Consulting services as blockbuster drugs

No, this isn’t a series of observations about client “dependency” on consultants.
Sometimes we can learn a lot about one industry by looking at it through the lens of another. So imagine, if you will, what kind of consulting industry we’d have if it looked more like the pharmaceutical industry. That’s not a strange comparison, when you think how much the consulting industry depends on innovation (new technology, new management ideas) to stimulate growth, just as pharmaceutical profits are driven by a small number of highly successful drugs. The consulting industry suffers from the commoditisation of its services; pharmaceutical companies have to deal with the expiration of their patents.

Moreover, recent data reveals the extent to which the drugs industry is under pressure. Investment in R&D, which historically has been as high as 30% of total sales, has fallen to 15%. At the same time, the failure rates of new drugs have risen. CMR, the consultancy behind the research, estimated that for every 12 drugs entering pre-clinical research, just one is submitted to regulators for approval as safe and effective in patients. “There is a real problem with innovation. The science is getting more difficult, and companies really need to understand how a product works in order to succeed,” commented the researchers.

Those observations are directly applicable to the consulting industry. Here, explicit investment in innovation has always been much lower, with consulting firms relying on individual consultants to find creative solutions to the unique problems posed by clients. In recent years, however, the mantra of “let’s not reinvent the wheel” has shifted the emphasis to developing methodologies. These have multiple benefits – they make consulting work more tangible, less unpredictable and easier to manage – but they also constrain innovation. Reduced creativity at the coal-face has not been compensated for by increased expenditure on new services at the centre, leaving the consulting industry – like the pharmaceutical sector – short of new ideas to fuel growth.

However, this situation has arisen not simply because consulting firms want to save money (again, like drug companies, they do), but because, as CMR puts it, “the science is getting more difficult”. With clients better informed and more sceptical than they were 20 years ago, finding something new to do has become harder. Reversing this trend requires a different approach to product development: “understanding how a product works in order to succeed” applies here, too.

This brings me back to a point highlighted in our recent report on marketing in consulting firms. Differentiation doesn’t come from offering “high-level” innovation, but from understanding what works and what doesn’t at a far more detailed level, for small clusters of clients at best, not entire sectors.

Welcome to the world of nano-consulting.

20th July 2010