THE CRAZE FOR CONSULTANTS
When it comes to advice, you'd be hard-pressed to find a more avid listener than AT&T. Last year alone, the telecommunications company dished out $347.1 million on "consulting and research services," more than Bell Labs annually spends on basic research--and nearly three times what it spent in 1990.
Among the nearly 1,000 consulting firms on AT&T's gravy train are some of the best-known soothsayers of big business. McKinsey & Co., the high church of consulting, took home $24.9 million of that treasure, up from a mere $8.4 million in 1990. Monitor Co., the strategic firm co-founded by Harvard business school's Michael E. Porter, got $58.5 million--a sum equal to nearly two-thirds its total revenues last year. And Arthur Andersen received $36.1 million.
As consulting bills go, AT&T's is...gigantic. It's also a sure sign that the advice game is alive and well. Even as corporations continue to lay off thousands of employees, they're hiring consultants in unprecedented numbers, creating an all-time boom in the field. "I have never seen this business any busier," says Roger Nelson, who heads up Ernst & Young's $1.1 billion consulting business. "Change is driving the business. Companies are expanding, contracting, changing structures, and going global."
The signs of the consulting gold rush are all around: MBAs are being lured into the profession at record rates. Major new entrants, from IBM to Xerox Corp., are setting up their own consulting shops to work for third parties.
Some downsized corporations are turning to consultants to do work they no longer have the in-house talent to perform. And once-brief assignments have grown into megaprojects involving dozens or even hundreds of consultants at multi- million-dollar fees.
MAGIC WORDS. Some companies that have rarely looked to outside help, such as Procter & Gamble Co., have signed million-dollar contracts with consulting outfits. And even some nations, undergoing a sort of reengineering of their own, are jumping on the consultants' bandwagon: Bulgaria recently awarded Chicago-based A.T. Kearney Inc. a 14-month assignment to help it establish a development strategy for its energy industry.
Only a few years ago, some industry observers worried that consulting was a maturing business incapable of growing much more than 5% a year. Now, firms such as Monitor and Coopers & Lybrand boast backlogs and are turning away work. The profession's leaders expect double-digit growth rates for at least the next five years. In 1993, some 80,000 consultants--from partners at elite global firms with offices around the world to displaced executives with fax machines in their basements--sold $17 billion of advice. That's up 10% from the previous year, according to Consultants News, an industry newsletter.
To some extent, the increase is a self-inflating bubble: Consultants beget more consulting as they fuel the marketplace with new ideas and management fads. The incantations of these necromancers can make managers worry that their rivals have gotten hold of some powerful new magic--so they had better buy a little corporate juju of their own. "The market also is overheated because of all the hype and excitement generated around reengineering," says John S. Clarkeson, chief executive of Boston Consulting Group Inc.
And consultants show no sign of running out of spells to cast. CSC Index Inc., the Cambridge (Mass.) firm that gave the word "reengineering" its buzz, is launching a new nostrum called "value discipline." The idea: To sustain leadership, a company must achieve "operational excellence," "customer intimacy," or "product leadership." Gemini Consulting, meantime, is pushing "business transformation," a concept the firm defines by the "four R's"--reframing corporate issues, restructuring the company, revitalizing and then renewing the organization and its people.
Translation: It will cost you a lot of money.
BIG BUCKS. But the consulting craze is also being fueled by more than the catchphrase du jour. Roiled by unrivaled turmoil, companies increasingly are grasping for the hand of the consultant to steady them through the processes of going global, reengineering, rethinking, and shrinking. Coopers & Lybrand is helping Avon Products, H.J. Heinz, and Burger King crack the Chinese market. AT&T says a big reason for its heavy use of McKinsey and its ilk has been to help its efforts to globalize operations. Tenneco Inc. is spending $3 million for each of seven consulting projects with a single firm to eliminate inefficiencies and costs. GTE Corp. paid Boston Consulting Group $15.1 million in the past two years to help it reengineer its operations.
Yet even these lucrative assignments pale in comparison with other "transformation" projects--in which consultants guide the implementation of massive changes in a company's operations, systems, and culture--that can cost tens of millions in consulting fees each year. "We now have assignments worth $30 million to $50 million with contracts as long as three years out," says Francis Gouillart, a senior vice-president at Gemini Consulting, which has worked with Union Carbide, British Telecom, and DuPont. Adds George T. Shaheen, managing partner of $2.9 billion Andersen Consulting: "The contracts are bigger, longer, and more complex. They require greater numbers of people and have a greater impact on the enterprise."
But just what is that impact--and exactly what is management getting for all the money it spends on consultants? Over the years, of course, the profession has taken its lumps--and rightly so. Although McKinsey declines all comment on clients, the firm has played a major role in advising the managements of such troubled companies as American Express, Digital Equipment, General Motors, and Sears Roebuck during their declines. It was McKinsey, for example, that was instrumental in GM's unsuccessful restructuring in the 1980s.
It's small wonder that consulting, as it was then practiced, often produced little result. Under the old model, senior executives called in the consultants. A team of four to six MBAs, often young, arrogant know-it- alls, interviewed scores of managers and came up with a report in three to six months. A few hundred thousand dollars later, the report was presented and quickly forgotten, gathering the proverbial dust on the shelf. "The insights you delivered were sometimes impractical," admits Gemini's Gouillart. "I was probably batting 25% to 30% on an implementation rate."
Now, however, the advice-givers say the business is changing in ways that allow them to deliver more value to their clients. Consultants are no longer just parachuting in, observing, and bailing out. They're forming teams with executives at client companies and working together to analyze problems and develop solutions. Assignments that were once narrowly focused have evolved into 18-to-24-month efforts that encompass strategy, operations, organization, and technology.
TEAM PLAYERS. And instead of producing dust-gathering reports, these client-consulting teams work together to perform the nitty-gritty implementation that's needed to deliver results. That was the case for General Systems Co., an $18 million consulting firm of 80 professionals in Pittsfield, Mass., and its relationship with Tenneco in Houston. Tenneco's late chief executive, Michael H. Walsh, had called on the firm's services in the early 1980s to help weed out inefficiencies at Cummins Engine Co., where he was an executive vice-president. A few months after joining Union Pacific Corp. as CEO in 1987, Walsh hired General Systems again.
Within months of being recruited to the top job at Tenneco in 1991, Walsh called on General Systems for a third time. "Their approach is to pretty much become part of the fabric of the organization," says Richard L.
Wambold, who worked closely with the consultanting firm as Tenneco's vice- president for operations. "They virtually live in your building."
Teams of Tenneco staffers and consultants began to examine specific divisions of the company, one by one, attempting to measure what General Systems calls the "cost of quality," or the cost of inefficiencies and failures at the company. The objective: to reduce such costs to less than 10% of revenues, the benchmark set by such companies as Motorola Inc. and Xerox. The goal is to take out $1 billion in annual costs. So far, Tenneco has whittled its cost of quality from more than 20% to 14% or 15%, adding $461 million to operating income in the past two years. In light of that, General Systems' fee of $15 million to $20 million over five years starts looking like a bargain.
STRICTER SCRUTINY. Today, nine General Systems people continue to work closely with teams of Tenneco managers as advisers. And each month, the firm's two principals, Armand and Donald Feigenbaum, attend the company's monthly performance-review meetings at which senior management measures progress. Such never-ending assignments, in which consultants weave themselves into the company, will become standard, believes H. Michael Gleason, group executive of Electronic Data Systems Corp.'s management- consulting services. "We'll have relationships with clients that last 5, 10, or 15 years, with many work efforts in those periods." Small wonder that EDS is bullish on the business. Within the past year, it has built a 3,100-person management-consulting practice from scratch, raiding competitors for staff and hiring 80 MBAs this year.
As the consulting assignments grow longer and the fees grow ever larger, clients have become more demanding. They're doing more homework before hiring a firm, and they're insisting on demonstrable, measurable results.
British Telecom PLC, for example, took six months to select a consulting firm when it embarked on a vast effort to change its culture. A group of five executives led by Michael L. Hepher, group managing director, screened an initial slate of 16 major firms, eventually narrowing the list to three companies: McKinsey, Andersen, and Gemini. Each firm was asked for at least three client references.
