Many strategy students are interested in consulting— specifically, strategy consulting. Therefore, a deep understanding of the five forces affecting the consulting industry is a must. Before proceeding, it is useful to dispel the notion about “pure” (or “classical”) strategy consulting, which hardly exists any more. Even at the Big Three firms—McKinsey, Bain, and Boston Consulting Group (BCG)—revenue from such traditional strategy consulting, which used to be their meat and potatoes, decreased from 20% of total revenue in 2013 to 10% in 2019. Therefore, for the purposes of this case, “consulting” refers to broader management consulting.

Sellers and Buyers

Universities broadly or business schools specifically can be viewed as sellers to consulting firms (also known as consultancies). Because consulting firms generally pay well and offer a glamorous career, they often attract top applicants. In 2018, 800,000 applicants went after 8,000 jobs at the industry leader McKinsey. Of course, individual applicants can be viewed as sellers of their services. Given the eagerness to compete for jobs in consulting firms, the bargaining power of universities, business schools, and applicants as sellers is not a significant cause of concern for the industry.

On the other hand, buyers (hereafter “clients”—using the consulting industry language) enjoy significant bargaining power. From the beginning of the consulting industry, clients have always wondered about their return on investment (ROI). The opacity of consulting work and the typical refusal to be held accountable for the effectiveness of implementation after recommendations are made by consultants have made ROI difficult to assess. Just like consulting firms evolve, clients also evolve and many have hired ex-consultants. The Big Three alone have a small army of 50,000 “alumni,”2 and many now work for former client firms. It is no surprise that many consulting alumni, now corporate executives, are spearheading the efforts to reduce the scope of their firms’ engagements with consultants and migrate more of such outsourced work in-house.
Traditional engagement often uses a billable hour model, whose costs may be difficult to control. Bringing more work in-house, headed by former consultants who possess some expertise in the work consultants perform, can allow firms to better control costs. Even when these firms do need help from consultants, corporate executives with earlier consulting experience often have enough knowledge to identify the most appropriate consulting firms, as opposed to relying on the largest name-brand firms that may not necessarily have the most appropriate expertise but will certainly charge the highest fees. Overall, clients increasingly leverage their bargaining power by either bringing some work in-house or demanding a more transparent understanding of ROI for consulting engagements.

Rivalry
Rivalry for high-end clients primarily takes place among the Big Three. Their primary value proposition is 

(1) the knowledge and insights packed in their advice to clients, 

(2) the prestige and legitimacy they bring to clients, which may have to make some challenging, high-stakes strategic decisions. 

It was the Big Three—primarily McKinsey, which was founded in 1926—that helped diffuse the idea that management was a profession rather than a mere trade. They thrive on brainpower more than specialist industry knowledge or mere common sense.
Leading consultants who have awesome brainpower can make boards and top management teams (TMTs) feel more comfortable to proceed with high-stakes decisions.
Knowing their power to bring legitimacy, consulting firms work closely with boards and TMTs in order to gain a better understanding of their preferences and constraints prior to delivering the “appropriate” recommendations.
A well-known “secret” of consulting firms is to get nonroutine, cutting-edge engagements that can teach them a great deal—all paid for by the first clients on such problems—and then to market and reuse such learning in future engagements across multiple clients. Another “secret” to make money is their business model of leverage by deploying a small army of (relatively) lowly paid junior consultants. The higher the ratio of junior consultants to senior consultants, the more lucrative an engagement becomes. At McKinsey, most senior consultants who are partners can fetch $1.5 million a year. Therefore, the pressure to generate revenue is intense. Clients that believe they are getting “gray hair” consulting may not know that most (and sometimes all) of the underlying work is performed by “brains” consulting done by junior consultants.
In addition to mainstream solution-shop consulting firms (such as the Big Three famed for “undefined” problems), there are specialized value-added process service providers, which address problems of defined scope with standard processes. The Big Four accounting firms (Deloitte, EY, KPMG, and PwC) and leading information technology (IT) firms (such as Gartner, IBM, Infosys, SAP, and Tata Consulting Service) belong to this category. There are also a number of boutique shops in specialized areas.
Examples include 

(1) executive search (headhunting) and leadership coaching consultants (such as Spencer Stuart, Heidrick & Struggles, Russel Reynolds Associates, Egon Zehnder, and Korn Kerry—known as “SHREK” firms), 

(2) executive compensation consultants (such as Frederic W. Cook, Pearl Meyer, and Mercer),

(3) corporate-governance proxy advisors (such as Institutional Shareholder Services [ISS]).
Hard lines separating different segments within the consulting industry do not exist. Starting in 2010, the Big Four accounting firms entered the core strategy consulting market, and elbowed Monitor Group—a relatively “young” strategy consulting firm that was co-founded by Harvard strategy guru Michael Porter in 1983—into Chapter 11 bankruptcy in 2012. Deloitte then bought it out for $120 million and turned it into Monitor Deloitte in 2013. PwC acquired PRTM in 2011 and Booz & Company in 2013—now Strategy&. EY followed the trend by acquiring Parthenon Group in 2014 and the European businesses of OC&C in 2016 and 2017—now all under the EY-Parthenon brand.
In response, the Big Three have significantly expanded their technology consulting, focusing on lower-margin but longer-term engagements. For example, starting in 2007, McKinsey offered McKinsey Solutions, a technologybased analytics software that can be embedded at clients, providing ongoing engagements outside the traditional one-off, project-based model. Overall, “pure” (or “classical”)
strategy consulting has become, in the words of the Economist, a “side dish,” accounting for about 10% of the Big Three’s revenue in 2019.

