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Meet
the MasterMinds: Michael Treacy on Double Digit Growth
 Michael
Treacy, former professor at MIT's Sloan School of Management
and co-author of the bestseller, The
Discipline of Market Leaders, has been helping
companies achieve market success for more than twenty-five
years.
He is the co-founder and chief strategist of GEN3
Partners, a consulting firm that works with clients
on product innovations. Prior to Gen3 Partners, Treacy
led a strategy consulting firm.
Treacy's new book, Double
Digit Growth, presents a common sense way
for companies to achieve and sustain profitable growth.
MCNews talked to Treacy about business growth and about
his views on the consulting industry.
MCNews: Does it seem to you that today's businesses
place less emphasis on managing growth than on managing
costs?
Treacy: No question about it, there is less
emphasis on growth.
I can challenge almost any management team in any company
to cut costs 10% in a year, and they would know exactly
how to do that--what data to go grab, how to analyze
it and how to set stretch objectives. They'd distribute
responsibility for those goals and initiate projects
and programs. And--boom, they'd find a way to meet that
challenge.
But if you ask management teams to grow a business
10% a year, they don't have a clue. They'd say well,
it would take some luck and we'd have to do some trial
and error. But if the market isn't growing, there's
just no way we could do it.
MCNews: Is the discipline required to achieve growth
that different from what's required to execute large-scale
cost reduction?
Treacy: It should be the same, right? You gather
data, analyze it, set objectives, initiate projects
and then have a follow-up process.
MCNews: Then why don't more business managers focus
on growth initiatives?
Treacy: Most companies have no diagnostic information
on growth, and managers don't spend a lot of time thinking
about that aspect of their business. What does the typical
budget in a company look like? It has maybe fifteen
or twenty lines on cost and one or two lines on revenue.
Companies have invested billions in accounting systems
that spit out a load of data on costs but almost nothing
on revenue. The details about sources of revenue
are not that difficult to figure out, but most companies
don't have that basic information with which to run
their businesses.
For years, many successful companies have grown profits
on flat revenue. How? They became masters at cutting
costs. But, we are reaching the outer limits on trimming
costs and managers have wrung it out for about as much
as they can.
There are also very few opportunities for price increases
in most markets these days. If anything, people are
worried about deflation. So if you've tapped out cost
cutting and you've got no room to maneuver on price,
how do you grow profits now? You've got to grow volume.
And most managers don't know how to do that.
MCNews: Have consultants contributed to this focus
on corporate cost reduction?
Treacy: The consulting profession has gotten
world class at helping organizations cut costs. Look
at strategic procurement, for example. It's just another
version of cost cutting. Or look at process reengineering.
Say what you will, 85% of it ended up being focused
on cutting costs.
Consultants have developed a powerful capacity for
helping their clients cut costs. In fact, if there is
one area in which consultants should be able to guarantee
results, it is cost cutting.
MCNews: So you think growth will get on the radar
for businesses?
Treacy: I think a long-term shift is going to
happen. We're going to see growth be the agenda for
companies for many years to come. And I don't think
consulting firms are tooled up to help their clients--or
themselves--with that.
MCNews: How will the emphasis on growth impact consulting
firms?
Treacy: They need to recognize that if you want
to grow a business, it takes a lot more than a sales
force. If you're not thinking about value propositions
and about how to use acquisitions and other approaches
to help drive growth, then you're missing critical pieces
of the puzzle.
The truth is you don't need to be very strategic or
even very smart to get behind an aggressive sales force
and grow a business to a certain level. You'll reach
limits, but for a while you can grow like crazy that
way. And that's exactly what consulting firms have done.
It's ironic that while professional services are
essentially revenue driven, consultants don't know a
lot about how to grow revenue.
MCNews: Do consultants need to change how they sell
their services?
Treacy: For complex sales, a shift is already
taking place in many industries. The old approach was
to put super smart salespeople out there and give them
some marketing and sales support. They lived on their
wits and their incentive programs, and they made it
happen.
But that's an expensive and risky way to sell because
you end up paying those smart salespeople a ton of money.
So some companies have flipped that around and have
started to de-skill their sales forces.
