Clayton Christensen and others write:
The rise of alternative professional services firms, such as Eden McCallum and Business Talent Group (BTG), is another chapter in the modularization story. These firms assemble leaner project teams of freelance consultants (mostly midlevel and senior alumni of top consultancies) for clients at a small fraction of the cost of traditional competitors. They can achieve these economies in large part because they do not carry the fixed costs of unstaffed time, expensive downtown real estate, recruiting, and training. They have also thus far chosen to rely on modular providers of research and data rather than invest in proprietary knowledge development.
This rings pretty true to my experiences in the sofware contracting industry. Companies like Toptal and crew.co are following a similar model:
The article also talks about modularization:
This disaggregation is also explained by a theory—one that describes the increased modularization of an industry as client needs evolve. As the theory would predict, we are seeing the beginnings of a shift in consulting’s competitive dynamic from the primacy of integrated solution shops, which are designed to conduct all aspects of the client engagement, to modular providers, which specialize in supplying one specific link in the value chain. The shift is generally triggered when customers realize that they are paying too much for features they don’t value and that they want greater speed, responsiveness, and control.
This viewpoint was discussed at length in Christensen’s book The Innovator’s Solution on the chapter about commoditization and decommoditization. Essentially, as a product gets “good enough”, the market demands that it becomes more modular to get at the real value. For example, long ago it was said that “nobody ever got fired for buying IBM equipment”; then, as computers became componentized, savvy buyers checked instead that there was indeed “Intel inside”. Along with commoditization, the sister process of decommoditization occurs and creates a market for processors in this instance, and the high margins are shifted downwards to this new component.