Five client-side trends that mid-sized consulting firms can’t ignore

March 2011
Acknowledgement
I would like to express my sincere gratitude and deep appreciation for all the experts, consultants and researchers
from various LinkedIn communities, who have been kind enough to provide their valuable time and insight to validate
or otherwise enrich the content of this white paper.
Thank you to all those who helped, online and offline, and almost crowdsourced this white paper: Lee Frederiksen,
Ron Kennedy, Rick Carter, Tony Rice, Tony Tiernan, Chaitanya Sagar, Puneet Gangwani, Jane Lee, William
Woloschuk, Todd Phillips, John Kowa, Mark Slotnik, Joseph Tempio, Andrew Kasumba, Bill Adkisson, Howard Dion,
Margo Thomas, Al Paoli, John Burnham, among others.
Five Client-side Trends
that Mid-Sized Consulting
Firms Can‟t Ignore
ValueNotes White Paper
By Pratibha Kurnool

2White paper | March 2011 | Five Client-side Trends that Mid-Sized Consulting Firms Can‟t Ignore
Table of Contents
1 CLIENT-SIDE TRENDS IMPACTING GROWTH ASPIRATIONS........................................... 2
1.1 COMPENSATION STRUCTURES BEING ALIGNED WITH VALUE DELIVERED...................................... 2
1.2 CHANGE MANAGEMENT WORRIES LINGER.................................................................................... 3
1.3 SPECIALIZATION INCREASINGLY VALUED MORE........................................................................... 3
1.4 CLIENTS NEED HELP TAPPING GROWTH MARKETS ........................................................................ 4
1.5 GROWING SMB/SME MARKET .................................................................................................... 4
2 PROFITABLE GROWTH STILL POSSIBLE; BUT CHALLENGES PERSIST ....................... 5
2.1 THREE WAYS TO PROFITABLE GROWTH ........................................................................................ 5
2.1.1 Collaboration.......................................................................................................................... 6
2.1.2 Downstream revenue generation (from research & management services)........................... 6
2.1.3 Re-structuring cost models ..................................................................................................... 7
2.2 CHALLENGES IN ADDRESSING PROFITABILITY AND GROWTH IMPERATIVES.................................. 7
3 HOW EXTERNAL RESEARCH SUPPORT TEAMS CAN HELP.............................................. 8
The consulting industry is going through dramatic change, which will significantly alter the
consulting landscape, as we know it. These are evolutionary shifts as far as the consulting
industry is concerned, and a key indicator of things to come has been the increasing polarization
between the large, established consulting firms and smaller, independent, boutique firms. The big
firms are growing bigger in terms of overall market share and revenues, while the pool of
independent, specialist consultants is growing in sheer numbers. Needless to say, client side
imperatives have been the major drivers. We discuss below some of the key client-side trends,
which are impacting the global consulting industry today.
1 Client-side trends impacting growth aspirations
1.1 Compensation structures being aligned with value delivered
Pricing pressure is a pet peeve of consultants, and especially so during downturns. However, our
research suggests that the pressure is not so much on the fees per se, but rather on the value
attached to the fees. Clients are willing to pay, as long as they can see the value being delivered.
Very often, the consultants that face pricing pressures are those that are not able to establish the
value they deliver to customers. While measuring value delivered is an inexact science, it is worth
investing in innovative methods to measure and demonstrate this. Firms which invest in trying to
quantify the value will have a clear edge over others who, quite plainly approach the assignment
from an “effort” perspective. We believe that clients will want to move towards compensation
structures for that reflect outcomes, with fees linked to performance or returns rather than effort.

A key implication is that consulting can no longer be an intellectual exercise, devoid of contextual
understanding. Consulting firms will have to align their own business models to bear some of the
risks, as well as share the rewards of the consulting exercise. Firms which are able to align their
value proposition accordingly will not only overcome pricing challenges better, but also
significantly improve their chances of not leaving any spare money on the table. To do this, it‟s
critical for firms to understand, articulate and objectively quantity, for each engagement, the
immediate as well as the additional value they will deliver to the client.
1.2 Change management worries linger
As has been oft-repeated, it‟s never the advice that fails, it‟s the execution. Most consulting
engagements result in some kind of organization change. Research suggests that the
subsequent change management is an area that most clients are skeptical about, as there is
invariably no one around to see it through. For instance drafting and implementing a customer
communication program may not be enough – overseeing the program till it completely integrates
into the corporate DNA is what clients value most.
Given the increased focus on results and outcomes, clients are increasingly demanding that their
consulting firms have a stake in the execution, either in full or in part. To continue with the earlier
illustration of the customer communication strategy, a firm capable of executing the customer
engagement program, either on a Build-Operate-Transfer (BOT) mode or as a management
service, will be able to deliver significantly higher value as compared to those that can‟t or won‟t.
1.3 Specialization increasingly valued more
In a world increasingly obsessed with specialization, “management consulting” or even „strategy
consulting” sounds a tad too generic. Clients value specialized knowledge, especially in sectors
and fields that call for a high level of technical knowledge or
industry experience. Pharmaceuticals, specialty chemicals,
healthcare, manufacturing, logistics, financial services are a few
examples of sectors where specialization is critical. Similarly,
specialization in terms of service orientation, such as Human
Resource Management, Supply Chain Management, Change
Management, IT/Technology, sales and account management,
brand management. etc., is also valued for the consultant‟s
experience and subject matter expertise.
Large firms (McKinsey, PricewaterhouseCoopers, Bain &Co) are
able build deep specialization catering to multiple industries
given their scale and size while smaller niche firms, by definition are already specialized.
However, mid-sized firms, especially those that try to or want to do add too many specialist
practices, will end up not being specialized in anything. The most significant challenge in adding
any kind of specialty discipline is in recruiting the right people. Real “specialists” either choose to
Specialization is necessary
Large firms can build deep
specialization catering to
multiple industries given their
scale and size while niche
firms, by definition are already
specialized. However, mid-
sized firms, especially those
that try to or want to do add too
many specialist practices, will
end up not being specialized in
anythingIndian and international
journals.

join large consultancies with heavy pay packages or harbor ambitions of owning their own
boutique practices.
The value attached to specialization combined with the challenges of sustaining a discipline-
based organization structure can put mid-sized firms with limited specialist skills at a particular
disadvantage.
1.4 Clients need help tapping growth markets
That clients are seeking growth is a given, especially in an environment where growth is
extremely difficult to come by. The bulk of the growth opportunities are either in (untapped)
emerging areas or geographic markets. Consultants with appropriate breadth of operations
(either geographically or in high-growth sectors) and are able to guide their clients through
uncharted waters will be valued significantly higher than those who offer limited services (read:
restricted to traditional markets).
What this means for a consulting firm is that there are multiple consulting opportunities, which can
be exploited, if and only if, the firm is able to demonstrate the required capability. Helping clients
tap emerging / newer market opportunities goes beyond “advice”, and includes significantly
deeper insight with respect to evaluating such markets, assessing specific opportunities, scouting
for partners / collaborators, meeting them, negotiating and finally ensuring successful market
entry. This kind of end-to-end program management is what customers are seeking now and
unfortunately, it is also where most mid-level firms fail to deliver!
1.5 Growing SMB/SME market
The SMB/SME market and the mid-market or the middle market companies are among those
recording the highest rates of growth today. These companies
are also in real need of consulting, the most prominent areas
being IT/technology, CRM and sales. Historically, these smaller
companies have been the most neglected, by the large and
small consulting firms alike. However, larger firms are now
addressing the mid-market needs by providing standard
technology-and-process enabled consulting services, for a
fraction of the fees that they would have charged their larger
clients. Innovation in service delivery or commoditization by the
larger firms is helping them tap newer opportunities while
focusing on profitable growth.
Given their positioning and size, small and mid-sized firms are
best-positioned to address the more bespoke needs of this
growing market A key differentiator will be innovative pricing
mechanisms, which can effectively address the price-value conundrum that clients face in their
decision-making process while hiring consultants. The target client base has limited resources for
The SME/SMB market is
attractive
A key differentiator will be
innovative pricing mechanisms,
which can effectively address
the price-value conundrum that
clients face in their decision-
making process while hiring
consultants. The target client
base has limited resources for
funding such assignments and
consulting firms will therefore,
need to have aligned cost
structures to meet demand,
without compromising on value
delivered..

funding such assignments and consulting firms will therefore, need to have aligned cost
structures to meet demand, without compromising on value delivered.
2 Profitable growth still possible; but challenges persist
The combined impact of the trends on the small to mid-sized consulting firms is the mounting
challenge to compete in an era of shrinking client budgets and increasing client expectations
2.1 Three ways to profitable growth
If all the challenges faced by small and mid-sized consulting firms face today had to be summed
up in two words it would be “profitable growth”. A deeper analysis of this two-word expression
would throw up two unique challenges – Growth and Profitability.
Figure 1: Sample List of Consultants’ Networks
Growth at the cost of profitability is neither
sustainable nor scalable. Big consulting firms
are getting the biggest and the best contracts,
because they have the branding, the scale
and the resources to compete at every level.
The smaller deals are at threat from smaller
consulting firms, who are using low-overheads
driven cost advantage to compete on price.
Commoditization of the consulting market in
the SMB/SME segment, as discussed in
Section 1.5, is taking away a key customer
segment from the smaller firms. The challenge
will be to prove and deliver the value proposed
to the client, in the midst of increasing
competition from the larger, established firms
and pricing pressure from the independent
consultancies.
So, how can the mid-level firms grow
profitably? There are three ways small to mid-
sized consulting firms can build a strong
competitive edge which we believe will initially
lay the groundwork and subsequently act as
the lever to drive future business.
General Management / Strategy Networks
Association of Management Consulting Firms
Management Consultancies Association (MCA)
The International Guild of Professional Consultants
Consulting Network
Independent Consultants Network (ICON)
Business Consultancy Network (BCN)
Practice Specific Networks
Association of International Tax Consultants
The Association of Due Diligence Professionals
Independent Computer Consultants Association
Qualitative Research Consultants Association (QRCA)
Vertical Specific Networks
American Association of Healthcare Consultants
The European Chemical Marketing and Strategy
Association (ECMSA)
Automotive Consultant Association

2.1.1 Collaboration
Trends in the consulting industry indicate a growing need for collective collaboration among
consulting firms. Collaboration will enable firms to unlock opportunities otherwise beyond their
reach. For instance, for management consulting firms, vertical specialization is easier said than
added - specialists come at a cost, if at all they can be added that fast. So how can a firm
convince a bank about being the best positioned to carry out the channel engagement strategy
when it does not have a banking expert on its rolls? A bank‟s challenges are unique and the
bank needs an expert who understands banking, in and out. The value proposition goes up
several notches if the consulting team were to include a channel management expert along with a
banking consultant.
Therefore, collaborating with or consciously cultivating strategic alliances with other boutique
consultants or specialist research firms will enable small consultants to compete with larger firms
and be of real value to their clients.
Joining a network of consultants for sharing ideas and best practices and collaborating for
supplementary or complementary expertise can significantly increase business visibility, and
consequently increase growth opportunities (see Figure 2 for sample list of networks)
2.1.2 Downstream revenue generation (from research & management services)
Research and consulting may sound synonymous to many, but there are plenty of consultants out
there who consider research as a step down the ladder. A closer look at the largest consulting
firms today reveal that all of them spice up their consulting with rock solid research. These
research outfits are typically low key, but provide these firms with a distinct value proposition
which helps bag the big consulting deals.
There are many other opportunities downstream, such as, say,
the complete execution of the proposed customer communication
strategy. The consulting firm is possibly the best equipped to
align the execution with the advice, meaning it generates the
content for the communication (white papers, case studies, web
content, and newsletters), manages the communication and
takes complete charge of customer engagement so that the
client sees immediate benefits from the consulting activity.
In fact, at many of the largest firms, downstream revenue from research and management
services hogs a significantly higher proportion of the revenue as compared to core consulting
revenues! While research is a core input to consulting, revenue per consultant is typically lower
for the research component, and absorbs valuable bandwidth.
Downstream revenue from
research
At many of the largest firms,
downstream revenue from
research and management
services hogs a significantly
higher proportion of the revenue
as compared to core consulting
revenues.

2.1.3 Re-structuring cost models
The way to profitability, especially on the bigger contracts, is to break it down into a WBS (work
breakdown structure) system, where 80% or more of the tasks are performed by the most junior
employees. Re-structuring WBS systems not only results in higher profitability, but also helps
firms maximize the most critical metric – revenue per consultant. A typical break-up of
consultants‟ timesheets at smaller, mid-level firms reveal more than 75% of time being spent on
smaller or lower value-added tasks requiring lower competency levels.
To illustrate, if the consulting engagement is to reduce wastage during packing at a
manufacturing facility, the first step will be to benchmark industry averages for packing wastage.
This would involve a set of tasks such as conducting advanced internet searches to find
companies with a similar manufacturing profile, listing down their products and researching their
packing practices and metrics, possibly using extensive primary research. It may be argued that
none of these are core consultant jobs, and can be performed by good market research people. It
is vital for firms to realize that they need to free their primary revenue drivers from jobs requiring
different skills and put in place a cost/business model which ensures each consultant operates at
their highest level of competency.
2.2 Challenges in addressing profitability and growth imperatives
A key concern that consultants from small and mid-sized firms voice often is the inability to
balance project deliveries with business development. Ensuring
a healthy pipeline of future projects, for atleast the coming 4-6
months, is challenging, given the delvery pressures of current
consulting assignments as well as limited business development
bandwidth.
And there remains the question of who will free up the
consultant‟s time? If the consultant has to review 10 competitor
profiles before meeting a client, she (or he) often has to start
with making them herself (or himself). This includes searching
for information on the Internet, looking through annual reports,
financial statements, business press and finally synthesizing all
the information into a format which that can be reviewed and
analyzed. Invariably, there is inadequate junior staff that can take the load off the mundane
searching and synthesizing. Further, even the junior consultants‟ time is also very valuable; and
activities such as these directly eat into their billable time.
Balancing Project Delivery
and Business Development
A key concern that consultants
from small and mid-sized firms
voice often is the inability to
balance project deliveries with
business development.
Ensuring a healthy pipeline of
future projects is challenging,
given the delvery pressures of
current consulting assignments
as well as limited business
development bandwidth.

Let‟s quickly take a look at how chasing growth might drag profits down in the short term.
Figure 2: Challenges in addressing growth imperatives
Therefore, the problem is not so much that firms are not aware of the various growth
opportunities or of the multiple avenues through which they can grow. The challenge they face in
growing, is in growing profitably, and through means that do not diminish brand value.
3 How external research support teams can help
The biggest consulting firms today have “captives” or back-
office arrangements where most of their non-core jobs are
performed. These back-offices form a vital component of the
firms‟ operational strategies and are critical in ensuring the
consulting business grows profitably. The operational model at
these captives is built around serving the needs of the core
consulting outfit. Some of the biggest back-offices have their
research support teams organized as per verticals, thereby
ensuring vertical expertise down the line. Analysts at these
back offices are trained to provide ad-hoc research support so
that consultant time on lower value-add tasks is reduced,
increasing revenue generating capacity across the
organization. These back research captives are typically
located in countries where talent availability is high and costs are low. India, Sri Lanka and
Philippines are among the most favored locations for setting up research support offices.
Research support teams
Consulting firms in the US, UK,
many parts of continental
Europe and Australia are
increasingly outsourcing their
research and other allied
activity to research firms who
specialize in providing research
support to consulting firms. The
costs of outsourcing are
negligible while the RoI on the
outsourced activity is
immediate.
Challenges to growth
 Bother of additional human resource or workforce management
Firms need to recruit people with additional skill sets, they need to find office space for them, they need to align HR
policies to include them - and before the firm knows it, it is spending more time managing people than working on
client strategy
 Inability to manage disparate skill set requirements for each engagement
Skills required to execute one assignment may not be the same as the next one. Assignment-based freelance
recruitments are often too expensive. Most firms take the easy way out and stick to what they do best and leave the
rest to someone else
 Challenges of managing spikes in business volumes
The variability in assignments can be very high, that managing spikes is a big issue. One consultant idle for 15 days
will dramatically eat into profits
 Fear of losing control
If hiring is not an option, using freelancers doesn‟t work too well either. There is always the danger that the knowledge
and the experience is resting with the freelancer, who may not be available for the next assignment.

Figure 3: Research Support for Profitable Growth
Setting up a research support office is not an option for many of the smaller and/or mid-level
consulting firms. It requires significant capital investment to start with and a threshold minimum
level of activity which can be immediately sent offshore. The captive model has its own problems,
and the high start-up and fixed costs mean that even large consulting firms are using third-party
vendors.
Consulting firms in the US,
UK, many parts of continental
Europe and Australia are
increasingly outsourcing their
research and other allied
activity to specialists that
provide research support to
consulting firms. The costs of
outsourcing are negligible
while the RoI on the
outsourced activity is
immediate. Further, unlike
captive firms, outsourcing to
experienced research
agencies provides firms with
the flexibility to scale up or
scale down support teams at
very short notice. So there is
no “fixed cost” involved and all
costs are directly proportional
to revenue generated (or,
variable costs). The best research agencies are able to provide a wide suite of services across
multiple horizontals. Consulting firms can leverage their vendor‟s vertical experience and
geographic bandwidth to not only strengthen their value proposition to end clients, but also
increase customer satisfaction and delight. The lower costs of research provide teeth to
proposals by ensuring competitive pricing. The cost arbitrage provides ample opportunity to
increase margins.
Some of the most important and immediate benefits that offshore research support teams can
provide consulting firms are highlighted below.
1. Provide the needed flexibility to manage spikes in business volumes. Support teams
can be scaled up or down depending on business demand.

2. Enable access to specialist analysts and horizontal/vertical expertise. In most
research support contracts, consulting firms can leverage the research firm‟s expertise and
choose specialist analysts.
3. Provide back-end support needed to go from implementation to advice. For on-going
client engagements, the support team can be trained to take on all the “regular” tasks, while
the consultant can focus on the implementation aspects.
4. Provide access to research expertise. A well-rounded research firm will be able to
provide specialist research expertise, quantitative, qualitative, survey-based, data analysis,
presentation support, company profiling, industry profiling and other research all of which is
typically valued by consultants for providing top-quality consulting services.
5. Improve TAT. The research teams provide another pair of eyes and hands, and most often
are located in a different time zone as well. This leads to a 24/7 working environment,
leading to faster project completion. More significantly, firms can improve value proposition
upfront by promising faster turnaround to clients
6. Improve conversion of proposals made to clients. The support team can help prepare
the proposal, freeing consultant‟s time to think through and define the value being proposed
to the client. The research team can also help in marketing related activity, including
generating leads, developing marketing communication for the consulting business, ghost-
writing blogs, producing case studies, white papers, knowledge maps and such other
collaterals to support business development activity.
7. Improve profitability. The difference between the price billed to the client and the cost
incurred on the research team can be significant. Offshore research teams therefore,
provide the crucial cost arbitrage advantage for increasing profitability on every
engagement.
8. Provide access to and presence in emerging markets. Typical research teams tend to
be located in emerging markets. These are invariably the very same markets that clients
are seeking growth from and firms with presence (albeit through their research support
teams) in these markets can enable successful market entry for their clients.
Consulting firms seeking profitable growth must consider adding offshore support teams. Building
a research support team or even entering into contract with a research firm for ad-hoc research
support will significantly enable firms to work the client-side trends to their advantage
We believe that these client-side and environmental pressures are not going to go away soon,
and consulting firms choosing to ignore them are running the risk of stagnation or worse. Firms
need to consider these trends and evaluate them for the impact on their business while
strategizing for growth.

About the Author
Pratibha Kurnool is a solutions consultant at ValueNotes. She has over seven years‟ experience engaging
with global corporates, research agencies, publishers and consulting firms. At ValueNotes, she has
managed teams providing business and investment research support to premier clientele, including some of
the world‟s largest companies, asset managers, wealth managers and management consultants. She
designs customized research solutions for clients, to address specific business challenges. She has
authored three major reports on Accounts Payable, Accounts Receivable and Tax Returns Offshoring. She
has also conceptualized and designed the first-ever Investment Confidence Index in India (the J.P.Morgan
Investment Management – ValueNotes Investment Confidence Index).
Pratibha is a Chartered Accountant from the Institute of Chartered Accountants of India.
About ValueNotes
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ValueNotes has specialized in the management of research, business intelligence, and information. We
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We partner with global consulting firms to offer a variety of research services via flexible engagement
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