The Development of the Management Consultancy Business: A Co-evolution Perspective

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FIRST DRAFT Please do NOT quote!

The Development of the Management

Consultancy Business: A Co-evolution

Perspective

Matthias KIPPING*

and

Ian KIRKPATRICK**

Paper for the 4 th Critical Management Studies Conference, Cambridge 4-6

July, 2005

SUB THEME 18

Professions and Knowledge Based Occupations

* Universitat Pompeu Fabra, Department of Economics and Business, Ramon Trias

Fargas, 25-27, 08005 Barcelona, Spain. Tel: +34 93 542-2874; e-mail:[email protected]

** Leeds University Business School, University of Leeds, Leeds LS2 9JT, UnitedKingdom. Tel: + 44 113 233-2611; e-mail: [email protected]


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The Development of the Management Consultancy Business: A Co-

evolution Perspective

Introduction

The last decades of the twentieth century witnessed rapid, some would say

explosive, growth of the management consulting industry. Until the economic

slowdown started in 2000, the worldwide market for consulting products increased

between 10 and 15 per cent per year, considerably more than global gross domestic

product (Kennedy Research; Armbrster and Kipping 2003). In 2003 the total revenue

of the top ten consulting firms stood at over $51 billion (Consulting News). Growth inthis business coincides with the creation of some mega-firms with several ten

thousands of consultants in a sector traditionally, and still, dominated by small and

medium-sized consultancies. It also coincides with rising numbers employed in the

industry (see Graph 1 on the number of employees in the top 30 firms worldwide

between 1983 and 2003) and in the range of products and services offered. But

perhaps most significant of all is the unprecedented level of visibility and influence

now enjoyed by consultants, especially large global consulting firms. Public andprivate organisations now routinely employ consultants for a range of tasks (Saint-

Martin 2000; Macdonald). Consultants, one might say have successfully embedded

themselves in the interstices of organizations (Ruef 2002).

In recent years there has been considerable debate about how we should account for

this dramatic change. The functionalist literature (as well as much of the business

press) has identified changes in the world economy often summarized under the

globalisation label as the major explanatory variable (e.g. Rose and Hinings 1999).

From this perspective the growth in management advice is regarded as a direct and

unproblematic consequence of changing corporate demands and the need to enhance

competitive performance. Against this is a more influential critical literature that

draws attention to the discursive strategies of the consultants themselves (cf. Fincham

1999, Fincham and Clark 2002). Exploiting the control needs of managers,

consultants, it is argued, have been able to create a constant demand for their services,

by repeatedly launching new management ideas or fashions. Building on the earlier


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work of Abrahamson (1991, 1996) and Sturdy (1997), Kieser (2002) has probably

gone furthest in this direction. He argues that by exploiting the fears and uncertainties

of, consultants have created a kind of addiction, turning managers into marionettes

on the strings of their fashions (Kieser 2002: 176; cf. also Ernst and Kieser 2002).

Kieser and many others see this as part of a wider phenomenon, often labelled the

management fashion industry, which also includes individual management gurus,

the popular management press and the business schools (e.g. Abrahamson 1991;

Micklethwait and Wooldridge 1996; Suddaby and Greenwood 2001).

In this paper our goal is to identify some limitations of this critical literature and

suggest an alternative. A key problem, we argue is that the fashion based view of

consulting development actually fails to explain longer-term historical trends in the

growth of the sector. If, as this approach suggests, consultants (and others) constantly

launch new fashions, which replace the previous ones, all they tend to do is ensure

their survival and the stability of demand. This however conflicts with historical

research, which reveals not only tremendous growth since the beginning of the

twentieth century (and thus in the overall size of the fashion market), but also more

fundamental shifts in the focus of consulting work itself (Kipping 2002). A further

concern stems from the heavy emphasis in this literature on the strategic agency of

consultants and their organisations in promoting change. As is widely noted this leads

to managers being portrayed as gullible victims of the fashion setters, who have no

functional reasons for hiring consultants other than their own fear of control loss.

