A review of the key issues associated with an important practical and theoretical area related to consulting

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Table of Contents

Summary
Introduction
Transaction Cost Theory
Demand for management consulting services
Conclusion
Reference List

Summary

Management consulting is very important, especially in today’s business environment characterized by economic uncertainties. This report is based on transaction cost theory which provides a rationale for management consulting. This document discusses the demands made on people working in management consulting.

The demand for management consulting comes from the need to help organizations and businesses in strategic development and implementation. This includes providing financial and marketing advice, improve workforce efficiency, determining organizational risks and the project implications of the organizations activities, and improving the internal operations of organizations.

Introduction

Management consultancy is part of business consultancy that has become very important for businesses and organizations today. Both start-up and established businesses and companies require expertise in setup and development, marketing, human resource planning and management, finance, operations, market analysis, economics, environmental management, manufacturing and other daily business activities (Drucker 1979, 22).

The modern business climate has made it necessary to acquire reliable feasibility appraisal. Management consulting focuses on developing strategies together with fine-tuning them to meet the needs of the individual businesses. Management consultancy firms are in demand to help organizations and businesses to transform their information systems, as well assetting up in regulatory and risk management structures.

Management consultants have to understand the various business environments and different cultures found as well as the factors which influence trends in the respective cultures (Canback 1998a, 8).

They also have to understand organizational cultures and complex organizational technology so as to help solve the problems experienced in the company. It is therefore necessary that they first listen and understand systems and situations before they begin advising and implementing new programs, practices or policies to achieve performance improvement.

Transaction Cost Theory

One theory that explains management consulting is transaction cost theory. It explains why management consulting exists,and explores the real costs of distributing resources in an imperfect global business environment with misunderstanding, misaligned goals and uncertainty.

According to transaction cost theory, an organization’s costs are categorized into production and transaction costs (Bower 1982, 4). Production costs are costs associated with production activities including manufacturing, logistics and product development.

Transaction costs are those associated with organizing the economic activities of the company. Both production and transaction costs vary with the organizational form. Transactional costs vary depending on technology and tastes, while production costs are influenced by resource allocation.

Transaction costs determine an organization’s operations in the market, which is regulated by prices, and its activities within the firm, also regulated by bureaucracy (Canback 1998b, 22). The optimum of an organization’s transaction costs is reached when its additional transactions in the firm exceeds the costs of conducting the same transactions across the market.

The relative level of market and internal transaction costs determines what is to be done in each sector or department in organization. The main market transaction costs include the cost of information failure, the cost of determining an organisation’s products and services, and the cost of creating and negotiating contracts (Kipping 2002, 34).

Prime internal costs include administrative costs of establishing the cost of motivating the workforce, the cost of resource allocation, as well as, the production cost (Canback 1998b, 23). Organizations acquire the services of management consultants to achieve this optimum.

Management consultants are therefore important to help organization structure perfect contracts, and reducing the possibility of individuals within the company acting out of their self-interest (Williamson 1975, 73).

According to Dawkins (1989, 72) organizations can only achieve credible and responsible behavior when their activities and operations are sustained by enforceable commitments since individuals can break agreements to serve their self-interest.

Demand for management consulting services

Management consulting involves the preparation as well as the delivery of business planning services. There is real demand on consultants to add value to businesses and companies (Frame 1994, 8). Management consulting firms must have across-the-board expertise in numerous areas into a singular solution for that particular business which requires market-focused, realistic plus impartial advice.

Emotional intelligence is particularly essential in consultancy considering that the work done by consultants involves interacting with people. Management consultantsare involved in offering solutions to business-related problems and therefore must engage with people on a daily basis. Thus, they have to be outgoing and have the drive to help companies and businesses prosper.

The expert or firm should be able to provide services to small business start-ups to enable them meet their needs, as well as to medium companies and global companies which are expanding into new markets. They should be able to provide business planning services such as feasibility studies, operational and financial planning, options appraisal, due diligence and market analysis (Block 2001, 147).

Management consulting firms/experts are also expected to work closely with the businesses/organizations to which they provide services in putting plans into action to enable them meet their goals. This implies that they have to work alongside the management teams of these organizations while filling various roles, which may include being trainer, client liaison, writer, analyzer and speaker (Buono 2001, 27).

Within the consultancy team, there needs to be experts in various forms industry and business fields. Today, many businesses and organizations retain the services of consultants to help them diagnose and analyse existing organizational problems in addition to developing plans for improvement.

Consultants are aware of an industry’s best practices and can transfer such practices to organizations which need them to improve their performance. This is as a result of their exposure to as well as relationships with several organizations.

