Thursday, July 04, 2024

Building a Consulting Firm and the Value of Independence

Frank Scavo, circa 1995
In this series on lessons learned in my career, we most recently covered my first decade as an independent consultant, ending with my first ERP selection project at Toshiba America Medical Systems. 

But as I was wrapping up my work at Toshiba, the US economy was entering the 1991 recession. Referrals from former Smith Tool coworkers had finally dried up. Nevertheless, there now was one new opportunity, but it would eventually mean giving up my status as an independent consultant. 

It was an opportunity offered by VC and DM [1], previously from the local SSA affiliate in Southern California, where they had represented BPCS at Toshiba. They had recently launched their own system integration firm, (hereafter, the “SI Firm”) to provide ERP implementation services to multiple software vendors. From my two years at Toshiba, I had the BPCS experience they needed. Would I be interested in joining them? Being out of work and with a young family to support, I accepted their offer. 

I was the third or fourth consultant hired, first as a contractor, then a couple years later as a full-time employee, and eventually senior vice-president and a member of the leadership team as the firm grew to over 110 employees. This post outlines what I learned over eight years in supporting the owners in building a consulting firm of some scale. 

My Time in Prison

That initial opportunity was with the Prison Industry Authority, which is part of the California Department of Corrections. CALPIA, by which it is now known, was in the middle of a BPCS implementation to support its manufacturing operations in, at the time, 26 state prisons [2]. The project was being led by Deloitte & Touche, but they were short of BPCS specialists. So, the opportunity was to subcontract me to Deloitte. 

But the project was in trouble. As described to me, the first team of Deloitte consultants had what might be described as some unrealistic expectations. They wanted to make CALPIA a Class A MRP implementation. Coined by Oliver Wight, Class A was the highest standard for MRP, based on a check list of assessment questions. Although Oliver Wight has since expanded the assessment to cover all areas of the business, the first checklist, published in 1988, was limited to defining excellence in the use of MRP II systems. I knew all this from my years of teaching APICS courses. 

Lesson #1: Set a Realistic Definition of Success

But, as noted, these expectations were not achievable. CALPIA was staffed with a combination of free staff and inmates [3]—not a particularly fertile ground for establishing world class manufacturing practices [4] [5]. As a result, the project went nowhere, and the initial team of consultants managed to offend nearly everyone at CALPIA with their quest to get to Class A MRP II. The new project manager, a more experienced senior manager from Deloitte, with the approval of the steering committee, developed a new project charter with more realistic objectives. The goal was now to just implement bills of materials and routings, inventory control, purchase orders, shop orders, and sales orders. The key metric was to achieve inventory accuracy of at least 90%—a low bar by Oliver Wight standards. 

So, I went around California working with free staff and inmates to successfully implement this functionality in seven of those state prisons. From this experience I learned that you need to recognize when ambitious objectives are simply not possible. You don’t get credit for setting lofty goals and not achieving them. In some cases, it is better to set a lower bar that the organization can realistically achieve. You can always come back later and raise the bar a little for the next stage [6]. 

Lesson #2: The Pros and Cons of Tech Vendor Partnerships

I could focus this post on the many other lessons I learned about ERP selection and implementation over my eight years at the SI Firm. But I think it is more interesting to talk about what I learned in helping to build and run a professional services business, specifically one largely focused on enterprise IT. 

As noted, from the beginning, the owners planned to provide implementation services for multiple ERP systems. They started with BPCS, without a formal partnership with SSA, the vendor. After a short time, they assigned me, with DM, the responsibility for the BPCS practice. For some years thereafter we built a successful consulting practice in following the local SSA affiliate around and turning around their failed implementations. At the same time, VC was developing our partnership with JD Edwards, which she later turned over to Nick Testa, a long-time friend of mine, whom I introduced to the firm. After two or so years, they added a partnership with QAD, which grew quite quickly, and I assumed leadership of that team a year or two later, along with my ongoing management of the BPCS group. Finally, around 1997, the firm established a partnership with Oracle. So now we had four ERP implementation practices. 

Partnering with tech vendors is a common strategy for system integration firms. Vendors can be a steady source of leads, and the partnership gives credibility to the service provider. The vendor also provides technical training and support. But there is a risk of becoming too dependent on tech vendors. Vendors are notorious for channel conflict, keeping the best leads for themselves, changing the terms of their partnership programs, or eliminating them altogether. So, there is an imbalance of power between vendor and partner. The owners of the SI Firm attempted to counter this risk by not basing the business on a single vendor. As discussed, we had four. So, this should have diversified the risk. When one partnership was weak, the others might be stronger. Until they all collapsed. 

