The consulting industry

all stages of the consulting process. Greater emphasis has been placed on clients’ active participation in problem-solving, new and more effective approaches to organizational change, the development of clients’ own problemsolving skills, quality management in consulting and the need for clients to learn from every consulting assignment.

Increased client competence in using consultants. Many organizations, private and public, have become experts in using consultants. They have developed their own criteria and methods for selecting consultants, collaborating with them during assignments, monitoring their interventions, learning from their approach and evaluating results. The progress made by the consulting profession would not have been possible without these advances by clients.

Internal consulting. Consulting services provided under various names by internal units within private and public organizations are not a new phenomenon, but their volume and role increased very considerably in the 1970s and 1980s. The internal consultant has become a regular actor on the management consulting stage.

2.2The current consulting scene

Thanks to the progress outlined in the previous section, and to the numerous challenges faced by businesses worldwide, management consulting has become an important and highly visible professional service sector in terms of size, structure, sophistication, range of services offered, standards applied, results produced and overall influence. Consultants have become acknowledged and often indispensable advisers in major business decisions and transactions. Leading consulting firms are respected and solicited thanks to their broad knowledge base, diversified resources, innovative spirit and capacity to cope with complex and novel situations.

Sector growth

The growth of the consulting sector reflects the high and steady demand for consulting. The estimated value of the world consulting market was US$102 billion in 1999, up 260 per cent from 1992, when the total revenue attained some US$28.3 billion. The 1999 estimate for spending on consulting in Europe was US$33 billion. Average annual growth rates of the world market attained 25 per cent in 1990–94 and 18.9 per cent in 1995–99. At present, the total number of management, business and IT consultants, including e-business consultants, may well be in the range of 650,000–750,000. These figures can only be estimates, because the scope of consulting has not been precisely delimited and data are collected from various sources. Yet the figures give a clear indication of orders of magnitude and trends.

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Management consulting

Sector restructuring

Over the past decade, sector restructuring has been significant and impressive. Mergers, acquisitions, new types of alliances and vigorous new business development with the firms’own resources have swept away the division between management and IT consulting, especially in large consulting firms. These firms have become providers of integrated and multidisciplinary services, able to respond to virtually any demand from their client base. While a few years ago it was possible to discern easily distinct types of large consulting firm, such as global multifunctional firms, strategy houses or information technology consultancies, this is no longer possible. It is true that some leading firms have maintained a prevailing technical profile thanks to which they attained their present technical reputation and market position. However, services in general have become more homogenized as many firms have copied competitors when they offer a new consulting product. Emphasis on service integration and complete packages has also made the service offerings of various firms more similar to each other.

The proportion of total consulting business in the hands of the largest firms did not change significantly between 1990 and 1999, when the 20 largest firms held some 50 per cent of the world market. However, the proportion increased in 2000 to nearly 60 per cent as a result of faster growth of large firms, mergers and acquisitions. Concentration among the top firms continued through large-scale operations such as the merger in 1998 of PriceWaterhouse and Coopers & Lybrand, which created the world’s fourth largest management and business consultancy (not including the audit and accounting wing of the new firm) with 34,000 employees and annual consulting revenues of US$6.6 billion in 2000. The first position was held by Andersen Consulting (renamed Accenture after the split from Arthur Andersen in 2000) with 62,000 employees and revenues of US$8.9 billion in 2000. The Big Six were reduced to the Big Five. Another major structural change was the acquisition in 2000 of the consulting wing of Ernst & Young by Cap Gemini. Further restructuring, including acquisitions of consulting firms by large non-consulting companies, is plausible, although the negotiations concerning the acquisition of the consulting wing of PricewaterhouseCoopers by Hewlett-Packard in the second half of 2000 were unsuccessful. Other initiatives to merge and create new alliances have had varied outcomes.

Another form of restructuring coming to the fore is the separation of management and business consulting from accounting and audit services in the large firms as a result of evolving perceptions of conflict of interest and other reasons (see section 6.2).

The movement into management and IT consulting markets by large nonconsulting firms from the manufacturing, utilities and service sectors – a sporadic occurrence some 6–7 years ago – has turned into a significant trend. HewlettPackard employed 6,000 consultants in 1999. In 1992, IBM had 1,500 consultants on its payroll. By 2000, with 50,000 consultants, it had become the world’s largest combined IT/management consultancy company measured in terms of annual revenue from consulting (US$10.2 billion). This trend is not confined to computer

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The consulting industry

hardware and software manufacturers. Management and business consulting, often in combination with IT consulting, is offered by airlines, banks, insurance companies, electricity authorities, manufacturing companies, and others. This is the result of several factors: the search for new business opportunities among nonconsulting firms; attempts to provide a more complete and better integrated service to customers (including hardware, software, advice and assistance in implementation); and efforts to achieve synergy by integrating key components of the value chain and making full use of firms’ special knowledge and business relationships (e.g. in public utilities). It also shows that, at present, financially and technically strong businesses from any sector can add management and business consulting to their service portfolio and that many such developments can be expected in the coming years.

Sector polarization has continued and presents considerable challenges for medium-sized and small firms, which have to search constantly for new strategies to cope with delicate problems of positioning, maintaining identity, finding a niche, surviving and ideally growing in a competitive environment, retaining competent people and convincing clients of their special skills and other advantages. These firms continue to account for an important share of the consulting market especially in Europe (42.3 per cent in 1999).

At the other end of the spectrum, thousands of independent practitioners and small partnerships of 2–5 consultants provide evidence of imagination, adaptability and vitality. In Europe, 82 per cent of consultancy firms are small; these firms delivered only 10 per cent of consulting services in 1999, but the sector concentration and the power of the large consultancies have not driven them out of business, although their conditions of work have changed quite substantially. Once again, the experience of recent years has demonstrated that, in professional services, size is not the only criterion, and that many services can be provided equally well or even better, and under more advantageous terms from the client’s point of view, by small operators. Small operators can often win by doing different things from large firms, providing a more personalized service and innovating. Networking and subcontracting have enabled many small operators to participate in large and complex projects, often in cooperation with larger service providers.

E-business consulting

Probably the most significant development that has shaped the consulting industry in recent years has been the emergence and spectacular growth of e-commerce and e-business consulting. Virtually non-existent until the mid1990s, it has rapidly turned into the most dynamic area of consulting business. By 2000, all the leading management and IT consultancies were also active in e-business consulting, offering software and advisory services for doing and promoting business via the Internet. Many of them have stressed that e-business should not be viewed as a different sector, but as a new dimension of any business and consulting which will soon become a standard and fully integrated component and method of operating.

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Management consulting

Equally, a number of new firms have appeared, often providing e-business consulting services in combination with development, marketing and installation of software – the so-called “e-consultancies”. At one point a group of them even started calling themselves the “e-five”, and statements such as “the new e-stars are set to destroy the old guard”4 began to appear. Within months, the e-consul- tancies had thousands of professionals on their payrolls. Many of these consultants came from the larger and more traditional consulting firms, most of which were relatively slow to enter the e-business consulting field.

The spectacular development of “e-consulting” was full of paradoxes. It brought a great deal of innovation, dynamism and entrepreneurship to consulting and its contribution and impact have ensured that “the profession will never be the same again”.5 It has created new opportunities, new business models and new ways of consulting in the era of the Internet and the knowledge economy. It has broken the resistance to change in many long-established companies and paved the way to doing more business through the Internet. It has shaken the selfconfidence of large consulting firms, which have realized that any professional service provider can lose its comfortable competitive advantage to dynamic and innovative newcomers if it misses major business trends and opportunities.

Conversely, many providers of e-consulting services, including those regarded as new stars and sector leaders, did not avoid the pitfalls of overselling, pushing clients into hastily prepared and over-ambitious projects, making unrealistic promises to both clients and investors, conceiving and launching “dot.com” businesses with no market and no future, overcharging, recruiting more staff than they were able to train and supervise, and others. In addition, many e-consultancies did not escape financial speculation based on anticipated growth and future earnings supposed to come from the “new economy”, rather than on professional reputation, competence and real business results.

This short though spectacular e-consulting euphoria culminated in 2000; by the end of the year, it was over. The share prices of most Internet consultancies dropped by 90 per cent or more, thousands of consultants employed in this sector became redundant, and “what was once a baffling industry, with dozens of firms all promising e-business transformation and transcendental strategic thinking, is now reduced to a rather more digestible shape”.6

Lessons are still being drawn from this short e-consulting boom.7 There is no doubt that the Internet has generated unprecedented opportunities for consulting services and that the information and knowledge-based economy will constitute an excellent market for consultants for many years. It is also true that, during the 1999–2000 e-business hype, quite a few consultants put their unrealistic ambitions and short-term financial interests before their professional integrity and their clients’ needs and interests.

Accelerated commoditization

High growth rates in consulting could not be maintained over extended periods without increased service standardization and commoditization. To meet existing

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