Strategy consulting is facing disruption as clients demand more flexibility, industry expertise, and quality.
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10 years ago, HBR explained that strategy consulting was on the cusp of disruption, driven by a reduction in pure strategy work, growth of in-house strategy teams and democratization of data. Fast forward to 2021-22 and that prediction was looking rather amiss with the strategy consulting industry registering consistent double digit growth. But, just a year later, the warnings became reality. A perfect storm of increased salaries, over-hiring through Covid and a smaller percentage of core strategy work meant the strategy consulting firms were not ready for the correction in the market. Low utilization resulted in lay-offs.
In this article we summarise what we’re hearing about hiring strategy consultants, directly from Chief Strategy Officers in large enterprises and Operating Partners in Private Equity. Client demand for consulting has rapidly shifted in the last couple of years and we believe that a new generation of boutique firms will be best positioned to capitalize on these changes. Typically led by ex-McKinsey, BCG and Bain Partners, they are providing a combination of deep industry expertise and flexible delivery models to provide superior returns on investment.
If you’d like to speak to any of these boutiques, to hear more about their offering, just click here.
Over a decade ago, the Harvard Business Review wrote about consulting on the cusp of disruption. They explained that consulting had experienced two decades of rapid growth in the 90s and 00s. As a result, the share of work that was “classic strategy” had steadily decreased to just 20%, down from 60% to 70% some 30 years ago.
This work was far less defensible, and as a result the incumbent firms were going to see their competitive position eroded by technology and alternative staffing models. “The vast turnover at consultancies means armies of experienced strategists are available for hire by former clients, whose increasing sophistication allows them to allocate work instead of relying on one-stop shops as they did in the past.”
It concluded with a warning: “...the pace of change being managed by the traditional clients of consulting firms will continue to accelerate, with devastating effects on providers that don’t keep up. If you are currently on the leadership team of a consultancy and you’re inclined to be sanguine about disruption, ask yourself: Is your firm changing (at least) as rapidly as your most demanding clients?”
During the post-COVID boom years, you would be forgiven for thinking that the HBR had got things rather wrong. The consulting industry saw rapid growth driven by increased corporate earnings and M&A. In 2021 alone, the strategy industry saw revenues grow by 15%.
The challenge for the consultancies in 2021-22 was hiring enough people - both freelance and full-time to keep up with client demand. Alongside the need for extra capacity, The “Great Resignation” meant retention was the other big focus, heralding blanket pay rises across the board.
A big driver of the Covid ‘boom’ was in fact the very thing the HBR warned would be the strategy firms’ downfall - expansion beyond the core strategy work. As you can see from below, pure strategic advisory shrunk as a percentage of revenue from 17% in 2010 to just 10% in 2023.
This combination of pay rises, over-hiring and an increasing reliance on non-core strategy work meant the industry was not prepared for the correction in 2022-23. As central banks wrestled to get inflation under control, the increased cost of debt drove the M&A market to a stand-still. Earnings were also squeezed, meaning companies had less cash to spend on consulting.
Suddenly, the HBR’s decade old warning seemed prescient: utilisation dropped rapidly sparking job cuts and wage stagnation, in turn prompting more consultants to jump ship and either go freelance or join a smaller outfit.
Given our exposure to Chief Strategy Officers in large enterprises and Operating Partners in PE, we speak with key decision makers regularly. And some very clear themes are developing:
Increased need for industry experience: With the increased prevalence of data, analytics and internal strategy teams, consultants are increasingly used to bring deep industry experience. PE funds in particular are looking for people who have spent 10-15+ years in the industry - people who haven’t simply observed what great looks like, but have been responsible for it (and know the mistakes to avoid).
Fees at unsustainable levels and rigid delivery model: Fees rose rapidly in 2021 and 2022. Whilst demand soared and consultants were having to turn away work, fees were central to growing revenues. These changes in fees were also critical to underwriting the increased compensation for consultants, both below and at Partner level. Whilst this new fee level might be defensible for core strategy work, clients are not prepared to pay such high fees for non-strategy consulting. Clients are also demanding more flexible delivery models: EM+2 isn’t the right model for a long-term transformation, and they want their partners to scale-up and down teams at the right times to provide the most impact.
Decline in quality: In our 10+ years in business we’ve not heard the quality of strategy consulting firms come into question, until now. Perhaps the most concerning of these three trends, increasingly we hear clients reference a lower bar to entry for consultants in the “boom” years of 2021-22, and that hybrid working resulted in lower levels of mentorship for more junior consultants. This is further evidenced by a recent survey commissioned by digital consultancy, Emergn: of 702 senior executives and project managers surveyed, 84% felt that the services of McKinsey, Boston Consulting Group (BCG), and Bain “were no help at all” in corporate transformation projects, while only 13% found them more helpful than a hindrance.
In response to this, we’re seeing some disruptive changes in the consulting landscape. Over the last 6-12 months we’ve seen:
Partners launching boutiques: Top-billing Partners are getting frustrated with the high-overheads that the consultancies have built up over the last few years, and it’s increasingly hard to get compensated as their predecessors did. This, partnered with the rise in quality of the freelance market, has meant a number of Partners are setting-up their own boutiques. Whilst this is not in itself a new phenomenon, the difference we are seeing is the volume at which it’s happening, and the quality of the Partners leaving. We’ve partnered with a couple of these new firms, and are seeing huge demand for their offerings.
Rise of quality in the freelancer market: we’ve written about this over the last decade a few times. The quality, and volume, of freelancers in the market has dramatically improved over the last 10 years. This trend has accelerated with the increased prevalence of Private Equity using it as a route to hire full-time team members: combining both a high quality bar, and providing the freelancers with extremely relevant experience.
Change from AI on the horizon: whilst the impact of AI thus far has been more limited than many expected, we are expecting this to play a critical role in the next 1-3 years. The role of the Analysts and Associates will change from a focus on analytics, to application to a specific company and industry. As such, our prediction is that there’ll be a premium on people who have deep experience within a company, even at the more junior levels.
The strategy consulting firms are some of the most well-known and respected brands in the global business world. We do not expect that to change, but we do expect a period of much lower growth/ decline in real-terms. Given the majority of the cost is variable (people), we have no doubt that this will be effectively navigated, and that profitability will be restored in the mid-term.
However, we don’t expect them to grow into the implementation and transformation space to the extent that they did in 2021-22. We believe the firms with a right-to win are those who have deep industry expertise outside of consulting, having successfully run similar businesses. We also believe that teams driving transformation will be flexible freelance consultants, who can offer more agile support than an EM+2 model, and aren’t as reliant on the apprenticeship model. Associates will no longer be a few years out of Grad of Business school - they will be 10-15 years into their career, with a real understanding of what it takes to implement change.
We regularly publish up-to-date articles to keep you up-to-date on the market and our work.
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