Although traditional consultancies remain industry leaders, new business models focused on specific niches are emerging.

Marc Kitten examines how these innovative firms are catering to an evolving market.

New approaches to strategy consulting

trategy consulting, as practised and presented in boardrooms for many decades by a core group of top firms, is changing. The traditional leaders are still there, maintaining their positions through scale and by tweaking their structures to adjust to market demands. But sometimes tweaking is not enough, and innovation comes in a seismic shift. How did traditional strategy consulting become what it is? How are offspring of the leading firms creating new business models to address and expand an evolving market? The centre of gravity in the industry is McKinsey, which under the direction of Marvin Bower created the original business model of strategy consulting. Strong values have secured McKinseys place among the market leaders for more than 75 years. McKinsey were not the first consultants, of course. Some say that consulting is truly the oldest profession, but its modern form appeared in the latter part of the 19th century, when engineering, accounting and law firms began to offer independent counsel to fast-growing and increasingly complex industrial organisations in the US. Arthur D. Little was the first external consultant to bring operational effectiveness to its manufacturing clients. McKinsey, however, is usually considered to be the originator of strategy consulting. While founder James McKinseys initial practice was only a rough approximation of this innovation, after his death Marvin Bower1 transformed the industry when

he developed the Firm (as insiders called it) along the lines of law firms, as a collegial partnership focused on the business problems of the CEOs of the biggest corporations. Bower, who died in 2003 at the age of 99, led the expansion of McKinsey from 1935 to 1967, and remained actively involved with the firm even after officially retiring in 1992.

From strategy to operations

The emergence of the Boston Consulting Group in the 1960s widened the circle of industry leaders. Though BCGs innovative approach to consulting could appear slightly more academic than McKinseys, the company nonetheless became the master of repackaging simple ideas into useful management tools. The 1970s were a period of explosive industry expansion, marked by the spin-off of Bain from BCG in 1975. Bain developed what it called relationship consulting, extending its services from strategy into operations. Its business model contained a response to the critiques of a growing number of clients of strategy consulting firms, who complained about buying blue sky thinking2 with little practical application. Both BCG and Bain had significant success to the point where Bain ultimately gave up on the idea of serving one client exclusively in each industry. Yet McKinsey integrated some of its competitors best ideas and practices while continuing to develop its own, and retained its lead.

In the last 20 years, many new players entered the field of strategic advice. Interestingly, they did not merely fight for their slices of the pie; instead, at least initially, they helped to increase its size. Major audit firms such as Andersen captured part of the strategy market, and helped to expand it through referrals from their audit teams to their newly formed consulting arms (in this case, Andersen Consulting, now known as Accenture). The Internet bubble of the late 1990s gave birth to new firms and forced traditional ones to take adaptive steps. The newcomers captured some market share though not enough to scare established firms, a couple of which doubled in size at the height of the New Economy bubble. More annoyingly, they attracted top talent, forcing the leaders to make organisational changes.3 But a few short years later, most of the new firms have died, and the changes at traditional firms have generally been rescinded. Even in size, most traditional firms today are much the same as they were in 1997.

A dramatic market change

Recently, it has become obvious that strategy is a particularly difficult consulting niche in adverse economic conditions. The capacity to offer implementation has ceased to be a strong differentiator. Several boutique strategy consultancies, including Monitor, LEK, Marakon and OC&C, have grown to a size at which they can offer global coverage. Yet during this time, some new ideas such as real options, value webs, experience architectures, knowledge management, business process outsourcing and even casual Friday have been integrated into the standard portfolio of established firms. It is thus all the more

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striking that the leadership of the established consulting brands has not been seriously threatened at least, not to the point where their services are perceived as a commodity. A founding partner of a well-known boutique recently summed up the situation: For the same exact proposal, the McKinsey name generally carries a 20% premium, at least. It could thus be argued that changes in the consulting industry have not been significant for some time. But what about the market? I believe that it has, in fact, changed dramatically since the mid-1990s, and that the changes call for an innovative approach to strategy consulting. Figure 1 sums up the four drivers behind these changes. Lets look at these drivers, and their cumulative impact, in turn. Clients are becoming much smarter consumers of consulting services. And that is no accident, because in recent years, many of them have actively hired former consultants as line managers and as internal consultants or strategy team members. The phenomenon was particularly evident following the dot-com meltdown, when many sharp, well-trained consultants left firms like McKinsey or BCG to join clients. The top firms had hired too much talent in their phase of exuberant growth. But the eventual consequences, once firings and voluntary departures reduced the firms internal talent oversupply, included providing clients with some of that same talent and, by the same token, eliminating their need or desire to hire a consultancy. Informal interviews with partners or former partners from several major strategy consultancies and executives who buy consulting services, as well as my own experiences, show that this heightened customer consciousness is leading clients to put pressure on five main dimensions of consulting:

