Consulting is the business of providing advice to clients for a fee in order to help them solve a particular problem or range of problems within a certain area of business. Consulting services are provided by consultants, a majority of whom have gained their expertise from previous employment. Some consultants work for large consulting firms, such as Accenture or Bain & Company, that offer expertise in a wide range of business areas; other consultants hail from academia and assist companies with problems relating to research or theory; and still other consultants are self-employed, independent contractors who offer specialized skills in a very specific area of expertise. For example, a former stockbroker might become a financial consultant; a computer scientist might become a computer consultant; a former employee in a non-profit organization might open a business as a fundraising consultant; and an accountant might become a tax consultant.
Expertise alone, however, does not make someone a consultant—at least not a full-time one. To be a consultant requires applying that expertise to practical problem solving. Consulting is a business. Consequently, it requires the application of marketing skills and the ability to reach out and establish job contacts. Personality also plays a role in consulting success. In fact, many experts advise those looking to hire a consultant to trust their instincts about personality. Joan Adams, in an article entitled "Do's and Don'ts of Hiring a Consultant" replies this way to the question How do I select the right consultant? "Go with your gut. The starting point for selection is you really have to like, respect and trust this person or it just won't work … Change is tough. I don't care how brilliant a consultant is—it is not going to work if you don't like the person."
In general, the kind of person who is most likely to succeed as a consultant is one who can put the needs and interests of clients before her own, who is not condescending, and who is unfailingly courteous and patient. A small minority of consultants work as internal consultants for one firm, usually a very large one. The majority, however, work independently and with no partners, often from their own homes, or run their own small consulting firms.
Consultants constitute a growing number (as yet undetermined, since there are no licensing requirements for consultants) of the self-employed. This growth began in the early 1990s, when the trend toward corporate downsizing left many skilled professionals without jobs. Many of these "downsized" professionals struck out on their own to do consulting work, often for the very firms that used to employ them. Those who succeed in building viable consulting businesses may earn as much if not more than they did in their former employment.
Reasons for failure often involve a combination of such factors as poor initial planning, careless marketing of one's business, and intense competition. The successful consultants are usually those who find a market niche for themselves through research, intensive marketing, and locale. Charging the right fee and avoiding falling into the trap of "free" consulting (for instance, when a client whose contract with a consultant has ended insists upon additional "feedback" or "follow up") requires business sense. Consulting fees can vary from almost nothing to thousands of dollars per assignment, depending on the assignment, market conditions, and the standard rate for that type of work.
Since most consultants are self-employed professionals, consulting can often involve inconsistent workflow, long hours and a great deal of pressure. Consultants must study their fields of expertise continuously to keep abreast of developments. To the millions of entrepreneurs who enter the consulting profession, however, the attraction and challenge of creative, independent work performed in a comfortable environment together outweigh the difficulties. And while competition is great, the number of large firms that dominate this profession are few. While some consulting fields have become saturated—such as the computer and environmental fields—there are always new trends emerging. For instance, with the unexpected fall of communism, the demand for eastern European specialists and "free market" consultants skyrocketed. As the need for business information grows and changes, the demand for consultants should continue to escalate.
TYPES OF CONSULTANTS
Consultants help all sorts of businesses find and implement solutions to a wide variety of problems, including those related to business start-up, marketing, manufacturing, strategy, organization structure, environmental compliance, health and safety, technology, and communications. In addition to size of the operation and field of specialty, consultants can be categorized in a number of other ways. For example, an advisory consultant analyzes the problem and turns recommendations over to the client, but is not involved in implementation of the solution. In contrast, an operational consultant remains on hand to assist the client in proper implementation, or in some cases handles the implementation without the client's assistance.
Part-time consultants are generally employed full-time within their field of expertise—marketing, for example—but also offer their services to other companies on the side. Although they are not usually able to charge as much money as full-time consultants, they also are not expected to devote their undivided time and energy to the client. Process consultants are skills-oriented generalists. With expertise in one or more technical areas, these consultants can apply their skills to any industry or organization. In contrast, functional consultants apply their skills to a particular environment; for example, a hospital facilities planner would concentrate on consulting to hospitals, rather than to other types of businesses that require facilities planning.
ESTABLISHING A CONSULTING BUSINESS
An entrepreneur starting up a consulting business must go through many of the same processes as those starting other types of businesses. The first step should be completing an honest assessment of skills. The aspiring consultant should identify both content skills—the technical expertise that clients will be willing to pay for—and process skills—the qualities that would enable someone to run a successful consulting business. Some of the more important process skills include communication, problem-solving, and interpersonal skills. In addition, independent consultants must have the ability to manage, market, and grow their own businesses. A good starting point is to make a list of all one's relevant skills and qualities, and then work from that list to create a short mission statement to guide the consulting business.
Like other entrepreneurs, consultants also must determine the most appropriate structure, location, and name for their businesses. The form or structure of the business depends upon the new consultant's tax situation, willingness to assume liability, and interest in taking on partners. A consultant who operates as a sole proprietorship, for example, is taxed as an individual and holds all personal and business liability. In a partnership of two or more consultants, each partner is taxed as an individual and shares in the liability. A consultant who organizes as a corporation enjoys limited liability, and the business is taxed as a separate entity. Preparing a detailed business plan can help aspiring consultants to think about how their business should be financed, where it should be positioned in relation to its competition, and what its most effective forms of marketing might be.
However interesting or fulfilling it may be, most consultants ultimately view their work as a moneymaking venture. To avoid confusion, each service the consultant performs should have a clearly defined fee. But deciding how much to charge for various services can be a challenge for a new consultant. The first step should be examining the costs relating to the consulting business itself. In addition to direct costs—expenses that can be directly attributed to a specific project and thus billed to the client in question—the consultant must also consider indirect costs—overhead expenses associated with running the business. Some common indirect costs include rent, utilities, insurance, office supplies and equipment, marketing costs, postage, automobile expenses, accounting or legal fees, dues to professional associations, and entertainment. The next step in developing a fee structure is to determine the cost of the consultant's labor. Some new consultants might use their previous salary as a starting point, or the salary of a comparable position. The most important factor to consider is whether the figure reflects the market value of the consultant's skills and experience.
Finally, the estimates of indirect costs and labor should be converted to daily values, taking any expected non-working days into consideration (including vacations, administrative time, business development time, and downtime). For example, a consultant hoping to earn $100,000 over the course of a year, expecting to pay $30,000 in indirect costs, and planning to perform 200 days of billable work would have a daily rate of $100,000 + $30,000 / 200, or $650 per day. This does not take a profit margin into account, which can range from 10 to 30 percent of daily expenses. A consultant's daily rate only provides a starting point for determining his or her fees for various types of services. The fee also depends on the kind of assignment, the prevailing rate in the industry or marketplace, the client's budget, and whether the consultant may need to establish a relationship with a new client or develop a reputation in a new industry. In addition, a consultant's fees may be structured in a number of ways. Some consultants charge by the hour, for example, while others charge a fixed price for specific services, receive a monthly retainer, or are paid on a contingency basis.
Potential clients cannot take advantage of a consultant's services if they are unaware of them. Therefore, in order to remain in business, new consultants must be able to market their services effectively. Analysts recommend that consultants use a variety of direct and indirect marketing techniques to gain clients and grow their businesses. One possible direct marketing technique is telemarketing, which involves calling potential clients on the telephone. Telemarketing is most effective if the consultant making the call is armed with knowledge about the company ahead of time, uses a prepared script, describes the benefits he or she offers, and mentions successful projects with other clients.
In some cases, telemarketing can be augmented with a direct mail marketing campaign. Although direct mail can be expensive, it is flexible and allows responses to be tracked. Experts suggest increasing the success rate of direct mail campaigns by making them specific, easy to read and understand, and aesthetically pleasing, and by including testimonials and business reply cards. Other possible direct marketing methods for consulting businesses include magazine and newspaper advertisements, association directories, networking, and referrals from other clients.
