Ep. 120 - Outputs vs. Outcomes: Why AI Is Forcing Consulting to Reinvent Itself w/ Tom Rodenhauser

[MUSIC] Hi everyone and welcome back to another session of the pursuit power half hour. I'm Brent and I'm joined today by our friend Tom Rodin-Hauser, the managing director at K2 Consulting Research. Today we're going to dig into the shift from consulting outputs to outcomes. It's the topic Contata and others have spent a lot of time on but continues to surface as a real point of tension across the consulting industry. We'll explore what Tom is seeing specifically in the consulting world. We're firms are getting stuck and why many of the approaches we see today could put future relevance at risk. Tom, as always, great to have you back and we look forward to the discussion today. Great to be back, Brent. So before we dig in to this topic, we're going to keep it very specific today. Let's frame it a little bit. We've had past episodes and a lot of really good content around the idea of moving into things like value-based pricing and pricing on value, not just the process and the work to get there, which is the traditional role of consulting for some time. So today we're going to tackle that head on and before we dive in, give our listeners and our viewers a framing of the setup of the key distinction from your vantage point. What's the difference between an output and an outcome? It's a great question. It's a great way to frame this discussion because I think I've been covering the consulting industry for 30 plus years. I think everyone thinks of outputs as outcomes, the actual process of consulting. We look at things like the actual hours spent, those are outputs. There's materials that are produced, the infamous deck at the end of the engagement. That's an output. The actual outcome consultants talk about outcomes that the client experiences as a result of the work that the consultants have done. The problem is there's never been a real direct link to the outcome. They're using the term outcome and it's really being mixed with the outputs that they're producing. For the longest time, you're able to get away with that because consultants always position themselves as advisors. This is what you should do. But we're in an era now where this is what you must do and this is how you do it. We're here to not only just give that advice on how to do it, we're actually going to do it for you. The outcomes become very crystal clear in terms of what they should be. Outputs are relatively immaterial at this point. We're recording this here 2026 early in the year. Of course, daily there's just a day loose of business content. The pace of change is accelerating, particularly the, there's plenty of bites and proverbial ink being spilled around how AI is sort of disrupting and changing the consulting industry. We've talked in the past about AI being a real disruptor probably in outputs, meaning lots and lots of firms who were billing and consuming and really architecting their deals around things they were doing for a client could now see, and of course, that correlation headcount can now see that reduced because why wouldn't you train multiple agents, an agentic type of proxy workforce to do that type of work, whether it's analysis work or deck producing, collation of different types of research and so forth that would previously be that early in their career army of consultants to do that. So we've, there's plenty of discussion around that. Now it seems like that is could be woven in and we're seeing kind of some exposure to the consulting firms around this idea of like, okay, we've now inverted the talent pyramid a bit. How do the industry that's built on outputs, deliverables, hours, implementations of new software, transformation, maybe a restructure with AI, how are they going to be forced to change? The fundamental issue, and we've been talking about this as you say quite a bit, the actual process of consulting, you know, what AI is doing to that is one conversation and it's basically not just fundamentally changing it, but as you say, inverting the pyramid, it's kind of taking the whole business model, a commercial model of consulting and flipping it on its head. That's one thing. The, to us, the more interesting thing that AI is doing is it's, in some cases, replacing the consultant in a way that I don't think the consultants understand and let me explain this, when we think about consultants, they are essentially designing and building solutions for their clients. And by solutions, we're talking about processes, not just technology. AI, when you really dig into it, AI encodes the design build, it encodes the strategy of what should be done into the agentic AI itself. So the consultant's role as a design build ultimately becomes supplanted. And what that means is they have to move into what, if you use the manufacturing analogy, into assembly. They actually have to assemble the solution and apply it to the client in a much more direct way. So this gets back to, you know, what's the role of the consultant in this new AI world? That's where we see this going. The ones that are just using AI, the consultants who are using AI, just to make the way they do things more efficient. That's got a very short runway. There's going to be a fundamental shift here and it's going to happen over the next couple of years. One thing that's interesting, so you and I both kind of observe the industry and live in the industry daily from different vantage points. Of course, we are a, an AI-powered kind of operational engine, so for consulting firms. You consult with consulting firms or a trusted, trusted advisor to them around where the market's going, where demand is going. You have a lot of insights on the buyers of consulting services. And for all of the change we're discussing, and all the sort of, I don't know, death nails that are being written about consulting. Business is still pretty good. I mean, from our vantage point, there's definitely a lot of upheaval. There's definitely early adopters. There's folks that are running from sort of this model