HR Consulting Business Plan: Market Analysis & Financials

Industry History and Overview

The human resources consulting industry was not founded so much as it emerged — as a distinct sector growing out of management consulting and from the internal human resource functions of large organizations. Over the past thirty years, the industry has expanded rapidly for several reasons. Many practitioners within it are former in-house HR professionals who, for one reason or another, began to work independently. Some were laid off from corporate positions and moved into consulting, while others simply sought greater professional independence. The broader trend toward outsourcing created additional opportunities for HR consultants as companies eliminated parts of their in-house HR teams and replaced them with external service providers. This shift created a rapidly growing market for consulting services. Consultants were able to sell their expertise to businesses — including smaller and medium-sized firms — as outside professionals capable of bringing fresh perspectives and targeted solutions to the workplace. This effectively created a market where perhaps none had existed before.

The industry today is worth, by some estimates, around $25 billion per year in the United States. Its growth rate, however, is closely tied to the overall state of the economy. The current estimated growth rate of the HR services industry is 0.3% per annum. The industry employs over 200,000 people across more than 80,000 businesses, meaning that the average HR consultancy employs between two and three people (IBIS World, 2012). This implies that a large share of firms consist of sole proprietors and that the industry is highly fragmented.

Target Market Analysis

There are a couple of distinct target markets for the HR consulting industry. The first includes large companies that use an HR consulting firm to augment their existing internal HR capabilities. These companies often need a specialized firm that can deliver a comparative advantage in a particular functional area — recruitment, compensation design, compliance, or organizational development, for example — creating the economic logic for outsourcing certain aspects of the human resources function.

The second type of customer is a smaller business seeking to outsource a broad range of HR services. These companies benefit from the arrangement because they are not large enough to warrant a full-scale internal HR department. They use the consulting relationship to gain the benefits of professional HR support at a cost lower than that of a full-time, in-house hire. A consulting team in this arrangement would typically work part-time for several such clients simultaneously, reaching full-time equivalent hours across multiple accounts. A variation on this model involves very small companies that need only a part-time HR professional; the consulting firm would fill that role until the client grows large enough to justify a dedicated in-house hire.

These two segments present a fundamental strategic choice: whether to offer generalist services or to operate as a specialized firm. The specialist path offers a more limited market but fewer competitors. The generalist path offers a larger target market with more competition. For HR Pros specifically, the generalist role is the more feasible option. Specialist firms tend to be staffed by seasoned veterans in a narrow subject area, whereas a generalist practice better suits younger HR professionals whose qualifications and competitive position align with breadth rather than depth. The generalist target market — smaller companies that view HR outsourcing primarily as a cost-saving measure — is quite large. It may grow even larger should the Patient Protection and Affordable Care Act remain in effect, as that legislation was expected to create additional compliance and administrative work for HR consultants serving small businesses.

Competitive Analysis and the Four Ps

As a new company, HR Pros has a great deal to overcome in building its business. Based on the target market analysis and an assessment of the competencies of the firm's principals, a generalist approach targeted at small businesses represents the service offering with the best growth potential. The company will develop a structured consulting system in which client needs are evaluated through a diagnostic model before service delivery begins. It is the organization of this diagnostic and consulting process — combined with the quality of solutions delivered by the team — that forms the basis of the firm's competitive advantage.

On pricing, the approach will be to position the firm as a premium service provider. There is no strategic value in underpricing, and clients should feel confident that they are receiving the highest quality of service available. Premium positioning will also generate the financial resources needed to maintain service quality over time.

In a consulting business, "place" can be interpreted in several ways. HR Pros will focus marketing efforts virtually, with the capacity to serve companies across the United States. Most work will be conducted remotely, though some travel to meet clients in person may be necessary. Online coordination allows HR consultants to work from anywhere, keeping overhead low. That said, some business development will be conducted in person, particularly in the local area where networking efforts are most likely to yield early results. Clients must have a high degree of confidence in the firm, so face-to-face interaction will follow initial contacts to build that trust.

References

IBIS World. (2012). HR consulting in the U.S.: Market research report. IBISWorld. Retrieved June 30, 2012, from http://www.ibisworld.com/industry/default.aspx?indid=1423