Saturday, September 10, 2011

Management Consulting: Customizing the Firm's Growth or Dividing the Industry's Future?

While industrial or business management has evolved as an exciting discipline of in-house endeavor to achieve objectives of efficiency and growth over the last two centuries, external management consulting has rapidly caught the fancy of corporations and leaders over the last few decades. The reasons for rapid growth of mainstream management consulting are related to the ability of the consulting model to attract and retain highly talented professionals, subscribe to expensive databases, synthesize best practices and evaluate multiple industry environments simultaneously. It would be impossible for corporations to create and maintain a huge knowledge infrastructure in a manner comparable to front-ranking management consulting firms could have. In a sense, management consulting has been one of the earliest outsourcing activities ever undertaken by corporations and their leaders. Companies such as McKinsey, BCG, AT Kearney, and Bain have emerged as the undisputed beacons of mainstream external management consulting, with a global footprint, over the last few decades. Several other consulting firms have also established themselves over the years, with national and/or international presence as appropriate to their profiles.

As with any successful activity, management consulting has also attracted its share (fair or unfair) share of criticism. Firstly, given the relatively short nature of consulting period (usually 3 to 6 working months) and the limited expert time (usually 3 to 4 full time consultants) that is devoted to a typical project, it is held that the consulting group has hardly the time and inclination to absorb the past of the corporation perceptively or the depth and breadth to delineate the future accurately. This limitation itself is due to the high cost of consulting, which makes even large corporations to resort to limited bursts of consulting assignments, which may actually be inadequate relative to the challenge. Secondly, some professionals believe that consulting studies essentially utilize the insights already known to the organization, and therefore the firms would be better off developing internal capabilities. Thirdly, some critics believe that consulting studies are just 'feel-good' palliative patchworks and do not provide sustainability. Possibly, there is a need to apply some consulting analysis to the managing consulting profession itself as well as how corporations and leaders resort to the consulting option.

Inverse of outsourcing

Surprisingly, corporate leaders do not view that resort to external management consulting is, in a sense, the outsourcing of their primary responsibility to make their businesses grow and practices efficient. On the other hand, many believe that openness to getting external consulting help is a contribution that breakthrough or transformative leaders make to their corporations. In fact, however, management consulting makes up for the deficiencies the leaders may have in institutionalizing conceptual and analytical strengths in their organizations, in developing appropriate knowledge base on environment, markets and competitors, in fostering creative thinking amongst their people, in synthesizing multiple leadership viewpoints to harmonized superior strategies and in spending personal time on the challenge and rigor of positive change management. At times, therefore, resort to management consulting appears to be an expedient way of delegating leadership and managerial responsibilities to a group of experts who can only have a transient involvement in an organization.

The evolution of management consulting has thus charted an inverse path relative to say information technology outsourcing, R&D outsourcing and manufacturing outsourcing. In these areas corporations have been able to achieve significantly lower costs while retaining specifications and quality at high levels and inducting newer technologies at a faster pace. Management consulting, in contrast, is perhaps the only outsourcing stream that has been far more expensive than a comparable inhouse activity. Three facts have supported this high cost outsourcing. Firstly, most management consulting assignments are undertaken at the behest of the top leadership of corporations. Secondly, management consultants are called upon to carry out certain change management activities in organizations which leaders could find difficult to carry out. Thirdly, management consultants offer a heady mix of efficiency and growth solutions. These three factors provide the management consulting firms sufficient aura to command a huge price premium.

Beyond the facades

Much of the distortion in management consulting arises from the erroneous perception that future vision and strategy as well as best practices are likely to be proprietary advantages which management consultants bring to the client corporation. The consulting firms cite the relative exclusivity of their clientele and the firewalls between the consultants as evidence of their closed source knowledge and prescription base. The facts are probably far distanced from the claim. In an era where even patented technical information is improved upon or circumvented, it is quite debatable if management analysis and prescriptions could really be proprietary to any one consulting organization or any corporation served by the consultants. In the current era of global value chains, networked relationships and analyst attention, management thought has ceased to be proprietary.

