . . . . . . . . . . . . . . . . 7

Creating More Predictability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

About TriNet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

About Kennedy Consulting Research & Advisory . . . . . . . . . . . . . 13



Best Practices in Consulting: Effectively Managing HR Administration

IntroductionThis paper discusses the underlying drivers of consulting operations, particularly those that involve a firm’s most valuable asset -- its people. In doing so, we also explore the correlation between effective management and a firm’s ability to effectively administer critical HR functions. We address crucial human resource capabilities, and the consider-ations of in-sourcing vs. outsourcing those activities.

Driving Consulting ProfitabilityThe reported pressures on fees have firms seeking new strategies to maintain profitability goals. Kennedy has found that a sizable portion of firms have not raised fees in a few years, while others have attempted to raise their fees annually. In either case, firms are reporting increasing costs directly attributed to employees and operating expenses, putting increased pressure on margins. If fees cannot be raised, costs must be cut or margins will suffer. However, a variety of strategies are being implemented to cut costs rather than just trimming costs across the traditional budgets.

Kennedy measures several expenses as a percentage of revenue, starting with direct full-time service costs. The components measured include base salaries, bonuses, retirement costs, and healthcare costs. On average, these direct costs total just under 60% of revenues (Figure 1).

Figure 1: Costs by HR Category as a Percentage of Revenues

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%40.8%

10.2%

2011 2012

Perc

enta

ge o

f R

even

ue

2013

1.5%

6.3%

Base Salaries Bonuses Retirement Healthcare

42.2%

7.7%

1.6%

6.2%

42.0%

8.0%

1.7%

6.6%

Source: Kennedy Consulting Research & Advisory



Given the cyclical nature of consulting, with periods of intense project-oriented work punctuated by extended down-time between engagements, many firms construct a flexible workforce comprised of full-time staff along with contractors to round out teams. So with the addition of contractors and short-term labor, total direct costs typically average 66%.

Additionally, a handful of fast-growing regional firms are leveraging a “local delivery benefit” as their go-to-market strategy. This strategy focuses on locally available talent to compete directly with the global consulting leaders. The benefit of locally sourced services is the savings realized in not having to pay travel and housing expenses associated with sourcing expertise from a major city halfway across the country.

The complexity of all these staffing models highlights the challenge facing consultancies in the management of its HR function. While smaller firms seek to avoid back-office operations in favor of shared responsibilities or outsourced services, many other firms realize the benefit of control and ownership of having back-office activities in-house.

HR tends to have a higher ratio of partner leverage relative to other support functions. The leverage measurement in Figure 2 shows that firms averaged a 3-to-1 ratio of partner to sales and marketing employee, a roughly 4-to-1 one partner to IT employee, and just over a 2-to-1 ratio of partner to HR employee.

Figure 2: Administrative Employee Leverage for Consulting Firms

0%

10%

20%

30%

40%

50%

60%

38%

Marketing and Sales Information Technology

Perc

enta

ge p

er P

artn

er

HR/Administrative

Administrative Employees

24%

55%




Many firms are also turning to an almost virtual model to keep office overhead to a minimum. This is a long-standing trend that professional services organizations of various sizes have implemented. Traditional consulting firms may have few operations that require a physical office location given that the billable consultants are typically at the client. Outsourcing of back-office, research and analyst activities has been increasing in favor.

Not surprisingly, the complexity inherent in this mixed workforce creates challenges. While firms present a unified front to their clients, behind the scenes, HR staff struggle with multiple incentive and benefits plans, and multi-level governmental reporting requirements. In turn, the level of paperwork – virtual or real – can be all-consuming.

The Case for HR ManagementConsulting attracts intellectual individuals, and those individuals collectively form the core product of a management consultancy. Packaging the knowledge and skills of its people, and delivering these skills through services and solutions, creates differentiation for a consulting firm.

The people side of the consulting business can’t be under-emphasized. With all the emphasis on talent selection and human capital as a means of creating such levels of differentiation, it is surprising that the methods used by consul-tancies to manage these resources are relatively staid by comparison. In fact, this phenomenon reinforces the fact that while consultants are expert in advising clients on best practices, they often face difficulties with their own operations.

For boutique firms ranging in annual revenue from $5-$35m, target operating margins are usually 12-15%. While 66% of revenue distribution is attributable to direct costs, our research indicates that firms spend approximately 22% of revenues on Sales/Governance and Administration (Figure 3).

Figure 3: Revenue Distribution for Operating Margin

Direct Costs SG&A

Revenue Distribution

Operating Margin

66%

22%

12%




Breaking down SG&A costs further helps determine the value firms place in various functions (Figure 3). Each of the variables on the expense side equates to decisions firms must make in order to balance efficient operations with protecting operating margin.

Figure 4: SG&A Breakdown by Function

Mgmt & Ops Business Development

SG&A Distribution

Marketing

42%

30%

8%

5%

15%

Personnel Technology


On the surface, each of these areas offers some flexibility in terms of trimming expenses. For boutique firms, management will usually allocate expenditures to align with annual budgets. But given the unpredictability of business, where client business can be concentrated, and a single business loss can have significant impact on profitability, management will usually adjust expenditures as the year unfolds.

