Episode 61 Transcript

Brent Trimble: Welcome to The Professional Services Pursuit, a podcast featuring expert advice and insights on the professional services industry. Again, I'm Brent, your host, and today, I'm joined by Tom Rodenhauser. Tom is the managing partner of Kennedy Research Reports and has spent almost 30 years advising leading management and IT consulting firms on strategic growth, talent management, and marketing positioning. I am really excited to have Tom here today.

Tom, it's great to have you on. Some of our listeners, and I say some—it might be a few—could be familiar with the work or with your firm, Kennedy Research, but they might not be aware of the origins of the firm or that the research that you commission is very relevant to the services industry, management consulting, IT consulting, different tiers of those firms, and the industry as a whole. Since we're focused entirely on the services business, it’d be great, and we welcome and look forward to your insights today.

Before we dive in, why don't you tell us a little bit about yourself and the origins and background of Kennedy Research?

Tom Rodenhauser: Sure thing, Brent, and thanks for having me today. I really appreciate that. As you mentioned, I've been doing this for about 30 years. Kennedy has been around a bit longer than that. The origin was really in newsletters—the old paper models that people actually read. The newsletters in those days were the inside baseball of what was happening inside, in this case, the management consulting industry.

Consulting is, and continues to be, a rather mysterious business. Back in the day, we wrote a lot about it, and I wrote a lot about it. Over the years, it evolved more into a market research business where we looked at the industry, where it was growing, and the size of the markets. We also looked at the capabilities of the providers and evaluated how well they did their job. In a way, it was a bit of a Consumer Reports approach to how the industry operated.

The interesting thing about consulting is that unlike other professional services, it's not really regulated, unlike accounting, where you have a CPA, or in the law industry, you have to pass the bar. There's really nothing that stops you from being a management consultant other than your expertise and the credibility you have in helping clients solve problems. We exist as an entity that looks at the industry and helps the industry understand its business, so in a way, we consult with consultants. It's an interesting business, and we enjoy doing it.

Brent Trimble: It's fascinating. When you speak of management consulting, and you certainly don't have to name clients, I think we can infer who those are, but maybe some insight into the types of brands and firms and their offerings that you both study and then advise to.

Tom Rodenhauser: A lot of the name brands people will use shorthand for, like the Big Four, speaking about the big audit and advisory firms like PwC and Deloitte; another shorthand, MBB, talking about the McKinsey, Bain, and BCG world; and then you have Accenture, IBM, and Capgemini; these are all firms that are, holistically speaking, part of the consulting universe; and then there's a whole host of more specialized or boutique firms, ones that are name brands in our industry, like Kearney or Booz Allen. They're well known in certain circles, and then there's just tons of boutiques and specialists, whether it's by industry, function, or geography, that maybe are no more than 50 or 100 people, but they're really great at what they do, and they serve a certain niche. We cover all those folks, and we do cover it at a global level. In our world, there are about 150 firms that we track actively that constitute a good share of the market. Keeping an eye on them allows us to keep our finger on the pulse to the industry.

Brent Trimble: That's great context, and I appreciate that. As we're recording this here, jumping off into calendar 2024 in January, there's quite a few themes: global economic pressures, this prevailing sense that the U.S. economy and certainly portions of the global economy dodged a recession bullet in 2023, though the outlook in 2024 is still a bit bumpy. There was lots of press around the expansion and contraction, and a little bit of a whipsaw around the big service firms because they are market makers, set some of the tone, and are good leading indicators of where services are going.

But one of the trends, even predating this year and the economic conditions notwithstanding, is this notion of productization of services. From where we sit, we talk to a lot of service providers, some of the probably 100+ firms that you've referenced, as well as IT consultancies, boutique firms, and certainly services within platform hybrids, and we've seen this building of momentum around this notion of taking services and packaging that into products, but still from the notion of service delivery from a management consultancy. It takes a lot of different shapes, everything from value pricing to dealing with complexion.

But I notice that on your website, and at the conclusion of the podcast, we'll definitely let our listeners know where they can go and get some of your external-facing research, which I think is really fascinating. I’ve been through a few of the reports, but on your blog, you had some research around the topic. One of these reports is the corporatization of consulting, which speaks to changing management structures. You touched on this as well as the productivity conundrum. But do you see this trend? Is this a trend that's accelerating—this notion of consulting firms evolving the model from large fee retainers and billable hour engagements to more productization of services? How do you at Kennedy think of that and conceptualize it?

