Why innovation is important to consultancies

Innovation is is the creation of new value through the implementation of original ideas. This might concern new strategies, business models and services. However, it might also concern more incremental or back-end subject matter, such as improvements in IP, delivery processes or new KPIs / OKRs.

For consultancies, innovation is rightly seen as a strategy to fight against the slow erosion of margins prompted by procurement, competition, commodification, and fickle yet increasingly experienced buyers. This is especially true in consultancy where management fads and fashions strongly influence service design and popularity.

In this article I delve a little into what innovation means as consultancies grow, how it can be fostered without burning budgets, and how it can be used to strengthen ties with clients.

Why is innovation important?

"Strategy", wrote Jules Goddard, "is the rare and precious skill of staying one step ahead of the need to be efficient". As with much of his writing, he was exaggerating to make a point, but the point is a valid one.

For consultancies, innovation means the avoidance of commodification by the client. As soon as one's consultancy is in a space where margins rely overly on operational excellence, continuous improvement, or cost leadership, you know you are on the slippery slope of becoming a commodity.

Innovation allows us to avoid this slope. It ensures that we are creating markets, not emulating competitors, that we are charging premiums rather than competing on cost, that we are creating new value rather than fighting for the market share.

Let me give you an example. I recently ran a strategic audit for a fairly traditional people-based consultancy whose growth had stalled. When I talked to them about the potential of using technology to enable better or even new services for their clients, I could see fear in their eyes. Technology, for them, was something that was a threat, not an opportunity. Fast-forward two weeks, and a very similar, but smaller consultancy asked me in to look at their fledgling low-cost data-solution that used AI to complement and drive demand for their services. This solution, they estimated, had cost them around ￡35,000, but was already driving hundreds of thousands in sales - even ignoring the 'asset value' for the firm.

I know which I would buy into.

Yet, interestingly, firms - even those nimble boutique types - tend to spend a lot more effort on cost cutting rather than investing in innovation. The thing with cost cutting, however, is that there is a golden range, and anything below this damages long-term growth. For consultancies, this is especially apt, as services that are older than three years old tend to attract more competition and are at increasing risk of dropping out of fashion with buyers.

I have a new client in the north of England at the moment: very successful and with one eye on selling the firm. The owners rightly know that a multiple will be paid on their EBITDA and so are cutting costs to the bone and driving up utilisation. This, they argued would maximise their profits and thus maximise the value of the firm. However, there are three problems with this approach.

First, typically half the firm's 'enterprise' value is paid on the achievement of post-sale targets over three years. Hitting these targets means having strong infrastructure, pipeline, IP, marketing and so on. All the things that the firm has cut back on.

Second, by investing in that infrastructure, IP, marketing and so on, the firm might improve the multiple that is paid on their EBITDA from say, 7 to, say, 9. For most firms, it makes more economic sense to invest in the firm as an asset rather than reduce costs to the bone.

Finally, who wants to work for a firm with 90% utilisation and no time for innovation, creativity and long-term thinking? Probably not your best performers. Giving space and encouragement to innovate is one of the best ways of creating a strong working environment.

If you can show buyers that you have an innovation pipeline by which your services and capabilities have become honed over the years and adjust to both improve and meet new client needs, this is worth much more than a couple of points on your EBITDA.

The Innovation Challenge

Since leading a 2-year ESRC project studying innovation in the consulting industry I have run the occasional gig with firms wanting to improve their levels of innovation - prompted usually by a high number of rejected bids on an innovation score, as a strategy to push up fees, or as a way to increase client buy-in through co-production projects.

Whilst some of these projects have been truly transformational, I’d say in about 50% of cases, the firm I’m helping sees innovation as a bolt-on, typically phrases such as; what innovative things can we do to land more bids at a higher price point?

Generally, the owner or partner is looking for a tool, technique, or piece of technology that will be the ‘magic bullet’ of ideas: a low-investment add-on that will not change the company. One Partner at in an Asian Big 4 office told me proudly that their innovation was, in effect, a suggestion box for employees. "Is anyone else doing this?", he asked.

Attempting to become more innovative without reflecting on your firm’s strategy is likely to generate wonderful sounding projects that fail when it is discovered consultants neither have the time, knowledge, or desire to innovate.

To work effectively, innovation needs to be built into the fabric of the firm: competences, policies, culture and leadership.

Whilst new technology, markets and client demands are great enablers of innovation, very little will happen unless your people have an appetite and skills to notice opportunities, progress them, communicate them and build business cases.

Despite the wondrous lauding of AI and Big Data, the beating heart of innovation is still people. And you, or your people, need:

●???? A deep understanding of the market, your clients and their challenges

●???? Knowledge systems that introduce and share new ideas that work

●???? A culture that values new ideas to the point of welcoming failure

●???? Leverage ratios and utilization targets that give time for innovation

●???? A culture that values new ideas to the point of welcoming failure

When I have this conversation, Partners or owners often agree wholeheartedly. Yet, things often become a little unstuck when we discuss the link between investment and returns: in smaller firms, investing in innovation is often a leap of faith.

The Investment in Innovation

For those of you building a firm for the long-term, the rise of AI provides another strong reason to invest in innovation. To a great extent, AI is already capable of doing the standardised tasks you might give to a junior. For those firms that do more commodified work, AI will eventually replace much of what they do. However, because AI has been trained on data from the past, it is not very good at doing new things. For example, if you ask AI about its own capabilities, it will usually not be able to tell you what the most modern models can do.

For this reason, innovation become much more important to the long term success of consultancies. We saw this during COVID, but much faster: those consulting firms who pivoted quickly and aligned their UVP, services and marketing with emergent trends, were the firms that were most resiliant.

Here are some key questions to consider when thinking about innovation in your firm:

• How much of your revenue comes from services created in the last three years?
• How do you capture and respond to market trends, new client needs and the opportunities of new technology?
• How does innovation align with your strategy and plan? What would great look like here?
• Are your people incentivised to capture, develop and communicate new ways of delivering firm and client value?
• Do your people have time, training and competence to succeed in innovating?
• Are your IP and services continuously improved?
• How do you measure innovation in your firm?
• Are you in danger of becoming commodified?
• When's the last time you saw a business case for a new service? What is your process for deciding whether to develop a new service or enter a new market?

Of course, there are hundreds of different tools, techniques, training, and technologies that can support innovation, but without motivated, knowledgeable consultants with sufficient time, innovation in consultancies simply becomes new, but fundamentally pointless, distracting, and temporary.

Prof. Joe O’Mahoney provides strategic advice, audits, and leadership training for consulting firms who are serious about growing and/or selling their consultancy. To discuss your needs, please book a session with Joe here:

Joe O'Mahoney | Consulting Growth Advisor

This article was originally published on ? joeomahoney.com . It has been rewritten and expanded here by the author.

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