Agency vs. Consultancy: How To Run A Profitable Professional Services Business That Scales

At best, professional services can be highly stable and profitable, bringing in 15-25% profits each year. However, many struggle to scale profitably. Based on our experience, agencies are more prone to profitability challenges compared to consultancies. Why is that? We’ll try to shed some light on this and offer advice to companies currently struggling.

Distinguishing Agency vs. Consultancy

First, it makes sense to distinguish between an agency and a consultancy. Agencies provide professional services to other businesses. Consultancies, on the other hand, offer higher-level advice on more strategic issues rather than focusing on day-to-day work. We wrote a complete article on the topic of distinguishing between the two.

Here's a rough division on how they differ:

• ‍Focus and Approach: Agencies are execution-driven, focusing on tasks like marketing and content creation, while consultancies provide strategic advice and high-level problem-solving.‍
• Service Offerings: Agencies handle multiple clients and projects simultaneously, offering services such as advertising and social media management. Consultancies offer specialized services like business strategy development and process optimization.‍
• Client Relationships: Agencies typically work on short to medium-term engagements with clear deliverables, whereas consultancies engage in long-term relationships, acting as trusted advisors and often working on a time & materials basis.

Why is it better to be a consultancy than an agency? Inevitably, as consultants generally work on higher-level issues, they can charge more per hour. Often, consultants are hired to focus full-time on one project, allowing them to drive profitability more easily than juggling multiple projects at once.

Profitability Challenges in Agencies

Why couldn’t an agency charge more and have their people focus on fewer projects? They could, but here's the catch. Many agencies start with low-level offerings, like Google Ads services. Companies are only willing to spend so much on Google Advertising, often invoicing only hundreds or a few thousand dollars per month per client, requiring the expert to handle multiple projects. The key to creating a successful agency is to start with higher-level strategic problems and build the offering portfolio around that. To charge more per hour and secure larger projects, one must engage with executives higher up in the organization.

IT consulting is a niche that has excelled in delivering hands-on work while managing large projects, allowing consultants to focus on a few projects at a time, making the work predictable and often profitable. The best IT consultancies excel at selling complex projects that might take months or years to complete, providing a stable invoicing base. This approach makes it easier to engage in shorter discovery projects while maintaining a long-term project portfolio.

In contrast, an agency often pitches for smaller engagements, making the project portfolio more fragmented. While this diversification and risk mitigation is beneficial, it complicates operations.

Types of Projects: Staff Augmentation vs. End-to-End Projects

One debate in running a professional services firm is whether to focus on leasing your people to clients' teams or delivering end-to-end solutions. A healthy business should have a bit of both but should start by selling end-to-end cases. Why? Well, being able to pitch and deliver complex projects increases the likelihood of landing new large customers. Successful accounts often start with a project. The engagement with the client evolves into "body shopping" as trust is established between the client and consultancy. There's no need to pitch for a large case as you've established trust with the client. Nowadays a lot of "body shopping" or staff augmentation is done using middlemen. Renting people through a third party makes it harder to create meaningful connections with clients' stakeholders, reducing the likelihood of becoming a strategic partner, and should be the last resort for an ambitious professional services company.

From Small Projects and Busywork Towards Larger Projects

At Operating, we despise busywork, which is focusing too much on operations instead of selling, consulting, and hiring. Many agency operations people obsess over automating their operations stack, which is unnecessary for a small firm. We've already written about reducing the amount of task level planning on company level before. Instead of optimizing the way the agency works, the company should be fully focused sales and hiring, using ready-made tools from the market as the backbone to theri business. It doesn't make sense to try to innovate with how you operate. Innovation happens in the client projects. Creating an Airtable-Spreadsheet-Zapier custom ERP means reinventing the wheel.

Our founding team comes from consulting, where full-time and half-time allocations with long-term projects are the norm. Agencies often get stuck in the cycle of selling small projects with small monthly fees, limiting their growth and profitability. Let's look at how professional services companies can optimize their offering for success.

Building Blocks of a Successful Offering

To grow profitably and faster, agencies should focus on solving problems that are:

• Complex: People are willing to pay for complexity, as seen with IT consultancies.
• Urgent: Urgent matters, like due diligence in M&A projects, pay well.
• High value: Solving strategic issues for top management guarantees compensation.

Targeting the Right Companies

Agencies and consultancies should focus on companies with the budget to spend:

• High-margin industries
• Large corporations
• Well-funded scale-ups

Targeting the Right Unit

Within these organizations, money isn’t distributed equally. Generally, there’s more money allocated for IT than for marketing, for example. This is because IT investments are often seen as critical for core operations and future growth, encompassing areas such as infrastructure, cybersecurity, and software development. However, marketing can also receive substantial budgets, especially when strategically aligned with business goals. For instance, companies that need to have a strong digital presence and that invest a lot in brand awareness may allocate significant resources to digital marketing, content creation, and customer engagement initiatives. There might also be opportunities in other units like R&D, if your professional services company focuses on highly technical consulting.

While there's no one-size-fits-all answer to which unit to target, bear in mind that it will have a significant effect on how easy or hard it will be to scale your company.

Organizing Sales and Project Delivery for High-Value Professional Services

There’s many ways to mess up a potential for a profitable delivery by making mistakes in sales. Sales should consist of people who are able to construct complex proposals and pitch them confidently. A successful sales person is both tech-savvy and good with people. In my opinion you can’t have one without the other, or at least part of the sales process will suffer. Outgoing ex-consultants make great salespeople. That’s why in more traditional consulting companies the partners are in charge of sales. They’ve walked the walk for many years. Read more on our thoughts about creating a successful sales process in a professional services company.

Once you're able to land clients, it's essential that you have the right types of consultants working in those projects that are able to identify new opportunities and pitch them to the client. Selling in professional services is a lot about solid account management.

Optimal Delivery Models: Time & Materials

The best delivery model for consulting is time & materials, i.e., billing by the hour. While some tinker with different types of ways to invoice their clients like value-based invoicing models, fussing over delivery models often indicates profitability issues in projects. When problems are high-value and there is trust between the client and consultants, hourly invoicing is acceptable. Other invoicing models create operational overhead, leading to more busywork, less profit, and more micromanaging.

Naturally, when the time of the consultant is high value enough, working with something like a success fee might make sense. This is the case for example in the M&A where the consultancy gets the cut from the transaction value, which is often significant, resulting in high effective hourly rates. However, not many get to enjoy this privilege, and time & materials model is great for its simplicity.

The Ultimate Professional Services Company (Be it an Agency or a Consultancy)

The ultimate professional services company:

• Solves complex, urgent, and high-value problems
• Targets high-margin industries, large corporations, or well-funded startups, and the right units in the companies
• Uses mostly time & materials invoicing
• Pitches for end-to-end solutions and provides some staff augmentation
• Has tech-savvy sales people, and consultants who are always discovering new opportunities in projects

Building such a firm requires brilliant founders with a unique idea, who can recruit the best people and scale the company. Only a handful of companies achieve this, but those that do are truly the best types of agencies out there.