Thoughts on the State of the Consulting Industry

Last updated on May 10, 2023

From a bird's-eye view, it doesn't feel like much has changed in the consulting world.

The Big Three are still The Big Three, flocks of college and MBA students become consultants after graduating, and synergies are still a partner's best friend.

But if you take a closer look, it's a completely different story: the industry is rapidly evolving, and it has been for quite some time.

While traditional consulting firms - those that focus on diagnosing and solving complex, ambiguous problems through project-based work - still appear to be in the driver's seat, there are signs that a change is imminent. In 2013, the share of work that is "classic" strategy for these firms was already down to about 20%, a sharp decline from 60-70% in the 1980s, and it's only continuing to decrease.

In reality, the consulting industry has quietly reached a critical juncture that will force firms to adapt or be left behind.

So how can firms thrive as the industry enters a new era?

McKinsey has already paved the way. Despite its massive success as a strategy shop for decades and its position at the top of the consulting food chain, McKinsey did not rest on its laurels and invested in a new method of delivering its services.

In this article, we'll break down why the consulting landscape is shifting and how firms can follow McKinsey's path to set themselves up for success.

Why Traditional Consulting Firms Are Under Attack

Before diving into how consulting firms can adapt and succeed in this new era, it's important to understand why they need to adapt in the first place.

Here are the main shifts in the industry that caused the massive decline in the need for classic strategy work:

Rise of independent consultants and freelance marketplaces

Having offices nationwide (or globally), a bench (more on that later), and expensive recruiting and training programs used to be a necessity. But firms such as Eden McCallum, who use an alternative business model centered around teams of freelance consultants, have challenged that notion.

By building teams of freelance consultants - often former employees of traditional firms - from a talent network, they avoid the entrenched structure and overhead costs that come with being a traditional consulting company. As a result, these alternative firms are able to not only charge significantly less for their work but also bring in a more experienced team and give clients more control over engagements.

This lean approach has enabled these types of firms, who initially began by serving smaller companies that traditional firms typically aren't able to, to grow and serve larger clients, creating more competition to win projects.

Democratization of data & emergence of technology-enabled solutions

In the past, a large part of consulting projects involved gathering data (e.g., about competitors). But today, access to data is much more widespread (through market research firms, databases, etc.), reducing the need to pay consulting firms for this type of work. Some of these companies, such as Gartner and Forrester, are even packaging their research with advisory services, which has introduced more competition for traditional firms.

And it's not just the availability of data that is hurting traditional firms: it's what has become possible with that data. Firms like RocketSource are leveraging AI-powered analytics to provide data as a service, which gives companies actionable, easy-to-understand insights from large sets of data.

While traditional firms have certainly taken action to either build similar capabilities in-house or acquire them through M&A, the growth of AI and big data has introduced a wave of non-traditional competitors to the industry.

Clients becoming more educated and building in-house capabilities

In recent years, clients have become more sophisticated:

Diversification of services: Clients have become increasingly educated about the specific services they require, and appreciate that there are different firms with different skill sets. In turn, some of the services that were included as a part of large consulting projects in the past are now being outsourced to other vendors. This has reduced clients' dependency on consulting firms to conduct all of the work and decreased the size of consulting engagements.
Pricing models: Clients are less accepting of projects with ambiguous outcomes and are pushing for value-based pricing, where they pay for measurable results, rather than the hourly rates of the consultants.
In-house capabilities: Clients are further reducing their reliance on traditional firms by building out in-house capabilities to address their business challenges, which is often done by hiring talent directly from consulting firms.

Overall, these shifts have resulted in more competition, smaller projects, and increased demand to demonstrate true, differentiated value.

Internal Challenges to Overcome

The threats to traditional consulting firms are not just external - their own internal structures and business models present another set of obstacles that need to be overcome in order to succeed in this new era.

