The Future of Consulting (Round 2)
Today: The deformation of consulting’s value chain; TikTok and the new Cold War; data and algorithms.
The Agenda 👇
Following up on the future of consulting
Answering a journalist’s questions about TikTok
What is most valuable: data or algorithms?
Round 1 of my writing about The Future of Consulting prompted quite a lot of feedback from subscribers. Many among you sent questions, and so I thought I would use that list as an outline to dive deeper on the topic. But first, let’s use this round 2 to frame the discussion a bit more.
As a reminder, in the previous round I described the consulting industry’s value chain as being composed of three different links:
Experts with proprietary knowledge at the top
Junior consultants who handle clients on a day-to-day basis at the bottom
Established partnerships with a unique ability to market and distribute their services in the middle
As always in the Fordist Age (= the 20th century), it’s the link in the middle that dominated the entire value chain. The middle’s superior wholesale transfer pricing power (I told you I would be reusing that one 😉) made it possible to retain most of the value added and thus keep most of the profits.
But these days, in consulting as in many other industries, I’m spotting a pattern that means bad news for legacy players in the middle of the value chain. Below is the generic version of what I’ve written elsewhere about industry transitions (in this case: shipping), as well as the ‘translation’ for consulting.
Lower margins. The emergence of asset-light players at the bottom, such as aggregators and marketplaces, provides customers with greater opportunities for arbitrage, pushing prices down. This means that everyone in the value chain has to trim their margins. For dominant players, this leads to doubling down on the effort to massify, thus making the service even more rigid. For those who don’t command as much pricing power, this contributes to degrading their service or going bankrupt, bringing scarcity and longer delivery times at the industry level. Overall, prices may go down, but due to the typical response of legacy players, it leads to lower quality, poor reliability, and lengthening delays.
What it means for consulting ▶️Clients are pushing prices down because there’s no limit in their pursuit of lower costs. At the same time, there are new players (such as marketplaces for freelancers) that provide clients with the skills and man-days they need from the outside. Because of the liquidity brought about by these new intermediaries, prices are brought ever lower, which forces legacy firms up the chain to reach difficult decisions in order to stay competitive. Large firms have the ability to compensate with a larger volume, but in the process they make their services less customizable, contributing to decreased client satisfaction. As for smaller firms, unless they have a firm grip on a specific niche, they have to call it quits, thus degrading the entire industry’s ability to respond to clients’ needs down the value chain.
Increased lateral competition. New competitors are sneaking onto the market. The increased effectiveness of aggregators and marketplaces makes it possible for players outside the industry to provide additional capacity through better yield management. At the same time, vertically integrated players are improving their performance through a more intensive use of technology across the chain, including for delivering consulting services. Their superior performance allows them to capture a growing share of the global market at the expense of incumbents. These new integrated players are both legacy companies and new entrants whose growth is fueled by new trends.
What it means for consulting ▶️ Think about all the players, both legacy and new entrants, that don’t actually belong to the consulting industry but are still able to deliver consulting-like services to clients in need. A clear example, I think, would be SaaS companies that are willing to deliver one-off consulting/support services to hasten deployment of their product and scale up their operations so as to maximize recurring revenue. Indeed the evolution of the enterprise market is a direct threat to legacy players within the industry: deploying a Saas solution, which is rather rigid by definition, forces the client to upgrade their organization and processes. And who is better positioned to provide the related management consulting services if not the SaaS company itself? That’s unprecedented competition that clients expect to be matched!
Yet another category that creates unprecedented lateral competition for consultants is investors. I already discussed that part in Round 1:
When I visited Shanghai in 2017, I was honored to be introduced to David Wei, a former executive at Alibaba and now a successful general partner with his private equity firm, Vision Knight Capital. David’s model was simple—and compelling: he would approach legacy corporations and offer them consulting for free; then, if the ‘client’ was responsive enough, David’s group would make an offer to invest in the company; then they would take control of the business and transform it from top to bottom to make it competitive in the Entrepreneurial Age.
Since then you might have spotted the nascent conversation about the rise of solo capitalists—people that don’t even bother to find an intermediary (such as a VC firm or a money manager) to invest in business ventures, approaching founders themselves.
What’s the best way both to assess the strength of an early-stage venture and to inspire trust in its founding team? It’s to provide advice, of course! It’s entirely possible that this new trend (which I admit is confined to the earlier stages) creates a habit from a business executive perspective: instead of paying for advice, you take it for free, and then you have the advisor invest in your company so as to reap the rewards of their services—hopefully with a multiple!