Like any other firm, a management consulting firm needs the largest clent base to maximize overhead absorption, reduce its costs (not necessarily its pricing!) and enhance profitability. It is, therefore, impossible for the consulting firms to serve only one firm in an industry and be viable. Management consulting firms often serve multiple clients in the same industry by choosing to wok with firms which are apparently not competing with each other and/or are utilizing different consultants for different clients in an industry. They also end up devloping, by design or default, different strategic or practice prescriptions for different clients. This is an unfortunate artificiality in the management consulting practice, which provides false security and unrealistic value to the consulting transaction. Several examples underscore the not so relevant nature of the 'closed service' or 'proprietary source' labeling of studies by the consulting organizations and its acceptance by the corporate clients.

Mirage of strategic differentiation

Management consulting firms claim a major value proposition in terms of strategic differentiation. In a competitive world, the ability and opportunity to script a path of strategic differentiation does not come easy. Consider a management consulting firm advising a telecommunications firm on strategy. Its degrees of freedom in advising strategic differentiation are limited to the choice of technologies (GSM. CDMA, 3G/4G etc.,), integration (processing hardware such as switches, transmission hardware such as towers and hardware, operating software such as routing and billing), and markets (local, global). Consulting firms tend to make a few differentiated (or more appropriately, dissected) strategies out of the available degrees of freedom in the name of different customized narrow line options offered to different clients whereas the ideal strategy for each client could be to follow an undifferentiated strategy of full line development.

Another example from the nutraceutical industry would offer similar insights. The client could specialize in vitamins, minerals and micro-nutrients, anti-oxidants, dietary supplements, food substitutes, functional foods and herbal or natural medicines. Unfortunately, the product bands and and user applications overlap so much in these categories that any strategic differentiation along any particular segment would only lead to narrow business focus and lack of sustainability - quite the antithesis of the idea of engaging the management consulting firm. If, on the fact of limited strategic options, the segmentation mindset forces the consulting firm to apportion the options to different clients, clearly no nutraceutical firm would have sustainability. It would probably be much better for the consulting firm to prescribe what each firm should embark upon without the worry of being seen as offering the same prescription to all the clients in an industry.

Competency-strategy fit
Potentially, consulting firms may have a better hold if they approach their engagements in terms of competency-strategy fit. That is because even if the strategic path for all companies in an industry could be the same, the ability of each individual firm to pursue the starategy could vary based on its capabilities and competencies. The consulting firm can then clearly articulate whether and how the competencies influence the strategy, and whether the costs and benefits of building or modifying the competencies dictate a need to segment the strategy. Understanding the competencies of the client is an essential starting block for any meaningful strategy study. However, given the expensive, time-titrated nature of high calibre management consulting firms, both clients and consultants tend to focus more on strategy rather than competency-strategy fit, leading to suboptimal results.

It would, therefore, stand to reason that any strategy study must have an essential component of understanding the competencies of its client. This, in turn, enjoins the companies to be candid and transparent about what they believe are their competencies. Such an approach reduces the time on needless diagnostics and focus more on firm level benchmarking and industry level comparators to add depth to competency profiling. Once competency profiles are established and competency-strategy fit is established through iterative analysis, consulting firms can provide another value-add by specifying how exactly the client can build competencies. This requires that consulting organizations must learn to work with the broader organization across the hierarchy as much as they enjoy working with the top leadership.

Execution, the true differentiator

In the domain of strategy, it often emerges that there is no right or wrong strategy and even great strategies can be rendered inconsequential through weak execution. This, unfortunately, has been one area where management consulting firms have failed to develop a value proposition and clients themselves are unwilling to allow any third party review of their execution. This is unfortunate. Management consulting firms need to develop divisions which have low overheads and high capabilities to track execution against agreed strategies. Such execution review should also come with soft advice on enhancing execution capability of a firm and making course corrections as required, providing simple but effective tools (not necessarily elaborate program management tools) which enable the firm to internalize such tools and become eventually independent in the domain of execution.

