When professional services firms talk about issues of sustainability, it is often through the lens of helping clients build organisations that are fit for the future. But consulting firms themselves are subject to the same pressures and the same uncertainties that their clients have to deal with. Right now, as the industry grapples with the effects of COVID-19, many firms are asking themselves what they ought to be doing to ensure a long-term future for their organisation.
To learn how one firm has responded to these pressures we spoke to Tom Bolger, Chief Strategy Officer at West Monroe Partners, about what he sees as the major risks facing businesses in this sector, and what firms can do to respond to them effectively.
Is the long-term sustainability of your firm something that sits high on your agenda at West Monroe?
'Sustainability', as a term, is often heavily associated with just the environmental dimension. That's why, at West Monroe, we talk a lot internally about the broader concept of 'stewardship' instead. I think it's a powerful word, because it implies a responsibility on our part to leave the firm in a better position than we found it. As stewards of the firm, we have a duty to put in place systems that will outlive the current generation of leaders, and to make sure that the firm has the capital structure, the client base, and the culture necessary to survive and thrive on its own two feet into the distant future.
What do you see as the biggest threats to the survival of the firm?
There are two categories of risk that firms like ours need to consider. The first is made up of risks that would threaten our ability to continue operating, and the second consists of risk to our independence—i.e. things that could force us to sell to a larger competitor and cease functioning as an independent entity. And probably the most likely reason that could happen would be an inability on our part to figure out how to smoothly carry out the equity transfer in our organisation from one generation of leaders to the next.
West Monroe is an ESOP company—and that means that 100% of our employees own equity in the business and 100% of our equity is owned by employees. There's a well-defined mechanism in the firm so that if I retire or leave the business, my equity gets bought back on predetermined terms and recycled back into the remaining employee base. That helps prevent us from getting into the situation you often see with privately held firms where one person owns 20, 30, even 40% of the equity and the next generation of leaders don't have the capital to buy them out. That's the number one reason that firms have to give up their independence and sell to larger competitors. Our system of cycling equity through the organisations ensures that we can stay independent for as long as we want to.
Does that ownership structure help create intergenerational equity in the firm, and ensure that your leaders are making decisions in the interests of the people who will succeed them?
Intergenerational equity—and the challenge of how to make sure that our leaders are prioritising the long-term health of the firm over short-term profits—is something we think about a lot at West Monroe. I don't think there's a specific system of controls or incentives you can put in place to make sure that happens, it's just something that emerges organically if you're able to build the right culture. Ultimately, one of the main reasons that people come to and stay at West Monroe is that they want to build something that can stand the test of time. And that means that if our people see the leadership team taking actions that compromise the long-term health of the business, those people are going to leave the firm.
Because we're all equity partners at West Monroe, our leaders need to think about the next generation of talent coming up through the business, and what they can do to benefit those future leaders—or else, they won't have anyone they can sell their equity to down the line. Effectively, our ownership structure forces us to act in ways that ensure the longevity of the firm.
You mentioned how your ownership structure helps to preserve your independence as a business. What about the revenue side of the equation? What steps have you taken to ensure you’re able to continue to drive business from your clients well into the future?
If you want to create a firm that can be handed over to the next generation, you have to minimise your exposure to massive downside events that could put the firm out of business. There are many ways we try to do that at West Monroe, but the biggest one is making sure that we have a diverse client portfolio; we try not to get too overconcentrated—or frankly underconcentrated either—in any given sector. Our business model today revolves around five key sectors, and our aim is to get as close as possible to a situation where 20% of our revenue comes from each of those sectors.
If you rely too heavily on one or two sectors to drive a business, you're significantly increasing your risk exposure. If 80% of our revenue came from the hospitality and travel sectors, then COVID-19 probably would have put us out of business by now. But equally, it's important not to spread yourself too thin and only dabble in certain sectors. That's because, in a time of crisis like the one we're currently going through, no client wants to work with a hobbyist. If you want to move into a new sector, you have to invest heavily enough into it that clients take you seriously.
Do the specific industries you choose, as a firm, to work in have an impact on your long-term resilience?
The industries your firm works in can have a big effect on your resilience to external crises. We chose about 12 or 13 years ago to focus on what you might call 'essential industries'—things like healthcare, financial services, utilities, and manufacturing. That was a conscious decision on our part, and I think there's been much greater appreciation for that decision in the wake of COVID-19. For the last 10 years, we saw a lot of our competitors move into ostensibly more exciting areas like retail and technology. And while sectors like those may help you grow at a fast pace, they have a tendency to shrink the most in the face of crisis. We're very grateful today that we made the strategic decision not to put all of our resources into chasing those sorts of sectors.
How important do you think more cultural factors are in contributing to a firm’s long-term survival?
Organisational agility is one of the key markers of a consulting firm's resilience. That's why we've put so much effort into developing a real test and learn culture here at West Monroe. And COVID-19 shows just why that's so important. We've been through recessions before, our leaders know how to manage through a downmarket—but nobody knows how to manage through a global pandemic. There's no rulebook for getting through this crisis, so you have to be able to try different things in order to figure out what works.
One of the classic strategies that firms use for risk mitigation is having a variable workforce—that is, leaning on freelancers and contractors so that they can scale up and down their workforce as the market fluctuates. We've made a conscious choice at West Monroe not to go down that route, primarily because we don't think it fits with our ownership model and the type of firm that we're trying to build.
Has COVID-19 had an impact on how your firm approaches these issues of long-term sustainability and stewardship?
Until the pandemic hit, consulting looked impervious to the effects of digital transformation; I used to joke that we were doing business basically the same way we were back in 1994. COVID-19 has changed all of that. Suddenly, firms have had to figure out how to use digital technologies to enable remote delivery. We're entering a new period in our industry's history in which firms will be able, for the first time, to competitively differentiate themselves based on their own adoption of digital working.
When life starts to return to normal after this pandemic, we'll probably find that 'normal' doesn't look like what it used to look like. There's a lot of work for consulting firms to do right now in terms of both reimagining their own businesses and helping clients to do the same. We at West Monroe have certainly found that there are pros and cons to the situation. The biggest change for us has been the reduction in the amount we travel; this is by far the longest I've gone without getting in a plane since I graduated! That obviously has environmental benefits, and a lot of people have also appreciated getting to spend more time with their families. But on the other hand, it's a lot harder to work in a collaborative way with clients and maintain individual relationships when you're not in the same office as them. The ideal balance is probably somewhere between where we are right now and where we were before COVID-19—and so once the crisis starts to end, we'll have to figure out how we find that balance and how we maintain it.
Digital transformation has become more important than ever because of COVID-19. My clients, for example, are mostly banks—and they've all seen branch traffic go way down and customers migrate en masse to digital banking. After the pandemic ends, many people may go bank to banking in branch, but a lot of people won't. In the post-COVID world, every business is going to need to be able to function where its customers are and is going to need to be able to manage a geographically diverse workforce. The big question that clients will be asking consulting firms will be, 'How can I transform my organisation so we're not just doing the same thing we were before but in a different way? How can I make sure that we're actually operating better than we were before the crisis?'