It’s no coincidence that this is the advice my colleagues and I give to everyone who approaches us asking about how to become a VC. We tell them to find a few early-stage companies that they like; advise them for free; if there’s a fit and the company is showing signs of possible success, they should use the trust they’ve gained to negotiate an allocation in the next round, then build a track record by doing that 5, 10, 20 times in a row. Then, based on that track record, they’ll finally be ready to meet potential LPs and have them invest in their first fund 😅
I’m not saying that these solo capitalists will represent direct competition for established firms in the consulting industry. What I’m saying is that they will inspire a habit whereby executives see advisors that actually have skin in the game. This is in direct contradiction to the traditional model of delivering consulting services for a fee, and I’m convinced it could have a systemic impact.
Let’s meet again for Round 3 in a few weeks (that’s the beauty of sending more editions a week)! In the meantime, I’m interested in your thoughts about the future of the consulting industry.
Bonus reading on the future of consulting: Fourth-Wave Consulting (Venkatesh Rao, The Art of the Gig).
I was interviewed by Sébastien Ricci, a China-based AFP journalist, yesterday about the TikTok situation and the consequences of the New Cold War for tech entrepreneurs and investors. Here are my answers, translated in English 👇
What does the TikTok situation, with the company being collateral damage in the rivalry between China and the US, tell us about the future of China’s tech companies? Will everyone be forced to choose a side?
Yes, I think that it will contribute to widening the gap, making everyone ask more questions as more Chinese-American frictions could arise. There’s already an open debate in the US regarding American VC firms that raised money from Chinese institutional investors (two years ago the same debate occurred regarding Saudi Arabian LPs). It’s very possible, most particularly if Trump is reelected, that the federal government will toss more sticks into the wheels of American investors who are managing those funds.
In Europe, we could soon see similar things happening: startups refusing funding that is directly or indirectly coming from Chinese sources, out of fear that they won’t be able to be purchased later by the American tech giants—Google, Facebook, and others that are currently the most active in the M&A market.
Are we seeing a “technological decoupling”? Is it still possible for a Chinese company to succeed and conquer market share in the US? And what about American companies in China, where the internet’s biggest names are absent (Google, Facebook, Twitter…)?
ByteDance/TikTok is a unique case of a Chinese company succeeding in expanding internationally (without even really being active on the Chinese market, if my information is correct!). Eugene Wei explained it here, saying that such success was made possible not through an effort to better understand Indian or Western users, but thanks to an algorithm that boosted the app’s virality beyond any borders or cultural differences.
But in the future, it’s possible that Chinese entrepreneurs will think twice before starting to expand internationally. Instead of risking the same fate as TikTok, they might decide to concentrate on only the Chinese market. The obvious consequence would be that international expansion simply won’t be on the map within China’s entrepreneurial ecosystem.
In your opinion, is a fragmentation of the internet beginning to take place?
I think it’s already here. During my trips to China, I was struck by the fact that the internet experience for Chinese users is radically different from our own. For us, the heart of the internet is Apple or Android, then going on Google, which gives us necessary services like search and maps, then different communication or social networking apps that are rarely used (if at all) in China: Twitter, LinkedIn, Facebook, WhatsApp, Snap, Instagram… Regionalization at the infrastructural level is just a natural consequence of the regionalization of apps and usage.
Last week China updated its list regarding authorized exports. It now includes both databases and algorithms. What value do such technologies have? Are they the key to the growing rivalry between China and the US?
In the digital economy, it’s the combination of a powerful algorithm with enormous datasets that creates massive amounts of value. If you have one without the other, you don’t have much of anything.
A country like France, with a large quantity of excellent engineers, knows how to create algorithms, but we don’t have the data, which only comes with a large population and a truly digital economy. The US has more people, but their economy is still relatively behind in turning digital—payments, for example, are still spread over lots of traditional channels including credit cards and cash.
The Chinese, with a billion inhabitants and an economy that has been largely digitized (including most payments, which now go through mobile phones), have immense datasets available to them, and therefore algorithms have a great deal of value for them.
Highly recommended on the respective value of data and algorithms: Netflix Recommendations: Beyond the 5 stars (Part 1) (Xavier Amatriain and Justin Basilico, The Netflix Tech Blog, April 2012).
If you’ve been forwarded this paid edition of European Straits, you should subscribe so as not to miss the next ones.
From Normandy, France 🇫🇷
Nicolas
