Advice becomes linked to results, with mixed consequences

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As a career consultant, I’ve heard many jokes about counseling. Like the evergreen one about consultants who take your watch to tell you the time. Yet, the management consulting industry continues to grow at a compound annual growth rate (CAGR) of 15-20% over the past decade. Whether it’s multinational corporations, national conglomerates, funded startups, or even governments, clients are willing to pay consultants to solve their most critical challenges. While there are many nuanced socio-economic reasons for this, one of the main reasons is that the board is hoarding talent. Across geography and time, counseling remains one of the coveted choices for top graduates from vocational schools (and increasingly, the humanities).

This concentration of talent ensures that consultants continue to find ways to stay relevant to clients. Two important trends illustrate this point:

First, as mentioned in my previous column, with the integration of strategy and technology, management consulting firms are increasingly developing deep technology capabilities. Accenture is a technology company with consulting capabilities. McKinsey calls itself a technology company and the others follow suit. Tech companies are scrambling to respond, either partnering up or buying consultancies.

Second, business models are increasingly linked to results. To be clear about the models: Traditionally, consultants work for a set amount. In outcome-based models, payment is tied to the production of an artifact (e.g., board-approved strategy, organization design, etc.) In outcome-based models , consultants are paid only when the client achieves the desired result, for example, revenue growth. or profits, successful integration of an acquisition, improvement of inventory levels, acquisition of target customers, etc.

In results-based models, the risk is shared between the client and the consultants. Consultants make disproportionate fees if the client is successful. Otherwise, the fees are minimal or nil. While that sounds fair, a key challenge with this model is attribution: how much of the success is attributable to the consultant versus the client’s own team. The following examples illustrate that customers are willing to integrate consultants into their internal teams and ignore attribution:

A leading Indian IT services company has integrated a global consulting firm into its strategic accounts team. Consultants have unlimited access to the client’s first hundred clients. The consultant is paid a portion of any growth achieved by cultivating these clients. An equally important consulting firm has its teams on the worksites of its builder clients to implement cost control measures. The consultant is paid from the savings made. An Indian healthcare services company engaged a global consulting firm to line up clients for its European expansion. The consultant will receive part of the European income for the next three years. A leading local company is insisting that customers pay for some of the savings from operational improvement projects in the form of fees. Similar examples abound and multiply. Our estimate is that by 2025, one-third of consultancy contracts in India will have some form of link to results.

What is the impact of this development? A clear advantage is that consultants are now paid according to what they deliver and not only according to their recommendations. If consultants are paid on what they earn (or save) for the client, a wide range of clients will be willing to hire consultants and help grow the industry. Similarly, clients who cannot (or do not want to) pay large fees can now benefit from counseling services.

However, is everything okay?

As the examples above illustrate, clients are “increasingly outsourcing their core competency” to consultants. Will this impact their long-term competitiveness, or, as some experts argue, the concept of core competency itself is outdated (instead, the required competency can be sourced from the “net” of a company and do not need to be owned in-house.) If consultants deliver the most critical results, why should companies attract, train and retain internal talent? This is especially difficult for middle managers, as these are the roles that consultants are replacing. Consultants work with multiple clients and know their competitive differentiations. In these models, a consultant is likely advising one client against another client – ​​is this ethical? And ultimately, will it be one consulting firm competing against another, rather than a client against a client? Answers will appear. But it sure is – as talent hoarders, consultants will find a way to stay relevant and make money. The impact on customers and their employees may not be entirely positive.

Abhisek Mukherjee is co-founder and director, Auctus Advisors.

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