All sorts of industrial product companies are headed
in that direction. But I don't see consulting firms
moving that way at all. Instead, consulting firms still
rely on the million-dollar-a-year partner to do the
selling.
In consulting firms, the bias in the partner process
is toward revenue generators. Too often, the best consultants
don't have the "numbers" to make it to partner.
If you could find a different model for how to sell
consulting services, you could broaden the criteria
for selecting partners and end up with better partners
running the firms.
MCNews: Is there a sound growth strategy for consulting
firms?
Treacy: There are a lot of other complexities,
but half of success really is about providing value
to clients. And, I have to tell you, the value propositions
most consultants put forward these days aren't worth
much.
There's a cancer that is eating away at the stability
of this industry, and that is the cost structure. The
costs drive outrageous rates that, in turn, demand either
superhuman levels of value or a real compression in
the client-consultant relationship. Clients have to
use consultants in just so precise a way that they can
get enough value in a short period of time.
What's almost as bad is consultants' lack of perspective
on the value of what they do. It brings to mind the
old Saul Steinberg poster of a New Yorker's view of
America. Somebody needs to produce a consultant's view
of impact. I've talked to many consultants who actually
believe that the delivery of a strategy is more than
50% of what it takes to drive results for clients. And
I look at them like they're insane.
I have never seen strategy be more than 5-10% of what
it takes to achieve results. What drives results is
a very complicated, multidimensional beast. There are
risks in many areas, most of which have to do with the
management of people--not strategy and not systems.
Consultants want to get paid a premium as if they are
at risk for results but they are, quite truthfully,
utterly unwilling to take those risks.
MCNews: In the product world you do get a guarantee
that this, whatever--hair tonic--will make you grow
more hair. If consultants say here's the result we'll
deliver, why can't they guarantee those results?
Treacy: Because deep down they understand that
they control only 10% of the variables. In their heart
of hearts they know that their proposition is a lie.
That's one reason I think the consulting industry is
morally bankrupt.
And, by the way, all these comments about consulting?
Just change the word to professional services. Advertising
as an industry is just as morally bankrupt. And look
at the troubles investment managers have gotten into
on ethical issues. These people are not at risk for
results. And they have an outlandish opinion of their
self-worth that drives cost structures and premium pricing
that, in the end, isn't justifiable.
MCNews: What insights have you gained from your
own consulting ventures?
Treacy: I started a consultancy in 1995 with
the avowed purpose of showing the big firms how consulting
should be done. I was going to do the true and honest
consulting that young, small firms try to do.
We weren't going to have a pyramid structure. It was
going to be more like a cylinder--one partner, one principal
and one associate. We were going to do short-term assignments
and get out of the client so we weren't sitting there
always looking for the next job.
We did tremendous work but couldn't make enough money.
Without the pyramid structure, you can't pay partners
what they think they're worth. And if you don't spend
your time groveling for the next assignment, business
development eats you alive.
So the first lesson I learned was about the difficult
economics of the consulting industry, especially the
cost of business development and the cost of personnel.
Over time, my firm grew to be very successful. But
I'd given up on every principle I had. We had a pyramid
structure. We were doing long assignments. And in month
one, I was trying to get the next assignment from that
client.
In 1999, I left to start a new business with Jim Sims.
We bought a tiny company made up of Russian scientists
with an amazing methodology for science-based product
innovation. It's the first time in my life in professional
services that I'm not embarrassed to discuss fees.
Not all consultants have to do what we're doing, but
the whole industry has to address this cost cancer,
especially the big firms.
MCNews: Are there other reasons that you're not
enthusiastic about big consulting firms?
Treacy: These firms gravitate to companies that
are under-led and under-managed. You don't see consulting
firms billing $10 million a year to General Electric
or Wal-Mart or any of the other highly successful companies
out there.
The big consulting firms often put desperate companies
on a form of life support. Maybe it's just a sad reality
that there will always be laggards in the market who
look to third party experts as their salvation.
MCNews: And they buy a lot of work. The question
consultants have to ask themselves is whether or not
what they are doing is actually helping.
Treacy: Yeah--do I want to be a party to this?
It's like plastic surgeons that have patients who come
back again and again. There's a point at which you have
to ask is this ethical?
