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

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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.

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

  1. 1. 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
  2. 2. 2White 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.
  3. 3. 3White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  4. 4. 4White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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..
  5. 5. 5White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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
  6. 6. 6White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  7. 7. 7White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  8. 8. 8White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  9. 9. 9White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  10. 10. 10White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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.
  11. 11. 11White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore 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, ValueNotes has specialized in the management of research, business intelligence, and information. We work with several clients in the US, UK, India, Singapore; and the repeat work we get from them is a testimony to our capabilities. We have experience across a broad range of sectors, and have specialized teams for healthcare/pharma, banking & financial services, BPO (outsourcing), telecommunications, IT, education, engineering, utilities, media & Internet. We work with leading global corporations, consulting firms, research and B2B publishers, PE and VC firms, and money managers. We partner with global consulting firms to offer a variety of research services via flexible engagement models to specifically meet the needs of global consulting and market research firms. Desk – based / internet research (Data collation and synthesis, financial analysis, company profiling, internet – based comprehensive research studies) Marketing Communication Support Content and Editorial Support Vertical Expertise (BFSI, Pharma, Healthcare, Engineering, Manufacturing, Infrastructure, Industrial, Automotive, Retail, FMCG, Education and Training, Telecom, Media & Internet) Survey modeling and analysis Continuous research support Primary research White label industry reports India market entry studies (opportunity assessment, market sizing and segmentation, competitive landscaping, partner selection and due diligence) How ValueNotes has helped other global Consulting and Market Research firms Reduced project delivery lifecycle and faster turnaround by leveraging the India research support centre Enhanced cost-competitiveness, especially while leveraging industry expertise or higher level research capabilities (statistical modeling, analytical report writing) Provided access to high-quality Indian market expertise Enabled hassle free management of primary research – difficult to source CXO level interviews, large scale B2B research across geographies within a limited time, etc Expanded consulting and research bandwidth – our clients have been able to service many more clients by leveraging their partnership with us Generated additional avenues for revenue generation – we pass on consulting and research leads to our global partners, which is beyond our ambit of services To get in touch with ValueNotes, please call us on (+91 20) 6623 1743 or email us at research@valuenotes.co.in ValueNotes Database Private Limited, 1 Bhubaneshwar Society, Abhimanshree Road, Pashan, Pune 411 008. India.
  12. 12. 12White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore © ValueNotes 2011 - you may reference or excerpt any part of this document provided due attribution is given to ValueNotes and the author

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