Survival instinct

One of the points often made about the consulting industry is that barriers to entry are low.  But this isn't strictly true.  They're low in theory (there's no regulation to keep new entrants out, for example) but history suggests they're high in practice.  Over the last 30 years there are remarkably few firms which have entered the market and achieved sustainable growth.

Why is it so difficult for small firms to become mid-sized firms, and for mid-sized firms to become large ones?

The answer lies in the economics of the consulting firm.  Most consulting firms begin with one big idea and they grow because they succeed in building up a reputation in this niche field.  After the first few years, the rate of grow usually slows and the consulting firm, panicked into thinking that there isn't sufficient demand for its services, tries to diversify.  Diversification lowers utilisation because new people are arriving who can't immediately be put onto the firm's existing projects.

If a firm gets through this crisis, it soon faces another, bigger one.  Much of its initial growth will depend on its niche reputation (it will be seen by clients as a specialist) but as it gets bigger, future growth will depend on winning bigger projects, projects which it will probably not have the scale or brand to win.  Utilisation falls again because the firm's sales process can't provide the pipeline of work required.

Recent history suggests that getting through this crisis as an independent, standalone consulting firm is nigh-on impossible.  Most of today's mid-sized consulting firms are part of large companies, only some of which are consultancies.  Instead, they are outsourcing companies, outsourcers, offshorers, engineering and manufacturing companies.  These "parents" provide consulting firms with new internal customers, an additional new channel to market, extra resources and (often) global scale and money to invest.  These are things which, if you're a consulting firm, you can't survive without.

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