TOPIC: WHY DO CLIENTS USE CONSULTANTS?
In today's globally competitive environment, consultancy has become an ever present feature of restructuring and corporate change. They play a critical role in shaping our economies and creating value for both the public and private sector. However, the impression created by the consultants as successful managers of change has been distorted by negative business press generated over the past few years (Zenger, 1994). These criticisms stem from the involvement of consultants in past controversial projects and the uncertainty in evaluating their services' true success and value creation. But then, why do clients use consultants? Although this topic has been debated over for some time, but a clearer understanding can be developed by analyzing the evolution of consultancy and the benefits it brings to an organization.
What is consulting? Consulting, as the word suggests, is imparting valuable advice to businesses with a view to help them do things more effectively, efficiently and cheaply. Many distressed firms use consultancy services to restructure their organizations and pace up with competition. Consultancy is like a joint venture between the customer and the consultancy, working towards attaining a desired goal. What is management consulting? According to Greiner and Metzger (1983), Like most business decisions that management takes, consultancy should also make business sense and create value for share holders. This is best explained by Gleicher's formula, C= (ADB)>X, which analysis if the benefit of change is greater than the cost of change, hence creating value.
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? According to Greiner and Metzger (1983), Management consultancy is an advisory service provided to organizations by highly trained and qualified individuals, who help to identify and analyze management problems, in an objective and independent manner and recommend solutions to these problems when requested.
C = (ABD) > X
C = Change
A = Level of dissatisfaction with the status quo
B = Clear desired state
D = Practical first steps towards desired state
X = Cost of the Change
Be it management consultants or IT consultants, their services are acquired for managing change successfully. However, before inducing change in an organization, management needs to make a conscious effort in assessing the need for change. Attitude towards change result from a multifaceted interaction of cognitive processes and emotions. Some individuals in an organization may perceive change as an indication of growth, innovation and opportunity; however, others may associate it with instability, confusion and anxiety. Therefore, the true value generated from change should take into account variables A, B and D, which should be greater than the cost of change X, otherwise it is prudent to not adopt change or hire the services of consultants.
WHY USE CONSULTANTS?
Why would a company want to hire the services of an external consultant when expertise of employees, who know the business better, could be used internally? Drucker (1979) expressed that the profession of management consultancy is an extraordinary and a truly unique phenomenon.
Organizations use consultants because they have specific and in-depth knowledge or skills around a particular subject or issue, which are not available within their own organization. Empirical research by Gattiker and Larwood (1985) suggests that, since knowledge is already available with the consultants, the organization is able to avoid investing in extensive training and focuses on efficient knowledge transfer. These consultants add value by bringing with them concepts from other industries and sectors, with a track record of reducing risk and enhanced probability of successful change management. For instance, many engineering firms hire the services of engineering or surveying professionals because of their technical qualifications and affiliations i.e. American Council of Engineering Companies, committing them to the highest standards of ethics and quality. Sometimes organizations call upon consultants to use their expert knowledge in identifying opportunities for further measurable improvements that is beyond their own capabilities (Werr and Styhre, 2003). It is common in many organizations, where the management takes this task upon them, but is unsuccessful as they are constantly tied up in their daily management issues, which makes the change process very sluggish and ineffective. Therefore, consultants are able to achieve results quicker for their client than they doing it themselves, which creates value, saves money and allows the firm to stay ahead of the competition.
Always on Time
Marked to Standard
Consultants provide objective and independent evaluation and advice. Since consultants are external to an organization, their aim is to work in the best interest of the client. Their objective is to use their expert knowledge and skills to provide problem solution and improvements. As they do not have any history, emotional connections with the organization or any political ties, their recommendations are considered unbiased and practical. They are not selling any products and have no financial interest in the products they recommend. Although a firm may have the expertise to improve its business internally, but sometimes managers being too close to the business do not have the emotional ability to make changes, resulting in hampering the growth process. Consultants act as facilitators by taking a macro picture of the organization, which enables them to see potential for wider application, promote consistency and avoid duplication. They are able to provide custom solutions which are consistent with the organizations strategic plans and mission statement.
