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The changing balance of power in the consulting market

The downturn in the market for consulting services has created chaos in this once highmargin industry.

By Ansgar Richter and Sandra Niewiem . 01 March 2004

The downturn in the market for consulting services has created chaos in this once highmargin industry. The impact on both management consultants and their clients has been profound. Sandra Niewiem and Ansgar Richter argue that both need to react.
The changing balance of power in the consulting marketConsulting markets around the world are in turmoil. For more than 20 years the industry grew at above- average rates. Driven by steadily rising demand, margins were abnormally high, even when supply expanded substantially as new players entered the industry and the established consulting firms continued to hire people in what they called the “war for talent”.

But within a mere three years all that changed. Since the burst of the Internet bubble in 2000, industry growth stalled then became negative in 2002 (see Figure 1). Prices for consulting services are down and consulting firms are feeling it. In order to retain clients, many firms now bundle in free extra services. Others expand the scope of their projects while maintaining the budgets. In a recent interview, a partner with one of the leading consulting firms told us: “There are creeping changes in the market. Suddenly, things happen that were just unthinkable five years ago. For example, the pro bono components. Some project parts being offered free of charge are de facto discounts. The old rules of the game don’t work any more”.

As margins in the consulting market have fallen, many firms have already bowed to the pressure. Not only have young firms of the dot-com wave, such as Razorfish, been broken up. Well- established niche players such as Oliver Wyman and even industry icons like Arthur D Little have gone into bankruptcy or have been taken over by stronger competitors.

These trends are indicative of fundamental changes in the relationship between the buyers and the providers of consulting services. Of course, the economic cycle is an important driver of demand for consulting and as the economy picks up, things should improve for consultancies. Underneath the surface, however, structural changes are taking place that tend to tip the scales in favour of clients. Our research shows that the consulting market is turning from a sellers’ into a buyers’ market.

Faced with this situation, both parties need to rethink the way they work together. For consultancies that gradually lose their power to appropriate the value generated by their services, the need for a change of strategy is particularly acute. But we believe there are important implications to be drawn for client firms, too. After all, regarding high value-added consulting services as commodities and buying on the basis of price considerations only is rightly considered a recipe for disaster. It is in clients’ best interest to choose their advisors carefully and to establish lasting relationships with a select few of them. We encourage clients to make active use of their newly gained power vis-à-vis consultants with prudence, however.

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