The Proliferation of Parabusiness

Manfred Hoefle


Executive Summary
What is Parabusiness?
What Drives Parabusiness?
Symbiosis of Parabusiness and Managerism
Parabusiness is Bad for Business
What is to be Done?
Literature and Links



The statements in this Thinkpiece on the proliferation of parabusiness are summarized in the following six propositions.

Propositions regarding parabusiness

  1. Parabusiness — a complex of management service providers with its own agenda — has grown much faster than the general economy in recent decades.
  2. The main factors are a transformation of business management, more state regulation,
    the self-induced complexity of businesses, the expanding financial sector, and ongoing globalization.
  3. Parabusiness is already oligopolistic, global and invasive of big businesses and state institutions.
  4. Parabusiness leads to actionism, bureaucracy, loss of competences and a trend toward standardized management concepts.
  5. The evolution of parabusiness from trustee to value extractor is problematic for commerce, economy and society. Parabusiness takes unfair advantage.
  6. Necessary counter-measures are firstly the responsibility of business management and secondly of lawmakers.

It is worth noting that there is so far no coherent and detailed description of these diverse and interrelated management service businesses and disciplines. The emphasis has always been on the analysis and description of, above all, management consulting and investment banking. The interaction of the various branches of the parabusiness industry, the common impulses behind its remarkable growth and its global expansion have been overlooked. The reasons for this are firstly, the wide scope of parabusiness and secondly, the initial fragmented nature of the parabusiness complex, and thirdly, the cloak of confidentiality that protects parabusinesses against liability and adds a veneer of prestige.

Note: Due to the numerous references and facts, individual sources are not quoted.



At first "parabusiness" may seem to be a vague term,(1) because it covers all the professional services rendered for management: the many genuine and claimed competences that are rendered at considerable cost to solve a variety of management problems. Technically speaking, parabusinesses render a service similar to assistance systems in automobiles, which help drivers to master the growing complexity of their car, and make driving easier and safer. Put differently, corporate executives hire a trained co-driver, mechanic and navigator to help them drive their own car.(2) Parabusinesses are hired by managers as their auditors, accountants, management consultants, strategy consultants, investment bankers, rating agencies, personnel recruiters, lawyers, public relations experts and certification firms.(3)

As the above list makes clear, there is a growing complex of management service firms, but very little is known of the true size and influence. This is because firstly, these services are in diverse disciplines and secondly, they were initially numerous but local and national service providers — commissioned mainly by Anglo-American businesses. However, this industry has now begun to be less and less fragmented. Many of these management service providers avoid the public gaze; they hide behind a wall of confidentiality, and understate their own size. Most of them started as small freelance operations and then evolved into offices and partnerships. Some have merged several times and now several are global players. An example is Boston Consulting, which was founded in 1963 as a one-man department in a Boston bank(4). By 1970 and renamed BCG it had been taken over by its 100 partner consultants. By the mid-1990s it had about 1,000 consultants. Today BCG has around 10,000 staff at 78 offices in 46 countries.

Gigantic size
So far and as a rule the branches/sectors of the parabusiness complex have been analyzed separately with each business ranked by size, reputation and profitability. But a wider perspective is necessary in order to fully grasp this industry and its numerous branches. A useful measure to expose its true dimensions is staff numbers, because all parabusinesses are labor-intensive people businesses.(5) My own calculations and conservative estimates give a total size for the parabusiness complex of around one million employees worldwide. A large share is professionals with a 'first-rate' education whose employers charge first-rate prices for their services.

The biggest parabusiness branch by a wide margin is auditing (audit, tax, advisory, consulting) with around 70 percent of total employees, followed by business-related investment banking with around 10 percent, management/strategy consulting and lawyers (working mainly for businesses) who employ 7 percent each. The geographic hotspot is the USA where over 40 percent is employed. Europe accounts for about one-third of employees with the largest cluster in London. The East-Asia region continues to grow in size.

What is remarkable is the absolute size of these firms as well as the high market concentration in almost every sector. The Big 4(6) auditing firms, Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG(7) each has around 200,000 employees and total revenues of around $130 billion.(8) These Big 4 firms dominate the scene and service nearly all major public corporations and banks. The credit rating market is dominated by the Big 3: Standard & Poor’s, Moody’s and the Fitch Group. Standard & Poor’s and Moody’s have a near duopoly with 80 percent of the world market. The least concentrated market sector is legal consulting (Big Law), where local legal partnerships still predominate.
Nevertheless, the degree of globalization is impressive: the biggest players in the auditing sector each operates in 80 countries. The management consulting firms each operates in over 40 countries. The most international of the auditing firms is Accenture, a public corporation, which has 400,000 staff at 200 offices in 120 countries.(9)

Unstoppable growth
The parabusiness industry as a whole has recorded average annual growth of 5 to 7 percent over the past 40 years, since when parabusinesses first took off.(10) This growth rate is roughly three times that of global GDP growth (not including China). Today about 1 million staff are employed in the parabusiness industry, up from about 500,000 at the turn of the century, from around 250,000 in 1990, and about 125,000 in the mid-1970s, when the decades of rapid growth began. This constantly high growth rate also reflects a structural shift in the economy toward the service sector.



