INSEAD Quarterly 200510

Strategy consulting, as practisedand presented in boardrooms formany decades by a core group of

top firms, is changing. The traditionalleaders are still there, maintaining theirpositions through scale and bytweaking their structures to adjust tomarket demands. But sometimestweaking is not enough, and innovationcomes in a seismic shift.

How did traditional strategyconsulting become what it is? How areoffspring of the leading firms creatingnew business models to address andexpand an evolving market? The centreof gravity in the industry is McKinsey,which under the direction of MarvinBower created the original businessmodel of strategy consulting. Strongvalues have secured McKinsey’s placeamong the market leaders for morethan 75 years.

McKinsey were not the firstconsultants, of course. Some say thatconsulting is truly the oldest profession,but its modern form appeared in thelatter part of the 19th century, whenengineering, accounting and law firmsbegan to offer independent counsel tofast-growing and increasingly complexindustrial organisations in the US.Arthur D. Little was the first externalconsultant to bring operationaleffectiveness to its manufacturingclients. McKinsey, however, is usuallyconsidered to be the originator ofstrategy consulting. While founderJames McKinsey’s initial practice wasonly a rough approximation of thisinnovation, after his death MarvinBower1 transformed the industry when

he developed “the Firm” (as insiderscalled it) along the lines of law firms, asa collegial partnership focused on thebusiness problems of the CEOs of thebiggest corporations. Bower, who diedin 2003 at the age of 99, led theexpansion of McKinsey from 1935 to1967, and remained actively involvedwith the firm even after officiallyretiring in 1992.

From strategy to operations

The emergence of the BostonConsulting Group in the 1960swidened the circle of industry leaders.Though BCG’s innovative approach toconsulting could appear slightly moreacademic than McKinsey’s, thecompany nonetheless became themaster of repackaging simple ideas intouseful management tools. The 1970swere a period of explosive industryexpansion, marked by the spin-off ofBain from BCG in 1975. Baindeveloped what it called “relationshipconsulting”, extending its services from strategy into operations. Its business model contained aresponse to the critiques of a growingnumber of clients of strategy consultingfirms, who complained about buying“blue sky” thinking2 with little practical application.

Both BCG and Bain had significantsuccess – to the point where Bainultimately gave up on the idea ofserving one client exclusively in eachindustry. Yet McKinsey integrated someof its competitors’ best ideas andpractices while continuing to developits own, and retained its lead.

In the last 20 years, many newplayers entered the field of “strategicadvice”. Interestingly, they did notmerely fight for their slices of the pie;instead, at least initially, they helped toincrease its size. Major audit firms suchas Andersen captured part of thestrategy market, and helped to expandit through referrals from their auditteams to their newly formed consultingarms (in this case, AndersenConsulting, now known as Accenture).

The Internet bubble of the late1990s gave birth to new firms andforced traditional ones to take adaptivesteps. The newcomers captured somemarket share – though not enough toscare established firms, a couple ofwhich doubled in size at the height ofthe New Economy bubble. Moreannoyingly, they attracted top talent,forcing the leaders to makeorganisational changes.3 But a few shortyears later, most of the new firms havedied, and the changes at traditionalfirms have generally been rescinded.Even in size, most traditional firmstoday are much the same as they werein 1997.

A dramatic market change

Recently, it has become obvious thatstrategy is a particularly difficultconsulting niche in adverse economicconditions. The capacity to offerimplementation has ceased to be astrong differentiator. Several boutiquestrategy consultancies, includingMonitor, LEK, Marakon and OC&C,have grown to a size at which they canoffer global coverage. Yet during thistime, some new ideas – such as realoptions, value webs, experiencearchitectures, knowledge management,business process outsourcing and even“casual Friday” – have been integratedinto the standard portfolio ofestablished firms. It is thus all the more

Although traditional consultancies remain industry leaders, new business models focused on specific niches

are emerging. Marc Kitten examines how these innovative firms are catering to an evolving market.

New approaches tostrategy consulting

11INSEAD Quarterly 2005

striking that the leadership of theestablished consulting brands has notbeen seriously threatened – at least, notto the point where their services areperceived as a commodity. A foundingpartner of a well-known boutiquerecently summed up the situation: “Forthe same exact proposal, the McKinseyname generally carries a 20%premium, at least.” It could thus beargued that changes in the consultingindustry have not been significant forsome time.

But what about the market? Ibelieve that it has, in fact, changeddramatically since the mid-1990s, andthat the changes call for an innovativeapproach to strategy consulting. Figure 1 sums up the four driversbehind these changes.

Let’s look at these drivers, and theircumulative impact, in turn.

Clients are becoming much smarterconsumers of consulting services.

And that is no accident, because inrecent years, many of them haveactively hired former consultants as linemanagers and as internal consultantsor strategy team members. Thephenomenon was particularly evidentfollowing the dot-com meltdown, whenmany sharp, well-trained consultantsleft firms like McKinsey or BCG to joinclients. The top firms had hired toomuch talent in their phase ofexuberant growth. But the eventualconsequences, once firings andvoluntary departures reduced thefirms’ internal talent oversupply,included providing clients with some ofthat same talent – and, by the sametoken, eliminating their need or desireto hire a consultancy.

Informal interviews with partners orformer partners from several majorstrategy consultancies and executiveswho buy consulting services, as well asmy own experiences, show that thisheightened customer consciousness isleading clients to put pressure on fivemain dimensions of consulting:

• They demand shorter projects.

• They require the work to be carriedout by senior people.

• They hire junior consultants directlyto do their internal analyses.

• They tender projects (often to gainfree valuable market analysis and ideasfrom all serious players), and activelynegotiate the fees.

That last point is immenselysignificant. The idea of tendering is inclear opposition to the traditionalapproach to strategy consulting, whichassumes a strong trust-basedrelationship between the seniorexecutive and his or her adviser. I amnot saying that such relationships havedisappeared – just that they areexposed to growing pressure fromclients’ shareholders, who seektransparency and value for money. Thekey point is that while McKinsey, BCGand Bain retain their premium overother industry players, many clients arenot willing to buy the usual product atthe usual rates.

The value of “top level” strategy-only projectscan be harder to justify.

Against a backdrop of volatileeconomic conditions, rising pressureon margins and growing competition,clients increasingly balk at projectswhose benefits cannot be clearlyquantified, and whose successfulimplementation cannot be assured.Shareholders expect immediate ortangible results especially duringdownturns, when strategy can besignificantly devalued.

Two intertwined trendssupport this resistance:increasing complexity and agrowing reliance on technology.

• In many industries, such ashealthcare, financial markets, energyand high tech, complexity hasdeepened to the point where basicbusiness frameworks no longer suffice.Instead, an informed and creative

approach to strategy, one that can bothmaster and cut through detailsbecomes necessary.

• At the same time, client successes areincreasingly and heavily dependent ontechnology. A “top-management-only”approach can lead to disaster iftechnological issues are notincorporated, which means that a trueunderstanding of the technologiesinvolved in a strategy, and of how theywill be implemented, is essential. It isworth noting that this insight can beread as an extension of Bain’s conceptthat strategy must be tightly linked withimplementation. In a more recenttwist, the management consultingfirms that developed within the BigFive audit firms played the technologycard with success, because IT-drivencontrol systems are central to theirestablished competencies, and IT nowplays a more important role in overallstrategy. The success was mitigated,however, as CEOs experiencedfrustrating dependency on ITconsultants and sought instead to hiretrustworthy deputies who couldunderstand the technology and itsstrategic implications.

Competition from niche consultancies,networks, the Big Five, investment banksand research houses is increasing.

Clients becoming much

smarter consumers

Dynamic market

and economy

Value of Top

Level strategy

only projects

hard to justify

Increased

competition

from I-Banks,

Big-5, niche

consultancies,

research houses

Figure 1

New approaches to

strategy consulting

INSEAD Quarterly 200512

Niche consultancies andfreelancers have hugely profited fromthe information revolution.Information is no longer reservedto, and controlled by, the big players,either access to it or how it can beexploited. In some cases, well-organisedindividuals can even play on levelground with the large firms, becausethe Internet and high-end PCs givesmall consultancies similar access andresources: Many lower-value activitiescan be quickly outsourced.

• Everyone can develop hugequantitative models and fancypresentations.

• Independent consultancies andfreelancers can work with each other invery effective networks.