Which is exactly what happened in late 1999. Our vendor partnerships all fell apart, each for a different reason. The end of the Y2K boom in ERP sales was certainly one cause, but there were other issues as well. We had hired substantial numbers of new consultants over the previous two years and had grown to over 110 employees. The owners had purchased an office building in Newport Beach, increasing the financial commitment. But now, clients were postponing or cancelling new projects and stretching out payables. Vendor partners were terminating our relationships. In 2000, we went through a massive layoff, of which I was a part. The firm would not survive much longer. 

If we did not have vendor partnerships, would we have suffered the same fate? Perhaps, but we would not have grown to the size we did. It is harder to build a technical services firm on a truly independent basis, relying only on relationships with buyers of technology. But it can be done, as my later experience at Strativa would show.

Lesson #3: True Management Consulting Requires Independence

This is a closely related lesson. During my entire time at the SI Firm managing implementation services teams, I continued my focus on ERP selection on the side. Then, in 1997, the owners asked me to form a management consulting practice focused on IT strategy, business strategy [7], and business process improvement. This, they hoped, would elevate our brand. Management consulting was always my top interest, and in a short time I hired a small team to help me. One of those was Dan Husiak, a Director of Business Process Reengineering and a Senior Consultant at Experian, who would later become my business partner and co-founder of Strativa.

But there was a conflict, on the IT strategy side, how could we do ERP selection consulting as part of a firm that was delivering services for four specific ERP systems? How could prospective clients be sure that our recommendations would not be biased toward those vendors where we had implementation practices? 

For some years previously, I threaded that needle by pointing to our references—all the times we had recommended, and clients had purchased, systems from vendors who were not our partners. But now a new problem arose. Our firm began reseller relationships with two of those vendors. Now there would be a strong incentive for our ERP selection work to favor those two vendors where we got sales commissions and where we could keep our implementation consultants busy. 

Sure enough, it didn’t take long before I started to feel pressure to have our ERP selection work favor those two vendors—to be fair, not from the owners but from other leaders within the firm. The financial incentives for a million-dollar software and implementation deal were much greater than the revenue we were receiving from the software selection engagement [8].

When Dan and I founded Strativa, we took this as a fundamental principle: No tech vendor partnerships. 

Lesson #4: Caring for Social Relationships in the Firm

I also learned during those eight years the importance of social relationships between team members. The owners were particularly strong on this aspect. Each summer we would have a 2.5 day team building retreat at some nearby resort, where we would meet around some business subjects or team building exercises and also have some social outings. 

This is not unusual, except for this aspect: The firm would also invite spouses or guests. It was not a small expense for the firm. But the owners thought it was too much to ask employees to leave their families for three days. Moreover, during the retreat the spouses/guests were also invited to all meetings, if they chose to attend. Some, like those on DiSC (behavioral) profiles, were quite interesting to many. The firm even paid for guests to get their own DiSC profiles. 

We would also have a holiday party at a nice restaurant each year, again, inviting spouses or guests. And the social events didn’t end there. At one point, Annie Roy, our technical services manager, arranged for us to take ballroom dance lessons, for those interested, including spouses and guests. 

As a result, I still know those family members of my coworkers. And interestingly, I don’t ever remember that we referred to the SI Firm as “a family.” Rather, the owners recognized and honored the fact that we all had families. We didn’t need the firm to be another family—which would have been awkward at the time layoffs became necessary. Who terminates family members?

When Dan and I founded Strativa, we continued this practice of caring for the social aspect. In the 20+ years that followed, we may not have held retreats, but we did have an annual holiday dinner and a summer barbeque, always including family members. Again, as a result, we got to know the families of our employees and never felt the need to refer to our firm as “a family” [9].

A Bridge in My Career Journey

I look back at those eight years at the SI Firm as a transitional period, from working as an independent consultant (a “single shingle”) to building and growing a consulting firm of some scale. In addition to the consulting lessons outlined above, I learned much about how to build and manage a consulting business. For example: 

  • Learning the keys to selling consulting services, which are intangible—something that prospects cannot touch or experience beforehand. 
  • Hiring, training, and retaining consultants—I developed an entire curriculum of consulting methodologies and consultant training, and I also designed the firm’s professional development planning process, which I separated from the traditional annual compensation review.
  • With the owners, designing incentive plans that reward high performers while protecting the firm on the downside.
  • Understanding labor law and compliance, including the structure of retirement profit-sharing plans. 
  • Accounting for the financial performance of the firm along with that of individual projects.
  • Developing the firm's first website in the mid-1990s—building web marketing skills that would serve us well in the coming decades. 

Without this experience, Dan and I would never have been able in 2000 to establish Strativa and in 2005 to acquire the IT research firm, Computer Economics. This experience includes the difficult times we all experienced in the final days of the SI Firm. As noted in an earlier post, adversity is often the catalyst for growth, whether personal or professional [10] [11].