Although the growth of parabusiness is due to different factors in its various branches, there are some overriding structural impulses. Below is a summary of the impulses on the client-side, followed by some of the impulses on the parabusiness side.

After a phase of industrial expansion and economic growth during the 1970s in the USA (and 10 to 15 years later in Germany), the perception and self-perception of business corporations began to change. Public corporations no longer saw themselves as producers of goods targeting sales growth and gaining market share and market power. Instead they were seen and saw themselves as investment objects whose purpose was to achieve a targeted return-on-investment.(11) After a phase of corporate diversification that ultimately disappointed (keyword: conglomerates), managements changed course and began to concentrate on the consolidation and concentration of their 'core business'. This and other ideas and conceptual tools were provided by so-called strategy consultants who, from then on, enjoyed a steady and profitable trade in 'redirecting' companies. Investment bankers and auditors also soon learned to benefit from and promote this new trend. The 1980s brought a greater capital-market orientation of corporations following the adoption of the shareholder value idea. This novel concept was also strongly promoted by management consultants.

In recent decades the number of owner-managed enterprises has declined, especially in the USA. These are usually smaller enterprises that focus on organic growth, avoid mergers and acquisitions, and usually do not hire management consultants. At the same time the growth of venture capital financing since the 1970s has paved the way for a new type of business model called a startup and following that the management or leveraged buy-out. These types of businesses generally depend on the services provided by investment banking and accounting firms.(12) The subsequent swallowing up of innumerable startups, innovative technology and internet firms by established US technology and internet corporations gave birth to an era of hyper-active M&A activity. To put this in a wider historical perspective: the number of acquisitions is unprecedented, it is problematic, and there is no end in sight.(13)

In a transaction-oriented (M&A) economy, promoted by parabusinesses, public corporations are increasingly treated as assets, which boosts the demand for the ancillary services provided by parabusiness. This partly explains a wave of concentration in the banking sector following the financial crisis, and currently in the pharmaceutical and media sectors, and numerous other service sectors.

Above all US corporations adopted a strategy of focusing on so-called core competences and began to buy-in services to cut payrolls and make their businesses 'lean'. As a result, many tasks previously undertaken in-house by staff units and specialists have now been outsourced. This approach toward 'complete professionalization' was intended to boost the temporary ad-hoc hiring of outside experts. The underlying assumption was that these outsiders are more professional and competent than in-house staff. This strategy also relieved top management of their responsibility for providing and directing technical/specialist departments and of their answerability to supervisory boards, investors, analysts, employees, local committees and host countries, if things go wrong. From then on outside professionals could be blamed.

A significant new growth sector was created by the spread of the nominal economy and in particular private equity firms and the grey capital market and the boom in hedge funds.(14) Firms in the nominal sector have a high propensity to spend large sums on analyses and other business services. Also as a consequence, close career relationships developed between strategy consultants and representatives of the financial sector, above all with private equity firms. These people get on well, as they have similar characteristics, due to their common MBA-type schooling and socialization. Whereas previously manufacturing industry was the main client of parabusiness, that role is being taken over by the finance industry, and increasingly by the government sector.

Highly attractive employers
What were once freelance professions have a long tradition, particularly in Anglo-Saxon countries, due to their social prestige and prospective high earnings. Consequently, many graduates of universities and business schools, from upper middle-class families, are eager to join the parabusiness industry, and avoid occupations in manufacturing.

In the USA and the UK, and increasingly in continental Europe, the share of law and business administration graduates has grown rapidly in recent years. In the USA, the number of MBA graduates has grown from 35,000 in 1975 to over 160,000 recently. As a share of the general population the number of lawyers in the USA is now ten times higher than in Japan.(15) For years the oversupply of business administration and law graduates has been criticized, while economies are being held back by a scarcity of engineers, computer scientists and natural scientists. This trend continues unbroken, also because business management studies are 'easier' and more profitable.

The consulting und investment banking sectors hire two-thirds of Harvard Business School graduates. This recruitment is hyped by McKinsey as a War for Talents.(16) McKinsey’s starting salaries of around $200,000 for MBA graduates in their so-called premium segment (corporate strategy, investment banking, private equity and hedge funds) is over double the salaries paid by manufacturing industry. Consultants who reach Partner level then aim to transfer to other firms and join at top hierarchy levels, two or three grades higher than graduates joining straight from university. While cleverly jumping the promotion queue these 'high-fliers' also expect to boost their previous salary by at least 10 to 20 percent. For these 'smart operators' a consulting job is the fast- track route to top management with a significant 'detour yield'. These facts alone are sufficient to explain why consulting jobs are very attractive to university graduates.