Tom Rodenhauser: It's a trend we've been seeing for a while now. When we talk about productization, when you think about consulting, there's really four ways to drive a consulting business. There's fees, compensation, utilization, and leverage. There's a finite amount of time. There are only so many hours you can bill. 100% utilization, which is what firms aspire to, is achievable, but then you burn people out, you lose people, and you go through that attrition. Fees also have a cap on them. You can only raise fees so much. The whole idea of productization is really taking and shifting from this time and material history of consulting and coming up with ways to deploy your resources and your people in a way that's much more efficient.

A lot of firms talk about how people are the product. The problem with that is that there aren't enough people; there's not enough time for those people, so what you end up doing is devising a way to scale your consulting business via products. A lot of times, the products can be technical or technological. They can also be methodologies or processes—things that are standardized and that you can deploy that way. Most consulting firms would talk about products in that latter category, unique methodologies, or things that they do that make them distinct and repeatable. But more and more, as consulting shifts into this more technological and technical domain, we're seeing a lot more products.

A good example of that is one of the firms we've worked with and are studying; they developed a predictive maintenance tool that they were working with on a large manufacturing client. In developing this tool, it allowed them to cut down on not only the maintenance issues but also be able to predict in a way that extremely cut back on downtime or machinery. Sounds great. Now, in a normal traditional consulting realm, the client would have owned that product; they would have owned that solution. But in this case, the consultant actually owned the IP, and the intent was to then deploy it to other industries and other areas. They developed a tool that they could deploy across industries as opposed to having a singular relationship with the client. That's a real way to look at the productization that's occurring in the consulting industry.

Brent Trimble: That's a really great way to conceptualize that. Would you say it's an evolution that's borne out of market shifts? You mentioned that there's a finite barrier when it pertains to time. There's only so much time. You can only sell so much time. Is it that? Is it margin pressure and the thresholds that clients are willing to pay for the services? Is it a mixture of both?

Tom Rodenhauser: It's all of the above. I think part of it is that I've talked to managing partners at some of the big firms, and one of the things they’ll admit is that there are only so many people. They're all fishing from the same talent pool. At some point, you run out of people and you run out of projects in the traditional sense where you're going project to project to project and you're staffing them up, and then that project is over and you have to look six months out and have a pipeline built up. It's a treadmill that keeps getting faster, and the incline gets higher. So what's happening? The fallback on that is, yes, then there's margin pressure because then you're dealing with projects that may have a shorter duration. You can't charge as much, and the fees start squeezing the profits that way.

Then you have clients; when you look at the client equation, they're very outcome-oriented. They want to hire the consultants to fix the problem. They want that solution very quickly, and they want it deployed very quickly. All of that is constraining the traditional consulting model. It's pushing the productization trend. But the challenge, and this is where the consulting industry is at right now, is that if you push too far into the product realm, you become just another vendor. One of the things that consultants always hold out as their distinctiveness, their reason to be, so to speak, is that they’re objective problem solvers. They're not vendors. They're not pushing a product and saying, this is the solution you need. Although in some cases, that is what happens. It used to be when I started out in the industry that consultants would hold themselves out as 100% objective. We’re pitching a solution, but we’re solution-agnostic in the sense that whatever tool is out there that fixes the problem, they would recommend the best one for the client, and it may be different from client to client. Now you're seeing firms that are probably more like 60% agnostic. They are pushing certain solutions, and they're doing it in such a way that this is a solution that you need, Mr. Client or Ms. Client, and it's something we built before, so we know it works. There's this balance or dance that's occurring between going towards the vendor route and not really being a vendor in the classic sense.

Brent Trimble: We think of consulting, and to your point, I think a lot of the market, or maybe the general populace, is a bit nebulous. Most people in the corporate world have some exposure to and some experience with the large brands that we've referenced and understand at least nominally what strategy consulting is—maybe problem-solving outcome-based modeling. Then it's transitioned over time to hybridization, a bit into managed services, outsourcing, and everything in between. But how resistant to that change in this evolution have you found that the traditional firm, which was built on the partner model of revenue-producing, certainly results-producing, but selling and delivering high-level expertise and outcomes to clients, is now evolving into more of these repeatable processes, projects, and quantifiable-type products?

Tom Rodenhauser: One of the things to touch on here is the cultural shift. It's both demographic and cultural. If you think about consulting 100 years ago, you can say management consulting really started, and at the time, they called themselves management engineers as a way to try to talk about themselves as something more scientific than maybe it was to combat the notion of being charlatans. Over the years, if you think about it in generations, really, we're talking about our fourth generation of management consulting. The culture of consulting over those years has been built on the partnership model. The partnership model is one of credibility and trust. If you look at any firm's core value statements, it's about client trust, it's about objectivity, and it's about solving problems. But at the same time, culture is a very difficult thing to put your arms around. Each firm looks the same, but every firm will tell you that their culture is different from their competitors; that's why they attract people.

