The internationalization of consulting services has been traditionally related to two main driving forces: a “follow-your-customer” strategy and a “market-expansion” strategy. Consulting firms serving clients among the TNCs would often need some type of representation abroad. This was particularly important for accounting firms auditing financial statements for large TNCs. Also, consultants servicing domestic customers may need international networks in order to obtain information on foreign markets, local legislation in other countries, and so on. Management consultants, law firms and accounting firms all need international connections in order to enable them to advise on international transactions. Consequently, their internationalization strategies have tended to emphasize a “follow-your-customer” strategy.
For engineering firms, these needs are less obvious, as most projects are located only in one country. Unless there is a continuous flow of project assignments in a specific country or region, and direct access to clients essential for maintaining a foothold in these markets, international representation or establishment is not essential. Thus, a “market-expansion” strategy has tended to be most important in this case. Nevertheless, international experience has become increasingly important as a qualification for bidding on projects carried out in developing countries, and for many engineering consulting firms this aspect of international
In the internationalization of manufacturing production, the utilization of national comparative advantage has been a strong argument for the strategies adopted by individual firms. In services, however, this factor has played a minor role. By far the most significant aspect of competitiveness has been created assets that yield competitive advantages for a particular firm or a group of firms. The extent to which consulting has relied on competitive advantages associated in particular with the specific skills of an individual consultant has made the impact of factors such as national natural resource endowments and wage levels far less relevant.
Comparative patterns of internationalization have shown some differences in the three industries analysed in this volume. Accounting is in some respects the most internationalized of the three industries; but, at the same time, concentration is relatively high in the industry, with the big international accounting firms dominating the market. This network of large TNCs is, however, loosely organized in the sense that most of the foreign affiliates operate more or less as individual entities. The rest of the firms in accounting are usually domestically owned, and most of their business is oriented towards the national market. This is partly due to the fact that accounting is the most regulated of the three industries. In order to provide the most important accounting services (such as auditing of accounts), most firms have to utilize registered accountants, which requires a certification obtained from national authorities. This certification is held by the individual accountant and not by the accounting firm.
Although countries are making efforts to implement mutual recognition of certified accountants, especially within the European Union, in practice it has not been possible to deliver basic auditing services at arm's length across borders owing to legal restrictions. The internationalization of accounting firms has therefore primarily taken place through the establishment of affiliates (greenfield investments or through the purchase of local firms), or the establishment of partnerships with existing accountancy firms in a market. The competitive position of international accounting firms varies from region to region. For example, even within the United States, there are large variations in the areas of specialization of the different accounting firms from State to State.2 The existence of firms with an international reach but with their activities anchored in national offices in accountancy consultancy services has led to the characterization of this industry as being shaped by multi-domestic rather than international competition.
On account of the close links of management consulting with accounting services, many TNCs in the management consultancy industry are also organized into multi-domestic networks. For example, although there are no formal regulations constraining cross-border activities in management consulting within the European Union, the majority of these consultancy services in that region are still offered by local consultants. A survey undertaken for the European Commission pointed out that the most important constraint lay in the clients' attitudes. These attitudes were observed to range from the desire for local knowledge and understanding to “xenophobia” (EC, 1995, pp. 24-39). The organizational patterns within the management consultancy industry are, however, more mixed. Very often, the way in which a management consulting firm is organized on an international level is dictated by the ownership pattern found in the firm that provided the original basis for the establishment of the management consulting firm - for instance, whether it originated in an international accounting firm, an engineering consultancy, a software producer or a public institution.
