Disruption in the Consulting Industry through Innovation
Indian Institute of Management-Calcutta
Foundation Day Lecture
16th November 2015
Founder and CEO –Sumantrana Management Consultants LLP.
Thank you for inviting me to deliver this Foundation Day Lecture at IIM Calcutta. It is a great honour and privilege for me to have the opportunity to exchange my thoughts with you. IIM-C has a special place in my heart. I started coming here as a young consulting partner of Price Waterhouse scouting for talent. Some of the recruits are now partners in consulting companies like IBM, PwC and Deloitte Consulting. Many of them are in the US or Europe. Then I started coming here for the occasional talk and finally, when the Peter principle caught up with me, I served on the Board of Governors of this great institution.
I have been a consultant since 1986. For almost three decades, I have consulted with a diverse set of clients both in the private sector and the government. I have had the privilege of being the consulting country leader of both PwC Consulting, which was acquired by IBM, and Deloitte Consulting. I have also had the privilege of serving on the global leadership teams of both PwC and Deloitte and, therefore, have had a close view of how the consulting industry has grown and evolved.
According to both Kennedy Consulting Research and Advisory and Gartner, the size of the global consulting industry is about $125 billion, give or take a few billions. Therefore, it is by any measure, a large service industry. Despite the dramatic changes around us, I would tend to agree with my HBS Professor Clayton Christensen that the consulting industry has remained more or less the same for the last 100 years. If you concede that I am still a consultant, what do we consultants do? We are engaged to solve complex business problems. Some of these problems have to be tackled globally. Multinational corporations operate seamlessly across national borders. Therefore, they expect their consultants and trusted advisers to do the same. You can count the number of global management consultants on your fingertips. Reason: to achieve a consistent quality and scale across the globe, it requires sustained investments in people, processes, technology, knowledge management and, yes, brand. It is not easy. The entry barriers are very high.
If a Nestle wants to redesign its global supply chain or a Lenovo wishes to craft a global growth strategy, there are a handful of consulting firms that are capable of delivering the solutions globally. While consulting thrives on uncertainty and change, the consulting industry itself has been immune to any dramatic change or disruption so far. Is this about to change?
The guru of disruptive innovation Professor Clayton Christensen of Harvard Business School (HBS) believes that the consulting industry is at the cusp of disruption. According to him, “Early signs of this pattern in the consulting industry include increasingly sophisticated competitors with non-traditional business models that are gaining acceptance. Although these upstarts are as yet nowhere near the size and influence of big-name consultancies like McKinsey, Bain, and Boston Consulting Group (BCG), the incumbents are showing vulnerability. For example, at traditional strategy-consulting firms, the share of work that is classic strategy has been steadily decreasing and is now about 20 per cent, down from 60 per cent to 70 per cent some 30 years ago, according to Tom Rodenhauser, the managing director of advisory services at Kennedy Consulting Research & Advisory.”
Why do you think Deloitte Consulting acquired Monitor, a pure strategy firm founded by the HBS strategy guru Michael Porter. Monitor was well known for consulting on innovation because they had acquired a Chicago-based design firm called Doblin. Monitor also had expertise in scenario planning and growth strategy. It bulked Deloitte Consulting’s capability to consult on issues that kept the C-suite awake at night. Why do you think PwC bought Booz & Co.? I would submit: for exactly the same reason.
A famous HBS professor was asked by a plucky student to explain the difference between strategy and operational excellence in 30 seconds. He had written several books on the subject but he was perplexed by this, “Dad what do you do for a living? type question. Not to be intimidated, he told the student next morning, “Operational excellence is how to fish better, cheaper, faster in the same water body and Strategy is knowing where to fish.”
Where and how are now blurred. While the 3 big daddies of strategy (McKinsey, Bain, BCG) are pushing down to operational consulting, the Big 4 (Deloitte, EY, KPMG and PwC) are climbing up. There is no clear distinction anymore between “pure” strategy and “pure” implementation. The line has been blurred. What is changing? Many clients are looking for, to borrow an expression from the car industry, “dream to gleam” services. They are saying do not simply provide me with strategy and design services, I want you to partner with me and implement the strategy until I see the gleam of polish on the new car that is now ready to roll out from my factory. Come and share with me the risks and gains. This is a far cry from traditional time-based or fixed fee billings.
When I became a consulting partner at Price Waterhouse I was taught that the five levers of profitability could be summed up in one acronym: RULES. R stood for rates, U for Utilization, L for Leverage, E for Expenses and S for Speed of billings and collection. Profitability of a consulting project is higher if you can drive rates up, achieve higher utilization and have a bigger leverage which is known as “shape of the pyramid”. If rates and utilization are the same in two projects, the one which has a broader base in the pyramid will make more money. The second two levers must be minimized. The faster you bill and collect, your investment in clients will be lower, less money will be locked up in working capital and this will have a favorable impact on your project profitability.
Let me explain the rationale briefly. That high rates of hourly billing are better than low rates do not require any explanation. But utilization needs a little elaboration. The available time of a consultant is a highly perishable commodity. Just as the revenue potential of an empty airlines seat vanishes as soon as the aircraft takes off, the revenue possibility of an unbillable consultant perishes if he cannot be assigned to a consulting project. Therefore, higher the utilization, the greater the contribution to both the top line and the bottom line. Leverage on the other hand is the partner to staff ratio on a project. Leverage is a major driver of profitability for large, global consulting firms. In any consulting assignment, data collection and analysis and requirements definition were jobs that the young, bright analysts did with great alacrity and confidence. They clocked a large number of hours that were billed to the client.
Thus you had a both high utilization and high leverage. Times are changing. The client has increasingly sophisticated approaches to big data and analytics. Data collection and analysis have been either largely automated or outsourced. Thus, the pyramids of consulting teams are shrinking. Clients are no longer willing to buy vast amounts of “junior hours”, they want the heavy hitting experts to weigh in. That creates a new scenario, where the old “Rules” acronym works not, new rules must be written.
As I have said, in the consulting industry “leverage” (defined as the ratio between a partner and staff level resources) is an important driver of profitability. As a general rule, the higher the leverage, the more profitable the project is. Just consider this: if a client wants to pay only for the partner with zero staff, very soon the project will become unprofitable as margins on staff that contribute to the profitability will disappear.
Consulting companies have responded to this challenge by creating IP based solutions and “products”. Some are reaping revenue streams from subscriptions. The ‘solutions’ are like IP or products that are created by a team using advanced analytics and other knowledge tools. The profitability comes either through volume users who pay subscription fees or by using the tool to architect a solution. This is a very different revenue model from the time billings of lawyers and traditional consultants.
We all know how SMAC continues to transform the world around us and how it is impacting the consulting industry. We are talking about social media, mobility, analytics and cloud. Let us take one example of disruption in each area. We will discuss social media first. The C-suite and the Board are keen to understand, for example, how the company is being viewed in social media, what are the live issues and if it can respond or adapt in any way as the “news breaks” not two days later. Consulting firms have developed algorithm-based solutions whereby live feeds are analyzed and a snapshot created of the positive, negative and neutral perceptions of the company. It is possible to drill down where the negative perceptions are coming from and if there are groundswell issues. Social media has now become a new battle ground for brands and corporate image.
Mobile technology is of particular relevance to India because of its ubiquity and penetration. Mobile technology is spawning a large number of start-ups which are focusing on payment systems, learning and development, on-the-job training, marketing, healthcare and wellness, safety and tracking and supply chain solutions.
In Analytics, the big area is predictive and prescriptive analytics. The client is not satisfied with a perfect set of diagnostic reports anymore. They want to know: what is to be done? Analytics is being used in areas outside business: to fight crimes, to understand election outcomes and to protect the environment. Increasingly, consulting in this area will be IP based.
The Cloud is disrupting the world of IT services as never before. The first disruption in IT services came when engineers were made electronically portable through connectivity. Now students from IIM are launching bootstrapped start-up projects because they no longer need huge campuses to compete with the Infosys or Wipro of this world. They have access to huge computing power and storage on a pay-by-the-drink basis, they do not need to own the bar and its infrastructure! Increasingly the campuses will be an overhead like the townships of steel companies became. I shall now talk about a sweeping change taking place in internet space literally above the cloud and grasp its implication for consulting.
A new storm of disruption is coming and this time it is Aquila, the drone. Aquila has a wingspan longer than a Boeing 767. But it uses lightweight materials that allow it to weigh about one-third of a Toyota Prius car. It is the face of Facebook’s new battle in the sky to achieve supremacy in internet connectivity.
Aquila will beam internet signals back to rural areas on earth that lack communications infrastructure. According to Jay Parikh of Facebook, 10 per cent of the world’s population live in remote rural areas — say in Africa and India and are unable to access the web. Therefore, it appears to be a complementary service. But wait. Facebook eventually wants to blanket the entire planet with these solar-powered drones made of carbon fiber.
Facebook plans to launch the drones with the help of gigantic balloons that will carry the device to the stratosphere. It will hover between altitudes of 60,000 and 90,000 feet. At these altitudes, the drone will be far above the airspace where commercial airliners fly and free from storms or other weather disturbances.
Aquila will be fitted with solar panels and batteries and will remain in the sky for at least three months, after which a replacement will be launched to overlap and take over. It will beam internet down to earth. But how? Each Aquila drone will provide internet to people on planet earth in a 50 km radius. Small cellular towers and dishes will receive the signals sent by the drone and will convert those signals “into a wi-fi or LTE network that people can connect to with their smartphones,” says Facebook.
Facebook has further shared that by deploying laser communication technology, it has succeeded in creating a way to stream data between drones at a rate of 10 gigabits per second, a speed which is as fast as fiber optic services. Facebook does not know the nitty-gritty of the universe of switches, boxes and wires which it has set about to disrupt. Therefore, it has formed alliances with Ericsson, Samsung and Qualcomm to make them stakeholders in the new ecology.
The drone project was developed by Facebook’s connectivity lab, which has hired former researchers from NASA’s jet propulsion laboratory and the national optical astronomy observatory, among others. The lab is part of Facebook’s internet.org initiative to bring the internet to places where there is an absence of connectivity.
Although the stated goal is to provide internet connectivity to remote parts of the planet, in my view, it will not stop there. We are seeing the beginning of a massive discontinuity and disruption in the internet infrastructure. Through multiple, connected drones Facebook will, with its partners, create a new internet backbone in the sky.
Mark Zuckerberg is very gung-ho about his new bold play. Listen to him, “As part of our internet.org efforts, we’re working on ways to use drones and satellites to connect the billion people who don’t live in range of existing wireless networks,” he said, adding, “our connectivity lab is developing a laser communications system that can beam data from the sky into communities. This will dramatically increase the speed of sending data over long distances.”
Mark Zuckerberg has a challenger: Google. Crazy in its audacity of vision, Google calls it the Loon project. In the words of Google, here is how it will work: “Project Loon balloons travel approximately 20 km above the earth’s surface in the stratosphere. Winds in the stratosphere are stratified and each layer of wind varies in speed and direction. Project Loon uses software algorithms to determine where its balloons need to go then moves each one into a layer of wind blowing in the right direction. By moving with the wind, the balloons can be arranged to form one large communication network.” The stated purpose of Loon again is to connect billions of people who are in remote parts of the world and are poorly connected. But the aim is to create an innovative internet infrastructure in the sky.
Google will be doing a major project in Sri Lanka. On July 29, Google has signed an agreement with the Sri Lankan government to launch the helium-filled, high-tech balloons over the country for the next few months. Google plans to begin releasing the balloons in the coming weeks, and hopes to have everything in place by March 2016.Then, Sri Lanka will become the first country in the world to have universal internet coverage. Who will win? Aquila or the Loon? It is too early to predict a victor. But my gut feel tells me that it is not going to be an either or scenario. Both crazy and loony projects will completely transform the skyscape of internet technology providing services faster, better, cheaper and nearer. The future is now! Think how these innovations will impact the digital strategy of businesses.
There is a second huge disruptive technology that is going to change the world of business, not just financial services. It is the Blockchain technology. Blockchain technology helps us to by-pass third parties and creates a cheaper, faster, better and more efficient method of consensus. For instance, if I sell my shares in Tata Steel I have to go through a broker of NSE or BSE. In the future I could rely on Blockchain to do that. Blockchain applications will be used for land registry, domain name registration on the internet, sale of content like books, music, films and it will extend way beyond monetary transactions.
