What boards should consider when choosing management consultants.

The chief executive of Fulcrium spells out his opinion of what boards should consider when choosing management consultants.

Management consultancy firms would have us believe they possess a diverse expertise and track record for solving business problems. I believe this is not always the case.

Many a client has learnt through expensive, often irrecoverable hiring mistakes that appearances can be deceptive.

Moreover, consultants are constantly reinventing the services they offer, entering new service lines and exiting from others – and clients find it difficult to keep up with all these changes. To optimise the value from engagements, clients should cut through the glossy websites and sales pitches, and really understand the capability and experience of consultants.

For example, it may not be common knowledge that McKinsey has made a big push into the lucrative information technology advisory arena over the past three years, and that IT, organisation and operations engagements combined have taken on a higher prominence compared with pure corporate strategy work.

Lesser-known firms such as Roland Berger Strategy Consultants and The Monitor Group have emerged as serious competitors.

Gone are the days when McKinsey was seen as the definitive panacea to an organisation’s strategic troubles. In fact, ask the chief executive of a large company why they would hire a strategy consultant and the response might be:

To provide selective analytical assistance to the in-house planning team - we would never let consultants be privy to our top-level strategy, let alone formulate it.

There goes the mystique surrounding work that strategy consultants really do. McKinsey is certainly a very expensive firm to hire, but if it can deliver that much more value, then clients have a good case for considering McKinsey. If it cannot, then it makes sense to go elsewhere because the consultancy landscape is rich with alternatives.

Accenture, on the other hand, has established a formidable strategy capability that it bundles into technology and outsourcing service lines – the rationale being that for outsourcing to be successful, it must be intricately tied to corporate and business unit strategies. But that thinking may be too late – it might have prevented Accenture’s NHS troubles, which stem from the doctrine that diseconomies of scale will kick in beyond a certain size.

We should therefore not be surprised that large-scale outsourcing is no longer in vogue.

The strategists now tell us the focus has turned to smaller, manageable, value-enhancing outsourcing deals.

If a client is looking for a stand-alone operations or strategy consultant, then Accenture may not be the best bet. However, if the client needs a consultant to weave strategy, operations and technology together, then Accenture is certainly a front-runner for the job.

In August 2002, IBM, the computer hardware manufacturer, acquired PwC’s consulting business, which consisted predominantly of outsourcing and systems integration services.

But I believe PwC Consulting was not a serious strategy force, and that is the service line necessary to exert influence with boards of the bigger international companies.

One wonders whether IBM would have agreed with my opinion that PwC Consulting did not have a strategy capability. And the problem with acquisitions is that they start to generate true client value only when synergies between the hardware and services businesses are fully harnessed – so for example, can IBM effectively articulate a compelling case for transforming the marketing function of a Fortune 500 company by leveraging IBM hardware? The former PwC consultants would first require proven marketing services capability as well as training in hardware, infrastructure and operating systems to even contemplate tying marketing strategy to IT infrastructure.

This is a very tall order. Clients may consider shopping for marketing advice and IT infrastructure separately.

Offshore entrants such as Tata Consultancy Services (TCS) have risen through the promise of “wage arbitrage” – offering low-end consultancy services (programming, call centres, outsourcing) at low-end prices. However, their recent ambition to diversify into the premium strategy and operations consulting segments may be misplaced.

Clients may ask: “How can TCS convince us that they have robust, consistent and mature high-end consulting processes? Why should I risk my personal reputation by awarding a key strategic assignment to TCS?”

Unsophisticated clients that initiate discussions with offshoring firms around premium services may find the cost of low-end work increases significantly, which defeats the purpose of offshoring and cost reduction.

The big accountancy firms (Deloitte, Ernst & Young, KPMG, PwC) have witnessed rapid growth as a result of reduced competition (partly because of the demise of Arthur Andersen), greater regulation (Sarbanes-Oxley, International Financial Reporting Standards), and the strong global economy which has led to an increase in the number of mergers, acquisitions and divestments.

Tony Blair stated in a speech to the Institute for Public Policy Research think-tank in 2005: “Sarbanes-Oxley has provided a bonanza for accountants and auditors, the very professions thought to be at fault in the original [WorldCom, Enron] scandals.”

To the naive client, the top accountancy firms may appear to be similar.

However, I believe that, unlike its competitors, Deloitte has not separated its accountancy and tax operations from its consulting business.

Therefore, clients may prefer to seek assurances that the audit and related services they buy from Deloitte do not cause corporate governance conflicts.

Likewise, with the Eighth European Directive (European equivalent of the US Sarbanes-Oxley Act 2002) becoming law next year, KPMG is expected to merge its fragmented franchised UK and European operations in a bid to serve multinationals seamlessly across geographic boundaries.

One of the effects of the fragmentation of KPMG, Ernst & Young and PwC was, I believe, to avoid rogue member offices bringing their whole networks of firms down.

KPMG’s clients should benefit from its planned consolidated structure because I think it will enable better knowledge-sharing and collaboration between the member firms, – but only if the distraction of the “merger integration” is managed well and avoids compromising client engagements.