strategic change in top management consulting: market
Post on 20-Oct-2014
1.866 views
DESCRIPTION
TRANSCRIPT
Strategic Change in Top Management Consulting:
Market Evolution and Current Challenges in a
Knowledge-based Perspective
Matthias Kipping and Thomas Armbruester
Dr Matthias Kipping is (Visiting) Associate Professor at Universitat Pompeu Fabra
E-mail: [email protected]
Dr Thomas Armbruester is a Lecturer in Organizational Behavior at the University of
Mannheim, Germany. Mailing address: University of Mannheim, Faculty of Business
Administration, Section Organization, 68131 Mannheim, Germany. Tel. 49-621-1811607.
Fax: 49-621-1811603. Email: [email protected]
Both authors used to work for strategic management consultancies prior to their academic
career. Further research was carried out as part of a project on "The Creation of European
Management Practice" (CEMP), funded by the European Commission under the targeted
socio-economic research program (Contract No.SOE1-CT97-1072).
The authors would like to thank the organizers of and participants in the session "Knowledge
Management in an Increasingly Borderless World" at the 19th annual meeting of the Strategic
Management Society in Berlin, 3-6 October 1999. Their comments on an earlier draft have
been very helpful to shape and sharpen the argument. Special thanks to Alfred Kieser and
Johannes Glueckler for extensive comments on an earlier draft.
Strategic Change in Top Management Consulting:
Market Evolution and Current Challenges in a
Knowledge-based Perspective
Summary
The paper outlines the evolution of the management consulting market from a knowledge
perspective and sketches the challenges and necessary changes strategic consulting firms
currently face. To this end, the paper delineates the different types of knowledge between
consultants and clients as well as between different types of consulting services. In spite of
their stable growth, traditional strategy and operation consultancies have lost business fields to
firms that offer a different type of consulting knowledge, such as information-technology-
oriented consultancies or, indeed, investment banks. The paper argues that in order for
strategic consultancies to provide more than their traditional type of knowledge, they need to
either discard their internal homogeneity or engage in network relations or strategic
partnerships with other firms.
Keywords: management consulting, management knowledge, interfirm collaboration
Table of Contents
1 Introduction....................................................................................................................... 1
2 The knowledge base of traditional strategy and operation consulting.............................. 6 2.1 Management knowledge and knowledge management.............................................................................6 2.2 Consultants' knowledge versus clients' knowledge...................................................................................8
3 Changes in the consulting market: origins and consequences........................................ 12 3.1 The evolution of services and service providers ....................................................................................12 3.2 The reaction of traditional strategy and operation consultancies............................................................16
4 Current challenges: conclusion and recommendations................................................... 20
References............................................................................................................................... 25
1
1 Introduction
Much has been written about the internationalization of the economy and the fast development
of information technology. It does not need to be repeated here that the increasing mobility of
capital, labor, and information is seen as the most important factor that requires corporations
to get involved in intensive knowledge transfers. The fast acquisition and reception of
management knowledge is considered as a precondition for successful management.
Management consultancies are widely assumed to play a particularly important role for the
development and transmission of management knowledge (cf. Havelock and Guskin 1971;
Barley and Kunda 1992; Fridenson 1994; Guillén 1994; Bessant and Rush 1995). Their
empirical-analytical capabilities and the dissemination of knowledge among their own staff
across continents, countries, industrial sectors and functional domains are assumed to provide
information necessary for successful strategies and change processes of their clients (Hansen
et al. 1999).
Over the last decade, however, the consulting market has undergone major changes.
Particularly for traditional strategy and operation consultancies1 – among which we would see
McKinsey, Boston Consulting Group, Arthur D. Little, A.T. Kearney, Bain, and other top
firms that have not traditionally focussed on information technological advice – the
competitive landscape has changed considerably:
• Large parts of consulting services have increasingly concentrated on IT-related
consulting, which meanwhile accounts for the largest share of the market in most
countries. In particular, new products such as Enterprise Resource Planning (ERP) and
1 Hereafter we abbreviate traditional strategy and operation consultancies (McKinsey, BCG, and the like, see above) as ‘TSOCs’ in order to distinguish them (a) from the consulting arms of the big accounting firms that have a strong focus on information-technology-related services, and (b) from firms that focus on organizational devlopment, management training, management coaching, etc.
2
connected consulting services have become important, perhaps dominant, issues on the
market. TSOCs have not systematically focused on this type of service. Companies
such as McKinsey have reacted to these developments only late by founding a Business
Technology Office, which however does not generate the revenue anticipated.
• From the late 1980s onward, the big accounting firms have expanded their consultancy
activities at very high rates of growth (Goshal 1993). In most consultancy markets, they
have come to occupy leading positions, outgrowing and, as a result, displacing many
TSOCs. For example, in many countries McKinsey is no longer ranked among the top
five (in terms of revenue, for country-specific data see for example the monthly leaflet
Management Consultant International in which each issue covers a different country),
which compares unfavorably to its position in the 1970s and 1980s. And A.T Kearney
recently had to lay off staff in the United States following a drop in revenues
(Management Consultant International, May 1999). This relative decline of TSOCs is
reflected in Table 1, which compares the top-ten league table of 1998 and 1991 and
thus reflects the considerable changes that took place within this period.
(Insert Table 1 about here)
Table 1 shows that, in 1998, the big five accounting firms and CSC generated
significantly higher revenues than TSOCs such as McKinsey, Mercer, A.T.Kearney, or
the BCG (the latter no longer being in the top ten). In 1991, by contrast, the TSOCs
had occupied the leading positions. This development in the 1990s is not attributable
to the audit business of the big five accounting firms, since this part of their business
3
has grown much more slowly than their consulting business. Rather, the figures reflect
the expansion of their information-technology-oriented advice.
The sixth column in Table 1 displays the multiplication of the firms’ revenues between
1991 and 1998. It strongly confirms the impression that TSOCs have lost large shares
of business fields in which consultancies operate to the big five accounting firms and
IT consultancies such as CSC. Therefore, although in absolute figures the TSOCs have
expanded their businesses due to the overall growth of the market, in terms of market
shares their performance can be characterized by a relative decline.
