Disaggregation of the Value Chain: Emergence of New Business ...
Disaggregation of the Value Chain: Emergence of New Business Models
in Strategy Consulting
Value chain disaggregation; strategy consulting; new business models
Dr. Sascha L. Schmidt
European Business School, Oestrich Winkel/
University of St. Gallen
CH-9000 St. Gallen
Tel: +41 76 377 8322
Fax: +41 71 224 2355
Dr. Patrick Vogt
Executive Advisor and Lecturer
Media and Communications Management Institute
University of St. Gallen
CH-9000 St. Gallen
Tel: +41 79 666 9547
Fax: +41 86 079 666 9547
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).
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,
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
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
"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
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.
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
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
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
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
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
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
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
four promising business models in the future of strategy consulting. These include
integrated strategy consultancies, strategy implementers, knowledge builders, and
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
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
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.
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
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
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
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.
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.
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