Is there such a thing as independence?

Client-side or supply-side?  It seems such a simple question, but in practice the response is much more complicated.

Consulting firms can be notionally divided into those that offer independent advice and those which have obvious ties, perhaps to a specific vendor if they’re an IT consultancy or to a parent company in the case of the consulting arm of an outsourcing company.  In theory “tied” firms have a vested interest in selling the services of their partners or parents and therefore cannot be trusted to act in their clients’ best interests.

But this logic falls over in several ways.

It implies that independence is the ideal and that any firm that’s “tied” is somehow second best.  Yet, for a client who has already decided to implement an SAP system, going to a supplier that has strong links with SAP itself makes perfect sense.  An “independent” IT firm can be at a disadvantage here:  because it works with multiple hardware and software vendors, it may have less practical experience of a specific one.

It also ignores the fact that every firm, large or small, independent or tied, has an agenda. A tied firm may want to encourage its clients to buy a particular software package or outsource a specific function, but an independent firm has just as much of a vested interest in getting clients to buy more of its services.  Indeed, if you quiz private sector clients about this issue, they either shrug their shoulders in puzzlement and indifference or darkly remind you that no one is independent.  As they see it, independence is more an attitude of a consultant’s mind than the characteristic of a firm.

But in the public sector, organisations tend to be more concerned about the tied/independent distinction, driven by a combination of wanting to ensure fair and open competition and by a desire for oversight and governance.  Thus, public sector organisations will use a tied supplier to deliver a service and an independent supplier to oversee delivery, but this can end up with a situation in which a firm that doesn’t know much about a subject supervising the work of one that does.

And that’s the nub of the problem with the independence question: that consulting firms and their clients tend to conflate “independent” with “generalist”.  That doesn’t make sense any more than asking a GP to oversee the work of a cardiologist would.  Getting a second opinion can be a good move, but only if you go to another expert.

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.

The value of brand in a recession

Most people would agree that the recession has so far produced a flight to brand in the consulting market.  But will this continue to be the case?

There are two forces acting here.

The first, pulling clients towards familiar firms, is security.  Of course, this has always been important to some extent, especially where high-profile, critically important projects were concerned.  But it is unquestionably more acute now.  With limited money to spend, clients are reluctant to bet it on a horse their colleagues may not have heard of.  Brands have been backed by two other advantages (which have helped reinforce the brands in their turn).  Big brand firms have had the resources to invest in account management over recent years, continually walking the corridors of their clients in a way their smaller rivals couldn’t afford to.  They are also the firms to have benefited most from the relentless shift towards preferred supplier lists.  If you only have space for five firms on your list, who would you choose?

But pulling against this is something quite different.  One of the reasons why clients choose a firm with a brand is to overcome internal uncertainty or even dissension.  Hire a well-known firm, the argument goes, and its credibility will rub off on our strategy or business case.  Worried that your colleagues won’t agree with your analysis?  Hire a big brand firm to validate your thinking.  There’s nothing wrong with this: we all need support and encouragement from time to time.  You might think you need more of it during a recession – but I’d question that assumption.  With fewer initiatives possible and the financial crisis making it clear what organisations need to focus on, the level of internal debate on how to deploy their resources has to be muted.  Clients won’t need expensive, big brand consulting firms telling them whether project A is better than project B, because they can’t afford to do either.  And they don’t need a firm to tell them what to do (cut costs, conserve cash) – and that could leave the big brands higher and drier than they expect.

Survival instinct

One of the points often made about the consulting industry is that barriers to entry are low.  But this isn’t strictly true.  They’re low in theory (there’s no regulation to keep new entrants out, for example) but history suggests they’re high in practice.  Over the last 30 years there are remarkably few firms which have entered the market and achieved sustainable growth.

Why is it so difficult for small firms to become mid-sized firms, and for mid-sized firms to become large ones?

The answer lies in the economics of the consulting firm.  Most consulting firms begin with one big idea and they grow because they succeed in building up a reputation in this niche field.  After the first few years, the rate of grow usually slows and the consulting firm, panicked into thinking that there isn’t sufficient demand for its services, tries to diversify.  Diversification lowers utilisation because new people are arriving who can’t immediately be put onto the firm’s existing projects.

If a firm gets through this crisis, it soon faces another, bigger one.  Much of its initial growth will depend on its niche reputation (it will be seen by clients as a specialist) but as it gets bigger, future growth will depend on winning bigger projects, projects which it will probably not have the scale or brand to win.  Utilisation falls again because the firm’s sales process can’t provide the pipeline of work required.

Recent history suggests that getting through this crisis as an independent, standalone consulting firm is nigh-on impossible.  Most of today’s mid-sized consulting firms are part of large companies, only some of which are consultancies.  Instead, they are outsourcing companies, outsourcers, offshorers, engineering and manufacturing companies.  These “parents” provide consulting firms with new internal customers, an additional new channel to market, extra resources and (often) global scale and money to invest.  These are things which, if you’re a consulting firm, you can’t survive without.

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