3b72bmanagement in Action Consulting

7/28/2019 3b72bmanagement in Action Consulting

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Amity Business School

Management in Action Social

Economic Ethical issues.Module 3


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Historical BackgroundManagement consulting has a long history (e.g.

Moore 1982;Kubr 1996; UNCTAD 1993).

The first management consultants appearedaround 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 ofconsultants expanded the concept ofmanagement consulting.

Edwin Booz started offering "business researchservices" in 1914, and James O. McKinsey

started McKinsey & Company in 1926. In Europe, Lyndon Urwick and Charles Bedeaux

were pioneers who contributed extensively todefining management consulting in the 1920s.

These consultants pioneered or implementedtechniques such as budgeting processes, thedivisionalized organization, merit-basedcompensation schemes, and forecastingtechniques.


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Three major developments took place in the 1960s.

First, Bruce Henderson moved from Arthur D. Little, Inc. to start theBoston Consulting Group in 1963 and more or less single handedlyoperationalized the concepts of strategy and strategy consulting.Out of this sprang a second generation of strategy specialists suchas Bain & Company, Strategic Planning Associates, Braxton

Associates, LEK Partnership, and Monitor Company.

Second, the major accounting firms started responding to the growthof management consulting and created management advisoryservice groups to augment their core accounting practices. Todaythe 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 CambridgeResearch Institute and Management Analysis Center (today, bothhistory), firms institutionalizing the combined consulting practices ofleading 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 byspecially trained and qualified persons who

assist, in an objective and independent manner,

the client organization to identify management

problems, analyze such problems, recommendsolutions 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 consultantsare responsible for the quality of their advice, but

they do not substitute for managers and have noformal authority.

Objective and independent indicates financial,administrative, political, and emotional

independence from the client (Kubr 1996). Trained and qualifiedshows that a consultant is

more than the individual and his or her personalexperience


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Further management consultants are those

who provide general management advice

within a strategic, organizational or

operational context, and who areinstitutionally 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 createsdemand for advice from both Multinationals, which want toget into emerging markets, and emerging-marketCompanies, which want to fight off these new competitors.

The new credo that org should stick to theirknittingmeaning they should hand over everything but their corebusinesses to external specialists. This has created ademand for consultancies selling advice on everythingfrom pay systems to computers.

The competition for ideas and talent: Bosses arebecoming increasingly convinced that ideas are the bestsource of competitive advantage. Consultancies employ ahigh proportion of the brightest young business minds, anddevote large resources to developing ideas, based on their

privileged access to companies in different countries andindustries.


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The fashion for re-engineering and downsizing:

which persuaded bosses to bring in consultants to re-engineer theircoreprocessesand take the blame forthe inevitable sackings.

Information Technology: Two recent developmentshave forced even the most stick-in-the-mud companies

to think seriously about information technology to boastproductivity: First, the spread of personal computers,which are dispersing computer power throughoutorganisations, and Second, the introduction ofpackaged solutions invented by companies such asSAP, Oracle, PeopleSoft and Baan.

The convergence of technologies such as computersand telephones: Bain, Booz-Allen & Hamilton andMercer Management (part of Mercer Consulting) all earnmore than a quarter of their revenues fromconvergence, says Consultants News.


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Different Business Consultancies

Hybrid Vs Pure Consultancies

Pure consultancies focus on consulting workonly 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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Niche Vs Generalist Consultancies

Generalist consultancies is one that offers manyservices eg. Accenture offers everything from

outsourcing to system integration to strategy work.

Niche consultancies are those which have

specialized people to handle specific consultingassignments.


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Body shopping

Body shopping is when a consulting company or anemployment agency sells bodies into clients to work

as contractors.


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Internal Consultants

Large companies employ a team of Internalconsultants. 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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Consulting by services Offered

Strategy Consulting

IT Consulting

Outsourcing Business Advisory services

Operation Management


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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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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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In the doctorpatient model, the consultant emphasizeshis or her diagnostic capability by carefully analyzing theclient organizations problems.

Using the consultants often unique experience base anddiagnostic skill, the consultant quickly assesses strategicand organizational blockages.

This model leads to an intimate and often trust-basedrelationship between the consultant and the client.


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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 todo 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 psychologicalanalysis methods is not coincidental.


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A similar segmentation is suggested by Nees and Greiner(1985), who divide strategy consultants into fivecategories.

The "mental adventurer" analyses truly intransigentproblems such as long term scenarios for countrydevelopment, by applying rigorous economic methodsand leveraging his or her experience base.

The "strategic navigator" bases his or her contribution

on a rich quantitative understanding of the market andcompetitive dynamics, and then recommends courses ofaction without too much regard of the clients ownperspective.


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The "management physician" derives theirrecommendations from a deep understanding of theinternal dynamics of the client organization, oftenwillingly 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 systemsalways in close cooperation with the client.

Finally, the "friendly co-pilot" counsels senior

managers as a facilitator rather than as an expert, andhas no ambition to provide new knowledge to the client.


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Consulting Is More Than Giving AdviceA 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 recommendedsolutions.

6. Building a consensus and commitment around correctiveaction.

7. Facilitating client learningthat is, teaching clients howto 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 assistanceis to obtain information.

Compiling it may involve attitude surveys, cost studies,feasibility studies, market surveys, or analyses of thecompetitive structure of an industry or business.