Managements of many organizations are using consultants as a neutral seal of approval for the decisions they make. Sometimes Consultants are brought in, to support unpopular decisions by the management as a blame transfer or insurance mechanism strategy. Sturdy (1997, p.389) stated, “Overall, the history of management consulting in recent times has been one, not of noise and plurivocality, but of silencing certain groups (e.g. employees, consumers and citizens)”. This suggests the importance of consultants as certifiers of managerial decisions and highlights their increasing role in corporate governance systems. However, consultants have been criticized for losing their objectivity in the past, which is discussed in the criticism section below.
Consultants are hired to provide temporary professional services to help organizations fill gaps where they lack critical expertise (Kubr, 1996). Consultants will probably be less costly in the long run than hiring new employees and their knowledge can be transferred to the organization for sustained results. Consultants are better at doing what they do, because they are always consulting various organizations. This idea encourages many organizations to outsource their management processes and decisions as they believe that knowledge is the source of competitive advantage. Management is a knowledge intensive activity and the under-utilization of knowledge workers can be detrimental to a firm, therefore leading to external consultants being used for incorporating the best practices of the industry. For example, many engineering firms have adopted a resource focus strategy, where they let their in house engineers focus on their core business, whether that would be designing a new bridge or constructing a tower, and simultaneously assigning other tasks to industry specialists.
Consultants are needed to keep shareholders happy. Return on Shareholders' funds is a critical measure for every public limited company. All the changes brought about in an organization are done with a view to bit up the share price and to give the shareholders greater returns in terms of dividends and share price appraisals (Coopey and Burgoyne 2000). Consultants help their clients to improve their share price and market value by actively using their expertise to boost short term profitability, better asset management, organizational restructuring and long term planning. They also install incentives for the managers to build share holder wealth. Share holders are interested in the short term profitability of an institution; therefore, the results of the consultants work should add value sooner than later. Many firms are comfortable doing business with others if they have reputable consultants on their panel. For instance, World Trade Organization (WTO) will fund those firms that have Mc Kinsey as their consultants.
Benchmarking your own organization against others in the industry has become critical to many firms competitive strategies. Consultants, who specialize in a certain industry or area, can create programs that will enhance valuation and use their analytical tool kit to assess their client's business health (Turner, 1982). Many U.S firms have been facing increased foreign competition and sluggish economic growth; as a consequence, firms need more than just a business plan. Firms such as Ford and GTE have begun to introduce benchmarking to keep them competitive in sales, manufacturing, R&D and other facets of their business.
The demand for consultants can also be based on the neo-political economy view (demand side explanation) and transactions cost economics. For instance, the demand for consultants has risen as there have been waves of deregulation and privatization, where consultants are hired to help with restructuring the organization, dealing with organizational behavioral issues and human resource management. For instance, in the US consumers have the ability to choose between alternative energy suppliers (after deregulation of the energy sector), which presents them with opportunities to save. The deregulation of the utility sector has impelled a redesign of bills and a complicated billing system. Many such firms are facing difficulty identifying and resolving billing problems, hence industry specialists such as commercial utility consultants are actively used to identify and implement solutions.
TRANSACTION COST THEORY
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Transactions Cost theory attempts to explain why management consultants exist. This theory which was initially developed by Ronald H.Coase in 1930s, deals with the real cost of allocating resources in a world of uncertainty. Transactions cost theory is concerned with why certain products and services are carried out internally while others are bought externally. A company's cost is classified in to either production costs or transaction costs, and according to Kenneth Arrow (1983), the difference between these two types of cost is that production costs can be varied by changing mode of resource allocation, whereas, transaction costs depend on the technology and tastes. According to this theory, all transactions carry a cost, which can either be an external market transaction cost or an internal bureaucratic transaction cost. A firm hires the help of external consultants when the cost of carrying out the transaction internally exceeds the cost of carrying out the transaction through the market. However, this theory further explains that since, a firms cost comprises of both the production costs and transaction costs, sometimes it is the improvement (reduction) in the production costs which outweigh the increase in transaction costs, resulting in overall lower costs. Douglass North (won the Nobel Prize in economics in 1994) was the first to highlight this notion. As depicted in the framework below, the transaction cost theory is bounded by two behavioral assumptions of bounded rationality and opportunitism. Williamson (1975, 1985) explained, that individuals act in their own self interest and their responsible behavior is only credible when supported by enforceable commitments .According to Wallis and North (1986), transactions costs have become a significant part of the US economy, which increased from 8 to 45% between 1870 and 1970, with the greatest proportion of increase in bureaucratic transaction costs.
