As a career consultant, I have heard many counseling jokes. How about advisors like Evergreen who are taking your watch to tell you the time. Nevertheless, the management consulting industry has been growing at a compound annual growth rate (CAGR) of 15-20% over the past decade. Whether multinationals, domestic conglomerates, funded startups or governments, clients are willing to pay consultants to solve their most pressing challenges. While there are many subtle socio-economic reasons for this, a major one is the genius of counseling hoarders. Across geography and time, consulting is one of the coveted choices for the best graduates of professional (and increasingly, humanities) schools.
This concentration of talent ensures that consultants continue to find ways to remain relevant to clients. Two important trends illustrate this point:
First, as mentioned in my earlier column, management consulting firms are increasingly building deeptech capabilities, with the integration of strategy and technology. Accenture is a technology firm with consulting capabilities. McKinsey is calling itself a technology firm and others are following. Tech firms are scrambling to respond by partnering with or buying out consulting firms.
Second, commercial models are becoming increasingly tied to results. To be clear on models: Traditionally, consultants work for a fixed fee. In an output-based model, payment is tied to the production of an artifact (e.g., board-approved strategy, organization design, etc.). In the results-based model, consultants are paid only when the client achieves the desired outcome, for example, increased revenue or profit, successful integration of acquisitions, improved inventory levels, target customer acquisition, etc.
In the outcome-based model, the risk is shared between the client and the advisors. If the client is successful, the advisors charge a disproportionate amount of fees. Otherwise, the fees are little or none. While this sounds reasonable, a major challenge with this model is attribution: how much success is due to the advisor versus the client’s own team. The following examples show that clients are willing to embed consultants in their internal teams and ignore attribution:
A leading Indian IT services firm has integrated a global consulting firm into its strategic accounting team. Advisors have unfettered access to a client’s top hundred clients. The advisor is paid a share of any growth he has achieved by cultivating these clients. An equally large consulting firm has its teams in construction clients’ project sites to implement cost-control measures. The advisor gets paid out of the savings given. An Indian healthcare firm has hired a global consulting firm to line up clients for its European expansion. The consultant will be paid a share of European revenue for the next three years. A leading domestic firm insists that customers pay a portion of the savings as fees through operational improvement projects. Similar examples abound and are growing. We estimate that by 2025, one-third of consulting contracts in India will have some form of outcome engagement.
What is the effect of this evolution? One obvious positive is that advisors are now paid based on what they provide, not just on recommendation. If consultants are paid for the client from their earnings (or savings), a wider range of clients will be willing to hire consultants and help the industry grow. Similarly, clients who are unable (or unwilling) to pay large fees can now benefit from counseling services.
However, is it all good?
As the examples above show, clients are “outsourcing their core competence” to consultants. Will this affect their long-term competitiveness, or as some pundits are arguing, the concept of core competence itself is obsolete (instead, required capacity can be sourced) from a firm’s “network” and in-house. Doesn’t need to be held.) If consultants deliver the most important results, why should firms attract, train and retain in-house talent? This is particularly challenging for middle managers, as they have roles in place of advisors. Consultants work among clients and know their competitive differences. In these models, it is likely that one advisor is advising one client against another—is this ethical? And lastly, will it be client versus client rather than one consulting firm competing against another? Answers will appear. But it sure is- as talent hoarders, consultants will find a way to stay relevant and make money. The impact on customers and their people may not be entirely positive.
Abhishek Mukherjee is the co-founder and director of Octus Advisors.