Indirect marketing techniques, while less likely to lead to immediate client relationships, are invaluable in helping new consultants increase their name recognition and credibility over the long term. Giving seminars, speaking before groups, joining professional associations, and writing articles or books are all good ways for consultants to build their reputations as sought-after experts in a given field. Another important means of publicizing a new business is through news releases, which can be sent to local media or trade journals to announce client relationships, successful projects, upcoming seminars, or other important happenings related to the business.
Evaluating Consulting Opportunities
New consultants may be tempted to jump at any business opportunity that comes along. A new consultant should, however, gather information about the client in order to make an informed decision about pursuing a consulting opportunity. This process, called qualifying the client, involves considering the nature, scope, and urgency of the project, as well as the client's budget. It is also helpful to find out about the client's desired outcomes and decision-making process. In addition, it may be useful to know whether the client has had successful experiences with consultants in the past, and what they feel the major obstacles to success would be for the project under consideration. A face-to-face interview and a formal request for proposal are the two main tools companies use in selecting consultants. Consultants can use these tools as a way to find out more about their clients, as well.
Proposals and Contracts
Proposals are an important part of the consulting business. Sometimes proposals serve to introduce consultants and their services to prospective clients, while other times proposals serve to finalize the arrangements between a consultant and a client. Prospective clients may request a formal proposal in order to compare several possible consultants, make decisions related to budgets or scheduling, or simply to collect ideas about how to solve a particular problem using in-house resources. Though companies sometimes ask for proposals and then do not end up hiring a consultant, companies that make a habit of such behavior are simply looking for "free consulting." Most experienced consultants try to discern the motives of potential clients ahead of time in order to avoid committing excessive time and resources to "free consulting."
Prior to submitting a proposal, a consultant needs to gather information about the company and its problem from interviews and outside sources. When writing a proposal, it is important for a consultant to demonstrate a strong understanding of the client's needs, describe his or her own ability to meet those needs, and detail a plan of action toward that end. Many successful consulting proposals are divided into three sections: the introduction, the methodology section, and the timing and cost section. The introduction provides an overview of the proposal, and should be used to demonstrate the consultant's understanding of the client's needs and desired outcomes. The methodology section is the main part of the proposal, and specifies the actions the consultant plans to take in order to provide a focused solution to the client's problem. It may also be helpful for the consultant to mention any unique services or expertise he or she can offer, in order to differentiate the proposal from those submitted by other consultants. The timing and cost section provides a realistic and specific fee structure and schedule for completion of the project. In addition, the consultant may wish to outline what effect, if any, the consulting process will have on the client's internal resources.
Proposals should be written in a conversational tone, without excessive use of technical jargon, and with the prospective client's needs in mind. The consultant may benefit from keeping in touch with the client while writing the proposal, as this helps avoid misunderstandings or incomplete information. If the consultant receives the assignment, the proposal then serves as the basis for a formal contract. Although some clients may simply sign the proposal to authorize the consultant to begin work, many consultants prefer to clarify the arrangements in a separate document. At a minimum, the contract should outline the scope of the project, the consultant's fees, and the proposed time frame. There are several other issues that the consultant may wish to address, including conflicts of interest, subcontractors, insurance/liability, expenses, confidentiality, and cancellation.
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Management consulting is generally a contract advisory service provided to organizations in order to identify management problems, analyze them, recommend solutions to these problems, and (when requested) help implement the solutions. Although there are few formal educational or professional requirements to be a consultant, these services are ideally provided by individuals who are specially trained or qualified in a particular field, such as information technology or organizational change, and who strive to provide independent, objective advice to the client organization.
Only a moderate amount of research has been done on the management consulting industry, although the industry has experienced a phenomenal growth rate since essentially emerging during the 1980s. Management consultants perform a variety of services and use many different methods to complete their tasks. These external consultants do not take the place of managers and have no formal authority, although they are responsible for the value of their advice—occasionally in a legal sense.
