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Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business ...
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  • 1. Disaggregation of the Value Chain: Emergence of New Business Models in Strategy Consulting Key words: Value chain disaggregation; strategy consulting; new business models Authors: Dr. Sascha L. Schmidt Lecturer European Business School, Oestrich Winkel/ University of St. Gallen Dufourstrasse 48 CH-9000 St. Gallen Tel: +41 76 377 8322 Fax: +41 71 224 2355 sascha.schmidt@unisg.ch Dr. Patrick Vogt Executive Advisor and Lecturer Media and Communications Management Institute University of St. Gallen Blumenbergplatz 9 CH-9000 St. Gallen Tel: +41 79 666 9547 Fax: +41 86 079 666 9547 patrick.vogt@unisg.ch About the authors: Both authors worked several years as engagement managers for a leading strategy consulting firm. At the moment they are writing their professor thesis (“Habilitation”) at the European Business School in Oestrich Winkel (Schmidt) and the University of St. Gallen (Vogt). They lecture MBA and executive courses at various business schools (e.g., Berlin, Lugano, Oestrich Winkel, St. Gallen, Zurich). 1
  • 2. Abstract The paper explores the predominant driving-forces shaping the strategy consulting industry. Clients have become more demanding and their skill gaps in relation to strategy consultants are narrowing. The instant availability of global information has precipitated an erosion of the competitive advantage of integrated players running internal research and knowledge building capacities. As a result, the strategy consulting value chain disaggregates, new business models emerge, and focused players enter the field. Based on the discussed changes within the strategy consulting industry the paper identifies and describes four promising business models and their respective strengths, weaknesses, and key assumptions for their sustainability. Two mini cases examplifies how small players can benefit from the disaggregation of the value chain. Industry drivers shaping strategy consulting The consulting industry can look at an impressive growth in the last decade. Between mid of the 1990ies to the year 2000 the size of the global consulting market has more than doubled to more than USD 110 billion in total revenues (Kennedy Information 2001: 35). Solely in Europe the number of management consultants has tripled at the same time (FEACO 2002: 8). However, since the burst of the Internet bubble at the begin of the century everything might have changed. Industry growth has stalled to become outright negative and especially incumbent consulting firms begin feeling it (Niewiem & Richter, 2004). In the context of this paper, we focus on strategy consulting firms such as McKinsey, Boston Consulting Group, Bain, Marakon, Monitor, Roland Berger etc. as well as 2
  • 3. strategic services arms of large consulting or accounting firms such as Accenture, Bearing Point, Gemini or IBM. These firms were established or grew large during the "second wave" of the development of the consulting industry, or were formed later yet followed essentially the main features of those classical second wave firms (Armbruester & Kipping 2001; Kipping 1996, 2002; Wilkinson 1995). The emergence of second wave consulting firms can be dated back to the 1950s when the rise in demand for a broader range of management consulting services beyond efficiency-enhancing concepts occurred (Dickmann, Graubner, Richter, 2004: 3). Traditionally, strategy consulting has been characterized by high profitability, high growth rates and rather limited competition (Payne 1987; Payne & Lumsden 1987; Ruef 2002). But the good old days are numbered. The strategy consulting value chain disaggregates. Overall, four major drivers can be identified behind this development. Firstly, the emergence of the Internet has led to unlimited access to data sources across the globe. The physical proximity to research institutes, investment banks etc. and the global network of research units becomes less of an advantage. Large integrated strategy consultancies previously enjoyed competitive advantages due to their internal research and knowledge building capacities. They have consolidated commodity services (e.g., data gathering and analysis) with high value-added activities (e.g., problem solving, option generation) to offer bundled strategy development services. Today, off-shoring of research services (e.g., data gathering and analysis) to countries with well-educated specialists and lower price tags, has become an increasingly popular trend. It significantly reduces entry barriers for new players. Really compelling offshoring gains come from 3
  • 4. "pairing savings with top-flight skills" (Hagel, 2004: 23). The most popular offshore location is India, combining high quality people with low costs (Agrawal, Farrel 2003; Agrawal et al. 2003). Secondly, skill gaps between strategy consultants and their clients are narrowing. There are several origins to this development. Recent corporate failures such as Vivendi, Swissair, Enron or Tyco have provoked lively debates about the effectiveness and reliability of strategy consultants in general. Even leading strategy consulting firms such as McKinsey are facing increased public criticism. The consulting myth is on the decline and large strategy consulting firms need to strengthen their recruiting efforts to remain successful in the "war for talent" (Axelrod et al. 2001; Dickmann, Graubner, Richter, 2004; Landriscina, 2002). Graduates increasingly consider more assured careers in international multi-business firms, thereby avoiding formal ‘up-or-out’ or ‘grow-or-go’ policies (Bower, 1979). Accordingly, large multinationals –the target clients for most of the leading strategy consultants– are better poised to attract high-calibre candidates from a variety of academic subjects and experience backgrounds for e.g., corporate staff or internal consulting positions. In addition, former strategy consultants are becoming more readily available in the labour market, due to recent capacity reduction by firms. Thirdly, clients are becoming more demanding on multiple levels (Rose, 2002). They have evolved into smarter buyers of consulting services. Improved knowledge gained from prior strategy engagements and recruitment of former strategy consultants, has increased their ability to assess the performance of strategy consultants. Clients are now 4
  • 5. placing more emphasis on clear end products, and measurable results. Anticipated standards of quality, in relation to performance, are escalating. Consulting engagements have also become more transaction focused and shorter in duration. In addition, clients request more senior advisors or specialists instead of entire project teams with a number of juniors. These developments put particular pressure on strategy consulting firms that traditionally offered fully integrated strategy solutions to clients. Finally, competition is on the increase in the area of strategy consulting. This competition has been accelerated due to increased price sensitivity. Nowadays, strategic consulting services face declining growth rates and increased competition. Prices are getting under pressure and some players already started to provide extra services free-of-charge or to expand the scope of their projects while maintaining the budgets in order to retain clients. Additionally, a host of small specialized players have entered the market and offer their services often at less than half of what the big consulting firms charge (Niewiem & Richter, 2004). This is compounded by the entry of competitors from adjacent industries (e.g., IT integrators) and an increased concentration of consulting units separated from audit firms. They primarily offer scalable strategy implementation services below average industry prices charged by incumbent strategy consultants. In addition, alternative pricing models are becoming the prevalent trend, putting pressure on strategy consulting firms that charge solely fees-for-service. For instance, Bain is offering performance-based fees or equity stakes as an alternative to fees-for-service. 5
  • 6. Disaggregation of the value chain Overall, the described trends lead to an increased competitive environment where integrated players get under pressure from newcomers that focus on certain parts of strategy consulting. As a result, the industry value chain disaggregates. Latter can be broken down into four generic components: (1) Knowledge building; (2) Project set up; (3) Strategy development; (4) Strategy implementation (see figure 1). Knowledge building already starts in the proposal stage of a client engagement. It encompasses data collection and synthesis, as well as analytical services. Information specialists represent a kind of ‘corporate intelligence’ for consultants. They gather data from predominantly public sources such as analyst reports, annual reports, financial statements etc. and synthesize these into company profiles, competitor assessments or industry fact packs (e.g., on competitive landscape, customer segmentation, product offerings, channels, technologies). Analytical services are higher value-added activities conducted by econometrists or statisticians in order to support consultants in their client work. They consist of standard analyses (e.g., forecasting, modelling and financial analysis, statistical analysis, database content creation and management), empirical research services (e.g., primary research surveys of industry participants and experts, consumer interviews) and development of standard tools and methods (e.g., EVA, real options). While available public sources are screened by information specialists, confidential client information is primarily collected by consultants over the duration of a strategy study and used to solve the particular client problem. However, findings from previous projects are 6
