The great divide?

One of the ways in which this recession is proving to be different from a consultant’s point of view is that demand for freelance consultants appears to have shrunk. Although there’s no hard data on the shift anecdotal evidence from clients, consulting firms and even freelance consultants confirms it.
There are several possible explanations for this.

The 2002 downturn saw a huge increase in the number of freelance consultants and in their acceptability even within blue-chip organisations. This was fuelled by the fact that many of the consultants had all the credentials of having worked for big consulting firms but had been made redundant as the latter struggled to shed surplus capacity. Freelance consultants were therefore seen as a good, cheap alternative to consulting firms. This time, consulting firms have husbanding their resources more carefully: lay-offs have been small-scale, so there has been no flood of new, highly qualified labour entering the freelance pool.

Clients, too, are more circumspect about using freelance consultants: while often very specialised and offering good value for money, they are more likely to take on quasi-line roles in the organisations that hire them, carrying out work which could be undertaken by a full-time employee. Precisely because of this, freelance consultants have been able to fly under the procurement radar, even though over time their fees can be considerable.

Increased, centralised scrutiny of consulting expenditure by procurement teams has revealed that freelance consultants, none of which individually gets paid a lot, can still add up to a large slug of money for a big organisation, perhaps as much as 20 percent of its total consulting spend. And, if you’re looking to cut expenditure on consultants, that’s a decent and comparatively easy saving to go after.

However, this points to another, perhaps much more fundamental reason for the decline of the freelance consultant. Clients are making a clearer distinction between “staff substitution” and bona fide consulting. The former involves an individual working with a client’s own staff for a long period of time; the latter is more likely to be a team (big or small) working on a specific project for a defined, usually short period. Crucially, the former comes down to skills, the latter to a solution. The term “solution” may not be the right one, implying as it does a commoditised package, but it highlights the crucial point that clients are buying a defined outcome or benefit and are less concerned about what it takes to deliver that. They’re buying an end, rather than a process.

As the skill/solution divide widens, it raises interesting questions about the position of traditional consulting firms. Most consulting firms still see themselves fundamentally as collections of skills: their pyramid structure and models of resource allocation and utilisation are all predicated on this; it’s also how they market themselves and the basis on which they recruit. But, as demand diverges, consulting firms are likely to find themselves stretched to tearing point. Are they going to be interim management firms or virtual firms, or are they going to be providers of packaged outcomes?

Don’t ask, don’t tell

Economic downturns invariably trigger renewed interest in paying for consulting services on a risk-reward basis. This one is no exception: every consulting firm I’ve spoken to recently reports that clients are talking about this and many believe there’s an opportunity for them to steal a march over their competitors by actively offering it. The jury is still out, of course, because past experience suggests that risk-reward deals are easy to talk about but hard to implement.

While we’re waiting to understand how that trend develops, we might take a look at something else the consulting firms are talking about – the growing number of clients who are announcing what the budget for a piece of work is before consultants put their proposals together.

Conventional wisdom says that, when you’re buying a customised, non-standard service such as consulting, you keep your cards close to your chest. You talk to several possible suppliers and use their responses to gauge what a reasonable market rate would be, then negotiate accordingly. There have always been drawbacks to this. The consulting firms end up vying with each other to see who is best at guessing the client’s budget, a corporate version of pin the tail on the donkey. All the attention given over to working out the price eats into that which could have gone into thinking about the client’s requirements.

Buyers can end up with five proposals, all at wildly different price points, none of which may have really identified what they need.

The way people have got round this is to use scope, scale and size as substitutes. The consulting firm will float an estimate of the time involved and the number of people who’ll need to be on the project, to see if the client baulks. A client who’s asked a big firm to pitch will know their rates will be higher than a small one.

But why not go the whole hog? Why shouldn’t clients tell the consulting firms exactly what their budget is for a given piece of work? Consulting firms would be able to compete on the basis of how much they could do for the money. Clients would find it easier to compare proposals and there would be nothing to stop them negotiating the fee down at the end if they wanted to (because who knows what a “market rate” is in the current climate?).

Risk-reward deals may change the consultancy industry in the future: asking and telling is doing so now.