The practice itself has existed since the early twentieth century. Management consulting pioneers such as Arthur D. Little and Harrington Emerson contributed much to the foundations of the concept. The two were also involved with the founding of the first consulting firms. In the first half of the twentieth century, consultants began to expand on the earlier work. They began offering what was termed “business research” and introduced such business practices as budgeting, divisionalized organization, merit-based compensation schemes, and forecasting methods.
During the early postwar years (and in many cases growing out of wartime experience), consulting experienced a big rush, with the formation of such firms as Cresap, McCormick & Paget, William E. Hill, Hay
Associates, and Towers Perrin. In the 1960s, major accounting firms began to take notice of the growing market for consulting and began to offer consulting services of their own. (However, by the late 1990s charges of conflicts of interest would cause some of these firms to distance their accounting practices from their consulting activities). Also at this time, with the formation of the Cambridge Research Institute and Management Analysis Center, consulting firms began to integrate methodology of the bigger firms and consolidate practices.
In the early 1980s, there were an estimated 18,000 management consultants; about 30 to 40 percent were employed in the large, institutionally organized firms. For the next decade, the industry experienced phenomenal growth, finally plateauing with the U.S. stock market bust of 2000 and the bursting of the dot-com bubble. Worldwide, the consulting industry also declined at that time, as many of the developed countries were suffering from a global economic downturn.
The industry bounced back in 2005, and again experienced significant growth. Plunkett Research estimates that consulting services—management, scientific, and technical—generated about $160.3 billion in revenues in the U.S. during 2007, a 3 percent increase over 2006. According to Kennedy Information, the global consulting market reached about $310 billion in 2007. Outside the United States the consulting industry has experienced a similar growth pattern.
The year 2008 posed a new challenge to American and global consultants, when the economic crisis ushered in another downturn. However, analysts advised those in the industry not to be alarmed, predicting a promising outlook for management consulting through 2010.
CONSULTING AREAS AND CATEGORIES
The consulting industry has four basic areas. Management consulting consists of looking at a company's organization to assess its ability to achieve its goals. Strategic consulting focuses on the direction and goals of a company as they relate to their specific industry. Information technology (IT) consulting brings technology advice to a company to improve its effectiveness and efficiency. Industry specific consulting brings expertise to highly specialized businesses.
E.H. Schein has divided the role of the management consultant into three categories. These roles are classified as purchase of expertise, doctor-patient, and process consultation. The purchase of expertise role is considered a “hands-off” approach in which the consultant brings his/her own views or opinions into the situation. The doctor-patient role is a more personal relationship between the client and consultant in which the consultant analyzes and assesses the threats to the company. In the process-consultation method, the consultant plays more of a facilitator role. The client provides the information necessary while the consultant defines the problems and creates the possible solutions. The client makes the final decision on how to resolve the problem.
D.B. Nees and L.E. Greiner have also divided the interaction between consultants and clients into five similar categories. The “mental adventurer” assesses long-term scenarios by using economic models and personal experience. The “strategic navigator” makes decisions based on quantitative data of the industry and makes choices without input from the client. The “management physician” makes decisions based on knowledge of the organization as opposed to the industry as a whole. The “system architect” directs the client by redefining and improving the routines and processes of the organization. Lastly, the “friendly copilot” acts as a counselor to senior management and does not offer any new ideas or knowledge to the client. The mental adventurer role correlates to Schein's expert model; the strategic navigator, management physician, and system architect to Schein's doctor-patient model; and the friendly co-pilot to Schein's process-consultation model.
Over the years, the relationship between the client and consultant has evolved into an intimate partnership. A.N. Turner has developed several task categories to describe management consulting approaches. These categories include supplying information to the client; figuring out clients' problems; making a diagnosis of problems; producing proposals based on the diagnosis; aiding with the implementation of recommended actions; providing client learning; and perpetually improving organizational effectiveness. The first categories represent traditional roles of consultants, while the last represent newer, evolving tasks. Although the relationship is becoming more sophisticated and complex, it still has a long way to go. An executive is still more likely to be influenced by his or her own instincts—followed by the advice of the planning staff, board of directors, and investment bankers—before he or she is persuaded by management consultants.
