Posted , in Business model
The physics (and economics) of value
We’ve talked before about how challenging it is for consultants to convince their clients that they really deliver value. In one blog post earlier this year, we asked if the consulting industry had hit a value ceiling: For a number of years, the proportion of consulting clients—both globally and in the US—who tell us that firms add more in value than fees charged has plateaued, with around only half of clients of the leading firm telling us that it delivers a positive net return. The range of scores has also narrowed as the bottom-rated firm has caught up: Today’s best practice, it would seem, is becoming common practice, making it harder for clients to differentiate between firms on this metric.
However, when we look at what US clients tell us about tax and risk advisory firms, the picture is very different: The market average value score is higher in tax and risk compared to consulting. The highest rated firm for tax and risk is also perceived to be much more value adding than in consulting, with 71% of clients of the top rated risk advisory firm saying it adds more in value than fees charged.
We think this reflects what physicists call the Observer effect. By observing a phenomenon, we change that phenomenon. The monetary value of risk and tax projects is arguably more easily observable and measurable than in management consulting. Clients can see the amount of tax that has been saved, or readily estimate the fines and lost revenue that would have occurred from a cybersecurity leak. The output from many consulting projects can be more nebulous and the results harder to disentangle from the impacts of other external factors.
Because of this difference in the nature of work, clients can more easily say risk and tax projects are more value adding. We think that if value was more visible in consulting projects—by firms measuring, tracking, and articulating value better to clients—perceptions of value would improve there too.
This can also explain why we see a bigger range of scores in tax and risk. If you can measure that a firm is highly value adding, then surely, the opposite is also true: You can also observe where a firm isn’t adding value. It cuts both ways: Tax and risk firms have a big opportunity to differentiate themselves from competitors by measuring the value they add and showing they can deliver more value than their rivals, but also face a greater risk of disappointing clients compared to what we see in consulting.
However, before firms start embarking on measuring the dollar value-add of projects, and start judging projects on this metric, firms should consider economics, not just physics. Goodhart’s law highlights that when a measure becomes a target, it ceases to become a good measure. Consultants could game the system by only taking on projects with a very measurable outcome in order to show they are adding value, avoiding more complex projects that are ultimately more valuable to clients.
So, do try to measure value more, especially in consulting—it may convince your clients that buying from you is money very well spent. But don’t get too hooked up on just what you can observe.