The management consulting industry is known to operate under a lot of secrecy, to the extent that some consultants use code-names for their clients, lest someone discover who is offering what services to them even during informal conversations.
By Prof. R. Srinivasan
Indian Institute of Management, Bangalore
The management consulting industry has been
through severe challenges. For instance, in 2002, The Economist (2002) wrote
that the strategy-consulting industry was “wasting away” as strategy had become
a commodity, as bright business school graduates were equally available to top
corporations as they were to consulting firms for hiring. Fortune Magazine
(2003) concluded that pure-play strategy-consulting as a
business was shrinking, as clients reduced their engagement levels, shortened
project lifecycles, and began demanding concrete, measurable returns for their
investments.
The management consulting industry is known to
operate under a lot of secrecy, to the extent that some consultants use
code-names for their clients, lest someone discover who is offering what
services to them even during informal conversations. The “big-three”
strategy-consulting firms dominate the global consulting industry: McKinsey
& Company (McKinsey), Boston Consulting Group (BCG), and the Bain &
Company (Bain). As TheEconomist (2013) reported,
these three firms grew by 12.4%, 14.5%, and 17.3%, with revenues of US$5.3b,
US$3.1b, and US$2.1b, earned from 17,000 employees in 50 countries, 6200
employees in 43 countries, and 5500 employees in 31 countries, respectively, in
the year 2011, which was marked by severe economic downturn. In spite of the
increasing convergence of the processes and practices in the industry,
stereotypes persist. As The Economist (2013) elucidates,
McKinsey consultants are perceived to be “vainies”, as they lecture clients on
the McKinsey way; BCG consultants are labelled as “brainies” as they spout
academic theory to sell their services; and Bain consultants have a reputation
for taking responsibility for improving the clients' bottom-line results. With
the maturing of the industry, it is no longer possible even for the big-three
strategy-consulting firms to only provide strategy advice and not take
responsibility for implementation. In fact, as the big-three firms are
expanding their service offerings to include a larger bouquet of services,
other firms like the “big-four” accounting firms (PwC, Deloitte, KPMG and
E&Y) are also expanding their services to step into strategy consulting. Van den Bosch,
Baaij, and Volberda (2005) propose three strategic
options for consulting firms: “follow the herd,” “become ambidextrous “, or
“back to the original focus”, when faced with decreasing returns to
exploitation of prior accumulated knowledge. These decreasing returns are
caused by the entry of new players into the industry, as well as the clients
becoming more capable of solving their own problems.
Christensen,
Wang, and van Bever (2013) identify three steps in disruptions that can affect the
consulting industry, similar to the disruptions they help their clients overcome.
First, new competitors arrive at the industry doorstep with new/non-traditional
business models. For instance, the consulting industry has seen entry of the
big-four accounting firms, forward integration by technology consultants (such
as EDS's acquisition of AT Kearney, or IBM's services), and the entry of
specialized niche consulting firms. The second step in the disruption is the
incumbents' responses—the responses include ignoring the new entrants or
conceding the mass market to new entrants and segment-retreat into high-margin
low-volume activities. The third step in the disruption process is the maturing
of the disruptive entrants' business models from a “barely good enough” quality
to a “generally acceptable” level, thereby flipping the market into new bases
of competition. Christensen
et al. (2013) suggest that consulting firms engage
in any of the following six self-disruptive behaviours, in order to balance
their core business model along with the disruptive models: (1) create an
autonomous business unit (2) hire leaders who come from the relevant schools of
experience (3) set up an independent (and custom-made) resource allocation
process (4) evolve independent sales channels (5) establish new profit models,
and (6) ensure unwavering commitment from the leadership.
Globalization presents another significant
challenge for the management consulting industry. When small firms who
differentiated themselves based on local/contextual knowledge dominated the
industry, consulting firms could organize themselves as neo-PSFs (von
Nordenflycht, 2010). However, with the globalization of
clients, global management consulting firms have begun organizing themselves as
global professional networks (GPN) (Brock, 2006).
Using the institutional theory and the
resource-based view of the firm, Brock (2012)identified
five managerial and organizational challenges for globalizing PSFs. First,
while global market entry provides the opportunity to maintain growth through
acquisitions (a means of quick capability building and customer-acquisition and
retention), the challenge for globalizing PSFs is to accomplish this without
compromising on the reputational capital as their source of differentiation.
The second challenge for globalizing PSFs is the varied governance forms across
borders, especially as firms operate in a combination of emerging and mature
economies, with different institutional norms and legal frameworks. Third,
traditional organizational structures that involved partners (who were owners
of the firm and were considered experts/specialists) and associates (who did
the analytical work and were either on a path to partnership or exit from the firm
in a few years) are giving way to new organizational structures, based on
specialized business functions, such as business development. A key
organizational attribute of these changing structures is the concept of
“leverage”, which denotes the efficiency of the firm's associates to leverage
the knowledge of the partners. In other words, the number of associates per
partner denotes the leverage ratio. The fourth challenge is presented by the
high leverage ratios in specialized firms, which restricts new knowledge
creation, and career opportunities for associates. The fifth and final
challenge is to integrate the global spread of PSFs into learning from multiple
contexts, efficient knowledge transfer within the organization, and effective
leverage of this collective knowledge into revenues and profits for the firm,
which is referred to as “organizational wisdom” (Scott-Kennel
& von Batenburg, 2012).
Efficient management of the firm's internal
tacit knowledge is therefore the key to effective management and growth of a
consulting firm (Scott-Kennel
& von Batenburg, 2012). Given that knowledge assets are
multi-dimensional in nature, it is important that consulting firms invest in
various human resources (HR) configurations to manage human, social, and
organizational capital (Swart &
Kinnie, 2013). Such firms face significant conflicts in
managing the balance between routines that support external demands from
clients (innovation) and internal utilization of capabilities (efficient deployment
of specialized human assets) (Jensen,
Poulfelt, & Kraus, 2010).
In sum, the challenges facing the management consulting industry
fall into three broad categories
- Competition and differentiation: As competition intensifies with the entry of heterogeneous players in the market, there is a significant need for consulting firms to define their unique identities and differentiate themselves from the rest, in an increasingly fragmented industry.
- Organizational design of the management consulting firm: The traditional professional partnership organizational form is under threat with increasing globalization of consulting firms as well as their clients. This necessitates that consulting firms consciously adopt new organizational forms that best suit their contexts and identities.
- Internal organization of knowledge flows to serve client needs: High knowledge intensity of management consulting firms ensures that firms proactively manage their knowledge flows within the firm, especially tacit organizational knowledge. Efficient leverage of organizational knowledge is essential for creating and maintaining the balance between exploitation of existing knowledge and creating new knowledge.
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