By Alan Radding
As the manager of Ford Motor Company's venture capital portfolio, Bryan Fairbanks recalls a time when the conventional sales analysis Ford had traditionally performed was proving inadequate. "We needed to get deeper into the data," explains Fairbanks, who says that the giant automaker soon turned for help to the Bios Group, a little-known venture based in Santa Fe, NM.
"We asked them to run a pilot project — to take a small portion of the data and see what they could do," says Fairbanks. The automaker liked the results, and asked Bios to do the same with the rest of the data. It also convinced the company's investment group to take a stake in Bios. "We look to invest in strategic relationships where we can get value through services and see equity appreciation," he explains. Ford believes the Bios approach can be applied much more widely throughout the company.
That's good news for Cap Gemini Ernst & Young, which first created the innovative venture nearly five years ago and is responsible for leading Ford to its door.
With so many consulting firms chasing a shrinking pool of attractive engagements, it becomes difficult for a firm to stand out. Just hanging out the e-business consulting shingle is no longer enough; the easy dot-com money is gone.
Consulting firms really have only five ways to differentiate themselves: price, service, quality, specialty, and innovation. Some of these differentiators, however, are not exactly appealing or even particularly meaningful. Not many consulting firms want to be known as the low-price leader, a strategy unlikely to produce the desired high margins or attract blue-chip clients. Almost every consulting firm touts service and quality; without those, you can't even get into the game. Many firms stake out a specialty, but that pigeonholes you into a niche. Pick the wrong niche, and you may find your firm trapped in a dead end.
That leaves innovation as the only way for a consulting firm to consistently differentiate itself from its rivals. Innovation, however, isn't easy. It requires a patient, long-term commitment to and investment in research and development (R&D). But the payoff from an innovation strategy built around ongoing R&D can come in many ways. It can attract attention, generate fresh ideas to take to clients, result in new products and services to sell, and produce spin-off activity that generates new revenue opportunities. As a result, different consulting firms have set up think tanks and R&D initiatives to pursuit innovation as a key differentiator.
Origins of an R&D Venture
CGE&Y, for example, operates the Center for Business Innovation. Its objective is to identify important issues and technologies 3–5 years before they appear on the radar screen of most everyone else, both clients and competitors, explains Chris Meyer, director of CGE&Y's Center for Business Innovation, Cambridge, MA. Currently, hot topics at the Center for Business Innovation include knowledge management, assessing the value of intangible assets, understanding the dynamics of networked markets, and harnessing complexity science for business usage.
It is this last area — complexity science — that led CGE&Y to create its Bios venture. "Five years ago, we got interested in complexity theory," recalls Meyer. Some initial inquiries convinced Meyer that there could be serious business interest in complexity theory. CGE&Y's experience with the Bios Group illustrates how consulting firms can use R&D-driven innovation as a strategy for differentiating and building their consulting practices while creating the opportunity for new revenues.
Complexity theory uses sophisticated quantitative techniques to analyze the behavior of complex systems. Typically, these systems are dynamic, predictable at times and seemingly unpredictable at other times. The behavior of people — making buying decisions, expressing preferences, taking actions — seems particularly fertile ground for the application of complexity science.
Study of the science of complexity emerged about 15 years ago from Los Alamos, the government's super-secret nuclear research center in New Mexico. The related private-sector efforts took shape at the Santa Fe Institute, a private, nonprofit, multidisciplinary research and education center. Taking advantage of the rapidly increasing power of computers, complexity science offers a new way of looking at problems — especially problems that resist traditional analytical approaches.
CGE&Y decided that complexity theory represented a worthwhile focus. But it was at a loss for how to expand its capabilities in this area. It couldn't just send some promising associates off to complexity science classes the way it might groom Java architects. Complexity science is tough stuff, and "there are too few people who know the math and the techniques," notes Meyer. Instead, Meyer identified Stuart Kauffman, a leading scientist in the field who had recently published a book on the subject. The firm not only bought 1,500 copies of the book, but also entered into negotiations with Kauffman to form a joint venture, the Bios Group, which was established in 1997.
