Digital Matters - Issue 33

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.