Management consultants

Sorting the wheat

from the chaff
Whether your company is a high flier or in dire need of capital, you have probably at one point
or another considered using the services of a management consultant. But whether they are
worth their salt has been questioned since the sector first emerged. James Brandman looks at
what the consultancies truly offer a corporate contemplating a restructuring.

Demand for business advice from management consultants continues to gain momentum as corporate clients look to restructuring in the desperate drive to add
value to the balance sheet. With more companies each day announcing defaults or
business troubles, that advice could be the
salvation or destruction of a company. But
how and when to choose a management
consultant, and how they truly add value,
are questions that most corporate executives would be hard-pressed to answer.
And given the budgetary pressures that
many corporates are under, directors are
finding it hard to explain away the high fees
being paid for such services. Sarah Taylor,
deputy director of the UKs Management
Consultancies Association (MCA), explains: Most sections of the economy are
under pressure due to the global economic
environment, so any discretionary expenditure has to be justified.
Consultants have had to help clients
justify that expenditure and to demonstrate
a specific return on investment within a defined period. The total fee income of
MCAs members rose 15% to 4.37 billion
($6.24 billion) in 2001, more than half of
which is income from management consultancy services. The European Federation of
Management Consulting Associations
(FEACO) reported growth of 18% in the
European market in 2000, which it estimates is now worth over Eu42 billion.

How to choose
But choosing the right consultant can be
like walking through a minefield. There is a
wide array of companies claiming to offer
management consultancy services. Apart
from the big five former audit firms, players from the financial, IT, telecommunications, communications, and even the advertising industries are getting involved.
This is not a regulated industry, says
Taylor, So anybody can call themselves a
management consultant. We would recommend working with a recognized managex Guide to Corporate Restructuring April 2002

Buying professional
advisory services is a
very serious investment.
Its often a high risk
proposition, so if they
dont have good data
about the market they
can cause substantially
more disruption than
the problem they were
seeking help for in the
first place.
ment consultancy association first. Good
management consultancy hinges on the relationship between the consultant and the
client and the continuation of that relationship through different stages of a companys development.
Other more technical suppliers, particularly players in the IT field, often implement projects swiftly, but do not get so
worked up about client retention. Says
Miles Quinton, managing principal of
strategy and change at IBM Global Services: Its difficult for clients who are not
mature at using consultants to commission
something, because it may be inappropriate
for the problem they are trying to solve.
They can potentially hire consultants
that do not have the necessary expertise.
You have to be sure that the consultants
that are placed on the project have the necessary experience and are people you want
to work with, he says.
Clients need to be well informed when
buying consultancy services, particularly
middle market and smaller companies.
Buying professional advisory services is a
very serious investment, says William

Trahant, partner in strategy consulting at

PricewaterhouseCoopers (PwC) in the US.
Its often a high risk proposition, so if
they dont have good data about the market and the resources they are pursuing,
they can cause substantially more disruption than the problem they were seeking
help for in the first place.
Trahant explains that the process of
change can be a lot more difficult in financially stable companies than in those that
are experiencing losses. The case for
change is much easier when youre on the
ropes and struggling than when you are
achieving success, he says. If a CEO
seeks to implement an enterprise-wide
change process, it has to be driven by a
very clear strategy to take the company to
the next plateau.
So why do companies with healthy balance sheets seek help from consultants? In
some cases, unfortunately, it is simply a
cosmetic process, designed to send a message to the market that you are keeping up
with your rivals and are preparing for new
ways of doing business. For others, Trahant argues, it is a genuine attempt to be
ready for change when it happens.
The danger you face in not promulgating change is resting on your laurels, he
says. So when the market shifts you have
no organ for change when its critical you
do something. On the other hand, look at
ICI. Debt-ridden ICI is restructuring its
balance sheet to find more capital.
Much of its debt is down to an ill-timed
transformation from a conglomerate to a
focused specialty chemicals group. It split
off its pharmaceuticals, agrochemicals and
specialty chemicals into Zeneca and in
1997 bought the specialty chemical business of Unilever, taking its debt burden to
around 6 billion.
ICI launched an 800 million rights
issue in late February to avoid downgrading its paper to junk bond status. Many
clients are anxious to benefit from outside
and world class analytical capability,
www.corporatefinancemag.com

Management consultants
says Trahant. But over the years they
have repeatedly been unable to pull the
switch and execute.
However, the management consultancy
industry is struggling to find enough qualified consultants to fulfil their clients
needs. As well as understanding core competencies such as operational and profit
improvement, consultants must know the
debt markets and how stakeholders and
analysts view the business.
As Shaun OCallaghan, partner in restructuring at KPMG explains, you can
just repair the balance sheet, which doesnt
fix the business. Or you can try to fix the
business, but without the right financing in
place you wont be able to implement it.
You cant just go out and do some kind of
performance improvement or capital investment programme without understanding how it will be viewed by your lenders
and investors, especially when they are
pulling the strings, he says.
According to OCallaghan, choosing
people with relevant market experience is
vital. If a consultancy only has one core
competency, it will fail somewhere else. If
it has the best industry knowledge, but
doesnt understand how the banks will
react to changing circumstances in the
clients business, it will also fail. Its the
same if it has a complete understanding of
what the markets want, but doesnt understand the industry. You need a mix of
people who are market practitioners, people who have industry expertise, and people who have been there and done it, he
says. The best consultants provide advice
and implementation on everything from
strategic planning, operations management and information technology to
human resources and outsourcing.
Theres little doubt that some clients
needs are better served by niche players, particularly for specialist types of advice and
one-off IT implementations. But for others
seeking advice on long-term improvement,
due process needs to be followed. There
has to be an open, honest, and sometimes
frank discussion, says OCallaghan. Very
often, we say to clients things they dont
want to hear. But part of the value of our
advice is bringing opinions they may not
want to hear. Better they hear it from us
than fail in the markets by not having their
ideas challenged early enough.

