Lesson
Number 2
 

Fads & Fashions of Management Consultants

Julius Lengert

 

"In the 1990s, McKinsey advised us to specialize. Now they say we should diversify again!" said an annoyed Martin Kohlhausen, Chair of the Supervisory Board, Commerzbank. He was reacting to the reproach from Frank Matter, head of McKinsey Germany, who had criticized the business models of German banks. That Kohlhausen should express this opinion is unusual. In Germany, after five years most CEOs have already departed or have forgotten the previous advice of hired consultants. After all, the expiry date for such consulting recommendations (and periodical change of direction) is five to ten years. Bearing this in mind, is it far-fetched to suggest that the business models of management consultants may even depend upon the forgetfulness of clients? If in doubt, study the 30-year history of (American) Top-management consulting in Germany. And for suitable historical case studies you need look no further than Siemens, Daimler, Veba/EON and the entire banking sector. Literature on the topic is also available.(1)
The beginnings of management consulting can be traced to strategic planning. To summarize, this is all about segmentation, economies of scale/experience curves, portfolio differentiation as well as diversification and specialising on core competences. A further aspect is cost management and cost-benefit analysis. The 1990s saw the advent of so-called world class projects, in which consultancies began to provide 'complete enhancement projects' for their clients: whereby outsourcing was a popular ingredient. At some point, innovation and technology were added to the package. While McKinsey tended to focus on costs and (cost) benchmarking, Boston Consulting (BCG) focused on time-based management (TBM); the latter was soon replaced by a more financial-oriented (cash-flow) management approach. The Stern Stewart consulting firm introduced EVA (economic value added) to Siemens, after which strategy consultants forcefully promoted the idea of shareholder value.

What can we learn from this short history?

Firstly: Consulting concepts come and go, like fashion trends
These concepts are mostly standardized, yet they appear to vary. Management concepts – mostly products of the US academic world or as used by American competitors – are imported and piloted at a sympathetic client in Europe and then systematically applied to other organizations in the same sector, but without taking adequate account of specifics of the individual businesses. A proper holistic assessment of the workforce is generally omitted, since employees are just another resource to be 'managed'. Once key target clients in a sector have been acquired, a new wave of consulting is started in a different sector. But this gives rise to a new question: what about confidentiality and the effectiveness of the so-called "Chinese Walls in the Practice Groups"? After all, consultants acquire their practical knowledge from clients: a knowledge base which grows with each project, to the sole benefit of the consultant. But is strict confidentiality really compatible with the widest possible selling/marketing of acquired systematic knowledge? Surely the big bonuses earned at most management consultancies by partners also depends upon progressive market penetration using that system? No wonder then, that businesses in a particular sector all seem to adopt the same business strategies, as if they were all surfing on the same wave: but maybe they are. Perhaps clients should be more skeptical about the confidentiality and integrity of their business data, their life-blood, instead of gladly handing it over to outsiders.

Secondly: The real needs of clients are not so important
The preferred clients of management consultants are ambitious young managerists, who use new management concepts in order to be noticed and to show what 'impact' they can have on organizations: these managerists are dedicated followers of management trends. They adopt changing trends to facilitate their career, which also neatly ensures the continuity of income for consultants. These first-time users, some also coincidentally alumni of management consultancies, are their most loyal customers. They managerists are also highly praised by uncritical business journalists as open-minded managers, management innovators, and even as human benchmarks of global management. Transforming such consulting concepts, expertly packaged, into an attractive product – best of all as a three-letter brand – with super graphics in PowerPoint and clearly calculated in Excel, is a routine consulting task. It is now also common practice to deliver to managers an unsolicited study, which includes an overwhelming collection of data from other companies and competitors, to prove without doubt that the latest consulting concept is perfectly tailored to deal with a prospective client’s awkward business situation. After all, the point is to sell the concept, not solve a problem. So is this merely a form of demand-creation at top management level? Well, sometimes even the most progressive managers have to be told what they need. The potential problem of negative acceptance by prospective clients is insignificant. Managerists are usually quick to see the advantages for themselves in consulting concepts.

Thirdly: Most consulting methods are standardized and mechanistic
A standard and mechanistic approach is obligatory for management consultants, also because then mainly apprentices (associates) can be deployed. This way management consultancies can ensure that their projects are highly profitable, at least for themselves. As a consequence, they devise consulting concepts which are usually modular and above-all low-cost. These projects are presented to suggest an analytical depth and strict logicality. Top-management clients appreciate this style of presentation, as it conveys utmost professionalism, which in turn helps them to dupe their own teams. Lower levels of management are then handed the thankless task of implementing the schemes: the actual implementation of the schemes is usually only briefly mentioned. In fact, there is hardly ever a check on whether the ideas can actually be implemented, the same is true for reviews to see whether the promised results are actually achieved. One can only wonder why

What lessons can we learn from this?

Management consultants are usually generalists, who are asked by managers to solve problems they cannot handle themselves. The excuse that managers make to supervisory bodies is that outside management help is essential. This avoids the question of why the present operational managers cannot cope. If an external consultant is hired – for whatever reason – this means enormous additional costs. After all, consultant fees are excessive (around €1,000,000 per consultant year plus ancillary expenditure). The whole complex of how to implement these new ideas is something that consultants are glad to ignore: if implementation does not work, then blame underperforming in-house managers or some unpredictable in-house opposition. The consultants will be fine; they are always paid in advance.
A lot of management concepts sold by consultants fail to address the real problems faced by clients, they create angst in the workforce and obstruct collective learning across the organization. And the cost-benefits? Are these consultants really worth anywhere near what they really cost?(2)

 

One final question still remains to be answered:

Why do these supposedly competent top managers take advice on their genuine field from inexperienced young people and pay them huge sums of money?

 

Notes:
(1) see West LB: at first they recommended going into investment banking (Permira) and later recommended an exit.
(2) see Thomas Leif, Beraten und Verkauft , C. Bertelsmann, Munich, 2006.