While there’s not necessarily a one-to-one correlation, it’s also true that increasing dollars in one area must usually be offset by decreasing expenditures in another area. As a result, consulting firms have differing philosophies as to the relative importance of each support area. Boutique consulting firms often off-load what they consider to be non-core business functions such as accounting, finance, legal, IT and marketing to third parties. This adheres with the guiding principle that non-billable staff and functions should be kept to a minimum.

For a boutique consulting firm, cutting expenses in either of these areas comes with trade-offs. Any expense that is discretionary in nature and murky in terms of return on investment is scrutinized. At the same time, expenses that are predictable and transparent in terms of benefits help managers even out cash flow and focus on strategic planning. As with any business, consulting firms can feel challenged altering processes that might have served them well in start-up mode, but now prove inefficient and expensive.



Early-stage growth is characterized by ad hoc HR management; senior consulting practitioners/partners typically implement such functions as recruiting and training with tactical assistance from staff-level personnel. As firms grow, the underlying HR management at successful consultancies become more structured. Meanwhile, firms that remain unstructured with its HR function usually fail to maintain healthy enough margins to sustain growth. It’s during this critical decision period that many firms balance their expenditures in support functions against margin expectations, and ultimately fail in their ability to manage rapid growth because administrative complexity becomes an undue burden.

Decision Points in Growing a Consulting FirmConsultancies typically follow a fairly linear path in terms of growth and maturity. There are various thresholds that firms face – primarily in size and administration – that can prove difficult to cross. As firms reach certain revenue levels, they face increased complexity in back-office operations, specifically with HR management issues and structure. This leads to decision points on critical investments. It’s during the rapid-growth phase that consulting firms must decide to insource or outsource certain support functions, including HR administration (Figure 5).

Figure 5: HR Administration and Investment

CriticalDecision Zone

$5m

5% 15%

Structured

Ad hoc

$35mRevenue

HR Expenses(as of SG&A)




Creating More PredictabilityThe HR function is particularly ripe for scrutiny given the myriad regulatory and compliance issues consulting firms face in managing a flexible workforce as businesses mature. At the very minimum, consultancies must address state-level employment regulations for full-time workers across multiple jurisdictions. Additionally, compliance mandates around health insurance and similar benefits have grown exponentially with the introduction of the Affordable Care Act.

Many consultancies will initially staff HR positions to fulfill recruiting and general administrative functions. Routine tasks, such as payroll and benefits administration, might be outsourced to specific providers and brokers. But core activities, such as recruiting and training, are held in house. This ad hoc collection of internal and outsourced support can be serviceable as consulting firms ramp up growth. The question arises at what points along this continuum are managers potentially short-changing the business by failing to optimize the balance of insourced and outsourced services?

The consulting industry has a very large population of smaller firms whose owners fail to relinquish day-to-day management of back-office operations. Conversely, partners may recognize the management conundrum, but opt to address the issues through a hybrid approach whereby partners still control decision-making while handing off tactical execution to in-house staff.

While either approach is perfectly reasonable from the owner/partner perspective, in each case, those managing the firm face the same challenges as their clients, namely, what activities should be managed with internal resources, and what can (and should) be outsourced for efficiency and profitability? By not addressing the challenge head-on, firms ultimately stymie their own growth prospects and potentially limit the long-term viability of their business.

Another option to the insourced or hybrid approach that is available to boutique consulting firms is the professional employer organization (PEO). A PEO is a firm that provides a bundled HR & benefits solution. Under this model, an employer can outsource virtually all HR administrative tasks, while also transferring certain liabilities associated with HR compliance and employee incidents to the PEO. The PEO also leverages the collective buying power of its clients to provide healthcare and other benefits to the boutique firm that are similar to what a larger firm provides. Some of the services that a PEO provides are: employee benefits, payroll processing and payroll tax compliance, workers’ compen-sation insurance, 401k retirement plans, HR automation, recruiting, risk/safety management, and HR training. The PEO does this by becoming and additional employer that has the responsibilities above. The boutique firm also remains an employer and remains responsible for directing and controlling employee activities. This practice is known as joint employment or co-employment.

For an industry that centers on human capital as its differentiator, consulting firms may be suspect of PEOs. But use of a PEO can result in saving time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees. The client company may also be able to offer a better overall package of benefits. The PEO model is therefore attractive to small and mid-sized businesses and associations.



There are two other areas of impact to consider. First, a PEO can improve the overall employee experience through better benefits, automation (access to earnings statements, 401k, employee directory, benefits enrollment, etc.) and higher levels of HR support when there are policy or claims questions. If you are bringing in consultants from larger firms, the PEO platform will resemble a familiar structure and generate confidence in joining your firm.