It is now well-known that the parabusiness sector is adept at creating business for itself by ‘discovering’ threats to clients with benchmarks and rankings that expose so-called ‘deficits’ or warning of an urgent need to conform with some legal requirement. Some clients are still unaware of the significance of bonuses for parabusiness top executives. The remuneration system in parabusiness has a pyramid structure: senior partners/directors (after 10 years) can earn annual salaries of $1 to 10 million, but this depends upon their billing volume.

A strong impulse for growth in the US-dominated parabusiness sector came from accelerated globalization in the 1990s, especially that of Southeast Asia/China and eastern European countries. The transformation of former command economies into market economies and the enormous market values given to privatized raw materials generated an unexpected source of new revenue; in response to this numerous offices were opened by parabusinesses in these new markets. It was another gold rush(18) and the use of English as lingua franca by business management was a big advantage for these mostly US firms.



At this point it is useful to briefly review some characteristics of managerism. The crucial factor is an asymmetrical relationship between owners/shareholders and hired managers of corporations: this arose with the invention of the public joint-stock limited company and the shift of decision-making power from owners with their personal interests to managers who also have personal interests of their own. Up until the 1980s, self-interested behavior by managers was bridled by an implicit code of common conduct and social consideration; such inhibitions were gradually discarded when managers reoriented their behavior to satisfy the demands of the capital market. The necessary techniques and models are taught at business schools(19) and repackaged as business consulting concepts by their alumni, and have proved to be highly profitable for consulting firms. The close partnership and support provided for corporate managers by parabusiness has become a fixed feature of the management landscape.

In the early 1930s, quarterly financial reporting was introduced with the noble intention of enhancing the power of shareholders. However, these quarterly reports and a greater capital-market orientation soon became powerful weapons in the hands of financial analysts. At the latest when the shareholder-value concept was invented, short termism gained the upper hand within public corporations.(20) This was another impulse for the growth of the auditing branch.

Other factors relate to corporate strategy: they include business refocusing, exploitation of scale, market power to boost return-on-investment, portfolio strategies with the acquisition and disposal of subsidiaries and divisions — in order to make the business lean. Underpinning it all is the concept of selective resource allocation. European, and in particular German companies, were eager to jump on this bandwagon.(21) This strategy resulted in more transaction activity (buying and selling) and in European firms listing on the New York stock exchange to conform to US-GAAP regulation. This, of course, also benefited the merger and acquisition specialists and auditing firms in the parabusiness complex.

This attempt by German companies to ingratiate themselves with the US capital market was not so successful — after a few years several of them delisted. The shareholder value idea also gave a welcome boost to executive pay. This is a result of the principal agent model, which allows managers to share in the success of 'their' business. This in turn gave rise to complicated incentive and remuneration schemes and U.S. compensation specialists were on hand to deal with this task; and they were willingly hired by executive boards, who expected to benefit. The solutions these consultants created often had to be reworked internally several times. From then on, increasingly, underperforming managers were soon replaced and management teams were subjected to potential analyses (management assessments).(22) This gradually led to shorter terms of service for top managers, which also benefited the executive search and recruiting firms and the management and personnel consultants.

A further factor was the introduction of stricter financial statement regulations, and taking greater account of compliance, after the banking and financial crisis (with the Sarbanes-Oxley and Dodd-Frank Acts) and newly formalized corporate governance, as part of a war on corruption.(23) At the same time, the effectiveness of executive liability has been weakened by D&O insurance (directors and officers) and evasion clauses in management employment contracts.

More recently a disruptive impact was felt by the emergence of large and aggressive internet firms, the Big 5, based on the U.S. west coast. The rapid growth of these young enterprises led to a geographic shift of consulting capacity, particularly that of investment banks. These young internet businesses undertake minor transactions themselves and cultivate their own styles of business, develop proprietary systems, operate in secret, and do not need to buy-in strategy designs — which mean there is less demand for consultants. Because these big firms in Silicon Valley are entrepreneurially led and continually invent new business models for themselves, they are self-reliant in consulting. However, consulting firms responded smartly by first observing and then repackaging these new ideas, and selling them on to others. New venture capital firms have emerged as a new short-term response and exit-oriented subculture within the parabusiness industry.

