Management consulting has been defined as “an advisory service contracted for and provided to organizations by specially trained and qualified persons who assist, in an objective and independent manner, the client organization to identify management problems, analyze such problems, recommend solutions to these problems, and help, when requested, in the implementation of solutions” (Greiner and Metzger, 1983, p. 7). This definition captures the diverse character of qualifications needed by professionals in the industry and establishes management consultancy as an autonomous industry. The characterization of the industry as independent is important, as management consultants should not be associated with any organization that has a close relationship with the client. Day-to-day management, implementation of specific projects, planning and designing new strategies, and so forth are all included in the variety of services supplied all over the world by international and local management consultancy companies.
The definition provided above suggests a certain focus of the products offered by management consultants, but the boundaries between management consultancy and other business services remain unclear. Some of the most important areas where those boundaries are blurred, and where the markets served by management consultants are threatened by services offered by firms belonging to other industries or professions, are the following:
• Auditors, who are typically very keen to give business advice to their audit clients. As a matter of fact, this is a strategy deliberately chosen by several of the big international accounting firms.
• Engineering consultancy, which increasingly supplements the technical skills in its business advice with managerial elements. This is most clearly seen in international project markets such as Eastern and Central Europe.
• Business advisory services within communication, public relations and similar areas, which are extending their services beyond the formulation of the messages that management sends to employees, owners, the press, etc. These advisers are willing also to engage in the decision processes that form the concrete background for the messages. In addition to these, other industries are entering the market. Most notably, a number of software houses have established consulting departments offering information-technology consultancy services similar to those offered by management firms. On the other hand, some management consultancy firms develop and market their own software products.
The obscure boundaries between management consultancy and other services have important implications for the markets and the strategies of major firms in the industry. The overall tendency is that the markets become far more competitive, and that the strategies and behaviours of most firms within the more narrowly defined industry of management consultancy tend to emphasize the building of specialized competencies that ensure clear advantages vis-à-vis competitors from other sectors.
2. Markets and industry structure
No official statistics are published for management consultancy markets worldwide, but one of the key journals in the field, Consultants News, has estimated that the world management consultancy services market amounted to $28.3 billion in 1992 and $40 billion in 1995.1 This figure tallies with an estimate of the European market reported by the Fédération Européenne des Associations de Conseil en Organisation (European Federation of Management Consulting Associations) (FEACO) - a figure of e42.5 billion ($37.8 billion at the current exchange rate) in 2000 (FEACO, 2001). Given that traditionally the United States market has accounted for roughly half of the world market for management consultancy, with the European market following in second place, it appears that the size of the world market for management consultancy can be roughly estimated to be around $70-80 billion in 2000.
The absence of reliable and comprehensive statistics is partly related to the lack of a strict definition of the industry and the blurring boundaries in relation to other industries. The figure of $80 billion quoted above includes, for instance, services provided by technology transfer institutions, think tanks, software houses, computer centres, information brokers and financial institutions. It may also reflect the fact that management consultancies often undertake work other than management consultancy (Vogler-Ludwig, et al., 1993).
To a large extent, descriptions of the market for management consultancy and statistical profiles of the industry have been equivalent to descriptions of the activities of the large management consultancy firms. The problem with this approach is the exclusion of the many small consultancy firms, e.g. consultants operating entirely on their own and often only in national markets. These firms are not included in most surveys of the industry, but they constitute the majority. According to a FEACO survey, there were approximately 40,000 enterprises with 260,000 consultants operating in the European market in 1999 (FEACO, 2000) ;
majority of firms are small in terms of employment. The same survey also found that small firms (with a turnover of less than e500,000) comprised 82 per cent of the total number of firms, while accounting for 10 per cent of total turnover; medium-sized firms accounted for 18 per cent of firms by number and 42 per cent of the turnover; and the largest 20 firms accounted for 47 per cent of the turnover.
In terms of employment as well as output, management consultancy is still a small industry. On the basis of the above-mentioned figure for the number of consultants, management consulting accounts for less than 1 per cent of employment in Europe; its share in European gross product is similar (FEACO, 2000). Moreover, the majority of the consultants have been reported to be located in five European countries: in 1998, Germany accounted for 31 per cent, the United Kingdom for 18 per cent, Italy for 16 per cent, and Spain and France for 8 per cent respectively of the then 200,000 management consultants operating in Europe (FEACO, 1999).
