The Trouble with Consulting

Predicting the end of traditional management consulting has become something of a cottage industry, but so far the market leaders have retained their allure despite a world which has shifted underneath them. 

The Management Consulting Business: A Rich Target for Disruption? 

Back in 2013, Clayton Christensen and colleagues published an alarmist article regarding the consulting business, entitled “Consulting On the Cusp of Disruption.”  In it, they argued that consulting’s expensive, integrated, black-box business model couldn’t last. Well, here we are in 2019 and strategy consulting is still thriving. Indeed, it’s a $250 billion revenue business that is still growing, with some firms enjoying double-digit expansion.    

Despite grim predictions that management consulting would go away due to any number of trends, the dominant firms — McKinsey, BCG, and Bain — have responded with considerable agility.  Their “up or out” employment systems convey a number of benefits, among them creating a rich pool of alumni with contacts at potential client firms, while also keeping the talent at the firms young and fresh. Even as strategy work has declined as a percentage of total effort, other kinds of advisory activities have taken their place. Historically, the big firms have successfully create a flywheel — getting engagements that teach them a great deal about complex situations, then re-using that learning in future engagements. The firms have also spent considerably on acquisitions in the design, advertising, and digital spaces to add those capabilities needed by clients.    

There are a few places, however, where the traditional models show some vulnerability. It starts with the fact that consultants are embedded in the world as it is, not the world to come. It’s very difficult to give advice that would lead to the system which favors you as an incumbent being disrupted.   

This means that one point of pain for customers of consulting services is that the consultant gets paid, no matter what the outcome of their engagement is — limiting shared incentives. I’ve had executives at major corporations express intense frustration with this model. As one said, “We’ve spent a billion dollars on consultants from all the big firms and we’ve missed at least five inflection points that are critical to our business.”  

Leverage: The Fundamental Business Model Challenge  

Whatever type of consulting work that a large firm does, at its core the business model is based on leverage. The more junior people you can staff at a client relative to more senior people, the more money it’s possible to make.  This means that the digital-enabled productivity gains which have revolutionized other sectors have not been brought to bear in consulting. This also relates to the type of work a consultant is centered on.   

As David Maister points out, the proportion of work a firm does will determine how much leverage it is able to achieve.  “Procedures consulting” means the main client “job to be done” is to obtain capacity and know-how to achieve a well-understood outcome. Installing an ERP system would be an example.  “Grey hair” consulting is all about accumulated expertise. The client’s job is largely based on the consultant’s reputation and its accumulated expertise — “Don’t worry about this, we won’t steer you wrong.”  “Brains” consulting involves focusing the best minds on new-to-the-world problems.    

New consulting services generally begin in the “brains” area, move to “grey hair” as firms gain experience, and eventually become well enough understood that they end up in the procedures space. Here’s the problem for many consultancies: While clients may want a “brains” type of outcome, it’s difficult to get a lot of leverage out of an engagement like that. And as innovations, technological shifts, and sources of competitive advantage change faster than ever, we can expect the proportion of traditional consulting work to move more into the “brains” space.   

What we can anticipate is that firms able to offer specific expertise in an area, even if their individual consultants are pricey, will begin to capture some business that might have previously gone to an established consulting firm. We can also anticipate that smart firms will continue to build strategy capability internally to wean themselves away from a dependency on long-term consulting relationships.   

 The On-demand Phenomenon Enters Consulting 

In other industries, the trend towards simply accessing assets rather than owning them has been disruptive (see Airbnb). As “brains” work becomes more important and deeply specialized expertise is necessary, boutique firms can credibly offer an alternative. This is likely to have a deep impact on the world of the consultant, as entities such as the GLG group make it possible for clients to simply buy a bit of a world-class expert’s time for a real-time conversation. Firms such as TopTal are already creating markets for truly high–end technical talent that prefers a freelance environment to being tied to a firm. And of course, resources such as LinkedIn can connect people to experts they previously would never have known existed. 

Legacy companies needing to understand digital technologies have turned to traditional consultancies in droves, hoping that these firms would help them work through their own digital transformations.  The results for many leading firms have been more digital disillusionment than digital success.   

We anticipate a market opportunity for an entirely different kind of consulting firm—one which uses digital technologies to do to traditional consulting what upstarts such as Dollar Shave Club, Wayfair, and Sofi have done to the incumbents in their industries.   

While there will always be a market for high-end consulting, look for a rising number of technology-infused alternatives which offer a combination of expert “brains at scale,” and more clearly-aligned incentives to put pressure on the traditional model.