  • 7. sanitized and shared within the strategy consulting firms. Project experience (non- codified knowledge) is transferred through personal interaction. Impersonal knowledge gets codified in project-reports and is usually shared through a centrally managed database. Project setup encompasses work scoping and planning including problem definition, identification of internal and external resource requirements, milestone planning and contract negotiation. Teams of consultants are staffed or individual specialists engaged in accordance with the relevant project requirements. In addition, clear project goals, key success factors and performance measures are determined upfront in order to allow for the effective monitoring of the project’s success at a later stage. Increasingly so called ‘beauty contests’ are conducted where a number of strategy consulting firms present alternative project proposals. The preparation of a ‘beauty contest’ requires certain upfront investments from attending strategy consultancies who are sometimes running the risk of clients enjoying unpaid ‘knowledge shopping’. Strategy development refers to the actual consulting work at the client site. Most of the strategy consulting firm’s structure their strategy development process along dimensions such as issue identification, structuring and analysis, analytical problem solving, strategic option generation, option assessment and creation of implementation blueprint. Given that strategy development requires in-depth industry knowledge, analytical and creative capabilities, as well as sound business judgement and project management skills, it is the not only the most difficult module, but also forms the greatest value-added component of 7
  • 8. strategy consulting. Large integrated strategy consultancies claim to have a core competence in strategy development. However, more and more highly specialized boutique firms or independent professionals are concentrating on this part of the value chain. Figure 1: Components of the strategy consulting value chain Knowledge Project Strategy Strategy building set up development implementation • Data gathering • Project scoping • Issue structuring, • Development of and synthesis and planning issue analysis implementation • Analytical • Resource • Analytical masterplan services requirement problem solving • Definition of (financial definition • Strategic option implementation models, primary • Consultant generation initiatives research) selection and • Option assessment • Set up of project office • Knowledge matching and priorization • Continuous guidance sharing and • Contract • Creation of and quality control distribution negotiation implementation • Performance blueprint measurement Strategy implementation encompasses the execution of the proposed strategy. This phase is often divorced from strategy development. First of all, a portfolio of implementation initiatives is defined according to a detailed implementation master plan. Continuous project guidance and quality control is ensured through the establishment of a dedicated project office. Strategy implementation projects have clearly defined performance targets (e.g., synergy realization across business units) and can be standardized to a certain degree. Given that strategy implementation projects have a longer duration and need more operational and less conceptual excellence, less costly specialized firms are often 8
  • 9. engaged instead of strategy consultants. Often, strategy implementation impacts IT systems so dramatically that IT integration specialists like Accenture or PWC are hired. Concentration amongst audit firms has led to an increase of competition in this already highly competitive market for strategy implementation /systems integration. Major players attempt to expand their service offering to the field of strategy development (backward integration) in order to ensure that their core business, implementation services, can be successfully sold on the consulting market. The different components of the strategy consulting value chain are, of course, not mutually exclusive but are rather interlinked. For instance, large integrated strategy consulting firms traditionally operate knowledge building and client services (project setup, strategy development) under one umbrella. Given that they require different skill- sets, incentives, career-tracks etc. knowledge building and client services are organizationally separated into consulting teams that work primarily at the client site and research and information departments in the back office. However, vis-à-vis the client knowledge building and consulting services are consolidated and priced as one service. The impact of their independent value creation is therefore indistinguishable to the client. Four promising business models According to the disaggregation of the strategy consulting value chain, new players are entering the market with promising business models. However, established players will remain a strong position. Rather second to third tier strategy consultancies will get under much more pressure. Considering recent industry changes and new demands, there are 9