Theories of the Universe
Initially, the Bios Group acted as a focused R&D operation. "We had not fully fleshed out the business plan. Instead, it worked through the Center for Business Innovation to bring ideas about adaptive systems to market," Meyer explains. The research attracted a few early clients, such as the Marine Corps. The big breakthrough came when Procter & Gamble (P&G) brought a significant supply chain project to the Bios Group. P&G subsequently made an investment in the venture.
Today, the Bios Group has completed 40 assignments with clients, 60 percent of whom have given follow-up projects. Positioning itself primarily as a software company, the company employs 130 people; introduced its first product, Market Brain, this past November; and recently received a $3 million order for its second product, Product Portfolio Management. The company rang up $17 million in sales last year. Of that, $4–$5 million represents consulting fees, reports Bob MacDonald, CEO.
Meyer conceived the Bios venture, and CGE&Y provided $6 million in start-up capital, but the consulting firm has stepped back from its founder role. The company now is one of a handful of investors in the operation, along with Ford, P&G, and others. "CGE&Y is a special investor," says MacDonald. With CGE&Y in that category, Bios Group is careful about working with consulting firms that compete with them, although it has done a project with Boston Consulting Group around learning curves. CGE&Y also acts as "a major distribution source for us. They give us credibility and access to the marketplace," Meyer adds.
For its part, CGE&Y holds two seats on the Bios board, Meyer taking one of them. The consulting firm is no longer sinking money into Bios, which is existing on additional funding it raises and its revenue stream. Bios is not yet profitable, although it expects to become so in 2003.
Currently, CGE&Y is the largest single shareholder, although it does not hold a majority interest. Eventually, the consulting firm will cash in when Bios Group goes public, which it hopes to do by mid-2002. "We were going to do an IPO this year, but with the change in the market, we changed our plans," notes MacDonald. By 2005, the company expects to be generating $275 million in revenue ($60 million of which from consulting fees), if everything goes as planned.
In the meantime, CGE&Y sees its relationship with Bios Group as a way to differentiate the consulting firm. "It gives us the ability to build innovative techniques into our consulting and to provide more advanced offerings to our clients," says Meyer.
The challenge for CGE&Y will be to incorporate Bios Group innovation into its day-to-day consulting practices beyond simply acting as a lead generator for the sale of Bios software. The problem is that complexity science is so obscure that it defies easy comprehension; it's not the type of thing a typical consultant can quickly absorb and then intelligently explain to a client. "The people over at the Bios Group are what I call 'scary smart.' They are operating at a completely different level when they look at data. Suddenly, they are relating it back to things like theories of the universe," marvels Ford's Fairbanks.
Evangelizing the Religion
Meyer doesn't envision turning armies of CGE&Y consultants into complexity scientists. Rather, the company is publicizing the work of the Bios Group within the consulting firm and encouraging consultants to follow up by reading various materials. Over time, he hopes CGE&Y practice managers will build Bios ideas into each practice's core offering. At this point, however, Bios-style complexity science is not central to CGE&Y's business and, given the obscurity of the subject, it may never be.
But that may be the nature of leading-edge, R&D-driven innovation. It certainly doesn't discourage CGE&Y or the Bios Group. Meyer is working on yet another potential spin-off for the Center for Business Innovation called NetStrike, an on-line exchange for managing independent IT contractors. The Bios Group itself has already spun off three ventures based on its technology: a 25% share in a San Diego–based biotech company; a joint venture with Nasdaq that addresses the trading of large blocks of stock; and another around one of its patents. The company has filed for 50 patents, MacDonald reports.
Whether CGE&Y's stake in the Bios Group turns into a big score financially depends on the state of the IPO market. Regardless, CGE&Y's Center for Business Innovation and the R&D it represents provide an ongoing source of new ideas, which it hopes will consistently attract the best and biggest clients. In this way, innovation becomes a differentiator that can sustain the firm over the long term.
Sidebar: PowerPoints:
• Innovation in consulting work requires a patient, long-term commitment to and investment in research and development (R&D). But the payoff from strategy built around ongoing R&D is often difficult to measure.
• By investing in an R&D venture focused on the area of science known as complexity theory, CGE&Y, Ford, and Procter & Gamble hope to gain new insights into the behavior of people — making buying decisions, expressing preferences, and taking different actions.
• Many firms stake out a specialty, but that pigeonholes you into a niche. Pick the wrong niche, and you may find your firm trapped in a dead end.
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