Management consulting refers to both the industry and the practice of helping organisations to improve their performance, primarily through the analysis of existing organisational problems and development of plans for improvement. Organisations may draw upon the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants' specialised expertise.
As a result of their exposure to and relationships with numerous organisations, consulting firms are also said to be aware of industry "best practices", although the transferability of such practices from one organisation to another may be limited by the specific nature of situation under consideration.
Consultancies may also provide organisational change management assistance, development of coaching skills, technology implementation, strategy development, or operational improvement services. Management consultants often bring their own proprietary methodologies or frameworks to guide the identification of problems, and to serve as the basis for recommendations for more effective or efficient ways of performing work tasks.
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Management consulting grew with the rise of management as a unique field of study. The first management consulting firm was Arthur D. Little, founded in 1886 by the MIT professor of the same name and was incorporated in 1909.[1] Though Arthur D. Little later became a general management consultancy, it originally specialised in technical research. Booz Allen Hamilton was founded by Edwin G. Booz, a graduate of the Kellogg School of Management at Northwestern University, in 1914 as a management consultancy and the first to serve both industry and government clients.
The first wave of growth in the consulting industry was triggered by the Glass-Steagall Banking Act in the 1930s, and was driven by demand for advice on finance, strategy, and organisation.[2] From the 1950s onwards consultancies not only expanded their activities considerably in the United States but also opened offices in Europe and later in Asia and South America. After World War II, a number of new management consulting firms formed, bringing a rigorous analytical approach to the study of management and strategy. Work carried out at McKinsey, Boston Consulting Group, AT Kearney, Booz Allen Hamilton, and the Harvard Business School during the 1960s and 1970s developed the tools and approaches that would define the new field of strategic management, setting the groundwork for many consulting firms to follow. In 1983, Harvard Business School's influence on the industry continued with the founding of Monitor Group by six professors.
The industry experienced significant growth in the 1980s and 1990s, gaining considerable importance in relation to national gross domestic product. In 1980 there were only five consulting firms with more than 1,000 consultants worldwide, whereas by the 1990s there were more than thirty firms of this size.[3]
An earlier wave of growth in the early 1980s was driven by demand for strategy and organisation consultancies. The wave of growth in the 1990s was driven by both strategy and information technology advice. In the second half of the 1980s the big accounting firms entered the IT consulting segment. The then Big Eight, now Big Four, accounting firms (PricewaterhouseCoopers; KPMG; Ernst and Young; Deloitte Touche Tohmatsu) had always offered advice in addition to their traditional services, but from the late 1980s onwards these activities became increasingly important in relation to the maturing market of accounting and auditing. By the mid-1990s these firms had outgrown those service providers focusing on corporate strategy and organization. While three of the Big Four legally divided the different service lines after the Enron scandals and the ensuing breakdown of Arthur Andersen, they are now back in the consulting business.
The industry stagnated in 2001 before recovering after 2003, with a current trend towards a clearer segmentation of management consulting firms.
The functions of consulting services are commonly broken down into eight task categories.[4] Consultants can function as bridges for information and knowledge, and that external consults can provide these bridging services more economically than client firms themselves.[5]
Marvin Bower, McKinsey's long-term director, has mentioned the benefits of a consultant's externality, that they have varied experience outside the client company.[6]
Consultants have specialised on tasks that would involve high internal coordination costs for clients, such as organisation-wide changes or the implementation of information technology. In addition, because of economies of scale, their focus and experience in gathering information worldwide and across industries renders their information search less costly than for clients.
In general, various approaches to consulting can be thought of as lying somewhere along a continuum, with an 'expert' or prescriptive approach at one end, and a facilitative approach at the other. In the expert approach, the consultant takes the role of expert, and provides expert advice or assistance to the client, with, compared to the facilitative approach, less input from, and fewer collaborations with the client(s). With a facilitative approach, the consultant focuses less on specific or technical expert knowledge, and more on the process of consultation itself. Because of this focus on process, a facilitative approach is also often referred to as 'process consulting,' with Edgar Schein being considered the most well-known practitioner. The consulting firms listed above are closer toward the expert approach of this continuum.
Many consulting firms are organized in a matrix structure, where one 'axis' describes a business function or type of consulting: for example, strategy, operations, technology, executive leadership, process improvement, talent management, sales, etc. The second axis is an industry focus: for example, oil and gas, retail, automotive. Together, these form a matrix, with consultants occupying one or more 'cells' in the matrix. For example, one consultant may specialize in operations for the retail industry, and another may focus on process improvement in the downstream oil and gas industry.
Management consulting refers generally to the provision of business services, but there are numerous specialisms, such as information technology consulting, human resource consulting, virtual management consulting and others, many of which overlap, and most of which are offered by the larger diversified consultancies. So-called "boutique" consultancies, however, are smaller organisations focusing upon one, or just a few of, such specialisms.
The 1990s saw an increase in what has been termed a 'future-based' approach. This emphasised language and alignment of people within an organisation to a common vision of the future of the organisation, as set out in the book "Three Laws of Performance". The essential concept here was that the way people perform is seen to correlate to the way that world occurs for them, and that future-based language could alter the way the future actually occurs for them. These principles were increasingly employed in organisations which had experienced a market transition or a merger requiring the blending of two corporate cultures. However, towards the end of the 1990s the approach declined due to a perception that the concept outlined in this book did not in practice offer added value to organisations.
