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Management Consultancies: Harnessing the brainpower of management consultancies to improve your business

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How to Create and Implement a Killer Business Strategy

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The pace of world business is plainly accelerating. It isn't rising from a standing start, either. The pace was already hot, and the heat is simply getting more intense. New products and services are proliferating as never before. New companies are rising to global scale in a decade or less. Vast mergers and acquisitions are reshaping the business map. New technology is opening new doors. That poses a question for all managers. Are you catching the hyper-charged bus - or is it passing you by?

The opportunities will continue to be abundant, but that abundance is useless unless it is exploited. The difference between the exploiters and the also-rans can be summed up in one word: brainpower. Jack Welch, the chairman of General Electric, remarked some time ago that the coming competitive wars would be won, not by whips and chains, but by ideas. That is plainly true. Lag in innovation and even an international star like Ikea, the Swedish furniture chain whose brilliant new thinking multiplied sales more than tenfold in two decades, can find itself facing serious problems.

One problem is that, during all those 20 years of super-growth, Ikea has never managed to build a strong business in the US. More generally, competitors of various nationalities have been attacking Ikea's dominant share of the self-assembly furniture market. Two years ago the heir-apparent to founder Ingvar Kamprad echoed a famous remark by IBM's John Akers, warning that Ikea was 'in crisis'. Unlike Akers, president Anders Moberg swiftly and effectively revamped operations: 1996-97 was a good year, with sales up 21% to $5.8 billion and earnings running at $340 million after tax.

Today good isn't good enough. Ikea is pouring resources into Asian expansion. More important, the company is launching 600 new products aimed at children - seeking to exploit an entire new sector of the market at a cost, in development and store changes, of at least $32 million. That's brainpower at work. The new concept lives up to Kamprad's wish that he and his 'co-workers' be 'a group of constructive fanatics, who with unwavering obstinacy refuse to accept the impossible' - but achieve it. As that implies, Ikea's strategy , like its furniture, is self-assembled. According to Business Week, Kamprad never uses market research, but 'relies instead on instinct to expand his empire.'

Children's Ikea first saw the light of day as a handwritten memo, three pages long. Whether or not the plan succeeds in giving Ikea a new lease of growth, Kamprad's modus operandi bears as little relation to today's high-powered management methods as his little memo does to the typical consultancy report. The consultants, of course, are the arch-exponents of those high-powered methods. Their industry contains the biggest concentration of management brainpower. Given the rising pressure for innovation and change, it's not suprising that these professional thinking abilities are being tapped so hugely: at a worldwide cost of perhaps $50 billion annually.

According to two Chicago journalists, however, much of this money has been spectacularly misspent. In Dangerous Company (published by Nicholas Brealey), James O'Shea and Charles Madigan report on some awful cases of bad management made worse by (presumably) bad advice. In the case of Sears Roebuck, for example, a disastrous policy, 'everyday low pricing', allegedly grew out of work executed by consultants Monitor Company. The client had a strategy of putting items on sale twice a year at deep discounts: such sales accounted for 55% of total volume. Sears eliminated the sales in favour of cutting prices across the board. But the customers held back, waiting for the discount sales to which they were accustomed - and Sears proved unable to support the low prices at its high level of costs.

At the least, Monitor, founded by the leading Harvard strategic guru, Michael E. Porter, failed to prevent the disaster. Everyday low pricing had to be abandoned after $200 million had been spent on promotion alone. Porter's consultancy kindly warns in its own sales literature that 'Most consulting interventions ultimately fail to achieve the ends intended.' That certainly was the outcome at Sears where, despite fees estimated at $15 to $20 million a year, two years' consultancy left the retail operation in even worse state than before.

Is that less a criticism of Monitor than of consultancy in general? Fascinating research by four luminaries of Wharton Business School pours great doubt on the value of the two strategies from which consultants earn the bulk of their fees: organisational and portfolio restructuring. In the first case, the corporate pieces are reshuffled, and operations are streamlined or closed by reengineering that probably results in considerable downsizing. In the second, whole chunks of the company are sold or spun off, leaving the group to replace them or to concentrate on the remaining core.

A portfolio example is ICI divesting itself of basic chemicals to concentrate on the specialised variety, and doing a deal with Unilever, which, following the same logic, was happy to sell. The best you can say is that portfolio restructuring doesn't do any harm. Wharton's researchers, after studying thousands of cases, found that over the post-restructuring years, the performance in terms of the share price and profits was slightly positive - a better result than other companies in the study won from organisational upheaval.