Ever since 1998, this table has not significantly changed. According to the latest
information about the year 2000 (http://www.kennedyinfo.com/mc/cn50.html; 07 Nov
2000), only CSC and Deloitte have swapped their positions as no. 4 and 5, and Cap
Gemini has entered the top ten at position 8, thereby ousting A.T.Kearney from the top
10 ranks. Therefore, the trend that IT-oriented consultancies supplant TSOCs
continues, but the main development has taken place between 1991 and 1998.
• In many countries, domestic consultancies have been bought by large international
groups, often the big five who have tried to enter the strategy markets this way. But
even such a well-established consulting firm like A.T. Kearney has been sold by its
partners to the giant EDS (Electronic Data Systems), even though it seems to preserve
its managerial independence – at least for the time being.
• In connection with the recent wave of mergers and acquisitions, investment banking
has become a major competitor for the strategy consultancies. Often, consultancies can
only do the ‘fine-tuning’, namely post-merger integration, after investment banks have
already completed the work at the strategic level of mergers and acquisitions – and
earned large fees.
4
• New competitors – sometimes, but not only, spin-offs from existing service providers –
have entered the market and compete with TSOCs in market niches. Many of these
small to medium-sized consultancies offer specialized services for considerably lower
fees.
These tensions that TSOCs face have been somewhat hidden by their constant growth and the
growth of the market as a whole. Their business was growing, and that other consulting firms
were growing much faster on the basis of other types of consultancy remained somewhat
unnoticed. In addition, TSOCs now suffer from a serious shortage of qualified recruits, since
not only other consultancies, but also e-commerce businesses and start-up firms compete in
the recruitment of high-potential staff. Strategy consultancies have increasingly resorted to
pouching consultants from competitors, a practice which has long been considered as a
violation of the professional ethos or codes of conduct and which was therefore very
uncommon until recently. Also, some strategy consultancies, most notably McKinsey, have
recently restructured their internal organization, and are looking for a variety of ways to meet
the challenges from the consulting arms of the large accounting firms, including closer
contacts with leading management scholars, the provision of IT-based services, etc.
In order to explain this market evolution and to outline potential future developments, we
focus on the knowledge base of traditional strategy and operation consulting. Our goal is to
identify this knowledge base and its limitations, in order to carve out the challenges TSOCs
face today. To do so, we introduce a two-dimensional model which highlights the knowledge
type of TSOCs and which juxtaposes it (a) to the knowledge type of clients, and (b) to the
knowledge type of competitors of TSOCs. We argue that this knowledge-based framework
captures best the differences between market participants and hence delivers a focal insight in
its recent development.
5
Our point of departure, therefore, is the literature on management knowledge, knowledge
management, and knowledge-intensive companies. This body of literature has grown
significantly within the last couple of years and has strongly sharpened our understanding of
changes induced by the internationalization of business and the mobility of information and
means of production. In this context, however, we suggest treating management knowledge
not as a matter of degree (i.e. how much of it do you have) but rather by distinguishing
different types of knowledge. Hence we do not treat TSOCs as firms with a particularly high
‘degree’ of knowledge, as the term ‘knowledge-intensive firm’ suggests, but rather with
respect to their type of knowledge embedded in their activities. Only then can the basis for a
comparison of different kinds of consulting services be created, developments on the market
be described and explained, and knowledge types that may influence the future of the
consulting market be identified.
To develop our argument, we first outline the knowledge base of traditional strategy and
operation consulting (Section 2). Based on Nonaka's model of knowledge development and
our distinction between regulation-oriented and change-oriented knowledge, we juxtapose
consulting knowledge to clients’ knowledge and thus delineate the knowledge core of
traditional strategy and operation consulting. On this basis, the positions of the competitors in
the consulting market are identified and the current tensions TSOCs face are explained
(Section 3). In the concluding part (Section 4) we outline the possibilities of TSOCs to react to
these developments. We refer to the internal logic of the one-firm concept and argue that an
expansion towards other knowledge fields would endanger their internal stability. On this
basis we argue that inter-firm collaborations with firms of different knowledge bases, such as
investment banks, IT consultancies and management trainers, is a more promising strategy for
TSOCs.
6
2 The knowledge base of traditional strategy and operation
consulting
2.1 Management knowledge and knowledge management
Polanyi (1962 and 1967) introduced a first and important framework by drawing a spectrum
between explicit and tacit knowledge. He suggested distinguishing tacit knowledge from
conventional assumptions about knowledge. Conventional, explicit knowledge can be
understood as knowledge the individual is aware of; it is codified, structured, and can be
communicatively transmitted to other people. Tacit knowledge, by contrast, is associated with
experience; it is uncodified and cannot be transferred to others. Polanyi’s concept of tacit
knowledge added the component of sub- and pre-consciousness (Spender 1996) and assumed
that all knowledge has a tacit dimension. The leitmotif of his notions was an epistemological
and methodological critique of the conventional, positivist norm of scientific methods. His
critique aimed at those approaches that consider scientific progress only at the explicit level,
that is, on rationalist and empiricist traditions of formulating hypotheses and testing them by
measuring variables. Polanyi argued that most progress takes place at the tacit level, since
scientific creativity is associated with an involvement in the phenomenon, for only this
provides room for intuitions about the interactions and circumstances to be explained
(Spender 1996).
Drawing on Polanyi’s distinction, Nonaka and his colleagues (Nonaka 1994, Nonaka and
Takeuchi 1995, Nonaka and Konno 1998) have developed a framework to understand and
foster the creation of knowledge in organizations. They depart from Polanyi’s claim that tacit
knowledge cannot be transferred and argue that organizational knowledge is created through a
continuous dialogue between tacit and explicit knowledge. On this basis, Nonaka and his
7
colleagues describe four modes of knowledge conversion: socialization as the transmission of
tacit knowledge to tacit knowledge; combination as the exchange of explicit knowledge;
externalization as the transmission of tacit knowledge to explicit knowledge; and
internalization as the transmission of explicit to tacit knowledge (Nonaka 1994). The most
important aspect of Nonaka’s model is the argument that knowledge grows through an
interaction of explicit and tacit knowledge. On this basis, Nonaka and his colleagues develop
recommendations to foster the process of knowledge creation through the sharing of
experiences, which helps to convert tacit into explicit knowledge and to crystallize knowledge
at the collective, organizational level. Therefore, the transformation of tacit into explicit
knowledge (externalization), and the internalization of the so generated explicit into tacit
knowledge, plays a particularly important role in organizational knowledge creation.