This is not a regulated

industry, so anybody can
call themselves a
management consultant.
bringing people into the company, but did
not offer any advisory services. In 1992,
management was independent from the
banks and there were business consultants
on board. But their recommendations were
not followed through as far as we understand it, says Szymanski.
At that time it was thought the banks
were managing the situation themselves.
The company was suffering continuously
from insufficient financing, so they tried to
build up momentum for an equity issue by
promoting the latest technologies. True
consultancy, he says, is very different from
what the companys banks were offering.
For a start, consultants are not in a position to hijack the roles performed by
management and are able to go through in
fine detail all the issues related to a corporate restructuring and to make it plausible.
I dont know of any bank that would supply you with a team of five or six people to
work for three weeks and at weekends as
well, he says. Its not just the hours, but
the expertise in detailing things right down
to the bottom. They are completely different service types.
The cultures of running a bank and a
consulting firm are very different, according to Ken Dawson, managing director of
Alpha Publications, which produces reports on the management consultancy industry. Management consultants should
have hands on management experience and
should know how to make things happen,
he says. There are very few banks that implement the consequences of a merger, acquisition or a restructuring, says Quinton
at IBM. Because we implement all the
time we can give an insight into the reality
of predicted benefits from a merger or restructuring, as well as the cost involved and
the difficulty in implementing the strategy.
And as Trahant points out: We partner
with clients and execute against clients
whereas investment banks are very good at
analysis and portfolio assessment, as well
as strategy development for divestitures.

A consultancy is not a bank

Hans Szymanski, CFO of German electronics group Schneider Technologies, says
its about people and communication. If
there is good communication between
management consultants and management, then the solutions and recommendations can be very profitable, he says.
Schneider has a history of using consultants. Having suffered huge losses over the
last 10 years it is now insolvent.
In 1998, it was on the verge of bankruptcy so had to implement a capital increase. It
brought in the well-known German management consultancy Roland Berger. In the
early nineties, Schneiders banks started
www.corporatefinancemag.com

Unregulated industry
Because of the disparate and unregulated
nature of management consultancy, there
needs to be a greater degree of quality assurance from the consultants themselves.
The large firms sign up to an ISO standard
ensuring processes are followed that underpin quality standards. And most consultancies have a rigorous programme of
checking out would-be advisers. Applying
for membership of an organisation such as
the MCA in the UK is another option.
The MCA demands five client references, which it follows up, investigating recent projects done with that firm. It also

asks for the accounts from the last three

years, as proof the firm is financially viable,
and about the experience of individuals
within the firm. We have strict entry criteria, a code of conduct and a disciplinary
procedure, so there is recourse for a client
should there be a problem, says Taylor.
If anyone brings it to our attention
that a member firm has breached our code
of conduct, we have a disciplinary procedure that could result in the expulsion of
the member firm.

Holding consultants accountable

Another way of appealing to clients is to
offer a risk/reward structure in the upfront
contract, where the consultancy actually
takes a financial stake in the work it is doing.
This is becoming ever more popular as an incentive to clients, but is not always viable, as
in some projects there are too many factors
beyond the control of the consultant.
There is substantial evidence in the US
of a migration in that direction, says
PwCs Trahant. I know some of our competitors are putting substantial fees at risk,
particularly with large-cap companies.
They are creating a success fee that is critical to how their engagement unfolds. At
IBM Global Services, a relatively new but
comprehensive consultancy, client satisfaction surveys are carried out throughout the
project as a matter of course and action is
taken swiftly if clients are not satisfied.
At the end of the day, it is up to the client
to do the due diligence beforehand. That
means a client needs to do their homework
before signing up to a consulting project,
says Dawson. If they dont, they are foolish. And that means checking out the reputation and previous experience of the individual consultants that will do the work.
Some consultancies have individuals that
sell the job to you, and who then disappear
letting a second team come in to do the
work. Bait-and-switch does in fact happen, says Trahant. But smart clients that
are used to consultancy services will make
sure that key people do the job. Its critically
important to have personal chemistry and
trust between consultant and client.
And it is this partnering relationship that
is fast becoming one of the most prominent
features in the consultants business model,
says Trahant. Partners operate on the basis
of fundamental trust and if there is an issue
then the relationship is doomed.
The other important change taking
place is the emphasis on consultants being
rewarded according to the outcome of the
work they do, which is a healthy incentive
for them to get it right at the outset. This
should in some way allay a clients concerns about the quality of service it gets.
But when it comes down to it consultants
do not replace management. Management
still has the responsibility for the decisions
it takes, as Trahant says: Consultants
dont make changes in businesses, clients
do. The consultants provide resources,
knowledge workers, talent, methodology,
experience and insight. But its the clients
who actually make the difference.
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