That being said, I think what we're seeing is a challenge to the traditional culture. There's this shift away from the trusted advisor, where the hierarchy of the partnership is essentially a pyramid. An analyst moves all the way up to a partner along maybe a 10- to 14-year career track. Partners, when they retire or are essentially bought out by the incoming partners, it's a model that's worked for a long time. But now we're seeing this pressure to change that, to change to more of a corporate matrix, if you will, because the more you become a product-like company, the less the partner organization model works from a governance and management standpoint. I'm talking at a macro level amongst the large firms. When you talk about the rest of the industry, if you're a smaller consulting firm, the partnership model can work just fine. But there are certain thresholds you reach from a size standpoint where it just becomes too unwieldy. One of the comments made to me early in my career is that a partnership is too big when you can't fit everybody around the conference table.

From that standpoint, there's a lot of firms that are very large that have the partnership model and are still operating that way. But that increased pressure of how you shift not only to this product mindset but also how you attract the next generation of partners, I think that's one of the biggest cultural shifts we've seen and one of the biggest demographic changes too. I speak at universities every year, especially business schools, where we talk about the consulting industry. Part of that evolution is that I think there are fewer people interested in consulting, fewer young people who are looking at consulting perhaps as a career. They're looking at it more as a stepping stone, which it is, but they're not necessarily aspiring to be that partner at one of these global firms. They're looking at these alternates, whether it's the hyperscalers, the Googles of the world, or startups. They're looking at wealth creation through a different avenue and through a different lens. There's this cultural backdrop that we're dealing with or that the firms are dealing with on top of just the business pressures of shifting the model.

Brent Trimble: The demography and shifts you brought up are really interesting. There’s a pretty popular Instagram account meme generator, @crazymgmtconsultants. I don't know if you've seen it, but it brings a lot of humor and light to anyone who's been inside one of the big firms working 100-hour weeks, and I think that the please fix hashtag was born out of that.

It'll be interesting, I think, to see, and it's probably that we're not writing with indelible ink here, with the large software platforms having experienced some bumpy rides of their own, if there is maybe some leveling out or balancing where maybe a form of consulting does come back into the top two or three career trajectory choices or whether it continues to just be seen as not an optimal long-term wealth creation career path.

Tom Rodenhauser: I think there's the romance of consulting. When you think about the industry and what it aspires to do, it's about solving the big problems. You have the ear of the board, the ear of the C-suite, and what you're doing is you have a sense of ego, if you will, when you're a consultant that you can go in and help these companies solve their biggest and most important problems.

The reality of that is quite different. You're solving problems, but you're never really solving them completely. In the old consulting model, I always used the medical analogy where, for a lot of consultants, what happens is that the client is the patient, and the client comes in to visit the doctor who's the consultant. If you go in to visit the doctor and your knee hurts, the doctor is going to look at your knee. A consultant is going to look at your knee, but then they're going to look at your elbow, then they're going to look at your hip, and then they're going to check the back of your neck, and they're going to find all these problems that need fixing. What ends up happening is the consultant, and the reputation of the consultant is that once they get in, they never leave. That goes back to the old project-to-project sustainability of the business model.

I think a lot of folks who get into consulting when they realize that the business is predicated on solving the problem but also looking for more problems to solve can become a bit disenchanted, a bit disillusioned. That's where you do get these memes, and you do get the HBO series about consultants and things like that and tell-all books and all that stuff. They're good reads, they're fun, and all that stuff, but the reality is that consultants do good work, or if they weren't around, they would be hired. But I do believe that a bit of disillusionment about the industry exists in this generation, the younger generation that's upcoming. I think that's also the mystery of consulting. The veil has been pulled back in such a way that people understand what consultants do a lot more. They know that it's about research, it's about analytics, and it's about identifying the problem and coming up with a solution. It's not just witchdoctors rubbing sticks together kind of thing.

Brent Trimble: In all the firms and the types that you study in that 100 plus or so constellation of everyone from the big market makers down to the boutiques, give us a sense of a firm that's maybe been doing some evolution that you think is doing well, and happy to say brand name if you feel comfortable or if you could describe in more abstract terms, but a firm that's really going through this evolution, becoming the not your grandparents’ consulting firm and seeing a future in consulting.

Tom Rodenhauser: There's probably a few we could talk about, but one that stands out is Accenture. Everyone knows Accenture, and it's really more of a technology firm now. But if you look back to the roots, it was Andersen Consulting. When I got into this business, Andersen Consulting and Arthur Andersen were joined at the hip. It was an accounting firm that had a consulting business, then there was a whole big, messy blow-up and a divorce. Andersen Consulting went out, became Accenture, and started down this path of evolving from a technology-oriented consulting firm to essentially a platform builder. That's what they are today.