that you just referenced of using AI for efficiency to actually building kind of, you know, really sophisticated models and outputs for clients. But the meat and potatoes of the industry still looks like time-based units of time and effort kind of, kind of billing and commercialization. Is that a fair assumption? Am I reading the room correctly? Yeah, you know, there is this, I'll call it a surge in AI strategy work. We talk with a lot of providers and they say, you know, business is in bad right now. We're doing a lot of this work with our clients to help them understand what AI, what the AI potential is. That sounds good, but it's not sustainable. It's a, clients are right now in a bit of a flux in terms of where they're at and you can apply this, you know, not only to the global enterprise clients, but also even mid-market clients. Everyone's kind of trying to figure out what AI means to them in their industry and their functional areas. The thing we've always maintained with AI that's different as a technology solution is it's not single use. It's not like an ERP system that's applied and it solves the problem. This spreads across the organization and fundamentally changes it. We think this part of the strategic work will be completed as it winds its way through different clients. That's over the next 18 to 24 months, just as the pace of AI continues to accelerate. What's interesting for us is there were a couple announcements in the past few weeks. One was I think the anthropic talking about partnering with BCG McKinsey Accenture and CAPG MNI. What was really fascinating there is that's the first time I've seen in three decades where a quote unquote vendor actually is the lead in a story with the consultants playing a supporting role and their roles are very specified in what they're to do. So that was one big change and then there's another one where I believe is open AI is partnering with a couple of private equity companies and basically forming consulting services for portfolio companies essentially bypassing the traditional route of having the consultants do that. Right. It kind of speaks to there's going to be instances where the consultants are replaced. So some of that doom and gloom, you know, that you're reading about about consulting being affected. That's true. On the other hand, the industry, the consulting industry is in a way reverting back to its roots and kind of what management engineers, the original term coined by McKinsey back in the 1920s. We're actually seeing a reversion back to that, but it's going to be two kinds of engineers. There's going to be system engineers who work kind of side by side with the AI platform companies. And then there are going to be what we call change engineers actual transformation of the clients kind of guiding the client through the AI transformation. We think that's where the consultant, the bulk of the consulting is moving and what what it will be in the future. The question is, who's going to be in that space? I think the answer is still unclear. Putting that aside and let's assume and presume that that dynamic is now set into motion. And we look at the rate of change. And you and I started talking about AI and the consulting business, probably, you know, in earnest about two years ago. And it's just compounds really rapidly. That there will be a need for consulting. There's bits transforming. There's a lot of pressures on it, but it's a very durable type of business and it'll thrive and survive in some point. And then it's got to change into more of this. More of more of outcome versus just just pricing the process. Let's also acknowledge that really stayed steady and true commercial models are still in existence, but it could be that they sort of reach a fork in the road quickly. I was glancing at the the SPI data that of course is a nice longitudinal study and market of five or six hundred usually respondents annually time and materials is still a persistent building model remarkably right and then fixed price and in that type of thing and value is always value and pricing outcomes is a is a lag or but let's presume that that is going to accelerate. What for when you're talking to firms that want to go through a transformation or that are studying where the market's going and want to be more anticipatory. What's the biggest barrier for moving to pricing and structuring outputs to actual outcomes for a client that's not necessarily just a successful implementation of platform acts or a maturation and upgrade of of you know some type of process or system from from X to Y all be it very important work that still has to be done. But why is it hard for firms to make this transition and and move kind of evolved to the moving moving more to an outcome there's two factors there one is the client. The client honestly the client is struggles with consultants when they talk about outcomes and outcome based pricing mainly because you have to and I mean when I say define the outcomes you have to have very measurable outcomes that the client sees is a direct result of the consultant's work. So that's that's barrier number one getting the client to really adopt and adapt to that kind of pricing to a lot of consulting doesn't lend itself to measurable outcomes. As I said earlier, especially consultants that are dealing in more of a strategic space they're saying, hey, here's what you should do. But I don't know if we can measure that because XYZ ABC all that has to happen for those outcomes to be achieved and we're not going to be here doing that for you you have to do it yourself this gets into the change part. And consulting is historically not been very good at change management as an offering kind of an after the fact. The other side of it is the actual commercial model of consulting I mean most consulting firms are built based on the resources the people and you have to leverage the people through utilization. So you have to have two things happen simultaneously one is the client accept a different commercial model and the consulting firm has to change its commercial