How Have Consulting Business Models Evolved Over the Years?

Here's a high-level exploration.

To answer that it’s helpful to start by looking at the history of large consulting firms, since until fairly recently small and boutique consultancies did not experiment with innovative business models.

If we had to pick three terms to define the “traditional” business model in consulting, those would be specialization, people leverage, and time-based (or cost-plus) pricing.

We can elaborate on it using the Boutique Consulting Canvas, the tool we developed for business model analysis that’s specialized for small consulting practices. There we break down the business into three parts: Value proposition, value creation (key resources and processes), and value capture.

Value Propositions

There were always unique value propositions in the market, with consultancies taking a slightly different positioning to differentiate in the minds of buyers. But we can also spot a pattern: the marketing promises and the benefits that consulting firms brought to clients were mostly about specialization - by focusing on solving specific problems for a specific kind of company, firms could always deliver a better result than any internal team of employees ever could.

A firm that only does supply chain for mid-size retail companies will offer clients better work than their best internal employees ever could. Financial advisory firms have frameworks and methodologies that allow directors to make complex decisions without reinventing the wheel. A strategy consultancy that serves FT500s is likely to come up with better insights than their leadership team.

Over time, firms found other benefits that consulting clients were interested in hiring. They not only promised better results. But also faster, simpler, cheaper, and less risky ways to solve problems.

A sales consultancy might choose to sell not only advice but also the implementation of the recommendations to make it easier for clients to see results. A lean marketing firm might promise the development of new campaigns in a third of the usual time. An IT boutique consultancy can enter the market successfully by charging clients based on performance and offering an unconditional guarantee.

Value Creation

The most important resource of a traditional consultancy is its people. The team had the experience and expertise that allowed the firm to solve client's problems. The main benefit of engaging with a consultancy was to have access to their professionals.

Every project was delivered by a team of consultants. Every new employee learned skills on the job, from other consultants. New leads and opportunities came mostly from the consultant's network.

Today, people are still a key resource to consultancies. But not the only one. Slowly but surely, firms started to gather IP, market assets, and strategic partnerships that changed the way their practice worked.

A consultancy might use proprietary platforms or software to solve a client's problem, without adding more people to the project. Your practice may get regular inquires and inbound opportunities from the content or ideas you publish on the internet. You can even partner with other firms in your space to deliver projects you don't have the capacity to handle.

Value Capture

Look for any popular joke about consultants and you'll find a reference to hourly pricing. That's how all professional service firms typically capture value in the past: They tracked their time, multiplied it by their fee rate, and added any occasional expenses for clients to reimburse.

It worked because both parties understood and accepted this. The consultancy kept track of their people's time and expenses. Clients appreciated the possibility of having access to talent and expertise on a pay-per-use basis.

Over time, the limitations of this pricing approach started to become clearer. Consultancies, looking to increase their margins, started to staff clients with junior or underskilled consultants without reducing their fees. The complexity of projects grew, which made it harder for clients to estimate their length and final total cost.

This led to the adoption of other pricing structures. Fixed fees or project-based rates avoid the risk of clients getting overbilled and reward consultancies for efficiency. Monthly retainers and subscription-based make sense when clients have recurring needs while providing revenue predictability to firms. Value-based pricing also became an option for creative firms, and is sometimes coupled with performance-based fees to make them attractive to buyers.

What we saw during the last couple of decades was a gradual but clear change in consultancies' business models. Today we find a much bigger diversity of value propositions, marketing and delivery capabilities, and strategic choices to make their economics work. It's fair to say such changes were mostly driven by market competition and made the average consultancy much more client-centric.

Thanks for reading. You can get more specialized and actionable growth insights for micro consultancies in our newsletter. Every Tuesday, you get one idea from Danilo, one quote from other experts, one number you need to hear, and one question for you to level up your consulting practice.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.