It's interesting because I think if you talk about Accenture, you might not even call them consultants anymore or professional services firms. They're creating this new category. We call it platform building, but they're outside the confines of consulting for sure. I think some of the big four firms—the Deloittes and the PwCs—are following that path, but they're still constrained. Their consulting businesses are still connected to traditional audit and tax businesses. We saw what happened with EY last year when it wanted to split off and it didn't happen, and there's fallout from that. We see this evolution of these big mega-professional services firms moving beyond the traditional consulting space. Accenture is the best example of that.

Then, at the other end of the spectrum, when you look at a BCG, a McKinsey, or a Bain, there's room in this industry for a Harvard. Even if the Ivy League goes away, which is a way to characterize that the strategy segment, which is everyone, when they think about management consulting, they think about strategy advisors. Strategy as a functional area within consulting is less than 7% of the overall market, so there's not a lot of strategy work being done by consulting firms. A lot of it is operations and technology.

With that being said, the traditional strategy firms—not only those three, but also the others that are in that space—are challenged. Part of the agenda there is that they have to become more operations-oriented. They have to become more technical in the generative AI space and data and analytics, or they can shrink and protect their space as strategic alignment advisors, the boardroom position that they hold. But there's only so much of that work that's available to them.

When you look at what's happening with those firms and the investments they're making, they're looking more and more like they want to be in the data and analytics and the technical space, but they want to be in it in a very high-profile, limited way, almost like prototype builders if you think about it that way. Whereas Accenture would be an industrial builder, actually building the solution and owning the solution. On the other end, we see some of these firms prototyping and doing it in very select industries, but that's it. They're not going to go any further than that.

Brent Trimble: What you've described may be the slice of the pie that's devoted to pure strategy consulting: 7%, 10%. Would you say that is the trend that leads some people to say broadly that consulting is in a period of atrophy, but their work is out there? It's just that the dimension of the work has really changed.

Tom Rodenhauser: When we look at this, what is interesting is that the industry was on a pretty solid growth trajectory through the 2010s. When COVID hit, consulting actually surged. In certain sectors like consumer, wholesale, and things like that, it quite honestly exploded from 2020 to 2022, and that's because clients are in a state of distress. They have consultants on speed dial, and they hit them when they needed to solve some pretty critical problems.

Now we're coming out of that, and there's a new normal. It's growth and decline at the same time. We measure the industry by functional areas like supply chain, marketing, sales, and things like that. We also measure it by client industries, such as health care and financial services, and then by geography. You can look at the industry across those three dimensions and then gauge where it's growing and where it's not growing.

There are certain pockets where it's growing in functional areas, things like data and analytics. I talked about AI. That translates into areas like customer experience, marketing, and sales. Those areas are growing because that's where the need is. Likewise, in industries, we saw a big surge in consumers during COVID. Now we're seeing more of a surge in resources and things like that, and that ties in with environmental sustainability.

Geographically speaking, we're seeing emerging economies. Consulting has historically been very western, so it's North America and Western Europe, and a lot of the spend has always been concentrated there. We're seeing more Southeast Asia. We're seeing Mexico grow now, and Brazil is growing. There are pockets where the consulting industry is growing. Likewise, we're seeing declines in other sectors. The old tale of two cities—that's what we're seeing right now.

Brent Trimble: To follow on from that in the general business press, the Wall Street Journal had an article right before the holidays talking mainly about some contractions that the big four—EY, KPMG, and Deloitte—actually, in addition to reducing overall headcount, were really starting to reduce partner headcount. Maybe that talks about some of that whipsaw in supply and demand. From the Kennedy point of view, and I'm sure a lot of listeners are really going to be interested in this, what kind of economic indicators do you see or any signals in the market when there might be some stabilization and we go from contraction to growth again, probably not, to your point, the torrid growth we had in the post-pandemic period? But what are you seeing? What are you counseling your clients on at this point?

Tom Rodenhauser: There's four megatrends that we've identified that, at a very high level, are driving not necessarily the need for consulting services but tangentially consulting services. The first is this idea that we're no longer in the free money era of tighter credit; the cost of capital has increased exponentially from ten years ago and continues to be tight. That makes spending; consulting has always been a discretionary spend, and so it makes clients more judicious about spending. The trade policies, industrial policies, and big acts and legislation that have occurred over the last few years have an impact on consulting services in terms of how clients are going to react to those trade policies. You think about the Infrastructure Act and where all that money is being spent. It's a good example of that.

