Separate or embedded? How consulting firms should organise themselves in a changing market

For several decades, our standard categorisation of consulting services—strategy, operations, technology, etc.,—have reflected clients’ buying habits sufficiently and accurately that it’s made sense for consulting firms to organise themselves in the same way. Not only do we have “strategy firms”, “operational firms”, but bigger, diverse firms may well have a “strategy practice”, a “technology practice”—and so on. Those delineations have been helpful to both sides: clients have found them a convenient label telling them where to find the expertise they’re looking for; consulting firms have been able to recruit people to specific areas and even pay them differently, depending on the practice they work in.

When a new service emerges—let’s use digital transformation as an example—clients won’t know which firm to turn to because no firm has a practice in this field (it’s new!). The firms that respond by creating separate practices quickly have an advantage: They’re effectively posting a large sign over their front door, saying to clients, “Looking for digital? We’ve got it covered”. Not only does that make it easier for clients to find what are apparently the right firms (let’s remember that putting a sign over your door doesn’t necessarily mean you’ve got the skills to deliver), but they also get the impression that the firms who invested in that all-important sign are the ones taking this emerging area seriously.

At this point one of three things happen.

In Scenario 1 in our diagram below, everything is fine: Over time, the new service becomes part of the standard roster of consulting services, so the investment in creating a sub-brand reaps a long-term reward for everyone concerned, although firms that launched their sub-brand first will have an advantage.

The problem is that Scenario 1 is the exception, rather than the rule. In Scenario 2, enthusiasm for this new service is short-lived—it’s one of those flash-in-the-pan bursts of interest that clients are occasionally prone to. The consulting firms that jumped on the bandwagon quietly close down their new practice areas. Everyone moves on. By contrast, Scenario 3 is what happens when the new service gains, rather than loses, momentum over time, and becomes a significant and sustained source of revenue for consulting firms. However, the longer this service remains of interest to clients, and the more ubiquitous it becomes, the more likely it is to become part of what clients are looking for, not something distinct and separate.

The other lines in our diagram show how consulting firms tend to react.

While some firms react quickly to a new, emerging area of demand, most don’t want to jump too quickly and face the cost and mild embarrassment of closing down a shiny new practice that it made such a fanfare about. They only decide to create a separate practice once demand is established, but often this is too late. It happens just as clients start to think that this service is something that should be embedded in everything a firm does, rather than be separate. The ideal firm launches a separate practice much more quickly, maintains it for as long as clients think the service is very specific, but is prepared to integrate it with its mainstream business at the point when clients’ views have changed.

So the big question with transformation is which path client demand will take. We can already be confident that we’re not in Scenario 2 , but are we in Scenario 1, in which digital will stand alongside strategy and operational improvement as part of the standard consulting taxonomy, or in Scenario 3, in which clients will expect digital to be part of everything a firm does? Firms with separate digital brands have had a huge early-mover advantage, but will they now need to work out how to deal with clients who think digital should be part-and-parcel of everything they do?

But the same point is true on a much bigger scale if we look at technology. Most of the large consulting firms that didn’t start out as technology companies still have separate technology practices. But 75% of clients think that technology plays at least a role in every consulting assignment, so does it really make sense to keep it distinct?

Having a separate technology practice now screams to the market that technology isn’t core to what the firm does. Will having a separate digital transformation practice come to say the same thing?