New Entrants

Unlike law and medicine, consulting is an unregulated profession. Any individual or company can enter at will.
Recent examples include BTG, CEB, Eden McCallum, Gerson Lehman Group, and IDEO. These firms provide online marketplaces that cater to the increasing number of freelance consultants. In addition, the steady rise of data analytics is a certainty.

Sophisticated data technology has already automated average costing and pricing analysis. The speed and quantifiable output of such technology can reduce the importance of brands such as the Big Three in (traditional) strategy consulting and the Big Four in (traditional) accounting. For example, enterprise analytics player Beyond Core can automatically crunch a vast amount of data, capture statistically significant patterns, and present such insights in an animated briefing. Such big-data-based capabilities can eat junior consultants’ lunch. In 2016, Beyond Core was acquired by Salesforce for $110 million.
Overall, (traditional) strategy consulting firms such as the Big Three have been good at bundling—putting a lot of different consulting services into a single, high-priced package. The new entrants with deep and specialized capabilities—in combination with clients’ rising interest in containing consulting engagement costs and their enhanced ability to evaluate the true value of each service (discussed earlier)—are eating away some of the lower-end, more routinized work, resulting in significant disruption to the industry. Some of the basic work under the cloak of “high-end” consulting can be routinized, commoditized, and even automated.
Substitutes A number of serious substitutes exist for highly paid consultants from leading consulting firms. For clients, a simple substitute is: do not engage consultants. In executive search, since a majority of client firms end up hiring an internal candidate for a top job such as CEO or board member, some clients wonder why they need to spend one-third of the chosen candidate’s first-year compensation (including any bonuses) on one of the SHREK search firms. As CEO pay skyrockets, such executive search fees can easily exceed $1 million.
Another substitute is a dedicated, in-house strategy group maintained by some large multinationals. Samsung, for example, is famous for nurturing a Global Strategy Group, consisting of non-Korean MBA graduates who have previously worked for world-class firms such as Apple, Goldman Sachs, and Intel. Samsung deploys Global Strategy team members on internal consulting projects for its various units around the world. Many individuals are given an opportunity to take on a leadership role in a high-level consulting project much earlier than a typical consulting career provides (see Integrative Case 22: Samsung’s Global Strategy Group).
A third substitute is freelance consultants, who have diverse skills and experiences but do not have to shoulder the overhead costs for “gray hair” seniors and expensive downtown office space. For example, in 2003, in a project assessing UK competitiveness, the British government engaged Monitor Group, which delivered a report first authored by Michael Porter.3 In 2013, after Monitor Group went bankrupt, in a new project assessing UK competitiveness, the British government discovered your author, whose more reasonable consulting fee saved a bundle of money for UK taxpayers.

Challenges

In summary, of the five forces affecting the consulting industry, only one—bargaining power of sellers—is relatively weak or nonthreatening. Four other forces—
bargaining power of buyers, rivalry among competitors, threat of new entrants, and threat of substitutes—are strong. This analysis helps us understand why this industry that has long helped others sidestep strategic threats is itself facing some disruptive strategic threats.
Beyond the five forces analysis, which is a cornerstone of the industry-based view, the resource-based view would obviously highlight the necessity for consulting firms to develop new capabilities (such as McKinsey Solutions).
Left unexplored thus far, but strategically important, is the institution-based view, which focuses on the impact of formal and informal institutions. Part of the value that consulting firms deliver is a reputation built not only on technical excellence but also on integrity and legitimacy.
Consulting firms whose integrity and judgments are questionable will have a hard time winning new clients. One example is Monitor Group’s engagement with Muammar Gaddafi’s Libyan government in 2005–2007 to not only assess the state of Libya’s economy, but also ghostwrite a book to be published in Gaddafi’s name, which would glorify this notorious leader. The book was never completed, and Monitor Group later stated that the project had been a “serious mistake on our part.” This fiasco contributed to Monitor Group’s collapse in 2012. In another example, in 2012, a former managing partner of McKinsey was convicted of insider trading. In 2016, McKinsey was engulfed in a scandal in South Africa after it worked with a politically disgraced family that allegedly “captured” the state and engaged in significant corruption. Its new managing partner, in position since 2018, had to repeatedly apologize for such misdeeds. From an informal institutions standpoint, such scandals, which damage the integrity, reputation, and legitimacy of consulting firms, did not help win clients.
However, a defining characteristic of consulting firms is agility. While some individual firms have failed or disappeared, some have successfully transformed themselves throughout their history. For an industry dating back to 1886—when Arthur D. Little (which is still active in 28 countries) was founded—being agile about the new threats and opportunities is part of its DNA. As of this writing (April 30, 2020) when the world is engulfed in the coronavirus crisis, how to manage in lockdown conditions, how to deal with pandemics, and how to manage “black swan” (low probability) risks going forward are rapidly becoming a new area of practice in the consulting industry.

Case Discussion Questions 

1. Of the five forces affecting the consulting industry, which one is the most significant?
2. Which segment of the broad consulting industry will provide the best likelihood of success for a potential new entrant?
3. Based on Question 2, how would you prepare yourself to have the right combination of educational qualifications and practical experiences in order to compete successfully in that segment?
4. As a consultant to the consulting industry, please advise how consulting firms can best prepare themselves for competition in the post coronavirus environment.