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and for developing new competencies and services. In many consulting firms, the senior staff is busy negotiating and preparing new assignments, while the operating staff is busy serving clients. Little is done by way of research and new product development. That is why some academics have been able to compete successfully with professional consultants: basing their advice on research, they have come up with new products that have aroused the attention of the business community more than the service offerings of long-established consulting firms.

Every consultant has to decide whether or not to carry out research for product and methodology development, and if not, how to acquire the new knowledge and expertise without which product innovation is impossible. Some large and medium-sized consulting firms have chosen to do their own research, aimed mainly, but not exclusively, at developing new services. Another major benefit, which several consulting firms have already derived from research, is the demonstration of intimate knowledge of the business and management scene and of the firm’s readiness to share knowledge and experience with clients and a wider management public.

Sole practitioners and small firms are in a different situation; their limited resources prevent them from engaging in extensive research and development activities. Small and focused projects, however, are within their reach. They can, furthermore, keep informed about ongoing research in universities and management institutes and participate in workshops reviewing the methods and the results of recent research. Joint research involving several consulting firms, and research organized by consultants’ associations for the benefit of their members, are under-used and deserve to be explored.

In deciding to do research, a consulting firm has to face the question of relationships between research and operations. Research projects and teams separated from current client work do not seem to be the most effective solution. Better results have been obtained from research based on work for clients, using client assignments both as a source of information and for testing and applying research results. However, adequate organizational, time and financial provision must be made if research objectives are to be pursued in parallel with operational objectives. Without proper arrangements, it would be unrealistic to expect that operating consultants would also find time and energy for research and new product development.

28.3 The client base

Consulting services and products are always intended for a particular client base. Defining and developing this base are other key elements of strategy formulation. This includes considerations on serving:

–existing or new clients;

–organizations of different size (small, medium, large, very large);

–organizations in one or more sectors (e.g. energy, transport, health, banking, etc.);

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–private, public or mixed-ownership organizations;

–organizations with management systems at different levels of sophistication (e.g. firms that are very advanced in applying new manufacturing and management technologies);

–firms in a limited geographical area, in a whole country, in other countries and regions, or multinational firms;

–a larger or smaller number of clients.

In consulting, as in other professional services, having a solid clientele is probably even more important than having an excellent product to offer. Clients who know and trust the consulting firm from previous experience, and are prepared to return to it with new work, are a major asset. Relationships of trust and collaboration with such clients constitute what some authors call the consultant’s “relationship capital” or “customer capital”, which is defined as “the value of the organization’s relationships with the people with whom it does business”.1

Invariably, the strategists of the consulting profession put great emphasis on retaining existing clients and on knowledge-sharing, marketing and other strategies aimed at these clients. In some firms, repeat business accounts for 75–85 per cent of total earnings.

This, however, has to be considered in conjunction with service specialization and the firm’s overall development strategy. Growth and diversification may be impossible without finding new clients, thus increasing and diversifying the client base. Conversely, new products are needed to serve the existing client base. Clients stay with you, trust you and recruit you again, only if they see that you are developing your product line and your capabilities in accordance with their changing needs. Otherwise they have no reason to return to the same consultant.

There are, too, certain other strategy considerations. It is important to decide how many clients to serve. This may be crucial in the case of a single practitioner or a small firm. Getting large contracts from a small number of clients reduces the amount of time spent on acquisition work and ensures regular income. However, this may be a high-risk strategy, since it tends to create an excessive dependence on one or a small number of major clients, and even on individual managers in the client organizations. It may also narrow down the consultant’s horizon and limit the chances to learn from new clients.

Further, the level of the clients’ sophistication should be compared with the sophistication of the services that the consultant is able to provide. There are differences between clients (and countries and sectors) in terms of sophistication of their management systems, and competence of their managerial and specialist staff. Not every client requires, or can use, the latest innovations in management science and technology. Not every consultant can claim to operate at the cutting edge of management technology, and a realistic assessment of one’s own level of sophistication can be one of the soundest strategic moves.

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28.4 Growth and expansion

In many countries and even in international markets, large consulting organizations and single practitioners operate alongside each other. Various firms have grown in their own ways and, in many cases, no particular growth strategy has been pursued. The vision and entrepreneurial spirit of the founder or managing partner, and good performance in marketing and delivering services, have been the main factors of growth, allied with a favourable business climate.

Nevertheless, the size of the firm and the rate of growth ought to be considered when strategy is defined. These issues should be examined in connection with the range of services offered, sectoral and geographical coverage, assessment of the market, existing and newly developing competition, the consulting organization’s resources, and its ability to sustain growth while maintaining or improving service quality.

Is there an ideal size of a firm?

Some consulting firms have deliberately opted for a particular size and do not try to grow beyond it. This is often justified by a combination of human and managerial factors – the desire to maintain a coherent professional team where individuals can interact with each other and a simple management structure can be used. Conversely, size can become a constraint for small firms. They may see consulting opportunities that are fully within their technical capabilities, but beyond their reach owing to the importance of the potential client, the size of the contract and the number of consultants to be assigned to the project.

