The Boston Consulting Group is a leading global management consulting firm providing strategic advice to private, public, and non-profit sectors worldwide. Although not unique within the consulting industry, BCG provides a great example of a company that is highly effective at driving alignment between its business and operating models.
The company creates value for its clients by helping them discover and capture new business opportunities, identify and resolve operational inefficiencies, and transform organizations to achieve sustainable competitive edge. The service provided allows companies to unleash their potential and achieve higher performance.
For BCG to successfully capture value from its business model, 4 key factors come into play.
- Talent acquisition and retention: Talent is the single most important input that produces consulting firms’ output. Given the highly variable nature of consulting projects, the firm’s product is largely defined by the performance of its staff. Therefore, procuring high-quality talent is of crucial importance to the value proposition that consulting firms offer.
- Differentiated and proprietary expertise: In order to gain acceptance by clients as value-added outsiders, consulting firms have to bring in expertise that their clients don’t already have. Such expertise is often developed through accumulation of extensive project experience over time and forms a firm’s intellectual property. Such institutional knowledge is the foundation for the very existence of consulting firms. The effective use of this key capital contributes to a significant competitive edge.
- High labor utilization: Consulting firms are generally flexible in sizing their staff depending on variation in business need year by year, so labor is a variable cost over a multi-year horizon. However, within a single-year time frame, labor is a fixed cost because the firm can’t simply fire an idle employee given uncertainty over when the next project comes through the pipeline. Therefore, there’s significant scale effect from labor utilization. The less idle time the firm can manage for its employees, the more revenue it generates given fixed cost.
- Strong long-term client relationships: Because top consulting firms tend to recruit from relatively limited sources (i.e. top schools), the talent pools across these companies are inevitably quite similar, making it sometimes challenging to compete for business based on differentiated service. The comparable compensation level across firms of the same tier also leads to similar cost structures, making it hard to compete on price. Therefore, the difference between winning and losing a client project often boils down to client relationship. Moreover, the longer the relationships last, the more recurring consulting revenue the client can generate given the same level of upfront client acquisition cost.
Given these key success factors, BCG has a highly effective operating model that supports its business model. Here are some specific features.
- MBA sponsorship to acquire and retain talent: BCG pays full MBA tuitions for high-potential junior employees in return for 2 years of their committed service at a more senior level post-MBA. This ensures that a significant portion of its senior level talent are vetted at the junior level and retained within the firm.
- Centralized collection of project experience to build and leverage in-house expertise: BCG has a Knowledge Team that collects knowledge and experience from project teams after they finish a project and compile them into a central library that future teams can access for similar projects. Such knowledge sharing enhances staff expertise and service quality over time and also increases efficiency.
- Regional staffing to smooth out supply/demand for labor and ensure high utilization: Due to ebbs and flows in the project pipeline and varying business activity across different offices, BCG doesn’t restrict employees at a given office to client projects at that location. Instead, it evens out labor supply and demand by pooling all projects and staff within a broader region. Although such staffing arrangement incurs more travel expenses (whether born by the firm or by the client), the profitability boost resulting from higher labor utilization well offsets the incremental increase in cost or the potential downside of charging clients higher a price.
- Consultant gap-year externship at client organizations to cultivate future business relationship: BCG offers employees the opportunity to take a gap year to work at client organizations while keeping their positions within BCG. In fact, it also encourages employees to work at client companies after they leave BCG. This really helps the company plant its relationship network and brand image within its clients, so that it can generate sustained business from them in the future.