They demand shorter projects. They require the work to be carried out by senior people. They hire junior consultants directly to do their internal analyses. They tender projects (often to gain free valuable market analysis and ideas from all serious players), and actively negotiate the fees. That last point is immensely significant. The idea of tendering is in clear opposition to the traditional approach to strategy consulting, which assumes a strong trust-based relationship between the senior executive and his or her adviser. I am not saying that such relationships have disappeared just that they are exposed to growing pressure from clients shareholders, who seek transparency and value for money. The key point is that while McKinsey, BCG and Bain retain their premium over other industry players, many clients are not willing to buy the usual product at the usual rates. The value of top level strategy-only projects can be harder to justify.

approach to strategy, one that can both master and cut through details becomes necessary. At the same time, client successes are increasingly and heavily dependent on technology. A top-management-only approach can lead to disaster if technological issues are not incorporated, which means that a true understanding of the technologies involved in a strategy, and of how they will be implemented, is essential. It is worth noting that this insight can be read as an extension of Bains concept that strategy must be tightly linked with implementation. In a more recent twist, the management consulting firms that developed within the Big Five audit firms played the technology card with success, because IT-driven control systems are central to their established competencies, and IT now plays a more important role in overall strategy. The success was mitigated, however, as CEOs experienced frustrating dependency on IT consultants and sought instead to hire trustworthy deputies who could understand the technology and its strategic implications.

Against a backdrop of volatile Competition from niche consultancies, economic conditions, rising pressure networks, the Big Five, investment banks on margins and growing competition, and research houses is increasing. clients increasingly balk at projects whose benefits cannot be clearly quantified, and whose successful uc h ming m implementation cannot be assured. ts beco sumers Clien r con Shareholders expect immediate or smarte tangible results especially during downturns, when strategy can be of Top Value rategy vel st cts significantly devalued. Le roje only p justify Two intertwined trends o d hard t crease ion In support this resistance: mpetit nks, co Ba from I- iche increasing complexity and a n Big-5, ancies, growing reliance on technology. consult ouses In many industries, such as healthcare, financial markets, energy and high tech, complexity has deepened to the point where basic business frameworks no longer suffice. Instead, an informed and creative
c resear hh

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Figure 1

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New approaches to strategy consulting

ctice xt Pra ith he Nenique solutiongsaw strategic T in s pu

r act Develo nt teams, aches rathe ie the cl erational co sultants p and o classic con s than a

Figure 2

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tiv d execu vering an e best Niche consultancies and co th by dis mbership gies e strate eric this m inking and ry and Gen freelancers have hugely profited from sey new th cross indust a McKin best value from world d the e the the information revolution. aroun Offer advice to th aders n le drive conomic ility e Information is no longer reserved world Flexib sic l and cost & ande practica g to, and controlled by, the big players, C r top usin Delive ble advice topa either access to it or how it can be action talent from ad network n prove s and a bro analysts, s, tier firm stry expert ilities n exploited. In some cases, well-organised b u of ind arch capa lisatio se Specia and re individuals can even play on level ground with the large firms, because and bust have consulting doesnt mean that they the Internet and high-end PCs give lting demonstrated that in Consu o or their successors wont reinvest if BBDO ntly increase sturmer equity, small consultancies similar access and some cases the cu o ients ica cl Signif brand and they see enough value in it. se our clients nce, increa tplace resources: Many lower-value activities established firms nd he the marke a in Likewise, faced with more fluid and value can be quickly outsourced. can be slow to adapt to transparent financial markets, quickly evolving market conditions. Everyone can develop huge investment banks have developed The main issue, developed in Figure 2, quantitative models and fancy strong sector research to improve their can be simply stated: In volatile presentations. valuation capability. Many of their conditions it is often harder for large analysts are former strategy consultants Independent consultancies and firms than for small ones to recruit the who have been trained to integrate freelancers can work with each other in right people, get rid of the wrong ones strategic options into their thinking. very effective networks. and adjust rewards appropriately. And There is thus a growing common area that is critical, because in the final These trends are supported and of market research occupied by both analysis, consulting is about talent: advanced by increasing specialisation in investment bankers and the corporate people who can observe, think projects and issues. Specialisation has a finance teams of strategy consultancies. through, communicate and motivate double character here. First, there is a This overlap is affecting the market for other people to solve their issues. market for specialised advice. We are strategy consulting, as Fortune 500 Where are these drivers seeing an interesting ballet between the clients gain access to the sector research converging? I think they explain a traditional firms and the smaller provided by the investment banks and visible phenomenon: various new players, each jumping from one sometimes find it sufficient to inform strategic consulting business models lucrative specialised opportunity to their strategy needs. are emerging to adapt to changing another. Often the opportunity is Finally, research houses like demands. These models tend to cluster linked to a global issue such as Gartner and Forrester have developed in firms with two characteristics: they corporate governance, derivatives, consulting arms or services to capitalise are specialised or niche players with renewable energies, elderly care, waste on their research and analytical international reach, and they are management or pensions, to name only capabilities, and to capture part of the strongly influenced by alumni of a few. Second, despite their deeper value chain. In contrast to the specialty McKinsey and other top firms. Some resources, and despite the global nature niche players and perhaps names and prototypes to remember: of some issues, even big firms cannot be surprisingly, given their IT roots they Candesic (to which I belong) present and credible in every domain. benefit from the commoditisation of functions as a coherent firm of independent Its as if there were a consulting certain types of projects. They are entrepreneurial consultants. This model equivalent of single-issue politics; especially in demand when, for closely aligns with that of law increasingly, clients say they find in financial reasons, implementation is partnerships, where partners work niche consultancies the combination of not purchased from the initial supplier, together to develop a brand but are not only flexibility and costwhich happens to be a frequent case in also accountable for their own clients. effectiveness, but also expertise, that strategy consulting. The essential idea involves a full-time they believe is missing at the top firms. group of consultants working with partCompetition isnt just coming from The market and the economy are becoming more dynamic, and volatility is increasing. time, in situ experts to deliver rigour the fringes; it will keep coming from and expertise in one package. In major players in other domains. The This general situation has specific response to the main critique of fact that some of the Big Five audit implications for strategy consulting. strategy consulting that it stops where firms eventually withdrew from strategy Phenomena such as the dot-com boom

