Management consultancies were founded almost a century ago to support the growth of companies by guiding them in their decision-making. Their core business is formulating solutions to help their customers transform and improve their operational performance. Consultancy firms also stimulate the innovative capacity of companies, namely “the ability to continuously convert knowledge and ideas into new products, processes and systems”. But do consultancies succeed in developing this same innovative capacity at the service of their own activity?
This question may seem surprising when we refer to: the reason for being consultancies and the excellence they claim. However, it is clear that consulting firms struggle to renew themselves and tend to perpetuate a model that no longer meets certain expectations of their stakeholders.
We rightly formulate the hypothesis that the success model of consultancy firms, paradoxically, acts as a brake on their innovative capacity. Indeed, their profitability is based on the standardization of approaches that have proven themselves with other customers. Their activity therefore consists in adapting the expertise to the needs of the customers according to previously tested solutions. industrialization of this process encourages consultancies to apply principles of effectiveness and efficiency, which conflict with the logic of innovation.
Little research has been done in this area, but a quick review of these principles seems to support this intuition. For example the sales a high level of workers presupposes favoring individual capabilities and adaptability rather than collective intelligence. The principle of “up or off” is conducive to a highly competitive rather than collaborative environment. Finally, moving the activity from the consultant to the client reduces the time for internal exchanges, especially informal ones.
Based on these findings, we gathered the testimonials of more than 40 consultants from all walks of life working in management consultancies of all sizes. Based on our interviews, we dissect the different characteristics of the business model of consultancy firms and explain how they can strongly inhibit internal innovation.
A production-oriented business model
Using the RCOV model (see box below), we formalized the business model of consulting firms to identify the salient features and assess their relationship to innovation capacity.
Consultancy resources and skills are represented worldwide by consultants. Although recruitment policies are changing, consultants are selected on very specific criteria. They come from the same major management or technical schools and have all the technical and behavioral skills expected. This homogeneity is necessary to guarantee the quality of the services, but also to facilitate the mobility of the consultants and to identify the talents destined to progress in the structure. On the other hand, it significantly hinders the diversity that promotes innovation capacity within an organization.
The organizational structure of consultancies is pyramidal and generally consists of a large number of consultants, a close-knit pool of managers and a handful of employees. This structure includes a sales important at the base of the pyramid, institutionalized by the practice of up or out : either the advisor is efficient and moves forward in the structure, or he leaves the structure. This practice is a key element in the profitability of consultancies, by concentrating activity on production, by investing in a reduced number of high-potential consultants and by stimulating internal competition. However, these profitability factors are detrimental to the company’s innovative capacity: short times, reduced internal collaboration, political games, etc. The relocation of the activity from the advisor to the client exacerbates these adverse effects.
Management practices are calibrated to ensure implementation of the pyramid structure and control of advisors. Consultant utilization is another fundamental element of consulting firm profitability. First, all consultancies try to optimize the use of consultants, which shows that production takes precedence over the research activities necessary for innovation. The revenue model reinforces this preference of managers for production, as consultancies generally charge man-hours. With fluctuations in activity, managers will tend to use the best talents, who will therefore devote themselves to production and not hesitate to to work outside the billed hours. Consequently, the priority given to using the best talents for productive purposes distracts them from innovation practices.
These practices support the value proposition of consulting firms, which is also relatively standardized. Contrary to what you might think, clients expect from consultancy firms “a form of classicism”. If the service is to be of high quality (reinforcing the logic of internal competition), it must be comparable to that of competitors, if only to estimate and negotiate the price. Also, the execution must correspond to the representations and mental maps of the customer. This standard has a positive effect on the other components of the business model, as it makes it possible to optimize the management of resources that are themselves standardized. On the other hand, it is unlikely to stimulate creativity and innovation within teams of advisors. Developing innovative services carries the risk of mortgaging significant resources and skills, at the expense of production, with no guarantee of commercial success.
A business model that stands in the way of innovation?
Analysis of the business model of consultancies has enabled us to identify three main obstacles to developing their innovative capacity: imbalance between exploitation and exploration activities, lack of internal social relations, preference for short time frames.
The emphasis placed on billable hours encourages companies to develop a culture of production at the expense of a culture of innovation. By maximizing the uptime of top talent, consultancies effectively devalue exploration activities (e.g. studies and research, publishing activities, pro-bono missions, etc.). Subsequently, the relocation of production activities reduces the possibilities for formal and informal exchanges, catalysts for developing social ties, but also for generating innovations. Finally, the lack of diversity, the climate of peer competition and the focus on results places consultants in a series of short time frames, which proves to be detrimental to the development of innovation capacity within consultancies. In that sense, our research shows that for the consulting industry (as well as other sectors with similar business models), it is the business model itself acting as an inhibitor of internal innovation. This explains why, in most cases, large consultancies are no longer known for inventing new management practices, but for implementing “trendy” practices that have proven themselves and do not involve any risk.
Our analysis opens up exciting avenues for reflection for research, but above all for practice. First, it emphasizes the importance of assessing the business models awith regard to other variables that are important for their sustainability, such as the innovative capacity. Our case shows that these assessments can question practices at the scale of an industry, and sometimes in a favorable way, when they no longer match the aspirations of stakeholders, such as young graduates for example. Next, our study sheds light on the duality of models, when they prove both formidable to ensure a company’s financial and commercial performance, and vulnerable to developing sustainable sources of growth. This duality must be handled carefully by managers to anticipate the threat of potential new entrants to a market, who are likely to offer disruptive models.
Finally, we invite managers and researchers to come up with innovative business models that can sometimes cover a multitude of problems antagonists, which is proving increasingly important in light of the striking social and environmental problems. Such an approach presupposes deconstructing certain beliefs of leaders and managers to consider what can be paradoxical in the construction of performance.
The article was written in collaboration with Fernanda ARREOLA, Dean of the Faculty of ISC Paris.
†< Lees ook: Het abonnement, verdienmodel van een duurzamere wereld? >†