Posted , in Business model
Monetising your assets
Not many jokes made about consultants are actually funny, but I’ve always liked the one about the shepherd. There he is, minding his herd on a remote and rocky valley (Northern Greece, I like to imagine, somewhere near the Macedonian border, all olives and sunshine), when a sleek black car pulls up and a snappily dressed young man gets out, carrying a briefcase. “Hello,” he says, striding towards the shepherd, hand outstretched, “I can help.” The shepherd attempts a toothy smile.
“You need to know how many goats you’ve got, don’t you?” the young man continues, whipping off his Ray-Bans. “All I’d charge you would be one goat.” Without waiting for an answer, he removes his state-of-the-art laptop from its case, sets up a small satellite dish, and starts work. An hour later, he looks up triumphantly: “402.” The shepherd comes to with a start: “That’s extraordinary, how did you…” “Oh, I just used GoatTracker™, our new tool aimed at helping people just like you. It has embedded algorithms and predictive modelling of future goat movements. But if you don’t mind I’ll just take this goat and be on my way to the next valley.” As he walks off, the shepherd calls out, “You’re not a consultant by any chance, are you?” Now it’s the young man’s turn to look surprised: “Yes. How could you tell?” The shepherd sighs: “Well, you used an over-engineered solution to tell me something I already knew. And that’s my dog you’re carrying.”
The important point here is not the shadow this casts over the reputation of the consulting industry. It is, of course, whether one goat was the right price.
The price a consulting firm charges for its intellectual property is one of the most important decisions it will ever make, and most firms are poorly equipped to make it. Clients, we know, are very attracted to the idea of alternative delivery models and, in particular, to replacing traditional advisory work with a combination of software, proprietary data, and deep consulting skills, aimed at delivering a specific outcome, and often replacing a process that clients currently undertake for themselves for a period of time. Our research suggests more than 90% of clients are open to this new way of working, and approximately three-quarters think that the future of consulting looks like this.
The idea is attractive because it resolves one of the conundrums that’s been dogging the consulting industry in recent years: how best to integrate different types of work—the low-cost (highly skilled but repetitive work clients would do themselves if they had the capacity) and the high-value (in areas clients aren’t familiar with, where innovation and lateral thinking count for more). Asked why the idea of a new generation of managed services (we still lack the appropriate term for this approach) appeals, clients cite the ability to access tools (the low-cost element) and ongoing (high-value) consulting support. But what’s far from clear in our research is the price clients are willing to pay. A delivery model that involves fewer people inevitably sounds to clients, brought up on the standard consulting leverage model, as something that should be cheaper. “We’d expect consulting firms to pass on at least some of the efficiency savings they achieve through automation to us,” is a typical client comment. However, position your software asset correctly, as an aid to high-value consulting work, then many clients expect to pay more. Data in our recent report on the future of pricing suggests that 45% of clients think that consulting firms’ prices will increase precisely because they’re using proprietary tools.
In deciding how to price their assets, firms have two main choices. Offering stand-alone software licences to clients is an option, the main advantage being that it creates an independent and self-sustaining source of revenue. It’s a making-money-while-you-sleep scenario that’s attractive to consulting firms in theory, but rarely realised in practice. Instead, most firms opt for a hybrid approach that combines the machine and the human—software with consulting capability—so any licensing component is treated as one element of a package that’s been priced in a more traditional manner (time and materials, or fixed price). Three factors are driving this preference: worries that too aggressive or distinctive pricing of the asset may endanger a firm’s core proposition and brand identity; a lack of knowledge when it comes to selling these kinds of deals; and the fear that they’ll attract the attention of the major software vendors and end up ceding to them a strong position in a niche market.
But there’s a limit to how much longer they can hold out: 68% of the US clients we surveyed for this report already license “assets” from consulting firms, and a further 26% would be interested in doing so (only 6% actively disliked this approach). Software companies are already eyeing up the potential opportunities, meaning that consulting firms will need to think about not whether to engage but how best to do so. Brand strength and the depth of their human expertise could be trump cards, but only if the overall hand is well played.
Talking about his credentials and depth of expertise could have allowed our consultant to charge two goats, for example. Licensing GoatTracker™ across all the shepherds in the region would have meant far fewer tiresome trips to the sticks. But his best approach would probably be to make more of the human-machine interaction by demonstrating his expertise. Knowing what an actual goat looks like would be a good place to start.