Attn: Senator Dean Smith
Chair, Joint Committee of Public Accounts and Audit
PO Box 6021
Canberra ACT 2600
via email: email@example.com
16 April 2018
Re: Submission to Joint Committee of Public Accounts and Audit - Inquiry based on Auditor-General's report No. 19 (2017-18)
Summary: new Australian-developed technology can help the Federal Government increase the return achieved on its ongoing investment in Management Consulting services, while allowing smaller Australian companies to compete more effectively for Government purchases.
The Federal Government is not alone in its increasing use of consultants.
After steady growth from its origins in the late 19th century, the management consulting industry has grown rapidly over the last 40 years. Global revenues grew by about 20% over the period from 1980 to 1987 and have continued to grow at an average rate of 8% since then (Canback, 2017). Definitions, and therefore size estimates, vary but current overall global revenues are at least USD250 Billion annually (Consultancy.org, 2018).
The nine largest professional services firms account for sales of about USD114 Billion (see Table 1).
Table 1 - Global Consulting Revenues 2017 (USD Billion)
The Australian Market is estimated to be about USD4.6 Billion (Source Global Research, 2017), representing about 2% of global sales, and is generally recognised as one of the most developed markets for consulting services.
Two factors are driving the continued growth of the management consulting sector. The first is a general trend toward specialisation in the modern economy. Organisations utilise management consultancies to access their specialised skills, be it in operational improvement or digital architecture. This sets off a self-reinforcing dynamic where the consultants acquire an experience advantage over the client organisations, further increasing organisations' propensity to purchase consultancy to access their specialised skills.
The second factor is that large organisations' trend to increase specialisation and to access specialised skills externally creates new challenges of coordination for the senior leaders of these organisations. These coordination challenges create demand for advice in the fields such as strategic planning, organisational design, performance management and governance, for which most organisations again turn to consultants who have deep experience in these issues.
It is estimated that the ratio of management consultants to organisational executives has grown from 1:10 in 1980 to about 8:10 today (Canback, 2017).
So, our view is that the concern for the Committee should be less about the level of spend by the Federal Government than whether the return on this spend is appropriate.
Unfortunately, the broad data here is more unsettling.
We acknowledge that we have no data related to the performance of any specific management consulting project that may have been undertaken by the Federal Government.
We do however observe that other large organisations experience a wide variation in Management Consulting project performance, and we would expect a similar pattern in the Federal Government’s results.
Figure 1 below shows the results of a study (Steven H. Appelbaum, 2005) which examined the performance of 83 management consulting projects conducted for a North American telecommunications company. The data illustrate a distribution of project outcomes, with many projects falling far short of fully meeting their objectives.
Figure 1 - Consulting Project Performance Assessment
Figure 2 shows the results of a survey of US Corporate Clients (Source Global Research, 2105) which examined the value created across a range of consulting projects, expressed as a multiple of consultant fees for the project. This shows that only 40% of projects are deemed as creating value net of fees for the client organisation, with about 10% of projects failing to generate returns which even cover the consultant fees. It can also be seen that almost all consulting firms covered by the survey (which included many of the leading firms) produced a mix of 'good' and 'bad' projects.
Figure 2 - Distribution of Return on Consultant Fees
We expect that a review of Federal Government Management Consulting project performance would reveal a similar pattern.
So, what is the determinant of project success? Why are project returns so varied? Why do consulting firms that have a reputation for high quality deliver some projects that produce negative returns?
As shown in figure 3, an analysis of consulting project success factors at 255 companies found that the specific, relevant expertise of the consultant is the key determinant of project success (Bronnenmayer, 2016). In fact, consultant expertise explains about 60% of variation in project performance.
Figure 3 - Determinants of Project Success
Viewed through this lens, the wide range of project results become more understandable.
The specific expertise of the individual consultants in the team is the key determinant of project success. Clarity of purpose and an effective consulting process will support this, but success is unlikely if the core consulting team does not bring the required background and experience.
Failure to secure the appropriate expertise for the issue at hand is likely to be a key driver of the observed pattern of varying project performance outcomes.
So, what sourcing strategies are available to a manager seeking to engage consultants and how effective are these in securing the required expertise? Currently, managers face difficult challenges in efficiently sourcing the consultants with the specific expertise that will enable higher returns/lower failure rates.
Firstly, the consulting supply market is very fragmented and opaque. Most managers would know only a handful of potential suppliers – based either on personal experience or on consulting company branding – and tend to select from within that small group.
Moreover, as consulting is an ‘Experience Good’ (Wikipedia, 2018), it has been difficult to assess the specific capabilities of a consulting team in advance , making selection challenging.
“Brand-based” procurement is a common response by which the purchaser relies on ‘Brand attributes’ as an indicator of likely performance. Consulting firms have become ‘known for’ specific areas of expertise based on their history in specific project delivery and can be expected to provide strong capabilities in those areas. However, there are several limitations to this approach.
Especially in recent years, consulting firms, alert to the opportunity to shape buyer perceptions, have invested heavily in brand development which may or may not reflect their underlying capabilities. One large technical and professional services organisation is estimated to have invested more than USD1 billion over a ten-year period in advertising (print, airport billboards, television, etc.) in an effort to shape buyer perceptions. In-house 'journals' and other publications can also be understood in this context. As such, brand reputation may reflect the consulting firm’s capacity to invest in marketing, rather than underlying capability.
More fundamentally, brand is a poor indicator of the specific capabilities of the project team assigned to any individual client. There are differing levels of capabilities inside every consulting organisation and the commercial pressures to deploy all of these into client work are large. Evaluation and selection tends to take place at the consulting firm level, with little emphasis on the capabilities of the team that will be involved in the delivery of the project (in some cases the specific consultants to be involved may not even be specified within the project proposal). Clients should critically evaluate the specific capabilities of the proposed project team and not rely on 'brand' as a guarantee of quality.
Organisations who purchase large volumes of consulting services, such as the Federal Government, may be able to build up an internal view of consultant capabilities based on their own experience base. In practice however, most organisations lack the systematic collection and analysis of individual consultant performance that would be required to support this. Furthermore, the client/consultant 'joint responsibility' for project performance has meant that the consultants are often not held to account for poor performance where it does manifest.
Consultant selection can also be influenced by the 'Relationship Selling' strategy employed by many consulting firms. In these firms, senior staff operate as Key Account Managers, with client sales volume targets and associated incentives. Their primary role is to identify new sales opportunities within the client and to achieve on-sell/cross-sell from existing engagements. This is not to suggest that there is necessarily anything inappropriate about these sales practices, but managers need to be alert that their 'Trusted Advisor' also has strong commercial interests operating.
Consulting firms which utilise these approaches argue that clients can benefit from the continuity and context that a Key Account Manager can provide. We note however that the research (Bronnenmayer, 2016) suggests that 'Trust' and prior relationship with the consultant has a low correlation with positive project outcomes. Indeed, the author notes that a high level of Trust with the consultant may "convince the client to waive special screening activities, such as investigations regarding the consultants' skills, competences or expertise". Clients may find expertise in their existing consulting relationships but should not rely on the relationship alone to deliver this.
Some organisations establish Preferred Consulting Supplier ‘Panels’. To our view, these are misguided and ineffective. Most significantly, they limit the pool of expertise available to the buyer which thereby puts the prime driver of project success at risk. Further, we believe the supposed benefits – the cost savings associated with the reduction in unit rates that the buyers generally negotiate as a condition of Panel membership – are illusory as they fail to control for the input volumes. Consulting firms on these Panels can be expected to protect their long-term margins (on which their business models are based) by simply extending the average project duration, which is a factor that the client has little capacity to judge and control. We are highly doubtful about the efficacy of these programs.
More recently, innovative approaches to assist organisations to identify, select and manage consultants have emerged. The use of technology underpins many of these approaches.
WhoKnowsAbout (www.whoknowsabout.com), an innovative Australian start-up, has developed technology that enables more effective sourcing of consultants based on a comprehensive database of consulting expertise.
Based on public biographical data and the application of Machine Learning/Artificial Intelligence, we have assessed the capabilities of more than 500,000 individual consultants globally against each of more than 7000 specific knowledge areas. The database covers all consultants from the top 1000 global companies to local independent consultants.
A summary assessment of the capabilities of the top 1000 global consultancies (based on the capabilities of the consulting staff of each firm) can be found at: WhoKnowsAbout Global Management Consulting Rankings
We use this data to generate ‘shortlists’ of recommended consultants who have the specific expertise for the client issue at hand.
An advantage of our system is that we provide an efficient way for organisations to find and connect with smaller consultancies who have required capabilities, often at lower cost than the services offered by the larger ‘branded firms’. We currently have about 70,000 individual Australian management consultants in our database, many of whom are independent consultants or operate as small boutiques. As such, the technology could support the Government’s objective to help smaller Australian companies compete more effectively for Government purchases.
The same technology can also be applied to map internal organisational capabilities, based on publicly available data and/or organisational internal information systems. This helps organisations identify internal staff who may have the relevant capabilities, reducing the need to engage external consultants, or who can, at a minimum, provide technical advice to create informed consultant selection and evaluation criteria.
While our offer is fundamentally based in our data and technology, we wrap this in a process that helps the buying manager extract the maximum possible return from the spend on consultants. The key elements of this service are:
We believe that the application of our technology and processes could help the Federal Government efficiently source consultants with the required expertise at the lowest possible cost, improving the return achieved from the purchase of management consulting services. We would also help smaller Australian based consultancies to be found and to compete more effectively for Government purchases.
As far as we are aware, this technology and application are unique to WhoKnowsAbout. We would be pleased to discuss how this could be made available to the relevant departments.
Bronnenmayer, M. W. (2016). Success Factors of Management Consulting. Review of Managerial Science, Volume 39, Number 6, Page 706.
Canback, D. S. (2017). The Logic of Management Consulting, Revisited. Retrieved from Canback Consulting
Christensen, C. M. (October 2013). Consulting on the Cusp of Disruption. Harvard Business Review, 106 - 114.
Consultancy.org. (2018). Global Consulting Industry. Retrieved from Consultancy.UK
Source Global Research. (2017). The Australian Consulting Market in 2017. Retrieved from Source Global Research:
Steven H. Appelbaum, A. J. (2005). The Critical Success Factors in the Client‐Consulting Relationship. Journal of Management Development, Volume 24 Issue 1, pp.68 - 93.
Wikipedia. (2018, April). Experience Good. Retrieved from Wikipedia