As the Harvard Business Review puts it, “Consulting is more than giving advice.” This multi-dimensional practice involves different phases and processes that help clients identify and overcome roadblocks to business success.
Business consultants across industry verticals serve at least eight fundamental purposes –
- Improving organizational agility permanently
- Redefining a problem based on analysis
- Solving client issues
- Offering accurate information to clients
- Making recommendations based on the analysis
- Building a consensus for corrective action
- Supporting the implementation process of recommendations
- Educating clients on resolving similar problems in the future
Allied Market Research found that the global management consulting services market is growing at a CAGR of 10.2%. By 2031, it may carry a net worth of $811.3 billion. With competition in every industry becoming tougher than ever, businesses are heavily relying on consultants.
In an ideal world, every advice or recommendation would yield positive outcomes. However, reality shows that even the experts can go wrong at times. What is the cushion they can fall back on when things go downhill?
This article will discuss the importance of insurance for business consultants and its types.
Insurance is Not an Area to Cut Costs
Two of the top reasons why entrepreneurs choose to start a business consultancy are low startup costs and high payback. Some may not consider insurance to be a ‘vital business expense.’ As a result, they see insurance premiums as parasites eating into cash flow and profits.
Compromising coverage can come with hefty costs in the form of lawsuits. Consultancies may be sued for customer injury, property damage, etc. In some cases, even a client dispute may have legal consequences (despite the consultancy not being at fault).
Moreover, the business consulting services industry has dipped its proverbial toes into advanced tech waters. Artificial Intelligence, Machine Learning, blockchain, and cloud computing are enabling consultants to offer comprehensive solutions through deep insights from client data.
Firms may choose to ignore insurance due to over-reliance on these technologies. But high tech is not without its drawbacks (think integration issues, backup disasters, security risks, etc.). So, it’s always better to be safe than sorry.
General Liability Coverage is Not Enough
Some consultancies stay complacent because they believe general liability insurance is the only coverage out there. The problem is that this type of insurance covers just property damage and bodily injuries.
A consulting firm’s primary risk involves economic losses suffered by clients due to omission, error, or negligence. For instance – a management consulting firm providing business advice has little to worry about causing physical injury or property damage. Their risk of offering solutions that lead to loss of revenue (like decreased sales) is much higher.
Such firms require professional consultants’ liability insurance that protects them against economic losses caused due to negligence or error. Another name for errors and omissions (E&O) insurance, it provides coverage for the following “wrongful acts” –
- Actual or alleged omissions and errors
- Misleading statements where the outcome does not match the claim
- Negligence
- Breach of duty
- Unintentional breach of contract
Some professional liability policies may cover areas otherwise covered under general liability insurance. These include wrongful eviction, defamation, and intellectual property rights infringement. It is important to study the policy carefully to not end up with two policies offering similar coverage.
According to Huntersure, tailored insurance solutions are available depending on a business consultancy’s risk exposure. This means the professional liability coverage for a healthcare consultancy will be different from that of an IT consulting firm.
So, what type of consultants need professional liability coverage? It includes firms –
- Providing specialized expertise
- Rendering professional services for a fee
- Having clients who incorporate their advice into product offerings
- Supporting administrative functions of their clients
- Offering technology or healthcare services
Besides professional liability insurance, businesses may consider getting insured with the following –
Workers’ Compensation Insurance
Just like general liability insurance covers client injuries, workers’ compensation insurance covers employee injuries. This is a mandate across the US, but the rules may vary among states.
Workers’ compensation insurance takes care of lost wages, hospital bills, etc., in the event of an occupational injury. Without this coverage, a consultancy may suffer productivity loss and a poor reputation.
Cyber Liability Insurance
Business consultants often store sensitive and confidential client information. They also rely on email for correspondence, and most firms have a dedicated website. This makes them easy prey for cybercriminals.
Not even small firms are immune from cyberattacks, as revealed by the FBI’s Internet Crime Report. Small firms lost about $2.4 billion in cybercrimes (2021). This figure mainly included the enormous cost of recovering from a cyberattack.
Though cyber liability insurance does not prevent an attack, it can surely help recover from one.
Directors and Officers Insurance
Business consultancy owners are at risk of being sued by the firm’s shareholders, employees, or investors in case of mismanagement. Small businesses are equally vulnerable (because their pockets are not as deep).
If a corporate lawsuit is filed, a small firm may not be able to put up a legal fight. Instead of being financially crippled, it is better to have directors’ and officers’ insurance as a legal defense.
What Type of Consultants Need Coverage?
Insurance coverage is needed by business consultants across industry verticals. That being said, the coverage needs may differ depending on risk exposure. Let’s understand a few types of business consultants who must get insured –
- Management consultants offering advice for business management
- Strategy consultants dealing in strategic areas like economic, government, or organizational policies
- Operations consultants helping clients improve primary and secondary operations
- Financial advisory consultants helping clients to enhance their business’ financial capabilities
- Human resource consultants who help their clients hire and retain talent
- IT consultants assisting clients in the development and application of IT systems
Independent consultants working as graphic and interior designers, attorneys, accountants, etc., may also need insurance coverage.
Staying Prepared for Worst-Case Scenarios
Forbes partnered with Statista to publish its second annual list of the world’s best management consulting firms in 2023. The firms spanned across industries and 40 countries. Their well-trodden business mantra is to deliver advice based on careful analysis and attention to detail.
With tech disruption, the process has become easier and the turnaround, faster. That does not mean a business consultancy will never run into conflicts or legal issues. As consultancies stay on top of industry trends, invest in technology, and provide quality service, they must also prepare for worst-case scenarios (through insurance).