How many times have you read that something that we are used to is now no longer the norm? But we all know that change is inevitable, and that as technology, and our use of it, advances, this creates opportunities that never existed before. There is a plethora of “advice”, “viewpoints” and “thought leadership” in the media on the cloud, social, digital, analytics, mobile, and offshore and all these have created a world and set of opportunities that have created other spin offs like crowd sourcing. But how has this impacted business and IT consulting (consulting) delivery models?
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Much has been written and talked about around new consulting models and the value-add consulting can bring to IT Service offerings. Business and IT consulting took a major hit during the recent recession, just like many other sectors, but most of the major consulting firms have come out performing reasonably well and unscathed, but have they? In reality a number of key issues have been transpiring over the last 5-6 years that leads us to conclude that the traditional consulting model is dead or dying and will be replaced with newer, smarter, more profitable and more effective models.
Before we can look into what’s changed or what the new models are or will look like, it is important to look at the models we have been used to, both as clients and practitioners. The traditional consulting firms grew out of the major audit firms back in the 1960’s, with a lot of success. What they were offering was new, in demand, and added significant value to their clients.
Traditionally the consulting model was built around a leveraged Partner model with 1 Partner leveraging a team of between 10-15 consultants, with various managers in between. Clients were getting the benefit of the large audit firms investing in developing technology, thought leadership, collateral, methodologies, services and propositions, and quality talent for the new consulting business. The downside, over time, was that clients had to pay a premium for this, with every assignment having a Partner charging on the job. The inevitable risk adverse mind-set from the audit and tax Partners meant that the cost for review and risk assessment for every recommendation or report became larger and larger – and some of the major public legal cases also didn’t help.
Over time consulting grew beyond the audit firms, and we have had major business and IT consulting practices within many of the large Systems Integrators for the best part of the last 20+ years, including IBM, HP, and EDS. More recently we have seen a large investment in consulting practices amongst the Indian based SI’s, including TCS (part of the Indian giant Tata), Wipro and Infosys; as well as an increase in many pure play and niche consulting firms, like McKinsey, Bearingpoint, and Boston Consulting Group. There is one final category of consulting firms and these are the Associate based consulting firms that have been increasing dramatically over the last 10 years. What do we mean by Associate based? Simply speaking, instead of all the consultants being employed by the consulting firm each consultant is technically self-employed and merely part of that consulting firm’s resource base to be used when work is sold.
So what has changed and why is the old model dead? Various changes have taken place and we will look at each in turn:
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The demise of the Partner model...
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As mentioned above, the traditional model has seen most assignments being “led” by a Partner or Vice President. However, the effectiveness and necessity of having a Partner/VP on every assignment has been challenged for many years with clients simply refusing to pay for the Partner unless he/she can demonstrate the real value added. In some cases it is fair to say that a Partner may be the best person to help the client and lead the project or program full time. Unfortunately, this is inconsistent with the internal performance and financial measures in the consulting firms. In these instances, whilst the client wants to use and pay for the Partner full time, the Partner/VP is “compelled” to leverage his team and spread himself across a number of delivery projects whilst also selling new work and helping to manage the practice. In simple terms, the requirements from the client and the employer at poles apart, and unless the financial model within the consulting firms (and in particular where we are talking about a consulting practice within an SI) the leveraged Partner model is dead!
2.
Leveraging offshore capability...
