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Creative destruction in the consulting market
Sometimes you need to break things to make them better.
The Austrian economist Joseph Schumpeter likened economic innovation to “a gale of creative destruction”—the “process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Writing in the middle of the Second World War, he adapted Marxist ideas to argue that capitalism must devalue existing wealth if it’s to clear the decks for the creation of new wealth. It’s a somewhat Darwinian notion of business, but it continues to shape how we see innovation today: Credit card companies created new economic value by destroying the hire purchase market, taxi apps by changing the way we hail a cab.
And creative destruction is precisely what’s going on in the consulting industry. Transformation—business and digital—continues to be the dominant driver of growth, but it’s also a Godzilla-like monster rampaging through the jungle of traditional services. Evidence of this is all around us: In clients’ willingness to pay more to a twenty-something who’s capable of hacking into their systems than to a grey-haired strategy partner, and in the extent to which clients expect routine data-gathering work to be done by robots, rather than junior consultants. But the most important change is the one that’s least obvious.
Our global data model is built bottom-up, by estimating the number of people employed in thousands of major and mid-sized consulting firms around the world, regional players as well as the familiar global ones. From interviews with the firms concerned, backed up by huge amounts of data-gathering (some of which is, of course, automated), we can also classify people into the sectors they generally tend to work in and the types of projects they tend to work on. In aggregation, this gives us a figure for, say, the size of the strategy market in the Czech Republic ($48m, if you’re interested), or the risk and regulatory market in Thailand ($66m). If your firm focuses on operational improvement, it would be able to tell you that Singapore would be a much better place to base your Asia hub than Malaysia (at $524m, the Singaporean market was worth four times the Malaysian one in 2018).
But the process of creative destruction could mean these figures are misleading. Let’s take the operational market in Singapore as an example. Our standard definition of operational improvement, which reflects the way clients used to buy and the way most consulting firms are still organised, includes process redesign, benchmarking, cost cutting, etc. And a lot of that is being cannibalised by digital technology and transformation. Last year, we estimate that 30% of the $524m operational improvement market in Singapore could be classed as digital transformation (by way of comparison, the equivalent figure in the US, the most mature transformation market, was 53%). That would immediately leave a traditional operational improvement consulting firm with a much smaller market, so there’s a danger that, having secured its very expensive office space in the Central Business District, its consultants end up twiddling their thumbs at their very expensive desks.
All is not, however, lost. The process by which transformation is destroying the economic value of many traditional consulting markets is giving rise to new ones. For a firm that specialises in, for example, the interaction between digital and physical products and services, the market could be much bigger. Yes, only a small part of the operational improvement market may be relevant, but once bundled together with other capabilities—new product development, IoT technology, customer experience, and employee engagement, to name a few—then the potential opportunity is huge.
Many consulting firms are already in the process of dismantling their existing lines of service. The successful firms of the future will re-combine them to create new opportunities.