Management consulting: To the brainy, the spoils

ELITE management consultancies shun the spotlight. They hardly advertise: everyone who might hire them already knows their names. The Manhattan office that houses McKinsey & Company does not trumpet the fact in its lobby. At Bain & Company’s recent partner meeting at a Maryland hotel, signs and name-tags carried a discreet logo, but no mention of Bain. The Boston Consulting Group (BCG), which announced growing revenues in a quiet press release in April, counts as the braggart of the bunch.

Consultants have a lot to smile about (see table). The leading three strategy consultancies have seen years of double-digit growth despite global economic gloom. In 2011, the last year for which Kennedy Information, a consulting-research group, has comparable revenue numbers, Bain grew by 17.3%, BCG by 14.5% and McKinsey by 12.4%. All three are opening new offices.

Big trends that befuddle clients mean big money for clever consultants. Barack Obama’s gazillion-page health reform has boosted health-care consulting; firms would rather pay up than read the blasted thing. The Dodd-Frank financial reform has done the same for financial-sector work. Energy and technology are hot, too.

Companies are reluctant to talk about their use of consultants, and consultancies are relentlessly tight-lipped. Bain is said to use code-names for clients even in internal discussions. Such secrecy makes this a hard industry to analyse.

It also lets stereotypes flourish. McKinseyites are said to be “vainies” (who come and lecture clients on the McKinsey way). BCG people are “brainies” (who spout academic theory). And the “Bainies” have a reputation for throwing bodies at delivering quick bottom-line results for clients.

In fact, the big three all learn from each other. All three now use their alumni networks to gather intelligence and generate business—something McKinsey is famous for. All three stake some of their fees on the success of their projects, a practice once associated with Bain. And all three show off their big ideas to the wider public, as BCG’s founder was once among the few to do.

Consulting is no licence to make easy money. Cynics sneer that clients spend millions on consultants only to give the boss an excuse to do what he planned to do anyway. But that would be implausibly wasteful in these days of tight budgets. Consultants today cannot just deliver a slideshow and pocket fat fees. Even the elite three now make most of their revenue from implementing ideas, from finding ways to improve clients’ internal processes and from other tasks not traditionally considered “strategy consulting”.

As the elite firms move down into implementation and operations, they are meeting big new rivals hoping to move up into the loftier realms of strategy. Over the weekend of May 4th-5th partners at Roland Berger, a mid-tier consultancy, met to discuss a possible buyer for their firm. The most likely candidates are thought to be PwC, Deloitte and Ernst & Young, three of the “Big Four” accounting firms (the other is KPMG).

The big accountancy firms now do more consulting than McKinsey, BCG and Bain. Much of this involves manpower-intensive tasks such as technology integration. But their strategy and operations practices are ambitious, too. In January Deloitte bought Monitor, a brainy strategy firm, out of bankruptcy. In 2011 PwC bought PTRM, a respected operations consultancy. All four have scooped up smaller firms too. A successful Big Four bid for Roland Berger would reopen an old question: can the Big Four crack the elite tier?

It is too early to know whether the brainboxes of Monitor will fit comfortably into the Deloitte juggernaut. When EDS, a computer-equipment and services provider, bought A.T. Kearney, a midsized strategy firm, cultures clashed calamitously. A.T. Kearney bought itself free in 2006.

Nonetheless, Mike Canning, the head of Deloitte’s strategy consulting in America, says the Monitor integration is going smoothly, and that clients are showing new interest in Deloitte. Is Deloitte competing with McKinsey, Bain and BCG for work? “Day in, day out, on a regular basis,” says Mr Canning. Dana McIlwain of PwC echoes that: “We are definitely competing today, and only more so in the future.”

Bob Bechek, Bain’s boss, puts it differently: competition with the Big Four is up “very slightly in the past few years, but I mean like a couple of percentage points”. He salutes the Big Four: they do what they do well and profitably. But he argues that the heavy-lift, repeatable work at which they excel is a different kind of business. Strategy consultants concoct novel solutions to unique problems, which is hard.

