In 1989, just before embarking on a major consulting campaign designed to turn it into a world-class manufacturer, US conglomerate Figgie International was a profitable, $1.3bn company. Five years, and $75m worth of consulting later, the company’s revenues had plunged to $320m, resulting in a massive $166m loss, a class action suit and near bankruptcy. To make matters worse, despite spending more than $100m on equipment on the advice of consultants from a range of organizations, including Deloitte & Touche, Andersen Consulting, Price Waterhouse and Boston Consulting Group, those same advisors then came to the conclusion that world class manufacturing at Figgie was never going to work. Unsurprisingly, the whole debacle ended up in court with Figgie suing Deloitte & Touche, which at one point had more than 60 separate engagements at the company, for damages as a result of what it called inept performance and poor advice. The suit was settled out of court in 1995. Despite the existence of hundreds of similar, if not quite so dramatic tales, the so called ‘expert advice’ business has become one of the most successful industries of all time.
By Joanna Mancey
Last year, the management consulting sector in the US alone was worth $25bn. On a worldwide scale, revenues are more than double that. In their book Dangerous Company – The Consulting Powerhouses and the Businesses They Save and Ruin – James O’Shea and Charles Madigan, two veteran journalists from the Chicago Tribune, attempt to get under the covers of the secretive world of consulting industry in a bid to understand why businesses around the globe have become so dependent on hired guns, and to assess exactly what impact these advice givers have had. The result is an entertaining read, as the story above indicates, but one which, inevitably, ends up re-enforcing many of the well-worn clichTs about consultants, and which still leaves a number of questions unanswered. What is clear is that, when it comes to cash generation, consultants are second to none. Consultants are drawn to money the way hornets are drawn to ripe cantaloupes at a late summer party, the authors say. On average, according to a 1996 survey of consulting fees carried out by Kennedy Research Group, a partner at one of the large consulting firms collects an hourly fee of $270 – O’Shea and Madigan, meanwhile, claim to have unearthed hourly fees of more than $1,000. But even assuming that the average partner works 60% of the time (a very conservative estimate) at $270 an hour, his total contribution amounts to $310,000 per year.
Little wonder then that Andersen Consulting, the largest consulting outfit in the world, earned revenues of more than $5bn last year. What do companies get in return? In many cases, ripped off – through the billing of hundreds of ineffective and, in some cases, non-existent hours. Junior consultants are, say O’Shea and Magigan, little more than money mills, and consulting partnerships deliberately allocate as many raw recruits as a client will accept to a project. Furthermore, value-based billing – where consultants get paid according to the tangible gain associated with their services – is still a load of hot talk. According to the book, only 3% of companies have used value-based billing. The trouble with the switch to value-based billing is that it demands that consulting services are tailored to the individual and, despite attempts to dress it up as otherwise, the truth, says the book, is that consulting is all about recycling of ideas, the continual application of this year’s hot topic. So why do consultants continue to promise unique, individual treatment when so much of what they do is not individual at all? asks O’Shea and Madigan. The answer is most don’t. Wise consultants never really promise a client much of anything other than objective advice and proposed solutions that clients can accept or reject. It is easier to fight the court case that way. The fault is not entirely with the consultants. Part of the trouble, is that consultants make their money by doing what their clients want – the hired hit men doing the dirty work that managers baulk at. For example, when Andersen Consulting was engaged by O’Neal Steel Co, it got paid according to the number of jobs it cut at the company. The more jobs that went, the more it got paid. In fact, what becomes apparent from reading Dangerous Company is that the majority of the bad consulting experiences are largely due to bad management. The same accusation can also be leveled at the former management of telecommunications giant AT&T. Between 1989 and 1994, AT&T spent nearly $500m on consulting, presenting an array of consulting firms with multiple million dollar checks in a bid to find out what outsiders thought it should do. It lurched and shifted from consulting house to consulting house and from strategy to strategy, losing market share as it went. Undoubtedly much of that paid for advice was highly suspect, such as the go-ahead to purchase computer supplier NCR – a disastrous union for both companies which ended up with NCR being spun off on its own again last year.
Keen on technology
While many of the mini case studies in Dangerous Company are marvelous stories, the accompanying profiles of the consultants themselves are rather two dimensional. The book includes a broad look at a number of the major consultancy organizations, assessing the roots of the companies and the personalities of their founders to try and understand why organizations operate in the way they do. For example, why McKinsey has always been adept at whispering into the proper ear, why Andersen Consulting is so keen on technology, and why Bain Consultancy likes to get so close to the source of power. But details on the current heads of these companies and their detailed management doctrines are in short supply suggesting that, despite their two years of research, O’Shea and Madigan did little more than peep under the covers.
Dangerous Company – The Consulting Powerhouses and the Businesses they Save and Ruin