Management consulting grew with the rise of management as a unique field of study. The first management consulting firm was Arthur D. Little, founded in 1886 by the MIT professor of the same name and was incorporated in 1909. Though Arthur D. Little later became a general management consultancy, it originally specialized in technical research. Booz Allen Hamilton was founded by Edwin G. Booz, a graduate of the Kellogg School of Management at Northwestern University, in 1914 as a management consultancy and the first to serve both industry and government clients.
After World War II, a number of new management consulting firms formed, most notably Boston Consulting Group, founded in 1963, which brought a rigorous analytical approach to the study of management and strategy. Work done at Boston Consulting Group, McKinsey, Booz Allen Hamilton, and the Harvard School during the 1960s and 70s developed the tools and approaches that would define the new field of strategic management, setting the groundwork for many consulting firms to follow. In 1983, Harvard Business School’s influence on the industry continued with the founding of Monitor Group by six professors. It was also only after World War II that management consulting emerged in Europe.
Understanding Management Consultancy
Management consulting indicates both the industry and practice of helping organizations improve their performance primarily through the analysis of existing organizational problems and development of plans for improvement.
Organizations hire the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants’ specialized expertise.
Because of their exposure to and relationships with numerous organizations, consulting firms are also said to be aware of industry “best practices”, although the transferability of such practices from one organization to another may be problematic depending on the situation under consideration.
Consultancies may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, or operational improvement services. Management consultants generally bring their own, proprietary methodologies or frameworks to guide the identification of problems and to serve as the basis for recommendations for more effective or efficient ways of performing work tasks.
In general, various approaches to consulting can be thought of as lying somewhere along a continuum, with an ‘expert’ or prescriptive approach at one end, and a facilitative approach at the other. In the expert approach, the consultant takes the role of expert, and provides expert advice or assistance to the client, with, compared to the facilitative approach, less input from, and less collaboration with, the client(s). With a facilitative approach, the consultant focuses less on specific or technical expert knowledge, and more on the process of consultation itself. Because of this focus on process, a facilitative approach is also often referred to as ‘process consulting,’ with Edgar Schein being considered the most well-known practitioner. The consulting firms listed above are closer toward the expert approach of this continuum.
Many consulting firms are organized in a matrix structure, where one ‘axis’ describes a business function or type of consulting: for example, strategy, operations, technology, executive leadership, process improvement, talent management, sales, etc. The second axis is an industry focus: for example, oil and gas, retail, automotive. Together, these form a matrix, with consultants occupying one or more ‘cells’ in the matrix. For example, one consultant may specialize in operations for the retail industry, and another may focus on process improvement in the downstream oil and gas industry.
Management consulting refers generally to the provision of business services, but there are numerous specializations, such as information technology consulting, human resource consulting, virtual management consulting and others, many of which overlap, and most of which are offered by the large diversified consultancies listed below. So-called “boutique” consultancies, however, are smaller organizations specializing in one or a few of such specializations.
The 1990’s saw an increase in what has been termed as a future based approach. The emphasis in this approach is on language and aligning the people within an organization around a common vision of the future of the organization. This is exemplified in the book “Three Laws of Performance”. The basic concept is that The way people perform correlates to the way that world occurs for them and future based language alters the way the future occurs for them. These principles are increasingly employed in organizations that are experiencing a market transition or a merger that requires the blending of two corporate cultures.
Current state of the industry
Management consulting has grown quickly, with growth rates of the industry exceeding 20% in the 1980s and 1990s. As a business service, consulting remains highly cyclical and linked to overall economic conditions. The consulting industry shrank during the 2001-2003 period, but grew steadily until the recent economic downturn in 2009. Since then the market has stabilized.
Currently, there are three main types of consulting firms. Large, diversified organizations, Medium-sized management consultancies and Boutique firms which have focused areas of consulting expertise in specific industries, functional areas, technologies, or regions of the world.
Traditionally, the consulting industry charged on a time and materials basis, billing staff consultants out based solely on the hours worked plus out-of-pocket expenses such as travel costs. During the late 1990s and early 2000s, there was a shift to more results-based pricing, either with fixed bids for defined deliverables or some form of results-based pricing in which the firm would be paid a fraction of the value delivered. The current trend seems to favor a hybrid with components of fixed pricing and risk-sharing by both the consulting firm and client.
Management consulting is becoming more prevalent in non-work related fields as well. As the need for professional and specialized advice grows, other industries such as government, quasi-government and not-for-profit agencies are turning to the same managerial principles that have helped the private sector for years.
An industry structural trend which arose in the early part of the 21st century was the spin-off or separation of the consulting and accounting units of the large diversified professional advisory firms most notably Ernst & Young, PwC and KPMG. For these firms, which began operation as accounting and audit firms, management consulting was a new extension to their organization. But after a number of highly publicized scandals over accounting practices, such as the Enron scandal, these firms began divestiture of their management consulting units, to more easily comply with the tighter regulatory scrutiny that followed. In some parts of the world this trend is now being reversed where the firms are rapidly rebuilding their management consulting arms as their corporate websites clearly demonstrate.