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Clients have been trying to reduce the cost of projects for years – this is not rocket science. With the introduction of the Indian based SI’s some 20+ years ago, the whole IT services industry was revamped and the cost model fundamentally changed. Now much of the work that had previously been carried out locally (onshore), was now transferred to the much lower cost base offshore (India, China etc). The natural progression for both client and SI was, if this model works for IT services like Application development, maintenance and support (ADMS), IT infrastructure (ITO), and Business Process Outsourcing (BPO), then why can we not apply the same model to Business and IT Consulting? So we have seen most of the major consulting firms and practices build up large numbers of “consultants” offshore and thereby they have been able to reduce their overall cost of delivery. But at what cost to the client in terms of quality of delivery? I should state at this point that I am a great supporter of the offshore model and have spent a significant part of my career working for offshore led organisations, BUT it is not the panacea to address all client challenges and issues. There are many consulting activities and tasks that can effectively be performed away from a client site, and offering 24 hour working can, in theory, be a major selling point. However, more and more clients have become frustrated that key activities are being taken over offshore with little “control” from the local Program Manager. As one CIO at a FTSE 500 company told me recently “I went to talk to the PMO that had been down the corridor for the last 3 months only to discover the consulting firm had moved it, without my knowledge, to Chennai!” The concerns are also around the quality of the offshore consultants who often are highly skilled but have little knowledge of the client and the relevant local sector, and are detached from the client.
3.
90/50 versus 70/30!
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The third change or challenge is an internal one for consulting practices within an SI, but it has a very big impact on both clients and consultants. Without getting into a long drawn out debate of exact numbers and the way utilisation and profit are calculated, in simple terms an effective consulting unit will aim to operate at approximately 30% profitability and 70% utilisation. Also whilst many aspire to have consulting representing 8-10% of the total revenues of the SI, most are operating around 4-5%. It is fair to say that up until now many SI CEO’s have tolerated the “different” model of a consulting operation, but now the big question is being raised far more forcibly: “if the rest of the SI (90+% of the business) can run at 90+% utilisation and 50% profitability, then why can’t consulting?”. The honeymoon period is over and leaders of these consulting practices are under enormous pressure to come in line with the 90/50 model. Various approaches have been explored to try to reach these targets including: raising fee rates (not popular with clients), more offshore leverage (see above), increasing utilisation for all grades (this potentially reduces the time available for business development, service development, thought leadership etc), hiring freezes (reducing the available bench for business development etc and clients getting who happens to be left on the bench), creating “assets” (this can increase profitability and client satisfaction but is very hard to do with so much pressure on utilisation), and leveraging non consultants from the wider SI on consulting delivery (often leading to client quality concerns). A few firms have started to explore working with contractors and Associates, but this has not in the past always been popular if utilisation is not 90+% internally. In addition, a major concern has been around the quality of contractors (whether real or perceived).
4.
The consultants view...
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So how do consultants view the consulting market? Consultants have started to vote with their feet and we are seeing a very buoyant and talent rich contractor base in the UK. We have not reached the levels seen in the Netherlands or Germany, but certainly more and more consultants see the contractor option as preferable to full time employment. The reasons are pretty straight forward. At the more junior ranks and typically younger consultants the maths is straight forward – they can simply earn a lot more as a contractor than as an employee. A 27 year old consultant is able to earn +/- £90,000 as a contractor compared to a salary and bonus of around £55,000. Plus he/she has the benefit of doing what work they want to do. But straight forward salary and bonus is not everything and indeed employment offers sick pay (often negligible), pension (this varies significantly and private pensions are often a better bet), medical insurance (even a good family insurance of around £2-3k pa still leaves a self-employed consultant better off), and holiday pay. Not much for all the “hassle” and downside of full time employment with all the politics, frustrations, and ties in to one employer.
At the senior ranks it is less about just the money and more about the ability to achieve. We have already explored above the internal challenges of moving from a 70/30 model to a 90/50 model and all the pressures that are in place from the various stakeholders. Increasingly, senior consulting leaders are realising that meeting the objectives of the wider SI are just not achievable – minimal bench, being available for every opportunity, creating thought leadership, new propositions, more business development and delivery utilisation, and increasing demands for management information. More and more often this results in the dilemma of trying to achieve higher revenues and profit (and greater impact) within a hiring freeze!
This just leaves the mid-level managers who have young families, mortgages to pay etc where employment is seen as “safe” with a pension, medical insurance, paid sick and vacation. This group has been slower to move but it is starting to happen at pace as more and more get frustrated with lack of career progression, lower than expected bonuses, and a worsening work/life balance.
