Amity Business School

Management in Action Social Economic Ethical issues. Module 3

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Historical Background
Management consulting has a long history (e.g. Moore 1982;Kubr 1996; UNCTAD 1993). The first management consultants appeared around the turn of the 19th century and included individuals such as Frederick Taylor, Henry Gantt, Arthur D. Little, and Harrington Emerson. Little and Emerson also started two of the first institutional consulting firms.

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Between 1910 and 1940 a second generation of consultants expanded the concept of management consulting. Edwin Booz started offering "business research services" in 1914, and James O. McKinsey started McKinsey & Company in 1926. In Europe, Lyndon Urwick and Charles Bedeaux were pioneers who contributed extensively to defining management consulting in the 1920s. These consultants pioneered or implemented techniques such as budgeting processes, the divisionalized organization, merit-based compensation schemes, and forecasting techniques.

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Three major developments took place in the 1960s. First, Bruce Henderson moved from Arthur D. Little, Inc. to start the Boston Consulting Group in 1963 and more or less single handedly operationalized the concepts of strategy and strategy consulting. Out of this sprang a second generation of strategy specialists such as Bain & Company, Strategic Planning Associates, Braxton Associates, LEK Partnership, and Monitor Company.

Second, the major accounting firms started responding to the growth of management consulting and created management advisory service groups to augment their core accounting practices. Today the consulting practices of PricewaterhouseCoopers, Deloitte & Touche, and Ernst & Young often rival the accounting activities of these firms in size.
Third Also starting in the 1960s with the emergence of Cambridge Research Institute and Management Analysis Center (today, both history), firms institutionalizing the combined consulting practices of leading academics and practitioners began to make their presence known.

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Definition of consulting
According to Greiner and Metzger (1983): "management consulting is an advisory service contracted for and provided to organizations by specially trained and qualified persons who assist, in an objective and independent manner, the client organization to identify management problems, analyze such problems, recommend solutions to these problems, and help, when requested, in the implementation of solutions."

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There are a few key words in this definition

Advisory service indicates that the consultants are responsible for the quality of their advice, but they do not substitute for managers and have no formal authority. Objective and independent indicates financial, administrative, political, and emotional independence from the client (Kubr 1996). Trained and qualified shows that a consultant is more than the individual and his or her personal experience

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Further management consultants are those who provide general management advice within a strategic, organizational or operational context, and who are institutionally organized in firms.

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Why is management consultancy doing so well?

The answer can be summed up in two words: complexity and uncertainty. Complexity creates confusion; uncertainty creates fear; and both create a booming demand for outside advice. Other people's problems are our opportunities, says Lowell Bryan, a senior partner at McKinsey

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The Boom has been fuelled by some of the following: The impact of big economic changes such as globalisation and deregulation: Globalisation creates demand for advice from both Multinationals, which want to get into emerging markets, and emerging-market Companies, which want to fight off these new competitors. The new credo that org should stick to their knitting meaning they should hand over everything but their core businesses to external specialists. This has created a demand for consultancies selling advice on everything from pay systems to computers. The competition for ideas and talent: Bosses are becoming increasingly convinced that ideas are the best source of competitive advantage. Consultancies employ a high proportion of the brightest young business minds, and devote large resources to developing ideas, based on their privileged access to companies in different countries and industries.

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The fashion for re-engineering and downsizing: which persuaded bosses to bring in consultants to reengineer their core processesand take the blame for the inevitable sackings. Information Technology: Two recent developments have forced even the most stick-in-the-mud companies to think seriously about information technology to boast productivity: First, the spread of personal computers, which are dispersing computer power throughout organisations, and Second, the introduction of packaged solutions invented by companies such as SAP, Oracle, PeopleSoft and Baan. The convergence of technologies such as computers and telephones: Bain, Booz-Allen & Hamilton and Mercer Management (part of Mercer Consulting) all earn more than a quarter of their revenues from convergence, says Consultants News.

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Different Business Consultancies

Hybrid Vs Pure Consultancies

Pure consultancies focus on consulting work only eg. McKinsey, Bain and AD Little. Hybrid consultancies are those which add consulting to there existing business eg KPMG, Deloitte , IBM

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Different Business Consultancies

Niche Vs Generalist Consultancies

Generalist consultancies is one that offers many services eg. Accenture offers everything from outsourcing to system integration to strategy work. Niche consultancies are those which have specialized people to handle specific consulting assignments.

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Different Business Consultancies

Body shopping
Body shopping is when a consulting company or an employment agency sells bodies into clients to work as contractors.

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Different Business Consultancies

Internal Consultants
Large companies employ a team of Internal consultants. When there are experiencing the need for similar projects in different part of Organization, it makes financial sense to develop a team of its own rather than hire external consultants. Contractors

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Different Business Consultancies Consulting by services Offered Strategy Consulting IT Consulting Outsourcing Business Advisory services Operation Management

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Different Business Consultancies

Change Management consulting BPR Quality Improvement Lean HRM Project Management

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Student Exercise
You and Nine of your consulting colleagues have decided to leave and startup your own Management Consultancy. You will share the startup cost between the ten of you which you think you can afford. What are the main activities you will engage in as a consultancy. What will your main costs be? Estimate these costs. What will your income need to be ?

