There are different value-creation pathways for any professional services company. Some are more leveraged on proprietary content and methodologies, while others are mainly based on unique technical expertise or highly complex process management capabilities.
Since its genesis almost 100 years ago, management consulting has been amplified to countless different formats. In particular, global IT consulting soared in the past 30 years to eventually represent the major segment of an estimated USD 1 trillion in annual fees.
Over the years, any world-class management consulting firm has mastered the art of providing highly pragmatic, insightful, and unbiased advice to corporate clients on major organizational challenges.
That’s a very selective group worldwide. This short essay addresses its key value drivers.
I – Right People in Key Roles
Top-notch, passionate, and collaborative partners and associates are the basis of any successful professional services firm. Attracting and fostering high-caliber consultants are ultimately the pivotal goal of any vibrant partnership.
Talented and seasoned consultants enhance and enrich consulting business models by developing unique intellectual property around methods and technologies. Problem-solving and Systemic perspective remained core competencies and have been improved by amazing smart algorithms and powerful data lakes.
II – Smart Platforms Always Payback
The management consulting business has gradually embraced SaaS value proposition to corporate clients. In other words, human capabilities have been augmented by digital intelligence. That new reality drastically transformed valuation foundations.
High-margin tailored on-off engagements are still powerful free cash flow drivers, as they already were in the old days. Now, however, Monthly Recurring Revenue (MRR) based on SaaS platforms are increasingly critical in improving valuation in the long term. Data Scientists and Software Engineers are productively working side-by-side with Business Consultants.
The so-called Life-Time Value (LTV) heavily depends on that smart combination between high touch and high tech. After all, sustainable client relationships are still built around trust and impact. Management consulting reputation directly relies on consistent excellence in dealing with complex problems and ambiguous contexts. Given recent digital reshapes in almost all industries and geographies, excellence now includes high-quality, scalable platforms and exclusive data lakes.
III – Powerful Ideas Are Actionable
Leading consulting firms must continuously develop cutting-edge intellectual property to boost differentiation and profitability. There is no intrinsic value in common sense. Powerful IP can improve brand reputation and, at the same time, optimize cost structure.
Most consultants can design some 2x2 matrix to explain how something should be assessed. That is not IP in the strict sense. Effective intellectual property requires a unique perspective combined with irresistible business application, both based on solid research and extensive practice. That’s hard to find in any corner.
IV – Honor is Never Obsolete
As the global society becomes more engaged and active, external pressure matters to corporate clients and consulting firms. That’s a big shift for consultants used to serving clients regardless of their externalities and ethical principles.
Even though consulting firms are mostly positioned with b2b offerings, society and governments are pushing their standards and requirements in all possible directions. These low-profile firms have been judged by their practices and engagements. There’s no room anymore to sit on the fence.
V – Wealth Beyond Asset Light Operations
High operational margins on growing revenues have basically been driving value creation in professional services companies for decades. Committed top experts, powerful intellectual property, brand reputation, solid client network and robust management systems also have played important roles in improving EBITDA multiples.
As the consulting business model evolved and encompassed SaaS platforms, highly profitable on-off engagements must join forces with MRR licensing agreements. Future free cash flow is better discounted to net present value (NPV) if income inflows are less risky. On the other hand, massive capital deployments also increase financial risks associated with sunk costs and reduce operational cash flow on a monthly basis. It’s not easy to manage this dual reality.
One final remark: size matters! It matters a lot!
It’s wonderful to be part of an entrepreneurial adventure!
And it’s reasonable to state that small can always be beautiful.
That’s absolutely true!
Nevertheless, every company must grow to survive in the long run.
Growth increases complexity but also drives valuation multiples.
From investors’ perspective, larger size means a more resilient business model.