End Notes

[1] I recently reconnected with VC and DM at a funeral of the wife of one of our coworkers. I later spent some time at DM's home catching up on the last 20+ years and filling in some blanks on what happened at the end of the SI Firm. I thank her for her insights. And I thank them both for giving me the opportunity to learn the lessons outlined in this post. 

[2] When I tell people I implemented a manufacturing system in the California state prisons, they usually respond, “What, for license plates?” Yes, those are produced in Folsom. But CALPIA’s manufacturing operations go far beyond license plates, producing a variety of foods, textiles, furniture, and other products. So, it was an interesting exercise to implement a single manufacturing system able to support such a wide variety of products and manufacturing processes. 

[3] Although they are not paid minimum wage, inmate job assignments were highly sought after, not just for the wages they earned, but also because they gave inmates something meaningful to do. In addition, they were learning skills they could take with them when they were released. There was a long waiting list. So, only the best-behaved inmates got these positions. I dealt with them directly, and I found some of them quite talented. In a women's prison, I found out later that one inmate had been a CFO. 

[4] Talk about “shadow IT!” In one prison, a group of inmates had developed and implemented a PC-based manufacturing control system. This was not a healthy situation because none of the free staff understood it and were totally reliant on the inmates. Compounding the problem, the inmates, with the approval of the free staff, had actually “exported” the system to another nearby prison, where it was maintained by another group of inmates there. One of our challenges was to displace this system with BPCS. But there was great organizational resistance to this. The inmates and the free staff together did not want to lose control. 

CALPIA Badges 1992 vs 2018
[5] I recall a time in another prison where I was delivering some BPCS training. The staff had set up workstations around the conference room table, with one inmate and one free staff member for each workstation. You would think it would be the free staff member helping the inmates understand how to use the keyboard. But in fact, it was the other way around! 

[6] There is an interesting postscript to this story. A few years ago, my team at Strativa got an invitation from another consultant to help him do an assessment of an ERP system at a California state agency. As it turns out, it was CALPIA. I told him, “You’re not going to believe this. I implemented that system there 25 years ago!” So, we returned to conduct the assessment. Since this was a more recent engagement, I won’t provide additional details, except to say there was one CALPIA employee who still remembered me from my time there 25 years previously. 

My CALPIA badges from 1992 and 2018 shown nearby show me then and now over those 26 years. Before 2001, I loved to use that 1992 badge to get me through airport security. I don’t recall ever having it rejected, even though it had long expired. I think it made me look like law enforcement. (The back side says, “State of California Department of Corrections” and is signed by a prison warden).  

[7] The business strategy side of our management consulting practice became impactful. For example, shortly after forming the group, we did a business strategy project for one of the largest health insurance providers in the U.S. at the time. I wrote about one experience there in this post: A Personal Experience of Lateral Thinking.

[8] I still see this happening today. Just recently, I learned of a major consulting firm that offered to do a strategy project at no charge if they also got the implementation services to carry out the strategy. Strategy projects nowadays almost always involve a technology aspect, and you can bet that the consulting firm will recommend their vendor partners in the proposed solution. For this reason, smart buyers require that if they hire a consulting firm to give technology advice, they will not be able to compete for the implementation work, and certainly not be the reseller of that technology product. 

[9] In the late 70s, Ray Hayes, a fellow manager in the IT department at Smith Tool, told me, “Frank, we’re not a family, we’re a team.” That sentence stuck with me all these years. Here’s a good post on the difference between a workplace family and a team. I realize that many business leaders who say their firm is a family do so innocently. But still, I think it best to avoid such language. 

[10] This post would not be complete without mentioning the professional connections and friendships I made at the SI Firm that became critical in my future business. One was John Simonelli, who was our CPA and later joined the firm as our General Manager. John became a dear friend and a business advisor to me and Dan in launching Strativa in 2000 and acquiring Computer Economics in 2005. After Dan’s death in 2008, John helped me greatly in acquiring Dan’s shares in the two companies, and in 2020 he was instrumental in advising me on the sale of the two firms to Avasant LLC. 

[11] At the risk of leaving someone out, there were many other relationships that continued under Strativa. These include Nick Hann, who joined us at Strativa as the first employee after me and Dan, staying with me through the acquisition of Strativa and retiring in 2022. Another is Dee Long, who joined us as a Strativa consultant and stayed through the acquisition. There is also Barbara Newton, who joined the SI Firm just after me and later joined us at Strativa and Computer Economics, helping me run those two firms for 20 years. Hugo Valldejuli contracted to us at Strativa and made a critical introduction that eventually led to our acquisition of Computer Economics. Lynn Drury joined us at Strativa as a project manager, and Bob Gilson joined us as a consulting practice leader. These all, and others from those years, remain personal friends. 

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