Against the Moral Hazard in Technology Consulting

“Know when it is correct to object your client when it is evident they are wrong”

Technology consultancies and humanitarian organizations seem like two of a kind. Both vow to assist those in need. Humanitarian societies aid groups of people under mortal danger, agencies assist companies struggling with their development plans. The difference between organizations such as Red cross and technology consultancies is motivation. While Red cross operates based on political grounds using volunteer labor and donated materials, consultancies employ well-compensated top-of-the-class workforce to help clients for a compensation. This eventually runs into problems, one of them known in economics as the principal-agent problem, which I discuss here as the dilemma of moral hazard.

Finland is a small country with a particularly big technology consulting scene. We have hundreds of companies offering consulting on software development, design and digital business. Most players are SMEs but there are larger domestic (Tieto, Digia, Reaktor, Solita) as well as global players in the game as well (CGI, Accenture, Deloitte, BCG, McKinsey). The consulting market looks almost saturated from time to time, before a small disruption shakes the game and one segment shrinks, while another expands.

The three little conflicts

There are several conflicts that concern the vendor-customer relationship in the business of technology consulting. I explore three of them.

1. Are agencies disposable?

First, customers should not need any particular vendor to run their business. Partnerships, platforms and coalitions are fine, but should not be the lifeline. Nevertheless, customers may, however, find themselves in a vendor-lock situation in which their key business operations have been tied to specific expertise, solutions or the unique technology stack offered by the consultancy. This has been well acknowledged by big client companies operating in Finland who are successfully mitigating the issue by sourcing experts from several providers under clearly formulated frame agreements.

2. Consultants give and take

The second struggle refers to the loved and feared cross-pollination of ideas and expertise that consultants bring along. Customers hire consultants for their expertise and fresh point-of-views, i.e. what they can give. Simultaneously buyers can be scared what the outside experts will take away. Please understand that is not a matter of stealing intellectual property, which can be effectively safeguarded with the existing non-disclosure agreement practices. It is about know-how and ways of working.

This creates friction that is seldom out-spoken but repeatedly acknowledged. This shows when clients seek professionals with deep domain knowledge but shy away from the fact that this knowledge has been partially acquired by working for their competitors. Deep down everyone understands that this aspect of cross-pollination or intellectual prostitution is just what gives the consultants their competitive edge. Naturally, all clients would like to remain on the receiving side.

3. Conflict of a short and long-term interest in customer happiness

But the third phenomenon is the one that cuts the deepest. This is the competing, conflicting interests of the consulting company and their client. Most of the time their interests can be well-aligned. In Finland, we had numerous flourishing technology and marketing agencies during the heydays of Nokia on the global cell phone market. After Nokia’s decline, many companies found their future prospects cut short. The reliance on one huge client had been their blessing and curse. Agencies who could not find new markets perished.

Agencies understand the risks of unilateral relationships and thus naturally avoid their own “client-locks”. They need good client retention and want to have multiple clients across different domains to reduce risk. Successful companies have mastered the tactics of client retention. Although corruption is largely absent from Finnish business (Finland has for years been in Top3 in the global Corruptions Perceptions Index ranking up to 180 countries), it is clear that all possible means to maintain a good standing in the client’s eyes are explored.

Agencies want to make client stakeholders appear successful inside their company, and maintain their good spirits. Retention is always good for agency business in the short run, because it maintains a high utilization rate, keeps revenues steady but also means that individual consultants will slowly become more and more like the company employees. Needless to say, consultant happiness does not necessarily match that of their client stakeholder, leading to a different conflict.

The root cause of the moral hazard

Consultants are typically hired to solve some immediate challenges or needs. Consultants are expected to stay within the comfort zone, accept “known limitations”, exercise caution, and help steadily improving the business.

The defining problem in consulting is keeping the client stakeholder happy under all circumstances. Even when it calls for questioning the status quo that involves wrong goals, false constraints, and suboptimization they may have found themselves in. The issue lies in the imbalance of power as the consultant always remains at the mercy of the client, which means you don’t get to piss them off or your fired!

Fourkind’s fight against moral hazard

What Fourkind as a company wants to deliver is not just top notch expertise but intellectual honesty and candour. We do not wish to establish our presence at a client organization for the sake of billability, but for the value added. And by proving that this value is actually created.

For clients, we promise better cost efficiency, no vendor locks, and the best possible future proofing of their technology stack.

Instead of maximizing our hour based billing, we are in favor of value-based pricing models. We want to disengage from technology consulting business in which agency acts as an HR company lending out Java, React or CSS experts to semi-permanent positions. Instead, we look for greater opportunities to open up and accelerate streams of value creation.

We need a moral spine to dare to challenge the status quos and prevailing wisdoms about ‘what can’t be done’ even if it may break someone’s heart or hurt their darling project. Although arising negative feelings, invoking uncertainty or being criticized for something you always thought you were doing well is not welcome, it may be necessary for excellence over long term.

Fighting the moral hazard in these situations means forcing the customer to listen also to the bad news and undesirable analysis of the present state when it exist. For consultants, being straight and outspoken if you believe that the path a client is following is wrong and in the long runit will lead to their demise. In other words, not sacrificing short-term gain for the long-term success.

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Fourkind is not only about what we can do, but essentially the way we deliver it. After all, we are on a quest to provide better, unique hands-on advisory in the field of consulting. The reason for discussing moral hazard relates to Fourkind’s mission to provide better and sustainable consulting business. Delivering value instead of working hours.