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

Management consulting firms were created almost a century ago to support the growth of companies by accompanying them in their decision-making. Their core business is formulating solutions that help their clients transform and improve their operational performance. Consulting companies also stimulate the companies’ innovative capacity, 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 continue a model that no longer meets certain expectations of their stakeholders.

We rightly formulate the hypothesis that the consulting companies’ success model paradoxically constitutes a brake on their ability to innovate. In fact, their profitability is based on the 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 effectiveness and efficiency that run counter to 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 employees presupposes that you privilege individual capacities and adaptability over collective intelligence. The principle of “up or out” is conducive to a highly competitive rather than cooperative environment. Finally, moving the consultant’s activity to the client reduces the time for internal exchanges, especially informal ones.

Because of these results, we have collected testimonials from more than 40 consultants of all ranks and working in management consulting firms of all sizes. Based on our interviews, we dissect the different characteristics of the consulting companies’ business model and explain how they can strongly inhibit internal innovation.

A production-oriented business model

Using the RCOV model (see box below), we formalized the consultancies’ business model to identify its most salient characteristics and assess their relationship to innovation capability.

The consulting firms’ resources and competences 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 the services, but also to facilitate the mobility of the consultants and to identify the talents destined to develop in the structure. On the other hand, it significantly inhibits diversity and favors the innovation capacity of an organization.

business

The organizational structure of consulting firms is pyramidal, and generally consists of a large base of consultants, a tight pool of managers and a handful of employees. This structure involves a turnover important at the bottom of the pyramid, institutionalized by the practice of up or out : either the consultant is effective and he advances 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 harmful to the company’s ability to innovate: short times, reduced internal collaboration, political games, etc. The relocation of the consultant’s activity to the client reinforces these harmful effects.

Management practices are calibrated to ensure the spread of the pyramid structure and control of consultants. The consultant utilization rate is another fundamental element in the profitability of consulting companies. First, consulting firms all seek to optimize the use of consultants, which shows the primacy of production over the research activities necessary for innovation. The revenue model reinforces this preference for managers for production, as consulting firms generally charge for labor time. In the case of fluctuations in activity, managers will tend to use the best talents, who will therefore devote themselves to production without hesitating to occupation in addition to the invoiced hours. The priority given to using the best talents for productive purposes therefore diverts them from innovation practices.

This practice supports the consulting companies’ value proposition, which is also relatively standardized. Contrary to what one might imagine, clients of consulting firms expect “a kind of classicism”. If the service is to be of high quality (which reinforces the logic of internal competition), it must be comparable to that of competitors, if only to be able to estimate and negotiate the price. The performance must also correspond to the representations and the customer’s mental map. 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 themselves standardized. On the other hand, it is unlikely to stimulate creativity and innovation in teams of consultants. Development of innovative services entails the risk of pledging considerable resources and competences to the detriment of production, with no guarantee of commercial success.

A business model that inhibits innovation?

Analysis of the business model of consulting companies has allowed 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 culture of production at the expense of a culture of innovation. By maximizing the uptime of top talent, consultancies effectively devalue investigative activities (eg surveys and research, publication activities, pro-bono missions, etc.). So the relocation of production activities reduces the possibilities 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 series of short time frames, which proves to be detrimental to the development of innovation capacity in consulting companies. 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, in most cases, large consulting firms 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 exciting avenues for reflection for research, but above all for practice. First, it emphasizes the importance of assessing business models awith respect to other variables important to their sustainability, such as the ability to innovate. Our case shows that these assessments can question practices on the scale of an entire industry, and sometimes in a beneficial way, when these no longer correspond to the wishes 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 financial and commercial results, but fragile in developing sustainable sources of growth. This duality must be carefully managed by managers to anticipate the threat of potential new entrants in a market likely to offer disruptive models.

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

The article was written together with Fernanda ARREOLA, Dean of the Faculty at ISC Paris.

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