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A Potential Investor has offered to put Rs 25,00,000/- would you consider his offer if yes what percentage of the company do you believe would be a fair exchange for this money. What metrics do you use to measure your success.

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Management Consultants Roles and Tasks

Schein (1988) categorizes management consultants with respect to the role they play in their interaction with clients. He distinguishes between three models of consultation: 1) purchase of expertise; 2) doctorpatient, 3) process consultation.

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Management Consultants Roles and Tasks

The Purchase of expertise model is used by clients who require the consultant to bring their own independent perspective on the industry and the issues at hand. In its purest form, the consultant is not expected to interact extensively with the client but rather to provide his or her expertise in a hands-off relationship.

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Management Consultants Roles and Tasks

In the doctorpatient model, the consultant emphasizes his or her diagnostic capability by carefully analyzing the client organizations problems. Using the consultants often unique experience base and diagnostic skill, the consultant quickly assesses strategic and organizational blockages. This model leads to an intimate and often trust-based relationship between the consultant and the client.

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Management Consultants Roles and Tasks

The process consultation model builds on the notion that the consultant is the facilitator, while the client contributes the expertise. Thus, there is a clear division of roles and tasks. The client ultimately chooses what to do about a problem. The consultant, on the other hand, provides a methodology for defining the problem and finding the best possible solutions. The similarity to psychological analysis methods is not coincidental.

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Management Consultants Roles and Tasks

A similar segmentation is suggested by Nees and Greiner (1985), who divide strategy consultants into five categories. The "mental adventurer" analyses truly intransigent problems such as long term scenarios for country development, by applying rigorous economic methods and leveraging his or her experience base. The "strategic navigator" bases his or her contribution on a rich quantitative understanding of the market and competitive dynamics, and then recommends courses of action without too much regard of the clients own perspective.

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The "management physician" derives their recommendations from a deep understanding of the internal dynamics of the client organization, often willingly sacrificing some objectivity to gain a realistic perspective on what is achievable. The "system architect" impacts his or her clients by helping redesign processes, routines, and systems always in close cooperation with the client. Finally, the "friendly co-pilot" counsels senior managers as a facilitator rather than as an expert, and has no ambition to provide new knowledge to the client.

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Consulting Is More Than Giving Advice

A study by Turner 1. Providing information to a client. 2. Solving a clients problems. 3. Making a diagnosis, which may necessitate redefinition of the problem. 4. Making recommendations based on the diagnosis. 5. Assisting with implementation of recommended solutions. 6. Building a consensus and commitment around corrective action. 7. Facilitating client learningthat is, teaching clients how to resolve similar problems in the future. 8. Permanently improving organizational effectiveness.

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Consulting Is More Than Giving Advice

1. Providing Information Perhaps the most common reason for seeking assistance is to obtain information. Compiling it may involve attitude surveys, cost studies, feasibility studies, market surveys, or analyses of the competitive structure of an industry or business. The company may want a consultants special expertise or the more accurate, up-to-date information the firm can provide. Or the company may be unable to spare the time and resources to develop the data internally.

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Consulting Is More Than Giving Advice

2. Solving Problems Managers often give consultants difficult problems to solve. For example, a client might wish to know whether to make or buy a component, acquire or divest a line of business, or change a marketing strategy. Or how to restructure the organization to be able to adapt more readily to change; which financial policies to adopt; or what the most practical solution is for a problem in compensation, morale, efficiency, internal communication, control, management succession.

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Consulting Is More Than Giving Advice

3. Effective Diagnosis Much of management consultants value lies in their expertise as diagnosticians. Nevertheless, the process by which an accurate diagnosis is formed sometimes strains the consultantclient relationship, since managers are often fearful of uncovering difficult situations for which they might be blamed. Competent diagnosis requires more than an examination of the external environment, the technology and economics of the business, and the behavior of non managerial members of the organization.

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Consulting Is More Than Giving Advice

4. Recommending Actions The engagement characteristically concludes with a written report or oral presentation that summarizes what the consultant has learned and that recommends in some detail what the client should do.

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Consulting Is More Than Giving Advice

5. Implementing Changes
The consultant continually strives to understand which actions, if recommended, are likely to be implemented and where people are prepared to do things differently. Recommendations may be confined to those steps the consultant believes will be implemented well. Some may think such sensitivity amounts to telling a client only what he wants to hear. But if the assignments goals include building commitment, encouraging learning, and developing organizational effectiveness, there is little point in recommending actions that will not be taken.

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Consulting Is More Than Giving Advice

6. Building Consensus & Commitment To provide sound and convincing recommendations , a consultant must be persuasive and have finely tuned analytic skills. The diagnosis wont be accepted, recommendations wont be implemented, and valid data may be withheld. But more important is the ability to design and conduct a process for (1) building an agreement about what steps are necessary and (2) establishing the momentum to see these steps through.