More generally, there is a tendency to either ignore or push into the far distance the

defining context of broad structural and historical conditions that shape the practice

of consultants (Fincham 1999). The dominant image is of knowledge entrepreneurs

who possess almost boundless freedom to discursively shape organisational realities,

client demands and, indeed, client identity itself.

The remainder of this paper contains four main parts. Following an examination of the

fashion-based approaches, part two will explore some criticisms of it in more detail.

Here we will highlight, in particular, the legacy of neo-institutional theory. This

approach, although useful, overstates the importance of legitimacy and makes it more

difficult to account for the growth and the change the consultancy industry hasexperienced in the longer term. Part three of the paper will then consider ways in


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which existing accounts of the historical development of management consulting

might be strengthened by drawing on insights from and critical realism and

applications of it such as co-evolution theory (Reed, 2001; Lewin et al., 1999). This

literature we argue, offers a more robust theoretical platform for understanding the

growth and the changes of the consulting sector, one that emphasises both the

importance of structural conditions and the entrepreneurial role of consultants. In the

final section we seek to illustrate this drawing on a range of historical sources. We

suggest that consultants exploited opportunities provided by structural changes in

managerial capitalism (cf. Chandler 1977, 1990; Whittington and Mayer 2000;

Fligstein 1990, Barley and Kunda 1992) and the availability of new control

technologies. While this allows for some human agency (consistent with the view

that consultants play an entrepreneurial role in generating client dependency), it also

recognizes how this process was enacted within and shaped by a particular historical

context.

Fashion theory and the success of consultants

As suggested earlier an increasingly dominant theme in the critical literature on

management consultants is on the symbolic nature of consultant strategies and

consultancy as a powerful system of persuasion (Fincham, 1999: 335). The emphasis

is on the strategies of consultants seeking to demonstrate their worth and effectively

shaping demand for their services. Central to this are wider notions of management

fashion and their cyclical development over time. In common with other agents such

as gurus business schools and mass media organisations consultants are seen as key

players in the commodification of management ideas and their dissemination as

fashions (Abrahamson 1996). In the process they redefine the collective beliefs of

managers about which techniques are most effective and progressive. Hence the

power of consultants stems from their ability to generate demand for their own

services by creating management fashions, by stirring up managers fear and greed

and by making managers dependent on them (Kieser 2002: 182).

Three types of explanation are commonly given for why clients might succumb tothese influences (Clark and Salaman 1998).First are characteristics of management


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work that heighten managers receptivity to the ideas of consultants. Many accounts

emphasise deep-rooted psychological needs of managers and in particular the way

consulting interventions help satisfy albeit only temporarily a desire for order,

security and control (Huczynski 1993; Sturdy 1997). Abrahamson (1996) adds to this,

focusing on how new fashions may satiate managers need for status and help to

overcome a sense of boredom and frustration. Finally are more concrete reasons for

the willingness of managers to bring in consultants. Kieser (2002) notes how a desire

for control is also linked to the struggle for careers (cf. also Jackall 1988) and to the

pressure on managers to demonstrate performance to external stakeholders by

mimicking so called best practices of competitors within the same field (the

bandwagon effect).

A second kind explanation focuses on the packaging of management fashions and the

performances of consultants themselves. According to Kieser (2002: 174) the most

successful fashions are those that create the perception of enhanced control and

promise quantum leaps in performance. This in turn is linked to the skill of fashion

setters, for example, in designing new products that are perceived as relevant, familiar

and simple to understand. Others have focused on the use of rhetoric and how

consultants trade on their expertise and reputational capital (Clark 1993). Finally is an

influential trend in this literature that focuses on the way management gurus and

consultants manage impressions through their use of language, demeanour and glossy

documents. Clark (1995: 18) for example describes a range of communication

techniques whereby consultants construct a reality which persuades clients that they

have purchased a high quality service.

Thirdly, commentators have focused on the importance of the socio-economic and

cultural context within which management theories emerge and become widely

adopted (Clark and Salaman 1998: 144). Abrahamson (1996: 255) for example

argues that the selection of fashions and their success is conditional on particular

social norms of rationality and progress and also by mangers collective aesthetic

tastes (cf. also Greatbatch and Clark 2002). Others note how those ideas that prevail

tend to be those that best capture the zeitgeistor spirit of the times. (Grint, 1994;

quoted in Clark and Salaman 1998: 144). Finally, links are drawn in some accounts tothe broader political, technical and economic context in determining the success of


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fashion. Here, as we shall see below, attempts have been made to like the ebb and

flow of new fashions to economic cycles and perceived gaps in performance (Barley

and Kunda 1992; Abrahamson and Fairchild 1999).

