Management Consulting

mckinsey

booz-allen

Management consulting refers to both the industry and the practice of helping organizations to improve their performance, primarily through the analysis of existing organizational problems and development of plans for improvement.

Organizations may draw upon the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants’ specialised expertise. As a result of their exposure to and relationships with numerous organizations, consulting firms are also said to be aware of industry ‘best practices,’ although the transferability of such practices from one organization to another may be limited by the specific nature of situation under consideration.

Management consulting grew with the rise of management as a unique field of study. The first management consulting firm was Arthur D. Little, founded in 1886 by the MIT professor of the same name and was incorporated in 1909. Though Arthur D. Little later became a general management consultancy, it originally specialized in technical research. Booz Allen Hamilton was founded by Edwin G. Booz, a graduate of the Kellogg School of Management at Northwestern University, in 1914 as a management consultancy and the first to serve both industry and government clients.

The first wave of growth in the consulting industry was triggered by the Glass-Steagall Banking Act in the 1930s, and was driven by demand for advice on finance, strategy, and organization. From the 1950s onwards consultancies not only expanded their activities considerably in the United States but also opened offices in Europe and later in Asia and South America. After World War II, a number of new management consulting firms formed, bringing a rigorous analytical approach to the study of management and strategy. The second wave occurred in the 1980s and 1990s, with consulting gaining considerable importance in relation to the US gross domestic product. In 1980 there were only five consulting firms with more than 1,000 consultants worldwide, whereas by the 1990s there were more than thirty firms of this size. Growth in the 1990s was driven by information technology advice.

Many consulting firms are organized in a matrix structure, where one ‘axis’ describes a business function or type of consulting: for example, strategy, operations, technology, executive leadership, process improvement, talent management, sales, etc. The second axis is an industry focus: for example, oil and gas, retail, automotive. Together, these form a matrix, with consultants occupying one or more ‘cells’ in the matrix. For example, one consultant may specialize in operations for the retail industry, and another may focus on process improvement in the downstream oil and gas industry.

The 1990s saw an increase in what has been termed a ‘future-based’ approach. This emphasized language and alignment of people within an organization to a common vision of the future of the organization, as set out in the book ‘Three Laws of Performance.’ The essential concept here was that the way people perform is seen to correlate to the way that world occurs for them, and that future-based language could alter the way the future actually occurs for them. These principles were increasingly employed in organizations which had experienced a market transition or a merger requiring the blending of two corporate cultures. However, towards the end of the 1990s the approach declined due to a perception that the concept outlined in this book did not in practice offer added value to organizations.

Currently, there are three main types of consulting firms. Large, diversified organizations, Medium-sized management consultancies, and Boutique firms which have focused areas of consulting expertise in specific industries, functional areas, technologies, or regions of the world.

Traditionally, the consulting industry charged on a time and materials basis, billing for staff consultants based upon the hours worked plus out-of-pocket expenses such as travel costs. During the late 1990s and early 2000s, there was a shift to more results-based pricing, either with fixed bids for defined deliverables or some form of results-based pricing in which the firm would be paid a fraction of the value delivered. The current trend seems to favor a hybrid with components of fixed pricing and risk-sharing by both the consulting firm and client.

An industry structural trend which arose in the early part of the 21st century was the spin-off or separation of the consulting and accounting units of the large diversified professional advisory firms most notably Ernst & Young, PwC and KPMG. For these firms, which began operation as accounting and audit firms, management consulting was a new extension to their organization. But after a number of highly publicized scandals over accounting practices, such as the Enron scandal, these firms began divestiture of their management consulting units, to more easily comply with the tighter regulatory scrutiny that followed. In some parts of the world this trend is now being reversed where the firms are rapidly rebuilding their management consulting arms.

Added to these approaches are corporations that set up their own internal consulting groups, hiring internal management consultants either from within the corporation or from external firms employees. Many corporations have internal groups of as many as 25 to 30 full-time consultants. Internal consulting groups are often formed around a number of practice areas, commonly including: organizational development, process management, information technology, design services, training, and development. However, an internal consultant may not bring the objectivity to the consulting relationship that an external firm can and may face corporate politics just as any group in an organization.

Despite consistently growing revenues, management consultancy also consistently attracts a significant amount of criticism, both from clients as well as from management scholars. Management consultants are sometimes criticized for overuse of buzzwords, reliance on and propagation of management fads, and a failure to develop plans that are executable by the client. A number of critical books about management consulting argue that the mismatch between management consulting advice and the ability of executives to actually create the change suggested results in substantial damages to existing businesses.

More disreputable consulting firms are sometimes accused of delivering empty promises, despite high fees, and charged with ‘stating the obvious’ or lacking the experience upon which to base their advice. These consultants bring few innovations, instead offering generic and ‘prepackaged’ strategies and plans that are irrelevant to the client’s particular issue. They may fail to prioritize their responsibilities, placing their own firm’s interests before those of the clients.

Another concern is the promise of consulting firms to deliver on the sustainability of results. At the end of an engagement between the client and consulting firms, there is often an expectation that the consultants will audit the project results for a period of time to ensure that their efforts are sustainable. Although sustainability is promoted by some consulting firms, it is difficult to implement because of the disconnect between the client and consulting firms after the project closes.

Further criticisms include: disassembly of the business (by firing employees) in a drive to cut costs, only providing analysis reports, junior consultants charging senior rates, reselling similar reports to multiple clients as ‘custom work,’ lack of innovation, overbilling for days not worked, speed at the cost of quality, unresponsive large firms and lack of (small) client focus, lack of clarity of deliverables in contracts, and secrecy.

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