In this article, we will discuss issues that affect your consulting success. First we will cover ethical issues you may encounter as a consultant, and how to approach them. Following the ethical discussion, we will provide an overview of some of the business approaches you need to know as your business progresses -- such as the amount of time it takes for you to see a payback on your investment, re-investment strategies, and -- if necessary, or the time comes --an exit strategy.
Ethics of the business
Rule number one: Never let winning a proposal for future work overshadow your values and ethics.
There are many ways to define ethics. In general, ethics are the standards governing the conduct of the members of a profession. Business ethics are those standards that we use to conduct business operations, and as a consultant, high ethical standards are the expectation, where individuals conform to sound moral principles. As businesses focus on earning a profit, there are often issues of misconduct based on the individual conduct of business men and women. Unethical behavior consists of issues such as harassment, fraud, conflict of interest, bribery, employee theft, or defective products. The key reason there are difficulties with ethics in the business world is because many people have limited experience in business management and find themselves making decisions about quality, pricing, and hiring practices. There are inherent values learned from the employees' culture, family, religion, or school that may not provide them a framework or guidelines for making complex business decisions.
As a consultant, you should have your own code of conduct and code of ethics. You may even desire to have a statement of values. These are important interactions with your customers. It lets them know that you are trustworthy and that you will only deal with clients who are equally trustworthy. The code of conduct is a formal statement that describes what a company expects of its employees. A code of ethics is a comprehensive list of general statements that serve as the principles and basis for the rules of conduct. A code of ethics will specify methods for reporting violations of ethics, the discipline for violation of ethics, and the structure of due process. This is a written document that specifies unacceptable and acceptable types of behavior. The statement of values is a list of management's values in terms of ethical operations. Codes of ethics address trustworthiness, fairness, citizenship, responsibility, care, and respect.
It is important to train employees about your company's policies and expectations, general standards, and applicable laws and regulations regarding ethics in your consulting business. Your priorities for ethics must be communicated to employees. It is important, as a business owner of a consulting company, that you and your employees understand, and can identify with, the ethical components of business decision making. It is crucial that employees understand that there is a degree of inherent ambiguity in ethical situations. How employees act in carrying out your business defines your company's ethical posture. It is important for you and your employees to understand that unethical behavior is never justifiable. A good mechanism to keep yourself in check, as a consultant, is to periodically perform an ethics audit, which includes a regularly scheduled complete audit of the documented measurements of compliance within your published policies and procedures.
As you develop the ethics framework for your consulting business, these are the key responsibilities you have:
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Serve your clients interests with integrity and competence.
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Maintain client results in confidentiality.
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Develop recommendations that can truthfully be made.
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Charge fees that are commensurate with the level of consulting you are providing.
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Inform your client of any issues that may impair judgment in your interactions.
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Develop no conflict of interest by hiring employees from your clients.
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Never work for two competing clients without their consent.
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Never accept fees for referrals.
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Report unethical behavior by fellow consultants to the appropriate professional association.
There are several entities that are able to provide information on compliance and best practices, as well as networking opportunities for improving the ethical poise of your business. The three main caveats to ethics focus around respect for yourself and the others you interact with; honor, which includes being an ambassador for doing the right thing, even when no one else is looking; and integrity, which is the commitment to always do the right thing, using honest values.
Consulting success in terms of strategies
Exit strategies, return on investment, re-investment times, and exit strategies should all be contained within your business plan. A plan can be reviewed over time to see what your initial intentions were for the business. They can also be edited when the plan no longer meets the future direction of your company. It is important that you plan ahead for several years. You should review your business plan for modifications, which include incremental growth opportunities. Your business plan may be necessary to provide lenders justification for providing you financial loans.
Return on investment
As a consultant you may want to develop your own return on investment calculations. It is recommended that you develop this in a spreadsheet, with the built-in calculators. Measuring return on investment for consulting projects is of value to both you and your clients. There is a tremendous interest in return on investment (ROI) to determine the success of consulting projects. The return on investment shows the monetary payoff of a project, and examines the cost benefit. ROI calculations are beneficial to consultants over time, because they show costs and performance data to measure the success of your projects. When you calculate the ROI, you are looking to capture any metrics you believe contribute to your success and your client's success. These would be areas such as:
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Satisfaction with the consulting interaction
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Success after implementation of recommendations
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Level of learning competence with employees after interaction
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Employee satisfaction
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Customer satisfaction
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Implementation costs
You want to use quantitative and qualitative measures of the project to determine the effects. Using an ROI or an ROI scorecard helps you and the client see the resulting value in the efforts. The expenditures for consulting projects can be great, so this is an excellent way, as a consultant, to show your worth to prospective future clients. You need to be able to tell clients what effect you had.
Payback and re-investment
As a consulting business owner, you will want to calculate when your business is actually making you money. You can use a number of financial payback calculators to determine return on investment.
First, we will discuss the typical return on investment categories you would use to calculate your return on investment. This is generally calculated by the projected cost savings of a project, or the income you anticipate receiving.
Projected cost savings or income. Examples of these include:
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Improved reliability/reduced use of help desk support
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Reduced training time for administrative staff
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Calculated time saved in manually creating basic reports
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Reduction in the cost of annual maintenance
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Reduced use of consumables, and an increase in sustainability or recycling
Project expenditures as a cost. Examples of these include:
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Contract costs for employee labor
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Travel and expenses
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Software, hardware, database, or tools
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Research materials
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Mileage
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Supplies, such as binding, postage, signs, printed advertising
Project discount rate as a total of:
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The bank lending rate
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Inflation
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Risk
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The net discount rate
The return on investment (ROI) is a detailed analysis of all the variables that can impact the outcome. The return on investment is the most common tool used by clients and business consultants to determine the value of the product or service, by determining whether you're getting your money's worth. You can determine whether to continue to purchase a product or service or not. This is the most typical formula for calculation of the return on investment:
ROI = [(Payback - Investment)/Investment)]*100
We say this is the most typical formula, because this is a mathematical calculation for the return on investment. Some companies and consultants go further in their explanation of return on investment, through tangible and intangible measures. It is important that your return on investment is both qualitative and quantitative. Intangible measures may not have a cost, but they have an extreme added value to the organization. An example of added value is good will. The business may spend additional money in the development or use of a product or service that provides an added benefit for society or customers. It brings no monetary value to the product or service, but adds to the collective reason why consumers value it.
