Are consultants worth the money?
Cost-conscious companies are also rethinking the ways in which they restructure, write
They were there when Pacific Brands hatched its plan to shutter its Australian clothing factories and slash jobs. They were hired by the federal government to lay out the path of the national broadband network - the biggest infrastructure project in Australian history.
Now they are inside Qantas, Fairfax Media, National Australia Bank, Telstra and other companies big and small, and government departments, too.
They are the management consultants - influential guns for hire whose services come with a hefty price tag, staffed by the brightest, youngest things top-notch universities can produce.
Since the first, McKinsey & Co, arrived in Australia in 1962, the top companies - McKinsey, Bain & Co and Boston Consulting Group (BCG)- have become ubiquitous, their influence and alumni networks spreading deep into boardrooms, academia and government.
To their critics, they are the faceless men of corporate Australia - influential but inscrutable, unaccountable yet holding in their hands the fate of workers and executives alike. Often, cynics say, they are brought in to endorse a plan the chief executive and board intended all along - a plan that usually involves cutting jobs.
But their defenders - including many of the men and women who once worked for them - say they simply have an intense focus on serving their clients, and on finding solutions to the public and private sectors' most perplexing problems.
"One of the things consultants can do is help you broaden your scope and lift your eyes above the horizon," veteran executive and director Rod Eddington says.
A former consultant says: "They have a very intense focus on getting to the heart of a matter - working with the most senior decision makers and relentlessly winnowing their work to provide as sharp a point of view [as possible]. They really do stand or fall on the basis of the quality of their work."
Bain and Co has been hired by Fairfax, while BCG is examining NAB's cost base. In recent times, management consultants have tackled everything from potential changes at Wesfarmers' pokie machine operations - a job handed to BCG last year - to McKinsey's Project Oyster at Pacific Brands, a "transformation" that involved outsourcing production and ditching brands.
One big transformation job by McKinsey was Project Breakout at ANZ in the early 2000s, which aimed to reshape the bank's "political and bureaucratic" culture. McKinsey, with KPMG, was also hired in 2010 to produce an implementation study on the national broadband network. The price tag: $25 million.
Indeed, depending on the number of consultants deployed and the time taken on a job, the fees can mount to tens of thousands of dollars a day, and reach into the tens of millions of dollars for a project.
But while their job partly involves steering clients through change, the world is changing around the consultancy firms, too.
They are having a good year, but upstarts are encroaching onto their turf. "The consulting arms of the big four accounting firms have closed the gap on them," Beaton Research + Consulting founder George Beaton says. "And new forms of competitor are coming along."
Big companies, baulking at the fees and looking to cut costs, have also become smarter and more discerning about how they use consultants.
Boral chief executive Mike Kane, for example, recently decided to hire one consultant from a leading firm to train his staff to carry out a cost-savings review, rather than a whole team. "I was prepared to pay for proven techniques and approaches and to have someone coaching and asking questions along the way, but I didn't want all of the identified cost savings going to pay for a team of consultants to do the job," he says.
The latest available accounts for two of the three top consultancy firms shows revenue has shot up in recent years.
Accounts lodged with the Australian Securities and Investments Commission show BCG's Australian earnings jumped by more than a third in two years - from $109.8 million in December 2009 to $149 million two years later. Net profit more than doubled to $12.5 million in the same period.
McKinsey Pacific Rim lifted revenue from $73.7 million in 2009 to $106.6 million in 2011, and net profit surged from $10.4 million in 2009 to $13.1 million in 2011.
A crucial part of the consulting groups' business model is their carefully burnished reputations as elite "thought leaders", set apart from the other firms, big and small, that make up the crowded consultancy sector.
Their "frameworks" are the stuff of corporate legend. BCG's Growth Share Index, for example, which dates to the 1970s, classifies assets as stars, cash cows, question marks and - for low-growth, low-market-share companies - dogs.