Another strong impulse for growth, above all for management consulting and personnel consulting, is generated by their own ever-changing trends, concepts and recommendations for clients. Examples of alternating recommendations are decentralization and centralization, diversification and concentration; or changing trends and concepts such as core competences or value added chains, lean businesses or meta-structures, and so on.(24)

Managerism also means leadership by CEOs who are opinionated, narcissistic and glory-seeking. Such a managerist as head of a business will pay for flattering professional advice and establish close and collegial relations with top consultants, also in anticipation of some personal advantage later. Managerists of this sort were, in Germany, for example — Jürgen Schrempp, Thomas Middelhoff, Klaus Zumwinkel, Utz Claasen and Eckhard Cordes.(25) Ex-consultant managerists usually also keep in close contact with their former consulting colleagues, which can also benefit their former parabusiness employer. This has been witnessed in Germany within the banking, postal and telecommunications sectors, and within major corporations like Siemens, for example.(26)
Consulting at top executive level is largely based upon personal relationships. Placing consulting alumni in key positions, often as head of a business, offers an ongoing advantage. This is why McKinsey has developed a global alumni network.( 27)



Above all else, one should be aware of real problems caused by the fast expanding parabusiness industry. Of course, businesses should and often need to import new ideas and professional help when in-house experts cannot solve problems or cannot handle complex regulations and legal matters. It is impossible to say in each case to what degree external parabusiness input is sensible. Therefore the negative aspects of parabusiness described below are generalizations and as such will not always apply. However, they do give a broad picture of the degree and type of negative influences that parabusiness often has for client businesses, the economy, and eventually for civil society and the state.

Negative impact on business clients
At the top of the negative list for a business client is the danger of losing in-house expertise. When in-house experts are first disregarded and then their skills and know-how are discarded, managers themselves will lose the overview of the potential options open to them.
Handing over management issues to consultants weakens internal debate and analysis of vital business issues. Consultants’ suggestions will replace healthy in-house discussion on best possible solutions. Consultants are generally dismissive of in-house experience and knowledge. Managers (after ‘taking onboard’ consultant advice) will also begin to disregard and denigrate the capabilities of their own people and organization, and see no need to encourage and develop those capabilities. Instead they will take the easier option of buying-in advice. By doing so they will cause the firm to lose its own customized business-related expertise, which will have taken a lot of company time, money and brain-power to acquire.

External advisors will promise heaven and earth to clients and even support them personally to convey ideas and strategies. Client executives gladly use these consultants as justification and references for strategies, which they then 'own'. This tactic soon becomes transparent, and is copied by others. It was, for example, common practice for senior executives at major German corporations to use consultants to prepare and edit their presentations for meetings with their supervisory and managing boards. Legal opinion is often bought by management boards as a form of fail-safe insurance to cover all conceivable events and eventualities.

When external analyses, recommendations, opinions and ideas become the standard, a simple question must be asked: what is the role of the corporate manager? And why are such parabusiness expenses not accounted for as supplementary management expenses? To understand why this is significant, consider the following: in the late 1990s, Siemens, for example, spent over €100 million every year on management consultants. A combination of excessive executive pay and excessive external advice is a sure sign of managerism at work.
Furthermore, is it not strange that consultants are paid to advise on surefire methods of cutting payroll expenses, while at the same time management pay and expenses are going through the roof? This includes expenses for consulting and other parabusiness. What happens is not that payroll spending is cut; instead spending is shifted from regular employees to managers and their external advisors — to parabusiness.

Disregard for in-house competences leads directly to new dependencies, which can become chronic and irreversible. Business managers who are addicted to outsourcing advice are implicitly outsourcing and undermining their own leadership — even though 'leadership' is among the most common words in the managerist vocabulary. These managerists create imbalanced firms because they do not do their job properly; the do not do what they are paid for. They violate the first duty of a business manager: to devote their energy and creativity to value creation, innovation and supporting their co-workers — not self-serving their own reputation, income and career.

Negative impact on the economy
That big businesses employ the services of leading parabusinesses and these in turn focus their efforts on major players in industry, commerce and financial services is a fact. Big firms not only give preference to big firms, they steadfastly promote each other. This is part of the story behind the transactions and orders, inordinate fees, transactions, and global expansion of parabusiness. Smaller firms are at a huge disadvantage: per $1 million sales revenue the auditing charges paid by SMEs are higher by a factor of ten compared to fees paid by big corporations.

Increasingly efforts are being made by parabusinesses to consolidate what were once specialist services: this was recently the case in personnel services with the fusion of Koran Ferry, the Hay Group (28) and Willis Towers Watson. This fusion brings together corporate risk, broking, human capital and benefits (above all company pension plans). This NASDAQ-listed firm is based in London and has 39,000 employees in 120 countries.(29)

Parabusiness dominance in particular sectors leads to the emergence of parabusiness standards, cross selling and one-stop-shops; it does not favor unique customer-specific solutions. Instead, advantages of scale are transformed into higher profit margins. In fact, a random sample shows that parabusinesses achieve a return on sales (operating profit margin) of over 20 cent, and in the highly profitable sector of management consulting and investment banking they achieve a 40 per cent return on sales. This is a remarkable, stable and very high profit margin, and well above that of most of their clients.

A contemporary M&A case study, the takeover of Monsanto by Bayer, gives an insight into the windfall profits being earned. The investment bank Morgan Stanley charged Monsanto $120 million for four-months of sale consulting and support, and the transaction advisors Ducera charged Monsanto $45 million.(30) In fact, returns of over 50 percent on fee are not unusual (even on low-risk projects with indemnity from liability).