Rich Lesser, BCG’s boss, acknowledges the challenge from the Big Four, but is confident. Having new rivals is nothing new, he says. Tom Rodenhauser of Kennedy Information reckons that the Big Four “are cracking the C-suite, but they’re not first on the speed-dial for strategy work”.

The elite firms are keen not to seem complacent. While boasting about opening offices in Bogotá or Addis Ababa they acknowledge that emerging-world bosses are not blown away by flashy names. The consultants aim to win trust with quick projects that show bottom-line results, before looking to book longer engagements.

Clients in the rich world are changing, too. Fifteen years ago Indra Nooyi, then the head of strategy (now the boss) at PepsiCo, was a demanding client for consultants, having been one herself at BCG. She was a rarity at the time. No longer: the consultancies have seen many of their alumni go on to fill senior positions at big companies.

Some, such as McKinsey, make it easy for big firms to poach their people, by putting potential employers directly in touch with consultants who tick the right boxes for a vacancy. The idea is that this outplacement service makes McKinsey a more attractive place to work. It also keeps the talent churning, constantly refreshing the firm’s intellectual capital.

Clients are increasingly demanding specific expertise, not just raw brainpower. McKinsey and BCG, in particular, are hiring more scientists, doctors and mid-career industry types, and reducing the proportion of new MBAs in their ranks.

Vainie: “Vidi, vici”

The firms spend big sums on “thought leadership”: ie, papers, books and conferences. This is not all airy-fairy theory. McKinsey has invested heavily in proprietary data. Its boss, Dominic Barton, says: “With the push of a button we can identify the top 50 cities in the world where diapers will likely be sold over the next ten years.” The firm invests $400m a year on “knowledge development”, and Mr Barton touts its “university-like capabilities” to impart it to its consultants.

It is fashionable to complain that consultants “steal your watch and then tell you the time”, as one book put it. But customers clearly value what the consultants offer. Otherwise, the elite three and the Big Four would not be growing so fast.

Things are harder for the next tier, however. Old firms such as A.T. Kearney and Booz & Company (which considered but abandoned the idea of a merger in 2010) are seen by some potential clients as too small to bestride the globe but too big to be nimble. They will watch Roland Berger’s fate with interest.

Source: http://www.economist.com/news/business/21577376-world-grows-more-confusing-demand-clever-consultants-booming-brainy

Ways to profit from ‘new normal’

As they pore over volatile economic forecasts for the years ahead, consulting firms, along with their clients, are seeking an answer to the crucial question: Is there money in the “new normal” and, if so, how and where can it be made?

The answer to the first part of the question is a straight “yes”.

The recession brought on by the acute financial crisis of 2008 also ushered in one of the toughest years in the sector’s history, as clients – particularly in developed countries – reached for the scissors, to shorten consultants’ mandates, trim costs, or cut or defer contracts.



In the UK, for example, 2009 was the first year in which the consulting sector’s revenues shrank.

But 2010 marked a comeback, precisely in some of the sectors – notably banking and financial services – that had pulled in their horns in the depths of the crisis.

Most of the top 10 global consulting practices showed strong growth in revenues in 2009-10, with PwC, KPMG and McKinsey up 9 or 10 per cent, as shown by figures from Kennedy Consulting Research & Advisory, a US-based industry analysis group.

At the same time, the crisis naturally forced changes on the multinational consultancies. They are seeking more revenue from fast-growing economies in Asia, Latin America and elsewhere; refocusing their work on the private sector in countries where government work has become scarcer; and improving the services provided.

What is clear is that there is no scope for complacency and whether consultants prosper or merely tread water will depend on how successfully they answer the second part of the opening question.

As recently as June this year, some consultants were hailing a “post-crisis environment”. But as the implications of confusion in the eurozone have spread beyond European borders, it has become clear this was a premature judgment.

Meanwhile, external regulation is back on the agenda, thanks to surprisingly radical proposals from Michel Barnier, European internal market commissioner, to ban big audit firms from offering consultancy services.

The official line from many consultants is that clients are again planning for expansion.

Customers are investing and planning for growth “for the first time since 2008 ... even within the context of uncertainty created by the eurozone crisis”, comments Andrew Hooke, chief operating officer of PA Consulting.