There is an obvious disagreement between Polanyi and Nonaka about the transferability of
tacit knowledge. For our purposes it suffices to say that there is a type of knowledge that is
experience-related and often function-specific and thus much more difficult to capture and
transfer than explicit knowledge, and for us it does not matter whether we label it implicit or
tacit knowledge. Management consultants are widely seen to play a crucial role in this
process: they help companies to externalize the implicit knowledge of employees, and they
transfer explicit knowledge from other organizations (best practices) and help to internalize it
in the client company. As the following section will show, however, this process is hampered
considerably by (a) the differences in the kind of knowledge predominant in the consultancy
and the client organization, and (b) the interests and identity of the consultancy business.
8
2.2 Consultants' knowledge versus clients' knowledge
In order to illustrate the difficulties consultants face in the interaction with clients, we outline
the differences between the knowledge-type of the client organization and that of management
consultants. These differences can be delineated along two continuums:
• Implicit/tacit knowledge (client) versus explicit knowledge (consultant)
• regulation-oriented knowledge (client) versus change-oriented knowledge (consultant)
Knowledge within the client organization is characterized by a deep familiarity with the tasks
and issues of the process of value creation within their organization. It is acquired through
routines and has assumed a subconscious form, since its carriers cannot freely express the
knowledge without an external stimulus. Grant (1996: 115) outlines the role routines play in
organizational knowledge as follows:
"While routines may be simple sequences, their interesting feature is their ability to support complex patterns of interaction between individuals in the absence of rules, directives, or even significant verbal communication. To this extent, routines embody Thompson's notion of coordination by mutual adjustment. There are two main dimensions of this complexity. First, routines are capable of supporting a high level of simultaneity of individuals' performance of their particular task (…). Second, routines permit highly varied sequences of interaction."
This specific kind of knowledge is closely connected with physical assets, grown practices and
organizational processes in the host organization. It is difficult to transfer to other
organizations, even if the physical features and processes are similar. The purpose and goal of
this kind of knowledge is the creation of value in the specific context of the individual
organization. This parallels Pentland and Rueter’s (1994) insight that routines are the
‘grammar of action’ of organizations and should hence not be dismissed as encrusted,
bureaucratic behavior. Speaking in terms of Nonaka’s model, therefore, clients' knowledge is
9
mainly tacit and gained through processes of socialization within the organization and through
the internalization of explicit knowledge. The interest with which this knowledge has been
gained is not driven by the transfer of knowledge, but by the day-to-day goal of running the
operations of a particular company.
The knowledge of consultants, by contrast, is particularly driven by triggering change in client
organizations and by the interest to apply knowledge in other assignments, in other
companies, and hence in other contexts. The implicit or explicit goal of consulting knowledge,
therefore, is its transfer and thus its communicability. Management consultancies have an
interest in making knowledge accessible to all their employees in order for them to apply it to
a variety of contexts; thus it must be codified and leveraged to the communicative level.
Consultancies have different ways of transmitting this knowledge within their own
organization, namely through knowledge-management software (groupware), extensive
exchange of approaches and experience in practice groups, or in face-to-face meetings and on-
the-job training during project work (Hansen et al. 1999). But in any case, a communication-
oriented type of knowledge, whose purpose is transferability, is necessarily of an explicit kind.
It is based on an awareness of the knowledge carriers about their knowledge, and belongs to
the realm of consciousness. As Spender (1996: 52) points out, consciousness as explicit
knowledge on the individual level demands an objectification at the organizational level. It
must be objectified, because it is not supposed to remain related to a particular task, domain,
or function in the organization, but exactly the opposite: it is supposed to be context-
independent.
The second dimension along which client and consultant knowledge differs is connected to
the interest and intention through which knowledge is generated. Spender (1996) argues that
knowledge is not (only) thinking-based, but (also) activity-based. This parallels Blackler's
10
(1993) claim that research needs to move away from theories of knowledge towards theories
of activity-based knowing. Organizations, therefore, must be conceived of as activity systems,
whereby knowledge is shaped around the main activities and interests.
The activities within the client organization are centered on running the system as it is. The
inherent logic is to maintain the business with its current operations, not to alter it. The
knowledge prevalent in the client system is thus regulation-driven. If clients recognize the
need for change, then it is precisely because regulation-driven knowledge does not suffice to
induce the necessary adaptation to the market. This is where management consultants come
into play. Their inherent logic and their commercial objective are to change systems.
Management consulting as a service is economically based on the need for clients to change.
If there were no pressure for organizations to change, management consulting would probably
not have the same function or business opportunities. Consulting knowledge, therefore, is
based on experiences with altering organizational conditions (for the different logics of clients
and consultants see also Kieser 1998). The different types of knowledge generated through
clients and consultants' different activities can therefore be stated as regulation-driven versus
change-driven.
The 'ideal' position of management consultants, however, is not opposite of the client with
respect to the above knowledge continuums, but rather somewhere in the middle. Regarding
the need for change in the client organization, one of the consultant's most important tasks is
to externalize tacit knowledge and to make it explicit. Likewise, explicit knowledge from
outside the organization cannot be imposed on the client's routine-driven, stability-oriented
knowledge; it must be adapted to it and, most importantly, internalized and turned into tacit
knowledge. The crucial and in a way original knowledge of consultancies is therefore what
could be called procedural change-oriented knowledge’. This comprises knowledge of how to
11
analyze an organization (and make its implicit knowledge explicit), how to convince
organizational members of the need for change, how to implement new processes or routines
(making explicit knowledge tacit), etc. The typical positions of the client and of TSOCs can
hence be sketched as presented in Figure 1.
(Insert Figure 1 about here)
The ideal type of strategic management consulting, therefore, should not share too much in
common with the client, since the consultancy could not add value to the client's business. On
the other hand, it should not be too far away from the client either, because the
communication between the two parties would then break down and mediation between
consulting and client knowledge would become impossible.
The crucial insight we gain through this sketch is that management consultants and clients
have substantially different types of knowledge, not different levels. These different kinds,
however, indicate the inherent difficulties of each consulting assignment. In order to perform
successfully, consultants have to perform two tasks: (i) leverage the tacit knowledge within
the client organization to a level of explicit knowledge; and (ii) internalize both internally
generated and externally transferred knowledge into new routines within the client
organization.
However, as a considerable number of historical case studies show (e.g. Holmes and Green
1986, Pugh 1988, Public Histoire 1991, Cailluet 1995, Church 1969; Pasold 1977; for a
summary see Kogut and Parkinson 1993, and Kipping 1996), the performance and successful
completion of these tasks is very difficult. In many instances the concepts of consultants were
12
not suitable for the specific organization or its context and therefore only adopted ‘on paper’.
Their recommendations were sometimes considered too ‘radical’ or ‘revolutionary’ and, even
more often, opposed by middle or even senior management. As a result, clients frequently
introduced the consultancy suggestions only partially or gradually. In a number of cases where
a full-scale implementation was attempted, the company reversed to the previous structure
later on, or adopted a hybrid form of the two.
Based on the two-dimensional model of knowledge outlined above, it is possible to examine
the resulting changes in the consultancy markets more in-depth. They concern mainly the
emergence and growth of more explicit kinds of knowledge on the one hand, and even more
change-oriented service providers on the other.
3 Changes in the consulting market: origins and consequences
3.1 The evolution of services and service providers
The last ten to fifteen years have been a period of both constant growth of and considerable
changes in the consulting market. Both the growth and the changes were driven by
developments on both the demand side, i.e. challenges posed to client organizations resulting
from the globalization of economic activities and the increasing and more rapid flow of
information, and the supply side, namely the emergence and expansion of new service
providers. The most visible development has been the fact that the previously big eight,
meanwhile big five accounting firms rapidly expanded their consulting activities from the
mid-1980s onwards (cf. Goshal 1993). This shift in their business direction was prompted by
the lack of growth opportunities in their traditional audit markets. Leveraging their knowledge
of information technology and their extensive client base in auditing, they managed to become
13
important providers of consulting services around the world and today occupy positions
among the top ten consultancies in almost every country (for country-specific data see the
monthly leaflet Management Consulting International).
The expansion of the big five accountancy firms benefited especially from the development of
Enterprise Resource Planning (ERP) systems. Companies such as the German SAP, the Dutch
Baan or the American Peoplesoft have developed software to provide a company-wide IT
system that allows for a comprehensive control of data and information through packaged
configurations (Lindvall and Pahlberg 1999). The demand for these systems and for related
consulting services grew rapidly during the 1990s, and the consulting branches of the big five
accounting firms quickly concentrated on this strongly growing market segment. Services
related to these systems and the generally fast development of information technology begun
to strongly influence the consulting market. These consulting services grew and continue to
grow faster than the market average and TSOCs.
Therefore, although the consulting market has grown strongly overall, TSOCs have lost a
relative share of the business fields in which consulting firms are active. The direction of this
loss has primarily been towards information technology and hence towards the explicit
knowledge type. TSOCs focussing on strategy and reengineering must concentrate on clients’
operations and hence depends on the implicit knowledge of client employees. By contrast, a
striking feature of IT, and also of ERP systems, is that they can to an extent ignore the tacit
knowledge within client organizations and instead provide an explicit framework for
capturing and exchanging information. At the same time, the implementation of these systems
is oriented towards organizational routines and the regulation of day-to-day operations. Even
if the implementation of information technology requires a reasonable extent of organizational
change, this is not in the foreground of projects of this kind. On the contrary, the
14
implementation of such systems is oriented towards the regulation and stabilization of
routines. It is supposed to simplify day-to-day operations instead of questioning and changing
them. Once an ERP system is implemented, the change of organizational routines becomes
increasingly difficult. In summary, TSOCs focusing on strategy and re-engineering have, on
the whole, lost relative market shares to providers of explicit, regulation-driven knowledge
(upper left field of Figure 1).
In addition, the consulting market has been strongly influenced by the emergence of a new
competitor: investment banks. The internationalization of markets and the high mobility of
information and means of production have activated a wave of mergers and acquisitions that
triggered the growth and importance of investment banks. Although consulting in mergers and
acquisitions used to be an important pillar of strategic management consultancies, they did not
obtain the same share in this development as the investment-banking sector. The procedures
investment banks use, preparing mergers and acquisitions by analysing companies from the
outside and mostly based on explicit, quantitative data, are characterized by a decoupling from
the interior operations of the companies they deal with. Neither is the tacit knowledge of their
clients particularly relevant for their business, nor is it oriented to organizational routines or
regulation. The investment-banking approach is hence strongly change-driven and only
concerned with explicit knowledge (upper right field of Figure 1). This is the other competitor
to which conventional management consultancies have lost shares in business fields in which
consultancies operate.
Another important, albeit less visible development in the consulting market has been the
emergence of internal management consultancies as well as management coaching and
training. Due to the rapid and continuous changes and uncertainty in the environment of client
organizations, there has been an increasing demand for consultants who accelerate, structure
15
and accompany the change process in companies. This change has been much less perceptible,
because it involves a large number of small consultancies, often one-man shows, with diverse
backgrounds such as psychology (coaching, seminars for social skills) or organizational
behavior (consulting for management and organizational development). This kind of
management consulting is oriented to the tacit knowledge of clients. Although they are
likewise change-driven instead of routine-oriented, these forms of consulting have captured
those parts that have largely been neglected in the evolution of the market: a rigorous
orientation to the individual and his lifeworld in the organization and to those kinds of
knowledge that are tacit and experience-related (lower right field in Figure 1).
In particular, both internal management consulting and management coaching capture those
services external consultants have difficulties with: to orient change-driven knowledge at the
function-specific and company-specific day-to-day operations. Management training and
coaching pursue similar paths of change. Here, the mechanism is based on the experiences of
individuals within the firm, on changes of their perception, evaluation of situations, etc.
Although this market appears significantly smaller and conventional consultancies have lost
much less relative market shares in this direction, it still contributes to the pressures faced by
strategic consulting firms. The following Figure 2 sketches these developments in terms of the
different kinds of knowledge that these new and/or expanding service providers offer. The
arrows indicate the shift of relative market shares.
(Insert Figure 2 about here)
Thus, in conclusion, there seems to have been an increasing specialization in the consulting
market regarding different types of knowledge. This has increased the demand for
16
consultancies with IT knowledge, especially the consulting arms of the big five accounting
firms, and the demand for investment banking activities in terms of mergers and acquisitions.
At the other extreme, the need to train managers and motivate employees has increased the
market for development-oriented consultancies that focus almost exclusively on the tacit
knowledge of individuals in organizations. This has favored management coaching and
training-oriented services, but has also provided an opportunity for internal management
consultants who have a better understanding of the company-specific knowledge than external
consultants (and may be considerably less expensive). Finally, the wave of mergers and
acquisitions has created a need for a more remote kind of knowledge, both explicit and
change-driven, provided by investment banks. They arrange and structure these deals, thus
also provide strategic direction, and leave only the detailed implementation (post-merger
integration) to consultancies.
In this tension between explicit knowledge on the one hand and tacit, development-oriented
knowledge on the other, TSOCs have increasingly lost their dominant role. This development
has been disguised – at least partially – by the overall growth in the market from which many
of them have also benefited. There are nevertheless clear tensions in the market and TSOCs
have increased efforts to reorient their activities and redefine their role. However, as the next
section will show, these are hampered by their internal logic, structures, and beliefs.
3.2 The reaction of traditional strategy and operation consultancies
As a result of these changes, TSOCs have come under increasing pressure within the market.
Clients now appear much less reluctant to terminate consulting assignments prematurely and
to criticize consultants and their performance privately or publicly. Competition among
consultancies has heated up and they are watching each other closely in terms of performance,
17
client perception, and attractiveness for high-potential recruits. They have also become
increasingly reluctant to publicize data on their revenues and number of staff. Concerning the
challenges posed by the new and rapidly expanding entrants discussed above, TSOCs have
come to recognize the threat from the consulting arms of the big five accountancies. They
have increasing concerns about competition through investment banks, and they are now only
beginning to consider the market for training, executive development, and coaching as a
potential field of activity.
Recently, TSOCs have made considerable efforts concerning internal knowledge
management. Almost all of them have introduced some form of specialization, both in terms
of client industry and/or in terms of approaches, mainly by increasingly employing their
consultants in specific branches such as telecommunications or automotive, or by forming so-
called practice groups such as logistic or marketing. However, in terms of the codification and
externalization of their own knowledge they have usually not gone as far as the big five
accountancies (for example e-based consulting; see in this context also Hansen et al. 1999).
More recently, TSOCs have also started hiring experts with specific knowledge, for instance
in IT or human resource management, in addition to MBA graduates with more general
management knowledge.
One of the reasons why the market of IT consulting has long not been recognized as a major
threat is certainly connected to the elitist self-image and reputation of TSOCs. They have
managed to establish strategy and organization as the ‘noble’ segment of the consultancy
market (Henry 1993). This has enabled them to attract high-potential graduates and to charge
above-average fees for their services, since high fees serve as a signal of value in the absence
of more tangible criteria to measure consultancy performance. Information technology has
long been associated with computer freaks, technicians with old suits, bad haircuts and bad
18
breath, with mainframes in the basement of the building instead of the management board’s
top floor, and with technical stuff way too operational for strategic questions (we all
remember sentences like “technical equipment follows structure follows strategy”). Entering
into the growing IT segment was considered a distortion of this image with potential
consequences both for the recruitment of new consultants and the all-important reputation
among client companies. By contrast, IT-oriented consultancies have an incentive to enter the
strategy segment, because it will help to enhance their image, enlarge their recruitment basis,
etc. This constitutes a major threat for TSOCs, because due to a lack of IT knowledge they
cannot offer a one-stop shop for clients. Only recently have TSOCs tapped into the IT
consulting market, for example McKinsey with its foundation of a Business Technology
Office three years ago. But their success is very limited. To put it provocatively, the often-
mentioned arrogance of strategy consulting has taken its victims.
Even the current steps into the market of management training and development are very late,
and this lateness can equally be seen in the context of the elitist self-image and the belief in
quantitative approaches. Management training and development has to do with ‘soft stuff’ and
is therefore considered the domain of ‘less scientific’ people rather than ‘fact-oriented’
consultants. The self-concept of doing quantitative, data-oriented consulting has prevented
them from recruiting staff and systematically entering markets for management training,
coaching, executive development, etc., they have so far failed to exploit possible opportunities
for growth in these business fields.
TSOCs have begun to change their recruitment patterns and increasingly hire graduates with
backgrounds other than MBAs. However, this new pool mainly comprises graduates from
(positivist) natural sciences such as physics, biology, etc. Only in very rare cases hire
consultancies individuals with a background in psychology, sociology, anthropology, or
19
history. Hence TSOCs hold only those human resources that can handle quantitative-analytical
approaches; hermeneutic knowledge does not belong to their academic socialization. It is
smaller consultancies that hire individuals with a background in social sciences and hence
provide different approaches to organizational change.
In addition, TSOCs have become increasingly active in the creation and dissemination of
management ideas. They have increased their collaboration with leading business school
professors and management gurus, trying to tap into their ideas, for example by
commissioning work or inviting them to give presentations at internal gatherings. They have
also dramatically increased their output in terms of publications, attempting to create new
management fashions or ride on the waves of existing ones. McKinsey, for example, has
published more books over the last ten years than over its whole previous history (for fashion
creation through book publications see also Kieser 1997).
Furthermore, top management consultancies are usually based on a logic, or even an
obligation, of growth (Maister 1982; 1993). Only by expanding continuously, can they offer
new recruits an opportunity to advance and eventually become a partner and shareholder in the
consultancy as a reward for their hard work over a number of years. And only by offering such
an opportunity can the existing partners attract the high-potential graduates necessary to
provide a service of sufficient quality to justify high fees. But even those strategy consulting
firms that are still expanding, face problems as a result of their organization, because they find
it difficult to integrate the increasing number of experts into their hierarchies and systems of
promotion, and thus hamper their efforts to generate and cultivate more specialist knowledge.
Neither the big five nor smaller consultancies face similar pressures. The former are much
more formal organizations, also reflecting their significantly larger size. They have more
hierarchical levels and a much higher ratio of consulting staff to partners than conventional
20
consultancies. They can therefore offer more opportunities to be promoted from one level to
the next and have a more structured and systematic human resources policy. Investment
banks, too, have been moving towards traditional forms of organization with an increasing
separation of ownership and control and a more systematic division of labor. Small
consultancies focusing on tacit processes of organizational change, by contrast, are very
loosely structured. Once they reach a certain size, they often disintegrate, leading to the
formation of several smaller firms. They can nevertheless carry out large projects through
forming ad-hoc, temporary networks. This also allows them to leverage the necessary
knowledge and customize their approaches.
In summary, the attempts of the conventional management consultancies to address the
challenges they are facing appear insufficient. This is not necessarily due to their
unwillingness to change, but the result of their inherent logic, self-image, and belief in
homogeneous structures and personnel. In the next chapter we therefore outline a few
preliminary suggestions of how to overcome these problems in order to face current and future
challenges.
4 Current challenges: conclusion and recommendations
Above we have provided a framework to suggest on which type of knowledge TSOCs are
based in contrast to other market participants. On the basis of this knowledge-based
framework we have reviewed and sketched the development of the business field for
management consultancies in the 1990s. We have made the case that this business field has
expanded, that new competitors have emerged, and that other firms have strengthened their
positions vis-à-vis TSOCs. On this basis we have argued that the internal logic, structure and
beliefs of TSOCs have hampered them to acquire those knowledge types that are necessary for
21
expanding into the widened business field. This concerns the growth-driven partnership
organization, the elitist self-image and reputation, and the quantitative focus of organizational
analysis. Based on these arguments, we suggest in the following a strategy to solidify and
improve the competitive position of TSOCs. This may help to regain their ideal-typical role as
intermediaries between tacit and explicit, and regulation- and change-oriented knowledge.
A first idea would be to recommend TSOCs to widely enlarge their business services and thus
human-resource base towards both IT consulting and management
training/coaching/development. However, as we will contend below, this would contradict
their traditional logic of internal coherence and the concept of the one-firm firm. We will
argue, therefore, that strategic collaborations with firms of other knowledge types is a much
more promising strategy.
We understand that some consultancies have taken steps toward broadening the scope toward
the knowledge fields of IT consulting (explicit, regulation-oriented knowledge) and
management training (implicit, change-oriented knowledge). Monitor, for example, has
adopted what could be called a multi-divisional organizational structure. Regarding
management development, training and coaching, this would mean to widely enlarge the
recruitment policy to hire a significant number of consultants with a social-scientific
background or experienced management trainers and coaches. Based on such a more diverse
composition in terms of staff and approaches, TSOCs could then attempt to diversify towards
the other knowledge types and business fields outlined above. This may even have the positive
side effect that a greater understanding of the life-world of the individual in the client
organization could be developed among the consultancy staff, and firms would be less likely
to meet barriers against the implementation of their advice and concepts. Regarding IT
consulting, it would at first sight be useful to further pursue and intensify the efforts to tap
22
into this part of the consulting market. This would also require an intensification of hiring
experienced individuals in the IT sector rather than fresh graduates from business schools,
since business schools can hardly satisfy the demand for IT experts. We understand that most
TSOCs have taken steps in this direction, which is, for example, reflected in the foundation of
McKinsey’s Business Technology Office.
These changes would require TSOCs to change structurally. To give but one example, a
consulting firm such as McKinsey could form separate divisions, namely McKinsey Strategy
and Operations (the ‘old’ McKinsey), McKinsey IT and e-commerce, McKinsey Mergers and
Acquisitions (to compete with investment banks), and McKinsey Coaching and Development
(to cover the training and coaching market). This way they could expand to all knowledge
fields outlined above. A fifth division focussing on start-up firms and venture capital may be
another sensible diversification, and McKinsey has indeed already established such an area.
Consultants could become permanent members of one division and specialize in this area.
However, these efforts would run counter to the existing practices and tenets of TSOCs and
therefore constitute a source of considerable tension within these firms. This concerns
primarily the internal functioning of TSOCs. Internal homogeneity, the one-firm concept, has
been an important factor in the successful worldwide expansion of the largely US-based
strategy firms in the post-war period (Kipping 1999), and for them it is very difficult to strike
a balance between the demands of an increasingly specializing market and their own internal
logic. Similar educational backgrounds, a uniform promotion policy, and a worldwide
organizational culture have prevented the partnership systems of these consultancies from
disintegration. An increasing diversification of recruitment and consulting approaches, or the
multi-divisional form suggested above, would threaten this homogeneity. IT specialists,
strategy or marketing consultants, and management trainers/coaches, would represent a very
23
diversified workforce, which could not be integrated in a uniform organizational culture.
These entirely different backgrounds and working styles would hardly fit under a roof of
homogeneous terms of promotion and compensation. The tensions between Andersen
Consulting and Arthur Andersen show that consulting firms with a heterogeneous platform of
personnel and approaches are always threatened by disintegration and spin-offs. The danger
would emerge that the main value proposition to clients, the quantitative-analytical approach
to business questions conducted by individuals with the same value system, would lose its
foothold and the firm as a whole would lose relative market shares even in their home territory
of operative analyses and strategic advice.
A much better advice, therefore, would be to stick to the tenets of internal homogeneity and
the one-firm concept and to engage in networks of cooperation with firms of other knowledge
types such as IT consultancies, investment banks, and management training and coaching
firms (see Figure 2, above). Recent research on joint ventures, strategic alliances and network
ties of companies (Hamel 1991; Hagedoorn and Schakenraad 1994; Mowery et al. 1996;
Powell et al. 1996; Appleyard 1996; Simonin 1997; Dyer and Nobeoka 2000; Koput and
Powell 2000; see also the earlier volume edited by Contractor and Lorange, 1988) has shown
that establishing network ties not only to clients, but especially to companies that offer
complementary types of service, is a promising strategy to access knowledge and develop new
fields of business.
