Week Notes S0 E2 Is traditional consulting about to be disrupted?
Originally published on Medium on April 27, 2018.
Searching for the big fours moat
Having working in management consulting for a little while now, I’m consistently amazed at the willingness of clients to pay the extravagant fees of the consulting industry. How have such defensible margins grown when the core product offerings of these firms (brains on seats) appears to be an indefensible business model?
Are the margins ripe for disruption? Based on a brief analysis of the typical traditional consultancy’s practices vs. the ‘moats’ we might use to judge the defensiveness of a product business it would suggest so.
Economies of scale
The ‘as is’ model relying almost entirely on warm bodies to scale services as demand grows is innately unscalable. As client demand increases marginal costs for adding N+1 services grows at minimum linearly or even worsen exponentially with time as overheads grow to support increasing headcount.
Network Effects
This does exist on a limited basis in theory through sharing of people and knowledge across sectors on the supply side; but there is seemingly limited intentional horizontal integration in the market across clients on the demand side. Services are usually designed as siloed per client bespoke offerings rather than benefiting from growth in a value ecosystem as demand for a particular service grows.
Intellectual property (Technology)
Given the client-centric model with most IP staying with the client of a service offering and little incentive to expend capital to develop technological replacements for tasks which will disrupt their traditional offerings (brains on seats), I’ve seen few examples were IP would act as a moat to substitution with a competing consulting service.
High switching costs
Given how government and BigCos operate the big four and similar are protected as a limited pool of organisations who have the scale to bid & win for the framework contracts which provide a ‘limited’ licence to print money if they can be resourced (see economies of scale).
The large tender costs of the procurement process acts as a moat in itself; a firm needs the financial scale to expend the significant resource to simply compete, and once the contract is signed clients are usually unable to re-tender for financial and political reasons without significant due cause.
Hence the focus on such contractual models and margins can blind many firms from other opportunities deemed less lucrative, and makes them increasingly reliant on the continuance of the procurement model into the future.
Brand & Customer loyalty
Yes, clients can like a consultancies people and their work, with personal trust built up between individuals and the client leading to a firms name on a CV adding a level of assurance to justify the daily rates. Yet it is also the weakest given the business models dependence on human resources who by their nature are fickle over the longer term.
An alternative: Scaled VC-Advisory services
So what are the alternatives to this model? Opportunities are endless, yet those which match the traditional margins enjoyed without significant change will be rare.
Disruptive firms such as Cloudreach offer one example; offering a model which integrates professional services with technology to a far greater extent than traditionally used.
Another courtesy of Andreessen Horowitz is to integrate professional services with the financial services which already exist as separate business units within the Big4. Scaling out A16z’s model of investment with targeted professional advice and services at the outset could be interesting.
Back in my Startup days I used to say;
“ I don’t care about the outcomes of a client project unless it contributes to the wider product (ney business) strategy” .
The former add value to the immediate client and revenue in the short term. The latter adds value to all clients and revenue stretching into the future.
With management consulting in its current state; I’m sorry to say I see too much of the latter and too little of the former, with disruptive technology enabled firms nipping at their heals, ready for clients to wake up to the possibilities offered at price points which can’t be touched by the Big4.