Disruption in the Consulting Industry (Part-1)

In this series of posts  I assess the claims and implications of the  Harvard Business Review (HBR) article “Consulting on the Brink of Disruption“. I follow the line of thought of the article but I also bring in my own thinking and experiences.

In this post, I start with a brief introduction of the concept of “disruption”. I then discuss information asymmetry in the consulting industry and how it has shaped the consulting industry historically.

In part-2 we discuss how the information asymmetry (or opaqueness of consulting is reducing) and how it is causing disaggregation in the industry. Here I provide some examples from my own experience.

In part-3, I discuss the strategic options for consulting companies to deal with and even take advantage of disruption in their industry.

Disruption

Clayton Christensen who coined the term disruptive innovation, and the lead author of the article we are analyzing, defined disruption in the HBR article What Is Disruptive Innovation? as follows:

“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success.

You can watch Christensen discuss disruptive innovation in the context of the computer industry in the below video segment.

(Please note that I will discuss the article How Useful Is the Theory of Disruptive Innovation? published in the MIT Sloan Management Review , which challenges Christensen’s theory in a future post).

Information Asymmetry in the Consulting Industry

The article refers to the opaqueness of consulting being the main barrier to disruption of the consulting industry. This opaqueness can be more formally understood as information asymmetry within a principal-agent framework. For complex strategic challenges, the principal (client who is purchasing consulting services) will find it difficult to define the services required and to judge the quality of the consultant’s work. One way clients overcome this challenge is to use educational pedigrees, eloquence, and demeanor as substitutes for measurable results, giving incumbents with established reputations an advantage and creating barriers to new entrants in general.

It is important to note that the article is mainly focused on the strategy houses of consulting (the companies who traditionally offer strategic solution advice such as McKinsey and the Boston Consulting Group (BCG). These companies generally provide advice on complex strategic challenges that may involve considerable uncertainty (For example: how should the banking sector respond to the rise of blockchain?). These types of problems exacerbate the problem of information asymmetry.

Continued in part-2.

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