SIC 8742
MANAGEMENT CONSULTING SERVICES



This industry consists of establishments primarily engaged in furnishing operating counsel and assistance to management of private, nonprofit, and public organizations. These establishments generally perform a variety of activities, such as strategic and organizational planning; financial planning and budgeting; marketing objectives and policies; information systems planning, evaluation, and selection; human resource policies and practices planning; and production scheduling and control planning.

NAICS Code(s)

541611 (Administrative Management and General Management Consulting Services)

541612 (Human Resources and Executive Search Consulting Services)

541613 (Marketing Consulting Services)

541614 (Process, Physical, Distribution, and Logistics Counseling)

Industry Snapshot

In the early 2000s, management consulting was an $80 billion enterprise within the United States and a $100 billion industry worldwide. Nothing has funneled more money into the business world than information technology consulting, which boomed in the 1990s as companies groped for ways to harness the benefits of office automation, network computing, and e-commerce. Other important consulting specialties include general strategy, marketing and branding, leadership, logistics, human resources, and industry-specific practices. All told, one standard reference on the industry lists 118 distinct types of consulting services offered and 98 industries served.

In many ways the industry has been propelled by what could be described as business fads—philosophies, events, and practices that ignite intense interest for a few years but gradually fade. One such example was the rise of reengineering, a form of organizational change dictated by management strategy, of the early and mid-1990s. Later in the decade, however, corporate leaders set their gaze on challenges like e-commerce and employee satisfaction, which was especially worrisome in the United States in the late 1990s while labor was in short supply.

By the turn of the twenty-first century, the majority of management consultancies were offering Internet-related services to the hordes of businesses launching online ventures. Those who had resisted delving into the e-commerce arena were scrambling to make up for lost time. When the technology industry in North America crashed, fueling a more widespread economic malaise, management consultancies began to see their revenues slow. As a result, the industry was characterized by both fee reductions and layoffs in the early 2000s.

Organization and Structure

Individual Firms. The most common organizational structure for a management consulting firm is that of a corporation. A typical consulting firm might employ research associates at the lower level, with consultants and senior consultants at the next level. Managing consultants are next in the hierarchy. At this level, individuals typically have greater degrees of client interaction, as well as responsibility for the success of consulting projects. Finally, at the top of a typical firm's hierarchy are partners. In addition to running the operations of the organization, partners are generally responsible for bringing new business into the firm.

Management consulting firms usually operate in project teams. Depending upon the firm and assignment, consultants on project teams often spend more time at the site of the client's offices than they do at their own. There, they gather data and interact extensively with personnel from the client organization, make recommendations, and often work on implementing solutions. Often, client personnel will work as part of the consulting team for the duration of the project to ensure that the organization has input into the process. Client participation increases the likelihood that the solutions will be implemented effectively.

Management consulting firms generally operate on a project fee or hourly fee basis. Fees in the consulting industry tend to run very high, due to the significance of the problems that consultants help their clients to overcome.

Industry Structure. Management consulting firms range in size from sole practitioners to large businesses. As far as areas of expertise, some firms are devoted to specific practice areas while others offer a broad range of services to varied clientele. For example, a consulting firm might specialize in providing clients with compensation and benefits packages, to the exclusion of all other services. Yet other firms might provide a broad range of advisory services—combining such varied forms of advice as consulting the chief executive officer on general business strategy and consulting a management information systems (MIS) executive on a new computer network. A major segment of the consulting market is occupied by consulting organizations that are part of Certified Public Accountant (CPA) firms. Such firms attempt to serve their tax and audit clients with management consulting services as well. Another type of consulting function is one that exists within a non-consulting organization. Such internal consultants provide specialized services for their corporations. An example is an internal human resources consulting department within a Fortune 500 corporation that serves the varied divisions of the organization as if they were external clients.

In addition to providing expertise or advice, many management consultants perform in the role of process consultant. This approach recognizes that the client firm already possesses knowledge of its own industry and internal corporate environment that exceeds the knowledge available to the consultant. Therefore, the role of the management consultant is one of facilitating the process of pulling solutions out from within the client organization and providing insight with an objective point of view.