These trends are supported andadvanced by increasing specialisation inprojects and issues. Specialisation has adouble character here. First, there is amarket for specialised advice. We areseeing an interesting ballet between thetraditional firms and the smallerplayers, each jumping from onelucrative specialised opportunity toanother. Often the opportunity islinked to a global issue such ascorporate governance, derivatives,renewable energies, elderly care, wastemanagement or pensions, to name onlya few. Second, despite their deeperresources, and despite the global natureof some issues, even big firms cannot bepresent and credible in every domain.It’s as if there were a consultingequivalent of single-issue politics;increasingly, clients say they find inniche consultancies the combination ofnot only flexibility and cost-effectiveness, but also expertise, thatthey believe is missing at the top firms.

Competition isn’t just coming fromthe fringes; it will keep coming frommajor players in other domains. Thefact that some of the Big Five auditfirms eventually withdrew from strategy

consulting doesn’t mean that theyor their successors won’t reinvest ifthey see enough value in it.

Likewise, faced with more fluid andtransparent financial markets,investment banks have developedstrong sector research to improve theirvaluation capability. Many of theiranalysts are former strategy consultantswho have been trained to integratestrategic options into their thinking.There is thus a growing common areaof market research occupied by bothinvestment bankers and the corporatefinance teams of strategy consultancies.This overlap is affecting the market forstrategy consulting, as Fortune 500clients gain access to the sector researchprovided by the investment banks – andsometimes find it sufficient to informtheir strategy needs.

Finally, research houses likeGartner and Forrester have developedconsulting arms or services to capitaliseon their research and analyticalcapabilities, and to capture part of thevalue chain. In contrast to the specialtyniche players – and perhapssurprisingly, given their IT roots – theybenefit from the commoditisation ofcertain types of projects. They areespecially in demand when, forfinancial reasons, implementation isnot purchased from the initial supplier,which happens to be a frequent case instrategy consulting.

The market and the economy are becomingmore dynamic, and volatility is increasing.

This general situation has specificimplications for strategy consulting.Phenomena such as the dot-com boom

and bust havedemonstrated that in

some cases theestablished firms

can be slow to adapt toquickly evolving market conditions.

The main issue, developed in Figure 2,can be simply stated: In volatileconditions it is often harder for largefirms than for small ones to recruit theright people, get rid of the wrong onesand adjust rewards appropriately. Andthat is critical, because in the finalanalysis, consulting is about talent:people who can observe, thinkthrough, communicate and motivateother people to solve their issues.

Where are these driversconverging? I think they explain avisible phenomenon: various newstrategic consulting business modelsare emerging to adapt to changingdemands. These models tend to clusterin firms with two characteristics: theyare specialised or niche players withinternational reach, and they arestrongly influenced by alumni ofMcKinsey and other top firms. Somenames and prototypes to remember:

Candesic (to which I belong)functions as a coherent firm of independententrepreneurial consultants. This modelclosely aligns with that of lawpartnerships, where partners worktogether to develop a brand but arealso accountable for their own clients.The essential idea involves a full-timegroup of consultants working with part-time, in situ experts to deliver rigourand expertise in one package. Inresponse to the main critique ofstrategy consulting – that it stops where

New approaches to

strategy consulting

The Next Practice

Client leads

Generic

Specialisation

Flexibility

& cost

Develop unique solutions with

the client teams, acting as strategic

and operational coaches rather

than as classic consultants

Deliver top practical and

actionable advice using

proven talent from top-

tier firms and a broad network

of industry experts, analysts,

and research capabilities

Offer the best value –

driven advice to the

world economic leaders

Significantly increase our

clients brand and customer equity,

and hence, increase our clients

value in the marketplace

Increase the effectiveness of

executives and their enterprises

by discovering and teaching to

this membership the best

new thinking and strategies

from across industry and

around the world

Corporate

Executive Board

Candesic

McKinsey

BBDO Consulting

Figure 2

New approaches to

strategy consulting

INSEAD Quarterly 2005 13

implementation begins – Candesicpairs consultants with field experts whoare currently employed in theirindustries (making sure that there is noconflict of interest, of course).

