UK: The great consultancy cop-out.

UK: The great consultancy cop-out. - As clients downsize, management consultancies keep growing. Outsiders by definition, they know little of the client firm, yet are assuming the responsibilities for which managers are paid. By Simon Caulkin Outsiders

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Last Updated: 31 Aug 2010

As clients downsize, management consultancies keep growing. Outsiders by definition, they know little of the client firm, yet are assuming the responsibilities for which managers are paid. By Simon Caulkin Outsiders it seems are now assuming the responsiblityue.

Of all the paradoxes of the modern business world, perhaps the most remarkable and least satisfactorily explained is the rise and rise of the management consultant. The naive might have imagined that as management disciplines matured and executives increasingly mastered them, the need for outside advisers would fade. Think again. Growing from almost nothing before the second world war, the global consultancy market is now worth around $40 billion (or £24.6 billion), $15 billion of that in the US, and employs upwards of 100,000 of the most highly qualified people in the world. The Gartner Group estimates that management consultancies' fee income will double by the turn of the century.

Similarly, as top managers in big companies jack up their pay in line with their sense of self-importance, they might have been expected to shoulder more responsibility for what goes on in their firms, not less.

Not a bit of it. Managers seemingly cannot wait to bring in consultants to advise them how to divest non-core businesses and outsource functional departments - mainly information technology, but increasingly others ranging from marketing to human resources - often to the same consultants. Far from slowing down, 'we are experiencing a wave of growth the like of which we have never seen before,' lyricises one of the top people at Price Waterhouse Management Consultancy, which, like many other big consultancies, expanded by around 25% last year. While client companies downsize, consultancies merrily upsize as they absorb their customers' discarded functions.

It is hard to see where this process will stop. The more firms follow consulting advice to focus and outsource, points out Eileen Shapiro, an ex-McKinsey consultant who has written a telling and wry critique of fad-surfing, the fewer managers they have available to form project teams to think through important issues themselves. In turn, they become reliant on hand-me-down solutions - and consultants. Says Shapiro: 'The result from a financial perspective is that the fixed costs of the business are cut, but since more people are needed to think, these costs are often replaced by the variable (and higher) costs of consultants who now never go away.'

Perhaps latent unease at these patent conflicts of interest is why - another paradox - in public few companies or business leaders have a good word for the product they are queueing up to buy. Here's Lord Weinstock summing up a career at the head of a major company: 'Consultants are invariably a waste of money. There has been the occasional instance where a useful idea has come up, but the input we have received has usually been banal and unoriginal, wrapped up in impressive sounding but irrelevant rhetoric.' Here's Howard Davies, deputy governor of the Bank of England, reflecting on his perplexing time at McKinsey, 'perplexing, because I found it hard to understand why my clients were prepared to pay decent money to employ someone who knew so much less about their business than they did'. Anita Roddick meanwhile says that having consultants tramping through the Body Shop was the most uncomfortable period in its history. Among many employees of big corporations, the Dilbert's-eye view of consultancy, summed up by Scott Adams, strikes a resonant chord: 'A consultant is a person who takes your money and annoys your employees while tirelessly searching for the best way to extend the contract'.

Apparently, buying consultancy is like buying girlie magazines - something everybody else does. In private, many companies are consultancy junkies, as the overall figures prove. And it's an expensive habit. A top-level consultant with one of the big names - McKinsey, Bain, Boston Consulting Group, Andersen, PW - bills £3,000 or more a day (on average, McKinsey employees each generate revenues of $475,000 a year). For a substantial piece of work, expect to pay £100,000-£150,000 a month for a year or more.

A McKinsey report costs upwards of $1 million. The big multinationals which are the consultancies' most coveted captures support a whole ecology of consultants. In its recent corporate reorganisation, Shell employed its regular consultancy, McKinsey, to work out a new structure, then took second-phase advice from a board-level group of individual consultants plucked from a variety of sources. Meanwhile Shell country operating companies, themselves huge operations, were employing many of the other majors on re-engineering projects. Shell doesn't say how much it spends in total, but insists that the amount is tightly controlled. Whatever, it is certainly peanuts compared with the all-time record of declared totals: AT&T's $347 million in 1993.

How do companies explain these stupendous price tags? Most big firms shrug that they are just part of the cost of doing business. For clients, consultancies provide man-and brain-power to get them over a temporary hump, specialist skills that are not cost-effective to keep on the payroll, and wide cross-industry experience which throws up useful parallels between seemingly unrelated sectors. In addition, over a decade of mounting market pressure, firms eager for the latest in operational efficiency have queued up to buy crash courses in benchmarking, best practice and corporate self-improvement exercises. Consultancies have been quick to oblige them. Then too, beadier corporate governance scrutiny, tightening environmental and financial regulation and the increasing need for companies to formalise their public stance (be it on ethics, corporate governance or world trade) inexorably generate burgeoning demand for a wide variety of more specialised advice - in extreme cases, all at once. So, for example, when British Gas's TransCo pipeline business faced the simultaneous need to break itself up, introduce a market for gas and conform to a new regulatory formula, not surprisingly it 'had consultants crawling all over the place,' in the words of one executive.

