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The price of dubious advice - pounds 100bn a year

Sun, 6th Jul 2008

LORD LEVER was talking of advertising when he famously remarked that he knew that half his spending was wasted, but not which half. The same might be said of management consultancy, which shares with its sister professional service the gravity-defying ability to keep on growing, despite the lack of any real proof that it does any good.

In fact, the unstoppable progression of the management advice industry is monument above all to the power of faith and the need of senior managers for reassurance. At least in Britain and the United States (other countries are less greedy users) it has become just another cost of doing business.

It may seem remarkable that a trade that is unregulated, has no qualification nor proven corpus of theory or practice, and no statutory standing, should now be worth upwards of $100bn a year worldwide, accounting for 4 per cent of operating costs, or pounds 2,000 per employee, in a cross-section of private sector companies interviewed by the National Audit Office in 2006. Or that almost all large companies should be advice junkies, or indeed that many of them should be headed by ex-consultants or that its senior mem bers should flit with consummate ease between the private sector and the public sector, which they have done so much to make safe for their own ilk.

In fact, as Chris McKenna showed in his masterly study of the rise of the suggestively entitled 'world's newest profession', this shadowy status is much to the big consultancies' advantage, giving them a Macavity-like ability to vanish from the scene of crime, while others have to stay and take the rap. Thus, management consultants were as deeply involved in devising Enron's innovative structures as its accountants, but Andersen, the auditor, was brought down in the fall of the energy company, while the consultants emerged unscathed.

Better yet, consultants have been huge beneficiaries of the post-Enron legislation they themselves helped to bring about. To diminish conflict of interest, 2002's Sarbanes-Oxley Act required directors to run tough management compliance checks, while barring auditing firms from carrying them out. The result has been a field day for consultants, who already a decade ago made up one in 13 of the US managerial workforce.

It is conceivable that the same lucrative pattern of double benefit is about to repeat itself. In recent years, the major consumer of management consultancy has been financial services - in 2007, UK consultancy firms pocketed pounds 1.7bn from the financial sector for advice alone, according to Accountancy Age includ ing IT consulting and implementation, the figure would be much higher. As we know, this advice has at best not prevented client companies from making some very bad management calls. If, as seems likely, tighter regulation results - for example to manage risk or control incentives - guess who will be in pole position to monitor it.

The other huge consultancy consumer is the public sector. Central government and the NHS were respectively second and fifth largest advice markets in 2007 - and the NHS would have undoubtedly ranked higher, above the whole of manufacturing industry, if IT was included. In fact, it's hardly an exaggeration to say that under New Labour the public sector has been a test-bed for reform-by-consultancy. According to the NAO, the public sector spent pounds 2.8bn on consultancy in 2005-06 - that's 28 per cent of the total UK market. This works out at a remarkable pounds 10,000 per public sector employee, or 11 per cent of all operating costs.

As to value for money, the NAO's judgment that it's impossible to assess wider benefits, but that 'there is some way to go before central government overall is achieving value for money from its use of consultants', probably goes for the private sector too. The big consultancies, after all, have given us the IT-dominated mass-production service factories that are as customer-unfriendly, unpleasant to work in and inefficient in the private sector (bank and mobile phone contact centres) as in the public (HM Revenue and Customs).

And if, as recent research suggests, the most promising management practices are not someone else's but lurking hidden in an organisation's own values and traditions, who is more likely to excavate them: a bright young consultant straight off the MBA production line, or its own employees?

The lucrative catch-22 of management consultancy was neatly foreshadowed by Niccolo Machiavelli in 1513. There was, he declared in The Prince , 'an infallible rule: a prince who is not himself wise cannot be wisely advised... good advice, whoever it comes from, depends on the shrewdness of the prince who seeks it, and not the shrewdness of the prince on good advice'. The more you need it, the less likely you are to be able to use it. Consultants are not going to be out of a job any time yet.

The Observer, 6 July 2008


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