  • 10. four promising business models in the future of strategy consulting. These include integrated strategy consultancies, strategy implementers, knowledge builders, and focused networkers. Traditional integrated strategy consultancies, largely the incumbent strategy consulting companies such as Bain, Boston Consulting Group, Roland Berger or McKinsey, will remain a promising business model in the future. Despite value chain disaggregation, they still control the client-interface in a still intransparent market, which is key to success. As long as integrated strategy consultancies build their advice on superior insight/foresight and tailor it to clients’ needs their competitive edge remains in tact. However, besides keeping long-standing relationships alive integrated strategy consultants need to identify ways to build lasting relationships with new clients that can withstand periods of low demands for project work. The quality of the services provided is dependent on the ability to attract the best talent. Furthermore, the ability to share and leverage knowledge across different projects is crucial requiring an optimal internal exchange between industry, functional and geographical experts and client project teams. While data collection, synthesis and analytical services are being commoditized large integrated players still benefit from their project track record and their ability to share and exploit codified and non-codified knowledge. But in order to keep relatively high margins alive they also need to control costs especially in the knowledge building and strategy implementation process, through efficient internal service offering or outsourcing/off-shoring or partnering. According to more demanding clients integrated strategy consultancies feel impelled to hire 10
  • 11. experienced consultants. However, their revenue model is based on a pyramid distribution of senior to junior consultants. If less junior people can be hired and placed on client teams the traditional revenue model might need to be adjusted. Large strategy implementers such as Accenture, Braxton or Bearing Point will keep their stake in the market for strategy consulting as well. Some major players have already started to team up with software companies to offer a seamless integration of IT solutions that accompany strategy changes (e.g., Accenture and SAP). Their key success factors lie mainly in their ability to manage complex integration projects and their cost-efficiency given that implementation services are standardized, scalable and its performance can easily be benchmarked. In order to acquire integration projects, strategy implementers have endeavoured to build up internal strategic services groups that offer strategy development with mixed success (see e.g., Accentures Strategic Services Group) or made backward acquisitions (e.g., IBM acquired PWC Consulting). One of the major challenges for strategy implementers could become internal consulting departments that often take over implementation tasks and therefore substitute external service providers. Many large companies such as Shell, Siemens, Credit Suisse are more and more using their in-house consultancies for IT and implementation related projects. Other inhouse- consulting arms of multinationals (e.g., Volkswagen, Porsche) go even further and offer strategy implementation services externally. Knowledge builders are newcomers such as Pipal or Evalueserve offer their services to basically all players in the strategy consulting industry, but also to related businesses such 11
  • 12. as, investment banks or research institutes attached to universities or non-profit organizations. The service offering ranges from basic data collection and market research to fully-fledged analytical services. Key success factors are speed, the quality of analysis at reasonable costs and the management of relationships to consultancies. One of the successful new knowledge builders is Evalueserve, headquartered in New Delhi, India. Evalueserve provides a multi-lingual research team comprised of experienced professionals with advanced degrees in business and technology. The team is complemented by a group of client executives, providing local sales and project management support. Via telephone, internet, email, and instant messaging, Evalueserve provides immediate assistance to incumbent strategy consulting firms, consultant networks or independent professionals around the globe. Finally networkers benefit from the unbundling of strategy consulting services. They focus on particular parts of the value chain and cover additional services with network partners. For instance networkers focus on project setup services as entry points into the strategy consulting industry and outsource consulting project work to network partners. They often recommend single specialists that work with internal project teams at the client site. Key success factors for networkers are the ability to positively impact on the success of consulting projects through a comprehensive project set-up and the availability of highly specialized network partners. 12