Many of these strands have been brought together in the more recent work of Rovik

(2002) who identifies what he calls the secrets of the winners. Based on an empirical

study of three successful ideas, Management by objectives, Total quality

management, and Development dialogue (the latter being a Scandinavian adaptation

of American performance appraisal systems), he outlines a number of factors that

contribute to this success (ibid.: 142-143). Included on this list are characteristics on

the way consultants package ideas and their approach towards presenting them. From

a theoretical perspective, Rovik (2002: 143-144) rejects what he calls a possible

rationalistic-instrumental explanation, i.e. the suggestion that the winning ideas are

simply the best management tools. He also questions the metaphysical-inspired

belief that organizations are more or less helpless captives of theZeitgeist, and

consequently, that a recipe that gains wide acceptance is an idea whose time has

come. Instead Rovik advocates what he calls a sociological-institutional paradigm.

On the one hand, he highlights the social construction through the process of

definition and presentation. On the other hand he presents a modified view of neo-

institutional theory. The latter suggests that organizations can gain legitimacy

adopting ideas from the institutional environment, which does include management

consultants. According to Rovik, it is also necessary that the recipes themselves have

been legitimized in terms of norms and values that are widely accepted among the

worlds organizations.

The thrust of this literature is therefore to stress how management consultants and

other fashion entrepreneurs can, under certain conditions shape demand for their

services. This literature also suggests that over time clients become increasingly

dependent on consultants generating (from the perspective of the latter) a virtuous

circle in which demand begets more demand. Kieser (2002: 176) for example talks

about the planned obsolescence of consulting products and how consulting always

plants the seed for new, deeper-reaching uncertainties. Of course none of this means

that consultants are always successful. It is often acknowledged that managers mayresist change and are far from being gullible or mindless consumers (Sturdy 1997;


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Fincham 1999). As we shall see the market for management fashion is itself unstable

and subject to frequent and cyclical changes. But while these limits on the power of

consultants are recognised the dominant theme of this literature is emphasise their

primary entrepreneurial role in driving change through the mobilisation and

legitimation of fashion.

Some limitations of the fashion approach

This account of change what we might loosely describe as fashion theory has some

obvious merits. Unlike the earlier, more practitioners based literature the focus is not

entirely prescriptive. Nor is it assumed that consulting interventions are always

functional and that they will result in positive organisational learning. Instead, as we

have seen, this literature is more critical in drawing our attention to the role of power

and self-interest in shaping practice. The risks as well as benefits of consulting

interventions are highlighted. And yet, while this theory and research has greatly

advanced our understanding, it suffers from a number of limitations. In what follows

we outline two main kinds of problem. First is the question of how far this approach is

helpful in explaining longer-term historical trends in the consulting industry. Second

are some more deeply rooted theoretical problems arising from the influence of

institutional theory and the relative neglect of defining context in accounts of change.

Accounting for l ong term trends

To illustrate the first problem it is useful to look briefly at the historical research

conducted on the development of management consulting since the early twentieth

century (e.g. McKenna 1995, 1997, Ferguson 2001, Kipping 1996, 1997, 1999, 2002).

This research draws our attention to three main characteristics of change.

Firstly, this research points to what, by any calculation, is the staggering rate of

growth of this sector over a relatively short time period. Firms, like McKinsey or

Booz-Allen & Hamilton that counted one or two dozens of consultants in the 1930s

(McKenna 1995), grew to several hundred by the early 1960s, with a significant

number located outside the US (Kipping 1999). Today the same firms employ severalthousand consultants. The industry leaders IBM, Accenture and Capgemini now have


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several tens of thousand employees. The available estimates for the past decades show

how overall employment among the largest thirty firms in the industry grew from

about 20,000 in the early 1980s to 430,00 at the beginning of the 21 st century (see

Graph 1). In terms of global revenues, growth has also been staggering. Table 1

indicates an increase in global revenues of the top ten worldwide management

consultancies from $160 million to $51.5 billion between 1973 and 2003. This

amounts to a more than 300 fold increase over the thirty-year period in nominal terms.