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Consulting Is More Than Giving Advice

7. Facilitating Client Learning Management consultants like to leave behind something of lasting value. This means not only enhancing clients ability to deal with immediate issues but also helping them learn methods needed to cope with future challenges. This does not imply that effective professionals work themselves out of a job. Satisfied clients will recommend them to others and will invite them back the next time there is a need.

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Consulting Is More Than Giving Advice

8. Organizational Effectiveness Sometimes successful implementation requires not only new management concepts and techniques but also different attitudes regarding management functions and prerogatives or even changes in how the basic purpose of the organization is defined and carried out. The term organizational effectiveness is used to imply the ability to adapt future strategy and behavior to environmental change and to optimize the contribution of the organizations human resources.

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Internal Management Versus Management Outsourced

Marvin Bower (1982), the driving force behind McKinsey & Company over almost half a century, suggests six reasons why hiring external consultants makes sense in many situations: 1) they provide competence not available internally, 2) they have varied experience outside the client, 3) they have time to study the problems, 4) they are professionals, 5) they are independent, and 6) they have the ability to create action based on their recommendations.

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Internal Management Versus Management Outsourced Bruce Henderson, the force behind the Boston Consulting Group for many years, has a similar perspective (Hagedorn 1982). He argues that consultants add significant value to society (through their clients) by reducing the problem solving cycle time. But as with Bower, Hendersons implicit argument is that management consultants work together with their clients in a complicated relationship to jointly solve the problems at hand. Henderson also argues that the consultant needs to work in a specialized institutional environment which takes into account that the key resource is the body of consultants, a highly mobile resource, and that a consulting environment is characterized by instability.

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Internal Management Versus Management Outsourced Kelley (1979) makes a contrary argument to Bower and Henderson based on interviews with more than 200 internal consultants at various companies. He argues that external consultants are more expensive than internal consultants, they are not available at the right time, and they lack an understanding of the clients environment. This reduces the external consultants effectiveness. Kelley also predicts that the bulk of consulting work will be carried out by internal resources in the future and that external consultants will be used only for special problems and when there is a need to augment the internal resources.

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Transaction cost theory

Transaction cost theory, deals with the real costs of allocating resources in an imperfect world of misunderstandings, misaligned goals, and uncertainty. Transaction cost theory was initially developed in the 1930s by Ronald H. Coase, to help explain why certain activities, products, or services are carried out internally in firmswhile others are bought and sold in the market place.

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Transaction cost theory

First, a companys costs are usefully classified in two categories:
production costs. transaction costs.

Production costs are those we are most familiar with. They are all the costs that are associated directly with productive activities (Masten 1982) such as manufacturing, logistics, and product development. Transaction costs, on the other hand, are those costs associated with organizing economic activity.

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Transaction cost theory

Transaction cost vary with organizational form (Masten 1982). Kenneth Arrow (1983) put it, The distinction between transaction costs and production costs is that the former can be varied by a change in the mode of resource allocation, while the latter only depend on the technology and tastes, and would be the same in all economic systems. It has been estimated that at least 45 percent of the gross national product in a developed society is generated by transaction costs (Wallis and North 1986).

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Transaction cost theory

Ronald H. Coase (1937) created a framework for transaction costs in his pioneering work The Nature of the Firm Within this framework, all transactions carry a cost, either as an external market transaction cost or an internal bureaucratic transaction cost. He stated that there are transaction costs which determine what is done in the market, with price as the regulating mechanism, and what is done inside the firm, with bureaucracy as the regulator.

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Transaction cost theory

The most important market transaction costs are :
the cost of determining the price of a product or service the cost of negotiating and creating the contract, and the cost of information failure.

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The most important internal transaction costs are associated with the administrative cost of determining what, when, and how to produce,
the cost of resource misallocation (since planning will never be perfect), and the cost of demotivation (since motivation is lower in large organisations).

In any given industry the relative magnitude of market and internal transaction costs will determine what is done where.

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Transaction cost theory

Williamson (e.g. 1975; 1985) extended the argument by noting that two behavioural assumptions are critical. First, individuals in an organisation are boundedly rational. Second, individuals behave opportunistically. This means that they will act in self-interest with guile. This, in the words of Herbert Simon (1976) means that human behavior is intendedly rational, but only limited so. This limitation makes it impossible to structure perfect contracts and any contract will be incomplete even if all information is available.

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Transaction cost theory

Williamson (1975) demonstrated that three factors play a fundamental role in determining if market or bureaucratic transactions are optimal. The factors are Asset specificity, Uncertainty, and frequency of transactions.

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Asset specificity
Under conditions of high asset specificity market transactions also become expensive. By asset specificity is meant physical assets, human assets, site, or dedicated assets which have a specific usage and cannot easily be transferred to another use. Under this condition, opportunistic behaviour can be expected if the asset is part of a market transaction.

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Uncertainty
High uncertainty such as business cycle volatility or technological uncertainty will lead to more bureaucratic transactions since it will be difficult, and prohibitively expensive, to create contracts which cover all possible outcomes. Thus, with higher uncertainty firms tend to internalize activities.

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Frequency of transactions
If the transactions are frequent there is once again a tendency to manage the transaction through bureaucracy since the repetitive contracting cost will be higher than the bureaucratic cost.

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