It is interesting to note that thisparallels the knowledge managementpractices of firms like Accenture, whichmaintain their own networks ofexperts. It is also a low–fixed-costbusiness model that allows clientsaccess to consultants with internationalbackgrounds who have already beentrained at the top consultancies andare looking for a more entrepreneuriallifestyle or want to pursue a portfolio ofactivities. In other words, Candesic’smodel aims at allowing a boutique tocompete for high-end consultingtalent, while promising its clients analternative to traditional firms.

The Next Practice was founded in2004 by C.K. Prahalad, one of the mostfamous management gurus. Their workstarts from the assumption that the besttalent for strategic innovation is to befound within client firms. They act asstrategic and operational coaches, bothstretching and supporting client teamsas they seek answers on their own,rather than as classic consultants. Thisco-creation of strategy starts within theclient company, but may also involvevarious other stakeholders. The NextPractice professes that there is rarelyneed for a big consulting team; a fewenablers are sufficient to drive thelearning process in a very Socratic way.The promised advantagefor the client isknowing that it willbe able to fullyinternalise the relevantissues and theirmanagement.

The Corporate ExecutiveBoard provides best practicesresearch, decision support toolsand executive education to 75% ofthe Fortune 500 companies.4 CEB

recognised that many corporationsface the same business problems andmade addressing these issues a nichepractice, by offering informed genericrecommendations to its subscribers.Together with member firms, CEB’sconsultants first identify issues ofgeneral interest in a given industry.Researchers develop and structurebest practice analysis based onintensive interviews and marketresearch, and list recommendations.Further value is added by sendingconsultants to train and coachexecutives in the client firms.

BBDO Consulting is the only strategicmanagement consultancy integrated withina global marketing communications agency,Omnicom. Founded in 2000, it hasestablished its expertise in brand,segmentation and pricing strategies,with an approach that considersconsumer behaviours and commercialdrivers equally, makingrecommendations in the context ofmarketing and sales executionrequirements. Like others, BBDO hasretained the Bain lesson that strategywithout execution makes no sense. Itsconsultants also overseeimplementation and providemonitoring of its recommendedstrategies. Since its founding, the firmhas grown to cover the UK, Germany,Spain and Switzerland, in the process

UPTURN

• Hard to keep people

(war for talent)

• Hard to raise per diems quickly

to long standing clients

• Hard to raise compensation of

non-partners to market level

Large strategy firms

find it hard to adjust

to the more rapidly

cycling economy

DOWNTURN

• Hard to make people redundant

(top firms never fire people)

• Hard to lower per diems to

market levels due to high

commited cost base

• Hard to lower compensation of

non-partners to market levels

attracting more than a hundredemployees from other firms.

As figure 3 suggests, each of thesemodels is based on the intensiveexploitation of a single idea in aspecific niche. Though my exampleswere created by or with McKinseyalumni, they do not have a monopolyon innovation in consulting. However,I do find that innovative models foroffering strategic advice are nearlyalways shaped by former consultantsfrom top firms. The workingmethodologies and rigour topconsultants bring with themcontribute both to expanding themarket for strategic advice and tobringing it closer to the evolvingneeds of specific clients. Theimplication is that the traditionalconsultancies will remain important asplayers, as competitors and as sourcesof ideas. Yet my main point is that newconsulting business models are a forcethat can’t be ignored. I would arguethat despite difficult economicconditions, we will see further changeand variety in these models, not less.Quite simply, in an increasinglymature consulting industry, one sizewill never fit all again. IQ

About the author:

Marc Kitten is a partner at Candesic in London and

Paris, and a former senior consultant at McKinsey &

Company. He attended the Young Managers Program in

1997 while at Deutsche Bank. He holds an MBA from

Chicago GSB and graduated from Edhec. He is also an

adjunct professor in strategy and finance at several

MBA and MSc programs in Europe.

Figure 3

1 See the 2004 biography McKinsey’s Marvin

Bower, by E. H. Edersheim, Wiley EDITIONS.

2 See Dangerous Company: Management

Consultants and the Businesses They Save and

Ruin by James O'Shea and Charles Madigan,

Penguin Putnam, for more on the history of

those firms.

3 Zefer, a consultancy set up by a former

McKinsey analyst in 1997, grew its staff to

almost a thousand in two or three years, and

disappeared less than a year later.

4 Source: company website