Five client-side trends that mid-sized consulting firms can’t ignore

March 2011

Acknowledgement

I would like to express my sincere gratitude and deep appreciation for all the experts, consultants and researchers from various LinkedIn communities, who have been kind enough to provide their valuable time and insight to validate or otherwise enrich the content of this white paper.

Thank you to all those who helped, online and offline, and almost crowdsourced this white paper: Lee Frederiksen, Ron Kennedy, Rick Carter, Tony Rice, Tony Tiernan, Chaitanya Sagar, Puneet Gangwani, Jane Lee, William Woloschuk, Todd Phillips, John Kowa, Mark Slotnik, Joseph Tempio, Andrew Kasumba, Bill Adkisson, Howard Dion, Margo Thomas, Al Paoli, John Burnham, among others.

Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore

ValueNotes White Paper By Pratibha Kurnool

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White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore

Table of Contents

1 CLIENT-SIDE TRENDS IMPACTING GROWTH ASPIRATIONS ........................................... 2

1.1 COMPENSATION STRUCTURES BEING ALIGNED WITH VALUE DELIVERED ...................................... 2

1.2 CHANGE MANAGEMENT WORRIES LINGER .................................................................................... 3

1.3 SPECIALIZATION INCREASINGLY VALUED MORE........................................................................... 3

1.4 CLIENTS NEED HELP TAPPING GROWTH MARKETS ........................................................................ 4

1.5 GROWING SMB/SME MARKET .................................................................................................... 4

2 PROFITABLE GROWTH STILL POSSIBLE; BUT CHALLENGES PERSIST ....................... 5

2.1 THREE WAYS TO PROFITABLE GROWTH ........................................................................................ 5

2.1.1 Collaboration.......................................................................................................................... 6

2.1.2 Downstream revenue generation (from research & management services) ........................... 6

2.1.3 Re-structuring cost models ..................................................................................................... 7

2.2 CHALLENGES IN ADDRESSING PROFITABILITY AND GROWTH IMPERATIVES .................................. 7

3 HOW EXTERNAL RESEARCH SUPPORT TEAMS CAN HELP .............................................. 8

The consulting industry is going through dramatic change, which will significantly alter the

consulting landscape, as we know it. These are evolutionary shifts as far as the consulting

industry is concerned, and a key indicator of things to come has been the increasing polarization

between the large, established consulting firms and smaller, independent, boutique firms. The big

firms are growing bigger in terms of overall market share and revenues, while the pool of

independent, specialist consultants is growing in sheer numbers. Needless to say, client side

imperatives have been the major drivers. We discuss below some of the key client-side trends,

which are impacting the global consulting industry today.

1 Client-side trends impacting growth aspirations

1.1 Compensation structures being aligned with value delivered

Pricing pressure is a pet peeve of consultants, and especially so during downturns. However, our

research suggests that the pressure is not so much on the fees per se, but rather on the value

attached to the fees. Clients are willing to pay, as long as they can see the value being delivered.

Very often, the consultants that face pricing pressures are those that are not able to establish the

value they deliver to customers. While measuring value delivered is an inexact science, it is worth

investing in innovative methods to measure and demonstrate this. Firms which invest in trying to

quantify the value will have a clear edge over others who, quite plainly approach the assignment

from an “effort” perspective. We believe that clients will want to move towards compensation

structures for that reflect outcomes, with fees linked to performance or returns rather than effort.

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A key implication is that consulting can no longer be an intellectual exercise, devoid of contextual

understanding. Consulting firms will have to align their own business models to bear some of the

risks, as well as share the rewards of the consulting exercise. Firms which are able to align their

value proposition accordingly will not only overcome pricing challenges better, but also

significantly improve their chances of not leaving any spare money on the table. To do this, it‟s

critical for firms to understand, articulate and objectively quantity, for each engagement, the

immediate as well as the additional value they will deliver to the client.

1.2 Change management worries linger

As has been oft-repeated, it‟s never the advice that fails, it‟s the execution. Most consulting

engagements result in some kind of organization change. Research suggests that the

subsequent change management is an area that most clients are skeptical about, as there is

invariably no one around to see it through. For instance drafting and implementing a customer

communication program may not be enough – overseeing the program till it completely integrates

into the corporate DNA is what clients value most.

Given the increased focus on results and outcomes, clients are increasingly demanding that their

consulting firms have a stake in the execution, either in full or in part. To continue with the earlier

illustration of the customer communication strategy, a firm capable of executing the customer

engagement program, either on a Build-Operate-Transfer (BOT) mode or as a management

service, will be able to deliver significantly higher value as compared to those that can‟t or won‟t.

1.3 Specialization increasingly valued more

In a world increasingly obsessed with specialization, “management consulting” or even „strategy

consulting” sounds a tad too generic. Clients value specialized knowledge, especially in sectors

and fields that call for a high level of technical knowledge or

industry experience. Pharmaceuticals, specialty chemicals,

healthcare, manufacturing, logistics, financial services are a few

examples of sectors where specialization is critical. Similarly,

specialization in terms of service orientation, such as Human

Resource Management, Supply Chain Management, Change

Management, IT/Technology, sales and account management,

brand management. etc., is also valued for the consultant‟s

experience and subject matter expertise.

Large firms (McKinsey, PricewaterhouseCoopers, Bain &Co) are

able build deep specialization catering to multiple industries

given their scale and size while smaller niche firms, by definition are already specialized.

However, mid-sized firms, especially those that try to or want to do add too many specialist

practices, will end up not being specialized in anything. The most significant challenge in adding

any kind of specialty discipline is in recruiting the right people. Real “specialists” either choose to

Specialization is necessary

Large firms can build deep

specialization catering to

multiple industries given their

scale and size while niche

firms, by definition are already

specialized. However, mid-

sized firms, especially those

that try to or want to do add too

many specialist practices, will

end up not being specialized in

anythingIndian and international

journals.

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join large consultancies with heavy pay packages or harbor ambitions of owning their own

boutique practices.

The value attached to specialization combined with the challenges of sustaining a discipline-

based organization structure can put mid-sized firms with limited specialist skills at a particular

disadvantage.

1.4 Clients need help tapping growth markets

That clients are seeking growth is a given, especially in an environment where growth is

extremely difficult to come by. The bulk of the growth opportunities are either in (untapped)

emerging areas or geographic markets. Consultants with appropriate breadth of operations

(either geographically or in high-growth sectors) and are able to guide their clients through

uncharted waters will be valued significantly higher than those who offer limited services (read:

restricted to traditional markets).

What this means for a consulting firm is that there are multiple consulting opportunities, which can

be exploited, if and only if, the firm is able to demonstrate the required capability. Helping clients

tap emerging / newer market opportunities goes beyond “advice”, and includes significantly

deeper insight with respect to evaluating such markets, assessing specific opportunities, scouting

for partners / collaborators, meeting them, negotiating and finally ensuring successful market

entry. This kind of end-to-end program management is what customers are seeking now and

unfortunately, it is also where most mid-level firms fail to deliver!

1.5 Growing SMB/SME market

The SMB/SME market and the mid-market or the middle market companies are among those

recording the highest rates of growth today. These companies

are also in real need of consulting, the most prominent areas

being IT/technology, CRM and sales. Historically, these smaller

companies have been the most neglected, by the large and

small consulting firms alike. However, larger firms are now

addressing the mid-market needs by providing standard

technology-and-process enabled consulting services, for a

fraction of the fees that they would have charged their larger

clients. Innovation in service delivery or commoditization by the

larger firms is helping them tap newer opportunities while

focusing on profitable growth.

Given their positioning and size, small and mid-sized firms are

best-positioned to address the more bespoke needs of this

growing market A key differentiator will be innovative pricing

mechanisms, which can effectively address the price-value conundrum that clients face in their

decision-making process while hiring consultants. The target client base has limited resources for

The SME/SMB market is

attractive

A key differentiator will be

innovative pricing mechanisms,

which can effectively address

the price-value conundrum that

clients face in their decision-

making process while hiring

consultants. The target client

base has limited resources for

funding such assignments and

consulting firms will therefore,

need to have aligned cost

structures to meet demand,

without compromising on value

delivered..

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funding such assignments and consulting firms will therefore, need to have aligned cost

structures to meet demand, without compromising on value delivered.