MCNews: If you look at the past history of the consulting
industry, it looks cyclical. Do you think there really
are cycles for consulting?
Treacy: I think three cycles are piled on top
of each other. There's no doubt there's an economic
cycle, right? When clients tighten their budgets, the
first thing they cut is discretionary spending, and
surely most consulting is discretionary. So that is
for real.
The second cycle that has a significant impact on the
consulting industry is what I will simply call the euphoria
cycle--and it doesn't necessarily correlate to the economic
cycle. There are eras when companies are highly optimistic,
concept-oriented and futuristic in their thinking. Then
there are times when companies get very realistic, tactical
and show-me-the-money oriented.
The 1990's were a period of euphoria for businesses.
Witnessing the shift to the current period of cynicism
has been like watching a bi-polar personality. The higher
we went in the 1990's, the only certainty was the lower
we'd go when it went the other way.
I don't see us climbing out of this cynicism cycle
for three to five years, even if the economy continues
to improve. I think the degree of cynicism clients
have about the new, the possible and the conceptual
will remain with them for a long time.
MCNews: You mentioned three cycles. What's the third?
Treacy: The third cycle is related to the euphoria
cycle. We have to recognize that business innovation
is the little engine that has driven the whole consulting
industry.
Twenty-five years ago when companies thought about
innovation, they thought mostly about product innovation.
Then along came some companies--Wal-Mart, Southwest
and FedEx, for example--that proved with powerful business
models that you can have as much impact in a market
by innovating how you do business as you can by innovating
what you sell.
The business innovation cycle peaked at the top of
the Internet boom when people thought that the reinvention
of business models could somehow overrun wealthy, well-established
companies. Since then, I think the business innovation
cycle has run dry.
You tell me--what's the big, bold, new idea in business
today? I can't find it. We had reengineering in 1990,
followed by new economy, web-based company models around
1998. Those were the last two.
So here's where we are in consulting. We're in a modest
up-tick in the economic cycle. We might have hit bottom
in the euphoria/cynicism cycle. And in the business
concept cycle there is no big concept in sight that
has broad appeal.
We're in a slightly strengthening economy, with
deeply cynical clients and no big new idea. So is
this market going to get better? Don't bet on bonuses
this year either folks. You haven't gotten a bonus in
three years? Well, this is year number four coming up.
MCNews: What about outsourcing as the next idea?
Treacy: I have told audiences far and wide that
business process outsourcing is a huge, twenty-year
opportunity. That assumes, of course, that you can take
over a process and commit to results--not just effort,
but real results.
Opportunities have to be chosen carefully because outsourcing
will be incredibly remunerative for some business processes,
but for others, profitability will be elusive.
But business process outsourcing might be the next
big idea. In fact, it could be the salvation of professional
services if the industry got behind it and said let's
build the capabilities we're missing to be able to commit
to results.
MCNews: Last question: what are you reading these
days?
Treacy: I'm rereading Darwin's The
Origin of Species, and for a very specific
reason. The idea is that products and technologies follow
evolutionary lifecycles that are similar to natural
selection among biological entities.
I'm trying to understand, not just Darwin's basic idea,
but evolutionary systems and what's new and different
about that science. I'm going look at how evolution
applies to technology and try to more deeply understand
what our Russian scientists have on that front.
MCNews: That's fascinating. Thanks for your time.
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What
Would a New Year Be Without Predictions?
According to Forrester
Research, 2004 could shape up to be a decent year
for consultants and other service providers. Almost
half of the companies Forrester surveyed expect to keep
their spending on outside services flat in 2004. But
the story changes slightly once you look at the industry
picture.
Retailers, for example, seem optimistic
with 47% indicating they will spend more on outside
IT services. However, it appears that money won't be
spent on outsourcing--over 60% of retailers say that
outsourcing IT or business processes is not on the agenda
for 2004.
Companies in the Distribution and Transportation
industry are also showing some signs of optimism, as
33% expect to increase IT budgets in 2004. These companies
plan to spend money on efforts to improve the ROI of
existing investments.
In either case, while the market in retail
and distribution may not be as strong as in some past
years, there should be plenty of demand for the right
consultants.
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