Every Consultant’s 2 Most Important Tools

important tools
Consultant’s 2 Most Important Tools

There are many critical concepts that a consultant needs to know in order to deliver value to the client.  And it’s very difficult to narrow that list down.

But if forced to reduce to the two most important concepts, regardless of the type of consulting or the industry and market the client works in, I would have to have to bring it down to the following two.

The most important tools

1) Cost/Benefit  Analysis. C/B analysis is a decision making process of comparing the benefit of spending money (or something of value, such as time) to the benefit received in return.  We perform C/B analysis in our daily lives when we decide whether to buy something, meet a friend or call our mother.

In business, we perform this analysis in a more scientific process by crunching the numbers to determine the true cost effectiveness of an investment.  A consultant needs to be able to state any recommendations in terms of how the client will benefit in relation to the cost.

For instance, let’s assume you recommend that a client pay your firm $10,000 to develop a software application.  (Please note that the numbers I use here are generic to show simple calculations.  The $10,000 could really be millions, as could the return.)

In return, you calculate that she will reap the benefit of additional revenue of $2,500 per year for five years.

$2,500 * 5 = $12,500

And since…

$12,500 > $10,000

…it’s a good investment to make right?

Not so fast.  This leads me to the second concept.

2) The time value of money. When you’re in the business of giving business professionals advice on how to run their business, whether it’s at the strategic or tactical level, it’s important to provide that advice knowing how the investment will work for them over time.

The time value of money is essentially the understanding that a dollar today is worth more than a dollar in the future, because money invested can grow with interest.

Using our previous recommended that a client pay your firm $10,000 to develop a software application.  Let’s assume that your client can invest her $10,000 and make a 5% annual return on it.  Therefore, in one year, she could have $10,500.

$10,000 * 1.05 = $10,500

If she invested it for 5 years she would have $12,762:

$10,000 * (1.05)5 = $12,762

If you prefer that to be shown in tabular format:

Year Beginning value Interest rate End of year value
1 10,000 5% 10,500
2 10,500 5% 11,025
3 11,025 5% 11,576
4 11,576 5% 12,155
5 12,155 5% 12,762

 

So showing her that your software will provide a payback of $12,500 tells her that it’s not as good of an investment as her expected 5% return which gives her $12,762.

So let’s say instead that by investing in your software, she could reap an annual return of $2,600 per year.

$2,600 * 5 = $13,000

You can now show a positive cost/benefit of $238.  Keep in mind that you must document any assumptions and have logical reasoning behind any annual returns that you suggest.

See my related post: 4 Ways to Enhance a Consultant’s Credibility

The ultimate goal of a consultant is not to write computer code, develop marketing plans or increase hits to the client’s web site.  The goal is to add value.  If a consultant can demonstrate to the client the value of one decision over the other, he builds credibility and becomes a more trusted advisor that the client will continue to turn to in the future.

If you would like to learn more about working in consulting, get Lew’s book Consulting 101: 101 Tips for Success in Consulting at Amazon.com

As always, I welcome your comments and criticisms. 

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