Even when inflation is taken into account, the compound annual growth rate is XX,

far beyond the growth of the world economy during the same time period.

TABLE 1 ABOUT HERE

This growth not only concerns the largest firms; there also seems to have been an

overall increase in the number of service providers in an industry still dominated by

individual practitioners and small and medium sized consulting firms (Keeble and

Schwalbach 1995; Crucini 2004). Moreover, it can only be partially explained by

globalisation, even if countries like Germany and Japan only experienced a significant

development from the 1970s and 1990s onwards, respectively (Kipping 2002b). The

dominant consulting firms were already operating at a global scale during the inter-

war period (Kipping 1999). Hence, one must look for other explanations for this rapid

growth. A key factor, for example, seems to be the proliferation of different kinds of

management consulting services including HR, operations management, strategy

and IT. Consultants to a certain extent managed to colonize the field of management

knowledge (Suddaby and Greenwood 2001).

However, and this the second important finding from the historical research, during

the 20th century the development of this sector has not been linear. Rather it has gone

through a number of distinct, albeit overlapping waves characterised by qualitatively

different kinds of management consultancy, focusing on different types of services

(Kipping 2002; cf. McKenna 1995, Ferguson 2001). According to Kipping (2002), the

dominant consultancies in the first wave provided services related to the scientific

organization of individual work and the productive process in factories and offices.

By contrast the most successful consultancies in the second wave concentrated onadvice to top management in terms of corporate strategy and structure. Finally, those


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in the still emerging third wave focus on the use of information and

communication technologies to control far-flung and extensively networked client

organizations. The main characteristics of each of these waves are summarized in

Table 2 [NOTE: Kippings analysis explicitly excludes HR consultancies, since these

were never a major concern for top management and never dominated the consultancy

industry in terms of reputation and visibility, even if some of them reached

considerable size, as shown in Table 1.]

TABLE 2 ABOUT HERE

The important point here is that these waves are not the result of short-lived

management fashions. Instead, they represent a considerable difference in the focus of

the consultancy services even if these also evolved within each of the waves (see

below). Thus, consulting in the first wave was oriented towards shop floor and

production management; second wave consultancies focused on the corporate level,

providing advice on organizational issues, planning and marketing even if they

sometimes also got involved in implementing them at lower levels of the

organization; third wave consulting consists mainly in implementing IT-based

management and control systems with the adaptation of organizational practices and

the corresponding training. For a number of reasons, related mainly to their reputation

and their own structure (Kipping 2002a), the dominant firm in one wave found it

difficult to retain their leadership position in the subsequent wave. Due to the overall

growth, their decline was initially relative and therefore difficult to perceive even

for industry insiders.

Thirdly, each of the waves identified above was not only characterised by different

populations of firms, but also by radically distinct approaches to organising consulting

work (Kipping and Kirkpatrick 2004). The first wave was made up primarily of

smaller engineering based firms that were highly decentralised in their organisation.

The second wave was dominated by larger one firm consultancies typified by the

model of McKinsey and its emphasis on partnership and strong corporate culture. The

current and still emerging wave is dominated by much larger global firms with

fairly formalized management structures and tools. Hence, one sees a marked shift inthe composition of this sector and the population of firms within it over time. As


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noted above, these populations were and are overlapping. There has been no

straightforward and immediate shift in populations. This fact is also to some extent

illustrated in Table 1 above. Among the top ten consultancies in 1973, those of the

second wave clearly dominate, but one can still see the tail end of the first wave (May

and Maynard). The data for 1993 and 2003, clearly show the rise of the third wave

with the IT firms only appearing in the final year. This leaves the second wave in

2003 in a similar position to the first wave in 1973 with only McKinsey remaining

among the top ten.

