All Profit Comes From Risk

A common feature I see in many fast-growing consulting firms is that they recognize the importance of risk.

Peter Drucker famously wrote, "All profit is derived from risk." His point is that risk is not always to be avoided, but rather managed. And entrepreneurs, consultants included, are a big part of making this happen.

The world is complex, unpredictable, ambiguous. The speed at which markets and technologies change, the lack of predictability in their business, and the difficulty of telling cause and effect apart are all seen as risks for your client. Your expertise can work as insurance to these risks.

An entrepreneur would not take a risk without expecting some kind of compensation for it. When you reduce uncertainty and the potential losses for a client, you have the right to charge for it. That's your profit.

When you look at things from this perspective, the recipe to raise the value of your engagements is simple. The bigger the risk you reduce (or manage) to your clients, the more they will pay for your work.

Now, in order to do this, we need to clarify our understand of business risk.

Many consultants understand that the more uncertainty there is, the bigger is the perceived risk. This is part of the story, but not all of it. As Philip Morgan puts it:

"If I went to a restaurant where I love every item on the menu and asked the waiter to bring me whatever they feel like, there is a large amount of uncertainty and no potential harm. I'm going to enjoy the heck out of a delicious meal no matter what they bring to the table. Lots of uncertainty, but no real risk."

I love this example, and find Philip's definition of risk incredibly practical: Risk = Uncertainty x Potential for harm.

You might think that highlighting all the uncertainty in your prospects' world will make them see value in your offerings. But if prospects have nothing or little to lose (potential or harm), they see no risk. How does it hurt them?

If your dream clients see no risk in the problem you are solving, you are toasted. You can have an excellent marketing strategy, earn a great reputation for being consultative and articulated, be the leader in your niche. You will still struggle to sell large projects since you can't justify the value - prospects won't see it.

A while ago I wrote about what makes a good offering and added potency as one of the 3 traits. The consultant who makes someone's life easier will make less than the one who saves someone's life. That's why the best offerings feel big and powerful.

If you want more profitable engagements, the path is simple: identify your clients' bigger risks, and find a repeatable way to manage, insure, or reduce them.