McKinsey's 7S framework urges companies to think differently about organisational issues, while its MACS framework, standing for Market Activated Corporate Strategy, is designed to help a company decide what businesses it should own.
The firms cultivate close relationships with top business schools and publish research - such as BCG's Value Creators rankings - to remain in the news. "These firms have been quite good at developing the idea that they are ahead of the curve, they come out with new innovative ideas, they all have magazines, they encourage their partners to write books," Chris Wright, of Sydney University's faculty of economics and business, says.
Over the years, they have helped shape public policy in areas such as industrial relations, productivity, education and manufacturing, through their work for governments, companies and industry groups such as the Business Council of Australia.
But it is, perhaps, through their powerful alumni that their presence is most felt.
McKinsey might have finished its national broadband network implementation report three years ago, but its DNA remains at the organisation, with one of its alumni, Siobhan McKenna, chairing its board, and another, Diane Smith-Gander, serving as a director.
Commonwealth Bank chief executive Ian Narev was straight out of McKinsey when he was recruited as the bank's head of strategy by Ralph Norris. ASX chief executive Elmer Funke Kupper and former BHP Billiton chief executive Marius Kloppers both did time at McKinsey, as did opposition environment spokesman Greg Hunt, and entrepreneur and former Victorian Labor MP Evan Thornley
BCG's alumni include Australia Post chief executive Ahmed Fahour, NAB finance executive director Mark Joiner and St George Bank chief executive George Frazis.
And Jetstar chief executive Jayne Hrdlicka worked at various stages for Bain, along with Pacific Equity Partners managing director Tim Sims - one of many former Bain consultants in private equity and PEP in particular.
Bain's most famous alumnus is former US presidential contender Mitt Romney.
"It's character building," says Victorian Liberal MP Alan Tudge, who worked at BCG. "It's a very satisfying role. You work incredibly hard and under intense deadlines, and it can become an all-encompassing job. There are very high expectations, and very high expectations from the clients, and a very strong professional drive to deliver for the clients."
The companies' burgeoning ranks of alumni reflect, in part, their high staff turnover - "every two years, half the people go", a former consultant estimates.
The long hours and relentless travel also mean many consultants leave when they find partners and have children, leading to the sector's reputation as a training ground and a young person's pursuit.
This intense work - and the relative youth of many consultants - leads to long-lasting friendships.
Despite the rumoured ruthless "up or out" policy of the groups - jettisoning consultants when their careers hit a rut - the firms take pains to keep in close touch with their alumni.
This has led to the perception that former consultants stick together, and dole out plum jobs to their old firms once they reach the top of the corporate or bureaucratic tree.
However, former consultants deny this. "Working the relationships is of course part of it but the executives' arses are on the line - they need to defend their choice of adviser," one says.
"Sure, it does give consulting firms great advantaging in getting future work if you help people who are leaving get jobs and they might become clients," another says. "But it can be a bit overrated. Some people say it's a secret society like the Freemasons. I have never felt obliged to do anything for an alumnus of the firm I worked for."
And says a third: "I still know a lot of people that I met when I was at [the firm]. It is not as though they are the reason I got a job or they get jobs because of that or that there's some kind of vast web of people [from the firm] running the country."
Yet the strength of the alumni relationships is clear when you track the career path of successful former consultants.
Some of them, having made an impression, stay behind when a consultancy has finished its project with a big company, or are hired years later. They, in turn, hire people they know and trust.
Hrdlicka's first client at Bain in Australia in the late '90s was a thirty-something Alan Joyce, then in charge of Ansett's route network.
After the consultancy gig for Ansett ended, the pair stayed in touch and, more than a decade later, Joyce, who by this time was Qantas chief executive, offered her a job in 2010 as head of strategy and information technology.
Hrdlicka's predecessor at Jetstar, Bruce Buchanan, had a five-year stint at BCG, during which he led the team that prepared the business case for Jetstar. Joyce and former chief executive Geoff Dixon asked him to stay on at Jetstar for six months, and it turned into an eight-year stint at the budget airline.
Ironically, the management consulting industry is itself being shaken up by new outfits with new operating models, which say they are making headway.
The new competitors include Internal Consulting Group, a two-year-old venture led by former Oliver Wyman consultant David Moloney, whose clients, he says, include most major blue-chip and government entities in Australia. "We would easily be one of the fastest growing companies in Australia and certainly the fastest growing consulting firm by any measure," Moloney says.
He points to a lack of innovation in the consulting sector, saying it has barely evolved since its beginnings in the 1940s.
On the one hand, Internal Consulting Group is a professional association for consultants - providing everything they once relied on a firm to give them, such as insurance, administrative support or even a desk if they wanted one. On the other, it is a consultancy one-stop-shop for clients, who can pick and choose which consultants they want to hire for specific projects.
Cast Professional Services, founded by former McKinsey Australia managing partner Adam Lewis and former BCG principal Cindy Carpenter, has a hand-picked network of about 40 freelance consultants on its books. The idea is to give both clients and consultants more flexibility, but with the partner-level oversight of a big consultancy firm. Since its launch almost three years ago, Cast's projects have included a corporate merger and strategy projects for big banks.
The new outfits are expanding as clients are closely examining their spending. Several companies have told Weekend Business they recently severed long-standing links with external consultants in an attempt to prune costs.
"A lot of businesses are looking very hard at consultancy spending across the board - from specific projects, to HR, to restructuring programs," a senior manager says. "If they are looking externally, it is on very limited terms, or they are doing it in house."
For the $200,000 to $250,000 a small project would cost through a consultancy, companies could put on skilled professionals to do the project, then keep them on to use in other parts of the business. A lot of companies are doing this, the manager says. "You'll find consultancies are doing it tough at the moment."
When Kane took up the role of CEO at Boral late last year, he knew one of his first big tasks was a cost review. He also knew the company needed help to do it - but he did not want a big team of external consultants coming in, and Boral could not afford it.
"Instead, I wanted our own people to take on the project and to own the decisions, and to be well-equipped to do the task," he says. This influenced his decision to choose one consultant at the "right" firm to come in and train Boral's staff.
Yet Boral, like many other big listed companies, also has a "handful" of executives and senior managers who have spent time in consultancies, whose skills Kane has called upon. "It's been very helpful to identify those individuals in the business and to leverage their skills and past experience," he says.
The elite consultancy groups have weathered bubbles and downturns, and watched competitors come and go. They rode the boom of the 1990s, somehow escaping the fallout from the collapse of Enron, McKinsey's client. They have survived the rapid growth of the IT consulting industry, which spawned giant listed consultancies such as Accenture. They withstood the tech wreck and the global financial crisis.
Even the imprisonment of former McKinsey global managing director Rajat Gupta, for insider trading while a board member at Goldman Sachs, appears to have barely tarnished their cachet.
Their longevity is a result of their reputation, their alumni insist. This, they say, is the greatest rebuttal to one of the common criticisms levelled at the firms - that they are unaccountable, expensive rubber stamps brought in to endorse management's plans.
"I'm sure there are times when a manager might have known what they want to do and they just want a rubber stamp," a consultant acknowledges. "Could that have occurred in some places? Yes, it probably could. You are just aware that when you are working with one of these particular firms, that firms that used to be viewed in a particular light no longer exist because they did something like that. You would get pressure from an executive that wanted a particular outcome. We would take it as a point of pride to resist it."
There is an old joke that consultants are paid to borrow your watch to tell you the time. "Well, yes," says one. "But if you walk in and the watch is in pieces all over the table, and there's no clocks in the room, putting it back together can be helpful."
McKinsey and Bain were unable to comment for this story. BCG declined to comment.
How they compare
Global revenue $6.6 billion
Boston Consulting Group
Global revenue $3.6 billion
Global revenue $2 billion
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