The demand for management consultancy fluctuates with the business cycle, but during the 1990s a relatively steady rise in demand became manifest, as recourse to management consultancy became increasingly common practice among larger companies, and new markets opened up in regions such as Eastern Europe and the growing economies of Asia. Statistical data that document this demand are difficult to obtain, but figures compiled for countries in the European Union may serve to illustrate some salient features. At the end of the 1990s, for example, the largest increases within Europe were reported in information-technology consultancy (as companies and organizations prepared for the introduction of the Euro and the year 2000 issue, which also accounted for the largest share of total turnover (44 per cent) in 1999), followed by production-management and financial and administrative system consultancy, with the financial services sector being the biggest user, followed by communications, manufacturing and energy (FEACO, 1999 and 2000).
A useful distinction can be made between demand in two different markets for management consultancy services: the interaction market and the international project market. The differences between these two markets are particularly significant for understanding two aspects of the tradability of consulting services: on the one hand, the different requirements of these two types of market may impose different barriers to entry by virtue of the skills, reputation and flexibility characterizing the products offered for each market; on the other hand, the differences between the two markets also exemplify the contrast between approaches stressing the development of professional skills or client relationships respectively - and thus the strategies of generating more or less standardized product lines. The differences in demand will exert an influence on the strategies adopted by the management consultancy firms as an element of competitiveness, but they do not necessarily directly influence the nature of services offered. The interaction market resembles traditional markets for buying and selling services. Public and private clients demand services in the same way as they demand services from an auditor, a solicitor or a public relations bureau and actually through the same mechanisms as those whereby a master artisan is asked to give a proposal for building a house. These market mechanisms are typically described in textbooks on services and service marketing. The interaction between the customer and the supplier is very important and decisive for the turnover of the specific service.
Most management consultancy firms strive to satisfy the needs of existing and potential clients, on the one hand, and to build up barriers against movement of vital staff to close competitors, on the other hand. For many firms, achieving client satisfaction and the prestige and
reputation that accompanies such achievement constitutes the overarching goal. But to ensure that this “capital”, accumulated in terms of skilled human resources, is appropriated by the firm is an equally important objective. Most management consultancy firms attempt to retain their key people by offering high remuneration or partnership.
The task of accumulating competitive skills is often undertaken almost on an ad hoc basis as the knowledge gathered in one assignment is carried over into the next, or the management consultant perceives a new idea or “fad” in the business. On account of this rather unsystematic approach, many firms have difficulties moving into new fields. For example, not all management consultancies reacted promptly to the wave of interest in quality assurance - delivered as management services under headlines such as quality certification (ISO certification) and total quality management. This huge market that appeared suddenly some years ago has been served only by a small part of the management consultancy industry. Today, business process re-engineering has become a hot issue for many companies and even public institutions. Again, only a small part of the management consulting industry has succeeded in building up the required knowledge within a very short period in order to supply this kind of service.
The international project market is, in contrast, characterized by a set of relatively fixed relationships between at least three generic market players: the technical and administrative buyer, the economic buyer and the supplier. The technical/administrative buyer - a public organization, ministry, local municipality or private company which is expected to receive the service - defines the terms of reference independently or in cooperation with the economic buyer - an international funding agency or organization. The supplier - the management consultancy firm - must establish good contacts and client relationships with the economic buyer and, in addition, must establish good relations with the client requesting the service - the technical and administrative buyer. This is the rule for the international project market. This market place is characterized by very strict rules and procedures for buying and selling services. The interaction process between supplier and client is very different from that in the other generic market for management consultancy services. Both demand and supply tend to be cast in rather standardized formats, and in this respect the international project market represents an important point of entry for firms that have acquired the basic skills but have not yet built up a substantial reputation.
The international project market has, in the post-Second World War period, been significantly influenced by the demand for projects carried out in developing countries. More recently, the economic transition in Central and Eastern Europe has generated a major new market for projects. These markets represent demand for services in a wide range of areas, including those of concern to both Governments and recently privatized industries. The funding for management consultancy in these countries came initially from Governments or international agencies, but there is a growing market for services that are financed directly by the customers and which tend to fall into the category of client interaction. Indeed, many companies say that they no longer actively seek projects funded by international financial institutions or Western donors.2
3. The core of management consultancy business: