2009

Opportunity Analysis

Team 6 Priya Bharbhari, Shen Ge, Nick Thiele

Table of Contents
Executive Summary.........................................................................................................................2 Introduction......................................................................................................................................3 Business Overview...........................................................................................................................4 Industry Analysis.............................................................................................................................6 Porters Five Forces.....................................................................................................................6 Competitive Advantage...............................................................................................................7 Business Model................................................................................................................................8 Core Strategy...............................................................................................................................8 Strategic Resources......................................................................................................................9 Partnership Networks...................................................................................................................9 Customer Interface.....................................................................................................................10 Management Team.........................................................................................................................10 Licensed Professionals...............................................................................................................11 Experienced Management Consultants......................................................................................11 Value Chain - abridged..................................................................................................................12 Marketing Plan...........................................................................................................................12 Operations Plan..........................................................................................................................13 Financial Plan............................................................................................................................13 Critical Risks..................................................................................................................................15 Conclusion.....................................................................................................................................15 Appendix........................................................................................................................................16 References......................................................................................................................................18

EXECUTIVE SUMMARY
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In a growing market with more than six million new businesses started in 2008, our management and legal consulting firm will target the growing and underserved small business market, primarily those companies needing to diversify risk by lowering consulting costs and by requiring payment based on future cash flows. In addition to new venture growth in the United States, we see significant industry growth in the consulting industry as well. Economic trends typically lead to acquisitions of small firms by major firms such as Deloitte and Accenture. However, a differentiated strategy for our firm with a focus on small start-ups will enable us to create value in the market and maintain profitability. Our core operational strategies not currently utilized within the general consulting industry are: to utilize diversified professionals to create service economies of scope, to use innovative technology to standardize client business plans to create efficiencies when working with third-party contract consultants, and to utilize sophisticated methods of deferred payments based on future cash flows. These services are not necessarily unique individually, but offered together within the same firm creates unique value with a competitive advantage. Additional competitive advantage and sustained feasibility can be obtained by maintaining a proven track record over time. Superior brand recognition can create demand in the banking and investment market. We anticipate that eventually investors will request a startup to utilize our services to increase the likelihood of success and reduce financial risk or loan default.

INTRODUCTION
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During the first weeks of this course, our team focused on various opportunities that exist within the management consulting industry. Our professional backgrounds and individual career goals helped us think through potential opportunities in the marketplace that could (1) fulfill a need in the market, (2) create value for the client, and (3) be profitable. We came up with three attractive opportunities that we felt would create value and be profitable. These ideas were: 1. Small business legal consulting. With the known statistics of how many firms face legal issues, or are simply unaware of the legalities of starting a business and maintaining liability coverage, we believed this would be a viable business. 2. A Web site for rating small consulting firms. This would essentially provide transparency to the business world as to the value of a specific type of consulting. 3. Small business consulting with a diversified management team. This option is the one we selected, and will be discussed in great detail within this report.

After conducting extensive research on the management consulting industry, we believe that by creating value through a diversified management team, using innovation in our service operations, and providing deferred payments to clients, our firm will create enough demand to sustain us over time. With this specific combination of consulting services, our first-mover advantage will build us strong name recognition.

BUSINESS OVERVIEW

In 2008, approximately 530,000 small businesses were created every month, representing 32% of the adult US population (Fairlie, P.1). Of these new ventures, many do not have the financial resources to hire management and legal consultants to look over critical aspects of their business policies and practices. Our consulting firm will create significant value by utilizing 4

strategic alliances and efficient operations to minimize costs to our firm and to the client, as well as mitigate risk for each party. As addressed in the Introduction of this report, we will differentiate ourselves in three distinct ways to add value in the market and remain profitable. These distinctions include creating value through a diversified management team, using innovation in our service operations, and providing deferred payments to clients. Diversified Management Team. Benchmarking against a Wells Fargo Financial Services business model, we believe that having both management consultants and licensed professionals on the same consulting team will lower costs and promote an effective and efficient flow of information. Innovative Service Operations. Consulting firms compete on talent and cost. Utilizing retired professionals that support entrepreneurial work will be critical to our success. Retired professionals add value by lowering costs and by their ability to work under our financial model of contractual payments based on the success of the business. Also, they bring new ideas to the table and decades of experience. To make it possible to work with retirees, our firm will create a software that will standardize electronically a companys business plan. Since there is no one standard way to write a business plan, our retirees would find it difficult without a standardization process to find and analyze information that is relevant specifically to them. Our standardized software will enable easy access to only pertinent information. Deferred Payments. New ventures need access to good consulting advice and capital to run the business. Since financial resources are oftentimes limited when starting a new business, entrepreneurs must forego the needed consulting services. We have created a model that will 5

categorize potential clients based on risk and cash flow potential, and enable us to contractually defer payments based on sales revenues. This will differentiate us from the competitors by mitigating the risk of the client and our firm.

INDUSTRY ANALYSIS

Much of our research focused specifically on the management consulting industry; however, management consulting is too broad of an industry for our particular focus. In addition to the research conducted using professional databases and reports illustrating current market trends, financial projections, etc., we analyzed current service trends of competing firms, particularly those companies that work on the early stages of business development. Please see Table 1 in the appendix for a summary of our findings. Management consulting industry growth has been fairly stable at about 2.3% over the past five years. However, in 2009 there is expected to be a significant drop to .6%. The 2009 IBISWorld report shows that industry revenue, number of establishments, employees, and total wages have all grown during the past five years. See Table 2 in the appendix. Research conducted at Babson College shows that 59% of new business owners have concerns relating to protection of the clients personal assets. This same study showed that only 9% of new entrepreneurs understand all of what the experts thought were relevant (Brown, et al., p. 276). Conclusions of this study explain that legal assistance early in the venture development process may facilitate the entrepreneurs decision to abandon legally risky ventures before they are underway (Brown, et al., p. 284).

PORTERS FIVE FORCES 6

Porters Five Forces show that our consulting firm will face several obstacles to maintain any advantage in the marketplace. Buyer and supplier power is irrelevant for the type of services we are offering, but new entrants, substitutes, and rivalry are either high or moderate threats to the firm. There are very low barriers of entry in this industry, and we anticipate firms copying successes from one firm to another. We do consider substitutes to be only a moderate threat at this point of our business development because not many firms can substitute a deferred payment consulting service with a paid service.

COMPETITIVE ADVANTAGE

Some companies such as Paragon Innovations specialize in turning a product idea into a marketable product. They mainly focus on product development for already established industries (www.paragon.com). They generate their revenue from established companies outsourcing the engineering and marketing portion of a project to them. Others are focused on a 7

much broader audience. For instance, quirky.com focuses on turning ordinary peoples ideas into marketable products through an interactive online discussion and voting forum-type interface (www.quirky.com). Their revenue comes from ordinary people paying $99 to submit ideas. In return, the people get valuable feedback and analytics from professionals even if their ideas do not go into the second stage of product development. As can be seen, there is a huge potential in this industry considering the number of variations. The main differences between these companies can be narrowed down to three essential aspects: 1. Target audience 2. Services provided 3. Necessary personnel

BUSINESS MODEL

CORE STRATEGY Our Mission: To provide exceptional management and legal consulting to start-ups in idea generation and growth and development phases of business. Market Scope: Financial service providers are the largest customers for management consulting. However, trade, manufacturing, technology, and telecommunications are the major industries with high entrepreneurial activity. In spite of the economic downturn, there are rapid changes in the technology and trade industry. According to 2002 census, the four largest firms in US account for only 12.2 % of industry revenue. The 50 largest firms accounted for only 30.1% of the overall revenue. We assume that many small business ventures cannot afford to go to these big firms for high-level management consulting, so our target market will consist of small entrepreneurial firms. 8

Basis of Differentiation. We will create service economies of scope by unifying management and licensed professionals on the same team. Payments will be based on future cash flows of the company, which will mitigate risk and create demand for our services. Also, we will contract retired professionals as consultants to lower costs for the client and the firm.

STRATEGIC RESOURCES

PARTNERSHIP NETWORKS Our firm will create a competitive advantage by leveraging our strategic networks with retired professionals, bankers, and investors. Retired Professionals. The majority of our actual consulting work will be performed by third-party contractors consisting of retired business professionals. Many retired professionals feel a void being out of the workforce. Our business model will enable them to be actively involved with entrepreneurial work in the field they love. Most retirees will be financially stable and able to work under contracts based on future cash flows. Finally, retirees bring decades of relevant experience to the table with additional networks to promote our success and sustainability.

Bankers and Investors. We will continuously network with bankers and angel investors to promote demand for our services. As we maintain success, local investors will see how our services mitigate their risk. Eventually, bankers and investors will require that certain clients use our services prior to making any financial investment.

CUSTOMER INTERFACE Target customer. Our target customers are local, small start-up firms that have a feasible idea and/or business model. Since we are focusing on local start-ups, much of our client interface will initially be done in person. However, to reduce costs and accommodate our model for hiring third-party contractors, much of the business plan analysis and other consulting procedures will be performed virtually over the internet. Fulfillment and support. As a services firm, fulfillment is specifically re flected by our execution intelligence. As we network and market ourselves to the entrepreneurial community, our services will create a demand that brings clients to us. Having licensed professionals, such as attorneys and accountants, we can legally support our work and stand by our services. Pricing Structure. We will charge our fees in two parts: the upfront fee, which is based on a risk profile and cash flow estimation, and then contractually defer payments over a period of one to three years. See Financial Plan on page 13.

MANAGEMENT TEAM

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A diversified management team is critical to the success and value of the consulting firm. We believe that having a licensed accountant, attorney, and financial advisor, as well as seasoned management consultants, will enable our firm to compete at a higher level. The services of these professionals in isolation is of no added value to a start-up since there is ample competition in the marketplace, but teams of experienced professionals will create a unique value that will, in a sense, create a bundling effect that will increase efficiencies with the flow of information, and in turn lower costs for our clients and for our firm.

LICENSED PROFESSIONALS Research conducted by Babson College shows that 44% of new businesses either alter or completely abandon its business strategy because of a failure to understand legal issues relevant to the business (Brown, et al., p. 273). The study also shows that the most prevalent concerns of new business owners are issues related to asset protection and personal liability. These statistics illustrate the value of having licensed professionals employed within the firm. A licensed attorney on the consulting team will be extremely valuable. Many small businesses will consult with an attorney when forming a business, creating contracts, or conducting any legal matter; however, that attorney will likely not know the intricacies of the business model and how to perform the legal work to maximize the benefits to the business owner. Having an attorney on the consulting team will provide insight as to more personalized advisement and service.

EXPERIENCED MANAGEMENT CONSULTANTS

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The experience of the management consultants will provide a means to both innovate and execute valuable service to small businesses. Our licensed professionals will have detailed responsibilities for our clients, but our management consultants will essentially be the glue that holds the organization together. Our management consultants will be valuable by not only providing valuable insight in to the needs of the clients, but also by managing our contracted consultants, or retirees. Their responsibilities will include recruitment, contract negotiations, fee allocations, and all other administrative tasks relating to job completion and follow-up.

VALUE CHAIN - ABRIDGED

MARKETING PLAN We believe that our experienced consulting team, including both legal and management consultants, coupled with our cash flow model will create sufficient demand to minimize our dependence on advertising for client acquisition. However, starting out will require strategic efforts to build credibility and name recognition. In the early stages of initial client acquisition, we plan to utilize credible, high traffic advertising tactics such as Entrepreneur.com, geographic support groups including the Chamber of Commerce, and small business clubs or university entrepreneurship centers. After our initial success of operating near capacity, we will rely primarily on word-ofmouth and basic internet advertising. We know that entrepreneurs know other entrepreneurs, and are likely to share these consulting experiences amongst each other. Also, a financial network of

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angel investors and banks could create a demand for our services prior to full commitment for financial investment.

OPERATIONS PLAN The internal flow of information is crucial to lowering costs and promoting effective operating procedures. We are bringing in house a diverse team of professional s for this very reason. A unified group of accountants, lawyers, management consultants, etc., will enable clear understanding of goals and expectations. Since the work performed is very dynamic in nature, there will not be a single operating plan that we implement with every client. However, presumably everyone on our team will look over the initial project, and have the work flow through various stages in the process, while some tasks will be handled simultaneously. It is critical for our lawyer to look over the plan prior to any major advancement to make sure that the venture is legally viable. Many issues may be caught by our lawyer that may limit the work to be done by others on the team, or even cause the client to transform his or her business model. Other key operating factors include the location where we will establish our services and the means of acquiring clients in that area and methods of communicating with the client. Technology will be critical to promote operational efficiencies since work will be done virtually in many cases.

FINANCIAL PLAN 13

Our financial model is the backbone of our entire business plan. We believe that the ultimate needs of the start-ups we will be targeting are confidence in expected revenues, and having someone to bear the risks associated with obtaining those revenues. We have created a model that will enable our firm to meet our clients needs by absorbing only a manageable amount of risk. The most effective way to gain the confidence of a potential client and to maintain attractive cash flows for our firm is to contractually base our revenue stream on the future cash flows of our clients. To realistically manage our own costs and liquidity, we have created a simple matrix that will mitigate risk by requiring clients to pay a certain portion of our fees up front. This up-front fee will be determined by analyzing our risk associated with accepting that client, and the attractiveness of the new venture. For example, a potential client with a moderate risk factor of .4 and an attractiveness rating of .5 would owe a total up-front fee of 20% of the estimated consulting cost. See Table 3 below. Table 3. Example Up-front Fee Schedule Client Company A Company B Company C Risk .1 .4 .7 Attractiveness Rating .5 .5 .5 Total [Risk x (1-AR)] .05 .2 .35

All remaining costs related to a particular job will be collected on a one to three year contract. Payments will be collected monthly utilizing standard accounting principles of when revenues are realized by the client. Collection of payments will continue until the financial obligation of the client has been met in present value terms. Our firm could also put each client

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under contract to take ownership of certain liquid assets in the form of collateral in the case of a client terminating the business prior to fulfilling any financial obligations.

CRITICAL RISKS

According to an industry report, one of the critical risks of small consulting firms will be the increased competition and growth of larger firms during periods of economic instability. The 2009 IBISWorld Industry Report states, The current economic downturn is likely to affect smaller, boutique consultancies there will be a rash of acquisitions over the coming years (IBISWorld, p. 15). As we see M&A in the consulting industry, there will be a transfer of ideas and efficiencies that increase competition, which will likely include operating changes to match our own specifically utilizing diversified professional teams and deferred payment options. Since our focus is primarily on small start-up businesses, our risks will be mitigated because economic instability creates an environment of new business growth. Although the industry competition will be more intense, there will exist more needs and opportunities for the services we provide. Another major risk we face is the challenge of not being able to grow with the market. Since our team comprises licensed professionals, we cannot simply bring on a new lawyer without having a substantial need. The risk of growing too fast will affect our firm by either lowering our margins when we bring on a new licensed professional, or by overworking certain employees.

CONCLUSION
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The management consulting industry is highly volatile. Current economic trends and statistics reflect the need for business consulting; however, the need is being rapidly met. Small consulting firms in particular are going to experience the challenges that come to the industry, often leading to many M&As with larger firms acquiring smaller firms. The challenges are especially prominent during an economic recession. Yet, with this expected volatility comes an opportunity for small firms to innovate and set themselves apart from the competition. Our firm has created a business model with innovative operations that will promote success in the industry. We do anticipate our procedures to be copied by other firms, but we also believe that having somewhat of a first-mover advantage with this model will create brand awareness and competitive sustainability.

APPENDIX
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TABLE 1 - COMPETITIVE ADVANTAGE SUMMARY COMPANY Paragon Innovations Research Valley Innovation Center TARGET Companies desiring new product ideas or development Science and technology startups SERVICES -Product development -Marketing -Advisory services -Service/funding provider network -Physical incubator space -Public exposure and review -Crowdsource to provide capital. -New products (to interested parties) -Public exposure and review -Advisory services -Service/funding provider network -Public exposure and review -Advisory services -Service/funding provider network -Business plan -Financial modeling -Marketing plan -Legal affairs -Website design -Negotiation support -Board support PERSONNEL -Engineers -Marketing consultants -Accountants -Attorneys -Entrepreneurs -Financial Advisers -Professors -Software engineers

Joy de Vivre Inc.

Individuals

InventBay

Individuals

-Attorneys -Entrepreneurs -External consultants -Software engineers -Software engineers -External consultants

Quirky

Individuals

Haywood Consulting Group

Small startups

-Accountants -Entrepreneurs (predominately Mr. Haywood) -Financial advisers -Legal advisers

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Table 2 Real Management Consulting Industry Growth (IBISWorld, p. 5)

REFERENCES

September 2009. How to Start a Consulting Business. (n.d.) Retrieved September 23, 2009, from http://www.entrepreneur.com/startingabusiness/businessideas/startupkits/article41384.html Brown, C., Colborne, C., McMullan, W. (1988). Legal Issues in New Venture Development. Journal of Business Venturing, Elsevier, vol. 3(4), pages 273-286. Fairlie, R. (2009). Kauffman Index of Entrepreneurial Activity. The Kauffman Foundation. Retrieved November 2, 2009, from www.kauffman.org Haywood Consulting Group. < http://www.haywoodconsultinggroup.com> 2009. 29 Oct 2009. 18

IBISWorld. (2009, March 26). Management Consulting in the US: 54161, Industry report. Retrieved September 15, 2009 from the IBISWorld database. InventBay. <http://www.inventbay.com> 2009. 29 Oct 2009. Joy de vivre, inc. < http://www.joydevivre.org> 2009. 29 Oct 2009. Paragon Innovations. < http://www.paragoninnovations.com> 2009. 29 Oct 2009. Quirky. <http://www.quirky.com> 2009. 29 Oct 2009. Research Valley Innovation Center. <http://rvic.org> 2009. 29 Oct 2009.

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