To win the job, Gemini gave the company 10 references, including companies in North America, Britain, France, Germany, Italy, and Canada, and it guaranteed that BT could handpick the consultant's best people for the assignment. The company's executives visited six of Gemini's telecom clients, including Bell Atlantic Corp., before signing up the firm in May of last year.
Starting in October, teams of consultants and BT managers began studying all the company's operations--from its basic strategic business objectives and overall vision to the efficiency of its communications network. "We're now designing the changes, piloting them, and testing them," says James A.
Otterbeck, a Gemini consultant. Over the course of what's expected to be a two-year assignment, Otterbeck says, "we'll involve and work with over half of the client organization, or 80,000 employees."
The importance of the work is clear. "We have staked our future on the work of our joint teams," says Hepher, who believes the massive effort will result in cost savings of "hundreds of millions of pounds" and change the company's culture so that it will become more responsive to customers. BT won't say what it's paying Gemini for the job, but consulting-industry sources believe the assignment will cost tens of millions of dollars and involve dozens of Gemini consultants.
Some observers worry that the trend toward such long-term relationships could undermine some of the benefits of consulting. After all, a key strength of consultants is that they can bring a fresh and impartial eye to a company's problems. That may no longer be the case if they work in close- knit teams with clients for years instead of months. "When outsiders become de facto members of management teams, they lose perspective," says a prominent consultant. "They start to know Bill and Harry down the hall.
Instead of helping a company gain a broader perspective, they create another room full of mirrors."
Many insiders say that's exactly what happened in the 1980s, when Boston's Bain & Co. invented the idea of "relationship consulting," in which the consultants become entrenched as quasi-insiders for years. At Chicago-based Baxter International Inc., say former Baxter executives, Bain grew into such a powerful presence that the consultants became virtual line executives and were embroiled in the company's internal politics. Some of Baxter's own executives grouse that they could not gain approval from top management without first vetting their ideas with the consultants. Bain still works for Baxter, but its presence has been drastically reduced.
FRONT-END WORK. Many consultants now say that one reason previous long-term relationships failed was that the consultants sometimes tried to usurp the role of the managers. Still, the pressure on consultants to maintain those relationships may cause them to oversell their services. "There is a concern about being too dependent on consulting or a suspicion that the consultant will sell things the client doesn't need," concedes Brian Dickie, president of Booz Allen & Hamilton Inc. "We've exploited these vulnerabilities, and so have other firms."
The traditional front-end work to "diagnose" a company, as consultants put it, tends to be relatively cheap. The big fees come later, as they swarm over the company for the design and implementation phases. In 1991, when GTE sought Boston Consulting Group's help to reengineer its operations, GTE handed out $2.4 million to its consultant. The next year, as planning and early implementation was rolled out, fees jumped to more than $10.9 million. Last year, as more GTE managers assumed greater responsibility for making the changes, the sum fell to $4.1 million.
Critics say the prospect of such hefty fees distorts the role of the consultant. "The job of a consultant is to put him- or herself out of a job," insists Gerald Ross, the co-founder of Change Lab International, a small consulting firm. "You shouldn't build a dependency with the client for years. But most of these big firms now want to hook you in and get on the gravy train." The process seems to work best when the consultants are willing to transfer what they know to the client. "You don't want the consultants to do all the thinking and the client to do all the doing," says BCG's Clarkeson. "We're ahead of the game if we pass on as much as we know to the client, rather than saying we'll remain the experts and do it for you."
That view is endorsed by W. Sanford Miller Jr., chief marketing officer for CIGNA Corp. "What consulting firms have to do today is look at an assignment as an educational experience for the organization they are working for," says Miller. "After having a consulting firm in, people in the company should be smarter and more familiar with the key issues raised in the assignment."
A few consultants, however, worry that sharing too much of their knowledge with clients will take some of the mystique out of their business.
"Because the projects are bigger and longer, you're getting so close to your clients that they come to know all your tricks," says Fred D.
