How to Choose a Management Consultancy

By Paul J. H. Schoemaker, Ph.D. and Scott Snyder, Ph.D.
Chairman and President, DSI

Business leaders and strategists in large companies have many possible sources of support for their strategic planning, with a variety of methods and tools. The decision process for determining who will provide this support and what methods and tools are appropriate can be painstaking. These decisions are often biased by firm politics, personal relationships, legacy planning processes, risk aversion, and the latest "flavor of the year" in business strategy. All this makes the sound selection of a management consultancy firm a difficult decision indeed. How did AT&T manage to lose billions of dollars in market value after spending nearly $500M in consulting fees with McKinsey and Monitor, two of the premier strategy firms in the world? Or why did a 1992 study* of firms using the BCG Matrix Method of portfolio selection report a lower return on capital than other firms?

Source: Kennedy Information 2003

If the project is important and involves the CEO, why not use McKinsey, BCG or Bain? As a well-known IT commercial once claimed "no one gets fired for buying IBM." And many managers believe the same about McKinsey, BCG, Accenture or some of the other well-known consulting brands. However, IBM’s challenges in the mid-1980s and McKinsey’s own soul searching of late underscore that no player is invincible. Newcomers (which IBM and McKinsey once were) will try to challenge the prevailing consulting paradigm. This is very much happening today where alternative approaches – such as the scenario planning, coopetition, real options, balanced scorecard and executive dashboards – originate from outside the main consultancies. And the advice dispensed by the brand name players is by no means always sound, as the book Dangerous Company makes abundantly clear.*

Given that there are no sure things in strategy consulting, how can a firm develop an unbiased, guiding framework to choose the best strategy help at the right time? Indeed, why not do the work internally?

Avoiding the Traps

As a former senior executive at a Fortune 500 company responsible for advanced planning, one of us (Scott) interacted with a variety of consultants from small boutiques to larger firms including Andersen and McKinsey. Like many peers in this type of position, he found himself in a love-hate relationship with external consultants. The fresh perspective, exuberance, and hard-hitting insight of senior partners provided an injection of hope and optimism as well as an alarm bell on the need for outside perspectives. But when the rubber met the road, and the project was underway, the seasoned, creative minds faded into the background, and green, freshly minted MBAs paraded in, armed with consulting cookbooks and analysis tools. They failed to understand the culture, the intricacies of the product, and the unwritten rules of engagement in the market because most of them had never managed a business before, let alone one like this. Before the client could stop the train, huge bills had been racked up and interim results were unsatisfactory. However, they were committed and well into their planning cycle. The die was cast and managers would need to take whatever results they received and use them, even if there were no real breakthrough ideas or truly new insights emanating from the process.

This may not be typical of most consulting engagements, but every firm has experienced "buyer’s remorse" related to a consulting engagement midstream or after seeing the results. Herein lies the dilemma with strategy and general management consulting decisions. Many firms have elected to take control of this process and hire a high caliber team of internal consultants to manage their strategy, relying as little as possible on outside support. However, in-house consultants often encounter similar barriers as external firms such as mistrust due to lack of ownership in the end result. Other firms do not want to bear the overhead of a large scale internal strategy team year round and would rather bring in outside support when they need it. So, which is the right approach?

An Experiment at Shell

In the early 1980s, one of us (Paul) was on sabbatical from the University of Chicago with the strategic planning group of Royal Dutch/Shell in London. They were in the midst of pioneering scenario planning, as Shell faced an industry trend away from vertical integration, increased environmental pressures, limited "elephant fields" as well as a host of technological and geopolitical uncertainties. As internal planners started to roll out scenario-based strategic planning, they needed outside implementation assistance due to the sheer size of Shell (involving over 100 operating companies around the world). So company planners conducted an informal experiment. The planning group invited most of the leading consultancies to work side by side with Shell’s internal staff in actual engagements to extend their reach, observe each external consultant and compare them. The strategy consultancies involved included McKinsey, BCG, SPA, SRI, Bain as well as a few boutiques such as Braxton and Dominique Mars.