Dyer and Nobeoka (2000) have most recently shown that the creation and management of
network-level knowledge sharing processes at least partially explain productivity advantages
in the automotive industry. They looked at the knowledge-sharing network of the car
manufacturer Toyota and found that it “(1) motivate(s) members to participate and openly
share valuable knowledge (while preventing undesirable spillovers to competitors), (2)
24
prevent(s) free riders, and (3) reduce(s) the costs associated with finding and accessing
different types of valuable knowledge” (p. 345). An important prerequisite for this is that a
network identity with rules for participation and entry is established. This way, the value
proposition to clients could be considerably enhanced by an integrated service TSOCs could
not provide on their own. A network of firms such as a TSOC, an investment bank, an IT
consultancy, and a management development institute, could provide all knowledge types
outlined in Figure 1 and 2 and without the danger to overstretch the TSOC’s internal logic.
Although the above studies on inter-firm collaborations have been undertaken in industries
other than management consulting, they present ample examples and evidence of successful
collaborations among firms with different types of knowledge. These studies share in
common, as Dyer and Nobeoka (ibid.) put it, that the notion of dynamic learning capabilities
to create competitive advantage needs to be extended beyond firm boundaries. In this context
it is interesting to note that in other knowledge-intensive fields such as biotechnology and
semiconductors, firms are not only actively expanding the volume and scope of
collaborations, but are also broadening the kinds of partners with whom they cooperate
(Powell et al. 1996; Koput and Powell 2000; Appleyard 1996). Koput and Powell (2000)
found that the larger, older and more successful firms in the biotech sector are, the more they
cooperate with other firms and the larger the variety of cooperation partners. Interfirm
cooperation, they conclude, is not only a transitional stage to success and maturity, but rather a
significant organizational practice which “represents neither dependency nor specialization
but an alternative way of accessing knowledge and resources” (ibid: 2). Along the same line,
Child (1999: 26) concludes that strategic alliances “can foster learning both by facilitating
knowledge transfer and by promoting knowledge creation on the basis of complementary
competencies.” According to him, the distinctive advantage to arms-length market relations is
the potential for exchanging and building upon tacit knowledge.
25
From this point of view, increasing cooperation of TSOCs with firms based on the other
knowledge types outlined above is a much more promising strategy than establishing a
divisionalized form with its danger of disintegration. We would therefore not be surprised if
clusters of, for example, an investment bank, a TSOC, an IT consultancy and a management
coaching firm were to emerge in the near future (see Figure 2, above). If such firms manage to
establish a common network identity in the sense of Dyer and Nobeoka (2000), then
cooperation between these firms would enhance their knowledge base and serve clients with
integrated services no firm could provide on its own.
Based on these arguments we propose that strategic collaborations between TSOCs, IT
consultancies, investment banks, and management training institutes are much more likely to
be successful than current attempts of TSOCs to establish one-stop consulting firms. In
summary, what we advocate is that TSOCs reclaim their central position between explicit and
tacit, regulation- and change-oriented knowledge – but in much closer connection to providers
of other types of knowledge. To this end, TSOCs will have to develop collaborative know-
how (Simonin 1997) about identifying and selecting potential cooperation partners and
negotiating the terms of an agreement. Otherwise they would run the danger to become
‘squeezed out’, i.e. continue to loose relative market shares to existing and new competitors
with the potential consequence of giving up their independence, as many of their smaller
domestic rivals have already done throughout the last decade.
References
Appleyard MM. 1996. How Does Knowledge Flow? Interfirm Patterns in the Semiconductor Industry. Strategic Management Journal, Winter Special Issue 17: 137-154.
Barley SR, Kunda G. 1992. Design and Devotion: Surges of Rational and Normative Ideologies in Managerial Discourse. Administrative Science Quarterly 37: 363-399.
26
Bessant J, Rush H. 1995. Building Bridges for Innovation: the Role of Consultants in Technology Transfer. Research Policy 24: 97-114.
Blackler F. 1993. Knowledge and the Theory of Organizations: Organizations as Activity Systems and the Reframing of Management. Journal of Management Studies 30/4: 863-883.
Cailluet L. 1995. Stratégies, structures d’organisation et pratiques de gestion de Pechiney des années 1880 à 1971. PhD thesis, University of Lyon II.
Child J. 1999. Learning Through Strategic Alliances. Manuscript. Manuscript. Forthcoming in: Dierkes M, Antal AB, Child J, Nonaka I, (eds.). Handbook of Organizational Learning. Oxford: Oxford University Press 2000.
Church RA. 1969. Kenricks in Hardware. A Family Business: 1791-1966. Newton Abbot: David & Charles.
Contractor FJ, Lorange P, (eds.). 1988. Cooperative Strategies in International Business: Joint Ventures and Technology Partnerships Between Firms. Lexington, MA: Lexington.
Dyer JH, Nobeoka K. 2000. Creating and Managing a High-performance Knowledge-sharing Network: The Toyota Case. Strategic Management Journal 21: 345-367.
Fridenson P. 1994. La circulation internationale des modes manageriales. In: Bouilloud J-P, Lecuyer BP, (eds.), L’invention de la gestion. Histoire et pratiques. Paris: L’Harmattan, pp. 81-89.
Goshal S. 1993. Andersen Consulting (Europe): Entering the Business of Business Integration. In: Hendry J, Eccles T, eds. European Cases in Strategic Management, London: Chapman & Hall, pp. 30-58.
Grant RM. 1996. Toward a Knowledge-based Theory of the Firm. Strategic Management Journal 17 (Winter Special Issue): 109-122.
Guillén MF. 1994. Models of Management. Work, Authority, and Organization in a Comparative Perspective. Chicago: The University of Chicago Press.
Hagedoorn J, Schakenraad J. 1994. The Effect of Strategic Technology Alliances on Company Performance. Strategic Management Journal 15: 291-309.
Hamel G. 1991. Competition for Competence and Inter-partner Learning within International Strategic Alliances. Strategic Management Journal 12 (Summer Special Issue): 83-103.
