External Strategy Consultancies. Evaluating Their Value-Add

Table of Contents

List of Abbreviations

List of Figures and Tables

1 Introduction
1.1 Importance and Criticism of Management Consultants and the Controversy to Evaluate their Performance
1.2 Problem Definition and Objectives
1.3 Course of Investigation

2 Theoretical Fundamentals of Strategy Consulting
2.1 Concept of Strategy Consulting
2.2 Heterogeneity of the Management Consulting Market
2.3 Phases of the Consulting Process
2.4 Roles and Functions of Management Consultants
2.5 Roles and Motives of Clients
2.6 Client-Consultant Relationship

3 Theoretical Fundamentals of Strategy Consultant’s Performance Evaluation
3.1 Concept of Performance Evaluation and Service Quality
3.2 Practical Relevance of Performance Evaluation
3.3 Perspectives and Dimensions of Performance Evaluation
3.4 Difficulty and Complexity of Performance Evaluation

4 Empirical Approaches to the Performance Evaluation of Strategy Consultants
4.1 Overview and Rational for Selecting the Approaches
4.2 Scientific Approaches
4.2.1 Approach by Klein 1978
4.2.2 Approach by Hoffman 1991
4.2.3 Approach by Gable 1996
4.2.4 Approach by Fritz and Effenberger 1998
4.2.5 Approach by Ernst 2002
4.2.6 Approach by Sangüesa Sanchez 2003
4.3 Practitioners Approaches
4.3.1 Approach by Kubr 1986
4.3.2 Approach by Phillips 2000
4.3.3 Approach by ASCO 2013
4.4 Summary and Final Discussion of the Approaches

5 Conclusion
5.1 Concluding Remarks
5.2 Implications for Practice
5.3 Future of Strategy Consulting and Performance Evaluation
5.4 Contributions and Perspectives for Further Research

Reference List

Appendix

List of Abbreviations

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List of Figures and Tables

Table 1 Collection of Management Consulting Definitions

Table 2 Phases of the Consulting Process According to Different Authors

Table 3 Collection of Evaluation Definitions

Table 4 Scientific Approaches to the Performance Evaluation of Consultants

Table 5 Practitioners Approaches to the Performance Evaluation of Consultants

1 Introduction

1.1 Importance and Criticism of Management Consultants and the Controversy to Evaluate their Performance

From the beginning of the 1980s to the late 1990s, strategy consultancies¹, in industrial markets grew annually by more than 10% and continued to grow with two digit growth rates for almost 15 years preceding the economic crisis in 2008 (Groß & Kieser, 2006; Law, 2009; Wood, 2002). Recent reports reveal an remarkable growth of management consulting services worldwide with a magnitude of $220 billion per year globally (Canato & Giangreco, 2011; Law, 2009), which Ernst and Kieser (2002, p. 56) refers to as the “ConsultingExplosion”. Nevertheless, succeeding the economic crisis, at least for the European market, growth rates have declined to 2.9 percent in 2010 and 6.6 percent for 2011, while the estimate for 2012 is 5.8 percent (Poor, Milovecz, & Kiraly, 2012). Due to impressive market growth over several decades, today consulting can be regarded as an influential industry with an similar growth of academic interest in the area (Hislop, 2002). According to Ernst and Kieser (2002), the massive growth of the management consulting segment is predominantly “due to the consultant’s ability to create demand for their services by inducing in managers a perception of control loss, and simultaneously, offering means to restore their perception of control.” (Groß & Kieser, 2006, p. 70). Similarly, Power (2004) found that consultants themselves specify and define the client’s², which they then solve. What is even more surprising, compared to lawyers or accounting firms, no firm is required to hire consultants. Still many firms naturally rely on the help of consultants for almost any business problem (Ernst, 2002; Faust, 1998; Groß & Kieser, 2006).

Conversely, critics point out that management fashions, often created by management consultancies with the intention of increasing demand, in many cases produce more hot air than useful knowledge (Abrahamson, 1996; Crainer, 1997; Kieser, 1997). Therefore, it is not striking that management consulting has come under increased criticism in recent years (Byrne, Muller, & Zellner, 2002; Clark & Fincham, 2002; Craig, 2005; Ebrahimchel, Mohe, & Sternzeld, 2006; Kihn, 2005; Micklethwait & Wooldridge, 1996; O'Shea & Madigan, 1998; Steppan, 2003). Indeed, there is a shared public opinion that the consulting industry is occupied with “pretenders and charlatans” (Argyris, 2000; Groß & Kieser, 2006, p. 71; Micklethwait & Wooldridge, 1997), mainly driven through revealing literature such as “House of Lies: How Management Consultants Steal Your Watch and Tell You the Time” (Kihn, 2005; or Craig, 2005; Pinault, 2001). Moreover, a drastic increase in the consultant's fees, involvement in numerous corporate scandals, and growing skepticism towards their recommendations and concepts in general foster criticism (Ebrahimchel et al., 2006; Ehrhardt & Nippa, 2005). Also, several fiascos of management consulting support, such as at the Swiss, or Enron have been publically disclosed (Ebrahimchel et al., 2006; McLean, 2004; Phil, Maier, Esch, & Knörle, 2009; Sridharan, Dickes, & Caines, 2002). The prejudice and public criticism of strategy consultants can partly be related to the difficulty to evaluate their performance³ (Groß & Kieser, 2006).

Therefore, in light of those opposing views on the value and impact of strategy consultants, it is not surprising that consultants, academics and clients alike are increasingly driven to evaluate the performance of management consultants. Still, some argue that systematic economic evaluation of consulting projects seems to be of no particular interest in recent years, neither for the consultant, nor for the clients (Ernst & Kieser, 2003; Lechner & Kreutzer, 2005), but according to Moldaschl (2005), who speaks of the “Controlling Revolution” that is the increasing interest in performance evaluation, strategic controlling, auditing, ratings in general, performance evaluation of consultants seems to be a logical and necessary step. However, much of the debate has only taken place on a conceptual level (Ebrahimchel et al., 2006; Wright & Kitay, 2002). Also, consulting is indeterminate, requires interaction with the client and is unique in the sense that one consulting project is never exactly like another one (Clark, 1993; Ernst & Kieser, 2003; Fincham, 1999). These characteristics severely aggravate the problem of the evaluation of consulting projects (Ernst & Kieser, 2003), which has lead to an increasing academic interest in evaluating the performance and impact of management consultants (e.g. Clark & Fincham, 2002; Ebrahimchel et al., 2006; Kieser, 1998; Wright & Kitay, 2002). Hence, there are different philosophies as to the evaluation problem of consulting services (Knyphausen-Aufseß, Schweizer, & Rajes, 2009). Even though investigations into performance evaluation of consultants have been conducted for more than three decades now, academics still lack a common approach, as well as clear empirical analyses of the emerged concepts. A major empirical study has been presented by Ernst (2002). Nevertheless, the results are already several years old, and major changes in the consulting services industry, such as the professionalization of client’s relationships (Höner & Mohe, 2009; Kipping, 2002; Mohe, 2005) puts additional pressure on strategy consultants to justify their performance and the evaluation praxis itself may have changed in recent years (Ebrahimchel et al., 2006).

1.2 Problem Definition and Objectives

In consideration of the opposing opinions on the impact of management consultants and in light of prior investigations, the following research question emerges: How can the value-add that is the performance of strategy consultants be evaluated? In order to answers this research question, the following sub-questions will be addressed as well: Firstly, which roles and activities fulfill consultants and clients during a consulting project? Secondly, which difficulties arise in attempting to evaluate the performance of management consultants? Thirdly, what are the motives and practical relevance from the perspective of the consultants and the clients to evaluate the performance of consulting services? In this context, management consultants are understood as external consultants of major strategy consulting firms aiming to provide solutions to strategic problems. Additionally, the main attention will be on models to evaluate their performance as opposed to others, which focus on determining drivers for consulting project success (e.g. Appelbaum, 2004). Hence, the paper compares scientific approaches, which are originated from sound theoretical investigations and practitioners’ approaches that are derived from evaluation practice.

The aim of this paper is basically threefold: Firstly, provide an understanding for the complexity and heterogeneity of management consulting. Secondly, sketch the most important aspects and difficulties, which arise in the context of performance evaluation of consultants. Since the aim is not to develop a comprehensive model, which can be used to economically evaluate the performance of management consultants, the thesis thirdly aims to rather fill the void, which has been opened since the last major review of performance evaluation models for consulting services a decade ago (e.g. Ernst, 2002; Sangüesa Sanchez, 2003) by presenting an updated review on the major models that have been established since the start of academic research into this area in the 1970s.

1.3 Course of Investigation

In order to achieve the mentioned objectives, the paper is structured as follows: Initially, the first chapter has stressed the background on the importance of management consultants and their evaluation, following the problem definition and the aim of this paper. In this context, the research area has been identified and narrowed down the scope of this thesis. In the following, the procedure for the remaining work is explained.

Subsequently, the second chapter will establish the core foundations of the concept of strategy consulting as the object of investigation, and will lead to an understanding of its specific features, functions, roles, and relationships with clients. This is necessary because neither academics nor praxis have agreed on a common concept of management consulting. Therefore, a sound definition and clarification will be given, before the motives, roles, functions and characteristic of the clients as well as the consultants will be discussed. A clear understanding of the interactions between both parties is essential in order to understand the complexity to evaluate the consultant’s performance, thus the client-consultant relationship will be examined in the end.

In the subsequent third chapter, the review will set the theoretical foundations necessarily to evaluate the performance of management consultants. Hence, a short introduction into concepts and processes of service quality assessment and performance evaluation will be given, before a thorough concept definition for this research will be derived. Then, the practical relevance and motives of performance evaluating of consulting services both from a consultant’s as well as from a client’s perspective need to be understood in order to understand its value contribution to both parties. The thesis continues with specifying the different perspectives of performance evaluation namely client, consultant, process and results, along with defining the three dimension, which are content, formal and process, of evaluating the performance of consulting services. In order to understand the complexity and variety of approaches, general difficulties arising during the evaluation process need to be clarified afterwards.

In the fourth chapter empirical models of existing studies in the area of evaluating consulting services are introduced. In this context, the paper explores the main approaches to the evaluation of consulting services, both from a scientific and a practitioner's perspective. However, the limited scope of the paper only permits to present the most established approaches, thus the review does not strive for completeness of all available findings. As such, the selected models for inclusion in this review were restricted to those cited by other leading papers focusing on the performance evaluation of management consultants. Having shortly presented each of the models individually, which is essential due to their heterogeneity, they then will be compared and critically discussed.

After that, the most important aspects of the work are summarized in chapter five. Based on this, conclusions for managers are presented before a forward-looking perspective on the future of strategy consulting and its value-add evaluation will be taken. Lastly, the paper concludes with synopsizing its contributions and offering possible directions for future research.

2 Theoretical Fundamentals of Strategy Consulting

2.1 Concept of Strategy Consulting

In order to achieve the offered objectives of this paper, the basics concepts of strategy consulting are introduced in the following. First, a definition of the term strategy consulting will be given. Since there is no generally accepted definition in the literature available, a reference definition for this work will be originated based on the existing definitions of management consulting. In the succeeding sub-chapters, the consulting process, its components, and its main actors are introduced before the client­consultant relationship will be examined.

On the whole, there are two distinct branches regarding a consulting definition. A more general concept includes everyone who helps others to analyze and solve their problems, whereas a more narrow definition restricts this group to companies or representative agents of those companies, and thus accepts management consulting as a profession (see Kubr & Oficina International del Trabajo, 1997, p. 3; Sangüesa Sanchez, 2003, p. 15). This paper considers only the second branch of definitions. Considering Table 1, which represents an overview of major management consulting definitions, the subsequent characteristics of a concept of strategy consulting are remarkable: Management consulting is perceived as an objective and independent (L. E. Greiner & Metzger, 1983; Kubr, 2002) advisory service (e.g. L. E. Greiner & Metzger, 1983; March, 1991) provided by external (Clark & Salaman, 1996), qualified companies (L. E. Greiner & Metzger, 1983), which aim to improve the client organization through problem-solving and the implementation of recommendations (L. E. Greiner & Metzger, 1983).

Table 1 Collection of Management Consulting Definitions

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Based on the previous analysis, the following reference definition of management consulting will be used for the purpose of this thesis:

Strategy consulting is a professional advisory service offered by external, objective, independent, and qualified firms or representatives of those firms, who aim to analyze and solve client's problems or improve their situation.

2.2 Heterogeneity of the Management Consulting Market

Even though the concept of consulting has been reduced to strategy consultancies, it still remains a highly heterogeneous industry in terms of firm characteristics, focus and firm philosophies. In this context, Klein (1977) found that “There is hardly anything a business does for which there is not a consultant.” (p. 36). Thus, the heterogeneity of this market is not surprising. Subsequently, a few major aspects of difference that have been identified in the literature between the various management-consulting firms are presented (see Ernst, 2002; Kubr, 2002; Sturdy, 2011).

Firstly, the firms differ with regard to their size. Most commonly, one can differentiate between small partnerships, medium-sized consultancies, or large multinational management consultancies. Accordingly, some may only offer their services to the national market, whereas the global firms, through their integrated network of consultants, usually serve various markets simultaneously (BDU, 2013; Kubr, 2002). Also, strategy consultancies can vary according to their degree of specialization. In particular one can distinguish between generalists, usually the larger consultancies, and specialists, who are usually small, highly-specialized consulting boutiques. In this perspective, Kubr (2002) emphasizes that currently there is an growing trend towards the specialists as the complexity of problems handled by consultants is increasing (p. 44). Furthermore, the market’s heterogeneity is based on the variety of activities and project types. To exemplify management consultants may address corporate strategy, corporate finance, business development, corporate social responsibility or marketing and sales. Since especially small firms cannot over the full range of expertise and activities, this is a further criterion to differentiate them. Also, they vary concerning their role or philosophy, Nees and Greiner (1985) offer five classifications, which are mental adventurers, strategic navigators, management physicians, system architects, and friendly copilots (see Delany, 1995, p. 100). Finally, management-consulting firms can also differ with regard to their level of qualification. Management consulting is not protected as an official profession, thus the market is highly unregulated in terms of market entry or use of the term (L. Greiner & Ennsfellner, 2010; Groß & Kieser, 2006). Consequently, the level of professionalism and expertise varies and a certain minimum standard of quality cannot be assured across the firms. In consideration of the market’s heterogeneity, quality and performance evaluation becomes even more problematic but necessary.

2.3 Phases of the Consulting Process

In order to evaluate the consultant’s value-add, an understanding of the major stages in a consulting project is essential. Similar to the definition of management consulting, literature has not agreed on common phases in a consulting process. Thus, some widespread classifications of different researchers will be offered, before a reference consulting process for the course of this paper is defined.

To start with, the phases of a consulting project are similar to any basic process of project-related activities. The disorder and variety among the definitions may be due to the fact that management consulting, as a knowledge-intensive service, is characterized by a service delivery process that is unstructured, complex and extremely customized to meet the client's unique requirements (Bettencourt, Ostrom, Brown, & Roundtree, 2002; Xue & Field, 2008). Therefore, Table 2 presents an overview over some dominant categorizations.

Table 2 Phases of the Consulting Process According to Different Authors

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In this context, the following aspects are striking: Firstly, it is worthwhile noticing that there are no limitations with regard to the level of detailing the process steps. Whereas some academics only identified the aggregated level of single tasks into major process steps, which are usually five phases (e.g. Fritz & Effenberger, 1998, p. 7; Kubr, 2002, pp. 153-257), others recognized 10 or more process steps (e.g. Strasser, 1993, p. 95; in particular Soriano, 2001, p. 45).

Secondly, some authors consider the post-project evaluation to be part of the consulting process (e.g. Armenakis & Burdg, 1988, pp. 340-341; Fritz & Effenberger, 1998, p. 7), whereas others neglect this aspect completely (Kubr, 2002, pp. 153-257; Strasser, 1993, p. 95). Therefore, for the scope of this thesis, the consulting process is defined based upon the following phases, which have been identified across the various authors as presented in Table 2 as major steps in the process of management consulting:

1. Initiation
2. Problem definition
3. Analysis
4. Problem-solving
5. Implementation
6. Evaluation

In this respect, initiation implies screening the market for possible consulting service providers as well as selecting and contracting a management consultancy. The problem definition implies describing the scope of the problem and declaring the objectives of the problem-solution. Then, the analysis phase includes gathering and analyzing the required information of the client organization along with identifying or redefining the problem, which may happen since the entire scope of the problem is not necessarily known in advance (e.g. Delany, 1995). Subsequently, all major definitions stress the importance of the implementation of the consultant’s recommendation and their evaluation, which will be the main focus of this thesis. However, as will be explained later on, it is important to recognize that the consultant’s evaluation cannot only take place at the end of the consulting project but also throughout the consulting process.

2.4 Roles and Functions of Management Consultants

Now, as consulting is an interactive process, the roles and functions of management consultants will be examined shortly, before the client’s roles are inspected. Among others, the consultant may take the role of the observer, process consultant, investigators, coach, expert, or advocate (Lippitt & Lippitt, 1986, p. 31). Others understand the consultant’s role as standardizers of organizational processes such as innovation or facilitators of organizational change (Sturdy, Werr, & Buono, 2009; Wright, Sturdy, & Wylie, 2012).

Being classified as a knowledge-related service, the consultant’s primary function is to transfer and process knowledge into the client organization or provide advice (Bergh & Gibbons, 2011; Sarvary, 1999; Skjalsvik, Lawendahl, Kvâlshaugen, & Fosstenlakken, 2007; Xue & Field, 2008). Additionally, Delany (1995) explains that management consultants provide requested information, offer solutions to the client’s problem, conduct diagnoses, deliver recommendations, assist the implementation process, build consensus and commitment, facilitate client learning, and improve the overall organization’s effectiveness (p. 100) (Quinn & Rohrbaugh, 1983). Apart from the officially assigned roles and responsibilities through a consulting contract, there are many other roles and functions that are unofficially executed by management consultants. In this respect, one can note the political function that is hiring consultants to achieve personal goals within the organization, or the legitimizing role of consultants. In this role, consultants are hired to justify previously taken management decisions (e.g. Ernst, 2002, pp. 20-22). To conclude, management consultants perform different, more or less observable, functions and roles during a consulting assignment.

2.5 Roles and Motives of Clients

Similarly to the consultants, the roles and motives of the clients need to be considered as well. However, prior to this, it is worth mentioning that the clients are very diverse. They have different industrial backgrounds such as healthcare, financial services, insurances, public sector, high-tech manufacturing, or infrastructural services such as electricity (e.g. BDU, 2013). Furthermore, they can differ in terms of size, previous experience with management consultants, or their professionalism of managing the consulting assignments (e.g. Shenson, 1990). Managing the consultants themselves include aspects such as selecting appropriate service providers, contracting them, and evaluating their post-project performance for future selection processes. In this regard, recent findings found that clients in general are increasingly becoming more professional in the way the manager consulting assignments (Höner & Mohe, 2009; Kipping, 2002; Mohe, 2005).

As far as the client’s motives are concerned, one may simply argue that consultants are hired to fix any business problem, provide proactive business planning, or help launching a new firm (Phillips, 2000, 2011). Moreover, the clients may simply not posses the expertise or organizational resources required to perform certain tasks. Also, since the belong to the client organization, they may lack independence and objectivity, which may be needed to make reasonable judgments (Armenakis & Burdg, 1988; Montgomery & Weinberg, 1979; Wilson, 1972). Nevertheless, consultants are also hired to legitimize decisions, which have already been taken by executives or to communicate and implement “unpleasant” organizational changes (Ernst, 2002, pp. 20­21; Sturdy, 2011). Summing up, clients have various reasons to hire strategy consultants. Having decided to hire consultants, one of the client's major roles is to actively select, manage and evaluate them throughout the consulting assignment.

