It is without a doubt the question that lies at the heart of the management consulting industry: do consultants actually add value to the businesses that hire them? On the one hand often criticised by executives and media for the high fees and PowerPoint approach to problem-solving, on the other hand acclaimed by many for the high-value delivered to complex challenges. A new study by the World Bank and Stanford University now provides some more science to the long standing debate. Based on a ‘consulting experiment’ they executed across 20 companies they conclude that consultancy does add value. So is it a fact now?
It has been an ancient practice to sell services that have, when it comes down to it, questionable added value. In one group, the sellers know their product will not help their mark, they trade off the ignorance and good will of their “customer”, consider here the predictions of the fortune teller or the profound but defunct wisdom of the sophists. In another group, the truth is greyer, the product may be beneficial, the party that sells their knowledge believes in what they do and intend to bring the benefits of their knowledge to their customers, even if they themselves handle from a profound ignorance, take as an example the 18th century medical practice of leaching to cure almost any ailment.
Management consultants, in general, don’t belong to the first group, yet do they belong to the second? In recent years several attempts have been made to quantify the value of consulting, however the majority of research papers have either been unconvincing, or in some cases it remains questionable as to how ‘independent’ the analysis were.
In the UK, the best example at hand is a research conducted by the MCA in 2010, titled ‘The Value of Consulting’. The study was thorough, arguably the most comprehensive of its kind in the region – 1,800 public sector consultancy projects were assessed on client performance* and in-depth interviews were held with 30 clients. Based on a model, the representative body of the UK industry market concluded that management consultancies had created £56 billion of value to their UK clients in a single year. On average, the return for clients averaged £6 for every £1 spent, although the benefits in some best practice cases even increased to 20 times the costs involved in hiring consultants.
Yet at the same time for outsiders and critics the key findings did not come as a real surprise. The MCA represents the industry and consulting firms, and has a clear interest in promoting the industry’s value. The report’s key message for government institutions – “think twice before reducing the use of consultants” – came in a period when the UK government was contemplating plans to cut excessive spending on consultants. “It is interesting that the sector still feels the need to justify its existence,” commented Professor Laura Empson, director of the Centre for Professional Service Firms at Cass Business School (London), at the time.
Does Management Matter?
In the recently released report ‘Does Management Matter?’, the World Bank and Stanford University embarked on answering the same question, with the key difference being that they can be deemed ‘independent’. To identify the value of management consulting the authors conducted an experiment at 14 large, randomly selected multi-plant textile firms in India**. These 14 companies received a five-month management makeover, executed by consultants from Accenture, and at the end of the road the profitability and efficiency of these revamped factories was compared with a group of six factories that continued doing business as usual.
The experiment consisted of three phases. The first phase involved providing management diagnostics for one month at all the plants, effectively an initial management-health check. In the second phased the fourteen participating factories received four months of management consultancy. For the most part, all was left status quo, but the old ways of working were upgraded based on 38 best practice management standards. Finally, in the third phase a follow-up evaluation was performed in all factories to assess the effectiveness of the intervention techniques.
The results were clear: management consultancy matters. Besides reduction in waste from defects and loss of inventory to poor storage, there were significant improvements in the operation of treatment plants. On average, the introduction of new management techniques increased productivity by 17%, translating in a $325,000 on average annual increase in profitability per plant. Given the $250,000 fee the consultancy reported it would have charged an individual firm for comparable services if it paid directly, it came down to a 130% one-year rate of return. In addition to first year economic benefits exceeded the cost of the consulting, the implementation of the techniques, over a period of years after the experiment, allowed the firms to expand their business further, boosting long-term benefits.
Fact or not?
The results from the experiment highlight the value of implementing management principles and the use of consultants. On a positive note, the study was conducted by two renown independent institutions, and executed by a consultancy that is highly regarded in the field. Yet similar to any research, reservations can be made. The experiment was performed in India, in an environment where modern management knowledge was not well embedded and overall lags the maturity found in Western markets***. So would the experiment also hold in a different industry, or region? Or beyond the field of operations management? And in more mature, large companies? Going forward, one thing remains evident. The search for the holy grail of the consulting business continues.
* The MCA asked all its members (>50 consulting firms) to send their client satisfaction surveys. To ensure the validity of the research, firms were obliged to send complete sets of data: they were not allowed to pick only those where the feedback was positive.
** The firms were all family owned, had been operating for more than 20 years, and the firms had an average of 270 employees, placing them in the top 1% by employment for Indian manufacturing.
*** Prior to the experiment, the companies used only around 10 out of the 38 management best practices.