A tipping point in the structure of the firm

Our report, “The balancing act: trends in consulting firm recruitment”, published last week, argues that, if current trends continue, consulting firms could look very different in the future.

Almost every firm is built around the pyramid model in which the limited and expensive time of a small number of senior people at the apex of the organisation is leveraged across a large number of less experienced people at its bottom. This allows the firm to work on more projects and earn higher profits (because junior people are more profitable than senior ones). Our research suggests that most recruitment activity is being concentrated at the level just below partner. These are attractive people to bring in: they’re often very experienced but still less expensive than those who are already partners; they’re also young enough for a firm to mould to its culture. Because such people are in demand, recruitment activity may be a function of churn – everyone is fighting for a share of the same group. Anecdotally, however, we hear a lot of firms talking about wanting to increase the number of people they have at this level.

So far, perhaps not so new. There’s been discussion for some years about whether the pyramid model will give way to a diamond, or even coffin-shaped, structure as firms recruit more middle-ranking project managers. But there are two factors which are different here. First is the increasing demand for specialist skills, exacerbated by a recession which forced many organisations to think twice (or even ten times) before bringing consultants in. Expertise is top of the list of requirements of every client we speak to; indeed, the more senior the client, the greater their need. Second are fee rates: while those for junior consultants fell sharply during 2009-10, rates for the most senior people held up remarkably well. Clients, looking for quality not quantity, were prepared to pay for it. That starts to change the metrics which underpin the pyramid model: people at the top become more profitable so it makes sense to make them more chargeable.

A third factor isn’t yet in place, however. This is to do with numbers. Now that there’s an economic incentive to sell more partner time, firms can afford to increase the number of people at this level and raise their utilisation levels. This means that the limiting factor is not leverage or profitability but volume. How many people are there in the labour market who could be recruited at this level? Not many, according to the consulting firms who contributed to our research. Will that change in the future? Maybe: given that firms have been investing in middle-ranking consultants over the last few years and – even allowing for the recent recession – more people work in consulting than ten years ago, there should a larger number of people coming up through the system, people who’ll make it to partner level over the next few years, the consulting industry’s equivalent of baby-boomers. We may be approaching a tipping point in the structure of the firm.