There were two important insights from this set of experiments. First, no consultancy had truly proprietary methodology (they all had smart, well-educated professionals who pretty much worked with the same analytic tool kit). Second, the success of the engagement hinged largely on the caliber (intellectually and organizationally) of the senior partner overseeing the project. Consulting is a very brain-intensive activity in which experience, personality and political savvy matter greatly.

New Ideas and Approaches

Today, however, we see new consultancies being formed around distinctive approaches, such as Monitor around Michael Porter’s work, The Hammer Group around process reengineering, Norton around the balanced scorecard, GBN around scenario planning, and our own firm (DSI) around critical thinking and managing uncertainty. Are these approaches simply hooks (as the Experience Curve and Product Portfolio matrices were for BCG) that provide an entrée into generic consulting, or ones that can provide sustainable advantages for the firms that use them? In terms of new strategy approaches, two points are very telling: (1) they come and go with a remarkably short life cycle; (2) the underlying ideas often originate from outside the main consultancies, which then adopt and refine them. Regarding point one, there has been a litany of concepts and methods in the field of management consulting, such as: SBUs, experience curves, portfolio matrices, PIMS, segmentation, critical success factors, five forces, total quality management, wisdom of teams, cross-functional management, matrix designs, core competencies, process reengineering, business reinvention, coopetition, value chains, scenario planning, learning cultures, value migration, CRM, activity-based costing, real options, balance scorecard, value innovation and executive dashboards. Many of the ideas are sound within the context for which they were envisioned; the real challenge is to know when and how to apply each in a particular client setting.

Where did the ideas of these consultants come from? Some came from leading companies themselves, such GE’s early work on SBUs and PIMS or Shell’s role in scenario planning. But even these ideas had their antecedent in earlier work. For example, scenario planning was practiced by SRI and before then by Herman Kahn’s Hudson Institute. Other ideas, however, were mostly developed by consulting firms. Bruce Henderson at BCG introduced the world to experience curves and product portfolio models. This was a great success and proved – perhaps for the first time – that a consulting firm could be created around a few distinctive strategy concepts. BCG then spawned various spin-offs such as Bain and SPA (Strategic Planning Associates). McKinsey, as a general consultancy with deep bench strength, does not embrace a single approach or concept, although it has become known for its seven S frameworks. Many other strategy approaches had their origin in academia, such as Michael Porter’s Five Forces, Jay Galbraith’s matrix designs, Michael Hammer’s process reengineering, Barry Nalebuff’s coopetition, David Teece’ appropriability regimes, Prahalad and Hamel’s core competencies and reinvention, Kaplan and Norton’s balanced scorecard, and Chen’s value innovation.

So What is a Manager To Do?

Clearly, the selection of a consulting firm is not a simple matter and merits careful consideration, especially since the price tag is usually at least six figures for the mainstream players. Here are some criteria managers can use to score the various consultancies:

