Consulting on the Cusp of Disruption
18 March, 2015 / Articles
After years of debate and study, in 2007 McKinsey & Company initiated a series of business model innovations that could reshape the way the global consulting firm engages with clients. One of the most intriguing of these is McKinsey Solutions, software and technology-based analytics and tools that can be embedded at a client, providing ongoing engagement outside the traditional project-based model. McKinsey Solutions marked the first time the consultancy unbundled its offerings and focused so heavily on hard knowledge assets. Indeed, although McKinsey and other consulting firms have gone through many waves of change—from generalist to functional focus, from local to global structures, from tightly structured teams to spiderwebs of remote experts—the launch of McKinsey Solutions is dramatically different because it is not grounded in deploying human capital. Why would a firm whose primary value proposition is judgment-based and bespoke diagnoses invest in such a departure when its core business was thriving?
For starters, McKinsey Solutions might enable shorter projects that provide clearer ROI and protect revenue and market share during economic downturns. And embedding proprietary analytics at a client can help the firm stay “top of mind” between projects and generate leads for future engagements. While these commercial benefits were most likely factors in McKinsey’s decision, we believe that the driving force is almost certainly larger: McKinsey Solutions is intended to provide a strong hedge against potential disruption.
In our research and teaching at Harvard Business School, we emphasize the importance of looking at the world through the lens of theory—that is, of understanding the forces that bring about change and the circumstances in which those forces are operative: what causes what to happen, when and why. Disruption is one such theory, but we teach several others, encompassing such areas as customer behavior, industry development, and human motivation. Over the past year we have been studying the professional services, especially consulting and law, through the lens of these theories to understand how they are changing and why. We’ve spoken extensively with more than 50 leaders of incumbent and emerging firms, their clients, and academics and researchers who study them. In May 2013 we held a roundtable at HBS on the disruption of the professional services to encourage greater dialogue and debate on this subject.
We have come to the conclusion that the same forces that disrupted so many businesses, from steel to publishing, are starting to reshape the world of consulting. The implications for firms and their clients are significant. The pattern of industry disruption is familiar: New competitors with new business models arrive; incumbents choose to ignore the new players or to flee to higher-margin activities; a disrupter whose product was once barely good enough achieves a level of quality acceptable to the broad middle of the market, undermining the position of longtime leaders and often causing the “flip” to a new basis of competition.
Early signs of this pattern in the consulting industry include increasingly sophisticated competitors with nontraditional business models that are gaining acceptance. Although these upstarts are as yet nowhere near the size and influence of big-name consultancies like McKinsey, Bain, and Boston Consulting Group (BCG), the incumbents are showing vulnerability. For example, at traditional strategy-consulting firms, the share of work that is classic strategy has been steadily decreasing and is now about 20%, down from 60% to 70% some 30 years ago, according to Tom Rodenhauser, the managing director of advisory services at Kennedy Consulting Research & Advisory.
Big consulting is also questioning its sacred cows: We spoke to a partner at one large firm who anticipates that the percentage of projects employing value-based pricing instead of per diem billing will go from the high single digits to a third of the business within 20 years. Even McKinsey, as we have seen, is pursuing innovation with unusual speed and vigor. Though the full effects of disruption have yet to hit consulting, our observations suggest that it’s just a matter of time.
Why Consulting Was Immune for So Long
Management consulting’s fundamental business model has not changed in more than 100 years. It has always involved sending smart outsiders into organizations for a finite period of time and asking them to recommend solutions for the most difficult problems confronting their clients. Some experienced consultants we interviewed scoffed at the suggestion of disruption in their industry, noting that (life and change being what they are) clients will always face new challenges. Their reaction is understandable, because two factors—opacity and agility—have long made consulting immune to disruption.
Like most other professional services, consulting is highly opaque compared with manufacturing-based companies. The most prestigious firms have evolved into “solution shops” whose recommendations are created in the black box of the team room. (See the exhibit “Consulting: Three Business Models.”) It’s incredibly difficult for clients to judge a consultancy’s performance in advance, because they are usually hiring the firm for specialized knowledge and capability that they themselves lack. It’s even hard to judge after a project has been completed, because so many external factors, including quality of execution, management transition, and the passage of time, influence the outcome of the consultants’ recommendations. As a result, a critical mechanism of disruption is disabled.
Therefore, as Andrew von Nordenflycht, of Simon Fraser University, and other scholars have shown, clients rely on brand, reputation, and “social proof”—that is, the professionals’ educational pedigrees, eloquence, and demeanor—as substitutes for measurable results, giving incumbents an advantage. Price is often seen as a proxy for quality, buoying the premiums charged by name-brand firms. In industries where opacity is high, we’ve observed, new competitors typically enter the market by emulating incumbents’ business models rather than disrupting them.
Tags: Crystal Lagoons®
