Turning a Profit.
Companies that follow a codification strategy rely on the “economics of reuse.” Once a knowledge asset—software code or a manual, for example—is developed and paid for, it can be used many times over at very low cost, provided it does not have to be substantially modified each time it is used. Because the knowledge is contained in electronic repositories, it can be employed in many jobs by many consultants. Many consultants can be assigned to a project; big projects will have a high ratio of consultants to partners. For example, there are more than 30 consultants for each partner at Andersen Consulting.
The reuse of knowledge saves work, reduces communications costs, and allows a company to take on more projects. As a consequence, firms such as Andersen Consulting and Ernst & Young have been able to grow at rates of 20% or more in recent years. Ernst & Young’s worldwide consulting revenues, for example, increased from $1.5 billion in 1995 to $2.7 billion in 1997.
By contrast, the personalization strategy relies on the logic of “expert economics.” Strategy consulting firms offer their clients advice that is rich in tacit knowledge. The process of sharing deep knowledge is time consuming, expensive, and slow. It can’t truly be systematized, so it can’t be made efficient. That means, first, that the ratio of consultants to partners in these firms is relatively low—there are approximately seven consultants for each partner at McKinsey and Bain. And second, it means that it’s difficult to hire many new consultants in a short period because every new person needs so much one-on-one training. For those two reasons, strategy consulting firms find it difficult to grow rapidly without sacrificing the customized approach.
Nevertheless, their highly customized offerings allow them to charge much higher prices than firms offering more standardized services can. In 1997, for example, daily fees for a McKinsey consultant were on average more than $2,000; at Andersen Consulting, the figure was slightly more than $600.
Turning a Profit.Companies that follow a codification strategy rely on the “economics of reuse.” Once a knowledge asset—software code or a manual, for example—is developed and paid for, it can be used many times over at very low cost, provided it does not have to be substantially modified each time it is used. Because the knowledge is contained in electronic repositories, it can be employed in many jobs by many consultants. Many consultants can be assigned to a project; big projects will have a high ratio of consultants to partners. For example, there are more than 30 consultants for each partner at Andersen Consulting.The reuse of knowledge saves work, reduces communications costs, and allows a company to take on more projects. As a consequence, firms such as Andersen Consulting and Ernst & Young have been able to grow at rates of 20% or more in recent years. Ernst & Young’s worldwide consulting revenues, for example, increased from $1.5 billion in 1995 to $2.7 billion in 1997.By contrast, the personalization strategy relies on the logic of “expert economics.” Strategy consulting firms offer their clients advice that is rich in tacit knowledge. The process of sharing deep knowledge is time consuming, expensive, and slow. It can’t truly be systematized, so it can’t be made efficient. That means, first, that the ratio of consultants to partners in these firms is relatively low—there are approximately seven consultants for each partner at McKinsey and Bain. And second, it means that it’s difficult to hire many new consultants in a short period because every new person needs so much one-on-one training. For those two reasons, strategy consulting firms find it difficult to grow rapidly without sacrificing the customized approach.Nevertheless, their highly customized offerings allow them to charge much higher prices than firms offering more standardized services can. In 1997, for example, daily fees for a McKinsey consultant were on average more than $2,000; at Andersen Consulting, the figure was slightly more than $600.
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