model and by that I mean if you follow this through the AI journey they do replace a whole part of their organization using tools technology. And then they have to apply those tools and technology in a way not just to make the consulting process more efficient but to actually drive to those outcomes that they determine in advance with the client and then structure the whole engagement around that that's a lot of that's it's almost a root Goldberg type of construct. So it's very delicate and as a result both sides tend to fall back to kind of the the true isms that they're used to what they know yeah and you brought up a good point to I mean the client is definitely a bit of an obstacle here like I think of commercial contracts and you think of like our platform right to be it's adaptable to a lot of different commercial constructs and there's that point between. Business development whether it's a managing director who is farmed a new engagement within an existing client or maybe there's a sales team or some sellers that have brought something and you've now got to conform to the clients. Contracting procurement type of structure and you're uploading rates and roles into a reba or whatever you know platform is out there and it's just like gosh that is such a muscle memory. Well Trotton not saying it's a pleasant experience but how is that going to be disrupted you have to strip all that away and just say look like we've built this outcome this transformative outcome for you that's going to result in. X for that we've now prescribed a value of why. It is going to be transacted by people just like it always has been but maybe do you have any do you have any anecdotes maybe of a you know of course name but. Of any client you're working with who been able to maybe do some of this while going through any kind of transformation themselves you know. There's one anecdote that kind of sticks in my mind and it's almost counter intuitive in the sense that most consulting firms or consultants I should say they've thought about outcome based pricing in the context of. We can make a lot of money because we can solve this problem present the solution measure the outcome and get five X 10 X what we would have gotten it was just a straight on. You know time and material is a fixed price so we had one client where you know they were presented with here's the engagement here's the outcomes will achieve they all agreed to the outcomes so. You know that was one barrier removed. But the actual pricing was I think it was ten times what the engagement would have cost it was just a regular engagement and the reaction from the client was. Why would I do that if you're going to give me the outcome and do it called the old fashioned way why would I want to go this way and you don't get the success based fee and pay infinitely more and they say well we guarantee the outcome. And the client said but you don't guarantee the outcome if you do it the other way it was sort of this ingenuous kind of well yeah it really kind of undercut the whole premise and I think this is on the consultant side I think this is the issue is you can't use outcome based pricing as a way to get more than what you would normally achieve through regular traditional pricing. And I think that's you know that's why they call it success based but the success is not the successes for the client not for the consultant that's I think one thing. that has to happen here. Would you say, this part of our discussion, would you say that the sort of grounding principle is it's not necessarily a pricing problem, it's an operating model issue by both the consultancy and the client? It's definitely in our view an operational issue. I think it, and this speaks to also the relationship with the client between the consultant and the client. To actually, as I said earlier, to actually be part of the outcome, you have to be essentially on the hip, joined it to hip with the client. This is why so many firms have gotten into managed services where they're actually taking over the operation because you can control the outcome. I think this is ultimately what we're going to see as a reversion back to where consultants may not have as many clients, but the clients that they do have, they are with for a long, long time. It goes back to the roots of consulting where you didn't just do the engagement, you're done, move on to the next engagement, different clients, same problem. This will be more of a journey and ongoing journey with clients. We see a splintering of the industry where you really have super, super mega that's working on the system side and then all of these change transformation engineers that will work very closely with clients for a very long time. We reference this in the business press a little bit in the opening of our discussion, but just in the last couple of weeks, open AI and then Thropic, some private equity, boring lots of funding into these ventures where this term, the teams of the Forward, Employment Engineer, which I think will be a term will tire of over time because it'll be overused. But in theory, these teams that can go into an enterprise, a mature enterprise, determine areas where AI makes sense to improve, refine, speed up, add velocity to lots of processes and systems and data and whatever the case will be depending on the business and the vertical. And then transform them, deliver the outcomes which I would presume would be systemic change with agentic systems and workforce that was previously maybe the domain of lots of people in disconnected platforms and now is kind of leapfrogging and joining. In some cases, they're partnering with consulting firms in some cases, they're kind of creating their own. So that change is happening and it's coming. If firms say we're a good mid-size consulting firm, you're not Accenture Deloitte or McKinsey or Bain or BCG but you've a couple hundred to a couple thousand people and a really nice stable of clients, you're well suited for the future economically. We've talked in the past, like you don't have over concentration of kind of