  • 13. Case examples of emerging "networkers" The first good example for a new networker benefiting from the disaggregation of the consulting value chain is Cardea, a meta-consultant. Founded in 1999 and based in Zurich, Switzerland, Cardea is dedicated to improve sourcing and management of external consultants for its clients. Its core services cover three stages of consulting engagements. (1) In the set-up phase, Cardea supports the client to define the problem to be solved and discusses alternative project and procurement strategies. Based on that Cardea assesses the needs and requirements for external experts to solve the particular client problem. (2) In the selection phase, Cardea identifies, evaluates and selects external consultants fulfilling specific project requirements. It uses standardized tools and procedures to assess bids and offer support in negotiating contractual agreements with external consultants. (3) In the project phase, Cardea helps its clients to manage and monitor consultants effectively so that projects pay off at the end. Cadea's value creation focus lies in the selection phase. Based on its proprietory database with carefully assessed consultancies and tailored market research Cardea provides a longlist of potential consultants to the client within a a couple of days. After that, using reference checks, personal interviews and specific assessment methods to determine a possible match between the consultancy and the client, Cardea compiles a shortlist in about one week. The shortlisted consultancies are then invited for 'beauty contests', availability is checked, approaches defined, fees agreed and so on. Cardea’s value proposition is to work as independent meta-consultant selecting the best available advisor to solve a particular client problem. A pool of 700 professional service providers, some 350 pre-assessed and monitored, facilitates accessibility to specialists that might fulfil 13
  • 14. individual project requirements. Since its foundation in 1999 Cardea supported more than 250 projects, mainly in the area of strategy, for about 40 of large and medium sized Swiss and German corporations such as UBS, CS, ABB, Allianz and Munich Re. Cardea identifies and recommends the best suited consulting firm to its clients but acts only as intermediary. The contract is finally agreed between the consulting client and the consultancy. Cardea earns a certain percentage of the project fees. Similar to independent financial advisors Cardea gains a kick-back independent of whom is going to get the project, in order to act at the client's best interest. With its network business model, Cardea clearly benefits from the increasingly fragmented and hence intransparent consulting market. It further benefits from the inability of large consulting clients to set up clear strategies to procure consultants, to internally coordinate engagements of external consultants and to systematically assess and track the performance of consulting suppliers. A second illustrative case for a new networker is a-connect, another Zurich-based consultancy founded in 2002. a-connect focuses its business on the client relationship and outsources as many tasks as possible. Doing so, a-connects negotiates and guides consulting projects in a way similar to leading strategy consultancies. A principal or vice- president is owning the client relationship and serves as primary contact for the client. Day-to-day project work is done by one or several of some 120 independent professionals, who are pre-selected and managed by a-connect. Research, chart production and administration are outsourced to partners in India, South Africa and US. For instance, access to specialist know-how, analytical services and research tools is 14
  • 15. provided through knowledge builders such as Evalueserve (see above). a-connect's value proposition is to help its clients define skills, expertise and time requirements for a particular strategy consulting project and provides the selection, matching and placement of independent professionals. Its particular value is first to provide a better match between client needs and consulting skills than a traditional strategy consultancy. One of a-connect's competitive advantages lies in its pool of ca 100 pre-assessed independent consultants who have consulting as well as line management experience. Secondly, a- connect is more flexible than a traditional consultancy as the risk of under-utilization is outsourced to independent professionals. The latter are, as a prerequisite, financially not dependent on a-connect and therefore willing and able to take this risk. Thirdly, due to its particular set up and its non-pyramid structure, a-connect is adequate to provide individual specialists rather than full project teams. Given the above mentioned trend that large corporations insource some consulting projects, they sometimes need only a consultant with specialized knowledge who works with the internal team. Contrary to Cardea, a-connect acts not as intermediary, but subcontracts network partners, facilitates project management and assures quality control throughout the entire consulting project. This includes contract negotiation and the handling of fee payments, expense accounting, and insurance and tax issues. Interestingly though that a-connect, on the one hand, competes with traditional strategy consulting companies such as McKinsey, BCG and Bain on a project level. On the other hand, the business model relies exactly on these types of consultancies on the talent level. a-connects core base is its pool of independent professionals, who are able to deliver McKinsey- and BCG-like quality. 15
  • 16. The networkers' business model has the obvious adavntage of being very flexible. Given that they do not need to employ their network partners they take fewer risks than traditional consulting firms. On the flipside, they are are to a certain degree dependent on the quality of services provided by their network partners as well as their availablilty. At the moment, talent is still available in the consulting market given that communities of independent professionals are emerging supported by electronic market places being built. Interestingly though, the functioning of the networkers’ business model is dependent on its fiercest competitors, namely large integrated strategy consultancies. The talent pool of independent professionals, even though outsouring is part of the backbone of networkers, can only be maintained as long as large integrated strategy consulting firms hire, train and finally dismiss more talent than they need to retain for desired growth. In order to attract high-quality network partners networkers face increasing competition and need to think about ways how to serve and retain their partners best. Another challenge might come from internal consulting departments who try to insource project set up and consultant selection services. So far, networkers' market share is still rather small. But it will be exiting to see how established players react if the networkers maintain their growth rates and further advance into their home turf. 16
  • 17. References Agrawal, V., Farrel, D. & Remes, J. (2003): Offshoring and beyond. The McKinsey Quarterly Special Edition: Global directions: pp. 25-35 Agrawal, V., Farrel, D. (2003): Who wins in offshoring? The McKinsey Quarterly Special Edition: Global directions: pp. 37-41. Armbruester, T. & Kipping, M. (2001). Strategic Change in Top Management Consulting: Market Evolutions and Current Challenges in a Knowledge-based Perspective. Academy of Management Proceedings, pp. A1-A5. Axelrod, E.L., Handfield-Jones, H. & Welsh, T.A. (2001): War for talent – part two. The McKinsey Quarterly, number 2: pp. 9-11. Bower, M. (1979): Perspective on McKinsey. New York, McKinsey & Company, Inc. Dickmann, M., Graubner, M. & Richter, A. (2003): Human resource management in tomorrow’s consulting firms. Forthcoming in: Consulting to Management, volume 14, number 2. FEACO (2002): Survey of the European Consultancy Market. Brussels, Feaco. Hagel, J. (2004). Offshoring goes on the offensive. The McKinsey Quarterly, number 2: pp. 21-29. Kennedy Information (2001): The global consulting marketplace: Key data, forecasts and trends. Fitzwilliam, New Hampshire, Kennedy Information. Kipping, M. (1996): Management Consultancies in Germany Britain and France, 1900- 60. An Evolutionary and Institutional Perspective. Discussion Paper in Economics and Management. University of Reading, volume 9, Series A. Kipping, M. (2002): Trapped in their wave: The evolution of management consultancies, in: Clark, T., & Fincham, R. (eds.): Critical consulting. New perspectives on the management advice industry. Oxford, Blackwell: pp. 28-49. Landriscina, M. (2002): The 10 best consulting firms to work for. Consulting Magazine, Special Issue November. Niewiem, S. & Richter, A. (2004): The changing balance of power in the consulting market. Forthcoming in: Business Strategy Review, Spring Issue. Payne, A.T. (1987): New trends in strategy consulting industry. Journal of Business Strategy, volume 7, number 1: pp. 43-55 17
  • 18. Payne, A.T. & Lumsden, C. (1987): Strategy consulting – A shooting star. Long Range Planning, volume 20, number 3: pp. 53-64 Rose, T., & Hinings, C.R. (1999): Global clients’ demands driving change in global business advisory firms, in: Brock, D., Powell, M., & Hinings, C.R. (eds.): Restructuring the professional organization. London, New York, Routledge: pp. 41- 67. Ruef, M. (2002): At the Interstices of Organizations: The expansion of the management consulting profession, 1933-1997, in: Sahlin-Andersson, K. & Engwall, L. (eds.): The expansion of management knowledge. Stanford, Stanford University Press: pp. 74-95. Wilkinson, J.W. (1995): What Is Management Consulting?, in: Barcus, S.W. & Wilkinson, J.W. (eds.): Handbook of Management Consulting Services. 2nd edition. New York et al., McGraw-Hill: pp. 1.3 – 1.16. 18

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