As a consulting business owner, you want to look at the return on investment -- not only in terms of resource costs, but also including the value of your own time. This gives you a true reflection of the return on investment. Many consultants overlook the value of their own time, in terms of employee cost. Make sure you include these in your calculation. This is an important part of making your business profitable.
Here's an example, assuming an 8 percent rate and initial startup costs of $40,000 (business license fees, rent, insurance, supplies in the form of a loan). Your return on investment would be 168.7%, and your payback period would be 7.8 years.
Payback determination
Determining how long it will take to receive payback from your investment in your consulting business is calculated as the payback determination.
Ok, remember the $167,500 you needed in the economic realities lesson? You didn't make it yet.
Re-investment
Re-investment is a personal decision based on risk, current financial status, and future aspirations as a consulting business owner. How large do you want your company? That depends greatly on how long it takes to actually turn a profit. You can see the payback time for your original loan of $40,000, but it can take years for you to feel comfortable re-investing in your business such as purchasing land, building, or adding additional employees. The general rule of thumb for business investment is that you contract employees until you make a profit of at least $167,000 in a year. Re-investing your business does have some risk, but also a great deal of reward. Investing in your business can add efficiency to your productivity, such as hiring customer support or administrative help, which increases your productivity, and therefore increases the number of consulting jobs you are able to take on at one time. This increases your profits and potentially decreases some of your expenses. Before you reinvest in your business you want to make sure you have enough cash flow on hand to cover any commitments that you have to employees or clients for the next six months. You would calculate this, based on your present income and cash flow but this gives you a baseline.
Exit strategies
Every successful business plan contains an exit strategy in case things don't go as planned or in case they go better than you expected. Consultants take different routes after their consulting experiences, some retire and pass on the business, some go back into technical fields, and some sell their businesses to others.
Many consulting business owners choose to sell the business to others. As the business owner, you have to determine where you want to be with your company, whether you are expanding or planning your exit strategy. There are a number of reasons why business owners sell their companies, such as fighting among the owners, struggles with borrowing cash, market shifts, or boredom. There is no set strategy for exit; it is based on your own personal goals. Some of the most common exit strategies are:
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Sell all or part of the business.
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Using a leveraged buyout, where a company is acquired by a person using the value of the company's assets to finance the acquisition.
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Pass the business to a family member.
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Offer the company through an initial public offering.
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Liquidation, which means stopping operation of the business, selling all the assets, and paying off creditors and keeping the proceeds after taxes.
The important thing is for you to determine your exit strategy in advance, and determine if you want to join the corporate world, start another business, or simply retire and give back to the community.
If you do make the decision to sell your company, these are the steps you should take:
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Solidify your company processes on paper, such as client information, methodologies, sales, and other information potential buyers may want.
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Develop some marketing materials about your business, such as the services you provide, number of employees, and real estate assets.
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Determine prospective buyers.
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Potential buyers will perform due diligence.
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You will sign the final proposal or negotiation.
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You will set in place post-sale notifications for clients, and other transition plans, such as insurance.
Summary Reminders and Takeaways
In this lesson, we discussed the necessity of ethics, payback and re-investment strategies, as well as exit strategies. We learned that the number one consulting ethic is to never let winning a proposal for future work overshadow your values and ethics. Business ethics are those standards we use to conduct business operations, and -- as a consultant -- high ethical standards are the expectation, where individuals conform to sound moral principles. As money is the focal point of many business decisions, many unethical behaviors exist in day-to-day business activities. Unethical behavior consists of issues such as harassment, fraud, conflict of interest, bribery, employee theft, or defective products. There are inherent values each employee learns from their culture, family, religion, or school that may not provide them a framework guidelines for making complex business decisions.
If you are the sole consultant, you are responsible for managing the ethics paradigm, which includes competition, culture and behavior, laws and regulations, client interest, profit-making, strategy, and motivation. If your business has employees, your priorities for ethics must be communicated to them. Your business should have its own code of conduct and code of ethics.
The ethical framework within a consulting business includes serving your client's interests with integrity and competence, maintaining confidentiality, developing truthful recommendations, charging fees that are commensurate with the level of consulting you are providing, informing your client of any issues that may impair judgment in your interactions, developing no conflict of interest, and reporting unethical behavior.
Calculating your return on investment, you want to include aspects of customer satisfaction, implementation of recommendations, level of learning competence, employee satisfaction and customer satisfaction, and your implementation cost.
As the business owner, you determine when to re-invest in the business based on the payback and financial calculations from your consulting business. The return on investment is calculated by cost savings, cost, expenditures, and any loan rates for starting your business. The formula for return on investment is ROI = [(Payback - Investment)/Investment)]*100. Many consultants reinvest in the business. Once they have reached the payback period of any loans for starting their consulting business. Be cautious as you invest to expand your business to ensure you have the 6 to 12 months of emergency funds and do not add additional employees until you have reached at least $150,000 to $170,000 in annual earnings.
You have several options for exit strategies, which include selling part or all of your business, passing the business onto a family member, offering an initial public offering, or liquidation. If you do sell your business, you will want to determine the processes, methodologies, and sales information about your company that potential buyers will want to know.