All negative records were broken during the 2007 bail-out of American International Group (AIG), the world’s biggest insurer. The Wall Street Journal calculated that total fees for auditors, lawyers and investment bankers came to $1 billion. And the cost in fees of acquisitions completed prior to that must be added to the sum to get the overall amount wasted on questionable parabusiness services.
Another example of parabusiness earning power was the corruption investigation ordered by Siemens at the instigation of the US stock exchange supervisory body (SEC), and carried out by the lawyers Debeviose & Plimpton. Siemens handed over €200 million to these specialists in "white collar criminal defense" (then almost one-third of that legal firm’s annual revenue). The auditor Deloitte, that was also hired, pocketed €350 million. The annual spending by major U.S. corporations (General Electric and Bank of America) on audits can reach $80 million. In Germany the auditing mandates of the largest DAX public corporations can be as high as €20 million. Given such happenings is it wrong to speak of value extraction and parasitic behavior, even before looking at causes and benefits?

The concepts and practical solutions that parabusinesses sell are always additional to the normal level of a client’s business complexity. These solutions will boost parabusiness profits and growth by creating complicated non-transparent solutions and will also act as an entry barrier to other service providers and thus pave the way to future profitable contracts. This applies to all parabusiness products, from sophisticated structured financial products to highly differentiated assessment and incentive systems, comprehensive due diligence processes and non-transparent risk models. And not to be overlooked is the thicket of taxation in many leading economies that is also a never-ending source of earnings for highly specialized tax consultant.(31) Recent cases of tax avoidance in Luxembourg are a perfect example of this.

Parabusiness firms often spread scenarios of emerging threats that often lead to actionist decisions by clients. Such threats can be an unfriendly takeover by Chinese investors (successors to the Japanese threat), poor economies of scale, being too small to survive, warnings of over-complexity, some kind of gap here, a pending collapse there, a failure to innovate, a need to specialize, or diversify, centralize, decentralize, off-shore, on-shore, and so on. Managers are warned that the smartest businesses have already taken these messages 'on-board', are already taking consultant advice, and already successfully implementing 'existential solutions'. Such consultant-speak should by now be familiar and easy for managers to see through, but apparently not.

Parabusiness contributes to widespread managerial conformity, in particular among public corporations. Differences between businesses were clearly apparent 20 years ago; today in many ways both corporate businesses and their executives are more or less interchangeable. Evan electrical engineering firms like Siemens, Philips, GE and ABB have fallen under the influence of a capital market that favors parabusiness systems and practices. This conformity also contributes to the systematic executive job rotation between companies, and this too helps to make these companies more similar and standardized. It also has the added 'convenience' of making job-hopping easier for managerists. In this way, parabusiness leads not only to greater standardization but also to a loss of competitive diversity across the economic landscape.

An overarching and 20-year-old problem is the growth of transactions (M&A) and the nominal economy. This in turn gave rise to the boom-bust cycle of private equity and the explosive growth of hedge funds. There are several reasons for this trend: one is the simplification and reduction of business activity to processes and projects, capital structures and transactions. Deep-seated knowledge of technology, operating procedures and systems is no longer called for, because it is time-consuming and requires stable teams working in groups and not as ad-hoc project teams. It is considered smarter to buy-in technical expertise as and when needed. A historical note: although now a rare breed, until the 1970s there were several management consultancies famous for specializing in technology/engineering: the Battelle Institute ("The Business of Innovation since 1929"), Arthur D. Little and Booz Allen Hamilton and Stanford Research International. It was the spread of the shareholder value idea that opened the door for finance-oriented consulting firms.(32)

Negative impact on state and society
Calls for a powerful, lean and fit-for-purpose state can be heard again, and the desire for a more livable society. It stands to reason that their realization will require that certain demanding preconditions are met. Some these preconditions will now be looked at in detail, in particular with regard to their interaction with the parabusiness complex.
The strength of a state depends upon it holding a monopoly in formulating and implementing the political organization, laws and regulations of a country, while prioritizing whole over particular interests. It must first create the necessary capabilities and scope for action, and not unnecessarily delegate (outsource) powers to private for-profit interests. This also applies to lobbying and the awarding of contracts to parabusinesses to help in formulating regulations and laws. Since the turn of the century, an ever-bigger and increasingly influential lobbying scene has evolved in European capital cities, and particularly in Brussels.(33)

State responsibility must not be weakened by delegating such responsibilities to high-earning ancillary service providers and allowing soft corruption, which will happen when parabusinesses become too influential. At that point the state will be steadily and stealthily eroded. Parabusiness is largely built upon relationships, including alumni networks. The preference given to children of influential parents on internships and first jobs is noticeable.(34) Despite the strict confidentiality demanded, also on government projects, pro bono services(35) are propagandized as evidence of the selfless service for civil society that parabusinesses is providing. This same applies for the latest trend: initiatives to 'solve complex social challenges'(36), which invariably highlight the positive social impact of parabusinesses.

Note: Consulting business for the government sector, which has flourished from 2003 onwards, is available (in German only) in a separate essay on paragovernment affairs.

The state has a duty to limit the powerful and stealthy extraction of economic wealth under cover of the 'shared economy'. As a rule, this label is a front for businesses and intermediaries who are backed by an army of advisors, lobbyists and lawyers. Finally, one should consider whether society wishes top scoring graduates to work in parabusinesses, considering that such trainees and associates may, after years of perhaps publicly-funded academic study, not spend time gaining useful practical vocational experience at long last, but instead use a few more "gap years" in parabusiness as a stepping stone to a top management position with a client. This shortcut while advantageous for individuals and profitable for consulting firms it is not necessarily advantageous for the economy and it can be divisive within client businesses and long-term within society.

Society must attach greater significance to value creation and actually making goods and services and ensure that these processes are sustained. Sacrificing innovation, responsibility and accountability for consultant-driven complexity is the wrong choice. Business managers who subordinate themselves to US-dominated parabusinesses will lose their self-determination and freedom of action.

Note: The dominant influence of US parabusinesses is described in a separate essay.



As Paracelsus (1493-1541) said, "Poison is in everything, and no thing is without poison. The dosage makes it either a poison or a remedy." This insight can be applied to many aspects of humanity, community and society. As the title of this Thinkpiece implies and the (necessarily fragmentary) analysis demonstrates, this insight is also true for parabusiness. These have now expanded beyond a sensible human scale. Consequently, they should be restricted and down-sized. The necessary steps and general suggestions for implementation now follow.

First: Corporate governance must be clearly structured.
Managing boards are independent and free to choose who to mandate for external support. What is missing is a parabusiness policy: similar policies already exist in other less critical areas. Such a policy should be formulated by the firm’s board and be mandatory, above all for executive managers. A common-sense rule is that only in exceptional cases is general management/strategy consulting permitted, no automatic prolongation of mandates, and no hiring of ex-consultants, to preclude fraud (not only on legal matters). And beforehand careful and independent checks must be made on whether tasks can instead be handled in-house. The ever-present danger of proprietary knowledge being leaked to third parties must be made explicitly clear. Finally, performance of the completed task should be audited or reviewed.

Second: Think like an entrepreneur/SME owner-manager.
In practice, managers should be cautious in dealing with parabusinesses. First the question of actual benefits and undesirable side-effects, such as demoting in-house staff or loss of skills and experience, should be objectively and honestly answered. It should be understood that a key aspect of the business model of some management/strategy consultants is to transfer and exchange solutions and know-how across industries and across borders.(38) Rejecting acceptable in-house candidates and instead hiring consultants is a questionable move. A rough analysis shows the performance of top consultants when hired as business leaders is mixed, to say the least.(39) However, there is nothing wrong with hiring specialist consultants (and experienced coaches/technical moderators) to tackle specialist/technical tasks to be completed more cost-effectively, and from which lessons can be learned but without risking loss of expertise or giving away any proprietary information.

Third: Sustain in-house competences.
In the past, a series of big corporations, as part of a supposed leaner business strategy, and under the subtle influence of outsiders, disbanded many in-house technical and specialist units. Later, after judging the expected benefits and actual experience, they then copied not the advice but the practice of consulting firms, and attempt to rebuild in-house capabilities, for example Bayer and Siemens. Porsche is a special case: it has used its production engineering know-how to set up its own consulting firm, which as a business center does a lot of work for third-parties. It should always be investigated whether, instead of consultants, specialists can be borrowed from other firms or shared, and whether associations and foundations can arrange efficient support via their networks. In particular, firms that are key-account clients of consulting firms should critically analyze their own capabilities and determine whether future-oriented investment to sustain in-house competences is not a better strategy.

Fourth: Exploit and extend the protection afforded by anti-trust law.
The oligopolies created by rating agencies (keyword: Big 3) and auditing firms (keyword: Big 4) and other branches take place because nobody has opposed them. A trend to even further consolidation is clearly apparent. That is why the opportunities offered by the EU should be used to break-up such oligopolies. Political steps must be taken to encourage new competitors in the rating sector.(40) The legal requirement introduced by the EU in 2016 for mandates to be rotated every 10 years in inadequate. This merely exposes the chronic hesitancy of authorities and agencies to act and the strong resistance of those who should be regulated. The obvious conflict of interests dictates that consulting activities should be segregated and that certain services such as legal, tax and risk advice should be demerged.

Those who still need convincing that down-sizing the Big 4 is called for should look at a gallery of their headquarters buildings in our city centers. These signature buildings, designed to project power and strength are unabashed icons of size, influence and wealth(41); in that respect they are like the bank headquarters that were built in our major cities a century ago.