one client, there's like nice distribution, you have a marketing engine that's firing, you've got clients that are satisfied, you're growing, changes coming. But what's the outlook for those types of firms if you don't change, I mean you don't change rapidly enough to something like outcome, what's the path forward look like? Over my experience, consultants are very adaptable, they can kind of find the clients that suit them. Early in my career, consultant told me that demand for consulting is unlimited because there's unlimited problems. I thought that was a bit polyanish, but it's true, but I think the issue with those who don't adapt especially into this kind of change transformation, engineer approach, I think ultimately they become maybe not irrelevant but not growing because the stable of clients will continue to shrink. The economics of that business will ultimately become much, much more compressed, you'll be competing on price, speed, and that's a no-win situation because someone's always going to do it cheaper and faster. And that distinctiveness, you know, again, consultants can be pretty good at kind of becoming a bit zellig-like and changing their stripes and adapting, but this is such a fundamental shift for clients, for the consultants that I think those types of firms will be marginalized. They won't be part of what we would call the new consulting industry, just kind of be relics and over time, you run out of gas and you end up being a tombstone in the graveyard of consultants and that's, there's been a lot over the years. So this idea probably that right now business is good is not a sustainable model. And listen, like we've been through BoomBus cycles before, definitely like think of like the years of going in and helping a firm just to digitize, you know, things that were predominantly paper or manual or transitioning from on-prem to cloud, like big, epochal transformations. This one seems different. And if I'm interpreting you correctly, there's going to be these new players that are merging right, the large consultancies that are partnering now with the primary AI platforms doing the engineering and then implementing the smaller firms that are driven by good relationships now, like they'll, if they might have the opportunity to adapt and build this capability, they'll probably be a really nice, if they can change fast enough, a really nice alternative or secondary offering to the big ones just in the way they always have been. But maybe there's, would it be fair to say there's a nice middle ground where you could retool and provide this as a capability, but also price, maybe AI transformation gives it the opportunity to finally move more to outcome based pricing. Is that a fair? Yes, that's fair. I think what we're going to see is a renaissance not unlike, I think in the late 1980s, there were a bunch of firms that came into existence and I'm thinking of, you know, the LEKs, the Americans, Parthenon, you know, firms that hived off of somewhere because they wanted to create a more distilled vision and version of where they had been. And I think we're going to see that now where there's going to be, I'll call them new firms coming out of old firms. And those firms will do strategy because strategy will exist outside of this ecosystem of change engineer and system engineer, but that's a small universe. And I think what happens is they'll, those types of firms who will use AI, they will make what they do not only infinitely more efficient, but they'll be guiding their clients in a way that feels more strategic. But that's going to be an anomaly for the industry at large. You know, the boom bus cycles over the last 40 years, they've always, it's always been around a technology and the client adopting the technology and then moving on to the next technology, et cetera, et cetera. There's no next technology after AI. It's kind of like we're at the end. And you know, I go back to that design build construct where AI fundamentally exists to make the decisions, whether we allow it to make the decisions is one thing, but ultimately it exists to make the decisions. And it just replaces in many cases what the consultants have done historically. So I think you factor in the subset of clients that will exist out there that kind of need the comforting blanket that consultants provide. But the really, you know, the enterprises and you know, once they really go through this AI transformation, it's the end of the line for for the next revolution. So I think we're going to see a breakup of the industry, a lot of new little firms being created and then a consolidation amongst the very, very, very top. As you think through that, and let's, let's say your middle size well positioned, maybe to be nimble in this new era. And these, there's this convergence of factors. There's AI as kind of a strategic offering kind of a new imperative. There's not an AI 2.0 coming, right? It's just going to just keep evolving, so it's not like the days of building a capability and a large scale SAP for HANA transformation and certifying your consultants on that and then moving on because it leaves something else coming. It's really transformative. Let's assume that. But you've also got a change your commercial model and pricing model. What do you think those types of firms could be doing today to get ready rapidly? To take advantage of this new era, even if they're really, maybe they've dipped their toe in outcome pricing and it hasn't really worked but they're willing to go there, they acknowledge that change is coming. What would you counsel in terms of next stages to evolve? So there is the application of AI to yourself that has to be happening. You have to be at the forefront of that. First of what I've heard from the kind of firms that you describe is they're doing that but kind of bits and pieces, maybe doing some stuff internally around their HR processes, automating, things like that, the interviewing and hiring process, that's great. I think it's the actual application of AI around the process, true process of consulting and the knowledge capture. And then this sounds maybe trite but I think it's identifying clients who are going to be the future clients, not the ones that are holdovers to the past. And I hate to say but consultants and clients but consultants will fall back on what's familiar. And they don't say no to clients often enough. So I think you have to kind of look especially if you're in sector specialists, they're an industry specialist, you have to identify clients that truly need your help in this AI transformation change that's coming. And maybe it's not right there for them right now but it's going to be there a year from now and start working with them now. And do start the journey for the outcome pricing now. Because again what I said at the outset, ultimately the client has to agree to it first and foremost. And you can't retrain old clients to accept outcome based pricing. It's much easier to train the new clients from the outset. Along those lines of falling back on old habits, are there internal metrics for the consulting firm to consider as you think through like let's find some new clients or let's find some clients that are willing to transform with us and define what outcomes can be priced. There's things like logging time and measuring utilization and everything that's derived from leveraging the talent period. Those things have to be disrupted a little bit as well. They have to be disrupted because right now consulting business is really simple in terms of you have fees, compensation, leverage and utilization. Those are the four levers you can pull. Utilization is something that's going to be disrupted and is being disrupted. The leverage by extension of that is being disrupted. Fee's are being disrupted. And yet compensation is sort of this still set in stone because that's the expectation that you get paid. The thing we've been talking about outcome based fees, ultimately what's going to happen is you're going to have outcome based compensation. So you actually, and I know that sounds, but what's the difference when you start having the individual contribution level being measured by outcomes, it changes the commercial model internally. I think that's going to be a significant shift, mindset shift and operational shift per firms. Because again, it's relied on a pyramid concept and it's relied on the creation of these outputs to feed things. If all of a sudden you flip that around and you're saying to a consultant, what are you connected with with the outcome? It really just changes the whole measurement. This has been great, Tom. And I think very timely, right? As we were talking about the convergence of multiple pressures on the industry, but then with this overarching theme that right now businesses is good. I mean, the anthropics and the chat GPTs, they see partnering with these large firms is a conduit. The large consulting firms still have the year and the seat of the table with large clients. And then you have kind of the tranches that go below them of kind of mid-size firms. There's a lot that can be taken away from that. But if you were to leave a firm, what are these emerging firms with a mindset shift they could adopt now? What would that be? I think you have to stop describing yourself as a consultant and start describing yourself as an AI services, whether you call yourself a change engineer or a connection to the AI services piece of this that says we're going to be doing things differently. I wouldn't use the term consultant. That'd be the first and only thing. That's going to be hard. You think about the millions of people probably engaged in some form of consulting who for years had to explain to the relatives what it was they did for living at Thanksgiving and Passover meals and so forth. You think of trying to explain to a parents of a certain generation what a frontier engineer is. You know, but the one thing we've been thinking about is modern consulting started 1900s. There are basically three roots. You had your kind of the economics, the McKinsey's, that type. You had the psychologists, the Booz Allen and then you had the true engineers, scientifically, Arthur D. Little. They all fused together over the last however many years and it was the genesis of the multi-service firm that you did, all of these things. We're seeing a breakup of that and a reversion back to these roots. I think what's really interesting is you look at the start of consulting and they had to explain what they did and they specifically used that term management engineer to describe something that was indescribable and to make it more practical and understandable. That's what we're coming back to. I don't think you're going to be allowed to have the imprecision of consultant, kind of the amorphous term of consultant. Instead, you're going to see this reberge and back to a much more engineering mindset and the difference between a consultant and an engineer. An engineer builds something. It is what it is. The output is the bridge and the outcome is the bridge. The consultant's always been allowed to have it both ways and I think we're entering this era where they can't have it both ways. I think you've teed up a great topic for a future power, half hour where we maybe a lot of folks don't know the history of consulting, maybe kind of look back at time and then this regression that you're seeing. But thanks so much, Tom, for joining us again today. This is always a great partnership that we have. You bring a tremendous amount of insight, I know, to our listeners and we always learned something particularly now. So many dynamic pressures on the market and in the industry as a whole. Thanks so much for joining us and this was really a good look at maybe prioritization and you left, I think, the listeners with maybe some sobering thoughts around, you know, there is not another version of this sort of software coming. This is truly transformative. If you enjoyed this podcast, let us know by giving the show a five star review on your favorite podcast platform and leaving a comment. 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