Who's eating your lunch?

It is tempting for large consulting firms to think they are immune from competition from independent consultants. The idea that a firm such as McKinsey might be threatened by a freelancer seems as laughable as a cartoon elephant standing on a chair above a tiny mouse.

But the truth is that competition has a domino effect – two domino effects, actually, depending on whether demand for consulting is growing or falling.

Let’s divide consulting firms into four groups:

• Tier One firms are distinguished not just by size but by virtue of the fact they have recognisable brands and a genuinely international (if not always integrated) structure.
• Tier Two is typically populated by mid-sized firms, but what sets them apart is their depth of experience and expertise – something you only acquire if you’ve been around for a while.
• Tier Three firms are the young pretenders. Often (but not always) new entrants, their lodestones are focus (they’re very specialised) and innovation (the only way they can make their mark among their bigger rivals).
• Tier Four is where the freelance consultants sit. While often experts in their field, the main advantage they offer clients is price.

As a consulting firm evolves and grows, it moves through these tiers, so that price gives way to focus and innovation (which reduce the need to charge low fee rates), and innovation eventually gives way to expertise and experience. At the very top end of the food chain, the biggest firm, always on the hunt for talent and keen to set themselves apart, acquire Tier Two firms. And, in a growing market (indicated by the green arrows in the diagram below), that’s exactly what you expect to see happening. Everyone competes by trying to move up the food chain, using their strength, whether that’s price, focus, innovation, etc, to take another firm’s market share.

But in a shrinking market, the pressure moves in the other direction (the red arrows). Tier One firms, unable to win the large projects to which they’re accustomed, muscle in on mid-sized, Tier Two type of work. Tier Two firms, meanwhile, find that their experience and expertise isn’t enough to allow them to pitch for work traditionally done by Tier One firms but have to focus and be more innovative in order to take market share from Tier Three firms, many of which are being forced to compete on price against freelance consultants.

These are all trends we’re seeing at the moment, suggesting that the market is – despite the growth of some firms – still shrinking overall.