2 Profitable growth still possible; but challenges persist

The combined impact of the trends on the small to mid-sized consulting firms is the mounting

challenge to compete in an era of shrinking client budgets and increasing client expectations

2.1 Three ways to profitable growth

If all the challenges faced by small and mid-sized consulting firms face today had to be summed

up in two words it would be “profitable growth”. A deeper analysis of this two-word expression

would throw up two unique challenges – Growth and Profitability.

Figure 1: Sample List of Consultants’ Networks

Growth at the cost of profitability is neither

sustainable nor scalable. Big consulting firms

are getting the biggest and the best contracts,

because they have the branding, the scale

and the resources to compete at every level.

The smaller deals are at threat from smaller

consulting firms, who are using low-overheads

driven cost advantage to compete on price.

Commoditization of the consulting market in

the SMB/SME segment, as discussed in

Section 1.5, is taking away a key customer

segment from the smaller firms. The challenge

will be to prove and deliver the value proposed

to the client, in the midst of increasing

competition from the larger, established firms

and pricing pressure from the independent

consultancies.

So, how can the mid-level firms grow

profitably? There are three ways small to mid-

sized consulting firms can build a strong

competitive edge which we believe will initially

lay the groundwork and subsequently act as

the lever to drive future business.

General Management / Strategy Networks

Association of Management Consulting Firms

Management Consultancies Association (MCA)

The International Guild of Professional Consultants

Consulting Network

Independent Consultants Network (ICON)

Business Consultancy Network (BCN)

Practice Specific Networks

Association of International Tax Consultants

The Association of Due Diligence Professionals

Independent Computer Consultants Association

Qualitative Research Consultants Association (QRCA)

Vertical Specific Networks

American Association of Healthcare Consultants

The European Chemical Marketing and Strategy

Association (ECMSA)

Automotive Consultant Association

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2.1.1 Collaboration

Trends in the consulting industry indicate a growing need for collective collaboration among

consulting firms. Collaboration will enable firms to unlock opportunities otherwise beyond their

reach. For instance, for management consulting firms, vertical specialization is easier said than

added - specialists come at a cost, if at all they can be added that fast. So how can a firm

convince a bank about being the best positioned to carry out the channel engagement strategy

when it does not have a banking expert on its rolls? A bank‟s challenges are unique and the

bank needs an expert who understands banking, in and out. The value proposition goes up

several notches if the consulting team were to include a channel management expert along with a

banking consultant.

Therefore, collaborating with or consciously cultivating strategic alliances with other boutique

consultants or specialist research firms will enable small consultants to compete with larger firms

and be of real value to their clients.

Joining a network of consultants for sharing ideas and best practices and collaborating for

supplementary or complementary expertise can significantly increase business visibility, and

consequently increase growth opportunities (see Figure 2 for sample list of networks)

2.1.2 Downstream revenue generation (from research & management services)

Research and consulting may sound synonymous to many, but there are plenty of consultants out

there who consider research as a step down the ladder. A closer look at the largest consulting

firms today reveal that all of them spice up their consulting with rock solid research. These

research outfits are typically low key, but provide these firms with a distinct value proposition

which helps bag the big consulting deals.

There are many other opportunities downstream, such as, say,

the complete execution of the proposed customer communication

strategy. The consulting firm is possibly the best equipped to

align the execution with the advice, meaning it generates the

content for the communication (white papers, case studies, web

content, and newsletters), manages the communication and

takes complete charge of customer engagement so that the

client sees immediate benefits from the consulting activity.

In fact, at many of the largest firms, downstream revenue from research and management

services hogs a significantly higher proportion of the revenue as compared to core consulting

revenues! While research is a core input to consulting, revenue per consultant is typically lower

for the research component, and absorbs valuable bandwidth.

Downstream revenue from

research

At many of the largest firms,

downstream revenue from

research and management

services hogs a significantly

higher proportion of the revenue

as compared to core consulting

revenues.

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2.1.3 Re-structuring cost models

The way to profitability, especially on the bigger contracts, is to break it down into a WBS (work

breakdown structure) system, where 80% or more of the tasks are performed by the most junior

employees. Re-structuring WBS systems not only results in higher profitability, but also helps

firms maximize the most critical metric – revenue per consultant. A typical break-up of

consultants‟ timesheets at smaller, mid-level firms reveal more than 75% of time being spent on

smaller or lower value-added tasks requiring lower competency levels.

To illustrate, if the consulting engagement is to reduce wastage during packing at a

manufacturing facility, the first step will be to benchmark industry averages for packing wastage.

This would involve a set of tasks such as conducting advanced internet searches to find

companies with a similar manufacturing profile, listing down their products and researching their

packing practices and metrics, possibly using extensive primary research. It may be argued that

none of these are core consultant jobs, and can be performed by good market research people. It

is vital for firms to realize that they need to free their primary revenue drivers from jobs requiring

different skills and put in place a cost/business model which ensures each consultant operates at

their highest level of competency.

2.2 Challenges in addressing profitability and growth imperatives

A key concern that consultants from small and mid-sized firms voice often is the inability to

balance project deliveries with business development. Ensuring

a healthy pipeline of future projects, for atleast the coming 4-6

months, is challenging, given the delvery pressures of current

consulting assignments as well as limited business development

bandwidth.

And there remains the question of who will free up the

consultant‟s time? If the consultant has to review 10 competitor

profiles before meeting a client, she (or he) often has to start

with making them herself (or himself). This includes searching

for information on the Internet, looking through annual reports,

financial statements, business press and finally synthesizing all

the information into a format which that can be reviewed and

analyzed. Invariably, there is inadequate junior staff that can take the load off the mundane

searching and synthesizing. Further, even the junior consultants‟ time is also very valuable; and

activities such as these directly eat into their billable time.

Balancing Project Delivery

and Business Development

A key concern that consultants

from small and mid-sized firms

voice often is the inability to

balance project deliveries with

business development.

Ensuring a healthy pipeline of

future projects is challenging,

given the delvery pressures of

current consulting assignments

as well as limited business

development bandwidth.

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Let‟s quickly take a look at how chasing growth might drag profits down in the short term.

Figure 2: Challenges in addressing growth imperatives

Therefore, the problem is not so much that firms are not aware of the various growth

opportunities or of the multiple avenues through which they can grow. The challenge they face in

growing, is in growing profitably, and through means that do not diminish brand value.

3 How external research support teams can help

The biggest consulting firms today have “captives” or back-

office arrangements where most of their non-core jobs are

performed. These back-offices form a vital component of the

firms‟ operational strategies and are critical in ensuring the

consulting business grows profitably. The operational model at

these captives is built around serving the needs of the core

consulting outfit. Some of the biggest back-offices have their

research support teams organized as per verticals, thereby

ensuring vertical expertise down the line. Analysts at these

back offices are trained to provide ad-hoc research support so

that consultant time on lower value-add tasks is reduced,

increasing revenue generating capacity across the

organization. These back research captives are typically

located in countries where talent availability is high and costs are low. India, Sri Lanka and

Philippines are among the most favored locations for setting up research support offices.

Research support teams

Consulting firms in the US, UK,

many parts of continental

Europe and Australia are

increasingly outsourcing their

research and other allied

activity to research firms who

specialize in providing research

support to consulting firms. The

costs of outsourcing are

negligible while the RoI on the

outsourced activity is

immediate.

Challenges to growth

Bother of additional human resource or workforce management

Firms need to recruit people with additional skill sets, they need to find office space for them, they need to align HR

policies to include them - and before the firm knows it, it is spending more time managing people than working on

client strategy

Inability to manage disparate skill set requirements for each engagement

Skills required to execute one assignment may not be the same as the next one. Assignment-based freelance

recruitments are often too expensive. Most firms take the easy way out and stick to what they do best and leave the

rest to someone else

Challenges of managing spikes in business volumes

The variability in assignments can be very high, that managing spikes is a big issue. One consultant idle for 15 days

will dramatically eat into profits

Fear of losing control

If hiring is not an option, using freelancers doesn‟t work too well either. There is always the danger that the knowledge

and the experience is resting with the freelancer, who may not be available for the next assignment.

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Figure 3: Research Support for Profitable Growth

Setting up a research support office is not an option for many of the smaller and/or mid-level

consulting firms. It requires significant capital investment to start with and a threshold minimum

level of activity which can be immediately sent offshore. The captive model has its own problems,

and the high start-up and fixed costs mean that even large consulting firms are using third-party

vendors.

Consulting firms in the US,

UK, many parts of continental

Europe and Australia are

increasingly outsourcing their

research and other allied

activity to specialists that

provide research support to

consulting firms. The costs of

outsourcing are negligible

while the RoI on the

outsourced activity is

immediate. Further, unlike

captive firms, outsourcing to

experienced research

agencies provides firms with

the flexibility to scale up or

scale down support teams at

very short notice. So there is

no “fixed cost” involved and all

costs are directly proportional

to revenue generated (or,

variable costs). The best research agencies are able to provide a wide suite of services across

multiple horizontals. Consulting firms can leverage their vendor‟s vertical experience and

geographic bandwidth to not only strengthen their value proposition to end clients, but also

increase customer satisfaction and delight. The lower costs of research provide teeth to

proposals by ensuring competitive pricing. The cost arbitrage provides ample opportunity to

increase margins.

Some of the most important and immediate benefits that offshore research support teams can

provide consulting firms are highlighted below.

1. Provide the needed flexibility to manage spikes in business volumes. Support teams

can be scaled up or down depending on business demand.

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2. Enable access to specialist analysts and horizontal/vertical expertise. In most

research support contracts, consulting firms can leverage the research firm‟s expertise and

choose specialist analysts.

3. Provide back-end support needed to go from implementation to advice. For on-going

client engagements, the support team can be trained to take on all the “regular” tasks, while

the consultant can focus on the implementation aspects.

4. Provide access to research expertise. A well-rounded research firm will be able to

provide specialist research expertise, quantitative, qualitative, survey-based, data analysis,

presentation support, company profiling, industry profiling and other research all of which is

typically valued by consultants for providing top-quality consulting services.

5. Improve TAT. The research teams provide another pair of eyes and hands, and most often

are located in a different time zone as well. This leads to a 24/7 working environment,

leading to faster project completion. More significantly, firms can improve value proposition

upfront by promising faster turnaround to clients

6. Improve conversion of proposals made to clients. The support team can help prepare

the proposal, freeing consultant‟s time to think through and define the value being proposed

to the client. The research team can also help in marketing related activity, including

generating leads, developing marketing communication for the consulting business, ghost-

writing blogs, producing case studies, white papers, knowledge maps and such other

collaterals to support business development activity.

7. Improve profitability. The difference between the price billed to the client and the cost

incurred on the research team can be significant. Offshore research teams therefore,

provide the crucial cost arbitrage advantage for increasing profitability on every

engagement.

8. Provide access to and presence in emerging markets. Typical research teams tend to

be located in emerging markets. These are invariably the very same markets that clients

are seeking growth from and firms with presence (albeit through their research support

teams) in these markets can enable successful market entry for their clients.

Consulting firms seeking profitable growth must consider adding offshore support teams. Building

a research support team or even entering into contract with a research firm for ad-hoc research

support will significantly enable firms to work the client-side trends to their advantage

We believe that these client-side and environmental pressures are not going to go away soon,

and consulting firms choosing to ignore them are running the risk of stagnation or worse. Firms

need to consider these trends and evaluate them for the impact on their business while

strategizing for growth.

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About the Author Pratibha Kurnool is a solutions consultant at ValueNotes. She has over seven years‟ experience engaging

with global corporates, research agencies, publishers and consulting firms. At ValueNotes, she has

managed teams providing business and investment research support to premier clientele, including some of

the world‟s largest companies, asset managers, wealth managers and management consultants. She

designs customized research solutions for clients, to address specific business challenges. She has

authored three major reports on Accounts Payable, Accounts Receivable and Tax Returns Offshoring. She

has also conceptualized and designed the first-ever Investment Confidence Index in India (the J.P.Morgan

Investment Management – ValueNotes Investment Confidence Index).

Pratibha is a Chartered Accountant from the Institute of Chartered Accountants of India.

About ValueNotes ValueNotes is an India-based provider of business research and intelligence. Over the past ten years,

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How ValueNotes has helped other global Consulting and Market Research firms

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