Tag Archives: Harvard Business School

This blog is the second part on changes in the strategy consulting industry. If you missed the last blog, please find it here.

As discussed before, the industry’s character has changed already. Apart from the mentioned mergers, one has to take notice of the fact that classic strategy work is today the source of only 20% of revenues for consulting companies such as McKinsey (see Christensen of HBS). In the following passages I would like to dig into what the relevant drivers are, and how profits are impacted.

Even if author Steve Denning (Blogger at Forbes) has his own idea of why Monitor went bankrupt and questions the validity of Porter’s Five Forces, I want to use that very model to analyze what is happening. Denning claims:

“What killed Monitor had nothing to do with competition among rivals, or risk of new entrants or threat of substitute products or bargaining power of customers. What killed Monitor was the fact that customers were not willing to pay sufficient for what Monitor was offering.”

Many business majors would ponder on such a statement, but with Denning originally being a lawyer , I think we need to walk him through the model (Mr. Denning, in case you read this, please excuse my small joke). It needs to be said that the overall idea of the model is that five forces shape the long-term profitability of any industry. (Porter)

To start things off, we can quickly brush over competition. One can see that aspects like continues growth , differentiated offerings and established brands keep competition from being too fierce, but the overall number of players is still fairly high. Which brings us to the next point: New entrants are, against Denning’s claim, also influencing the industry. New boutique firms, technology player and Big4 want a piece of the attractive margins, and the low entry barriers make it easy to join in.

These margins are also the reason for other threats, which the model and economists label substitutes. Christensen mentions two points in his article, which fit in beautifully here. For one he talks about the increase in firms offering technology driven solutions (such as Salesforce.com but also the recently introduced “McKinsey Solutions”) and Facilitated Networks of consultants (e.g. Gerson Lehrman Group). Further he gives a great example of how the US legal industry took a major hit, when companies started insourcing roughly 33% of legal services (i.e. under Jack Welch). Similarly large companies are nowadays setting up their own “inhouse” consulting departments. This too, inevitably, takes business and profits away from the consulting industry.

Finally, I will ignore the supplier force for now, even though talents take another big cut out of the margins, and move on to the final force of buyer power. Here Christensen also mentions an astonishing observation, which I feel combines the two aspect of transparency and democratization of knowledge. Businesses used to request consulting services for expert advice, in which the product was highly untransparent with regards to the analysis taken and the value added. Christensen claims that this is where the brands and also the high margins stem from. Actually the high fees were used as a proxy for high quality of the service by many customers. This is different in today’s world, since the industry’s fluctuation rate of 20% has released over 50.000 alumni of the major consulting firms into businesses all over the world. Thus companies now have staff and managers who are far more sophisticated in dealing with strategies, process optimization, and – most importantly – with consultants and their projects. As a result more and more standard tasks are being insourced, special jobs taken care of by focused specialists, and the actual benefits of contracting consultants are now more visible. Price and brand are no longer a proxy.

As you may see from this, nearly all forces are working against the consulting industry, which is why the existing players are experiencing extreme pressures and eventually industry consolidation.

So much for the industry structure. For insights on costs and an outlook on what change the industry can expect next, please stay tuned for my next blog.