Reliance on project-based work

Traditional consulting firms are heavily reliant on project-based work to generate revenue. While this has been a lucrative strategy thus far, as the scope of projects continues to become smaller and competition for projects becomes more saturated, the time and energy required to secure projects and the unpredictable nature of projects becoming available will begin to take a toll.

Simply put, depending solely on project-based work for revenue is no longer a sustainable strategy.

If the steep decline in strategy work over multiple decades isn't enough to convince you of the danger of over reliance on project-based work, consider how rapidly disruption has knocked off leaders of other industries. Blockbuster, for example, posted a record $5.9B in revenue in 2004, right in the middle of a two year stretch in which its market value tumbled by 75%. And just six years later, thanks in large part to Netflix's ascent, Blockbuster filed for bankruptcy.

Moral of the story: don't be f0oled just because something has worked for a long period of time. Companies with deep-rooted success are often the most susceptible to disruption because they don't want to recognize its existence.

The cost of a firm's bench

Unstaffed employees are an eyesore for any partner. When consultants aren't staffed on a project, it's a major cost to the business.

The cost of recruiting, training, and onboarding employees

Consulting firms have to spend significant time and money to attract, train, and onboard employees, only for many of these employees to leave (~18-20% turnover rate for top firms). This creates a never-ending cycle of recruiting, hiring, and losing talent.

These internal structural challenges, coupled with outside shifts, point to a glaring need for consulting firms to reduce their dependency on project-based work and to find a way to utilize their resources more efficiently.

The Solution: Kill Two Birds With One Stone

We've spent the entire article so far examining the threats to traditional consulting. But in the midst of the changing landscape, firms have a chance to seize a major opportunity that utilizes their strengths - just as McKinsey has.

Traditional consulting firms have two major assets that new entrants to the market do not:

Years, if not decades, of experience and deep expertise
Significantly more resources to deploy

Here is how firms can win by properly leveraging both to their advantage:

1. Turning A Firm's Collective Knowledge Into Recurring Revenue

A consulting firm's value is, in essence, its collective knowledge and the expertise of its consultants.

Why, then, is it only being deployed on projects?

More often than not, once a project for a client is completed, all of the insights, learnings, and deliverables that came out of it end up collecting dust in a Teams or Sharepoint folder.

Sure, maybe the slides that were created will be shared with analysts as templates to work off. And without a doubt, the folks who worked on the project will utilize the knowledge they gained on their next one.

But firms are missing out on what is quite literally a goldmine by sitting on these insights, learnings, and deliverables that they are gaining from every single project, not to mention the wealth of best practices, methodologies, templates, and other knowledge that the firm has established from years and years of working with clients that they deploy on a daily basis.

What's the solution, then?

It's actually quite simple: repurpose and monetize the research, insights, best practices, methodologies, templates, and other knowledge gained from project-based work into recurring revenue streams.

Which is exactly what McKinsey has done by building McKinsey Solutions, a suite of asset-based solutions that reduce dependence on project-based work.

Failing to invest into a similar solution is the equivalent of wearing a great outfit once.

Ironically, the same trends that are leading to smaller project sizes are also leading to increased demand for specialized expertise and industry-specific knowledge. Said differently, the firms that are able to maximize their unique industry knowledge and expertise in specific areas will succeed.

So instead of letting these incredibly valuable assets sit in a Teams folder or inside a partner's head, or used exclusively during a project, firms should be packaging them into hubs of knowledge that they can charge a subscription fee to access.

This can help traditional consulting firms in several areas:

Reduce their dependence on project-based work

As we discussed, relying solely on project-based work to generate revenue in today's landscape is not sustainable. Repurposing learnings from project-based work into subscription-based products provides traditional consulting firms with alternative revenue streams.

Create efficient and passive sources of income

The beauty of repurposing work they've already done and the knowledge they've already gained is that they are 1) able to build revenue-generating assets much faster and with less effort than projects and 2) have assets that generate revenue that are not reliant on billable hours.