Often, companies seek management consultants for specific areas of their businesses. Analysts predict that the following areas will seek increased consultant services through the year 2013:
- Infrastructure: Services will be requested in physical asset management, capital spending optimization, project management, and commissioning services.
- Learning and development: Consultancies with a proven track record in training and employee development will thrive, including areas such as Internet
training technologies and remote consulting techniques.
- Communication: Companies will seek help with writing, including technical writing, blogging, and copywriting; speaking in front of groups, communicating ideas to a team; and public relations.
- SaaS (Software as a Service): Enterprises seek assistance with business processes, delivery of niche programs, or integrating business processes that accompany IT advances.
- Recruitment: Consultants with innovative recruiting methods and the ability to deliver hard-to-find skills for openings will continue to be in demand.
The existence and phenomenal growth rate of the management consulting industry cannot be easily explained. However, Marvin Bower of McKinsey & Company, a large consulting firm, offers six reasons why companies should hire consultants. First, consultants offer extensive knowledge and access to resources not available internally. Consultants also contribute broad experience in the field. Next, consultants possess the time to research and analyze the problem. Consultants are also professionals. They are also independent of their clients and are able to make objective decisions the client might not be able to make. Lastly, consultants have the ability to implement the recommendations they provide to their clients. In large organizations, many of the problems encountered should be able to be handled internally because they have dealt with them in the past. In this case, time would be the deciding factor on whether the problems were handled internally or outsourced to management consultants.
Depending on the respective firms, consultants most often have certain requirements for targeting potential clients. The level of engagement or difficulty is one factor to be considered. Some firms such as Gemini Consulting, another major player, are looking for “multidimensional engagements that address bottom-line business issues.” These companies would rather deal with “high-end engagements” as opposed to routine supply chain work. The length of time involved is another factor to be considered. Some firms like to work with long-term engagements, where strategy can be developed and implemented over time. Other firms are content with taking on short-term discrete jobs. Larger firms tend to focus their attention on larger companies, and companies like McKinsey & Company tend to focus on engagements that “excite” their consultants. They enjoy making transformations and radical changes not only to the companies themselves, but to the industry as a whole.
Management consultants are becoming increasingly discriminating about the clients they accept in order to protect their reputations and ensure the success of the engagements. Some consultants base their evaluations on whether the proposed project will have a profound impact on the company. Some will only accept a client if they believe the project will be successful, while others look for clients that share their core values. It is not uncommon for prospective clients to ask for a proposal over the telephone. A work session is usually conducted to gather information and address problems. If the prospect states it does not have the time for a work session, the case is usually not taken. Consultants clearly avoid prospective clients who have already decided what they want to do before soliciting the consultant. It is estimated that up to 70 percent of clients begin the consulting process by asking the wrong questions. It is the consultant's responsibility to get the client's priorities in line and have the management focus on problems facing the company. This may explain the current rise in “relationship consulting,” whereby a consultant works with a company for several years to see strategies implemented and changed as new challenges are faced by the company.
Meanwhile, many types of consulting and accounting projects are being offshored. Initially North American firms did this as a cost advantage. Offshoring, however, has become necessary as multinational companies continue to open offices, factories, and research facilities in other nations.
Information Technology (IT) is one of the fastest-growing segments of consulting; it includes consultants focused on e-commerce; telecommunications; intranet and Internet strategies and functionality; hardware systems design and implementation; software design, acquisition and implementation; and Web site design and operations. Successful consultancies that started with an IT focus have evolved into full-service companies. In many cases, they are integral departments within larger technology-based companies. The IBM Global Services unit is a good example.
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con·sult·ing / kənˈsəlting/ • adj. (of a senior person in a professional or technical field) engaged in the business of giving advice to others working in the same field: a consulting engineer. ∎ (of a business or company) giving specialist advice: an environmental consulting company.• n. the business of giving specialist advice to other professionals, typically in financial and business matters.