That great theorist and historian of economics, Joseph Schumpeter (1883-1950), foresaw the emergence of manager/investor capitalism and big business corporatism(42). He correctly predicted that economic power would be concentrated in public corporations, first nationally and then globally. This trend continues today unchecked.

The drivers of this trend and those who profit most are not the entrepreneur/owner-manager, but the globally active managerists and the parabusinesses that accompany and advise them. Parabusinesses have parasitic characteristics(43) and have grown so big that they are now detrimental to the economy and to society. In a never-ending race for quick returns and big profits, parabusinesses are now making a great effort to gain entry to the government sector to repeat their success in the commercial sector: in manufacturing, banking, insurance and so on. They see no end to their markets. Their problem-solving capability is seriously overestimated. Their negative impact is grossly underestimated.

This Thinkpiece aims to highlight the proliferation of parabusiness and to limit its negative impact.



(1) The Greek prefix "para" also occurs in the word "parasite": an organism that lives by obtaining nutriment from the body of another organism. Also known as "scroungers" or "freeloaders".
(2) "Paralegals" are specialist staff in legal firms with a sound basis of legal knowledge who undertake a wide variety of tasks. They are legally trained experts who assist lawyers and make important contributions to the performance of a law firm.
(3) In addition there are niche activities such as shareholder services (proxy voting at AGMs), risk management consulting and personal coaching for top managers.
(4) Founded by the legendary Bruce D. Henderson, who was hired from Arthur D. Little. Their first client in continental Europe was Siemens.
(5) Based on the published total number of key companies (e.g. in auditing the Big 4 plus 10 percent, in consulting the biggest 50 plus 20 percent, and for law firms the biggest 200 plus 20 percent), less their estimated or published "non-business" revenues. This does not include the major IT services and big data providers such as Cap Gemini or contract business firms such as Accenture or Booz Allen Hamilton. Because the share of business services used directly or indirectly by management is omitted or seldom published, conservative estimates are made.
These relevant revenues are not calculated due to the inordinate effort needed and for reasons of accuracy. After all, the aim is to demonstrate the scope of the problem and not to provide a detailed analysis.
(6) The Big 4 — after the demise of Andersen and the Enron scandal (2001) — and the Big 8 of 1980, Big 6 of 1989, and Big 5 of 1998.
(7) KPMG is a combination of KMG (Klynveld Main Goerdeler) and Peat Marwick.
(8) Three times more people work in the accounting branch than work for GE and eleven times more than for Apple. The accounting industry posts the same revenue as GE.
(9) Accenture is the world’s biggest management consulting, technology and outsourcing firm. About half of its revenue comes from consulting and outsourcing. Its parabusiness units employ about 50,000 staff.
(10) There were phases of growth earlier in some fields: at the start of the 20th century in engineering-related consulting (production and innovation), investment banking and auditing, after the great economic depression and the foundation of the SEC in the USA (in 1932).
(11) In the USA "conglomerisation" began in the 1960s with individual firms turning into finance and controlling-oriented businesses (low interest rates – rising stock prices).
(12) Consider the biggest leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts (KKR), referred to as "Barbarians at the Gate" and "The Fall of RJR Nabisco".
(13) Between 2001 and October 2016, Google/Alphabet acquired 204 businesses/startups (2010 – 2014 around 30 each year); Apple has acquired 82 businesses since 1988, half of them in the USA. Microsoft, Facebook and Twitter have similar M&A histories.
(14) Recently hedge funds have quickly become one of the most important asset classes: they hold around $3 trillion under management in around 10,000 funds; the biggest, Bridgewater, manages around $1 trillion. Private equity companies hold an estimated $2 trillion.
(15) Based on comparable professional qualifications, the American figure is three to four times higher; in German it is about half as small.
(16) Among the targeted 'best' are Rhodes Scholars, Fulbright and Bayerische Elite-Akademie scholarship holders, and students sponsored by Studienstiftung des deutschen Volkes.
(17) A notable case is Edward G. Krubasik, for many years the Siemens Account Manager at McKinsey before, by order of the Chairman of the Supervisory Board at Siemens, Krubasik was the first non-Siemens person to be appoint directly to the Managing Board. Soon the "Krubasic Effect“, which was kept secret for a long time, had an affect as total earnings of managing board members was raised in two stages by around 100 percent; the justification was that Krubasik while still at McKinsey had actually been working 'for' Siemens and had been earning twice as much as his clients, who were the Siemens managing board.
