What is Management Consulting?

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In explaining what a Management Consultant does, it is important to first start broadly: nearly anyone who exchanges professional services to a business in exchange from money could be described as a “consultant.” A programmer who sells custom software to a company might be referred to as an “IT consultant” or a “software consultant.” An accountant offering tax advice might be called a “tax consultant.” Even an attorney offering strategic guidance on a lawsuit might be referred to as a “legal consultant.” As you can see, the word “consultant” is a vague, broad descriptor.

When we use the terms Management Consulting (or Strategy Consulting), we are referring to something more specific. It refers to a cottage industry of companies that assemble a group of intelligent, analytical minds that work together to help clients solve complex business problems. This is still a broad definition, but it’s more specific than the more generic term, “consulting.” Management Consultants are engaged in projects that help clients enhance business performance and ultimately create value for shareholders and owners.  (Note that this definition fits best for-profit corporate clients, though clients can also include the government, a private equity firm, or a non-profit organization.) There are many such Management Consulting firms in operation today, whose primary business is selling Management Consulting services to a broad array of clients. We will discuss many of the leading firms in more detail in a later chapter.

Management Consulting projects (often referred to as Cases, Studies, or Engagements) are broad and varied—this is one of the appealing aspects of the job for potential entrants to the industry. To illustrate, each of the example questions below describes the essence of a project that Management Consultants we know are either currently working on or have worked on in the recent past.  These are challenging, strategic questions facing the Consultant’s client company, and it’s the job of the Management Consulting team to help the client answer the question more effectively.

  • Should Insurance Co. enter the Indonesian Market? If so, should it do so through organic growth or through acquisition?
  • Should Hotel Co. raise its prices? If so, by how much?
  • Should Truck Component Manufacturer Co. outsource or offshore a share of its production?
  • What can Healthcare Co. do to reverse declines in gross margins and profitability?
  • What will the competitive landscape look like for High Tech Co. in 5 years?
  • Who will benefit and who will lose from developments in sonar technology?
  • Should Private Equity Co. acquire Mortgage Servicer Co.? What are the drivers of mortgage volumes and what will shift these trends over time?
  • What are the potential synergies if Waste Management Co. acquires another industry player in another region?
  • What is the expected supply and demand of zinc in the next 10 years? What are the key drivers?
  • What will be the impact of the various regulatory changes in the financial services industry on Regional Local Bank Co.?
  • How many homes will be built in the U.S. in the next 20 years?

These questions, and the tasks surrounding them, are typical of Management Consulting engagements in general. They demonstrate the types of strategic questions, problems and conundrums faced by corporate clients everywhere. In each case, as both the macroeconomic and microeconomic environments for each client continue to evolve, organizations have to be well prepared to address these types of strategic questions–they will have a dramatic impact on the company’s future.  In short, Management Consultants play a key role in helping clients succeed in the short-term and in the long-term.

Now, here is a very reasonable question: how can an outsider to a firm—one who is not even necessarily a specialist in a particular industry–charge high fees to assist a client in making major, often transformational, decisions around such challenging strategic issues? It seems, at first glance, unlikely that an outsider can provide expertise that is not available in-house at a leading company in an industry. First, however, we should make the point that the major Management Consulting firms continue to grow and hire more consultants every year, even in this challenging economic environment. This suggests that Management Consultants are presumably adding more value for clients than the cost of their services.  (Unlike legal and accounting advisory services, consulting services are almost  entirely discretionary spending for clients, so this spending must be justified and considered value-enhancing by the board/management of any company. Otherwise the spending would be curtailed or turned off entirely.) In other words, there is a substantial demand for Management Consulting services, and all indications are that this demand is healthy and growing.

Management Consulting projects vary greatly, as we have already seen. However, there is a common thread across all of them–they typically involve heavy amounts of research and analysis, much of which is proprietary or specialized.  This is a point in favor of Management Consultants: they have a competitive advantage, relative to their clients, in conducting research or in analyzing information. Typically, this competitive advantage comes in the form of highly talented employees, combined with highly specialized research or analysis methods that the Management Consulting firm has developed and refined over time.

Another important point in favor of Management Consultants is external objectivity. In other words, Management Consulting firms are often hired specifically as outsiders to help make decisions. For example, a head of a client division may strongly feel that X is the correct strategic decision. That head of the division might hire a Management Consulting firm to help him or her verify that X is, indeed, the best course of action. Alternatively, the head of the company may hire a Management Consulting firm to help determine whether X is correct, or whether Y or Z is indeed a better course of action. In other words, Management Consultants offer an alternative, independent viewpoint that may help a company determine whether its internal decision making is optimal.

Finally, Management Consulting firms develop expertise in specific areas over time, because they tend to concentrate their efforts in specific areas of interest. For example, a Management Consulting firm may have performed a specific profitability analysis technique at Companies A, B, and C, all of which are in the same industry. In this analysis helped those clients, it stands to reason that Company D, which is also in the same industry, might be interested in having the Management Consulting firm conduct the same profitability analysis. In short: because Management Consulting firms are independent entities, they may develop expertise that no single player in a given industry can develop internally.

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