Because the management consulting industry is unregulated, any individual or company that offers advice in exchange for compensation may be classified as a consultant. For this reason, the definition of a management consulting firm often varies, depending upon the source of information. Nonetheless, an understanding of the industry can be ascertained by separating consulting firms into distinct categories and contrasting the categories.

The following breakdown describes the most common and most widely recognized types of consulting organizations, first by organizational structure, and then by consulting specialty (also known as "practice area" within the industry).

Large Consulting Firms. This classification represents the largest players in the management consulting industry whose primary service is providing expertise and consultation to management. The broad heading of large consulting firms encompasses the larger of the generalist consulting firms and strategy consulting firms.

Big Five Accounting/Consulting Firms. A handful of large public accounting and consulting firms lead the industry on an international scale. These include the so-called Big Five: Andersen Worldwide, PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG Peat Marwick. Consulting divisions of the Big Five are especially strong in information technology (IT) and management information systems (MIS) consulting. These firms typically offer strategic or generalist management consulting services as well. As of the late 1990s, though, the marriage of public accounting, particularly auditing services, and consulting was a troubled one; most of the top firms attempted to wall off their accounting and consulting practices to avoid appearing to have conflicts of interest.

Small Firms/Boutiques. Small firms or boutiques often provide specialized services or offer expertise that focuses on one industry or a single business practice area. These firms tend to be small, lesser-known niche players that do not regularly compete directly with the larger consulting organizations. Many of these firms operate in a single, geographic region. Some small or boutique firms service only one client.

Sole Practitioners. Perhaps the most difficult segment to define in the management consulting industry is that of the sole practitioner. This group encompasses many outplaced or retired executives and part-time consultants who offer expertise in areas where they have a great deal of experience. Sole practitioners are often engaged by smaller firms and even their previous employers. This classification of the consulting industry also includes university professors who provide consulting in their areas of teaching expertise.

Internal Consulting Organizations. Large corporations may have recurring project work for which the expertise of external management consultants would be required on an ongoing basis. Many such firms have developed internal consulting staffs in order to deal with this demand in a more cost-effective manner. Such internal organizations may be generalists or may specialize in corporate strategy, human resources issues, information technology, or other areas that are critical to the company's operation.

IT/MIS. The information technology segment is the largest segment of the consulting industry. The Big Five all provide expertise in this area and draw substantial revenue from it as well. Firms that specialize in information technology tackle business problems by applying technology to provide solutions. For example, a firm specializing in information technology might help a corporation to become more efficient in their order fulfillment operation by installing computers and equipment that automates the process. One of the firms that is best known in IT/MIS consulting is Andersen Consulting.

Compensation/Benefits Consulting. Compensation/benefits consulting firms represent the second largest independent segment of the industry in the United States. Firms that specialize in compensation/benefits consulting offer services related to human resource management with specific expertise in practices such as developing corporate grading and compensation schemes, titling plans, and benefits packages. Examples of firms that practice primarily in the compensation/benefits consulting practice area include the Hay Group and Hewitt Associates.

Generalist Consulting. Generalist management consulting firms typically provide advice on strategy to their clients but may also have internal expertise in specific industries, such as banking or health care, or in particular practice areas, such as new product development or operations. Generalist consulting firms often provide consulting in IT/MIS and compensation/benefits as well. Examples of generalist firms include McKinsey & Company, Inc.; Booz, Allen & Hamilton, Inc.; and Arthur D. Little, Inc.

Strategy Consulting. Strategy consulting firms specialize in providing advice on corporate strategy to senior executives—answering such questions as, "How can our firm improve profitability?" Strategy firms compete with generalist firms for strategic engagements but do not provide the nonstrategy services of the broader, generalist firms. However, the larger strategy firms, as they have expanded their lines of business, have become more difficult to distinguish from the generalist firms. Examples of firms that have traditionally been regarded as strategy firms include the Boston Consulting Group and Bain & Company.

Specialty Consulting Practice Areas. This segment is by far the most difficult to define, for it encompasses so many different possible practice areas. Specialty consulting firms are often boutiques or small to medium size organizations that service a niche in the consulting market.

Marketing Consulting Firms. These firms provide marketing research, product test markets, target market selection, and other services directly related to the marketing of client products or services. Perhaps the best known marketing consulting firm is Yankelovich, Skelly and White/Clancy Shulman Inc.

Business Re-engineering/Organizational Effectiveness. This specialty in management consulting refers to the radical redesigning and rebuilding of the processes and functions of a business to recreate the company as a highly effective, cohesive whole that performs optimally. The concept of "Business Re-engineering" was originated by the Index Group (Now CSC/Index, Inc.). Increasingly, other consulting firms are also developing this line of business—most notably, Andersen Consulting.

Environmental Consulting Firms. With increased public attention on the environment, and increased governmental concern over hazardous waste, environmental consulting firms have seen increased demand for their services in recent years.

Health Care Consulting. There are two primary specialties that fall under the heading of health care consulting. The first practice area is providing general advisory services such as strategy consultation or cost-containment studies for health service agencies (e.g., Health Maintenance Organizations) and hospitals. The second practice area is in helping corporations to select employee health benefit plans that minimize costs and provide the best health care coverage for the organization.

As health care costs continue to rise in the United States and concern for health coverage increases, this consulting specialty has been experiencing growth as well. In addition to specialty firms that provide health care consulting, many of the larger consulting organizations also service this industry.

Changes in the economy can affect firms in different ways. For instance, if the economy slows and businesses become more concerned with the bottom line, they may put off decisions such as automating. This negatively impacts the information technology segment of management consulting. At the same time, however, executives of corporations in hard times might be more prone to call upon a consulting firm that can help them to find ways to increase their revenues, contain their costs, or reduce their head count.

For consulting firms, approximately 20 percent of their costs are consumed in new business development. Costs for marketing activities include the production and distribution of promotional materials, salaries of partners who are responsible for client development and new business, and association memberships. The area in which firms may expend the greatest amount of resources, however, is in the competitive bidding process, also known in the industry as the "bake-off."

A bake-off occurs when a client with a problem approaches several consulting firms. These firms each spend time and money becoming acquainted with the client's organization, attempting to develop internal champions for their firm. The bake-off often involves several personnel from each consulting firm, all dedicating their time, without pay, at the site of the potential client in order to gather a better understanding of the problem. At the end of the competitive bidding process, the client chooses one of the firms, or none, and the remainder have invested resources without remuneration.

Because of the expense involved in acquiring new clients, consulting firms try to become the "house consultants" for their existing clients. In doing so, the firm may become so trusted by the client that it can bypass the competitive bake-off and be engaged directly by client management. This is an enviable position for a consulting firm to be in, as it can minimize business development costs and ensure a more steady flow of income.

Industry Associations and Accreditation. There is no central licensing agency for management consultants. Nor are there any industry guidelines or regulations as standards for operating practices. The only form of acknowledgement for consulting expertise is the Certified Management Consultant designation that is granted by the trade association, the Institute of Management Consultants.

Another primary industry association is ACME (formerly Association of Consulting Management Engineers). Both ACME and the Institute of Management Consultants operate as divisions of the Council of Consulting Organizations (CCO). Other industry associations include the Society of Professional Management Consultants, the Association of Management Consulting Firms, the Association of Management Consultants, and the Association of Internal Management Consultants.

Background and Development

The practice of consulting began in the late 1880s. At that time, Frank Gilbreth was conducting time-and-motion studies to improve bricklaying techniques. At about the same time, Frank W. Taylor was applying time studies to improve the steel industry. In 1886, Arthur D. Little founded the consultancy that bears his name and is now one of the largest consulting firms in the world. Little began working in 1881 to bring scientific ideas to management practices. The next industry event was the introduction of a quality aspect to time and motion. In the 1920s, Charles Bedaux enabled his clients to make tremendous leaps in productivity by improving quality.

