As firms transition from cost-cutting, to revenue-growth pursuing, the realignment of consultants' compensation incentives is often a topic of conversation. However, a leading compensation expert, Robin Ferracone, says that even the best-intended compensation models will fail if consulting firms don't first address their highly vulnerable business models. To better understand the threats and opportunities, Consulting's One-on-One sat down with Ferracone, the founder and CEO of RAF Capital, a strategic investor in HR-related businesses, and founder and Executive Chair of Farient Advisors, an executive compensation consulting business. She was previously the President of Mercer's human capital business.
Consulting: In what ways are consulting firms vulnerable?
Ferracone: I feel as though consulting is under siege because of its economics. In a downturn, the economics are very starkly revealed. Most firms still bill on the basis of time; they have hourly rates and work on a project basis, leveraging junior staff. In a boom time, when you have more work than you can handle, this model works fine. But in poor economic times, projects go away, or consulting is seen as discretionary work that can be deferred. That model loses power very quickly. The model can also exacerbate staff turnover. In a downturn, you have to keep the people that can sell the work—the more senior talent, so you let go of some junior talent. As a result, you have less junior talent to leverage, so more senior people are doing junior-level work and they don't like doing it. It quickly becomes less interesting work. And the fallout can continue even after the economy recovers. When times get better, my guess is we'll start seeing a lot of talent looking to leave their firm. Many are already planning to leave.
Consulting: Are they looking at stronger consulting firms or are they looking to leave the consulting profession altogether?
Ferracone: Consultants see the traditional time/billing structure as being a weak profit model. And they want to go somewhere with a stronger profit model, general industry. In consulting, the work is increasingly becoming deleveraged, the work is less satisfying. It's just no longer where they want to be in their career. If there are bonuses in Q1, I'd expect to see lots of departures following those bonus payments.
Consulting: How can firms counteract these challenges?
Ferracone: Some firms try to make work/life balance better. They add a social purpose to their firm. They make sure the development path is clear. Firms like Deloitte do a great job with that. But a truly successful firm has to be more than just a great place to work. I feel the entire consulting profession needs to be willing to consider greater change.
