Cost

Consulting is a cut-throat business where cost analysis is very important.  The service industry has to be very cognizant of competitors prices, and how they're affected by inputs.  This can be more difficult than costs in other industries.  For example, within the computer market, there are often a few original equipment manufacturers that produce components.  When the price of a component changes, it is felt throughout the industry.  As far as the computer itself, it is easy to find out how much the company is charging.

In consulting, our rates are not public.  When we compete for contracts, there is no way of knowing how much the competition is proposing.  As a result, consulting firms can go about pricing in various way.  First, however, we need to know where competitors costs come from.  The major input cost for our service is human capital.  At Deloitte, we are recognized as a top-tier consulting firm.  In order to obtain and retain the best talent, cutting salaries and benefits isn't an option.  My firm is very concerned with margins, and attempts to avoid reducing them at all costs.  We use our variety of consulting services and quality staff to justify high prices.

However, there are times when the employee costs cannot be justified.  In the federal sector, there was a large amount of hiring with the anticipation of more business.  This didn't materialize the way my firm has planned it.  Lay-offs aren't part of our business model, per se.  Now, profits for the federal practice have slowed.  While the federal practice wasn't fully prepared with a strategy to react to this problem, the commercial side has some lessons on this subject. 

For all of our consultants, training costs are very high... and they get higher based on the consultant level.  Federal consultants who were hired without a project realized that their prospects were limited the longer they went without a client.  This, combined with other administrative processes within my firm, resulted in turnover.  The approximate replacement cost for each lost employee is approximately half of that person's salary.  One way to combat this issue is through hiring less permanent staff and more project associates.

Project associates are only hired for individual projects, require less training, and typically have lower salaries.  By using these employees to reduce costs is a good strategy.  The problem occurs when there is an improper balance between skilled consultants (who have undergone more industry training) and new project associates (lower experience=lower cost).  Competitors can exploit this by challenging our expertise.  Without this vital factor, we cannot justify high prices.

"Innovating" in consulting

My firm has its own community of practice dedicated to innovation.  Since I work in a consulting firm, the term innovation can be misleading.  We aren't producing anything tangible.  Instead, we come up with innovative ideas.  The tricky thing is that we don't actually implement any of the innovative ideas ourselves... and they really aren't innovative in the first place.  I'll explain.  Our innovation lab is geared at coming up with ideas that we can sell in order to win contracts and increase total billable hours.

However, we aren't really leaders, considering that the innovation we come up with is already being done.  We just learn about it, become experts on whatever the trend may be, and then re-package it for potential customers.  A lot of our focus lately has been on social media.  Facebook and Google would have no need for our services.  As a matter of fact, we learn a lot of lessons from them.  Our strategy is to break down the innovation efforts that work, determine how they can be best implemented, and sell these services.

Looking at the list of once strong companies that have gone out of business, one can see where a consulting firm would come into play.  These companies either don't know how to go about doing business any other way, or just refuse to do so.  A firm like mine will use lessons learned from industry leaders in order to spur innovation for failing companies. 

Production in Consulting

While it may not appear that management consultants produce anything, we view research as our output.  Recommendations aimed at improving companies' performance come from data and information gleaned from many resources.  Our production typically starts with white papers, which originate from the need for research on a particular topic. Depending on their demand, the information in the white papers may be used for proposal work to gain clients, or be posted on our vast research site. 

Each project's deliverables include a painstaking amount of lessons learned and templates to be used for future work.  This results in both the proprietary content only for internal use and practice methods to be used for a variety of clients.  When there are great industry shifts, my firm will ramp up production, decrease production, or completely change our focus (to new industries or trends).  Our production of information and research is analogous to any other company's development of a tangible product.  If that product warrants any kind of demand, chances are my firm is involved in its industry.  When we recognize gaps in information, we will hire more people to conduct research on the topic.  It just so happens that what we produce is available online or on paper.