Hansen MT, Nohria N, and Tierney T. 1999. What’s Your Strategy for Managing Knowledge. Harvard Business Review, March-April: 106-116.
Havelock RG, Guskin A. 1971. Planning for Innovation Through Dissemination and Utilization of Knowledge. Ann Arbor: University of Michigan Center for Research on Utilization of Scientific Knowledge.
Henry O. 1993. Un savoir en pratique: les professionnels de l’expertise et du conseil. PhD thesis, Department of Sociology, University EHESS, Paris.
Holmes AR, Green E. 1986. Midland. 150 Years of Banking Business. London: Batsford.
Kieser A. 1997: Rhetoric and Myth in Management Fashion. Organization 4/1: 49-74
Kieser A. 1998: How Management Science, Consultancies and Business Companies (Do Not) Learn From Each Other: Applying Concepts of Learning to Different Types of
27
Organizations and to Interorganizational Learning. Working Paper Universität Mannheim, SFB 504, Working Paper No.98-20. Forthcoming in: Clark T, Fincham R. 2001. Critical Consulting. Oxford: Blackwell.
Kipping M. 1996. The U.S. Influence on the Evolution of Management Consultancies in Britain, France, and Germany Since 1945. Business and Economic History 25/1 (Fall): 112-123.
Kipping M. 1999. American Management Consulting Companies in Western Europe, 1920 to 1990: Products, Reputation and Relationships. Business History Review 73/2 (Summer): 193-222.
Kogut B, Parkinson D. 1993. The Diffusion of American Organizing Principles to Europe. In: Kogut B. (ed.). Country Competitiveness. Oxford: Oxford University Press, pp. 179-202.
Koput KW, Powell, WW. 2000. Science and Strategy: Organizational Evolution in a Knowledge-intensive Field. Paper presented at the annual meeting of the Scandinavian Consortium of Organizational Research, Stanford University, Palo Alto, September/October 2000.
Lindvall J, Pahlberg C. 1999. SAP/R3 as a Carrier of Management Knowledge. Paper presented at the SCANCOR workshop on Carriers of Management Knowledge, Stanford University, 16-17 September 1999.
Maister DH. 1982. Balancing the Professional Service Firm. Sloan Management Review, Fall 1982: 15-29.
Maister DH. 1993. Managing the Professional Service Firm. New York: Free Press
Mowery DC, Oxley JE, Silverman BS. 1996. Strategic Alliances and Interfirm Knowledge Transfer. Strategic Management Journal 17 (Winter Special Issue): 77-91.
Nelson RR, Winter SG. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press.
Nonaka I. 1994. A Dynamic Theory of Organizational Knowledge Creation. Organization Science 5/1: 14-37
Nonaka I, Konno N, 1998. The Concept of "Ba": Building a Foundation for Knowledge Creation. California Management Review 40/3: 40-54.
Nonaka I, Takeuchi H. 1995. The Knowledge Creating Company. New York: Oxford University Press.
Pasold EW. 1977. Ladybird, Ladybird. A Story of Private Enterprise. Manchester: Manchester University Press.
Pentland BT, Rueter H. 1994. Organizational Routines as Grammars of Action. Administrative Sceince Quarterly 37: 484-510.
Polanyi M. 1962. Personal Knowledge: Towards a Post-critical Philosophy. London: Routledge and Kegan Paul.
Polanyi M. 1967. The Tacit Dimension. London: Routledge and Kegan Paul.
Powell WW, Koput KW, Smith-Doerr L. 1996. Interorganizational Collaboration and the Locus of Innovation: Networks of Learning in Biotechnology. Administrative Science Quarterly 41: 116-145.
28
Public Histoire. 1991. L’identité d’un groupe. Lafarge-Coppée 1947-1989. Paris
Pugh P. 1988. The History of Blue Circle. Cambridge: Cambridge Business Press.
Simonin BL. 1997. The Importance of Collaborative Know-how: An Empirical Test of the Learning Organization. Academy of Management Journal 40/5: 1150-1174.
Spender J-C. 1996. Making Knowledge the Basis of a Dynamic Theory of the Firm. Strategic Management Journal 17 (Winter Special Issue): 45-62.
Table 1 Change in the top ten worldwide consultancies, 1998 vs. 1991
Consultancy Revenues in 1998 ($ mill.)
Rank in 1991 Revenues in 1991 ($ mill.)
Revenue Multiplier
1 Andersen Consulting 8,307 1 2,260 3.7 a
2 PriceWaterhouseCoopers 6,000 3 and 7 1,685 3.6
3 Ernst & Young c 3,970 5 862 4.6
4 Computer Sciences Corporation
3,500
n.a.
n.a.
-
5 Deloitte Consulting / DTT
3,240
8
685
4.7
6 KPMG 3,000 6 802 3.7
7 McKinsey & Company 2,500 2 1,100 2.3
8 Mercer Consulting Group
1,543
4
894
1.7
9 Arthur Andersen a 1,368 - - -
10 A. T. Kearney (part of EDS)
1,234 n.a. n.a. -
a In 1991, Arthur Andersen had no consulting activities; the multiplier including the 1998
of both firms would be 4.3. b Combining the revenues of Price Waterhouse and Coopers & Lybrand which merged in
1998. c Merged with Cap Gemini in 2000. Source: Financial Times, 10 December 1999, based on Management Consultant
International; own calculations
1
Figure 1: Typical knowledge-type positions of clients versus traditional strategy and
operation consultancies
Traditional
Strategy and Operation Consultancies
Explicit knowledge:
Communication and transfer-oriented
Implicit/tacit knowledge:
Function-specific and
experience-related
Change-oriented
Regulation -oriented knowledge
Client
2
Figure 2: The development of the consulting market
Traditional Strategy and Operation
Consultancies
Explicit knowledge:
Communication and transfer-oriented
Implicit/tacit knowledge:
Function-specific and experience-related
Change-oriented
knowledge
Regulation-oriented knowledge
Client
IT-oriented consulting Enterprise Resource Planning, etc.
Investment Banking
Internal Consulting; Management Training; Management Coaching; Organizational Development