There the outcome was slightly negative. In fairness, the strategies might have been more successful than appears from these conclusions. Failure to reshuffle the organisation or the portfolio might have led to great disaster. That case can neither be proved nor disproved: just as you can't demonstrate that, if Monitor had never entered Sears, the results would have been better - or worse. That's the difficulty with all strategic consultancy work, indeed, all management. You only know the actual results: those of alternative strategies, which might have been far superior, are for ever unknown.

But the Wharton research does throw a mighty spanner in the consultancy works. There's a third kind of restructuring where the advisers are not management consultants but financial experts. Restructuring the balance sheet produces very positive results - far, far better than organisational and portfolio revisions. The explanation is obvious. As advocates of EVA (Economic Value Added) would argue, the aim of management is to maximise the difference between the cost of capital and the return earned on capital. If cheaper debt replaces expensive equity, the gains are immediate and certain. That's also true if the capital is reduced (by buying back equity, say). Without any managerial effort, the basic economics must improve markedly, and at once.

These financial schemes may well require great ingenuity and technical brilliance for their conception. Their execution, however, is strictly routine. In contrast, the implementation of organisational and portfolio restructuring may take years and require high mental and managerial skills. Managing resources over time demands a whole series of difficult decisions - above all, how to invest surplus cash. The Wharton study suggests that managerial brainpower fails a simple test. Managers simply can't invest the surplus in rewarding ways.

In fact, if companies sell an unwanted business and keep the cash, they perform far worse than others which either spin off the business (as ICI spun off Zeneca) or return the purchase money to investors. What causes the mental misfiring? One observer of the Sears/Monitor relationship thought that the complexities of a huge US retail chain outstripped the consultants' reach. However great the brainpower brought to bear, its effectiveness must be stretched as size and complexity increase.

Hence the famous acronym, KISS: Keep It Simple, Stupid. Companies which used portfolio changes to tighten their focus (i.e., simplify the corporate collection), outperformed others which kept on changing the portfolio around. Financial restructuring, whatever its technical complexity, also has the virtue of simplicity from a managerial point of view. But when the same investment bankers advise on mergers and acquisitions (as they do with zest), the results are very different.

Mercer Management Consulting found that 57% of all transactions costing above $500 million since the mid-1980s had delivered returns below the industry average three years after completion. The bigger the deal, moreover, the worse the results. Pay more than 30% of your own turnover, and you're bucking serious odds: only a quarter of such deals prove satisfactory. Defiance of KISS quite plainly applies: a major acquisition greatly raises the level of brain-racking complexity.

Practice makes more perfect. Serial acquirers, so the research shows, are much better than rare purchasers at swiftly and effectively integrating their purchases. So brainpower alone is not enough - even the greatest mental capacity is made more effective by experience, repetition, and concentration. Another consultancy, McKinsey, recommends a dedicated M&A unit with 'the leveraged buy-out mentality for creating value in deals.'

The LBO, a classic example of financial restructuring, kills two birds with one stone. It substitutes debt for equity and it forces the management, which has acquired part of a diversified group, to focus on their defined field. They usually supplement the financial and portfolio restructuring with reengineering. The organic growth they generate from this treble restructuring should be exceptional and often is. Note, however, that the crucial difference doesn't lie in the brainpower of the buyout team - it is usually the same management - but in the newly focussed application of that thinking capacity.

The crucial role of focus emerges clearly from the 'superstars' who grew fastest in shareholder returns among Fortune's 1,000 top companies. The ten-year figures range from 35% per annum to 67.8%. In every case, the business can be simply defined, whether it's Intel and microprocessors, Harley-Davidson and motorbikes, Compaq and PCs, Nike and sports gear or Microsoft and operating systems. It's true that all these have widened their scope. Intel makes PCs and super-computers, Harley-Davidson sells clothing and accessories, Nike may move into sports events, Compaq makes powerful servers, Microsoft offers a huge range of other software. But all these diversifications form concentric circles round the core.

Gary Hamel, the leading prophet of organic growth, in an accompanying article nails down the brainpower breakthroughs, or 'innovative strategies', that have led to superstar success. One of the best places to start is the conventional wisdom. Turn it upside down. For instance, don't just look at the narrow industry, or direct competitors, or even your firm itself. Today you're competing in a new world where the frontiers between industries are blurred, where 'it's harder to distinguish competitors from collaborators from suppliers from buyers', and where it's difficult to draw the boundaries of the firm.

