What will it take to transform the economic model of consulting?

For the last 20 years or so, consulting firms have sought to improve their profitability by launching new services.  Operational improvement firms have sought to raise their fee rates by doing more strategy work; strategy firms have sought to increase utilisation by doing more operational improvement and even technology work.  ‘Brancheglidning’ the Danes call it – gliding from one area of business to another.

And they’ve met with some success.  But increasingly I think that this success isn’t what it seems and may have its limits; it may even not be the best way to change the underlying economics.

Let’s start with that first point, that the success isn’t what it seems.  A common complaint among mid-sized, operational consulting firms is that the strategy firms have moved into their space.  But our recent research suggests that, while clients are comfortable with firms cross-selling their services, they don’t want them to change their price point (a point we’ve discussed in more detail elsewhere).  In effect, strategy firms haven’t moved ‘down-market’, but have carved out a part of operational consulting and redefined it so that they can still charge strategy-like prices for it.

That takes us onto the second point: that this approach has its limitations.  Once we see it for what it is – pulling some operational consulting up, rather than take the firm down – it becomes clear that it’s not sustainable.  You can’t – I think – take all of operational improvement consulting and sell it at higher prices because, while clients accept that some operational work can be classed as strategic, much, much more is tactical.  Admittedly, no one quite knows where the line between the two is drawn, but we can be sure it will be reached at some point.

So what’s the alternative?  If you can’t improve margins and stave off price competition by diversifying, what can you do?  Clients are clear about this: you can change how you deliver services.  “Why is it,” said one, “that we’ve changed our organisation and the way we make money out of all recognition in the last 20 years, but consulting firms have hardly changed?”  “It’s because consulting firms have become big machines which have stopped listening to their customers,” responded another.

Two things matter to clients so far as service delivery is concerned – the level of expertise required and whether it takes a firm or an individual to deliver the service – and they’re increasingly canny about which service to use when.  Thus, it might make sense to bring in a team from one of the big brands if a difficult decision needs to be validated, but support in an internal team may take one expert.

For the moment, there’s a lot of ‘brancheglidning’ going on here, too: a single project may involve one firm working in several different delivery modes.  That’s not wrong, but it is confusing at a time when clients are looking for greater clarity. If they don’t find it, they arel likely to divide firms up into delivery groups and work with them in different ways, rather than assuming that one firm can work in all ways.  So the window of opportunity here is not long: consulting firms which want to transform their underlying economics have to look at different ways to deliver their services, not at developing new services – and they need to do so now.