The other roadblock to execution advice relates to organizational dynamics. A firm's execution capabilities are often a function of its structure, systems and people. Organizations are touchy about management consulting firms lacking the real depth to analyze these issues, especially the people issues, as inadeuqate appreciation could lead to erroneous solutions that affect the morale and motivation of existing team members. There do exist several cases where consulting firms were unaware of the nuances of people development in different cultures and caused more grief than growth for the companies as they stirred the talent hornest of the organizations. This does not mean that consultants and companies need to baulk away from the essential need of organizational competence. Rather, it focuses on the need for management firms to create specializations that can handle organizational efficiency matters sensitively and perceptively.

Working with the CXOs

All top-rung management consulting firms believe that their studies provide the best results only when they work with the CXOs, and even preferably with only the CEOs, of their client organizations. This proposition is even more intense in emerging markets where the passion and aspiration of the founder-CEOs for growth and the intellect and inclination of top-rung consulting firms to script growth strategies make a natural and irresistible match. However, this mutual fascination leads both the CEO and the consultant to seek growth without an understanding of what the broader organization needs and challenges. in matter of fact. Many founders and CEOs would loathe to admit their own limitations and either attribute low performance of their organization to the limitations of the team members or seek highly aspirational growth for their organizations imbuing their teams with mythical competencies.

Management consulting firms which consider working with the CEOs as their right as well as privilege, therefore more often not, end up basing their studies on wrong foundations, leading to wrong prescriptions. It is imperative for the top class management consultants to actually leverage their intellectual stature with the CXOs to do a sanity check on the claims of founders, entrepreneurs and CEOs, and lead the leaders as well as their organizations on to the right base. A simple broad based independent diagnostic study by the consultants could be an ideal way to start any consulting project, regardless of the inputs provided by the leadership.
Efficiency consulting

Within the management consulting domain, efficiency consulting has emerged as an attractive and, if one may say, a fashionable consulting stream. The history of efficiency models has, however, in it that they are most succesful only when they are internally developed (example, Toyota Production System) and voluntarily absorbed by peers. That is because efficiency movements usually require enterprise efforts, and more importantly mindset changes. An efficiency movement to be sustainable needs to be owned by the enterprise team without exception and based on individual level and machine level understanding of operational flow and input-output conversion. While consulting organizations are useful for their tools, templates and change advocacy, an internal organization is essential to absorb, desseminate and execute those aids.

As one considers the efficiency paradigm, the choice between driving down costs and driving up value is often dramatized as a key strategic decision. Consulting firms and clients need to look at this aspect as less of a choice and more of an integration. The former is better focused as elimination of waste and the later as generation of greater utility to achieve the integration. The bridge for both is an innovative bend of mind that develops creative solutions. Assignments, therefore, need to be holistic, looking at costs as well as values, to deliver optimal impact for the firm. There is also at times a strategic price to pay for either extreme lean or extreme differentiation. Studies must provide for surge capabilities as well as moderating abilities, which could be leveraged depending on how the economy and market move.
Time to insource

While outsourcing of growth or efficiency studies has served, and would continue to serve, a great purpose, there is probably a need for the managing consulting firms as well as clients to see how the paradigm of consulting can be made more holistic and realistic. External management consulting is an internal leadership responsibility that is getting outsourced and, therefore, needs to reflect high level of value and sutainability. If some of the aspects mentioned herein are addressed by the consulting firms as well as clients, possibly there would be more sustainable value. To nudge towards that, firms should probably start focusing on internal capabilities and commence insourcing of some of the prevoiusly outsourced leadership mandates. This could provide the needed collaborative competition, on an intellectual plane, between sophisticated consulting organizations and growth or efficiency hungry clients.

Posted by Dr CB Rao on September 10, 2011

1 comment:

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