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

Speaker A: Foreign. And welcome back to another session of the Pursuit Power half hour. I'm, um, Brent and I'm joined today by our friend Tom Rodenhauser, the managing director at K2 Consulting Research. Today we're going to dig into the shift from consulting outputs to outcomes. It's a topic Cantata 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, where 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.

Speaker B: Great to be back, Brent.

Speaker A: So before we dig in, uh, to this topic, we're going to keep it very specific today. Let's frame it a little bit. We've had, uh, past episodes and a lot of really good content around the idea of moving into things like value based pricing and you know, pricing on value, not just sort of the process and the work to get there, which was kind of the traditional role of consulting for some time. So today we're, we're kind of tackle that head on and before we dive in, give our listeners and our viewers kind of a framing of the setup of the key distinction from your vantage point. What's the difference between an output and an outcome?

Speaker B: You know, it's, it's a great, it's a great question. It's a great way to frame this discussion because I think, you know, and I've been covering the consulting industry for 30 plus years, I think everyone thinks of outputs as outcomes. The, the actual process of consulting. And you know, we look at things like, uh, you know, the actual hours spent, those are outputs. Uh, there's materials that are produced. You know, the infamous deck at the end of an engagement, that's an output, uh, the actual outcome. Consultants talk about how 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. So they're using the term outcome and it's really being mixed with the outputs that they're producing. And it, you know, for the longest time, uh, you're kind of, you're able to get away with that. You, because consultants always position themselves as advisors, this is what you should do. Um, but we're in an era now where it's, this is what you must do and this is how you do it. And we're here to not only just kind of give that advice on how to do it, we're actually going to do it for you. So the outcomes become very crystal clear in terms of what they should be. And outputs are relatively immaterial at this point.

Speaker A: We're recording this here 2026, early in the year and of course daily there's just a deluge of business content. The pace of change is accelerating particularly there's plenty of um, bites and proverbial ink being spilled around how a 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 correlates to headcount, can now see that reduced. Because why wouldn't you train uh, multiple agents, um, an agentic type of proxy workforce to do that type of work, Whether it's an analysis work or deck producing, collation of uh, different types of research and so forth. That would previously be that, um, early in their career, you know, army of consultants, uh, to do that. So, 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, um, we've now inverted the talent pyramid a bit. Um, how do the. An industry that's built on outputs, deliverables, hours, implementations of new softw, where a transformation, maybe a uh, restructure, uh, with AI, how are they going to be forced to uh, change the fundamental issue?

Speaker B: And we've been talking about this, as you say, quite a bit, the actual process of consulting, uh, you know, what AI is doing to that is one conversation. And it's basically not just fundamentally changing it but, but as you say, inverting the pyramid. It's kind of taking the whole business model, uh, commercial model of consulting and flipping it on its head. That's one thing. 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. Uh, 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 uh, 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. Um, there's going to be a fundamental shift here and it's going to happen over the next couple of years.

Speaker A: 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, uh, software for consulting firms. You uh, 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 the, in all the sort of, I don't know, death knells that are being written about consulting business is still pretty good. I mean from, 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 uh, time based units of time and effort, kind of, kind of um, billing and commercialization. Is that a fair assumption? Am I reading the room correctly?

Speaker B: Yeah. You know, there is this, I'll call it a surge in AI strategy work. You know, we talk with a lot of um, providers and they say, you know, business, business isn't 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, um, clients are right now in a bit of a flux in terms of where they're at and you can, you can apply this, you know, not only to the global enterprise clients, uh, 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 uh, 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 a 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 client sets 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, uh, few weeks. One was I think the anthropic talking about partnering with BCG, McKinsey, uh, Accenture and Capgemini. Uh, 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 was another one, um, where I believe it was OpenAI is, ah, partnering with a couple of private equity companies and basically forming, uh, consulting services for portfolio companies, essentially bypassing the traditional route of having the consultants do that.

Speaker A: Right.

Speaker B: 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 in kind of what, management engineers. The, the original, uh, 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, uh, of the clients, kind of guiding the client through the AI transformation. We think that's where the consult, 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? Um, I think the answer is still unclear.

Speaker A: Putting that aside, and let's assume and presume that that that dynamic is now set into motion and we look at the rate of change and you and I started talking about AI in the consulting business probably, you know, in earnest about two years ago. And it's just, it compounds uh, really rapidly that there will be a need for consulting. There's, it's transforming, um, 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 um, more of more of um 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 you know these, they sort of reach ah, a fork in the road quickly. I um, was glancing at the um, SBI data that uh of course is a nice longitudinal study in market of 5 or 600 usually respondents annually. Um, time and materials is still a persistent billing model remarkably right. And then um, fixed price and that type of thing and value is always value and pricing outcomes as a, is a laggard. But let's presume that that is going to accelerate. Um, 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 from M moving to pricing and structuring outputs to actual outcomes for a client? It's not necessarily just a successful implementation of platform X or a maturation and upgrade of some type of process or system from X to Y, albeit very important work that still has to be done. But why is it hard for firms to make this transition and move kind of evolve to that uh, moving more to an outcome.

Speaker B: There's two factors there. One is the client. Uh, the client, uh, honestly the client struggles with consultants when they talk about outcomes and outcome based pricing mainly because you have to. And M, 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. Uh two, 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. Um, but I don't know if we can measure that because xyz, A, B, C, 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. Um, and consulting has historically not been very good at change management as an offering. It's kind of an after the fact mhm that 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 uh, have two things happen uh 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've determined in advance with the client and then structure the whole engagement around that. That's a lot of, that's, it's, it's almost a Rube Goldberg type of uh, construct. So it's, it's very delicate and uh, as a result both sides tend to fall back to kind of the, the truisms that they're used to, what they know.

Speaker A: Yeah, and you brought up a good point too. 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. I mean it's adaptable to a lot of different commercial constructs. And there's that point between um, business development, whether it's a managing director who's 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 client's contracting procurement type of structure. Um, and you're uploading rates and roles into Ariba or whatever platform is out there and it's just like, gosh, that is such a muscle memory. Well, trodden, 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 Y. Um, it is going to be transacted by people just like it always has been. But maybe, um. Do you have any, do you have any anecdotes maybe of a, you don't have to of course name, but of any client you're working with who've been able to maybe do some of this, um, while going through any kind of transformation themselves?

Speaker B: You know, um, there's one anecdote that kind of sticks in my mind and it's almost counterintuitive 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 a solution, measure the outcome and get 5x10x what we would have gotten if it was just a straight on, you know, time and materials or fixed price. So we had one client where uh, you know, they were presented with here's the engagement, here's the outcomes we'll achieve. They all agreed to the outcomes. Um, so you know, that was one barrier removed. But the actual pricing was, I think it was 10 times what the engagement would have cost if 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, I'll call it the old fashioned way. Why would I want to go this way and 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 disingenuous kind of. Well, yeah, well it really kind of undercut the whole premise. And I think this is on the consultants 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 success is for the client, not for the consultant. That's, I think one thing that has to happen here.

Speaker A: Would you say in uh, this part of our discussion, would you say that the sort of grounding principle is it's not necessarily, it's a pricing problem, it's an operating model issue by both the consultancy and the client.

Speaker B: It's, it's definitely in our view and an operational issue. Um, 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 at the hip with the client. And this is why so many firms have gotten into managed services where they're actually taking over, you know, the operation because you can control the outcome. I think this is, you know, ultimately what we're going to see is 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. M and it kind of 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 client, same problem. This will be more of a journey, an ongoing journey with clients. So we see a uh, splintering of the industry where you really have super, super mega that's working, you know, on the system side and then all of these change transformation engineers that'll work very closely with clients for a very long time.

Speaker A: So we referenced this in the, the business press a little bit in the, the opening of our discussion. But just in the last couple weeks, um, OpenAI and anthropic, um, um, some private equity pouring lots of funding into these ventures where this term, uh, the teams of the forward deployed engineer, which I think will be a term we'll, we'll tire of over time because it'll be overused. But you know, 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 might be, depending on the business in the vertical and then transform them, um, deliver the outcomes which I would presume would be systemic change with um, agentic systems and workforce that was previously maybe the domain of lots of people and disconnected platforms and now um, 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. Um, if firms say we're a good mid size consulting firm, um, you're not Accenture, Deloitte or McKinsey or Bain or BCG, but you've a couple hundred to a couple thousand people and a uh, really nice stable of clients, you're well suited for the future economically. We've talked in the past, you don't have over concentration of one client. There's nice distribution, you have a marketing engine that's firing. You've got um, clients that are satisfied, you're growing, change is coming. But what's the outlook for those types of firms if you don't change, um, and you don't change rapidly enough to something like Outcome, you know, what's the path forward look like?

Speaker B: Over my experience, consultants are very adaptable. They can kind of find the clients that suit them. Um, you know, early in my career, uh, consultant told me that you know, demand for consulting is unlimited because there's unlimited problems. Uh, I thought that was a bit Pollyannish, 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. Um, the economics of that business will ultimately become much, much more compressed. You know you'll be competing on price, speed, um, and that's a no win situation because someone's always going to do it cheaper and faster. Yeah, uh, and, and that distinctiveness, you know, again, consultants can be pretty good at kind of um, becoming a bit zelig like and changing their, their stripes and adapting. But this is such a fundamental shift, uh, you know, for clients, for the consultants that I think though those types of firms will be marginalized. They won't be part of what we would call the new consulting industry. It'll just kind of be relics. And over time, um, you know, 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.

Speaker A: So this idea probably that right now business is good is not a sustainable model. And listen, like, we've, we've been through boom, bust cycles before. Yeah, um, definitely. Like, think of like the years of going in and helping a firm just do digitize, you know, things that were predominantly paper or um, manual or um, 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 emerging, right, the large consultancies that are partnering now with the primary, um, AI platforms, um, doing the engineering and then implementing, um, the smaller firms that are driven by good relationships now, if they might have the opportunity to adapt and build this capability, they'll probably be a really nice, uh, if they can change fast enough, a really nice alternative or secondary, um, offering to the big ones just in the way they always have been. Um, but maybe there's. Would it be fair to say there's a nice middle m ground where you could retool and provide this as a capability, but also price. Maybe AI transformation gives you the opportunity to finally move more to outcome based pricing. Is that a fair.

Speaker B: Um, I would. Yes, that's fair. I think what we're going to see is a renaissance. Not unlike, I think in the, the late 1980s, uh, there were a bunch of firms that came into existence. And I'm thinking of, you know, the leks, Americans, um, 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, um, 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 those types of firms will use AI, they will make what they do, um, not only infinitely more efficient, but they'll be guiding their clients in a way that um, feels more strategic. Uh, but that's going to be an anomaly for the industry at large. You know, the boom, bust cycles over the last 40 years. They've always, it's always been around the 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 I go back to that design build, uh, 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 um, 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, um, 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.

Speaker A: And let's say you're a middle size, well positioned maybe to be nimble in this new era. And there's this convergence of factors. There's AI as kind of a strategic offering, kind of a new imperative. Uh, there's not an AI 2.0 coming.

Speaker B: Right.

Speaker A: 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'll leave something else coming. It's really transformative, let's assume that. But uh, you've also got to change your commercial model and pricing model. What do you think those types of firms could be doing today to, to, to get ready rapidly, um, 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, but they're, they're willing to go there, they acknowledge that change is coming. What would you um, counsel in terms of next stages to, to, to, to evolve.

Speaker B: So there is the application of AI to yourself. That has to be happening. You have to be at the Forefront of that. Most of what I've heard from the kind of firms that you describe is they're doing that, but kind of bits and pieces, you know, maybe doing some stuff internally around their HR processes, automating, you know, 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. Um, 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, and I hate to say but you know, consultants and, and clients. But consultants will fall back on what's familiar.

Speaker A: Mhm.

Speaker B: And they don't say no to clients often enough. And so I think you have to kind of look, especially if you're in a sector specialist or an industry specialist, um, you have to identify clients that truly need your help in this AI transformation change that's, 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 uh, the journey for the outcome pricing now because again what I said at the outset, ultimately the client has to agree to it M first uh and foremost. And you can't, 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

Speaker A: of falling back on old habits. Are there internal metrics for the consulting firm to consider as you think through? 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. Did those things have to be disrupted a little bit as well?

Speaker B: They have to be disrupted because right now, you know, consulting business is really simple in terms of you have fees, compensation, leverage and utilization. Those are the four levers you can pull. Um, utilization is something that's going to be disrupted and is being disrupted. The leverage by extension of that is being disrupted, fees are being disrupted and yet ah, compensation is sort of this, this uh, 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 well, what's the difference when you start having the individual contribution level Being measured by outcomes, it changes the commercial model internally. Um, I think that's going to be, it's going to be a significant shift, mindset shift and operational shift for firms. Um, 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.

Speaker A: This has been great Tom, and I think very timely.

Speaker B: Right?

Speaker A: And as we're, as we're, we're talking about the convergence of multiple pressures on the industry. But then with this overarching theme that like right now, you know, businesses is good. I mean the, you know, the anthropics and the chat GPTs, I mean they saw, you know, they see partnering with these large firms as a, is a conduit. Um, you know the, the large consulting firms still have the, the ear and the seat at the table with, with large clients and then you have kind of the, the tranches that go below them of kind of mid sized firms. There's a lot that could be taken away from that. But if you were to leave a firm, one of these emerging firms with a mindset shift they could adopt now, uh, what would that be?

Speaker B: I think you have to uh, stop describing yourself as a consultant and start describing yourself as an AI services. Whether you call yourself a change engineer or a uh, 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 would be the first and only thing

Speaker A: that's going to be hard. And then you think about the uh, 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 a living at uh, Thanksgiving and Passover meals and uh, and so forth. But um, you know you think of like trying to explain to a parents of a certain generation what a frontier engineer is and you know, it's kind

Speaker B: of, you know, uh, but the one thing we've been thinking about is you know modern consulting started 1900s, uh and there are basically three uh, routes. You had your kind of the economics, the McKinsey's, uh, that type. You had the psychologists, the Booz Allen and then you had the true engineers, scientific like Arthur D. Little. Um, 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. And 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 uh, 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. And instead you're going to see this reversion back to a much more engineering mindset and the difference between a consultant and an engineer. An engineer builds something, they, it is what it is. The output is the bridge. It's, you know, and the outcome is the bridge. The consultant's always been allowed to kind of have it both ways. And I think we're gonna, we're entering this era where they can't have it both ways.

Speaker A: I think you've teed up a great topic for a, um, future power half hour where we maybe, maybe a lot of folks don't know the history of, of consulting. Maybe kind of look back at time and then this, this regression uh, that you're seeing. But thanks so much Tom for joining us again today. This is always a great uh, partnership that we have. You bring a tremendous amount of insight, I know, to our listeners and we, and uh, we always learned something, particularly now there's so much, so, 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's not another version of this sort of software coming. This is, this is truly uh, 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. If you haven't already subscribed to the show. You can do so anywhere. You get podcasts on, uh, any podcast app. And to learn more about the power of Cantata's purpose built technology, go to cantata.com thanks again for listening.