Second, the PEO does make it easier for the boutique firm to increase the number of permanent employees vs. contractors which in turn provides a number of benefits including the development of IP, consistent service delivery, culture development and client retention. It’s possible to realize this benefit because of the reduced liability exposure and admin burden associated with full time employees. One example is that, if a staff reduction were necessary because of a lost client, the PEO relationship and best practices deployed makes rapid contraction possible at much lower risk.

As indicated in the following decision grid, many consulting firms can handle HR administration with internal and outsourced resources, or through a PEO (Figure 6):



Figure 6: HR Administration Tasks

HR Administrative Function Internal Outsourced PEO

Salary Info ✔ ✔

Payroll ✔ ✔

Position Descriptions ✔ ✔

Interview Guidelines ✔ ✔

Candidate Screenings ✔ ✔

New Hire Forms ✔ ✔

Development Practices ✔ ✔

Skills Assessments ✔ ✔

Performance Management ✔ ✔

Employee Orientations ✔ ✔

Employee Info Management ✔ ✔

Health & Insurance ✔ ✔

Flex Spending Accounts ✔ ✔

Retirement/401k ✔ ✔

Employee Assistance Programs ✔ ✔ ✔

Reward/Recognition Programs ✔ ✔ ✔

Workers Compensation Insurance ✔ ✔

Employee Practice Liability Insurance ✔ ✔

Unemployment Management ✔ ✔

COBRA Administration ✔ ✔

Employee On-boarding and Off-boarding ✔ ✔ ✔

HR Investigations and Case Management ✔ ✔

HR Handbook/Policy Administration ✔ ✔

Time & Expense Management ✔ ✔ ✔

Applicant Tracking ✔ ✔ ✔

Health Savings Accounts ✔ ✔

Travel Management ✔ ✔ ✔

Health and Disability Claims Management ✔ ✔

HR Related Employee Inquiries ✔ ✔ ✔

HR Regulatory Compliance ✔ ✔ ✔




The question posed to those managing these functions is at what point does outsourcing certain tasks become a more viable option? Ultimately it’s a cost-per-employee factor and the overall efficiency gained that drives decision-making. PEOs are effective for firms that have outgrown an internal or hybrid approach and offer an alternative for those consultancies wishing to offload the majority of administrative functions – and potential liabilities -- to an outside provider. But PEOs’ cost efficiency diminishes as consulting firms grow and can fund internal resources (or achieve the scale to effectively negotiate better rates for such items as benefits and insurance). The size for which a PEO makes sense for boutique firms is typically measured in number of employees. This is because most PEOs either have a per-employee fee or charge a percent of payroll. Boutique firms that engage with a PEO typically do so between the 5-400 employee level.

Often the management challenge can be rooted in philosophical differences among owners, which manifests itself in the boot-strap approach of “who does what” with client-facing partners assuming the roles of internal managers. Outsourcing some functions becomes a necessity as basic delegated decision-making – an approach that served a firm well in its early stages – become unwieldy as consultancies grow.

ConclusionsConsultants are trained to understand cost-benefit scenarios and apply those to their clients. At the same time, consulting firms become so consumed with their clients’ business that they can lose sight of their own. Our research indicates that those executives who are managing consulting operations tend to emphasize client-facing activities – business development, marketing, branding – first and foremost. The priorities are understandable, but potentially shortsighted.

As evidenced by the growing size gap between global consulting providers and small boutiques, there is also a separation with the HR function within those two camps. The largest consulting firms make sizable investments in both the people and systems to manage their human capital assets. Small firms’ historical seat-of-the-pants approach to HR has evolved to some degree. But it’s obvious that many consulting firms would benefit greatly with a commitment to efficient and effective HR management.



About TriNetTriNet provides small to mid-sized businesses with an HR solution so they can free themselves from the complexities of HR and focus on their goals. As their trusted HR business partner, TriNet assumes many of the responsibilities of being an employer and helps these companies contain HR costs, minimize employer-related risk, and relieve the administrative burden of HR. TriNet offers bundled HR products, along with additional cloud products and strategic services, resulting in a comprehensive and empowering solution. www.trinet.com



About Kennedy Consulting Research & AdvisorySince 1970, Kennedy has been the world's leading source of market analysis on the Management Consulting and IT Consulting industries.

Kennedy Consulting Research & Advisory provides accurate and reliable market sizing and forecasts on consulting services world-wide, needs-analysis and vendor profiling for buyers of consulting services, timely and insightful intelligence on the top consulting firms in their respective markets, and operational benchmarks that measure consulting performance.

Kennedy's research spans multiple service areas, client vertical industries, and geographies.

Our analysts provide expert commentary at consulting industry events world-wide, and offer custom research for Management Consulting and IT Services firms.

Kennedy's advisory services provide results-oriented strategic guidance to buyers and sellers of consulting services.

Kennedy's clientele consists of Fortune 500 companies and the most highly regarded professional services firms in the world, representing over 90% of the service providers in consulting.

Visit www.KennedyInfo.com/Consulting.

best practices in consulting - kennedy 2014

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