'Otherwise we'd never have got it all done.' In this instance, the frenzied execution of projects ranging from IT to introducing domestic gas competition additionally created an acute need for something resembling corporate counselling which took the form of a consultant-led culture programme to socialise employees for their new existence in a competitive rather than a monopoly sector.

Meanwhile, at the top end, the shifting plates of the economy have created a fresh pasture for strategy consultants to plough. Privatisation and the marketisation of the public sector is one rich hunting ground, the NHS alone consuming £200 million of consultancy last year. Financial services, undergoing a frantic round of restructuring in the wake of deregulation, is another. When Britannia Building Society, the UK's sixth biggest, was agonising over whether to stay mutual or convert to plc status, it recruited strategy firm Monitor to analyse the issues. The result: a recommitment to mutuality which has involved a full-scale strategy and operational overhaul - and a strengthening relationship with Monitor which has overcome initial scepticism from some of the board.

Good consultancy can and does change companies, build teams, implant new knowledge and yield great bottom-line results. But the charge is that in too many cases it doesn't. Otherwise, why aren't more clients more successful? One reason, say critics, is that creeping dependency on consultants isn't just a management indulgence, it actually causes companies harm.

'It breaks my heart watching managers destroying their corporations with this lemming-like outsourcing of the basic job of management: thinking about the firm and worrying what it should do next,' Shapiro laments.

Like other addictions, she believes that consultancy abuse, is insidiously sapping managers' ability to reclaim responsibility even if they want to.

Ironically, part of the problem lies in the contradiction at the heart of the consultancies' own success. The more they grow, the greater the need for standard methodologies to ensure that consultants serving global clients in Sydney, San Francisco and Shanghai are all reading off the same slide pack. So the search for new ideas is tempered by the contrary need for standardisation to reap the economies of scale. The latter often wins. 'They're factories, fundamentally anti-innovative,' snaps a veteran of several big consultancies. 'There's much more mass-produced consultancy now.' The snag: if the problem the client has fits with the solution the consulting firm can offer, fine, but if not ... well, not. But even where the formula fits, if all the clients are getting a variation on the mass-produced solution, where's the competitive advantage?

'A great amount of the money spent on consultancy assignments is wasted,' one senior London consultant admits privately. Ironically given that the business is about delivering results, exactly what proportion is difficult to pin down. For a start, since no company likes to admit it failed to spot its appointed emperor was wearing no clothes, failures are rarely acknowledged. And consultants are famously reticent about their clients.

'We don't know how bad some of it is because there's a conspiracy of silence,' concludes Professor Anthony Hopwood, deputy director of the Oxford School of Management Studies. Even where failures are admitted, it's hard to establish whether the idea or the execution was at fault. Re-engineering guru Michael Hammer, for example, laments that it was companies that turned his doctrine into a synonym for downsizing and firing people, not his intention.

More subtly, in a growing number of cases it may be impossible to measure results objectively because, hypothesises Hopwood, effectiveness is not what these projects are about. Some are about reassurance, handholding and internal politics. At a time of great institutional change, much consultancy, he suggests, can be seen more as a socio-cultural than a 'task-instrumental' phenomenon.

In today's climate, it is not enough for a company in the public eye to be completing tasks, in other words, providing goods and services as it has always done. It must be seen to be doing them in the approved manner.

A company must be able to talk the walk. The privatised utilities are faced with this situation. In this context, consultancy becomes an exercise not in doing something better, but in style. 'It's like fashion,' says Hopwood. 'Old clothes do just as well at protecting you from the elements, but they don't do a lot for your credibility. Companies may feel for credibility reasons that they need to invest in the cultural language of today, so they go to the management fashion house to buy the proper style.' Hence the growth of what he calls 'designer management'.

Designer management, suggests Hopwood, is most likely to emerge where the managerial elite is poorly educated and insecure, and where new structures and boundaries (as in the formerly nationalised industries) are beginning to form - both the case in the UK. The further out into designer management, of course, the further the project will be away from problem-solving or anything measurable.

If it cannot be tested, it will be hard to buy this kind of consultancy rationally. Sure enough, like designer fashion, much consultancy is largely insensitive to price. Indeed, in the absence of measurable results, high price may be the most important legitimation of what is being bought. It is reported that, at the last moment, one

of the serious players short-listed for a major consulting project recently offered to do the work free - and was still rejected in favour of the high-price, fee-charging rival.

Costly consultancy fulfils another important unacknowledged function for its clients. It is a powerful indirect underwriting of top management's own status and responsibilities. See how vital and difficult this reorganisation is? The consultant's report cost $1 million! And if the consultant we talk to bills £3,000 a day, isn't that what we're worth too? At the limit, it's easy to see how some types of consultancy can slide from objective advice to, if not conspiracy, then at least cosy complicity with management.