Wiersema, a vice-president at CSC Index. "Familiarity can breed contempt.
You're no longer the guru with all the clever ideas."
BOOZ HOUNDS. Some companies have indeed decided that the gurus hold few secrets and are experimenting with forming their own groups of internal consultants culled from insiders and outside hires. "The truth is, it's not difficult to go into a corporation and cut money out of it," says Terry M. Ennis, who heads up an internal consulting unit with 50 staffers at DuPont Co. "But it's damn difficult to change the work processes and get results that are sustainable. Very few consultants can help you with that."
Most consultants, of course, bridle at such ideas. They say they bring objectivity, experience, expertise, and people power to critical management issues and that they're giving management its money's worth. AT&T, not surprisingly, defends the $347.1 million in fees it paid out for consulting to its regulated businesses last year. Much of the money went to help "expedite our movement into the global marketplace," says Patricia Cox, an AT&T director who buys consulting services for its communications group.
"If we were to do this on our own, it would have taken us substantially longer to capitalize on the different business opportunities in the world."
Procter & Gamble takes a similar view of its recent use of consultants to make its worldwide operations more efficient. Because the company lacked the knowhow to systematically eliminate layers of management and people, it brought in a team from Booz Allen. "They knew the steps and the process you had to take," says Gerald V. Dirvin, an executive vice-president at P&G who headed the effort--and retired at the end of it, saying it was a way to cut a layer of management. "We would have stumbled along trying to invent something."
Some 35 to 40 consultants from Booz worked with about 120 P&G executives on the cost-reduction effort, which was aimed at taking out $750 million in annual overhead costs. Together, the consultants and managers combed the company, analyzing operations and identifying ways to reduce costs and speed decision-making.
Unlike many companies today, however, P&G decided largely to implement the recommendations on its own. Instead of keeping Booz around for years, P&G kept the assignment to roughly 12 months. Using consultants is "a quick crutch that people get into," Dirvin says. "They say, `Gee, I haven't got the answer right now, and it makes my head hurt to think that hard.' So they hire someone to think for them."
In the booming advice game these days, there's certainly no shortage of cogitating and conceptualizing by the consultants--especially at AT&T and other companies that are forking over small fortunes on outside help.
Because these megaprojects are such a recent phenomenon, it's still a little early to know whether the new, more engaged and expansive style of consulting will pay off any better than the older, more superficial model did. But even if it turns out to be another disappointment, rest assured that the consultants will cook up something else.
HOW MANAGEMENT CAN PLAY THE ADVICE GAME
With fees rising as engagements lengthen, clients are demanding more results from their consultants. How do you get your money's worth?
SCREEN Before hiring a consultant, rigorously interview and screen several candidates for the job and ask for at least three recent client references.
RESEARCH Visit client sites and ask executives for evidence of tangible benefits delivered by the consultants--and whether the company could have done as well on its own.
JOIN IN Insist that the analysis of the company's issues be done not solely by consultants but by client-consultant teams, with in-house managers outnumbering consultants.
LEARN Demand that consultants share their skills and knowledge with the teams. Any firm that insists on keeping its methodology
or process secret is likely to seize too much
INTERNALIZE As the assignment moves into implementation, greater numbers of insiders should be involved in the effort to make sure the changes have staying power.
SET LIMITS Resist efforts by consultants to "scale up" a project to all other units of the company. If skills have been transferred to teams, insiders should be able to spread the ideas to other parts of your organization.
DATA: BUSINESS WEEKHOW'S THIS FOR
A CONSULTING BILL?
AT&T's regulated businesses spent $347.1 million on "consulting and research services" last year, nearly three times the $137.5 million it spent in 1990. Ten of the biggest winners:
DATA: COMPANY REPORTS
Consulting Fees from AT&T
ANDERSEN CONSULTING 56.7
MERCER MGT. CONSULTING 24.8
BOSTON CONSULTING GROUP 22.9
Consulting Fees from AT&T
CSC INDEX 7.0
A.T. KEARNEY 5.0
BOOZ ALLEN & HAMILTON 4.3
DELOITTE & TOUCHE 4.0
John A. Byrne in New York