Strategists to the Rescue

All eyes turn to the incumbents — the Old Economy stalwarts who now ponder the complexities of converting their companies into New Economy businesses. And no one group is likely to play a larger role in their conversion than the strategy consultants, who today harbor the economic insights and industry knowledge they require to reinvent themselves. Move over, Alan Greenspan — behold the supply side powers of consultants.
A bit too charitable, perhaps? Well, it wouldn't be the first time consultants earn kudos for being an "economic booster." Many economists agree that productivity growth — arguably, one of our economy's richest octanes at the moment — can trace its origins to a wave of re-engineering consulting projects that got underway inside thousands of companies in the early 1990s. Similarly, as more consultants help incumbent companies digitize their business, the economic dividends these efforts will pay are expected to multiply well into the future.
"When you realize the dot-coms no longer have billions of dollars to buy technology servers, storage and networking gear — the question becomes: Will the incumbents relax their purchases [since the dot-coms are no longer a perceived threat], or will they accelerate their purchases in light of their own business-centric situation?" explains Adrian Slywotzky, a partner with Mercer Management Consulting, and coauthor of the recently published How Digital is Your Business?

As the latest treatise from the man credited with having injected the words "value creation" into popular 1990s "consultingspeak," this book sets out to advance the premise that incumbent businesses will have their strategic options significantly broadened by the use of digital technologies — not exactly an original thought, but given that it comes from a Mercer consultant — and one whose thinking has long been rooted in business strategy, not technology, to boot —  it may say something more about the consulting profession. What does it say, exactly? How about: Technology has finally become strategic in the minds of the profession's big thinkers.
"If the incumbents relax, we're going to have a hard hit lished brands and scale.
 In the city of Kalamazoo, Michigan, for instance, Allstate's business is currently at a size where it can afford several in-house adjusters, a fact that ensures the insurance company will not be overpaying for accidents occurring within the city's limits. It's an advantage dot-com attackers are not likely to enjoy. In fact, any dot-com start-up interested in cutting into Allstate's Kalamazoo business would likely have to enlist a third-party adjuster to garner similar numbers, or resort to auditing other available extraneous information. 
"Neither [alternative] is likely to be as effective as what Allstate has," says Devine. "And given that 75 percent of costs are on the claims side, a dollar here and a dollar there really matters," he explains.

According to Devine, pricing information poses a similar challenge for attackers. Normally, attackers don't have the time or the breadth of data capture capabilitities to get the information they need to take on a large incumbent. Thus, they rely on industry sources, or what Devine calls "me, too" filings to develop their pricing schemes. 
"A 'me, too' filing would be to go the state regulatory offices and basically try to replicate the Allstate or State Farm class/pricing plan. … All the [attacker] can do is price at the average," he explains.
Think of it.  Allstate, State Farm, Progressive, and Geico all have reservoirs of detailed customer information including data on car purchases, driving patterns, credit histories, driving usage, accident frequency — the list goes on and on — all to be used in the calculation of its future dot-com pricing. It's an information advantage, that more incumbent businesses are learning to leverage, as strategy consultants supply them with the economic insights required to build their own attacker models.

But Speed Still Matters

"The revenge of the incumbents is upon us," says Carl Stern, CEO of McKinsey's arch rival, Boston Consulting Group. Stern's words have a dual meaning for those who reside within the ranks of strategy consultants. Not only do they underscore the growing New Economy ambitions of large incumbent companies, but they also signal a changing climate within the consulting marketplace — where after a time in which corporate clients clamored to do business with upstart Web consultancies, the incumbents are steadily turning to strategy consultants for their New Economy solutions.  
Stern says that many incumbents first turned to e-consultancies because of a sense of urgency about the need to be doing something Web-related.
"There was a period there where people were saying, 'Gosh, we just have to do something — anything' — and so there was this froth being put on top of what was really going on. Now that kind of desperate activity is gone, and it's plenty clear that the incumbents are approaching things it in a much more controlled, thoughtful, and systematic way," he explains.