Geopolitical risks, we have a variety of risks there. Wars that are going on, disruptions in supply chains—it's to be known what the effects will be, but the consultants are always dealing with that kind of situation as a result of the geopolitical risks. Then AI in general is a big unknown. For a lot of the firms, you'll read press announcements about the firms talking about AI. In most cases, they've been experimenting on themselves, so they've used AI to do things like pull all of their knowledge together in such a way that what used to take a few weeks to do discovery for them internally on a particular industry or a particular solution now takes seconds. They can pull together, using Gen AI, all of their knowledge that can then be applied in client situations.

That's great, but we don't know exactly what AI is really going to do. If you think about it, AI is primarily prominent in the software development sector. That's where a lot of AI occurs right now. As it moves out into other sectors, will it displace consultants? That's one of the big unknowns because consulting is a knowledge business. AI is all about knowledge. We don't think it's going to displace consulting necessarily, but it may supplant it in a way that has an effect on the consulting industry. Those four big megatrends, each individually, are having an impact on consulting. We don't know yet exactly what the impact will be.

Consultants have historically thrived in times of chaos. Whenever there are problems to be solved or during chaotic times, consultants usually benefit. We've always characterized it as consultants being a step ahead of the clients. If you think about it as a race, the consultants were always a step or two ahead. Now, more and more, we see the consultants running parallel with their clients. There's a reason a lot of them use these terms: partnering. We're partnering with our clients. To revert all the way back to the productization idea, a lot of this collaboration, partnering, and work that they're going to be doing with clients necessitates that not that they stay there for an unlimited number of projects, but that they stay there to truly partner and collaborate with the client. They basically have a marriage with clients that, heretofore, was more of a dating situation.

Brent Trimble: That's a good summary. I guess the key outlook is that these trends don't seem like they're going to be decelerating, and it would probably remain to be seen, of course, how AI ultimately unfolds in the model. With all the other economic and geopolitical pressures you noted, it'll be interesting to see if we do see that bounce back in the time of chaos that you described.

Tom Rodenhauser: Reflecting back, the last time we had this kind of disruption was when ERP came on the scene in the late ‘80s and early ‘90s. The consulting industry at the time wasn't known as technologists per se, but they basically altered their business model to develop and become systems implementers, or SIs. They did that to capitalize on the ERP craze and serve their clients. They never fundamentally altered their business model. They just bolted on the SI business to their existing consulting businesses, its operations, and its strategy businesses, and they were able to exist and grow even as ERP morphed into digital and beyond. But now we're looking at something with AI where it's going to be probably much more disruptive than ERP, and I think the consulting firms just can't bolt on AI like they did SI. As a result, they really have to fundamentally look at their business, the business that they're in and the business that they want to be in. That's probably the key question right now for a lot of them. What business do we want to be in?

Brent Trimble: We were looking forward to this episode, and I’m speaking for myself, and I think a lot of the listeners. It has not disappointed. You've covered a really great range of topics, from the provenance of Kennedy all the way through where we're at in the current moment. I'd love for you to maybe articulate to listeners. I referenced the blog, and you do publish some research there, but give certainly the website URL as well as some of the maybe research topics you've published, as well as perhaps tease a report that you've got coming out.

Tom Rodenhauser: Sure, kennedyresearchreports.com, that's where you can find us. We do our research. We do competitive landscapes and market analysis on, as I mentioned, all these growth markets. We also have a report coming out. It's actually a twice-a-year report called the Kennedy Market Monitor. What it does is actually look in real time at where the growth is in the industry. We do a market size and forecast by function, by industry, and by geo. We also do it by service delivery, so how do firms actually deliver their services? We also have a section on the investments that firms are making—both acquisitions, mergers, and alliances, but also internal investments. What are they doing from an organizational standpoint? What are they doing to actually build their capabilities and change the way they're going to market? That report is actually coming out at the end of the month. We'll have more information on the website in terms of how you can obtain it, but those are some things that are coming down the pike for us now.

Brent Trimble: That's great. Again, the report and the blog can be found at kennedyresearchreports.com. Tom, this has been great. I certainly learned quite a bit about the way that you identify, partition, and analyze this massive industry, one that we're very focused on on our platform, and then, of course, a lot of our listenership, so I really appreciate the time and the insight. We'll have to have you on again, I think.

Tom Rodenhauser: Happy to do so, Brent, and really happy to be part of it, so thanks. Thanks for the opportunity.

Brent Trimble: For our listeners, thanks for listening. As always, if you have any follow-up questions for Tom or myself, feel free to email them to podcast@kantata.com. We'd love to answer them, and thanks again for listening.

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