During the consultancy, the consultants need to help the organization/business evolve its plans to adapt to unpredicted economic circumstances which may include changes in the market (Clark &Fincham 2002, 55). Consultants have to focus on areas and ways which can enable the company reduce costs by making them more efficient and effective.

Thus, there is much demand from the management consultants to improve and re-engineer businesses so as to help them to overcome downturns and recessions successfully. Management consultants have broad knowledge and solid experience as regards planning the optimal marketing mix. They have to help their clients design marketing strategies that gives them a competitive edge over their competitors.

Businesses need to have the right marketing mix to leverage their product success rates in the marketing, and achieve customer and brand equity, customer satisfaction and loyalty.

Businesses also want to know how they can expand their markets, as well astheir chances of success should they decide to expand their markets (Davenport &Prusak 2005, 309). Consultants have to do a lot more work to help companies expand markets overseas. They have to offer strategic advice to companies planning to enter or are entering new markets.

The primary responsibility of consultants is to analyse and determine the level of risks of business ventures, as well as make educated projections regarding the long-term benefits of the organization’s practices and policies (Davenport & Smith 2000, 291).

Consultants must have the skills required to put into practice the necessary changes. This means that the consultants have to help the company/business develop written material which includes policies and plans, and give directions to the business by training and educating the organization/business employees on the new procedures and practices.

Management consultants have to offer strategic advice to companies/businesses on project-by-project basis. This may include programs like reorganization of a firm’s structure or rationalization of products and services offered by the firm (Hilpern 2010). Management consultants have to offer advice to corporations which are integrating acquisitions and reduce costs along international supply chain.

They offer solutions together with effective and practical implementation strategies of that solution. They have to help their clients prepare for change and managing change to attain sustainable success by developing strategies which improve operational efficiency and productivity, as well as, helping them strengthen their relationships with other businesses, partners, clients and suppliers (Turner 1982, 123).

There is more demand on management consultants to project the implications of an organization’s operation within an industry or in competitive contexts (Bessant& Rush 1995, 109). Consultants enable firms to continue with their normal business operations as they create links in the supply chain.

For businesses to be successful, their managers have to recognize potential partners and key areas of expansion, and then implement strategic plans which focus on improving positioning, as well as increasing transparency throughout the relationship networks.

This means that consultants should be able to analyze and have knowledge of interrelationships which includes relationships between people, technology and processes so as to help organizations identify and attain operational, financial, competitive, as well as, relational goals.

Management consultants also assist organizations to build new business capabilities in addition to integrating them so that the business can continue with minimal interference.

Another demand made on management consultants is helping companies achieve more lenient and efficient use of human resources.

They offer a range of advice to firms and businesses including job enrichment, personnel policy, human resource support programs such as training and development, recruitment, implementation of human resource planning systems like ERP among other operations and programs (Stryker 1954, 86). Management consultants have to make their services attractive to businesses and organizations.

This implies that they have to adopt a Project Portfolio Management (PPM) strategy to human resource management so that they can better understand, as well as anticipate, the needs of organization that they are servicing, then identify the positions and skills which are required to meet the needs of the company.

Organizations need management consultants who can place best personnel in the most strategic positions as well as excellent performers in support positions. This allows companies and businesses to align the skills of its employees with their needs (Den Hertog, 2000, 508).

They also have to help their clients efficiently allocate their staff to various simultaneous projects while ensuring that the organizations meet their current client demands as they anticipate future demands.

Management consultants also offer capacity/utilization analysis for organizations against their current and future personnel demand. They have to determine whether the organizations have the right number of executives or managers as well as supporting staff/positions and resources so as to allow them identify gaps and surpluses within their human resource.

They have to advise their clients on emerging business patterns which could include shifting patterns, trends that require new practice to lead to higher profits, demand for new skills, values in forecasts, as well as, influx of business in a new sector (Fornbrun& Nevins 2004, 86). This enables organizations understand when to rightsize,whom to layoff when that time comes and when to outsource a project or workforce.

With increasing uncertainties in the business environment, there is more demand for management consultants to offer services to executives and managers in planning for hypothetical scenarios and determining the projected results. The projected outcomes help managers save time and increase their visibility into their business ventures commitments, as well as, budget goals (Schon 1983, 133-134).

More is demanded from management consultants who offer financial advice and guidance. They have to guide businesses/companies on issues like putting in place of budgetary control systems and profit planning (Williamson 1975, 76).

Management consultant have to support small business, start-ups, private corporate companies and publicly listed companies to achieve optimal financing structures by helping them make critical financial decisions concerning the right mixture of equity plus debt.

Management consultancy firms are on demand to help firms and businesses improve their performance by transforming business intelligence, operations, and making financial transformations including cash management, cost optimization, working capital and revenue enhancement.

Conclusion

Transaction cost theory attempts to explain the issue of management. Not only does it offer an explanation as to why management, exists, but the theory also examines the real cost of distributing resources within an organisation in an efficient manner. This is especially important in an imperfect business environment where misaligned goals, misunderstandings and uncertainty prevail.

The theory also categorises an organisation’s cots into transaction cost and production cost. The two types of costs differ from one organisation to another. Whereas production costs are associated with such production activities as logistics, manufacturing and product development, on the other hand, transaction costs are the costs associated with a company’s economic activities.

In this case, transaction costs determine the operations of an organisation in the market. The main market transaction cost include the cost of determining an organisation’s products and services, administrative costs to motivate the workforce, and the cost of resource allocation.

There is a real demand for management consulting services to add value to businesses. Management consulting firms ought to have enough experts across the board. This way, the consulting firm is able to provide services to start-ups, medium-level companies, and global firms as well. There is a need therefore for management consulting firms to work closely with their clients in order to help them achieve their goals.

Business consultants are charged with the responsibility of analysing and determining the level of risks of business ventures and making educated projections regarding the long-term benefits of the firm’s policies and practices.

In addition, management consultants also provide strategic advice to businesses on a project-by-project basis. They help clients to prepare for change and manage change for sustainable development. There is a rising demand for management consulting firms to project the implications of an organisation’s operations within an industry or in the context of competition.

Management consultants also provide their clients with capacity analysis against their current and future demands for human resources. There is a dire need for management consulting firms to guide businesses on such issues as profit planning and implementing of budgetary control systems.

Moreover, companies rely on management consulting firms to help them improve their business performance by transforming their operations, optimizing their financial costs, and embracing the concept of business intelligence.

Reference List

Bessant, J., & Rush, H., 1995, Building bridges for innovation: the role of consultants in technology transfer. Research Policy, 24: 97-114.

Block, P., 2001, Flawless consulting: a guide to getting your expertise used, 2^nd Edition. San Francisco: Jossey-Bass/Pfeiffer. p., 147.

Bower, M. 1982. The forces that launched management consulting are still at work. Journal of Management Consulting 1 (1): 4–6.

Buono, A. F., 2001, Current trends in management consulting. Oxford: Information Age Publishing. p. 27.

Canback, S., 1998a, The logic of management consulting, Part 1. Journal of Management Consulting 10 (2): 3–11.

Canback, S., 1998b, Transaction cost theory and management consulting: Why do management consultants exist?, Working Paper 9810002. Henley-on-Thames: Henley Management College. pp. 20-24.

Clark, T., &Fincham, E., (eds) 2002, Critical consulting: new perspectives on the management advice industry, Blackwell, Oxford. P. 55.

Davenport, T. H., &Prusak, L., 2005, Knowledge management in consulting. In Greiner, L., &Poulfelt, F., (eds), The contemporary consultant: handbook of management consulting: insights from world experts. Mason, OH: Thomson-South Western. pp. 305–326.

Davenport, T & Smith, D 2000, Managing knowledge in professional service firms. In Cortada, J., & Woods, J., (eds), The knowledge management yearbook 2000–2001. Butterworth, Woburn, MA, pp. 284–299.

Dawkins, R. 1989. The selfish gene. 2^nded. New York: Oxford University Press. p 73.

Den Hertog, P., 2000, Knowledge-intensive business services as co-producers of innovation.International Journal of Innovation Management, 4 (4): 491–528.

Drucker, P. F., 1979, Why Management Consultants? In Melvin, Z., & Greenwood, R. G., The evolving science of management. New York: AMACOM.

Fornbrun, C., & Nevins, M., 2004, The advice business: Essential tools and models for management consulting. Upper Saddle River, New Jersey: Pearson Prentice Hall.

Frame, J. D., 1994, The new project management: The new business environment and the need for a new project management: San Francisco: Jossey-Bass. pp. 1–16.

Hilpern, K., 2010, Management consultancy: Why talented people are back in demand. The Independent. Web.

Kipping, M., 2002, Trapped in their wave: The evolution of management consultancies. In Clark, T., &Fincham, R., (eds.). Critical Consulting: New Perspectives on the Management Advice Industry. Oxford: Blackwell, 28-49.

Stryker, P., 1954, The ambitious consultants. Fortune, 82–88.

Schon, D., 1983, The reflective practitioner: How professionals think in action. London: Temple Smith. pp. 133-134.

Turner, A. N., 1982, Consulting is more than giving advice. Harvard Business Review 60(5): 120-129.

Williamson, O. E., 1975, Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. p. 73-76.

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