(18) A case study: Monitor, a strategy consulting firm, jointly-founded by strategy guru Michael Porter in 1983, developed a master plan to 'redirect' Libya. In 2013 Monitor declared itself insolvent due to overexpansion and was taken over by Deloitte.
(19) For example, the cost of capital theorem of Modigliani-Miller, the portfolio concept and the shareholder value approach.
(20) Despite contrary evidence the German Institut der Wirtschaftsprüfer (IDW) (Institute of Auditors) has advocated quarterly reporting for all public corporations; which also serves IDW’s own interest.
(21) Characterizing the booming strategy consulting business between 1980-2000 in Germany is this statement: "Pound for pound, the best market in the world for high-level consulting is Germany — McKinsey and BCG each has seven offices there — as it has been for two or three decades." (p. 256; Kiechel Walter III, The Lords of Strategy, Harvard Business Press, Boston, 2010).
(22) At Siemens all heads of operating groups were "assessed" by Egon Zehnder specialists.
(23) Essentially due to the Sarbanes-Oxley-Act (2000) with 1,106 sections (twice as many as earlier regulations) and the Dodd-Frank Act (2010), this has 1,256 sections and 2,319 pages. By comparison the Glass-Steagall Act (1932), which introduced the segregation of commercial banking and investment banking, had 37 pages and the Volcker Rule had 298 pages). The implications for compliance are elaborated elsewhere:, Insights, Number 2, "Compliance is Bureaucracy (American Style)".
(24) This includes companies that mostly forgo their own assets to focus on coordination of assets belonging to others and mostly act as arbitragers. Enron was an exponent of this strategy and was briefly admired and praised by McKinsey. Today these so-called intermediaries operate over the internet: Alphabet/Google, Uber and others.
(25) These CEOs are said to have played a major role in the remarkable success of McKinsey’s consulting business.
(26) An example: Barbara Kux, the first woman Member of the Managing Board at Siemens with a career history of McKinsey, Nestlé, ABB, Ford and Philips. Within three months of joining Siemens she had planned to spend €21 million on external consulting.
(27) Networking takes place mainly via events and a communication platform for around 30,000 alumni. The number of active consultants is around 10,000.
(28) Korn Ferry includes its traditional Executive Search business and now Employee Assessment, Remuneration and Development, which were part of the former Hay Group (with 4,000 staff in 86 offices in 49 countries).
(29) The personnel services firm resulting from the takeover of Towers Watson (2016), at that time the biggest firm in the sector. Towers Watson was itself the result of Towers Perrin merging with Watson Wyatt (2010).
(30) That means $165 million was paid in advance by the take-over candidate. If the deal did not happen, two-thirds of that amount would be retained by the advisors.
(31) Two selected facts: US tax regulations amount to 3.4 million words. GE has a Corporate Tax Department with around 900 employees and in recent years has hardly paid any taxes in the USA.
(32) For example, Stern & Stewart, who actively promoted the idea of shareholder value.
(33) The number of lobbyists, mostly employees of companies and industry confederations, is around 6,000 in Berlin and 14,000 in Brussels.
(34) Not much is publicly known about the family connections of 'VIPs', but, for example, while Hermann Franz was Chairman of the Supervisory Board at Siemens, his son and son-in-law were both employed by McKinsey.
(35) This includes short-term assignments for chamber orchestras, opera festivals, zoos and kindergartens.
(36) For example, the McKinsey Social Initiative (MSI). The first program called "Generation" was spun as a global non-profit organization to ready youths for "mid-level-jobs" in the retail trade among other things, supported by Wal-Mart Stores.
(37) This is remarkably true for, above all, most DAX corporations in Germany.
(38) A memorable saying commonly quoted in-house was "If Siemens knew what Siemens knows". Given the ongoing consulting over past years, it should be reworded as "If Siemens knew what McKinsey knows about Siemens".
(39) Prominent examples are former McKinsey bosses Jürgen Kluge (Haniel), Edward G. Krubasik (Siemens), Torsten Oletzky (Ergo), Utz Claasen (EnBW and others)
(40) A return on sales of 40 percent is good reason to suppose these are monopolistic/oligopolistic excess profits.
(41) Giving an impression of boastfulness also reflected in their brochures and the web.
(42) In "Kapitalismus, Sozialismus und Demokratie", introduction by Eberhard K Seifert, 7th edition, UTB, Stuttgart 1993.
(43) The term "parasitic consulting" has been used by management observers such as Walter Kiechel III and Adrian Wooldridge (Schumpeter columnist for The Economist).



  • Hoefle, Manfred: Managerismus - Unternehmensführung in Not, VCH-Wily, Weinheim, Germany, 2010.
  • Hopper, Kenneth; Hopper, William: The Puritan Gift, Reclaiming The American Dream Amidst Global Financial Chaos, I.B. Tauris, London 2007.
  • Wooldridge, Adrian: Masters of Management, HarperCollins, New York, 2011.
  • Kiechel III, Walter: The Lords of Strategy, Harvard Business Press, Boston, 2010.

In Managerismus (book in German), (German) and (English):

Newspapers and Magazines
Wall Street Journal, New York Times, The Economist, Fortune, Frankfurter Allgemeine Zeitung, Cicero.