6 common risks for consulting firms
The time to protect your firm from danger is before it ever happens.
Whether you’re just starting out or already an established consultant, knowing what challenges may lie ahead will give you an edge. Preparation promotes prosperity.
The risks in your consulting business can vary based on your practice area, but many issues can threaten consultants across industries.
Read below for some of the most common consulting risks and strategies to guard against them.
Unhappy clients can spell trouble
Despite your best efforts, at some point you’ll have a dissatisfied client. The question is, what steps can you take to keep your clients happy? And how can you limit the risks of a lawsuit or reputational damage?
Client dissatisfaction and consulting risk grow from many roots. Common reasons for complaints include:
- Missed deadlines
- Cost overruns
- Failure to deliver on expectations
- Use of sub-par contractors
The most important thing is to set realistic goals and deliver on your commitments. But good client communication from the beginning is also a powerful tool to keep clients satisfied.
Before you begin work with a new client, set clear expectations and put them in writing. Get a signed contract that details the terms of your agreement, including project scope and costs. To prevent future issues, you may want an attorney to prepare a standard contract template that covers all your bases.
Once you’ve clearly defined the engagement, keep the lines of communication open throughout the project. Inform your client of any issues and how you’ll fix them.
But even the clearest agreements and communications aren’t always enough. You may still end up with a customer who’s unhappy enough to sue.
To limit this risk, you may consider professional liability insurance, which is also known as errors and omissions coverage. This insurance protects you if a client claims your mistake or oversight caused them financial harm. It covers any legal defense costs, including court judgments or settlements.
Data breaches can cost you more than money
Any small business can be the victim of a data breach or other cyber crime. But if your consulting business stores client data on your servers, the consequences of a data breach can be devastating.
A breach can do lasting damage to your reputation, and recovery can cost tens of thousands of dollars. Businesses that aren’t prepared for the financial fallout may not survive.
If you store business or client data with a technology services provider, review their security protocols and verify the type of liability insurance they carry. These actions will protect your business in case their servers are compromised.
You and your employees should take reasonable steps to help prevent data breaches and other cyber attacks like phishing and malware. Best practices include:
- Installing antivirus software on all systems.
- Keeping current with security patches and critical updates.
- Using complex passwords that are frequently changed.
- Never clicking on a suspicious email link or attachment without confirming its source and validity.
- Routinely backing up your files, preferably on a separate server.
You may also consider working with an independent cybersecurity professional to audit your systems. But you can’t protect your business from every data breach.
Cyber liability insurance can cover your and your clients’ financial losses in the case of a data breach or other cyber crime. This policy comes in two forms:
- First-party coverage protects you if your business is attacked.
- Third-party coverage protects you from client lawsuits alleging you’re responsible for a breach at their business.
Together, they can make sure your business isn’t damaged by the effects of a cyber crime.
Stable income and predictable markets are never guaranteed
Business consultants must be prepared for uncertainty. Market ups and downs, shifting customer behaviors, and fluctuating client volume all contribute to unpredictable income.
But even in the face of unexpected costs, late client payments, and inconsistent business, you can take steps to reduce risk from cash flow issues. You should:
- Clearly specify payment terms and due dates in every client contract.
- Set up a fee structure that includes partial payment up front.
- Offer clients a monthly payment option and the ability to pay by credit card.
- Set aside a portion of every paycheck as savings.
- Establish an emergency fund.
One of the best ways to keep money coming in is letting buyers know you’re open for business. Neglecting networking and prospecting efforts is an overlooked consulting risk.
Too many small business owners fall into the trap of devoting all their time to their current clients. This can lead to a vicious circle of “feast or famine,” where months spent working around the clock are followed by no work at all — and no incoming revenue.
Only you can decide the right balance between tending to existing clients and looking for new opportunities. But some of the most successful consultants set aside 15-20 hours every week to focus on prospecting and networking.
Don’t get blindsided by scope creep
Among the many risks for consulting firms, scope creep is possibly the trickiest one.
Scope creep occurs when a client asks for deliverables and additional time not agreed upon in the original scope of work.
Especially as you’re first starting out, you might be tempted to complete these new items and avoid an uncomfortable conversation about money or sacrificing other project requirements. That may seem like a great way to build your reputation and earn a glowing recommendation, but it can easily backfire.
Often scope creep begins due to poor communication and ends with missed deadlines and resentment on both sides. Not to mention the time and money you lost giving work away for free.
To prevent consultant scope creep, take the following steps:
- Detail all project deliverables and expectations in the client contract or a statement of work (SOW). If you hope for a long-term relationship with the client, consider adding language to your contract that specifies details of a project will be spelled out in an SOW.
- Continuously update clients on progress and obstacles.
- Include possible scope creep scenarios in your estimates. Even if it doesn’t make it into your final agreement, you’ve set expectations around the cost and work involved.
- If you take on something outside your project scope for free, still send the client an invoice detailing the additional work with the charge zeroed out. This will help your client understand the extra value you’re generously providing.
It can be hard to say no to a client, but the costs of extending projects and giving away work can quickly add up. If you don’t keep an eye out for scope creep, it could put your financial goals at risk.
Beware of potential health issues with contractors and employees — and yourself
In a consulting business, you and your workforce represent your company’s most valuable assets. And you’re both susceptible to risk.
If your consulting firm has one or more W2 employees, you will need workers’ compensation insurance. This covers medical costs and lost wages if your employee suffers a work-related illness or injury.
Workers’ comp is required in nearly every state, and it typically includes employer’s liability insurance. This coverage can pay for legal expenses if your employee claims your negligence caused their injury. You may consider workers’ comp for yourself as well, though it’s rarely required by law for small business owners.
You’re not required to carry workers’ compensation for contractors. But you should chat with your insurance agent about protection options if a sudden illness or injury to a key contractor could jeopardize a project.
If you’re a management consultant specializing in IT, you may also need a fidelity bond. It protects you if one of your employees commits theft, fraud, or forgery against you or your clients. Many clients will require this bond as a condition of hiring you.
The dangers of property theft or damage
You and your employees may be your business’s most valuable asset, but you’re not the only assets. What happens if your office is damaged or business property such as computers are stolen or destroyed?
Your landlord’s insurance policy won’t cover these losses. But commercial property insurance will cover:
- Your office space
- Furniture and fixtures
- Office equipment
You may be able to save money with a business owner's policy, which combines commercial property insurance and general liability insurance. It protects businesses from risks such as bodily injury, property damage, and advertising injuries.
The fact is, the only certain thing in life is uncertainty. As a consulting business owner, you will undoubtedly face your share of the unexpected. But if you use risk management strategies to anticipate potential challenges and prepare for them, you can limit your risks and help your business thrive.
Complete Insureon’s easy online application today to compare quotes for business insurance from top-rated U.S. carriers. Once you find the right policy for your small business, you can begin coverage in less than 24 hours.