By: Frode Lundsten
It is coming our way, and we had better be prepared and ready. What (probably rightly) began in the legal industry is hitting management consultancy: an outcry against paying by the hour and paying premium rates for consultants just out of business school. Let me be straight out: I am worried but excited! Worried because I foresee a market shift that will erode and potentially eradicate the business model of management consultancy as we know it today. Exited because we (the readers), through InnovationManagement, have the chance to innovate the business model!
Crisis billing in the legal industry
The Global Financial Crisis (GFC) has forced companies of all sizes to reduce costs and scrutinize budgets for potentials savings. This includes the legal industry which has come under increasing scrutiny in terms of the value received from legal staff. This has resulted in demands from unyielding clients for alternative fee arrangements (AFA).
An emerging model in the Legal industry is the “virtual” firm, which acts as an intermediary
These demands have spurred creativity and started an innovation process within an industry that prides itself in being tradition-bound and conservative. So far, resulting AFAs for legal services at associate level are variants on a spectrum that goes from in-sourcing headcounts to out-sourcing e.g. to India, where an emerging model in between is the “virtual” firm, which acts as an intermediary between freelance lawyers and clients, on a case by case basis (Knowledge@Wharton “Legal Strategy 101: It’s Time for Law Firms to Re-think Their Business Model”, 29 April, 2009).
For the legal industry this issue relates to the fundamentals of their business model. The basic business model for legal services is based on leverage (the ratio between partners and associates), knowledge, and experience. These levers traditionally have favoured the formation of larger, highly-leveraged law firms. The balance among the market forces in Porter’s Five Forces model favours those firms that have included possible risks related to their client in the industry’s practice of billable hours. This business model, according to Olivier Chatain, Wharton management professor, is very sensitive to downturns as a 10% revenue decline can result in a 30% decline in profits.
Will clients demand AFAs in management consultancy industry
The answer to this rhetorical question is yes! The real question is more likely: Has the management consultancy industry accepted that AFAs are here to stay? The answer to this is, I am not so sure – and I am part of the industry!
The management consultancy industry may not yet have accepted the new trends.
Many readers undoubtedly will argue that AFAs have always applied in the industry, that AFAs apply when the management consultancy firm presents the client with a proposal at a fixed price or with maximum billable hours. If so, then I would argue that this is not in the spirit of an AFA that has been requested by the clients. The risk remains primarily on the client side and the price or time estimate, shielded by contingency and buffers, is just a clever disguising of billable hours.
Demand for AFAs exists, and the divide between the market, our clients, and the industry – the management consultancies, is becoming more and more visible and more difficult to ignore. The purpose of this article is to start the collaborative process of innovating the business model of management consultancy, the reason for my excitement. So what are the premises for such collaboration?
The two business models have similarities
Similar to the legal industry business model, our industry’s business model has an element of leverage built in to optimize scalability. I would argue that the leverage within the management consultancy industry is higher than that in the legal industry because of its specialization, which brings us to the second element in the business model: knowledge.
Where the barrier of entry into the legal industry as an associate is high and governed by regulation and in part by an industry-specific organ, e.g. The American Bar Association, the barrier to entry into management consultancy in significantly lower. In Denmark anyone can open a consultancy business and declare him or herself to be a management consultant, which makes it very difficult for the client to find the right consultant for the job. I would argue that this is why perceptions and credibility of consultants is so low, to the detriment of the knowledge transfer and knowledge sharing expected by client organizations.
The third key element in the basic business model is experience. Experience from similar situations, repeated again and again, to draw out best practice. Such experience, however, is often rooted only in specialist consultants who emerged having had solid experience in the sales process. Too often consultants have no hands-on experience and rely on best practice in other clients in similar situations and contexts. I would argue that this all too common lack of hands-on experience within the management consultancy industry is one of the key reasons for the industry’s lack of commitment to success and results, since the world tends to be viewed through the lenses of assumptions and disclaimers which its clients have to use in every day innovation activity.
The game is afoot
The challenge facing us is how to innovate the business model of management consultancy given the following four considerations:
- the business model must be seamlessly scaleable. If the new business model is to be viable in the long run, then management consultancy firms of all sizes must be able to use it.
- the business model must not be based on billable hours, days or weeks. The business model should look at the industry and offer consultancy services from a completely new perspective.
- the risks and opportunities must be equal between client and consultancy firm. Currently, every contract negotiation represents a win-lose situation, in which one part puts the risk on the other party. For the new business model to be adopted generally then new key performance indicators (KPIs) must be identified and agreed. Commitment to mutual success must be a part of the business model.
- the business model must be low-leveraged to remedy the mistrust between the market and the industry engendered by the current high-leveraged business model.
To maintain a transparent and open collaboration process, this innovation will take place on InnovationManagement. I will keep the collaboration open to readers for one month, and moderate posts only if their language or tone is incompatible with aims of Innovation Management.
New winds may be blowing, but we will be prepared for them. The revolution that began in the legal industry could be a wakeup call for the management consultancy industry. Perhaps InnovationManagement can help the industry to avoid erosion and potentially eradication. Nevertheless, management consultancy as we know it today, will change.
By Frode Lundsten, MBA, Guest Editor, Denmark