The Future of Consulting

European Straights, 2020-05-08

  • Consultants cleverly sealed alliances with the most prestigious universities and business schools (McKinsey – U of Chicago, BCG - Harvard). They created a rule of hiring the best and were present at all job fairs. These best graduates were good with modelling and scientific methods, which allowed their work even to be quoted in research publications.

  • Information is becoming more commoditized, and customers increasingly refuse to pay top dollar for it; shift to using information instead of selling it. Value investing makes sense when the info is scarce, but now it’s abundant and monetizing info arbitrage is not always possible. So the job of consultants is selling the future, not the present.

  • Everyone can be a consultant: lots of bloggers and Substack authors provide quality content for free (with a benefit to themselves, of course). Cheap and valuable expertise is eating the world, and big firm consultants are feeling the pressure.

  • Innovation is about breaking constraints, strategy is about embracing them. There’s no monopoly on innovation, and the competition is intense. [MK: in practice, large firms have the most innovations, and smaller firms increasingly get acquired before they get a shot at becoming big.] The cost of starting something is virtually zero.

  • The traditional consulting approach of passing info from a company to a company is not applicable for innovation, which is about ignoring the competition.

  • Scaling is increasingly becoming a non-issue as firms have figured out how to do it in an asset-light (and CAPEX-light) way. Reaching the scale, however, is unique to each firm, which can’t be commoditized.

The value chain of consulting

  • Top: essential assets, i.e. body of knowledge and know-how. Hardly defensible (with a few exceptions related to IP) and get stale quickly.

  • Bottom: junior consultants working with clients. Non-existent bargaining power with their firms.

  • Middle: designing the product (by converting the assets) and marketing/distributing it under the consulting firm’s brand. Retain most of the value added and keeps the profits.

  • So it may so happen that consulting and private equity will converge: instead of selling consulting to a firm and getting the consulting fee it’s more lucrative to take a stake in the firm and reap the benefits of the applied know-how.

New ways of doing business

  • The emergence of asset-light players (aggregators, marketplaces) pushes costs down. Keeping numbers requires increasing scale at the cost of inflexibility and deteriorating quality. Low pricing power —> poor quality or bankruptcy (further reducing the variety of services in the market).

  • The best way to assess the strength of an early-stage venture is to provide advice. This reduces the investment risk and increases the expertise within the firm.

  • Repeat this 10-20 times, and you can raise your own fund.

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