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November 2017

Are Big Consulting Firms Doomed?

By | Consulting Industry

Over the last century, the $425 billion consulting industry has been dominated by these firms:

  • Accenture (formerly Andersen Consulting)
  • Deloitte
  • PriceWaterhouseCoopers (PWC)
  • Ernst & Young (EY)
  • McKinsey & Company
  • Boston Consulting Group (BCG)
  • Bain & Company

Each of these companies has tens of thousands of employees, with fancy offices in virtually every major city around the globe.

They service the biggest corporations. They employ graduates from top MBA programs.

And yet, they are all being undercut by smaller, more specialized firms (I know because I own one).

Clients are realizing that they prefer working with niche firms, and they get more value. These smaller consulting firms are dominating. More than 70% of the consulting market is now comprised of firms between $500,000 to $5 million in revenue.

In the near future, big firms will struggle to compete, because they won’t be able to give clients what they need.

Here are five reasons why the consulting landscape is changing for the better.

1. Clients Want Specialization

The “old school” mentality was that consulting firms could do everything. Whatever problem you had, you just went to a major firm, and they could solve it. That didn’t work.

Clients no longer believe firms can do everything. They want firms that do a few things better than anyone else, and they don’t mind partnering with multiple firms to work on a project.

Think of this from a hiring perspective. No one wants to hire an employee who is “sort of good” at everything. They want to hire someone who is the best at one thing.

As I’ve written before: generalists don’t get hired, specialists do. The same holds true of consulting firms.

What clients tell us they hate more than anything, is hiring one massive firm who drops off 50 junior consultants with no real industry expertise—“generalists,” in other words—and they end up baby-sitting an expensive set of resources.

That was the dynamic with consulting firms for decades, but is easy to avoid now.

2. Clients Pay Less with Smaller Firms

Small and mid-size firms have a much leaner overhead structure. Most of them run on low-cost cloud technology (such as Office 365 and cloud-based time entry systems), lease little or no office space, and maintain a fit-for-purpose set of client-related insurance and bonds.

This means their back office requirements are minimal (and cheap!) and they can pass the savings along to the client. Often this translates to a 20-40% lower bill rate for the client. 

When a client hires a big firm, the massive overhead must be built into the bill rate. From the client’s perspective, this is completely unnecessary and adds no value.

3. Top Consultants Earn More at Smaller Firms

It is very easy for smaller firms to steal talent from big firms. When small or mid-size firms recruit consultants, it’s not uncommon to increase their compensation by 50-100%. Because they don’t have insane overhead costs, they can afford to pay their people more.

Where a traditional firm might pay a consultant $60 an hour ($100K salary plus benefits) while billing the client $200 an hour, small and mid-size firms can pay the consultant $100 an hour ($200K salary) while billing the client $130-140 an hour.

In other words, both sides win. The client saves 35%, and the consultant increases their compensation by 66%.

4. Consulting Is Finally Becoming Transparent

The consulting industry has been opaque for over a century. Firms worked within a “black box” where clients could only see the output, not the process that lead to it.

If the clients didn’t like the results, it was impossible for them to see where things went wrong.

Thankfully, for clients, this is changing.

Clients are now demanding to know more about the day-to-day execution of projects, in order to keep these consulting firms honest, and to catch issues before it’s too late.

Equipped with transparency and information to make good decisions, clients will typically hire smaller, specialized firms, where they get more talent at a lower cost.

Here’s a great article in Harvard Business Review called Consulting on the Cusp of Disruption that goes into detail on this topic.

5. It’s Easier Than Ever To Launch A Business

The last obstacle to disruption in the consulting industry was the high cost of entry.

In the past, it was expensive and difficult to go out on your own as a consultant or contractor. Now, it’s actually easier and more lucrative to be an independent contractor than it is to be an employee at a major firm.

Setting up a business used to take days, if not weeks, and it involved a team of professionals. Now you can register and launch a business by yourself, in under an hour, using tools like LegalZoom.

Finding clients used to feel impossible as an independent consultant. You had to network constantly, and rely solely on personal relationships to land new contracts.

Now, you can market yourself with LinkedIn and a resume. You can put this together in an afternoon, and high-quality consulting and staffing firms will find you.

There’s no barrier to entry anymore, and the upside is massive. Big consulting firms simply can’t compete, and as more consultants and contractors become aware of this, a tidal wave of people will strike out on their own.

In the future, the firms that support, engage, and staff independent consultants and contractors best, will be the firms that win. Because at the end of the day, clients only care about results, not the name of your firm

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