5.
Pricing...
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Whilst we have seen fee/price pressure for some time now, the current drive from clients (particularly with the increased role of Procurement) is to ask for even lower prices and discounts. I recently heard of one client who asked their consulting provider to reduce their fee rates by 40%. And whilst such requests are not the norm they are also not uncommon.
We have already talked about the cost of consulting services and the role offshore has played in trying to address this; but let’s look at this from a bigger perspective. Simply put the different objectives and needs of the various stakeholders in the consultant/SI/client relationships are clashing. Each and every consultant wants to get a good reward for all their efforts but what they are finding is that packages are often made up with a fair amount of bonus that simply is not paid, whilst the pressure, work/life balance, and internal politics get worse. The SI is demanding more profit, increased revenues, more business development, an increase in fees per head, more growth and market share. Clients want better quality, lower costs, more compelling thought leadership elimination or transfer of risk, better choice, and guaranteed delivery.
Price/fees are likely to continue to come under intense pressure in the foreseeable future, whilst the other issues and challenges will not go away.
Where Does This Lead The Future Of Consulting? ...
So much for the not so good news, where does this leave the future of consulting? There is no doubt that the demand for business and IT consulting is very buoyant and growing, but that does not mean that the challenges we have been through can be ignored. Equally, with such challenges there are opportunities. Right now we are poised for the first major change to the consulting delivery model in over 10 years, since offshore delivery was introduced into the consulting mix.
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I believe that the Associate based consulting firms will see a marked ramp in in terms of demand from both clients directly and from consulting firms themselves as they seek to lower overall pricing, minimise bench costs, increase profitability, and provide a larger consulting pool to their clients. So why should this be the case? To clients the advantages are clear with much lower pricing from the Associate firms as their overheads are minimal; more and more often the niche players have significant relevant sector or speciality experience, and not just in one or two individuals; a guarantee that the work will be performed locally; and these Associate firms are very delivery focused without the added pressures of selling additional IT services. But the one question that keeps being asked is “what about the quality?” The reality is that the quality of the individual contractors is at least as good as any consultant from a large consulting firm; the issue can be around the quality of a team.
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K2 Consulting Partners (K2) is breaking new ground in the UK business and IT consulting market by creating the first major change to the consulting model in over 10 years. It is finally addressing ALL the issues presented above in one organisation. K2 is the first large scale network and Associate based consulting firm in the UK, covering all core consulting disciplines and across all sectors. Rather than creating a new Associate based consulting firm that has its own pool of contractors, K2 has brought together a number of well-established Associate based consulting firms under one umbrella. Each of these firms has been successful in its own right and continues to provide excellent quality consulting to their individual clients. K2 provides the opportunity to these firms to work together and provide more end to end delivery capability to their clients under K2.
Scale
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For any consulting firm to be really successful it needs scale, this means lots of consultants. Currently far too many consulting firms are running with too few consultants in their teams, as they are not allowed to build up a bench. This creates all sorts of challenges in terms of meeting the various demands of business development, delivery, creating thought leadership, and new services, solutions and propositions. From a client’s perspective scale is important as it means a consulting firm has strength in depth across all the skills needed for delivery. K2 has over 2,000 Associates in the UK and it has only just been established. This allows the availability of the right skills with the right experience; this allows us K2 to have flexibility in working hours, location, and switching Associates as necessary.
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Value
Value is provided in two ways: firstly K2’s fee rates are around 50% of the major consulting firms for at least the same quality of consultants. Secondly, we are one of the first Associate consulting firm’s to pro-actively encourage, and reward, its Associates to create compelling Thought Leadership that is shared with clients and prospective clients.
Quality
Quality is not an after-thought in K2 it has been built into its model from day 1, with all partner members being known to the K2 leadership team; whilst each firms contractor base is small enough (+/- 150 Associates) for the owners to still really know each individual and the quality of the work they deliver to clients. In addition, each Associate must provide tangible references for each of their last 3 assignments.