A consultancy is a business that sells the judgement (judgment, in the US spelling) and skilled time of its people to solve a client’s problem. It is usually priced by the day or by the engagement, it takes responsibility for the quality of the work rather than for supplying a person, and it grows by hiring more billable people or raising the rate at which it sells them. In UK usage the firm is a consultancy; in US usage the same firm is a consulting firm, and a consultancy is more often the service it provides. Below, the four models a founder tends to choose between, and how each one behaves.
The four models compared
| Consultancy | Agency | MSP (managed service provider) | Contractor | |
|---|---|---|---|---|
| What is sold | Expertise applied to a problem: advice, design, hands-on delivery | A defined output: a campaign, a brand, a website, content | A continuing responsibility: keeping systems running to an agreed standard | One person’s time, usually under the client’s direction |
| How it is priced | Day rate or fixed engagement fee, off a graded rate card | Project fee or monthly retainer for a set output | Monthly fee per unit: user, device, application, or a tier | Day rate or hourly rate for time worked |
| How it scales | By hiring billable people and raising rates; revenue tracks headcount | By hiring, and by productising outputs so juniors can deliver them | By adding units under contract; revenue can grow faster than headcount if the service is standardised | It does not; one person has a fixed number of days |
| How it is valued | On profit, with a discount for founder dependence and lumpy projects | On profit and the stability of retained clients | On contracted recurring revenue and its margin, usually at a premium to project work | It is a job with an invoice; there is normally nothing to sell |
The rows are the point. A consultancy and an MSP can employ the same engineers and serve the same clients, and be valued on different bases because of what the contract says the client is buying.
Consultancy vs agency
The two are close, and many firms are a mixture. The working distinction is what the invoice describes. A consultancy’s invoice describes people and days, or an engagement that used them: “cloud architecture review, twelve days”. An agency’s invoice describes an output: “campaign creative, phase two”. Agencies are more often on retainers because the output repeats each month; consultancies are more often on projects because the problem, once solved, goes away. Both live on the same arithmetic, which is billable people multiplied by rate multiplied by utilisation, and both are valued in the end on how much of their revenue arrives without the founder selling it.
Consultancy vs MSP
An MSP sells a continuing responsibility rather than an engagement: the systems will be kept running to an agreed standard, for a monthly fee, for as long as the contract lasts. The delivery is often less glamorous than consulting and the margin per engineer is often lower at the start, but the revenue is recurring, and recurring revenue is what a buyer of the business will pay a premium for. Many consultancies try to add a managed service to their project work. It is harder than it looks, because the project engine pays the payroll and starves the recurring line of the people who could build it. That gap, between knowing the target and being able to move the mix, is one of the recurring subjects of this site.
Consultancy vs contractor
A contractor supplies their own time, usually under the client’s direction, and is paid for the days worked. A consultancy takes responsibility for the outcome and decides who does the work and how. The commercial difference is that a consultancy can put a junior on the job at a senior’s supervision and keep the margin; a contractor cannot. In the UK there is also a tax difference: off-payroll working rules ask whether a contract describes a service or the supply of a person, and a consultancy whose contracts read like the second is a staffing business with a nicer name.
We learned this one directly. Alongside our consulting work we ran a staff augmentation line, supplying engineers by the day. The two lines could invoice the same amount in a month and leave very different gross contribution behind, and reading our own contracts the way a tax inspector would was part of the decision, taken in 2018, to wind the augmentation line down. It was a large revenue line for us at the time.
Consultancy in the UK, consulting firm in the US
The word travels badly. In British English a consultancy is the company: “she runs a consultancy”. In American English the company is a consulting firm or a consulting business, and consultancy, where it is used at all, tends to mean the service or the engagement. Search behaves the same way: UK readers ask what a consultancy is; US readers ask about consulting firms. This page uses consultancy for the firm throughout and treats consulting firm as the same thing.
Why the distinction matters to a founder
Because the model you pick decides the arithmetic you will live with. A consultancy’s revenue is bounded by the people it can hire and keep busy, so its founders spend their time on rate cards, hiring and bench time. An MSP’s revenue is bounded by the units it can put under contract, so its founders spend their time on standardisation and churn. An agency sits between the two. A contractor has a ceiling of about two hundred and twenty days a year and a rate. Most firms end up as a mixture, and the mixture is fine as long as you know which line is paying for which. Choosing what kind of firm you are, and what you are not, is the first positioning decision; the consulting niche playbook is the method we used for it, weeks before we had a company.
If you are at the start of that decision, the story of how two employed practitioners with a point of view and no customers began a consultancy in 2013 is on the newsletter.