2.6 Client-Consultant Relationship

Having discussed the consultant and client's role, the interactive relationship between both parties will be studied in the subsequent section. According to Kubr (1977), apart from solving the problems, the relationship between client and consultant is a crucial aspect in any consulting relationship. The client-consultant relationship is a thoroughly discussed topic in academia on its own, hence, only a few aspects can be considered in the limited scope of this thesis (e.g. Appelbaum, 2004; McGivern, 1983; Nikolova, Reihlen, & Schlapfner, 2009; Sturdy, 1997; Xue & Field, 2008). Primarily, the nature of their relationship is the client's initiative to contact a strategy consultant for various reasons. Recent findings emphasize the client's role in this relationship, which has been neglected in previous research (Hislop, 2002). Specifically, academics argue that the client-consultant relationship needs to be considered as an interactive process in which the client plays an active and crucial role since he also shapes the working relationship (Fincham, 1999; Sturdy, 1997). It has been argued that already decisions about which consultants to hire are crucially influenced by previous relations of the client's managers, who were responsible for the selection of consultants (Hislop, 2002). An important factor in the client-consultant relationship is therefore their initial social ties and the level of trust (Hislop, 2002; McGivern, 1983, p. 382). McGivern (1983) additionally found that the dynamics of the client-consultant relationship are crucially influenced by “the degree of interaction between the parties, the extent of the requirement for interpersonal skills, the clarity of the focal problem/issue, the need for trust, the contingency of the methods used, client and practitioner values, and the influence of power” (p. 369). Moreover, Fincham (1999) contends that consultants seek closeness and partnership with the clients rather than distancing themselves as experts. Probably, this is due to the fact, that in the end, the client is the paying customer, thus it is in the consultant’s interest to keep a good relationship to the client. Also, the consultants rely on the client’s input to solve the problem.

Summing up, the dynamics and interactivity in the client-consultant relationship during any consulting assignment are crucial factors, which need to be considered in order to evaluate the consultant’s performance. Keeping those aspects into consideration is essential to understand the difficulty of objective performance evaluation. Additionally, it can be noted that consultants and clients rely on each other. Managers for example need consultants to solve their problems and also pride themselves on identifying the most trust worthiest consultants. On the other hand, the growth of the consulting industries would not be for the client’s trust and investments into management consulting services (Groß & Kieser, 2006; Power, 2004). Still, evaluating the strategy consultant’s value-add seems to be reasonable.

3 Theoretical Fundamentals of Strategy Consultant’s Performance Evaluation

3.1 Concept of Performance Evaluation and Service Quality

Having discussed the particularities of strategy consulting, the subsequent chapter is intended to present some concepts of performance evaluation. According to the definition of strategy consulting, which has been derived in chapter 2.1, strategy consulting is considered to be a professional service. Thus, concepts use to select and evaluate the quality other professional services will shortly be examined. Nevertheless, a reference definition of evaluation will be derived before. In this regard these aspects are striking: All definitions emphasize the determining aspects such as value, worth, use, and importance. Furthermore, they stress evaluation as a systematic process, which uses various tools and activities as a special kind of investigation. It has been stated also that the object of evaluation can be products, services or institutions.

[...]

¹ The terms ‘management consulting’, ‘strategy consulting’, ‘consultants’, and ‘consultancies’ will be used interchangeably throughout the course of this paper to identify organizations or representative actors of those organizations providing management consulting services to companies.

² The term ‘client’ will be used throughout the course of the paper as a generic term to apply to managers, department heads, or any other representatives of public and private enterprises contracting and employing the services offered by management consultants.

³ Throughout this thesis, the terms ‘value-add', ‘contribution', ‘impact', and ‘performance' will be used exchangeable and refer to any value-creation of the consultants.