Friday, March 4, 2011

Is Your Company Hooked On Consultants?

It's the classic chief executive's conundrum: how do you achieve a balance between engaging consultants to gain cutting-edge experience and knowledge that isn't available internally, and retaining a sufficient degree of independence to build capacity in the senior management team?

For centuries, leaders in business, political and military arenas have relied on advisers to provide a different perspective. Cardinal Richelieu, Machiavelli and Sir Thomas More are just three examples. But in the past 30 or so years, management consultants have increasingly become must-have professional advisers to boards, chief executives and senior executive teams on key strategic projects.

As the practice of engaging a consultant has become the norm in business, global management consulting firms McKinsey & Company, Boston Consulting Group (BCG) and Bain & Company have grown, while smaller, boutique firms also have proliferated.

In the global financial crisis, for example, companies were keen to use consultants to assist with the strategy the chief executive would need to lead the organisation out of an economic downturn that, for a while, threatened to be long and deep. There were several key reasons to outsource advice: to cut costs, to advise on growth strategies into new markets, to develop new products and to acquire other companies that were struggling to stay alive. "Fifteen years ago we were spending the majority of our time helping companies to think through new strategies," says Ross Love, managing partner of BCG Australia and New Zealand. "But over that time there has been a gradual trend for us to spend just as much time helping companies execute new strategies.

"This means we advise clients to anticipate the people and processes required (to meet the outcomes of a project), and to help companies to see through the implementation of the strategy over a period of time. As well, our clients are also asking us if we can enable the organisation to be more agile and more able to execute new strategies in the future. How to execute changes in strategy, in direction, in business models or in markets, and how to make things stick in a sustainable way is the perennial challenge for any company. There are good ideas all over the place – there are always opportunities to do things differently – but making that stick is forever challenging."

Walk through a BCG office Monday to Thursday and it's likely that few of the 130 consultants servicing Australia and New Zealand will be at their desks; most will be on-site at clients' premises working on assignments that run on average for 12 months. But it's not just a physical presence; working side-by-side emotionally, intellectually and culturally with a client is part of the job of the modern management consultant. So, does this mean consultants have a stranglehold on corporate strategy?

Love rebuffs the question. "The onus is on us on a daily basis to demonstrate to the client that we're there to supplement and complement what they do, and not to replace it. We don't seek to be in a position to direct or to manage within our clients' organisations. We are very clearly there to help and support people to make better decisions. We are more about empowering the people who manage the business rather than competing with them in any way. And if we were to ever get into that situation – which I believe we rarely ever do – we would change course immediately because that's not our role; it's not what we're hired to do, it's not necessarily what we're good at doing and it's not what we want to do, either."

Critical factors

But the president of the Business Council of Australia, Graham Bradley, warns some chief executives and boards risk becoming too reliant on consultants to provide advice when those skills and knowledge also need to be developed within the senior management team.

Bradley brings a rare perspective on why organisations hire advisers, having started his career in business as a management consultant. But he also knows what it's like, as both a chief executive and a chairman, to engage expert opinion. His background includes being a partner at McKinsey & Company and at national law firm Blake Dawson, and later as the chief executive of Perpetual, growing the company during his eight-year tenure into a leading listed funds management and financial services group. "[As management consultants], one of the things we used to worry about 20 years ago was making sure we didn't stay working with a client for too long because there was a risk of reduced impact on the organisation by doing smaller assignments rather than just the big critical ones," says Bradley, who also chairs the boards of HSBC Bank Australia, Stockland Corporation, Boart Longyear, Anglo American Australia and Po Valley Energy. "The danger was that you'd become rusted on to the management team and end up being seen as an overhead. We've seen this more recently with the phenomenon of a new chief executive coming in and throwing out all the consultants as the first step to renewed self-reliance of the management team."

If a consulting firm or a consultant becomes regarded as part of the employee body, both the company and the consulting firm is exposed to serious risk. "There is a risk for the consultants becoming dependent on the revenue stream from one client and there is a risk for the companies that they don't develop their own skills from within to manage change and to assess strategies effectively," says Bradley. BCG's Love agrees: "We work hard to avoid the trap of over-reliance. And the increasing interest from clients in how we can enable their organisations, as opposed to substituting for capabilities, is a testament to that."

But handled well on both sides, the benefits to the company are potentially enormous. Bradley says good management strategy requires the right information, creative ideas and sound commercial judgement. "Consultants are bringing the good information and ideas but it's very dangerous if the company itself doesn't bring its own judgement to the ultimate decision-making," he says. "No consultant will have the intuitive feel for the capabilities of the company that a chief executive and an executive team will have."

Objectivity is one of the core skills of a sought-after consultant, Bradley points out. "Consultants who fall into disrepute are those who become captured by the prevailing fads or strategic outlook of the company that they are serving. Like any other professional, a management consultant has to look beyond the interests of the current management team to the long-term interests of the organisation and its shareholders. Bringing a totally independent and rigorously objective perspective to the realities that are faced by companies is probably one of the most valuable qualities for a consultant."

Where chief executives and boards need to be careful is if the senior leadership team is overly dependent on the consulting firm. A recent article by Bain & Company highlights areas companies should consider during an analysis of a leadership supply gap. Among the questions it poses are: How many "mission critical roles" are filled by top performers? Can the company articulate clearly the consequences for individuals designated as high performing/high potential in terms of differential pay, rates of development, investments in training, deployment, access to senior executives and mentoring? How do you measure loyalty? What are your retention rates among your high-potential leaders? Answering these questions will be difficult for a company if the door to new leadership development opportunities is closed because, in effect, leadership positions are being held by external advisers.

An indicator of over-dependence will be if managers perceive the company strategy to be dictated by consultants rather than the chief executive. "But those warning bells will ring pretty early in the piece – both from management and the consultants – if that's the case," Bradley suggests. "These days boards also are alert to some of those lessons and will be challenging a chief executive whose consulting bill becomes a fixture."

Strategic overload

Yet companies are still prone to making this mistake. Rosemary Howard, executive director of AGSM Executive Programs at the Australian School of Business, has watched the evolution of the relationship between one major listed Australian company and a consulting firm. "The consultants were brought in to do the strategic work to the point that the consulting organisation was doing the strategy presentations to the board. In fact, that organisation had no strategic skills internally at all for a period of time. The engagement effectively meant that the whole strategic direction of the company had been outsourced to this consultant."

The way the chief executive chose to manage the relationship between the consultant's role and the senior and middle managers of the company wasn't transparent and this lack of communication was his key mistake. "It had a demoralising effect on those layers of management," Howard says. "They weren't able to learn from what was going on, to get new insights and have the opportunity for development. That was an example of a chief thinking he's solving an issue by hiring a consultant when he might actually be causing a much bigger problem."

How can the co-dependent trap be avoided? The first step is to outline very clearly why the consulting firm is being engaged, and then determine the length of time they will stay and, importantly, how and when they'll complete the assignment and leave. "There are some very good reasons to use consultants," says Howard. "But companies need to think about how the engagement links to their internal leadership and management capability. Some important questions involve how to translate the key learnings from the engagement. What insights about world's best practice will be gained, and how will they be captured internally? How can they be used to develop your people?"

A more confronting question is about why the company needs the consultant in the first place. If it's due to a lack of organisational and management capability, then companies need to look at what they are doing to recruit and to grow people across all the leadership and management disciplines, says Howard. A key issue, she believes, is the potential for the employee body, especially middle and senior managers, to resent plum jobs going to the consultant. A McKinsey survey on the non-cash motivators for managers found the chance to lead projects or task forces can be greater motivators that the three highest-rated financial incentives: cash bonuses, increased base pay and stock options. As Howard points out: "You may have 100 brilliant consultants working for you but if you don't manage them properly, you may, in parallel, de-motivate and demoralise tens of thousands of employees."

However, management consultants are not the only external advisers causing angst, according to Bradley. "I would say there's far more resentment from management teams about the level of fees paid to investment bankers than towards other professionals. They always seem disproportionate to the amount of time, effort and amount of work involved. A good management consultant, properly managed, who comes up with high value ideas beyond a company's frame of reference, and who takes the company's management team into a new dimension, is rarely a matter for resentment. Others bear the brunt of that these days, possibly even lawyers."

Increasingly, management consulting is seen as a training ground for tomorrow's chief executives. For example, Cameron Clyne, chief executive of NAB, one of Australia's Big Four banks, is a former partner of PricewaterhouseCoopers. But in the bid to win the business, the last issue a team of consultants may consider is exactly who they will be reporting to. "Having a former McKinsey partner for a client would have to be my worst nightmare as a consultant," Bradley says.

Thanks to BusinessSpectator

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