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Disruption again, but this time from the supply side

We’ve written before on this blog about if, when, and how the consulting industry will be disrupted, often suggesting that the forces that will drive change may be hidden in plain sight. Nowhere is that more relevant than when we consider the current talent crisis.

We’ve generally defined disruption as a mass change in client behaviour; that, for example, Uber was disruptive, not so much because of its technology, but because people changed the way they travelled. Demand-side disruption taps into frustration with existing services and price points: New York’s famous yellow cabs are dirty, cramped, and expensive, while in comparison, Uber’s cars are clean, air-conditioned, and usually cheaper. But disruption—in the sense there’s a sudden move of clients from one firm to another—hasn’t happened in consulting because the market is much more fragmented (a point we made in this article), and around three quarters of clients think the quality of work done by consultants is already “high” or “very high”. In addition to this, while consultants are rarely cheaper than the in-house equivalent, they’re metaphorically cleaner and better air-conditioned.

But less attention (including by us) has been paid to supply-side disruption, the kind of innovation that takes place when people are forced to behave differently because they can’t get hold of things they’re used to having. The reason why we spend less time thinking about this type of disruption is that it’s assumed to be temporary. For example, when coffee was unavailable during the Second World War, people used chicory as a substitute. Presumably that had a massive impact on the hitherto fairly niche chicory industry, but it didn’t last: Chicory was no substitute for a decent espresso. Similarly, the “supply” of flights was limited by government travel restrictions during the pandemic, so more people staycationed, but now, as it becomes easier to travel in some parts of the world, airline ticket sales are increasing rapidly. In contrast, some supply-side constraints result in long-term shifts in consumer behaviour: The forced move to al fresco dining in the UK has clearly resulted in more people preferring to eat outside, more of the time—we’re not quite Paris yet, but we’re trying.

The consulting industry is now suffering from its own supply-side problem; an acute shortage of people. This is, by all accounts, significantly worse than the industry’s familiar “war for talent”, but it’s not yet clear whether it’s a short or long-term problem.

If we assume this labour shortage is primarily short-term, then the obvious response will be to pay people more, thus attracting and/or keeping people who are sitting on the career fence. But even this has problems. Traditional consulting firms may pay their staff—and especially their partners—well, but they can’t compete with the salaries and other benefits offered by technology firms like Google. Even if they could, consultants who lived through the boom of the late 1990s will remember the extent to which salary expectations outstripped clients’ willingness to pay higher fees, resulting in a “market correction”: Demand contracted.

But what if we assume this is a long-term talent crisis? We should expect to see large, well-established firms investing heavily in productivity tools (to help staff work more efficiently behind the scenes), and managed services (where some of the routine work done by consultants is replaced by a combination of software tools and proprietary data, supported by deeper but more limited expertise). However, that’s likely to make it hard for small and mid-sized firms to compete: Already out-bid when it comes to paying rapidly inflating salaries, these firms will have to focus on expert-only models, offering senior people greater flexibility—both of which will limit their ability to grow. The distance between the very biggest firms, and the next tier down, will increase. However, for genuine disruption of the industry to occur, one of those very big firms would have to do something that allowed it to obtain—and keep—a higher proportion of the best people. Such a strategy would acknowledge that, however much consulting firms invest in technology, they very much remain people-based businesses, and that competitive advantage lies in control of these scarce resources.

So what would that move look like? We’ve long thought that disruption in the consulting industry won’t come from either within or without, but from a combination of the two. A merger between—say—Accenture and Google would put a fairly sizeable cat among the pigeons. An injection of money from a technology company would allow a consulting firm to offer potential recruits both substantially higher salaries, and a chance to work with leading-edge technology. And where most senior consultants go, clients will follow. If our putative Accenture/Google merger was accompanied by a strategy of poaching the brightest stars from all the major firms, now that would truly be disruptive.