Maybe so, but the strategy consultancies have also found the need to modify their approach.
"Once in a while nine months or so ago, we would lose a competitive situation to one of the Web-based consulting firms, and it was done [because they issued] the pledge, 'We can do strategy in the Internet space in two to three weeks.' They suggested that if you're a 'New Economy consultant,' this is all it should take," says McKinsey's Devine, who believes that the e-consultancies have correctly played upon their clients' growing appetite for speed.

That hunger led even McKinsey and its strategy consulting rivals to make changes.
"There's no question that in some cases there is a tremendous premium on speed-to-market, and we have adopted different processes in our client engagements that I might describe as being a little bit more iterative — which is to say 'let's get it right enough so we can begin to go into the marketplace, while recognizing we're going to have to fix and update the offering two or three times over the life of this new business," says McKinsey senior partner John Bookout, who, like any true McKinseyite, seems unable to mention the significance of speed without further emphasizing client demand for deep industry knowledge. 
 "I think that some businesses have started off with too little insight into industry, under the assumption that they would try it, fix it, and eventually get it right, but they are so off the mark in the first place that they are not fixing anything. Instead, it's a major redirection, and they end up losing whatever time advantage they may have had as far as being first to market goes," he explains.

A Gateway to Incumbent Opportunities

Lowell Bryan, a McKinsey senior partner, says that the incumbent threat is very real, but is not always immediately visible to clients whose view of the world may be obscured by a singular focus.
"It isn't the dot-coms that worry the large institutions. It's now the other incumbents. And it's incumbents coming from other industries or other geographies.  All you need to do is look at market capitalization growth to discover which companies are getting traction in the New Economy," explains Bryan.

Any onlookers who doubt the growing involvement of management consultancies inside this wave of incumbent wealth creation need only count the venture capitalists, bankers, and technology companies that have recently pursued alliances with strategy consultants in an attempt to get cut in on the mushrooming incumbent opportunities.
"We see a large number of our clients sort of adopting the approaches and processes that venture capital firms have, and in fact it's gotten to the point where they have invited firms like McKinsey to join their efforts to better understand how to commercialize technologies or to capitalize on marketplaces," explains Bookout, who says such opportunities often involve teaming relationships with VCs and private equity firms.
"These are the breeds of alliances you'll see — particularly for the business-to-business sector — where you have to marry technology with Fortune 1000 companies," says David Cowan, a managing general partner at venture firm Bessemer Venture Partners, which today claims to leverage multiple strategy consulting partners. 
It's the same type of Fortune 1000 opportunities that have led strategy consultants to begin building alliances with a variety of technology partners.
"These new business models are very much dependent on technology, and if you're a strategy consultant you can't very well suggest a digital marketplace and not understand technologies," says Wendy Lea, director of e-business consulting services for Siebel Systems, an e-business software vendor that has recently begun forming strategic alliances with strategy firms such as McKinsey & Co.
McKinsey's Bookout views the budding technology alliances as a necessary step in the firm's ever-maturing strategy offerings.
"The evolution of some of the consulting services that we provide will have an increasingly high technology component in  them. We have a choice of building this internally, which is not something we have historically done, or of finding new ways to collaborate that allow us to capitalize on technology-enabling services that we already provide," says Bookout.

A Mantra for all Seasons

Back inside the glass-and-steel office building, Devine's PowerPoint presentation has come to an end. His incumbent CEO is now determined to unlock his company's deep vertical knowledge, and he's now convinced Devine has the economic insights the company will need if it is to advance inside the New Economy. From Gupta's lips to incumbent ears.

Sidebar: PowerPoints:

• To advance their efforts to build New Economy businesses, large corporate institutions are turning to strategy consultants to help them leverage the vertical knowledge and economic insights that remain locked within their incumbent businesses.

• As upstart dot-com businesses continue to falter, strategy consultants are expected to help fuel the economy's growth engine as they advance their incumbent clients' fortunes inside the New Economy.

• While a consultancy's speed-to-market capabilities remain important to clients, the ability to supply economic insights and deep industry knowledge has become a primary concern as incumbents seek to advance their e-commerce efforts beyond Web-friendly interfaces.