A mysterious programmer using the name Satoshi Nakamoto minted a new coin, which he called the Bitcoin, not out of gold or other metal but using mathematics and encryption technology. He wrote a whitepaper titled, “Bitcoin A peer-to-Peer Electronic Cash System” in which he said, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing willing parties to transact directly with each other without the need for a trusted third party.” Bitcoin is built on blockchain technology. Bitcoin and other digital crypto-currencies and the blockchain technology can transform our business landscape. We will need visionary and creative individuals. You do not need an army of consultants, you need real experts to leverage this technology.
The advent of collaborative software like Yammer and Chatter are changing the way subject matter experts (SMEs) collaborate across the world to deliver solutions to a client. For instance, if I am a partner of a global consulting firm and I have a client in India in the beer industry which needs to solve a specific problem. Let us say my firm uses Yammer. I can go and post the problem in brief in a forum of beverage experts in my firm. It is more than likely I will not only find solutions but also experts who have actually worked on such assignments. I will have the ability to fly those deep experts to India to work on my client’s problem. That can be really powerful and I have seen this work magic.
There is another trend. The consulting industry is disrupting much the way large consulting firms are using connectivity tools and the internet to harvest the knowledge and expertise residing within their global networks. There are a number of large, global companies which are knitting together virtual networks of independent experts and consultants to deliver outstanding value to clients.
Take the case of Gerson Lehrman Group (GLG). Today, they are the world’s largest membership network for one-on-one professional learning, comprising more than 425,000 thought leaders and practitioners, including business leaders, scientists, academics, former public sector leaders and the foremost subject matter specialists. They serve more than 1,400 client companies in 40 countries. These clients include Fortune 500 companies in nearly every sector and the leading professional services firms and financial institutions.
There is also a silent disruption. I would call it disruption by stealth. Every leader of a consulting firm is searching for the magic bullet. Traditionally, consulting firms would go to retreats and come back with a list of platinum clients and direct their entire attention and sales focus on these handful of top-tier highly prestigious clients. There are two known problems with this strategy. First, most consulting firms come back with a list of platinum clients, which look more or less similar. If all firms had the same or similar list of target clients, the stage is then set for a bloodied, “red ocean” battle as each firm tries its best to fight for every consulting paisa of the client’s wallet and take market share from the other. Second, they are probably looking at the wrong place for growth clients. A decade ago, if you were focusing only on Sony, you missed Samsung, if your eyes were riveted on Wal-Mart you probably missed Amazon.com or Alibaba. You probably also missed Twitter, Facebook, Google, Salesforce.com and Workday. And did you focus on Polaroid, Kodak, Xerox, US Steel and so on?
The large, global consulting firms have very sophisticated and refined risk management systems that screen and select clients. International banks will be proud of such screening models. However, these systems, more often than not, shut out start-ups and mavericks who will emerge as the giants of tomorrow. As Christensen puts it rather aptly, “While consulting’s core apparatus is focused on bigger and bigger client engagements, small customers are unguarded.” If future global companies emerge from China, Japan and India because of either innovation or market size, future global consulting firms may emerge from these countries.
Consulting comes in two avatars. The first comes in the form of solutions to complex problems by using cutting-edge analysis, knowledge and break-through strategies, creativity and innovation. This avatar of consulting will continue into the future even though how it is delivered and paid-for will change. For instance, global experts may deliver services by using technology to collaborate in real time and “crowd source” solutions.
The second avatar of consulting services is more of “extra pair of hands” and “staff augmentation” providing armies of consultants thrown at a problem. This component of consulting will face severe disruption as delivery models dramatically change. While “Yelpification” of consulting may not happen in the near future, there is no doubt that the consulting industry is about to be disrupted.
I would like to conclude by quoting from the famous song of Bob Dylan:
The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
And the first one now
Will later be last
For the times they are a-changin'.
What lies ahead are interesting times and a courageous voyage into an uncharted blue ocean. One thing I hope will not change: consulting will continue to be an exciting profession. You know why? Because it thrives on change and disruptive discontinuity.