Engineering consultancy firms have generally been established as personally owned firms or as partnerships between the people - usually a few engineers - who establish a firm. When
these firms grow, however, they often become incorporated or practise special types of ownership; some engineering consultant firms are owned by the employees or by an independent foundation. Others are incorporated with private ownership and occasionally on the basis of public shares. Many of the large firms in the engineering consultancy industry have had long experience of international work. In many instances, the internationalization process has been similar to that of manufacturing industries. The initial export may have been work on a project that merely required the temporary transfer of employees. Subsequently, additional projects in the same overseas country would require that a contact is established with an independent representative, who establishes and maintains some immediate contact with local customers and also prepares missions for engineering consultants. Occasionally, engineering consultancy firms have relied on joint venture agreements or other more permanent arrangements with cooperative partners in this phase. The next step is usually to open a “sales subsidiary”, which in the case of engineering consultants usually means the establishment of a permanent office staffed primarily with local staff. Nevertheless, the head office is usually still responsible for contractual relationships and responsibilities vis-à-vis local customers; the local office is therefore primarily engaged in ensuring that the practical details of consultancy jobs are carried out, and they often have to rely on strong back-office support from headquarters. The last step is the establishment of a regular affiliate, which can act independently in most cases and even develop its own expertise in some areas.
The process of the internationalization of consulting firms is accordingly strongly affected by the particular types of ownership predominant among major firms in the different areas. Because lawyers and certified accountants often have a personal liability in relation to the services they provide, law firms and accounting firms have traditionally been organized in partnerships. These may range from very loose partnerships (which only involve cost-sharing for basic common facilities) to more corporate-like partnerships in which both liabilities and profits are shared. International representation is often initiated as loosely connected networks of nationally based partnerships; in law firms this is still the dominant form of organization of international cooperation. In the accounting industry, however, the process of internationalization has progressed to a different level, as the major players in the industry are increasingly linked together in closer forms of cooperation. Often, national brand names have been given up in favour of a common name.
The advantages and limitations of different organizational strategies for internationalization are briefly summarized in table V.4. In many ways, partnerships, which often have been imposed on the consulting industry for legal reasons (particularly with respect to accounting), have turned out to be quite flexible organizations for internationalization. New offices can be established merely by inviting a local partner to join the existing organization; the financial risk related to this type of international expansion is limited. If it is not possible to make a profit in a new affiliate, it is not difficult to withdraw from the market either, by inviting local partners to join another affiliate or simply by excluding them from the partnership. This flexibility is probably one of the main reasons for the rapid expansion of the big international accounting firms into a large number of new national markets. On the other hand, the partnership structure also has its limitations. For example, it may be difficult to ensure quality control in such a flat organization in which, to a certain extent, all partners run their own individual businesses. When new investments are to be decided or new strategies formulated, a corporate structure may turn out to be more suitable. Corporations can also more easily obtain external funding. For these reasons, many consultancies are now moving towards a more corporate type of structure.
Table V.4. Strategies for internationalization of consulting: advantages and limitations
Type of ownership Advantages Limitations
Corporate (e.g. quoted shares, affiliate of a holding company)
External funding of internationalization possible
Dependence on shareholders
Independent fund Independent of external
interests
External funding a problem
Owned by employees Independent of external
interests; more motivated staff
External funding a problem
International partnerships Expansion can be funded by
introducing new partners
Funding of new investments difficult
National partnerships Expansion can be funded by
introducing new partners; limited financial risk related to establishment in new countries
Difficult to agree on funding of new activities
Strategic business alliances Limited financial risk; no
common business strategy required
Lack of quality control; limited economies of scale, e.g. in marketing
The tradability of consulting services is likely, in the long term, to affect both the international market and the patterns of business organization outlined above. There seems to be little doubt that future markets will become more globally integrated. Since the technical tradability of many consulting products is already feasible, the removal of legal restrictions will lead to an increase of trade in this industry. The results in terms of reorganization are not clearly predictable, particularly since the exploitation of tradability can benefit existing patterns of organization as well as support new structures. The tradability of intermediate products may assist firms organized into partnerships to develop means for sharing competitive assets and strengthen the quality of services delivered by local partners. But the tradability of both intermediate and final products may also undermine loosely connected alliances and instead favour corporate structures or even cross-border trade by new entrants in local markets or overseas providers.
B. Towards a strategy for exploiting tradability: