What if your business model prevented you from innovating? The case of consulting firms

Management consulting firms were set up almost a century ago to support the growth of companies by accompanying them in their decision making. Their core business is to formulate solutions that help their customers transform and improve their operational performance. Consulting companies also stimulate companies’ ability to innovate, namely “the ability to constantly transform knowledge and ideas into new products, processes and systems”. But do consulting firms manage to develop the same innovation capacity in their own activity?

This question may seem surprising if we refer to the reason for being consulting firms and the expertise they claim. However, it is clear that consulting firms are struggling to innovate, and tend to pursue a model that no longer lives up to certain expectations of their stakeholders.

We rightly formulate the hypothesis that the success model of consulting firms paradoxically constitutes a brake on their ability to innovate. In fact, their profitability is based on standardization of approaches that have proven themselves with other customers. Their activity thus consists in adapting the expertise to the customers’ needs according to previously tested solutions. industrialization of this process encourages consulting firms to adopt principles of efficiency and effectiveness that meet the logic of innovation.

Little research has been done in this area, but a quick review of these principles tends to support this intuition. E.g turnover high level of staff presupposes privileging individual capacities and adaptability over collective intelligence. The principle of “up or out” is conducive to a highly competitive rather than collaborative environment. Finally, the relocation of the consultant’s activity to the client reduces the time for internal exchanges, especially informal ones.

Because of these results, we have gathered testimonials from more than 40 consultants in all ranks and work in management consulting firms of all sizes. Based on our interviews, we dissect the various characteristics of the consulting companies’ business model and explain how they can greatly hamper internal innovation.

A production-oriented business model

Using the RCOV model (see box below), we have formalized the business model of the consulting firms to identify its most prominent characteristics and assess their relationship to the ability to innovate.

The consulting firms’ resources and competencies are globally represented by consultants. Although recruitment policies change, consultants are selected according to very specific criteria. They come from the same major management or engineering schools and have all the technical and behavioral skills expected. This homogeneity is necessary to ensure the quality of services, but also to facilitate the mobility of consultants and to identify the talents destined to develop in the structure. On the other hand, it significantly hampers diversity and favors the innovation capacity of an organization.

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The organizational structure of consulting firms is pyramid-shaped and generally consists of a large base of consultants, a tight pool of managers and a handful of employees. This structure involves one turnover important at the bottom of the pyramid, institutionalized by the practice of up or out : either the consultant is effective and he moves on in the structure, or he leaves it. This practice is a key element in the profitability of consulting firms, by focusing 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 ability to innovate: short times, reduced internal cooperation, political games, etc. The relocation of the consultant’s activity to the client amplifies these detrimental effects.

Management practices are calibrated to ensure the spread of the pyramid structure and control of consultants. The degree of consultancy utilization is another fundamental element in the profitability of consulting companies. First, consulting firms all seek to optimize the use of consultants, demonstrating the primacy of production over the research activities necessary for innovation. The revenue model reinforces managers’ preference for production, as consulting firms generally charge for working hours. In the event of fluctuations in activity, managers will tend to use the best talents, who will therefore devote themselves to production without hesitation working in addition to the billed hours. The priority given to using the best talents for productive purposes therefore distracts them from innovation practices.

These practices support the value propositions of consulting firms, which are also relatively standardized. Contrary to what one might imagine, clients of consulting firms expect “a form of classicism”. If the service is to be of high quality (which strengthens the logic of internal competition), it must be comparable to that of competitors, if nothing else, in order to be able to estimate and negotiate the price. The benefit must also correspond to the representations and the customer’s mental card. This standard has a positive impact on the other components of the business model, as it makes it possible to optimize the management of resources, which are in themselves standardized. On the other hand, it is unlikely to stimulate creativity and innovation in teams of consultants. Development of innovative services involves the risk of mortgaging significant resources and competencies to the detriment of production, without a guarantee of commercial success.

A business model that hampers innovation?

Analysis of the business model of consulting firms has enabled us to identify three main obstacles to the development of their innovation capacity: imbalance between exploitation and exploration activities, lack of internal social relations, preference for short time frames.

The emphasis on billable hours actually encourages companies to develop a production culture at the expense of an innovation culture. By maximizing the uptime of top talent, consulting firms devalue effectively exploration activities (eg studies and research, publishing activities, pro-bono missions, etc.). Then the relocation of production activities reduces the opportunities for formal and informal exchanges, catalysts for the spread of social ties, but also for the generation of innovations. Finally, the lack of diversity, the competitive climate between peers and the attention to results place consultants in a number of short time frames, which proves to be detrimental to the development of innovation capacity in consulting firms. In this sense, our research shows that for the consulting industry (as well as for other industries with similar business models) it is business model itself, which acts as an inhibitor of internal innovation. This explains why large consulting firms in most cases are no longer known for inventing new management practices, but rather for implementing “trendy” practices that are proven and do not involve risks.

Our analysis opens up exciting paths for reflection for research, but above all for practice. First, it emphasizes the importance of evaluating business models awith respect to other variables that are important for their sustainability, such as the ability to innovate. Our case shows that these assessments can question the practice of the scope of an entire industry, and sometimes in a beneficial way when these no longer correspond to the aspirations of the stakeholders, such as young candidates. Then our research sheds light on the duality of the models when they prove to be both formidable in securing a company’s economic and commercial results, but fragile in developing sustainable sources of growth. This duality needs to be handled carefully by managers to anticipate the threat from potential new entrants to a market that is likely to offer disruptive models.

Finally, we invite managers and researchers to think of innovative business models that are able to cover a variety of issues, sometimes antagonists, which is becoming increasingly crucial in the light of the prominent social and environmental considerations. Such an approach presupposes deconstructing certain beliefs of leaders and leaders, in order to perceive what may be paradoxical in the construction of performance.

The article is co-authored with Fernanda ARREOLA, Dean of the Faculty of ISC Paris.

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