In the 1950s and 1960s, small firms began to proliferate as former sole practitioners expanded their business. Then, in 1963, the Boston Consulting Group was founded on the notion of giving strategic advice to clients. Management consultancy recognized this event as critical in changing the role that management consultants played. During the 1960s, CPA firms entered the fold and made the formal transition from offering advice related to their accounting activities to charging clients for business advice in a traditional consulting manner.

Consulting revenues in the United States grew steadily throughout the 1970s and 1980s and more rapidly in the 1990s, rising from $28.9 billion in 1990 to $70.7 billion in 1998, according to estimates by the Census Bureau. Separate calculations by the Kennedy Information Research Group, which publishes newsletters, periodicals, and research reports on the industry, placed the global value of consulting services at $100 billion as of 1999. Information technology services, reported Kennedy Information, represented fully 60 percent of the industry's revenue. Based on estimates of 1998 consulting revenues, the top ten firms alone had more than $33 billion in consulting receipts.

E-commerce consulting was perhaps the most important trend of the late 1990s and early 2000s. A natural fit with the industry's well-developed IT consulting practices, e-commerce advice and implementation typically involved steering conventional businesses toward a successful Internet strategy. There was, of course, also a market for consultants within pure-play Internet firms that were trying to break into the business. Leading consulting firms like Andersen and Deloitte found e-commerce such a potent consulting formula that they raced to set up separate e-commerce units to cater to this market.

Consolidation had a major impact on management consulting in the late 1990s, particularly among top-tier firms. Whereas observers used to speak of the Big Six or even the Big Eight, by the late 1990s consolidation had brought the top echelon down to five members. One of the most prominent mergers was between two members of the then-Big Six: Price Waterhouse and Coopers & Lybrand, which merged in 1998 to form PricewaterhouseCoopers. And in 2000, one of the remaining five, Ernst & Young, sold its consulting business to France-based Cap Gemini Group, effectively removing the Ernst & Young accounting practice from the consulting business.

Current Conditions

The U.S. management consulting industry was marked by an unprecedented level of cutbacks and layoffs early in the twenty-first century. The rise of Internet startup consultancies such as Scient and Viant in the late 1990s had presented a new form of competition to traditional consultancies, which were forced to compete both for new clients seeking to incorporate Internet technology into their business practices and for a rapidly shrinking pool of qualified employees. As a result, many firms began boosting their compensation packages to retain existing employees, as well as to attract new help. When the Internet market began to falter in 2000, weakening the U.S. economy, many consultancies were left overloaded with highly paid help. As stated in the July 2001 issue of The Economist, "consultants are finding that their rate of attrition—the rate at which people leave voluntarily—has shrunk dramatically as rival jobs (such as joining an Internet start-up or venture-capital operation) have become less attractive." When revenues began to wane in the early 2000s, many firms reduced headcount in an effort to bolster earnings.

Attrition at two of the industry's leading firms, Accenture and McKinsey, fell from 20 percent in 2000 to 12 percent in 2001. Accenture laid off 4 percent of its workforce and asked hundreds of employees to take a leave of absence that year. Pricewaterhouse Coopers also lightened its workforce and reduced pay to all U.S. consulting employees by 7 percent. Similarly, Cap Gemini Ernst & Young cut 4 percent of its global workforce, and KPMG Consulting laid off 7 percent of its staff. Consequently, between October of 2000 and October of 2001 the worldwide consulting industry saw its ranks fall by nearly 5 percent from a total of 600,000 employees to 572,000 employees.

Along with reducing their ranks, many consultancies trimmed their fees in an effort to remain competitive. According to Consultants News , fee increases will likely remain under 5 percent in the early 2000s, compared to 12 percent in 1998. The difficult market conditions also left some consultancies with no choice but to shutter operations. Cambridge, Massachusetts-based A.D. Little, hit particularly hard by the management and technology consulting industry downturn, declared bankruptcy in early 2002.

