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Consulting firms need new business models as clients' needs change

Crossroads

A new report by consulting industry analysts Source Information Services (Source) says consulting firms may have to reinvent themselves as the needs of their clients change.

In New Business Models Source calls on consulting firms to adapt their structures to reflect changing needs from clients.

The report's findings and recommendations are based on a survey of more than 2,600 senior users and buyers of consulting services in 14 major consulting markets across North America, Europe, the Middle East and Asia Pacific.

The report explains how the pyramid structure of a consulting firm, modelled originally on the way law firms work, is now unsuited to a world in which large-scale transformation projects stretch across organisations, continents, and years. The pyramid organisational model relies on time related pricing mechanisms, which now sits uncomfortably with clients who think that it should be possible to fund consulting projects out of the savings made or the new revenue generated.

A COO from the US services sector told Source: "Our business model has changed in many ways over the last 20 years. The consulting business model has stayed the same: if the industry is going to keep pace with our needs, it needs to reinvent itself."

Fiona Czerniawska from Source commented: "Even where the fees seem reasonable, clients are querying the value added, particularly with regard to sustainable change: consultants come and go, but what do they leave behind? Do they support success or create dependency?"

Two sectors pulling consulting apart?

The report points out that what makes the challenge to the pyramid model all the more urgent is the split of consulting into two distinct markets: low cost consulting and high value consulting. And these markets are moving further and further apart. The larger of the two, low cost, is not growing and this is resulting in consultants looking to move into high value.

What's the solution?

Source highlights that the most immediate solutions for consulting firms are:

  • Focusing on the low-cost consulting market — Success here will depend on being able to do more of the same in every sense: codifying and standardising consulting processes, replacing them with software assets where possible, and exploiting cost differentials in the global labour force to keep prices low.
  • Focusing on the high-value consulting market — This is where every consulting firm aspires to be. This market is appealing economically as well as intellectually; it's clearly where clients' attention is, and it's growing fast, even if the size of the market is small by comparison to its low-cost counterpart.
  • Bridging the low-cost/high-value gap — Source expects the biggest firms with the potential to be the 'mega-firms' of the future, to be most interested in this method. They will decide that to focus exclusively in either the low-cost or high-value market offers them neither the growth they aspire to nor the reliability of revenue they need. These firms face the greatest business model challenge. While the low-cost and high-value firms need to hone their models to take advantage of two quite specific sets of critical success factors. The firms that choose to do both face the unenviable problem of trying to reconcile two fundamentally different models.

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