UK: HELLER ON MANAGEMENT - THE DUBIOUS ECONOMICS OF SCALE. - The world's largest companies have been spending record sums on consultancy. Robert Heller weighs the relative merits of re-engineering and demerger and asks: is largeness a liability?

Last Updated: 31 Aug 2010

The world's largest companies have been spending record sums on consultancy. Robert Heller weighs the relative merits of re-engineering and demerger and asks: is largeness a liability?

The fashionable tide turned against large companies long ago. Yet fashion doesn't always reflect reality. While employment by major corporations is falling, not least among middle management, they still provide the bulk of job opportunities. Managers are understandably less loyal to great employers, and job-hop more: but the hops are most likely to be from one ample lap to another. And in several industries, the laps are becoming still more ample.

the large companies, too, that internal and external consultants have been busily instilling the precepts and practices of the New Management. One giant alone, AT and T, created some kind of record in 1993: $347.1 million on 'consulting and research' services, mostly contributing to a massive drive to re-engineer the phone company's culture and business systems.

The brand-leader in re-engineering, CSC Index, has grown nearly fivefold in three years to fees of $470 million, of which $7million came from AT and T's trough. From change management to cost-reduction, leadership to information systems, total quality to purchasing, large companies are spending and striving more than ever before to meet the competitive challenges which revised strategies - another booming consultancy field - have in their sights.

It is inconceivable that all this effort has been vain. However long it has taken, Detroit's car manufacturers are now broadly competitive with Japanese costs and quality. Other multinationals whose backs were to the wall (Cummins Engine, say, or Caterpillar Tractor) have come out fighting effectively and on reasonably equal terms. Even the symbol of corpocratic degeneration, IBM, is now turning over a profit. The experiences of its crucial PC business, though, underline continuing doubts over the viability of scale.

This year, when IBM could least afford to falter in face of Compaq's challenge, it has dropped to fourth place in the US market. The new PC leader, Rick Thoman, pulled no punches in telling the Financial Times about his predecessors' sins. Hailed for the success of its new-found independence, the unit was 'bogged down in bureaucracy ... To fill a typical corporate order, 13 managers had to sign off on various decisions.' The product array (70 models in some 400 configurations) was 'unmanageable' and produced from an uneconomic dozen sites (now being cut to four). Even if costs and response times are reduced to competitive levels, IBM has to market new machines using the PowerPC microprocessor 'that already seem doomed to sell poorly'. That is partly because of IBM's own commitment to Intel-based computers, but also because Apple has stolen a mighty jump on its PowerPC partner, selling its new line with uninhibited success for most of the year. Thoman can't opt out, however, because his boss, Lou Gerstner, has committed IBM's entire technological strategy to the new chip.

panies, in the US or Europe, whose top managers can swear, hands on hearts, that all their businesses are wholly immune from any of the Fateful Four? And what proportion suffer significantly from all four?

Whenever consultants come in, a similar picture is probably unveiled. The Sunday Telegraph, for instance, reports how Zeneca's speciality chemicals business used the Kalchas consultancy to discover the performance benchmarks and best practices of its competitors. Retiring chief executive the consultants' advice, the unit doubled its contribution to £50 million last year - but how and why did the 2X arise in the first place?

On one theory, the separation achieved by Zeneca a year ago will help to remove such blots from the escutcheon by increasing the visibility of businesses no longer hidden in the hulk of ICI. If that argument holds, largeness remains a liability, and the splitting-up adopted by ICI (but eschewed by Gerstner at IBM) is a better solution than re-engineering, leadership training, TQM, etc - or trying them all at once.

In fact, while the proverbial half of mergers still seem to misfire, demergers (Courtaulds, Racal and AT and T itself) have an impressive record of relative success. They look a better deal than the ill-directed 'downsizing' which has reduced costs at the expense of economic vitality. That's one worry expressed by Bennett Harrison, whose book, Lean and Mean, concludes that 'power, finance, distribution and control remain concentrated among the big firms'. That power can still corrupt.

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