Some limits of fashion theory in explaining change

Returning to the matter in hand, our contention is that none of these longer-term

trends can be adequately explained by the fashion based approach. Firstly and most

obviously is the problem of how one should account for the rapid growth in the size

and scope of the management advice industry. As we saw the focus of the

management fashion literature is on how fashions come and go, following a kind of

bell shaped pattern. Implied by this is that fashion niches or fields exist in a state of

equilibrium. While there is a cyclical turnover of new ideas and products (each of

which dominates the market for a short time) the overall level of fashion that can be

consumed remains more or less the same. As Abrahamson and Fairchild (1999: 713)

put it: each fashion niche has a finite carrying capacity in terms of the number of

fashions it can sustain, because knowledge consumers can only attend to a limited

number simultaneously. It is also assumed that knowledge entrepreneurs (read

consultants) will fill these niches to near maximal capacity because of high financial

returns. Hence, this model assumes that fashion markets have a finite capacity both in

terms of the numbers of fashions and providers who can be accommodated. This

however seems to run counter to the historical evidence relating to the consulting

industry. As we saw, there has been a dramatic increase in the size of this market

measured in consultancy revenues and employment, in the number of providers and in

the overall demand for management fashion.

A second problem concerns how we account for broader, more qualitative, shifts in

the nature of consulting interventions over time. The fashion model as we saw draws

our attention to constant flux and change in management ideas and fads, some ofwhich get recycled over time. This in turn has been explained in some accounts by


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changing cultural preferences and short-term economic cycles. But harder to

understand from this perspective are more fundamental breaks in the industry and

longer-term shifts in the emphasis and focus of consultants such as those described

earlier (also see Table 2). How, for example, do we account for the shift away from

production-centred, engineering-based services, focused primarily on the control of

labour, to an emphasis on corporate strategy in the 1960s? More recently, why have

we seen such a dramatic move across the industry towards the development of IT

related, or whole systems consulting products? The emphasis in the fashion based

approach on explaining historical change as a sequence of shorter term cycles

characterised by ebbs and flows of new management ideas makes it harder to

account for these more deep rooted, structural shifts in the nature and dynamics of the

consulting sector.

Finally, and closely related to the above, is the question of how one explains shifts in

the population of consulting firms over time. The fashion literature says very little

about this. Usually implied is a model of natural selection in which consulting firms

and other organisations (such as business schools) or individuals such as gurus

compete with each other in a fashion arena (Kieser, 2002; Rovik, 2002) even if

their competition also leads to a faster commodification of new management ideas

and a need to start the whole cycle again. Those firms (or populations) that survive are

by implication those most successful in articulating and disseminating new fashion.

Hence knowledge entrepreneurs thrive or falter on their ability to convince the

management audience why it is imperative that they should pursue certain

organizational goals and why their particular technique offers the best means to

achieve these goals (Clark and Greatbatch 2002: 129). But once again, while helpful

this kind of account is also limited. One problem is that it offers no explanation for

why entire populations of firms such as the engineering consultants that dominated

the industry until the 1960s failed to enter new markets and respond to new

fashions. Moreover, if there is a process of natural selection and, as we noted earlier,

fashion markets have a finite carrying capacity, then why is it that many older firms

managed to survive in the industry long after new fashions and products had become

dominant?

Theoretical Assumptions


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The fashion-based approach therefore runs into some difficulty when it comes to

accounting for longer-term trends in the management consulting business. Partly this

is because not much attention has been paid to these kinds of questions. However one

might also argue that these limitations arise from certain underlying theoretical

assumptions. Here we think it important to draw attention both to the influence of

mainstream institutional theory and to more general understandings of the structure

and agency.

The legacy of institutional theory

The influence of institutional theory has already been noted, especially with regard to

the work of Abrahamson (1996), Kieser (2002) and Rovik (2002). These authors

make effective use of concepts such as isomorphism to explain how dominant

management ideas get disseminated within fields (or niches). However, at the same

time, what they also take on board are some inherent difficulties of this approach,

most notably with regard to change. This is not to say that change is ignored. There is

considerable emphasis is on theorising change as a process of de-institionalisation

(Oliver 1992) in which established ideas (read fashions) loose their potency over time.

