18 September, 2009

The great management consultancy Swindle

Masters of illusion: The great management consultancy
swindle

It's cost the NHS GBP300m and its practitioners are
wielding the axe at magazine giant Condé Nast. But is
it all just smoke and mirrors? Ex-management consultant
Matthew Stewart recalls his career in the "efficiency
business" -- and reveals its dark arts

Thursday, 17 September 2009

It was 1988, and I was just finishing a D.Phil at
Oxford University on the topic of "Nietzsche and German
Idealism". The annual recruiting season had long since
gone. My life savings had dwindled into three digits.
It came to me in a pub, over a game of pool. I was
losing badly to a pair of undergraduates who had
recently received offers from a prestigious management
consulting firm. They were about 22-years-old; I was
going on 26. As I gazed at the pool balls ricocheting
around the table, it hit me that, instead of spending
the next year watching daytime TV, I too, could earn
some ready cash by offering strategy tips to CEOs of
Fortune 500 companies.

The more I thought about it, the grander it seemed. The
next morning, I sent out 10 CVs. One ended up in the
hands of the founding partner of a small and
enlightened consultancy firm based in New York. I
landed the job by providing a credible response to this
question: How many pubs are there in Great Britain? The
purpose of that question, I realised after the
interview, was to see how easily I could talk about a
subject of which I knew almost nothing, on the basis of
facts that were almost entirely fictional. It was an
excellent introduction to management consulting.

Over the past three decades our civilisation has made a
massive investment in people like me -- the kind of
people who can allegedly practice or sell management
expertise. Within a few months of the interview in New
York, I was suited up and billed out at a rate of about
a third of a million pounds per year (only a fraction
of which landed in my pocket in those first years). I
soon discovered that my lack of a proper business
education was no disadvantage on the job, which turned
out to be more interesting and enlightening than I
expected. I would eventually leave the business in 1999
to work full-time as a writer, but during the previous
decade, I would advise French businessmen on how to
succeed in Germany; tell Americans what to do in
Eastern Europe; show the Spanish how to become more
like the Americans. I spent one particularly haunting
year advising bankers in Mexico.

Wherever I was in the world, at the beginning of every
consulting project, one thing was certain: I would know
less about the business at hand than the people I was
supposed to be advising.

"The Whale" is a graph. Its official title is
"Cumulative Customer Profitability" and it also goes by
the generic name "skew chart". The Whale is my
madeleine. One glance at its distinctive curves and in
my mind I'm back, cutting and pasting charts and text,
running through airports, hovering over a transparency
projector in front of sceptical men in suits, and
trading boozy stories with team-mates in an overpriced
hotel restaurant.

I learned the art of whale-hunting -- as we called the
art of landing a big client -- from a partner I will
call Roland. He was a jolly, well-rounded figure, with
a face like a pink bowling ball. He had a thick French
accent and drew heavily on a limited stockpile of
American colloquialisms, cheerfully painting the world
in the bold strokes and primary colours, in a style
typical of those who live their lives in a foreign
language.

In the firm, Roland was the harpooner. His specialty
was sinking the barbed hook of our services deep within
the flesh of unsuspecting clients. Roland would say: "I
asked Joe (or whoever the client was) 'Joe, can your
people tell you, right now, which of your customers are
profitable?'" (It always sounded like he was calling
them "profiteroles".) Joe would have had no idea how
his profiteroles were doing.

The analysis Roland and his team performed for Joe
followed a prescribed course. Firstly, they constructed
a database of the client's customers, detailing each
customer's product and transaction activity over the
preceding year. Next they established a clean profit
and loss statement for the whole business, including
all overheads but excluding extraordinary items. Then,
to allocate the revenues and costs of the business to
each customer, they devised algorithms based on
detailed models of each kind of product and
transaction. The complexity of these algorithms,
naturally, was such that they were far beyond the
powers of most clients to comprehend. The result was an
analysis of the exact revenue, expense, and profit to
the client attributable to each of its customers.
Finally, the team lined up the customers according to
their profitability, thus allowing the client to see
how much of its profits could be attributed to its most
profitable customers, and how much to the least
profitable.

"Et voilà!" Roland would announce, revealing his graph.
It was the leviathan.

The typical Whale showed that the top 20 per cent of
the client's customers accounted for significantly more
than 100 per cent of its profits. That is to say, if
the client had served only these star customers, it
would in theory have made much more money than it did.
For the next 70 per cent or so of the customers, the
line went flat, indicating that they made little
additional contribution to the bottom line. For the
final 10 per cent of customers, the line took a
nosedive, meaning that these dogs were subtracting from
the client's profits. Toss in lines to track the
cumulative revenues and expenses of customers, and the
whole thing assumed the distinctive shape of a giant
fish.

I eventually came to understand that it is possible to
construct a Whale chart for just about any business
anywhere. It makes no difference whether the business
is inherently good or bad, well-managed or in the hands
of chimpanzees. It doesn't even have to be a business --
it can be a football game or a population chart. In
fact, you don't even have to do the analysis. You can
save 80 per cent of the effort by just borrowing data
from a previous analysis. There's always going to be a
skew. It isn't science; it's a party trick.

But it is also something close to a universal law.
Joseph Juran, a Romanian-born engineer who championed
quality control in industrial and manufacturing
settings, called it the principle of "the vital few and
the trivial many". The Whale is about focusing on the
things that really make a difference. It is the number
one item on every management guru's to-do list. It's
about the big break, the main chance, the sweet spot,
the Big Kahuna.

It was just one among a variety of quantitative models
that occupied the analytic core of my consulting
career, but it best represents the data-driven approach
to life that stayed with me long after I left the
business. In its best moments, management consulting is
a recognition of the quantitative nature of our reality
-- of the fact, too easily overlooked by innumerate arts
graduates, that a hard look at the numbers can explain
much of the structure of the world around us.

The management consulting industry depends on a small
number of gargantuan clients; we thought we were doing
pretty well out of one of our clients who spent $12m
annually on our services -- until we learned that this
behemoth's total spending on "strategy" consultants was
about $100m per year. In order to grasp why some large
organisations (but not others) spend so much money on
something as ethereal as "strategy," one must dispose
of the naïve idea that consulting involves the transfer
of knowledge.

The savvier consultants and their clients understand
that the basis of the business is not technological but
anthropological -- and that this is not always a bad
thing. Among human beings, it turns out, the perception
of expertise, however unfounded, can sometimes be used
to good purpose. As the shamans who poison chickens and
the soothsayers who read entrails have long
demonstrated, sometimes it is more important to build a
consensus around a good decision than to make the best
possible decision; sometimes it is more useful to
believe that a decision is sanctioned by a higher
authority than to acknowledge that it rests on mere
conjecture; and sometimes it is better to make a truly
random choice than to continue to follow the
predictable inclinations of one's established
prejudices. Consultants, following in the footsteps of
their pagan forebears, understand that they must adopt
the holy mien of a priestly caste.

So, cuff links matter; flying first class and ritual
feasting, too, are part of the job. But consultants
also know that an outrageously unjustified level of
self-confidence can add several points to one's
perceived expertise quotient.

The most important of the all-too-human functions of
shaman-consultants is to sanctify and communicate
opinion. Like ministers of information, consultants
condense the message, smooth out the dissonances, unify
the rhetoric, and then repeat and amplify it ad nauseam
through the client's rank and file. The chief message
to be communicated is that you will be expected to work
much harder than you ever have before and your chances
of losing your job are infinitely greater than you ever
imagined.

Those who are determined to find fault with the
honourable occupation of shaman-consulting should not
do so on account of its anthropological nature per se.
There is little point in criticising people for being
human. Rather, they should focus their rage on the
exemption from very ordinary requirements of
accountability and transparency which that
anthropological nature makes possible for both
consultants and their clients. The pretence of
knowledge where none is to be had, after all, is also a
licence to represent private interest as a public good.
Managers of client organisations easily abuse this
licence, using shareholder money to pay for consultants
in order to confer legitimacy on actions that deserve
proper scrutiny from truly independent sources. For
consultants, the arrangement has all the beauty of
writing your own report card.

In this respect, the problem of consulting is the
problem of the "knowledge economy" in a nutshell. When
you put forward the fiction that management is an
exercise in calculus, you tend to assume that integrity
is a cost of doing business rather than its foundation.
When you stipulate that management is the province of
experts, you lose sight of the fact that organising
fruitful co-operation among human beings is principally
a matter of building trust. And you forget the most
elemental truth of political philosophy, that in any
system that does not have the features of transparency
and accountability, no one trusts anyone.

I was taught about charts early in my career. Another
important lesson was that a management consultant must
learn to be loathed by his client's employees. It was
while working on one project at a bank, early in my
career, that I received instruction on this matter --
from Luigi, a senior manager. Luigi was the sworn enemy
of Lorenzo, the man who had hired us.

"So, you are Lorenzo's boys?" Luigi said through thick
rings of cigarette smoke, when he eventually deigned to
meet with me. The contempt in his voice was as thick as
cement. I guessed he was about twice my age, and he
probably weighed about twice as much too. His face and
his hair looked like they had been rolled around in an
ashtray.

"Do you know why consultants like to have
haemorrhoids?" he asked.

I looked at him with some alarm. "Because it makes them
look concerned!"

Many employees in the client companies hate us, of
course, because we watch them. We track their every
move as we hunt down inefficiencies. Then we fire 10
per cent of them and tell the rest to make up for the
difference.

But disgruntled victims of the process should know that
no one is more watched than the consultants themselves.
After every project, and often in the middle,
consultants at elite firms receive multiple evaluations
on their performance. Every six months, they sit down
for a formal, paranoia-inducing assessment of their
value to the global economy. At the end of the year, in
a typical firm, 20 per cent are then "counselled" that
they should seek "development opportunities" elsewhere.

It is a challenging environment, psychologically
speaking, and it is with some appreciation for the
stressful nature of the business that one should
reflect upon the chief paradox of the consultant's
lifestyle -- that the quest for efficiency seems
inextricably bound up with monumental luxury.

For long stretches of my career I was literally
homeless; I hopped from hotel to hotel and spent
weekends at exotic locations on the theory that this
cost the client less than sending me back to a home
that didn't exist. But I did not hop from just any
hotel to any other. On the contrary, I sometimes felt
compelled to rearrange my schedule so that I might stay
in the five-star hotel of my choice. As a consultant, I
developed a taste for hand-fed Japanese beef and the
kind of truffles that can only be found by a particular
family of pigs that lives near an inaccessible Alpine
village.

Yet I was a positive model of frugality compared with
some of my fellows. At one legendary dinner -- around
the time that the eerily Enron-like consulting firm I
helped to found was being sold to the public as part of
a visionary, dotcom enterprise -- a group of partners
allegedly set a company record for a restaurant meal at
around GBP20,000. "Living well is the best revenge," as
one of my peers put it, and we certainly believed in
revenge.

It was with a sense of confidence -- or possibly
overconfidence -- in the power of numbers, accumulated
over my first few years as a consultant, that I readily
accepted Roland's proposition that I should lead a team
of five on a four-week "diagnostic" project for a large
bank in Mexico.

"It's a fantastic project," he assured me. "It's about
risk management. They need a lot of help. It's pretty
scary down there. I'm going to position you as a risk
management expert."

"You know I never did any work in the risk management
area, right?" I said. He replied: "Relax! We have three
weeks before the project starts."

As both Roland and I knew, however, my supposed
preparation for the job was beside the point. All we
needed was a handful of models and pile of numbers.
We'd find our Whale alright.

Sure enough, in Mexico, after four weeks on the job, we
spotted him. In a windowless conference room deep
within the bank headquarters, a skinny,
stooped-shouldered man named Fernando sat in front of a
laptop computer and placed stupendous, one-directional
bets on the Mexican stock market. Appearances
notwithstanding, Fernando was a world-class optimist.
And with the market charging forward like a bull in the
ring, he looked like a world-class genius, too. He was
making so much money for the bank that everyone just
kept shouting "Ole!".

My year in Mexico followed in the well-worn trajectory
of the consulting business in general. The quantitative
models with which we supplied our client were fine
indeed, and sometimes quite elegant. But they could not
explain why the project morphed from a four-week,
deeply discounted "diagnostic" to a highly profitable,
year-long "implementation". Nor did they produce much
substantive change in the prognosis for the client.
Fernando continued to place his bets; the bank
continued to print money. Everyone believed the market
would go up, and they believed this because it was very
much in their interest to do so. It was not in our
interest to push them too hard to conceive of the
alternative.

Toward the end of that year, I sat down to dinner with
Roland over a feast of fried crickets, ant eggs, and
other exotic specialties produced by large armies of
Mexican workers. Roland was ecstatic. He was dreaming
of landing even bigger fish, of building a global firm
trading in whale blubber. He opened his arms wide, as
though outlining a larger version of his ever-expanding
midriff. I glanced down at my midsection and once again
I felt the horror. My belly was evolving into a
miniature bowling ball. I -- once a proud member of
Worcester College's third eight rowing team -- was fat.

In December 1994, the Mexican government decided to
relax the controls on the peso exchange rate. Investors
responded by dumping the currency, which lost about
half of its value in a matter of days. The stock market
crashed. The financial system would have collapsed
entirely, had not the US government intervened. Our
client could ill afford our already-outrageous fees and
so my year in Mexico came to an abrupt end.

The best that can be said about my work south of the
border, in common with many other projects I worked on
during my career as a consultant, is that perhaps it
amounted to a palliative, making the pain slightly more
bearable for our client. The more plausible judgment,
however, is that we were an expensive irrelevance, not
so different from the Mesoamerican priesthoods of
earlier centuries. We spent our time and energy
squabbling over the spoils in the unlit corridors of
power at the top of the economic hierarchy, riding our
vastly-inflated claims of expertise all the way to the
bank, wilfully oblivious to the systemic risk rising up
from below.

According to the rules of management consultancy, I
escaped intact, first to New York, briefly, then on to
London. Neither of which were as far from Mexico as I
had once imagined. The food was different. The business
of peddling "knowledge" was the same.

Adapted from The Management Myth: Management Consulting
Past, Present and Largely Bogus by Matthew Stewart,
published by Norton

==========


Auditing the business: Consultancy in figures

Big Four

The name given to Pricewaterhouse Coopers, Deloitte,
Ernst & Young and KPMG, the world's biggest
consultan-cy firms.

GBP9bn

The estimated value of the British management
consultancy market.

56,000

The number of management consultants in Britain.

GBP53,655

The average salary for a management consultant,
according to government statistics.


GBP300m

The amount the NHS spent on external consultancy last
year, according to the Management Consultants'
Association.

25 per cent

The cuts the publishers of 'Vogue', Condé Nast, are
reportedly about to make following a two-month audit of
their business by McKinsey & Co

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posted by u2r2h at Friday, September 18, 2009

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