Consulting firm

A consulting firm or simply consultancy is a professional service firm that provides expertise and specialised labour for a fee, through the use of consultants. Consulting firms may have one employee or thousands; they may consult in a broad range of domains, for example, management, engineering, and so on.

Management consultants, in particular, typically work with company executives and provide them with generalists and industry-specific specialists, known as subject-matter experts, usually trained in management or in business schools. The deliverable of a management consultant is usually recommendations for achieving a company objective, leading to a company project.

Many consulting firms complement the recommendations with implementation support, either by the consultants or by technicians and other experts.

Consulting services are part of the professional services and account for several hundred billion dollars in annual revenues. Between 2010 and 2015, the 10 largest consulting firms alone made 170 billion dollars growth revenue and the average annual growth rate is around 4%.

Segments

The segmentation of advisory services varies widely across organizations and countries. Categorization is unclear, in part because of the upheavals that have occurred in this industry in recent years.^[1]

One approach is to separate services into five broad service delivery families, considering the managers they are targeting:

• Services related to the company's overall strategy, which are addressed to the CEO,
• Services related to marketing, communication, sales and public relations, which are addressed to the CMO,
• Services related to management, financial management, taxation, accounting, compliance with regulations, for the CFO,
• Services related to the company's operations, intended for operational management, which may be different depending on the industrial sector (technology director, plant managers, operations directors, Research and Development managers), for instance COO and CTO,
• Service related to information technology (see IT consulting) intended for information management, which are addressed to the CIO.

Models of business

A consulting firm's model of business may be compared to staffing, wherein the objective is to lower labour costs for clients for an intended result, or relative to an intended result or output, in order to charge for a profit margin for the consulting firm. Clients are looking to procure or purchase external help and assistance. Consulting firms sustain their revenues from a labour economic point of view as a method for distributing labour, where certain positions, roles or fields of expertise within the labour market find it more suitable for contract work, as contrasted to in-house employment, for a few conceivable reasons:

• Client needs being incontinuous, or continuous but otherwise volatile in that they may vary from time to time in nature and scope,
• A potential scarcity of skilled labour available on the market,^[2]
• The possibility of offering a higher work level activity,^[3]
• The necessity for licensed labour or other qualified labour for tasks not making up the core task assembly of the client organization,
• Looking to get a hold of or utilize of third party intellectual property, intangible capital or other types of goodwill belonging to the consulting firm.^[4]

Aside from the economic arguments stated above, consulting also acts as a corporate services model:

• Where internal consulting solutions (at which the client firm acts as a de-facto employer) may run into issues of scope once projects get too large, external consulting firms may be able to provide a better solution for the larger consulting deals on the market,^[5][6]
• Risk and compliance audits may be suitable for a consulting contract as a means of safeguarding neutrality,^[7]
• Consulting comprises the natural service model for large-scale transformation projects in client enterprises,^[8]
• Certain service models, such as financial auditing and economic consulting, are effectively required to offer their services in the form of consulting agreements due to a lack of industry position outside of the tertiary sector,^[9]
• Some clients may decide to hand over entire assemblies of tasks to consulting firms for a period of time - this is akin to outsourcing agreements, however with the exception of a predestined due date which is atypical in outsourcing,
• Consulting is also used as a third party service model as could be seen in for example contract formations of b2b-deals, legal consulting and M&A activity,

consequently acting as a source of profit for clients, consulting firms and society as proffered.^[10][11][12] The consulting business model can be seen as a result of the knowledge economy, and as a subset of the knowledge industry.^[13][14] Today it is not rare for consulting firms to offer what may be considered turnkey solutions to clients.^[15][16] Knowledge transfer is also a prevalent sales argument for consulting services.^[17]

Outsourcing

It is common practice for consulting firms to be involved in the sale of outsourcing services as well. Similarly, outsourcing firms may offer consulting services as a way to help integrate their services with the client. Many consulting firms offer several service packages as part of their business portfolio. While consulting services and outsourcing services are compatible, issues arise if the clients are not aware of the differences between the two. From an ethical standpoint, it is important that clients are aware of what type or types of services they're procuring, as consulting services are meant to be a complementary service to the client firm, whereas outsourcing effectively aims to replace parts of the client firm that are imperative to their operational ability.^[18][19]

Types

There are different types of consulting firms serving different sectors. They mainly fall under the following fields:

• Architecture and Engineering
• Financial services
• Health care
• Hotel and hospitality industry
• Human resources
• Information technology
• Legal
• Management^[20]
• Music
• Regulatory compliance