The company may want a consultants special expertiseor 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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2. Solving Problems

Managers often give consultants difficult problems to solve.

For example,

a client might wish to know whether to make or buy acomponent,

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 incompensation, morale, efficiency, internalcommunication, control, management succession.


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3. Effective Diagnosis

Much of management consultants value lies in theirexpertise as diagnosticians.

Nevertheless, the process by which an accuratediagnosis is formed sometimes strains the consultant-client relationship, since managers are often fearful ofuncovering difficult situations for which they might beblamed.

Competent diagnosis requires more than an examinationof the external environment, the technology andeconomics of the business, and the behavior of nonmanagerial members of the organization.


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4. Recommending Actions

The engagement characteristically

concludes with a written report or oralpresentation that summarizes what the

consultant has learned and that

recommends in some detail what the clientshould do.


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Consulting Is More Than Giving Advice5. Implementing Changes

The consultant continually strives to understand whichactions, 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 maythink such sensitivity amounts to telling a client only whathe wants to hear.

But if the assignments goals include buildingcommitment, encouraging learning, and developingorganizational effectiveness, there is little point inrecommending actions that will not be taken.


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6. Building Consensus & Commitment

To provide sound and convincing recommendations , aconsultant 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 aprocess for

(1) building an agreement about what steps arenecessary and

(2) establishing the momentum to see these stepsthrough.


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7. Facilitating Client Learning

Management consultants like to leave behindsomething of lasting value.

This means not only enhancing clients ability todeal with immediate issues but also helpingthem learn methods needed to cope with futurechallenges.

This does not imply that effective professionalswork themselves out of a job. Satisfied clientswill recommend them to others and will invitethem back the next time there is a need.


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8. Organizational Effectiveness

Sometimes successful implementation requiresnot only new management concepts and

techniques but also different attitudes regardingmanagement functions and prerogatives or evenchanges in how the basic purpose of theorganization is defined and carried out.

The term organizational effectiveness is used toimply the ability to adapt future strategy andbehavior to environmental change and tooptimize the contribution of the organizationshuman resources.


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Marvin Bower (1982), the driving force behindMcKinsey & Company over almost half a century,suggests six reasons why hiring external consultantsmakes 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, and6) they have the ability to create action based on their

recommendations.

Internal Management Versus Management Outsourced


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Bruce Henderson, the force behind the BostonConsulting Group for many years, has a similarperspective (Hagedorn 1982).

He argues that consultants add significant value tosociety (through their clients) by reducing the problemsolving cycle time.

But as with Bower, Hendersons implicit argument is thatmanagement consultants work together with their clientsin a complicated relationship to jointly solve the problemsat hand.

Henderson also argues that the consultant needs towork in a specialized institutional environment whichtakes into account that the key resource is the body ofconsultants, a highly mobile resource, and that aconsulting environment is characterized by instability.



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Kelley (1979) makes a contrary argument to Bower andHenderson based on interviews with more than 200internal 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 willbe carried out by internal resources in the future and thatexternal consultants will be used only for specialproblems and when there is a need to augment theinternal resources.



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Transaction cost theory Transaction cost theory, deals with the real costs

of allocating resources in an imperfect world ofmisunderstandings, misaligned goals, anduncertainty.

Transaction cost theory was initially developedin the 1930s by Ronald H. Coase, to helpexplain why certain activities, products, orservices are carried out internally in firmswhileothers are bought and sold in the market place.


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First, a companys costs are usefully classified in twocategories: production costs.

transaction costs.

Production costs are those we are most familiar with.They are all the costs that are associated directly withproductive activities (Masten 1982) such asmanufacturing, logistics, and product development.

Transaction costs, on the other hand, are those costsassociated with organizing economic activity.

Transaction cost theory


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Transaction cost vary with organizational form(Masten 1982).

Kenneth Arrow (1983) put it, The distinctionbetween transaction costs and production costs isthat the former can be varied by a change in themode of resource allocation, while the latter onlydepend on the technology and tastes, and wouldbe the same in all economic systems.

It has been estimated that at least 45 percent ofthe gross national product in a developed society isgenerated by transaction costs (Wallis and North1986).



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Ronald H. Coase (1937) created a frameworkfor transaction costs in his pioneering work TheNature of the Firm

Within this framework, all transactions carry acost, either as an external market transactioncost or an internal bureaucratic transaction cost.

He stated that there are transaction costs whichdetermine what is done in the market, with priceas the regulating mechanism, and what is doneinside the firm, with bureaucracy as theregulator.



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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 willnever be perfect),

and the cost of demotivation (since motivation is

lower in large organisations).

In any given industry the relative magnitude ofmarket and internal transaction costs will

determine what is done where.


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Williamson (e.g. 1975; 1985) extended theargument by noting that two behaviouralassumptions are critical.

First, individuals in an organisation are boundedlyrational.

Second, individuals behave opportunistically. Thismeans that they will act in self-interest with guile.

This, in the words of Herbert Simon (1976) means

that human behavior is intendedlyrational, but onlylimited so. This limitation makes it impossible tostructure perfect contracts and any contract will beincomplete even if all information is available.



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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 whichhave 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 markettransaction.


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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 prohibitivelyexpensive, to create contracts which cover

all possible outcomes.

Thus, with higher uncertainty firms tend tointernalize 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 therepetitive contracting cost will be higher

than the bureaucratic cost.


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3b72bmanagement in Action Consulting