As the cynical Dilbert would put it, consultants spend a lot of time finding out what management wants to hear.

If management consultancy fulfils strong self-serving and psychological as well as organisational demands on the part of company managers, satisfying them, entirely appropriately, is a brilliantly effective supply-side business system. This jewel of the businessman's art is best illustrated by McKinsey, its mystique and arrogance as envied as they are bitched about by all the others. McKinsey, still a partnership, meticulously recruits very smart, insecure graduates and infuses them with an almost religious belief in the superiority of 'The Firm'. In a Darwinian survival test, it winnows them with a ferociously competitive 'up-or-out policy' in which employees who don't gain promotion within a set time are politely required to leave.

There is, however, little stigma attached to the exodus, which ensures a steady supply of new blood for the company while planting large numbers of consultancy-friendly alumni in potential client companies. Small wonder McKinsey is reported to consult for more than half the Fortune 500.

The economic model of consulting is equally honed. It is based on high leverage. The assignment is sold by a partner and directed by a senior consultant, but most of the work is number-crunching and analysis carried out at a lower level by what some call child labour, newly-minted MBAs who, though hardly cheap, are willing to bust a gut to make the next rung on that promotion ladder.

The model is perfectly adapted to the mass-engagement, performance-improvement assignments which have dominated the industry's recent past.

It also dovetails effortlessly in the larger management fashion production line which ties together consultancy, business schools and the business press in an eye-wateringly productive chain. The Ur-model to follow was defined by Tom Peters and Robert Waterman, who found themselves transformed by the success of In Search of Excellence from standard-issue McKinseyites to consultant superstars. These days the production process starts with Harvard Business School and its fabulously successful house organ, the Harvard Business Review. So influential is the journal that a single article in its pages can set up an ambitious academic as a $1 million-a-year consultant or turn a boutique consultancy into big business.

Until now, the big consultancy firms have been wonderfully served by their business model, as the figures testify. But will it hold up as the world changes? On the customer side, long-time users claim they are growing better (read: tighter-fisted) at deploying outsiders, keeping them on a much tighter leash than in the past. Shell, for instance, says that it now insists on choosing the individuals who will work on assignments and counters the foot-in-the-door danger by limiting contracts to six months at a time. Others discipline themselves by hiring externals only for a specific task, or ensure consultants work themselves out of a job by teaching managers to take change management programmes forward themselves.

Looking at it from the inside, Richard Pascale, one of an emerging breed of independent consultant megastars (fees: $20,000 a day and up) and a keen analyst of consultancy trends, believes that the big general practices may be heading for a cliff. For some, the strategy of relying on the phenomenal growth of outsourcing and the stampede to IT and information-based consultancy may turn out to be a trap. Fast-growing outsourcing houses have been using high-end strategy consultancies as stalking horses to gain top-level entree to clients' boardrooms. Cap Sogeti bought Gemini, Computer Sciences Corporation snapped up Index, and a year ago market leader EDS took over venerable McKinsey offshoot A T Kearney. Although EDS is currently crowing over a 10-year, £1 billion co-sourcing deal with Rolls-Royce Aerospace which involves both strategy and IT consulting, Pascale believes that in the long-term these alliances will end in tears. As with building societies buying estate agencies, there is a fatal flaw. 'The relationships with clients may look the same, but they're not. Whereas good consultancy is based on trust and partnership, outsourcing is much more a case of vend-or contract, where price and conditions are a daily issue.'

More fundamentally, Pascale argues that the underlying paradigm of performance improvement which has dominated management thinking (and consultancy economics) for the last 20 years is played out. 'We've come to diminishing returns in performance improvement,' he says. In a world of complexity and competition materialising from nowhere, the new game is what he calls organisational agility: the ability to turn on a sixpence to confront new conditions, competitors and customers.

But where the sole key competency is change, the consulting emphasis switches from conventional assignments assisting what the company does to helping explore and master the attributes that define what the company wants to be. This makes a mockery of leverage. Scoffs Pascale: 'At the edge of chaos, it's no use having a bunch of MBAs to hold your hand.'

If Pascale's diagnosis is correct, it's adieu to the fundamental economic model of post-war management consultancy. Smart companies will realise that new consulting models - prototyping labs, coaching, lean consulting - enable them to learn to do themselves much of what they previously assigned to consultants. Not only can they assume these challenges, they must master the intimate transformational capabilities themselves to get their agenda accepted in their companies. 'In which case, the big-name management consultancies are in deep trouble. I think they'll implode and disappear,' says Pascale.

'The assets will walk. The top consultants will set up on their own, like Tom Peters and Michael Hammer.' For some, the end of the Alice in Wonderland world where advisers grow twice as fast as their clients has got to come anyhow. 'What are managers paid for?' queries Shapiro somewhat tartly.

'To think, to be anxious, to take on hard decisions where there's no certainty about the outcome. You can't outsource that kind of worry.'

Simon Caulkin writes in the Management page of the Observer.

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