se th eir en Increa es and th teaching to

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implementation begins Candesic recognised that many corporations pairs consultants with field experts who face the same business problems and are currently employed in their made addressing these issues a niche practice, by offering informed generic industries (making sure that there is no recommendations to its subscribers. conflict of interest, of course). Together with member firms, CEBs It is interesting to note that this consultants first identify issues of parallels the knowledge management general interest in a given industry. practices of firms like Accenture, which Researchers develop and structure maintain their own networks of best practice analysis based on experts. It is also a lowfixed-cost intensive interviews and market business model that allows clients research, and list recommendations. access to consultants with international Further value is added by sending backgrounds who have already been consultants to train and coach trained at the top consultancies and executives in the client firms. are looking for a more entrepreneurial BBDO Consulting is the only strategic lifestyle or want to pursue a portfolio of management consultancy integrated within activities. In other words, Candesics a global marketing communications agency, model aims at allowing a boutique to Omnicom. Founded in 2000, it has compete for high-end consulting established its expertise in brand, talent, while promising its clients an segmentation and pricing strategies, alternative to traditional firms. with an approach that considers The Next Practice was founded in consumer behaviours and commercial 2004 by C.K. Prahalad, one of the most drivers equally, making famous management gurus. Their work recommendations in the context of starts from the assumption that the best marketing and sales execution talent for strategic innovation is to be requirements. Like others, BBDO has found within client firms. They act as retained the Bain lesson that strategy strategic and operational coaches, both without execution makes no sense. Its stretching and supporting client teams consultants also oversee as they seek answers on their own, implementation and provide rather than as classic consultants. This monitoring of its recommended co-creation of strategy starts within the strategies. Since its founding, the firm client company, but may also involve has grown to cover the UK, Germany, various other stakeholders. The Next Spain and Switzerland, in the process Practice professes that there is rarely need for a big consulting team; a few enablers are sufficient to drive the learning process in a very Socratic way. The promised advantage TURN ant DOWN for the client is redund people eople) e to mak ver fire p Hard rms ne knowing that it will (top fi to N diems UPTUR er per be able to fully to low to high ple Hard t levels due ep peo to ke marke ed cost base Hard r talent) it internalise the relevant comm tion of ly (war fo s quick mpensa levels r diem wer co e t issues and their raise p clients rd to lo ers to marke to Ha rtn Hard g standing non-pa to lon on of management. pensati e com rket level to rais a Hard artners to m The Corporate Executive non-p Board provides best practices research, decision support tools and executive education to 75% of the Fortune 500 companies.4 CEB
firms rategy Large st ard to adjust h find it ore rapidly m to the economy cycling

attracting more than a hundred employees from other firms. As figure 3 suggests, each of these models is based on the intensive exploitation of a single idea in a specific niche. Though my examples were created by or with McKinsey alumni, they do not have a monopoly on innovation in consulting. However, I do find that innovative models for offering strategic advice are nearly always shaped by former consultants from top firms. The working methodologies and rigour top consultants bring with them contribute both to expanding the market for strategic advice and to bringing it closer to the evolving needs of specific clients. The implication is that the traditional consultancies will remain important as players, as competitors and as sources of ideas. Yet my main point is that new consulting business models are a force that cant be ignored. I would argue that despite difficult economic conditions, we will see further change and variety in these models, not less. Quite simply, in an increasingly mature consulting industry, one size will never fit all again. IQ
1

See the 2004 biography McKinseys Marvin Bower, by E. H. Edersheim, Wiley EDITIONS. See Dangerous Company: Management Consultants and the Businesses They Save and Ruin by James O'Shea and Charles Madigan, Penguin Putnam, for more on the history of those firms. Zefer, a consultancy set up by a former McKinsey analyst in 1997, grew its staff to almost a thousand in two or three years, and disappeared less than a year later. Source: company website

About the author: Marc Kitten is a partner at Candesic in London and Paris, and a former senior consultant at McKinsey & Company. He attended the Young Managers Program in 1997 while at Deutsche Bank. He holds an MBA from Chicago GSB and graduated from Edhec. He is also an adjunct professor in strategy and finance at several MBA and MSc programs in Europe.

Figure 3

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