THE PAPER | Emerging Challenges for the Management Consulting Industry
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THE PAPER | Emerging Challenges for the Management Consulting Industry

By Prof. R. Srinivasan
Indian Institute of Management, Bangalore

THE PAPER | Emerging Challenges for the Management Consulting Industry R. Srinivasan

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.

This article is an excerpt from Panel Discussion “ The management consulting industry : Growth of consulting services in India” Volume 26, Issue 4, December 2014, Pages 257–270, published under Creative Commons. Download The Paper - LINK