The key word in that sentence is 'new'. Hamel advises that you bring in new people, talk about new subjects, seek new perspectives, develop new passions and try new things: i.e. experiment. Hamel asks managers 'Can you point to 20 or 30 small experiments going on in your company that you believe could fundamentally remake your company?' In most cases, there are none. In my experience, it's worse than that. Managers will reject a consultant's plans for trying a new idea on a limited scale: they would rather make their mistakes across the whole company.

That's the consultants' problem in a nutshell. They can take the horse to water, but they can't make it drink. On the other hand, the client's problem is that he can't know whether the water is poisoned until he does drink. Yet these clever types are just the kind of new people who should provide new perspectives and new conversations, if not new passions. What's the best way out of the maze? On this, the two Chicago authors, O'Shea and Madigan, offer first-class guidance. Their advice on using consultancy successfully is an excellent list of DO's and DON'Ts. It's worth much fine gold. Here's my version of the advice:

1. DO, before anything else, make absolutely certain that you know why you're even thinking of bringing in consultants. What's your problem? If you don't have a compelling answer, DON'T reach for the phone.

2. DON'T, even if the answer is that you have a clear need, automatically assume that you should initiate a full-scale consultancy project. Are you sure that nobody internal can meet the need? Or that a one-person hiring (maybe an MBA from a consulting firm) won't do perfectly well?

3. DO ensure that you're not fobbed off with second-best help. Insist that you get the partners you want, and that they give adequate attention to your project - or else.

4. DO get firm commitments on cost and time: no blank cheques. And link pay to performance and your satisfaction - with a satisfactory clause to cover termination.

5. DON'T cede control - ever. The consultants are there to help your managers, not replace them, and they should work closely with your people - who stay in charge throughout the assignment.

6. DON'T put up with shoddy or unsatisfying performance. Raise the issue at once, forcibly, and insist on satisfaction.

7. DON'T be over-impressed by consultants with books to their names, especially if they try to peddle the book's subject as a panacea. Anyway, will the author actually work on the project?

8. DO value your own people. A firm's own employees are deeply knowledgeable about the company and its business. The best consultants insist on running a joint project, in which they collaborate with staff. You should insist on the same.

9. DO measure progress. The authors point out that consultants themselves have methods for tracking progress; but you should have your own benchmarks. And if you're not happy with the pace (or anything else, for that matter), DON'T hesitate to say so.

10. DON'T try to fix it, if it ain't broke. A consultancy will always find something on which they can spend your money. But you don't have to pander to their desire.

There's a difficulty about that last point, true. Managers often fall into the trap of assuming that all's well - which can't be right, in any circumstances. All is never for the best in the best of all possible companies. Ceaseless self-criticism is founded on the belief, enshrined in the Japanese principle of kaizen, that every activity can always be improved, and that the duty of the manager is to win that improvement. That alone doesn't justify a call for consultants, though. Very good consultants, you will find, are already at work in the company - its employees at all levels.

The need is to tap their expertise. Use task forces and other teams to analyse areas of difficulty or under-achievement, and results may well be won in little time and at low cost. Moreover, you're simultaneously developing talent within the company in the best possible way - by working on its real-life problems. This kind of work also provides the best opportunity for cross-fertilisation and for experience of other parts of the business. And any firm that does use its own so effectively must be well-managed, which means that it will also handle outside consultants especially well.

O'Shea and Madigan emphasise strongly that best managements make best clients. Look at what CEO Arthur Martinez did to cure Sears' sickness. To make Sears 'a compelling place' to work, shop and invest' (his '3Cs' goal), he closed the historic mail order catalogue and lost 50,000 employees. Rather than axe still more, he thought: what about merchandise costs? Rather than squeeze suppliers, he used A. T. Kearney, manufacturing and engineering experts, to cajole and lead firms into joint process improvement. The savings won by the combined brainpower of managements and consultants helped nearly to quadruple operating margins.

Martinez did the strategic thinking, and used the consultants to supply operational brainpower. That's the right way round. The boss concentrates thought on a focused strategy and new ideas, using others, inside and outside, to focus on intelligent execution. And remember Ikea: they all refuse to accept the 'impossible'.

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