Digital Matters - Issue 33

"You don't have to be a tyro to see that the traditional consulting model still applies."

Consulting firms prosper when clients are either optimistic or paranoid. What's unusual about clients today is that their psyches are both optimistic and paranoid. The booming economy has companies thinking that they might soon be really rich. Internet technology has them thinking that they might soon be extinct.

So, in theory, these should be the best of times for those in the consulting business. And, by standard measurements, they are. Demand for high-quality consulting services has never been more robust. Profits for such companies have never been better. The partners and associates at firms like McKinsey & Co. and the Boston Consulting Group have never been busier.

And yet, if you talk to partners at the leading consulting firms across the United States, what you'll hear in their voices is anxiety — in many cases, high anxiety. The new Internet-driven economy has turned their world upside down and inside out. In an industry known for its slide decks, old-style consultants worry that what they're so busy doing is nothing more than rearranging the chairs on the (slide) decks of the "Titanic."

These days, the only thing that traditional consultants know for sure is that somewhere out there, Internet technology and new-economy entrepreneurs are conspiring to make their lives miserable. And, as their clients learned the hard way, consultants now know that these forces are both relentless and unforgiving.

The most immediate problem that consulting firms face involves finding — and keeping — talent. The consulting business is entirely dependent on the engagement of really smart people: Have them, and you win. Don't have them, and you lose. These days, you can't pick up a newspaper without reading about hotshots from Andersen Consulting or BCG or McKinsey & Co. packing their bags and taking up space at companies that didn't even exist a few years ago. And it's not just the young hotshots and wunderkinder who are champing at the bit and pawing the ground for a piece of the action. Partners, who theoretically have the least incentive to leave, are also walking out the door. Even managing partners have been known to jump ship: Last September, for instance, George Shaheen left Andersen Consulting to become president and CEO of Webvan, a just-launched online grocery service. That's right, a grocery service.
(Webvan went public two months later.)

No problem, you might say. Just build the farm team and get more talent. Indeed, it used to be just about that easy. Back in the glory days, hiring new talent was a layup. Every consulting firm worth its reputation at the Harvard Club used to have professors from all of the best business schools on retainer — at all times. Those professors would regularly help out with clients, but their real function was to scout for the best up-and-coming talent. Year after year, many of the best and the brightest from America's top business schools would sign on with these big consulting firms, pushed along by the gentle encouragement of their mentors.

But the Internet changed that cozy little arrangement practically overnight. Professors still woo the bright young stars in their classrooms, with speeches about the benefits of rounding out their education with a stint in the consulting world. "It will give you the opportunity to work in a lot of different industries," the professors say, "until you're sure about what you really want to do." But the B-school tyros aren't listening anymore. "Thanks for the advice," they snap in sardonic response. "I'll think it over." Translation: "How does never work for you?"

Much of the talent problem is inextricably linked to what has come to be known as the "compensation issue." Not too long ago, consultancies were considered to be among the most generous of employers. They paid for talent up front — in the form of a signing bonus, a good salary, good benefits, good everything — the minute a tyro graduated. At the time, joining a consultancy was a surefire way to start paying off those B-school loans.

And after you signed on, the deal was simple: Work hard, and maybe in 10 years' time (if you were good) you'd get to be partner. And then the really big bucks would start coming your way. But in the new economy, 10 years is like 10 lifetimes. And the tyros' reasoning is, if you're going to work days, nights, and weekends anyway, why agree to get paid at some undetermined point down the road — when you can have equity in an enterprise right now?

But the tyros aren't the only ones making life difficult for consulting firms in the new economy. Clients are doing their share to muck things up, by insisting on "fixed-fee arrangements." What a dreadful concept! Time charges are so much more comfortable. Fixed-fee arrangements might still translate into big fees — $2 million for this project or $10 million for that study. But there's no getting around the key word here, which is "fixed": Take it or leave it. Billable hours, a consultant's equivalent of leaving the meter running in a taxi, are now a thing of the past.

To make matters worse, traditional consultancies now find themselves surrounded by new companies that all seem to end in "ent" or "ant." There's Sapient Corp., Scient Corp., Viant Corp., and God knows what "ant" will pop up next. The old-style blue-chip firms can almost feel the "ant" colony gnawing away at their futures.

These new consulting firms are populated by escapees from traditional firms and are almost exclusively devoted to new-economy projects. They are dedicated to helping companies — old-economy or new-economy — that are setting sail for the "new world." They offer equity up front to their employees and take equity stakes in their clients' businesses. They don't see themselves as the real-life version of M*A*S*H's "pros from Dover," put here on Earth to rescue the dumbbells from their own stupidity. They position themselves as partners, and they do whatever it takes to meet their clients' needs.

Equally important, the new consulting firms are keenly attentive to the cultural issues that matter a lot to the tyros. Want to bring your dog to work? No problem. Don't want to travel because you've got young children at home? That's fine. Need time off to recharge your batteries? By all means, take the time. As silly as it might seem, these matters are perhaps the new firms' best recruiting tools.

And looming over the traditional problem of talent, compensation, competition, and culture is the most basic issue of all: What business, exactly, are the traditional consultancies in? They used to know. There was the strategy firm, the time-based-competition firm, the reengineering firm, the information-technology firm. There was the firm with the five forces, the firm with the seven S's, the firm with the dogs and the stars — and on and on.

Fads, like fashions, would come and go, and consultancies would reposition themselves. McKinsey, after its pitches on "strategy" and "analytics" tired, offered itself up as the Tom Hagen of consultants, consigliere to chief executives everywhere. But the Internet changed everything. In a knowledge economy, everyone's a consultant. And the new consultants can do just about anything for just about anyone — including acting on their own behalf. All of a sudden, all of the old descriptors are meaningless.

So what is a consulting firm today? Is it a venture firm, an executive recruiter, a "perma-temp" agency, an incubator, a strategist, a brander, an Internet-technology specialist, a digital architect, a creative-services provider, or a trusted partner? The "ants" bundle many of those roles together through partnerships and joint ventures. McKinsey, however, traditionally operated under ironclad rules (which it has only recently discarded) that prevented its partners from owning even a single share of a client's stock.

Given the changing shape of the consulting business, who would you bet on to succeed — traditional firms like McKinsey, or the "ants"? You don't have to be a tyro to see that the traditional consulting model no longer applies. It isn't even close to the new reality of the Web. The traditional model said, "We make a trade: your money in exchange for our smarts." The Web model says, "We collaborate — and get smarter together as we go along."

One thing's for certain: The Net has no room for anything in the middle. You're either a big company that offers "end-to-end" services, as they have come to be known, or you pick your niche and own it with relentless and determined specialization. Midsize models need not apply on the Web.

There's another certainty: Predators lurk everywhere. In January, IBM swallowed its own consulting-services division. Read between the lines of IBM's press release: This won't be the last consulting operation that the company gobbles up. Across the country, other big firms — from Interpublic Group to Microsoft to Omniocom to Sun Microsystems — are looking closely at the benefits of getting into the consulting business. All of which means that we will soon see the consulting business go through what the advertising business went through in the 1980s and 1990s: Holding companies will be created, which in turn will go public to raise fast cash. That cash will then be used to augment the consulting business's offerings.

McKinsey, for example, might buy the executive-recruiting firm Spencer Stuart. Omnicom might purchase both McKinsey and Spencer Stuart. Viant might acquire a highly creative advertising agency. PricewaterhouseCoopers might spin off its high-margin, high-value-added consultancies, and use the proceeds to buy or form a venture firm. Finally, only three or four giant consulting holding companies will remain, just as today there are three giant advertising holding companies: Interpublic, Omnicom, and WPP Group.

What makes this outcome even more likely is that venture-capital firms are highly motivated to invest in talent-and-idea shops. And the easiest way for them to do that is to bundle together smaller consultancies into one entity, to drive business there, and then to take it public to get their money out.

Consultancies like Viant are already publicly traded. Once the partnership model is made obsolete, all consultancies will become publicly traded. And at that point, everybody with cash will be able to put together any combination of consultancies that they think will be especially valuable.

Of course, consultancies aren't the first companies to go through this. It happened to their clients. It happened to other professional-services firms. And now it's happening to McKinsey and BCG and all of the others. The good news for the consultancies is that they've got some very smart people who can figure out what to do next. The bad news is that they've got the worst possible clients: themselves.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York City.

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