1. Brand & Reputation: How important is it to you personally, and the organization politically, that the firm you select is well-known with a strong reputation? How much are you willing to pay extra for the firm’s brand equity? In general, brand value should be considered if (1) you can’t easily evaluate for yourself the quality of the work delivered, (2) you wish to send a signal to others that you mean business or (3) if you want to establish high legitimacy. Large consultancies tend to have brands that focus on overall excellence whereas boutiques have more specialized brands around a particular methodology or within certain industries. Both process and content expertise matter, with vertical industry knowledge becoming especially important when implementation of the strategy is expected as well or if the project resides deeper down in the organization where industry jargon as well as product, technology, channel and client knowledge increasingly matter.
2. Good Relationships: Since strategy consulting can be intense, and usually touches upon politically sensitive subjects at high levels, knowing the people involved is critical. All large consultancies operate on a principle of leverage; the junior consultants bill many hours with the senior partners supervising several projects. McKinsey’s directors excel at getting strong mind-share at the highest organizational levels, while its minions reach deep in the organization for data and issues. With boutiques, more of the work will get done by the senior consultants. The quality of the relationship must be assessed at multiple levels, from the senior top to levels lower down where most of the work will get done. A pilot project or up-front workshop with breakouts is often a good way to get other key people to buy in. In the end, consulting remains very relationship-based and hence good chemistry and teamwork are critical to eventual success. Part of this requires deep dialog as well as alignment of expectations and roles.
3. Division of Labor: How much of the project work will be done by the consultant vs. your own team? Farming it out entirely has the benefit of less disruption and fast results. But the internal acceptance of the final results may be low (since there is no deep management ownership) and the transfer of skills is minimal since the stew was largely brewed outside your own kitchen. At the other extreme, the consultant acts as coach and directs your own team toward politically and intellectually sound solutions. Large firms may not be interested in or willing to work in conjunction with other firms or even internal planning teams due to their more monolithic approaches. Smaller firms may offer more plug-and-play options for developing a "best of breed" solution mix. The ideal solution must be a balance determined by the complexity of the issues, the comparative advantages of the client and consultant, and the cultural and organizational settings within which the engagement takes place.
4. Planning vs. Implementation: Are you just looking for top-level guidance (a sounding board or a new perspective) or a "soup to nuts" engagement where you expect the consultant to stay with you through implementation? Large firms like Bain and McKinsey have deep benches and will plant roots at your company well into the project. (Sometimes these roots are hard to eliminate later.) Boutiques will tend to parachute in for a limited period of time, deliver high value and then move on. The key question here is: Who can best do the implementation? Ideally, the client should own the implementation phase, guided perhaps by a consultant, but not as a substitute employee. In general, large consultancies will want to do most of the work themselves, whereas boutiques want to leverage your internal resources. Also, the larger firms may wish to present a complete answer (and report), whereas the boutiques may favor a joint solution in which they focus on following a sound process. In some cases, large firms like McKinsey focus more on high-end strategy development while IBM pushes to be the integrator and/or outsourcer to help implement the strategy.
5. Cost and Speed: Any tradeoffs among the above criteria must ultimately be balanced against budget and time. The project can be structured on a billing time and expense basis, be performance-based or fixed fee. Likewise, penalties and rewards can be added relating to quality, impact and timeliness. Larger firms can rack up significant bills quickly due to their team sizes and will want you to make commitments early in the process to a retainer or project fee. Smaller firms tend to offer bite-sized chunks of work that can be structured into larger projects or intermixed with your own projects. Most projects can be sped considerably by deploying multiple teams working in parallel, but this will require more overarching integration. Managers will need to explain their budget and time constraints openly to the consultant to assure that the best tradeoffs are made.

Borrowing Your Watch

There is good and bad news for managers. The good news is that there are actually high caliber consulting firms available that can deliver real value, especially in the developed part of the world. The bad news, for a manager, is that the plethora of choices among firms and approaches greatly complicates the selection of the right consultant. If money is not an obstacle, the project has high visibility, and brand and reputation are paramount, then you may elect to go with McKinsey-type firms. If your aim is to be different, challenge the prevailing wisdom, and take more of a personal career risk, you may choose to use a boutique firm in conjunction with your own internal team. In many ways, the savvy buyer should favor the up-and-coming boutiques because their value added has not yet been fully priced out in the marketplace. The boutiques are still making their mark, with strong involvement of the principals of the firm. These firms will not yet have codified their magic into the kind of templates and recipes needed play the leveraging game of hiring young talent, training them quickly and billing them out at about five times their internal cost. The planners at Shell tried purposely to hire the next wave of talent before they were internationally known gurus with fees to match their reputation and egos. This talent scouting was not easy, but often succeeded brilliantly. The way to do it is to start small: try out some boutiques (perhaps several at a time). And then run with the winners, who invariably will leave the mainstream consultancies in the dust.

The old joke is that management consultants borrow your watch to tell you the time. This can be all too true, especially when hordes of newly minted MBAs descend on your firm. Chances are good that they are reporting back your firm’s own distributed knowledge. But if you get the right team of consultants, selected for their experience, reputations and disciplined methodologies, then chances are good that they will borrow your watch and tell you that the time is different from what you thought. And that can really be worth - many times over - the fees management consultants typically charge.

* Dangerous Company, James O’Shea and Charles Madigan, Random House, New York 1997.