Some consulting firms also serve niche sectors, such as:

• advertising/marketing/public relations
• environmental consulting
• entertainment/media
• energy
• logistics
• consulting in politics and the public sector
• real estate
• recycling
• small business
• commodities

Successful consulting firm cases

Mexico

In 2013, there was a randomized trial in Mexico where 432 small and medium enterprises were allowed access to management consulting services for one year.^[21] As a result of this trial, there were many positive impacts. Such positive impacts include: increase in entrepreneurial spirit, increases in employment and higher wages for employees. Even after 5 years after the trial, positive impacts are still active.^[22] These results were achieved by advertising a consulting program to 432 enterprises and recorded data on the positive effects.

Money laundering in consulting firms

A consulting firm is a suitable instrument for money laundering.^[23] Illegally obtained money is laundered by the employment of consulting companies. The reason consulting firms are so effective at laundering money is because consulting services are immaterial, therefore, pricing is non-transparent.

Another reason consulting firms are effective at laundering money is because sometimes consultants regularly leverage their clients into charging higher prices.^[24] When a client of the consulting firm is satisfied, the consultant can charge higher fees through more leverage while setting prices through the contracting prices. Therefore, when auditors inspect financial statements provided by the consulting firm, the consulting firm can state that a certain consulting project costed an 'x' amount of money and auditors are unable to detect fraud, thus allowing money laundering to occur.

Impact of consulting firms in emerging economies

Negative impacts

The impact of consulting firms on local businesses in emerging economies do not always have positive effects.^[25] One reason for this is that firms in emerging economies suffer from the inferiority of their technologies and innovation capabilities, thus, although they have access to consulting firms, they cannot make the most of the advice given. Advice given by consulting firms to clients may not be used efficiently as clients firms in emerging markets tend to suffer due to a lack of infrastructure, organisation, and education. Another reason firms in emerging economies struggle to effectively use consulting services is that innovation is very costly and risky.

Positive impacts

As noted above, consulting firms in emerging economies do also have positive impacts. Positive impacts include: increases in employment, increase in entrepreneurial spirit and higher wages for employees.

Impact of consulting firms in developed economies

One study shows that there is a significant difference between efficiency between consulting firms in America (developed economy) and consulting firms in Asia Pacific regions (emerging economy).^[26] Efficiency scores of consulting firms in America were significantly higher than consulting firms in Asia Pacific regions. This is because firms in developed economies have better infrastructure, organisation and education, thus advice given by consulting firms is used efficiently.

See also

• Consulting
• Information technology consulting
• Knowledge economy
• Knowledge industry
• Knowledge intensive business services
• Knowledge transfer
• Management consulting
• Professional services network
• Staffing
• Temporary work

References

1. "Consulting on the Cusp of Disruption". Harvard Business Review. 2013-10-01. Retrieved 2017-12-30.
2. Maister, David H. (2004). "The Anatomy of a Consulting Firm". The Advice Business: Essential Tools and Models for Managing Consulting. Retrieved 22 May 2022.
3. "The Best and the Brightest: The Construction, Significance and Effects of Elite Identities in Consulting Firms". SAGE Journals.
4. "Strategy and Organization Consulting" (PDF). Center for Effective Organizations. Retrieved 6 April 2023.
5. Swartz, Don (1974). "Similarities and Differences of Internal and External Consultants". Academy of Management Proceedings. Academy of Management. 1974: 17. doi:10.5465/ambpp.1974.4980555. Retrieved 6 April 2023.
6. Kelley, R. E. (1979). "Should you have an internal consultant?". Harvard Business Review. Europe PMC. 57 (6): 110–120. PMID 10244211. Retrieved 6 April 2023.
7. "Caveat Compliance: Can Firms Rely on Advice Received from Compliance Consultants?" (PDF). Retrieved 6 April 2023.
8. Poulfelt, Flemming; Olson, Thomas H.; Poulfelt, Flemming; Bhambri, Arvind; Greiner, Larry (2017). "The Changing Global Consulting Industry". Management Consulting Today and Tomorrow. Taylor & Francis Group. pp. 5–36. doi:10.4324/9781315648293-2. ISBN 9781315648293. Retrieved 7 April 2023.
9. Munro, Lois; Stewart, Jenny (2009). "External auditors' reliance on internal audit: the impact of sourcing arrangements and consulting activities". Accounting & Finance. Wiley Online Library. 50 (2): 371–387. doi:10.1111/j.1467-629X.2009.00322.x. S2CID 154459504. Retrieved 7 April 2023.
10. Momparler, Alexander; Carmona, Pedro; Lassala, Carlos (2015). "Quality of consulting services and consulting fees". Journal of Business Research. Science Direct. 68 (7): 1458–1462. doi:10.1016/j.jbusres.2015.01.033. Retrieved 19 May 2022.
11. Armbrüster, Thomas (2006). The Economics and Sociology of Management Consulting. Cambridge, UK: Cambridge University Press. ISBN 978-0-521-85715-4.
12. Shogun, Steve M. (May 2004). "Editorial: Consulting, Research, and Consulting Research, Volume 23, Issue 2, May 2004". Marketing Science. INFORMS. 23 (2): 173–179. doi:10.1287/mksc.1040.0078. Retrieved 19 May 2022.
13. Sarvary, Miklos (1999). "Knowledge Management and Competition in the Consulting Industry". California Management Review. 41 (2): 95–107. doi:10.2307/41165988. JSTOR 41165988. S2CID 154894228. Retrieved 19 May 2022.
14. Jacobson, Nora; Butterill, Dale; Goering, Paula (2005). "Consulting as a Strategy for Knowledge Transfer". The Milbank Quarterly. 83 (2): 299–321. doi:10.1111/j.1468-0009.2005.00348.x. PMC 2690143. PMID 15960773.
15. Nissen, Volker (2018). Digital Transformation of the Consulting Industry: Extending the Traditional Delivery Model. Progress in IS. Springer Cham. doi:10.1007/978-3-319-70491-3. ISBN 978-3-319-70491-3.
16. Sandberg, Robert. "Corporate Consulting for Customer Solutions: Bridging Diverging Business Logics" (PDF). ex.hhs.se. Stockholm School of Economics. Retrieved 23 May 2022.
17. Butterill, Dale; Goering, Paula; Jacobson, Nora (16 June 2005). "Consulting as a Strategy for Knowledge Transfer". The Milbank Quarterly. 83 (2): 299–321. doi:10.1111/j.1468-0009.2005.00348.x. PMC 2690143. PMID 15960773.
18. Anderson, Stephen J.; McKenzie, David (January 2022). "Improving Business Practices and the Boundary of the Entrepreneur: A Randomized Experiment Comparing Training, Consulting, Insourcing, and Outsourcing". Journal of Political Economy. 130 (1): 157–209. doi:10.1086/717044. hdl:10986/34979. S2CID 240535903. Retrieved 21 September 2022.
19. Czerniawska, Fiona (June 2006). "Outsourcing: Death Knell for Consulting?". Consulting to Management. 17 (2): 57–59. Retrieved 21 September 2022.
20. "Business plan examples". Monday, 25 November 2019
21. Bruhn, Miriam; Karlan, Dean; Schoar, Antoinette (April 2018). "The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico". Journal of Political Economy. 126 (2): 635–687. doi:10.1086/696154. hdl:1721.1/121090. ISSN 0022-3808. S2CID 5814460.
22. "Why Big Data is becoming so Important in Supply Chain | Big Supply-Chain Analytics – Assuras – Providing Assurance & Confidence For Today's Leading Businesses". 2022-10-01. Retrieved 2022-10-24.
23. Teichmann, Fabian Maximilian Johannes (2019-01-01). "Money laundering and terrorism financing through consulting companies". Journal of Money Laundering Control. 22 (1): 32–37. doi:10.1108/JMLC-10-2017-0056. ISSN 1368-5201. S2CID 159328510.
24. Momparler, Alexandre; Carmona, Pedro; Lassala, Carlos (2015-07-01). "Quality of consulting services and consulting fees". Journal of Business Research. Special issue on The Spirit of Strategy. 68 (7): 1458–1462. doi:10.1016/j.jbusres.2015.01.033. ISSN 0148-2963.
25. Back, Yujin; Praveen Parboteeah, K.; Nam, Dae-il (2014-12-01). "Innovation in Emerging Markets: The Role of Management Consulting Firms". Journal of International Management. 20 (4): 390–405. doi:10.1016/j.intman.2014.07.001. ISSN 1075-4253.
26. Park, Gowangwoo; Lee, Seok-Kee; Choi, Kanghwa (January 2021). "Evaluating the Service Operating Efficiency and Its Determinants in Global Consulting Firms: A Metafrontier Analysis". Sustainability. 13 (18): 10352. doi:10.3390/su131810352.