Structuring a consulting firms

 1. Legal forms of business

 2. Management and operations structure
 Legal forms of business

Every consulting firm is unique and its structure reflects many factors, including the nature and volume of activities, personalities,
the strategy chosen, traditions, and the legal and institutional environment. In most countries consultants can choose among several
legal forms of business organization. This choice is not always completely free. Local legislation may include special regulations for
organizing and operating professional services, or for firms with foreign ownership. Therefore an international consulting firm may
have to use different legal forms in different countries. Unless the consultant is sufficiently knowledgeable in legal matters, he or she
should seek a lawyer’s advice. An accountant’s or tax adviser’s viewpoint is equally important because the forms of business
organization differ as regards regis­tration, taxation, record-keeping, reporting and liability.
Sole proprietorship
A sole proprietorship is a business owned and operated by a single person. The owner may be a single practitioner, or may have a
number ofassociates. While normally and legally there is no limit to the number of staff, it is usual for a “sole owner” to employ only
a few associates, and perhaps only for the duration of specific assignments. The firm’s net income is taxed as the owner’s personal
income; the owner’s liability for debts incurred by the firm is unlimited.Sole proprietorship is a simple form, suitable for those who
are starting in consulting but have some previous management experience, or who prefer to remain completely independent in their
consulting career. In addition to working on assignments, the sole practitioner has to market future assignments. The risk is quite
high in the case of sickness. Even if the single practitioner has health insurance and income-loss insurance, a prolonged illness may
adversely affect business contacts. The firm normally ceases to exist with the death or retirement of the owner (although his or her
estate remains liable for outstanding debts). 
Partnership
Partnership is a common form of business in management consulting and in other professional
service sectors. It entails a contract between two or more people to set up a firm in which they
combine their skills and resources, and share profits, losses and liabilities. Under most legal
systems, the partnership does not have to be on an equal basis: a consultant may enter a
partnership with a junior colleague on a 60-40 or other basis; or one or more of the partners may
wish to devote less time than the others to the partnership and will accordingly accept a smaller
share of both profits and losses.
The advantages of partnership include the division of labour to optimize the use of the partners’
skills, the possibility of undertaking more important and complex assignments, the possibility of
continuing the business in the absence of one of the partners, and a better utilization of resources
such as office space, equipment and secretarial support.
The disadvantages include the unlimited liability of each partner for errors and obligations of all
other partners arising from the business, the need to reach agreement on every important
decision, and the difficulties involved in harmonizing the personal preferences and styles of the
partners.
Corporation
Many consulting firms are established as corporations or limited
liability com- panies.2 The corporation has two fundamental
characteristics: (1) it is a legal entity that exists separately from the
owners (i.e. does not cease to exist after an owner’s death or withdrawal
from business); and (2) the owners have no personal liability for the
obligations and debts of the corporation (the shareholders are protected
from liability incurred by the company, except in certain cases,
especially when it is established that the corporate form was abused in
order to avoid personal liability).
Legal aspects of working with other consultants
Consultants may consider working with other consultants in a number of situations, for instance when they need to draw on
specific expertise or to collaborate on a larger project. When consultants (individuals or firms) cooperate with other
consultants on specific projects, they usually retain their independence and legal form of business and the relationship is
governed by an agreement defining the objectives and scope of cooperation. For example, if a consortium is established for
a complex consulting project, one firm would normally act as the consortium leader and be in a contractual relationship on
one side with the client and on the other side with firms that are consortium members but legally act as subcontractors.
In these instances, the following legal issues generally need to be considered:4
Under whose name are the consulting services performed when several consultants are involved? If a consultant engages a
subcontractor who has no contractual relationship with the client, the consultant will generally bear responsibility for the
work of the subcontractor. In addition, the consultant may, in certain circumstances, face joint liability for malpractice or
breach of contract by another member of the consortium, even if that member is not the consultant’s subcontractor, to the
extent that the consortium is deemed to constitute a partnership. The consultant should examine whether such risks are