Management consulting has grown quickly, with growth rates of the industry exceeding 20% in the 1980s and 1990s. As a business service, consulting remains highly cyclical and linked to overall economic conditions. The consulting industry shrank during the 2001-2003 period, but grew steadily until the recent economic downturn in 2009. Since then the market has stabilised.
Currently, there are three main types of consulting firms. Large, diversified organizations, Medium-sized management consultancies and Boutique firms which have focused areas of consulting expertise in specific industries, functional areas, technologies, or regions of the world.
Traditionally, the consulting industry charged on a time and materials basis, billing for staff consultants based upon the hours worked plus out-of-pocket expenses such as travel costs. During the late 1990s and early 2000s, there was a shift to more results-based pricing, either with fixed bids for defined deliverables or some form of results-based pricing in which the firm would be paid a fraction of the value delivered. The current trend seems to favour a hybrid with components of fixed pricing and risk-sharing by both the consulting firm and client.
The use of management consultancy is becoming more prevalent in non-business fields including the public sector; as the need for professional and specialist support grows, other industries such as government, quasi-government and not-for-profit agencies are turning to the same managerial principles which have helped the private sector for years.
An industry structural trend which arose in the early part of the 21st century was the spin-off or separation of the consulting and accounting units of the large diversified professional advisory firms most notably Ernst & Young, PwC and KPMG. For these firms, which began operation as accounting and audit firms, management consulting was a new extension to their organisation. But after a number of highly publicised scandals over accounting practices, such as the Enron scandal, these firms began divestiture of their management consulting units, to more easily comply with the tighter regulatory scrutiny that followed. In some parts of the world this trend is now being reversed where the firms are rapidly rebuilding their management consulting arms as their corporate websites clearly demonstrate.
Added to these approaches are corporations that set up their own internal consulting groups, hiring internal management consultants either from within the corporation or from external firms employees. Many corporations have internal groups of as many as 25 to 30 full-time consultants.
Internal consulting groups are often formed around a number of practice areas, commonly including: organisational development, process management, information technology, design services, training, and development.
There are several potential benefits of internal consultants to those who employ them:
Note: Corporations need to be conscious of and consistent with how internal consultant costs are accounted for on both a project and organizational level to evaluate cost effectiveness.
A group of internal consultants can closely monitor and work with external consulting firms. This would ensure better delivery, quality, and overall operating relationships.
External firms providing consulting services have a dichotomy in priority. The health of the external firm is in aggregate more important than that of their client (though of course the health of their client can have a direct impact on their own health).
The use of management consulting in governments is widespread in many countries but can be subject to misunderstandings and resultant controversy.
In the US, Booz Allen Hamilton (now split from Booz & Company) has become particularly known now as a consultant that primarily serves the US Federal Government. Deloitte Consulting LLP, amongst others, applies its industry expertise to helping government departments and agencies solve their problems.
In the UK, the use of external management consultants within government has sometimes been contentious due to perceptions of variable value for money. From 1997 to 2006, for instance, the UK government reportedly spent £20 billion on management consultants[7], raising questions in the UK House of Commons as to the returns upon such investment[8]
The UK has also experimented with providing longer-term use of management consultancy techniques provided internally, particularly to the high-demand consultancy arenas of local government and the National Health Service; the Local Government Association's Improvement and Development Agency and the public health National Support Teams; both generated positive feedback at cost levels considered a fraction of what external commercial consultancy input would have incurred.
In India, Agriculture Finance Corporation Limited provides consultancy mainly to governments and related institutions.
Despite consistently growing revenues, management consultancy also consistently attracts a significant amount of criticism, both from clients as well as from management scholars.
Management consultants are sometimes criticised for overuse of buzzwords, reliance on and propagation of management fads, and a failure to develop plans that are executable by the client. A number of critical books about management consulting argue that the mismatch between management consulting advice and the ability of executives to actually create the change suggested results in substantial damages to existing businesses[9]. In his book "Flawed Advice and the Management Trap", Chris Argyris believes that much of the advice given today has much in it of real merit. However, a close examination shows that most advice given today contains gaps and inconsistencies that may prevent positive outcomes in the future[10].
More disreputable consulting firms are sometimes accused of delivering empty promises, despite high fees, and charged with "stating the obvious" or lacking the experience upon which to base their advice. These consultants bring few innovations, instead offering generic and "prepackaged" strategies and plans that are irrelevant to the client’s particular issue. They may fail to prioritise their responsibilities, placing their own firm’s interests before those of the clients[11].
Another concern is the promise of consulting firms to deliver on the sustainability of results. At the end of an engagement between the client and consulting firms, there is often an expectation that the consultants will audit the project results for a period of time to ensure that their efforts are sustainable. Although sustainability is promoted by some consulting firms, it is difficult to implement because of the disconnect between the client and consulting firms after the project closes.
Further criticisms include: disassembly of the business (by firing employees) in a drive to cut costs, only providing analysis reports, junior consultants charging senior rates, reselling similar reports to multiple clients as "custom work", lack of innovation, overbilling for days not worked, speed at the cost of quality, unresponsive large firms and lack of (small) client focus, lack of clarity of deliverables in contracts,[12] and secrecy[13].
There are several qualifications that can lead to becoming a management consultant; they include: