BackConsulting is becoming outcome-linked, with mixed consequences
In outcome-based models, the risk is shared between the client and the consultants
PremiumAs a career consultant, I have heard many consulting jokes. Like the evergreen one about consultants taking 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 multi-nationals, domestic 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 key reason is that consulting hoards talent. Across geography and time, consulting remains one of the coveted choices for the best graduates of professional (and increasingly, humanities) schools.
This concentration of talent ensures that consultants continue to find ways to remain relevant to clients. Two important trends illustrate this point:
First, as mentioned in my earlier column, with the integration of strategy and technology, management consulting firms are increasingly building deeptech capabilities. Accenture is a tech firm with consulting capabilities. McKinsey is calling itself a technology firm and the others are following suit. Tech firms are scrambling to respond, by partnering with or buying consulting firms.
Second, commercial models are increasingly becoming outcome-linked. To be clear on the models: Traditionally, consultants work for a fixed fee. In output-based models, payment is linked to producing an artefact (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, growth in revenue or profits, successful integration of an acquisition, improved inventory levels, target customer acquisition and so on.
In outcome-based models, the risk is shared between the client and the consultants. The consultants make disproportionate fees if the client is successful. Else, the fees are little or none. While this seems 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 clients are willing to embed consultants in their internal teams and ignore attribution:
A prominent Indian IT services firm has integrated a global consulting firm into its strategic accounts team. The consultants have unfettered access to the client’s top hundred customers. The consultant gets paid a part of any growth achieved by farming these clients. An equally large consulting firm has its teams in its construction client’s project sites to implement cost-control measures. The consultant gets paid from the savings delivered. An Indian healthcare services firm has hired a global consulting firm to line up clients for its European expansion. The consultant will be paid a part of the European revenues for the next three years. A prominent home-grown firm insists that clients pay a part of the savings through operational improvement projects as fees. Similar examples abound and are increasing. Our estimate is that by 2025, a third of the consulting contracts in India will have some form of outcome linkage.
What is the impact of this evolution? One obvious positive is that consultants are now paid based on what they deliver and not just recommend. If consultants are paid from what they earn (or save) for the client, a wide range of clients will be willing to hire consultants and help grow the industry. Likewise, clients who are unable (or unwilling) to pay large fees can now benefit from consulting services.
However, is it all good?
As the above examples illustrate, clients are increasingly “outsourcing their core competence" to consultants. Will this impact their long-term competitiveness, or as some pundits are arguing, the concept of core competence itself is passe (instead, required competence can be sourced from a firm’s “network" and need not be held in-house.) If consultants deliver the most critical results, why should firms attract, train, and retain in-house talent? It is particularly challenging for middle-managers, as theirs are the roles consultants replace. Consultants work across clients and know their competitive differentiations. In these models, it is likely that a consultant may be advising one client against another client—is that ethical? And eventually, will it be one consulting firm competing against another, rather than client versus client? Answers will emerge. But this is for sure—as talent hoarders, consultants will find a way to remain relevant and make money. The impact on clients, and their people, may not be entirely positive.
Abhisek Mukherjee is co-founder and director, Auctus Advisors.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