It is impossible to determine an optimum size of a consultancy as a theoretical concept. Instead, it is necessary to keep in mind coherence between the firm’s strategic choices and plans, and its current and projected size. Analysis may reveal that there is no reason to grow, or, conversely, that the firm must grow if it wants to capture new markets, develop new service lines, cope with competition and satisfy the ambitions of its staff.

How far can consulting firms grow?

Attitudes to firm size and growth in consulting have been strongly influenced by the behaviour of the largest service providers. In the past 10 years, these firms without exception have vigorously pursued fast growth, combining various strategies, such as new staff recruitment, mergers and acquisitions, service commodification, and service portfolio restructuring. Significant growth factors have included combination and integration of management and IT consulting and the emergence of e-business consulting. Without information technologies and systems, the growth rate would have been much smaller. The largest consultancies, such as Accenture, PricewaterhouseCoopers, Cap Gemini or Ernst & Young, now employ over 45,000 consultants each worldwide, and

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their annual global consulting revenues exceed US$8 billion per firm. The growth of some other large firms has been even faster, although they have not attained the dimensions of the consulting giants. Furthermore, the largest firms provide services not only in consulting, but also in audit, IT, outsourcing, venture capital and other sectors (this has started changing, however).

It appears at present that most consultancies are happy to grow, and want to grow faster than the competition if possible. The question of the limits of growth is a taboo subject in consulting circles since no firm wants to admit that it has already outgrown rational limits.

For large consultancies, their size is a precondition for being considered for large and complex projects, for actual delivery of such projects, for providing a wide range of coordinated services to important business clients in the global economy, for serving clients active in a number of different countries, and for major government projects. Clearly, large firms can also afford to spend more on research and product development, marketing and publicity. Conversely, in professional services, size inevitably leads to problems with corporate culture and identity, staff competence and quality, coordination and supervision of service delivery, quality assurance and operational efficiency. It constrains competition and increases the risk of conflicting interests. For certain tasks and clients large firms are just too heavy, inflexible and costly. Thus, although the size of consulting firms is not a hot topic at present, it is likely to become one sooner or later. There may even be a reverse trend – downsizing, spin-offs, departures of specialized teams and units, breaking up of large firms into smaller and better-focused entities, and a range of similar strategic transformations.

Growth and questions of staffing

Growth involves recruiting and developing new consulting staff. If growth is fast, it is often difficult to find new consultants, the initial training of new recruits has to be shortened, and relatively inexperienced consultants have to be assigned to jobs that may be beyond their competence. Many consulting firms that have followed a fast-growth strategy have had to struggle with considerable problems of staffing, training, indoctrination, coherence, integrity, supervision and even efficiency.

A consulting firm that does not grow, or grows too slowly, faces other problems. As members of staff age and become more experienced, they want to be promoted to senior positions and obtain corresponding increases in remuneration. The firm’s leverage pattern may become distorted because it cannot maintain the normal ratio of juniors to partners. The cost of the firm’s services will also grow if the higher remuneration cannot be matched by increased staff productivity.

What is to be done? The firm may try to change its product-market scope, focusing on more sophisticated services that require more experienced (and better-paid) staff. In other cases, staff turnover can help. Staff members who see no chance of promotion may leave, and can be replaced by new recruits at junior

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level. In one sense, such problems exist in any organization. However, they tend to be more acute, and to have a greater effect on strategy, in professional service firms, because most of these firms are limited in size and the employees are highly competent individuals with ambitious career goals. We will return to this question in Chapters 36 and 37, where consulting careers and staff development are discussed in more detail.

Mergers and acquisitions

Growth and expansion can be achieved through mergers and acquisitions. In the 1980s and 1990s, many consulting firms adopted this strategy for various reasons: to add a new service line to their portfolio (corporate strategy, information technology, marketing), to acquire access to a consulting market in another country, to become international, or just to get a larger share of the market. Some large international consultancies bought ten or more smaller firms of varying profiles. The most spectacular mergers were of course those within the Big Eight group, which reduced the group to the Big Six and later to the Big Five.

In the professions, growing through mergers and acquisitions is a courageous and risky strategy, requiring highly sensitive and open-minded management. Different corporate and national cultures have to be faced and harmonized, many structural and human problems resolved, barriers to change overcome, and clients assured that they will get the same and an even better service. It is not surprising that not all mergers and acquisitions have been unqualified successes.

Networks and alliances

As consulting projects grow larger and more complex, and clients demand the highest quality of service, fewer and fewer consultants can rely solely on their own resources. Developing new services and capabilities with the firm’s own resources takes time, and may not be the right thing to do (e.g. if demand for certain services is irregular and small).

A merger or an acquisition may prove to be the solution. However, many firms do not want to lose their independence. Perhaps they have not found a suitable candidate for a merger. Or they may prefer to collaborate for some time with a partner before considering a legal merger, in order to ascertain if competency levels, consulting philosophies and organizational cultures are compatible.

Collaboration among independent professionals is nothing new. However, since the 1980s networking and strategic alliances have become an important feature of strategy in many consulting firms. They come in various forms:

●Informal networks. Such networks are usually formed by a group of single practitioners or smaller firms with similar or complementary profiles and interests. The network becomes a pool from which consultants choose collaborators case by case for assignments that are too large for one small firm, require special technical expertise, or extend to other countries.

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