The industry continued to face an absence of mandatory certification requirements and lack of enforceable industry standards at the turn of the twenty-first century. One potential conflict-of-interest involves the growing number of alliances between management consultancies and information technology suppliers, which some analysts believe could influence a consultant's recommendations about information technology products. Also of concern is the conflict inherent in an accounting firm that conducts auditing activities, as well as management consulting activities. In the late 1990s the U.S. Securities and Exchange Commission (SEC) began investigating Big Five auditors to ensure their independence from their consulting clients. Eventually, the SEC accused KPMG of violating federal securities law by auditing a company managed by a KPMG Consulting employee. This litigation prompted PricewaterhouseCoopers to put its information technology consulting operations up for sale. It also fostered Cap Gemini's $11 billion acquisition of the consulting arm of Ernst & Young in 2000 and KPMG's decision to spin off its consulting operations into a publicly traded company in 2001. In a similar move, Accenture (Andersen Consulting) also separated from its accounting business, although this had more to do with the desire of Andersen consultants to separate from the firm's slow growth accounting operations.

Industry Leaders

Accenture Ltd., formerly known as Andersen Consulting, is one of the world's largest management consulting firms, with more than $13.3 billion in revenues and 75,000 employees in 2001. Under its parent company Andersen Worldwide, Andersen Consulting had been an offshoot of one of the Big Five accounting firms and had offered some form of consulting services since at least the 1920s. The two Andersen segments epitomized the struggle between the older accounting side of the business and the new consulting side. The original Arthur Andersen & Co. accounting firm dates to 1918. The consulting wing had grown to match the accounting business in terms of revenues in the late 1990s, with big banks and communications companies as some of its largest clients.

In 1998, Andersen Consulting voted to split completely from Andersen Worldwide, which, in addition to its accounting and auditing work, was a competitor in the management consulting industry. Wanting to separate itself from what it viewed as the less lucrative auditing industry, the consultancy earned full autonomy from Andersen Worldwide in 2000; it was then that Anderson Consulting completed its name change to Accenture. The firm conducted its initial public offering in 2001.

A. T. Kearney, Inc. was founded in 1926 as a production and engineering consulting firm that served manufacturing clients. Over the years, A. T. Kearney has grown into a full service, generalist consulting firm employing more than 5000 professionals, half of whom operate as consultants. In 1995 the firm was bought by Electronic Data Systems Corp., a large systems integration and technology service provider. Sales in 2000 totaled $1.3 billion, and operations spanned 43 countries.

Booz, Allen & Hamilton, Inc. is another generalist consulting firm that was founded in 1914. Booz-Allen employed 11,000 consultants in more than 100 offices worldwide in 2001. The firm is organized around industry groups such as advanced technology, applied sciences, energy and chemicals, financial services, information and strategic systems, and marketing-intensive industries. It is split into two operating segments, the Worldwide Commercial Business unit and the Worldwide Technology Business unit. Global revenue in 2001 was $2 billion.

Cap Gemini Ernst & Young Group, Paris, France, is a global management consulting firm with fully integrated capabilities in strategy, operations, people, and information management. In 2000 Cap Gemini catapulted to the consulting industry's top five with its $11 billion purchase of Ernst & Young's consulting business. Based on 1998 results, Ernst had been the third-largest consultancy and Cap Gemini was eighth-largest. The combined company had an estimated 60,000 employees and a major presence throughout Western Europe and the United States. Sales in 2001 totaled $7.4 billion.

McKinsey and Company, Inc., a generalist consulting firm, is perhaps the best known of the generalist management consulting organizations. Founded in 1926, McKinsey experienced tremendous growth in the 1980s and 1990s, expanding to more than 11,000 professionals and a total of 84 offices by 2001. Most of this growth for McKinsey came from international expansion. In the United States, McKinsey reported approximate sales of $3.4 billion in 2001. McKinsey provides consulting services that address top management issues for large organizations. The majority of its work is in the area of strategy and organization. The remainder is conducted in specialized practice areas such as marketing, manufacturing, and technology.

