Consulting on the Cusp of Disruption

In October last year, Harvard Business Review published an article written by Clayton M. Christensen, Dina Wang and Derek van Bever, titled Consulting on the Cusp of Disruption. I read it when it was published, and I have not stopped thinking about it since. Having some time on a flight from Zagreb to Zurich today, I decided to write down some thoughts.

The main author of the article, Clayton M. Christensen, is one of the most well known academics in the field of innovation and he launched the concept of disruptive innovation in 1997, as we have written about previously on this blog.

For me, working in the global field of management consulting for more than 20 years, the article is one of the most important publications on consulting since I started. If you are involved in the consulting business, you definitely need to take the time to read this.

Management consulting

Management consulting, the practice of helping organizations to improve their performance and growth, operates primarily through the analysis of existing organisational problems and the development of plans for improvement. Organisations may draw upon the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants’ specialised expertise.

The first management consulting firm Arthur D. Little Inc. was founded in 1886. It started as a firm for technical research and later became a general management consultancy. Management consultancies have over the years attracted smart driven people who wants more from their work life than the routines of everyday tasks and also, when they are experienced, a hefty pay check, and global solution shop firms such as McKinsey, Boston Consulting Group and Bain are well recognized thought leaders. Niche players such as Bearing are well known within our fields of expertise on innovation and growth.  

Management consulting’s fundamental business model has not changed much since it was created in the late 19th century. It has always involved sending smart outsiders into dealing with challenging problems for a finite period of time and asking them to recommend solutions for the most difficult problems confronting their clients. Today many management consultancies have also branched into execution, helping their clients to both solve the problem and execute the implementation.

This is a core business idea of Bearing, Innovate-Execute. We prepare and do projects, not only studies. Projects start with a deep diagnosis phase, but they are always aimed at designing and implementing efficient and sustainable solutions that will have a real long-term impact. In our work, we often plays a central role in the coordination of the several actors and institutions involved in the development of a new solutions, and we provide analysis and advice to major stakeholders. This coordinating role is the core of our business and we got started because I and some other people in the initial core team got tired of the strategy consultancies we worked with on the client side who delivered reports but not implementations. Execution is the key to satisfied clients, and this aspect of consulting is strange enough not covered by the HBR article. This may be because the authors are renowned academicians and not people with own experience of executive work.

The “Cusp”

In psychology, a behavioural cusp means an important behaviour-change with far-reaching consequences. A game changing event.  In the Harvard Business Review article the authors argue that the basic business model for big consulting firms is under threat, and that threat is imminent and existential.

The basic idea is that there are three different business models in consulting, and then minor variations on them. The more traditional solution-shop model is now at risk of being disrupted by the two other models. According to the article, the main differences among them are as follows.

The three business models in consulting

Solution Shop

The traditional solution shops are structured to diagnose and solve problems whose scope is undefined. They deliver value primarily through the senior consultants experience and judgment, rather than through a repeatable processes and customers pay high prices in the form of fee-for-service. Most common, solution shops are hired by clients who are not capable of understanding or solving major challenges themselves, or because the clients would like an outside-in view to bring new ideas and competence for change. Examples includes the traditional management consulting firms, like McKinsey, Bain and Boston Consulting Group, but also niche players like IDEO. Bearing is in this field, in our niched focus areas where we have a competitive advantage from being specialists.

Value-Added Process

The value-added process business model is structured to address problems of known and defined scope with standard processes. This can be outsourcing of services or part of value chains and the processes are usually repeatable and controllable. Customers pay for output only and can measure the value of the service by comparing with previous internal cost or in benchmarking with others. Examples includes Salesforce, McKinsey Solutions, Accenture and Deloitte. The two later have been solution shops but are moving towards value-added business process. This sector has historically had much lower margins than the solution shops so profitability lies in scale or specialisation, like Salesforce.

Facilitated Network

Facilitated networks are structured to enable the exchange of products and services among a network of competent resources. Customers pay fees to the network, which in turn pays the service providers. Service providers tend to be squeezed in the middle, as they cannot get a personal relation with the customers and show the full extent of their competencies and thus their advice is treated like a commodity product. They are only asked to work on their exact area of expertise for a pre-defined set of specifications, and so do numerous other people in the network with similar competence and expertise. To be selected as an expert then becomes a matter of charging the lowest price.

I was recently contacted by such a facilitated network and asked to help a New York based investment bank with analysis of a large bank that I know well. I became curious how this would work so I signed up to help. Afterwards I realised that we had been paid well per hour for a few hours of my time, but if we had done this advisory as a traditional consulting project, in the usual fashion where we involve a team of colleagues and not only myself and sell a study that is much more in depth, then we would have charged 100 times more for the knowledge and analysis I personally delivered in a few phone calls.

Facilitated networks are good for the customer, not good for us consultants and of course not sustainable as business model for consulting organisations with overhead costs, offices and employees. It might work for experts who relocate to emerging markets with lower costs and have no overhead and can live on a strict diet. I know people who have done so. A very good Andersen consultant I knew who burned out left the industry and moved to a rural area in western France to live on farming and fishing and occasionally provide advice through a facilitated network. I have not heard from him since, and I am trying to make up my mind if this is encouraging or not.

Anyway, the facilitated networks promote individualism and egoism and even though they are built on collaboration they do not promote teamwork, which I think is essential for helping younger people learn and grow.  Examples of facilitated networks includes Experts Exchange, OpenIDEO, CEB, Gerson Lehrman Group, Eden McCallum and BTG.

The Threat

The forecast of the articles authors is that  the same forces that has disrupted many other industries are starting to change the world of consulting. The author’s base this prognosis on some leading indicators and below I include them and also add some of my own:

1. The decreasing share of classic strategy work in traditional firms.
2. The increased use of value based pricing.
3. The steady invasion of hard analytics and technology (big data), being a certainty to invade consulting, as it has invaded so many other industries.
4. The ability to deliver services and advice through technology and to connect experts to clients across vast distances in a connected, globalised world.

The authors argue that the traditional boundaries between professional services are blurring and that the two factors that have made consulting immune to disruption, opacity and agility are quickly becoming irrelevant and this is directly leading to the coming disruption.

Opacity refers to the client’s inability to judge the quality of a consultant’s work and agility is the ability of top consulting companies to move smoothly from one idea to another. The article then uses the example of the legal industry to support this argument.

The article goes on to recommends that traditional consulting firms significantly rethink their service models and experiment with new. The prescribed short list of changes that a consulting firm should act on includes:

• The disaggregation of the ‘one stop solution shop’ into modularized services that clients can procure piece by piece towards price list.
• The democratization of knowledge. The explosion of analytics and big data leading to ‘almost’ real time analysis and actionable insights.
• The growth of ‘asset based’ consulting. This is the packaging of ideas, frameworks, and analytics through a technology platform, often billed on license or rental based fee models.
• Technology will play a key role in supporting consulting services and should be embraced and new, internet based delivery models of knowledge are crowing out the traditional face to face delivery of advice.

The authors predict that a consolidation, a thinning of the ranks, will occur in the top tiers of the consulting industry over time, strengthening some firms while toppling others. Winners will be differentiated from losers by their understanding of the evolving pressures on their clients and by their ability to bring clarity and skill to fulfilling clients’ new requirements. Some well known mid-size firms have already gone bankrupt, as Monitor did in 2012 (see exhibit in box on right side). 

Industry leaders and observers will be tempted to track the battle for market share by watching the largest, most treasured clients, but the real story will begin with smaller clients. Both those that are already served by existing consultancies and those that are new to the industry. It is a sound advice to test new business models on smaller clients first, which is very much inline with the chart of s-curves below, that we often use as models for business transformation in our work.

Enough models, what about reality?

In my view, the disruption the authors are talking about is real. We have noticed the trends, especially since the crises started in 2008. The strongest trend comes from value pricing and higher expectations of excellence of services from prospective clients in order to hire consultants. Many people who worked in the industry before the crises do no longer fit. Only the top performers survive in the new world, and as it is tough, many top performers burn out.

In Bearing we have lost or disengaged more than 40 consultants over the past six years. These former colleagues were well adapted to market expectations before 2008 but could no longer function and take on assignments in the harsher world we have now. Few people can take the stress and pressure to always perform that is the new paradigm for survival in markets of hyper competition and low or zero growth, and this relates not only to consulting but to many other industries where globalisation has brought hyper competition as a norm.

Our current crew in Bearing are top performers of a younger generation than the people who were culled by the crises. They are smart, well educated PhDs or young professionals with energy, drive and a will to make an impact and change the world. This is a phenomena in many businesses in the advanced economies and history may regard this as a major loss of the credit crunch.

People born in the 1940s, 1950s and even people born in the 1960s have no place any more in many lines of business and whole generations have retired, taking a vast amount of experience and knowledge with them than in normal times would have been conveyed to the new generations in a more gradual change and retirement process. At the same time many of these people are now a burden for society for health care and premature retirement costs, making adaption to the emerging economies even more difficult for the “Western world”. Meanwhile life expectancy remains rising and we know the social security systems will not hold.

The article authors discussion on how the traditional solution-shop model is at risk of being disrupted by the “Value-Added Process Business” and “Facilitated Network” models sums up the challenge nicely.Yet, consulting firms have always been disrupted. What’s different now is that the pace of change is accelerating.

Change is generally good for companies that are willing to embrace the change. It’s also good for consulting firms, because it creates complex issues and challenges, and if there is something we consultants are good at handling, then that is complexity.

I look at some of the things that are evolving, and I see opportunities to partner in ways we could not before, through partnerships where our deep expertise of innovation, complexity, process, structure and change fits well with the financial know-how of private equity firms or the leading edge technology knowledge of niched technology companies. Such opportunities are more available today, at an accelerating pace.

Today we work also with traditional clients like cities, governments and large companies more as partners than as clients, where we consultants become a part of their outsourced value network for the long run, rather than in short term, well paid one-off assignments. In a way this is aligned with the value-added process paradigm described above.

It is an interesting time to be in the management consulting industry. We are going to see a shift, where we start to become participants and stakeholders in industry ecosystems, as opposed to just service providers. It creates a lot of opportunities and complexity, for sure, but it definitely changes the game. The key to survive in this time of disruption is to have smart, talented people, and in Bearing we do. Management consulting has always been attractive for people who want to make a difference and deliver change, and enjoy to do so in teams with other equally smart people.