covered by his or her malpractice insurance.
 The need for a non-competition undertaking prohibiting the other consultant from providing services to the client
during a specified period of time.
 The ability of the other consultants to make commitments on behalf of the leader or to change the terms of the
assignment.
 The protection of confidential information received from the client and shared with the other consultants.
 The protection of confidential information, know-how and intellectual property of the leader provided to the other
consultants for the purposes of the project.
 2. Management and
Corporate governance and top management
operations structure
The pattern of the consulting organization’s top management depends very much upon its legal statute. In firms
constituted as corporations (limited companies) there will be a board of directors. In a small firm the directors would
generally be the general manager (managing director) and the senior consultants (partners). In a large firm there may
also be external board members who, being non-executive, can play a useful role in the sense that they may preserve the
same detachment in guiding the firm as the consultants have in advising their clients. They also tend to be chosen because
of their range of business interests and contacts. In partnerships, decisions on key policy matters may be reserved for
periodical meetings of all partners.
Consulting units that are not independent firms may have a governing body comprising a cross-section of managers from
private and public enterprises, representatives of chambers of commerce and employers’ associations, senior government
officials, and possibly other members in addition to one or more senior managers from the unit.
The key position in the management hierarchy is that of the chief executive offi¬cer (CEO), who may be called principal,
general manager, president, managing director, managing partner, director-general, or simply manager or director. In a
partnership, the CEO would be elected by a partners’ meeting for a fixed period.
The CEO may use a management committee in the usual way for involving other managers or designated senior partners
in dealing with issues requiring collective discussion or decision. Other committees may be established for dealing with
issues such as strategy, quality, business promotion and marketing, IT, or staff compensation. They may be permanent or
ad hoc. As in other businesses and public organizations, there may be a tendency to create a committee each time an issue
cannot be immediately resolved or needs to be examined in a collective. A proliferation of overlapping committees, and
meetings of the same people under different committee denominations, are not signs of effective management.
Operating core
Consultants spend most of their time working for clients on specific assignments. Normally they do most of their work
at clients’ premises, and once an assignment is completed, they move physically to another client. In the management
system of a consulting firm, individual assignments are treated as basic management cells with precisely defined terms
of reference, resources and responsibilities. However, assignments are only temporary management cells and
structuring by assignments would not provide for stability and continuity of internal organization. Most consulting
firms therefore structure their operating core - the professional staff - in more or less permanent “home” units (called
“practice groups” in some professions). Consultants are attached to these units according to some common
characteristics in their background, clientele served, or areas of intervention.
Functional units. Functional units, the most common type of internal structure in the past and still quite widespread,
used to be organized by the basic functions of management, such as general management, finance, marketing,
production and personnel. A consulting assignment may be fully within the function area covered and the unit can
therefore staff and supervise the assignment from its own resources. In other cases, the unit would “borrow” staff from
other units for the duration of the assignment. This is particularly common in complex assignments dealing with
various aspects of a business.
They exist in two basic forms:
offices whose main purpose is marketing and liaison with clients in a delimited geographical area; these units tend
to be small, staffed by a few generalists, and equipped by certain services for supporting operating assignments;
assignments can thus be staffed by consultants from the unit and from headquarters;
fully staffed local (area) branches that can take care of most assignments using their own personnel; these units are
effective if the volume and structure of business done in the area concerned are relatively stable, or if the business
is expanding steadily. A major advantage for the consultants is that they do not have to be absent from their homes
for long periods.
Geographically decentralized units are most common in large consulting firms. A small firm must weigh the
advantages of getting close to the clientele against the cost of the operation and the firm’s ability to keep technical
and administrative control over geographically distant units. There are, in addition, various combinations. For
example, a decentralized geographical unit may specialize in the sector or sectors featuring most prominently in
the area covered by the unit.