The largest accountancy in the world, PricewaterhouseCoopers was created by the high-profile 1998 merger of Big Six rivals Price Waterhouse and Coopers & Lybrand. Founded in London in the late 19th century, Price Waterhouse was one of the world's oldest and most prestigious accounting firms, and by the 1990s was a massive international management services purveyor. Coopers & Lybrand was a prominent accounting firm in its own right, dating to a 1957 merger of two multinational accounting concerns. Like Andersen and others, PricewaterhouseCoopers has suffered from internal tension between its accounting and consulting arms; the company was considering splitting into two separate entities. In 2001 the firm brought in an estimated $20 billion in sales, and operations spanned over 150 countries.

Workforce

For the most part, large management consulting firms hire people with MBAs from top business schools as entry level consultants. For higher level positions, specialists may be recruited directly from the competition or from the industry. The latter is particularly true if an individual can offer industry expertise that would assist the consulting firm in expanding or servings its existing client base. Depending upon the industry and the needs of the particular firm, individuals with more advanced degrees or degrees in technical specialties (such as economics or computer science) may be selected as well. Some consulting firms will take academically strong candidates from top undergraduate schools as lower entry level consultants or analysts/researchers.

Overall, consultants in medium-to-large generalist or strategy firms are analytically oriented, well-educated individuals. In the past, management consultants in the United States were typically white males. Like other industries, consulting firms have been diversifying, especially as these firms increase their exposure in foreign markets.

The industry also comprises small firms, boutiques, and sole proprietorships that are composed of technical specialists such as information technologists or marketing consultants. These individuals may be displaced corporate professionals or individuals who have left larger consulting firms to start their own practices. It is also common for sole practitioners to perform consulting work on the side, in addition to their full-time positions with other companies.

Another segment of the consulting industry is that of university professors who consult to complement their full-time positions in teaching. These professors typically hold advanced degrees and are specialists in a particular field of research. This segment of the consulting population is self-regulating via the Academy of Management, Division of Managerial Consultation, which provides a code of ethics for its 800 members. The fastest growing segment of this market is systems analysis and administrative services managers; the areas seeing the least amount of growth by the year 2005 will be typists, word processors, secretaries, and bookkeeping/accounting clerks.

Research and Technology

The application of technology is a significant tool of the consulting industry. Many of the largest firms in the industry generate their revenue by applying technology solutions to business problems. An example of this is redesigning a distribution operation and inventory tracking system to automate the entire process with robotics, computers, scanners, and advanced software to control the system. Still other firms specialize in training corporate personnel to use technology.

Further Reading

Delaney, Kevin J., and Elizabeth MacDonald. "Cap Gemini Group Offers $10.7 Billion for Ernst & Young's Consulting Division." Wall Street Journal, 29 February 2000.

"Ethics Be Damned, Let's Merge." Business Week, 30 August 1999.

"HR Consulting Rides High." HR Focus, June 1999.

Klein, Melissa. "Slowdown in Economy, Stock Markets, Squeeze Consultants." Accounting Today, 8 October 2001, 3.

Koudsi, Suzanne. "Consulants: Who Are We?" Fortune, 3 September 2001, 48.

Martin, Justin. "Consulting Reincarnation." Chief Executive, June 2001, 35.

Michaels, Adrian. "Deloitte Holds Fast on Keeping Its Consultancy." Financial Times, 1 July 2001. Available from http://news.ft.com .

Preston, Holly Hubbard. "E-Commerce Explosion." Computerworld, 6 March 2000.

"Profitability Elusive for Many Firms." Consultants News, 2001.

Seminerio, Maria. "Large Consultancies Launch Venture Capital Units." PC Week, 3 January 2000.

"Top Consulting Firms." Industry Week, 24 January 2000.

U.S. Census Bureau. "Business Services." Service Annual Survey 1998. Washington, D.C.: 2000. Available from http://www.census.gov .

"Winners' Curse; Management Consultants." The Economist, 21 July 2001.



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