Innovation is a crucial driver of success for organizations. It is a tool for nurturing a competitive advantage, and it is the key to strengthening the sustainability of a firm over time. In this article, we explore how innovation can be hindered by the firm’s choice of a business model. In using as an example Consulting Firms, our article presents a dynamic representation of the way in which the elements of the business model interact, penalizing the ability of consulting firms to develop an innovation capability.
As Peter Drucker said, “Culture eats strategy for breakfast”, a clever way of acknowledging that something larger than strategic alignment, could impede a firm from accomplishing its objectives. When it comes to innovation, a similar reality seems to explain why firms cannot develop an innovation capability. A strong force exists within organizations, and it is often referred to as organizational inertia, an installed opposition that makes it difficult to ignite an innovation-focused culture.
Being unable to innovate jeopardizes a firm’s future. According to a recent McKinsey survey 90% of executives believe they are forced to not only generate product innovation but to actually question and bring considerable change to how they generate profits. Otherwise said, they must question their business models.
Business models are the ensemble of complex business choices that determine how a company creates value and makes a profit. They concern the “products or services the business plans to sell, its identified target market, and any anticipated expenses“. The business models should, therefore, be the drivers for each strategic choice of the firm, and establish not only what a firm does, but what it does not do. As David Teece, a leading scholar in this subject explains, “The essence of a business model is in defining how the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit” (2010, pg. 174).
But what is in a business model?
Traditionally, practitioners and academics have been concerned with how the reconfiguration of the components of a business model can lead to strengthening the competitive positioning of the firm. One of the most cited visualization tools is the RCOV model (figure 1). In this model revenues, costs, organizational design and the value propositions interact in order to determine the unique configuration of a firm’s business model. This configuration is limited by “trade-offs” or, otherwise said, an admission of the fact that engaging a resource for an activity or action, compromises its use elsewhere.
Figure 1: the RCOV model (resources & competencies, organization, and value proposition)
What is special about the business models of Consulting Firms?
Some years ago, we started paying attention to the business model of consulting firms. We noticed that there seemed to be sufficient evidence that, although consulting firms were able to provide innovative ideas to organizations, they were, themselves, lacking innovation from within. Otherwise said, they lacked an innovation capability.
The consulting firm sector is a mature one, with management consulting firms having existed for more than 100 years. Since their inception, consulting firms have been able to produce growth for their customers, by means of producing value-oriented insights that leverage their capacity to take an objective position and an external perspective. These solutions highly anchored in operational excellence and strategic positioning have been shown to produce improvements and innovation for their customers, with at least 50% of them claiming to have seen a significant improvement in their operations.
To be profitable, consulting firms (and most importantly consultants) must develop an ability to standardize approaches (or methodologies) that have proven successful with other clients. This means that the business model of a consulting firm consists of adapting acquired knowledge and experience, to propose, through the lens of previously proven ideas, solutions to their customers. However, this does not answer the question coming from our observations. Why are consulting firms not innovating themselves?
It’s the business model stupid
To find an answer we interviewed more than 50 managers, partners, and consultants within a variety of management consulting firms. During these interviews, we were able to gather the elements of the business model and to understand the interactions that exist, and inhibit, innovation.
From our research, we gather that the functioning of consulting firms can be summarized as follows. The consulting firm possesses a revenue model that is based on its ability to sell projects (and billable hours) to its customers. The productivity and profitability are reliant on the standardization of a set of solutions (value proposition), the optimization of staffing of consultants, and the standardization of competencies amongst them that can guarantee similar outcomes regardless of the customer. To date, although recruitment policies are evolving, our interviewees still discuss the fact that most business consultants share key behavioral traits and academic qualifications, which hinders diversity.
Consequently, consultants are chosen to participate in projects, favoring the staffing of the highest number of billable working hours. The teams are requested to delocalize to the customer offices or to work on siloed teams for the duration of the project. The volume of costs is fixed, which means that there is great pressure for managers to attempt to get close to the largest percentage of potential billable hours possible. It is well known that business consultants are expected to work shifts that are beyond the classic employee contracts. It is sufficient to see the example of Goldman Sachs, mentioned by one of our interviewees.
The value proposition resides on the ability of the teams to provide solutions within the expected framework of time that is granted by their clients. To induce such result orientation, consulting firms have an “up or out ” mentality, which intends to leave behind consultants that are unable to either adapt to the intense intellectual demands or incapable to adapt the standardized analytical procedures, to efficiently produce business recommendations.
If we consider these elements in the RCOV model we can see clearly that resources and competencies will focus on billable hours, impeding employees from engaging time for producing innovation. The Value proposition will emphasize the knowledge management practices structured towards the standardization of business approaches, with limited flexibility. As for the organizational structure, the delocalization of employees reduces the number of occasions for formal and informal conversations, both necessary as catalysts for the generation of social links that lead to the inception of product or process innovations. Finally, the lack of recruitment diversity, the impulse for competitiveness amongst peers, and the stressful results-oriented environment provide a short-sighted results orientation for consultants, all detrimental to generating an innovative capability with a mid- or long-term orientation. Our results are illustrated in Figure 2.
Figure 2: the relationships between the elements of the business model and innovation
In this sense, our research finds that it is the business model itself that acts as an inhibitor of innovation from within. This explains why, in most cases, large consulting firms have not been known to produce transformational innovation or new management practices in the last few decades. In fact, a vast number of consulting firms have mostly put into “fashion” practices that have proven themselves successful in the environments where they operate, produced by outsiders (either academics or practitioners). Our research opens an exciting new path for research, but also to better understand the effects of a specific business model choice on other relevant variables, such as innovation.
As a final recommendation, we believe partners and managers must really question the place that innovation has in the organization. Is there time, incentives, resources, and practices that encourage innovation? and most importantly, what are the processes set in place to actually develop the capability to innovate as an organization?
About the Authors
Fernanda Arreola is the Dean of Faculty & Research at ISC Paris. She is also a Professor of Strategy, Innovation & Entrepreneurship and a researcher that focuses on service innovation, governance and social entrepreneurship. Fernanda has held numerous managerial and possesses a range of international academic and professional experiences.
Raphaël Maucuer is an Associate Professor of Strategy at ESSCA School of Management, France. He holds a PhD in Management Sciences from the University of Paris-Dauphine. His research explores business models in various contexts such as multinationals, startups, consulting firms, and NGOs.
Adrien Terlier is a senior management consultant with a passion for strategy and innovation topics. He started his career in consulting through different experiences in Big 4 (Deloitte & KPMG) in Luxembourg thanks to several project in the financial industry. Today, he works as a consultant in the healthcare sector where he helps hospitals, laboratories, re-education centers and others healthcare actors to review and align their strategy with their core values and the objectives of the parties involved.