Allow firms to serve smaller clients downstream

This is perhaps the most important takeaway of the entire article. The reason SMBs are so difficult for traditional consulting firms to serve is that they have less cash to spend and often have less nuanced problems than larger clients. So typically, the only way to serve these companies for traditional consulting firms is to either:

Reduce their rates significantly, which results in firms operating close to margin or even losing money from the project; or
Deliver a watered-down version of a project that is delivered to a larger client (e.g., less staff, less customization), which usually results in an underwhelming outcome.

However, the ability to offer access to a hub of knowledge for a subscription (e.g., industry insights, pricing best practices & methodologies, etc.) completely changes this dynamic and enables traditional consulting firms to not only serve SMBs well but also build a fruitful and long-lasting relationship with them. Here's why:

A consulting firm can show its understanding and appreciation that an SMB has less cash flexibility: rather than try to force an overly expensive or difficult-to-execute project onto an SMB, a firm can offer a subscription to access ongoing insights and expertise at a fraction of the price of what a project would cost, showing that they recognize that it would be better for the business to save money.
An SMB would greatly benefit from learnings gained by a firm working with larger companies in their industry: a smaller business likely has less nuanced issues than larger companies, but will probably face similar problems as companies in their industry. So providing access to knowledge that a firm gains from serving larger companies in their industry is a perfect way to serve the SMB.
An SMB is leaning on a firm's expertise: by an SMB accessing a hub(s) of a firm's insights to help them solve their problems, the SMB will trust the firm more and more over time.
When an SMB grows and begins to experience more nuanced problems, it will turn to the consulting firm for project-based work: now that an SMB has been subscribing to a firm's hub for an extended period of time, when they do grow and are ready for a more typical consulting engagement, the SMB will in all likelihood turn to the firm they have leaned on for its insights.

In short, repurposing knowledge into subscription revenue streams and updating them on an ongoing basis is a perfect way for consulting firms to serve more clients, generate more revenue that isn't solely project-based, and create opportunities for future growth that were not possible before.

2. Utilizing Its Resources Creatively

Now that we've established the solution, the next question is who will be responsible for implementing it.

And our answer is music to any consulting firm's ears: the bench.

A fantastic way to utilize consultants on the bench is to have them be responsible for the majority of the work that goes into building and maintaining these hubs:

They can go into project folders and pull out the relevant materials and insights, and package them into hubs.
They can interview managers and partners on current projects and add new learnings and insights to the hubs in real time.

This allows the bench to participate in a productive, revenue-generating activity for firms, rather than being a direct cost.

Building and maintaining hubs could also be a great activity for new employees to participate in during the training/onboarding process as a way to learn more about the firm and gain some knowledge through osmosis. This could help to offset some of the cost of training and onboarding, as now, part of the process would involve a revenue-generating activity.

So not only is there a way for consulting firms to turn the expertise they have gained and continue to gain from project-based work into recurring revenue, but also to turn their personnel challenges into strengths to do it.

Hence, two birds with one stone.

The Bottom Line

The consulting industry is in the midst of disruption, thanks to alternative business models, the democratization of data, new technology, and clients becoming more sophisticated, and the pace of change will only continue to speed up.

With everything changing so quickly, it's more important than ever to stay agile by investing in R&D, actively pursuing new pilots, and experimenting with new ways of generating revenue.

If traditional firms want to survive and thrive in this new era, they need to find ways to repurpose their existing knowledge into recurring revenue streams and creatively leverage their resources to do so.

Only time will tell which firms will respond to this change. Those that can't will likely be in for a very difficult decade ahead.

PS: The Platform to Make It Happen

The only question that remains, then, is how to actually go about creating these hubs of knowledge and packaging together assets to start generating revenue.

Enter Kahana, the collaborative platform built by former consultants to do exactly that. We collaborate with experts to monetize their collective knowledge and build dynamic hubs their clients love.

Kahana allows a firm's employees to collaborate and create an unlimited number of hubs, easily package materials into each hub, and set a price point for each one.

If you're interested in working with us, we'd love to hear from you!

Let's chat

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