TRANSACTION COST FRAMEWORK
Market (external) transaction costs
Bureaucratic (Internal) transaction costs
Long term deviation
R. Townsend in his book, “Up The Organization”, mentioned that management consultants are people who borrow your watch to tell you what time it is and then walk off with it. Do management consultants actually add value to an organization or is it about keeping up with the latest fashion and trends? Consultants has been involved in a number of unsuccessful and controversial assignments, where they have failed to achieve projected performance goals and utilized significant resources of their clients. Their failure at AT&T, Sears and Enron, received enormous negative press on the credibility of the profession. Consultants have been criticized for promoting dubious management fad, which act as a failure in developing plans that are executable by their client, such as business process re-engineering (Davenport, 1995). The mismatch between management consulting advice and the clients ability to actually implement the recommended changes, results in substantial damages to existing businesses.
Consultants are accused of offering generic strategies and plans to their clients (one fits all strategy) with no customization or little innovation, which is irrelevant to the clients business. Consultancy is viewed as a self-interested process, whereby the consultants gain substantially at the cost of their client's insecurity. There is concern about the sustainability of the results or changes that consultants promise. Once the engagement between the client and the consultant is over, there is a disconnect between the two parties and the progress of the changes may be difficult to monitor or asses without the consultants supervision.
According to Clarke (1995), consultancy is about managing the client's impression about the services being offered by them. By successful impression management, consultants are able to create a positive impression of the outcome of their services in the minds of their clients. The clients believe that they have purchased a high quality service which will yield greater returns. Consultants are trained to gain the trust of the clients by working on several aspects of the human behavior, which is depicted by the following equation, known as the trust equation;
If these elements of trust are carefully addressed, consultants will be able to satisfy the client, even if no significant value addition has been done.
Consultants have also been criticized for being involved in the power and politics of the clients' organization (Jackall, 1988). Whereby, their services are used to legitimize the decisions that have been taken by the senior management, support unpopular actions or even influence outsourcing choices. This jeopardizes the objectivity of the advice given by consultants (Fincham, 2002) and results in no value creation. Sometimes the consultants lose their objectivity and independence by getting too close and personal with their clients. There is popular belief amongst many firms whether consultants actually understand the politics of a company and that they might learn and leave the company, leaving behind nothing of substance to benefit from. If consulting was done internally, the knowledge would remain with in the company for further continuous value addition.
Critics have also highlighted that the work done by consultants is ambiguous in nature and difficult to evaluate. It is difficult to establish a relationship between changes in the client's performance and the consultants work (Alvesson, 1993). Quantitative evaluation of the consultants work is a complex and highly political process, where the consultants constantly emphasize on the legitimacy and positive impact of their work.
FUTURE ROLE & GROWTH
Despite the criticism, consultants play a vital role in shaping our economy and creating value for both the public and private sector. Although their role is poorly understood the consulting industry is still growing with a ratio of consultants to managers of 1:13 in 2005. According to Stinchcombe (1965), many large corporations (due to legacy systems) to date are not able to realign their management processes in order to internalize many of the outsourced function, despite the opportunities present with the information technology revolution. For instance, a fifth type of consulting that is emerging is sourcing advisory. Post recession time will see an increase in new markets, the use of contractors, prolonging existing projects and a need for cash flow management. This will prompt a need for external consultants, as many firm s that downsized their operation will be in need of expertise. Despite continuous criticism from the press and academics, management consultancy has seen an astounding growth between 10% to15% annually, during the past two decades. The business is worth 81 billion Euro in 2007, employing about 450,000 staff and holding the reputation of being top 10 graduate employers. As a business service, consulting remains highly cyclical and linked to overall economic conditions. Management consulting is becoming popular with Governments (Booz Allen Hamilton is particularly known as a consultant that services the US government) and non for profit organization as the need for professional and specialized advice grows, in an effort to remain resource efficient like the private sector. From 1997 to 2006, the British Government has spent £20 billion for management consultants, in addition to £50 billion for IT systems, primarily by the NHS. This increasing expenditure on management consulting is showing a growing need for their services. Therefore, the client-consultant relationship will continue to grow stronger and long lasting; and management consultancy will continue to be many graduating students preferred career choice.