But the type of mandate available has permanently altered. Paul Gronwall, a senior analyst at Kennedy, says that among consultants and their customers “there is a growing expectation that economic cycles are shortening: the ups and downs are going to happen much quicker, so nobody’s going to put in place a five-year plan, because they’re lucky if they can see a year or two [ahead]”.

Alan Leaman, chief executive of the UK’s Management Consultancies Association, draws a comparison between the survey of its members in June 2010, when, despite the grim period they had just endured, they were bright about the future, and the association’s most recent study of firms.

“Now,” he says, “the numbers for the first half of 2011 look better than expected, but [members] are feeling a lot more nervous about the next six months.”

The uncertainty means the upsurge in demand for advice about how best to cut costs is unlikely to recede.

According to a recent survey of UK and global buyers of consultancy services, by Sourceforconsulting.com, nearly 40 per cent expect to spend more on advice about improving their operational efficiency over the next six months.

However, the efficiency drive may be combined with an uptick in demand for strategy advice. Raju Patel of Fulcrium, a specialist consultancy, acknowledging, that, in the medium-term, pure strategy is “a shrinking market”, says that “companies that have labelled themselves as strategy organisations have renewed or remodelled themselves and taken on market sectors they would not previously have considered”.

But it is usually at economic inflection-points that corporate customers look for strategy advice, often to validate tough decisions they may have to make anyway.

The difference in this cycle, industry observers and insiders agree, is that many companies now insist wise strategic counsel must come firmly attached to practical advice about how to implement it.

Here, the bigger consultancies, which can offer multiple consulting lines, may seem to have an edge, but as client demands become more complex, some believe the one-stop-shop firms will increasingly find themselves in partnership with specialists.

One area where change is slower coming, however, is the way in which consultancies are able to bill for their services. In spite of many firms’ desire to use a value-based fee approach (where firms are paid on the basis of the value created), clients are reluctant to move from more traditional billing models.

Consultants say defining what “value” looks like is one obstacle. Even if the trend towards value-based billing accelerates, only a few firms are big enough to put “skin in the game”, in the words of one, and take the risk of failing to pick up a fee at all.

Looking ahead, consultants expect 2011-12 to see continued strength in demand from sectors that rebounded from the depths of 2008, particularly those areas, such as financial services or healthcare, where a strong or changing regulatory framework drives business.

Sander van’t Noordende, group chief executive of Accenture’s management consulting business, picks out technology and emerging markets as the two biggest drivers of demand.

Companies are now grappling with how to apply new technologies in the front office, as well as the back, he says, and asking consultants how best to do it.

In markets such as China, India or Brazil, demand is increasingly “multidirectional”, coming from local companies seeking to expand abroad, rather than just multinationals seeking a foothold in a fast-growing region.

The consultancy offering itself goes both ways. Accenture has 70,000 employees in India – its largest country – but at the same time, according to Paul Friga, professor at the University of North Carolina’s Kenan-Flagler Business School, India-based consultancy firms such as Tata, Infosys or Wipro are “making strong moves into the US, leveraging a new model of global client assistance”.

As for Mr Barnier’s commission proposals, unveiled in September, their radical nature came as a shock. If pursued, they may offer opportunities for consultants outside the big four [PwC, KPMG, Ernst & Young and Deloitte] to poach staff. But they may also liberate some of the big audit firms to hunt for customers they are currently unable to approach.

Overall, the proposals may not change the competitive shape of European consulting much. “With audit, or without audit, these [big four] would be extremely powerful and high-quality consulting firms,” comments the MCA’s Mr Leaman.

The bigger threat in Europe comes from the continuing macroeconomic crisis.

If there is doom and gloom in the industry, it is, according to insiders, nothing like the sentiment just before the Lehman Brothers collapse in 2008.

Consulting firms are clearly now on the front foot. But then, as one consultant points out, “it was four months after Lehman that things got really difficult”.

Source: http://www.ft.com/intl/cms/s/0/e5ed3afe-086c-11e1-9fe8-00144feabdc0.html#axzz1et2QkiaZ