But what is much harder to explain from this perspective are other types of changes

underway in actors that may result in more profound transformations in fields, in

particular those involving the emergence of new populations or changes in field

boundaries (Dacin et al. 2002: 50). An assumption, often implicit, is that

organisational fields are relatively stable in their overall structure and membership

over time. As such the focus is primarily on accounting for changes such as the ebb

and flow of new fashions that occurwithin the basic parameters of a field, rather

than more fundamental breaks in the underlying rules of the game. While there has

been some attention given to the possibility of field re-composition (Reay and

Hinings, 2005), the mechanisms that bring about such epochal change are, as yet,

poorly understood.

A further problem is the tendency to overstate the importance of legitimation in

accounts of why managers buy consulting products. Within institutional theory,

although there is some recognition that both technical as well as institutional

pressures are likely to shape management practice (Powell, 1991, Oliver, 1992), mostattention is focused on the latter. This is also true of the fashion-based literature. Here


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as we saw the emphasis is on how managers use consulting products as a way of

increasing legitimacy, regardless of their impact on actual performance (Kieser, 2002;

Rovik, 2002). Now the problem here is not that legitimation is unimportant or even

that it is not a primary driver of fashion consumption. Rather the risk is that by

emphasising only this, we deny any space at all for efficiency considerations and how

these may also influence management decisions. As Wilkinson (1996: 435) suggests:

Contrary to institutional logic, business organisations are tools. They are

designed to serve a purpose, and while institutional acceptability is likely to have

some influence (consciously as well as unconsciously) on structure, it is unlikely

that considerations of legitimacy will be overwhelming in the face of competitive

pressures which may threaten not just institutionally defined success but the

organisations very survival.

The risk of drawing so heavily on institutional theory is therefore that one is left

arguing that the rapid increase in demand for consulting products is exclusively the

result of client uncertainties and desire to demonstrate legitimacy.

Assumptions about structure and agency

More fundamental difficulties arise from the theorisation of structure and agency in

much of the fashion-based literature. Earlier we noted that a key strength of this

approach is the focus on the entrepreneurial role of consultants in shaping demand

and bringing about change. Structural conditions are also recognised as important.

This is especially in the work of Abrahamson (1996: 255; also see Abrahamson 1997)

who links the rise and fall of new fashions to organizational performance gaps

opened up by real technical and economic environmental changes. However the

dominant tendency is to downplay this kind of explanation. External structures are

often pushed into the far distance and seen as very loose or general constraints on

action. Hence, Kieser (2002: 180) will only concede that there is something like a

general management discourse that influences the receptivity of managers to new

concepts, which come onto the market. Because of this primacy is given to the

agency of fashion setters in shaping demand and driving change. Thus, Rovik (2002:

143) attributes the success of management ideas to the process of definition andpresentation. Indeed, in some accounts (notably those that have taken a more


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discursive turn) the very ontological status of structure itself is questioned. Kieser

(2002: 180) for example, asserts that, there is no reality that can be perceived and

communicated outside language, pointing to how even business problems are

socially constructed. Clark and Salaman (1998: 157) go even further when they argue

that guru activitynot only constitutes organisational realities, it constitutes

managers themselves.

This tendency to downplay the role of the defining context, we argue, is problematic

for two main reasons. First, it may lead us to assume that management consultants

(and other fashion setters) have almost unlimited autonomy to shape reality. The

implication is that with the right techniques of persuasion and packaging almost any

management idea can be sold at any time, regardless of economic and technological

conditions. (As seen above, Rovik 2002: 143 explicitly excludes any role of the

Zeitgeist!). Also implied is that clients themselves are extremely gullible. From this

perspective consultants have the power to convince clients of virtually anything,

including nonexistent performance gaps andfantasy solutions narrowing these

imaginary gaps (Abrahamson and Fairchild, 1999: 734).

Secondly, without a full appreciation of the defining context, one is less able to

explain longer-term change. Focusing only on consulting strategy means that other

factors that stand partially outside this domain, which may affect the supply side or

give shape to client demands, tend to get lost or excluded from view. Thus, McKenna

(1995: 54-55) has linked the growth of management consulting in the mid-1930s to

the Glass-Stegall Act of 1933, which separated investment from commercial banking,

and SEC regulations. Banks no longer could offer consultancy-type services to their

clients or outside investors creating a vacuum, which was filled by existing service

providers such as Booz-Allen & Hamilton and James O. McKinsey and Company.

Similarly, it has been argued that the recent boom in the management advice industry

has much to do with corporate restructuring and the wider shift towards capital

extensive firms (Ackroyd 2002; Ackroyd and Lawrenson 1996). This in turn has led

to a marked increase in outsourcing activity, generating new opportunities for

providers of business services (including consultants). But this kind of analysis,

although useful, is largely absent from the fashion-based literature. Instead thetendency is to seek to explain change primarily as a result of consultant strategies and


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discursive practices. Exogenous conditions are either pushed into the far background

or, worse still, denied any existence at all.

An alternative view: Critical realism and co-evolution

These limitations of fashion-based accounts are, we suggest, sufficiently serious to

call for alternative ways in which one might theorise change In what follows we

outline in general terms what such an alternative might look like, drawing on two

bodies of literature. First is critical realism, a tradition of social theorising that in

recent years has become increasingly influential in organizational analysis (Reed,

2001; Vincent 2005; Greener 2005). Second, and more specifically related to the

question of change is a mainly US literature on the co-evolution of organisational

forms (Lewin et al. 1999; Lewin and Volberda 1999). Our intention here is to first

map out the key elements of these two approaches and then look at how they might be

applied to a historical analysis of the consulting industry and its development over

time.

Critical realism has been described as a third possibility for organisational analysis,

distinct from both positivism and post modernism (Ackroyd and Fleetwood 2000: 5).

At its core are a particular set of ontological assumptions, which state that that social

entities, or structures, (such as markets or gender relations) are real and exist

independently of our investigations, or even knowledge, of them. Hence unlike in

much postmodernist thinking, critical realists do not assert that the social world is

entirely socially constructed and socially determined. Reality cannot be reduced to

accounts of reality (ibid.: 11). Nor is it assumed, as in much research with a

positivist (or in history, empiricist) slant that overarching structures exist only if they

can be directly observed and somehow quantified. Instead the focus is on how social

events are shaped by deep structures with causal properties that endure regardless of

our cognisance of them.

This emphasis on the constitutive role of structure should not be taken as a form of

determinism. Central to critical realism is the idea that while structures have causalpowers (or emergent properties) these powers may not always be exercised. Much


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will depend on the particular historical context and on other countervailing forces that

mediate their influence (Sayer 1992). Added to this is the key role assigned to of

human agency in this approach. According to Archer (1995: 90) social interaction is

structurally conditioned but not structurally determined. The focus is not on how

structuresforce people to act in particular ways (one must reject the analogy of social

hydraulics) but how the causal powers of structure are enacted and realised through

the mediation of agents (ibid.: 195). Hence, what critical realism offers is a dynamic

account of how structures both constitute agency and are also reproduced and

(sometimes) transformed by it (Reed 2001: 215).

This understanding of the structure agency relationship is quite different from the one

implicit in the fashion-based literature described above. The emphasis is not on

untrammelled and unassisted creativity in which projects are designed in isolation

from the socio-cultural context (Archer 1995: 200). Rather, social agents are seen as

having capacities to innovate and bring about change, but only within the constraints

and opportunities afforded by the structural conditions they inherit. Critical realists

also differentiate between different kinds of agency. Some groups, with superior

resources, will be much better placed to take effective action and bring about either

the perpetuation of existing relationships or to induce change. In this connection,

Archer (1995: 258-60) distinguishes between what she identifies as corporate and

primary agents. Corporate agents are organised groups (such as consultants and

other professions) capable of articulating their interests and able to engage in

concerted action to either maintain the status quo or re-model structures. On the other

hand Primary agents are so-called such because they are not strategically involved and

have the capacity only to reproduce the conditions in which they exist.

A final and, given our interests in this paper, crucial set of insights to draw from this

approach are with regard to how one understands change. In stark contrast to the

functionalist assumptions that underpin much contemporary institutional theory

(where the stress on system integration) critical realism asserts that flux and change is

the normal state of human affairs. In any social system - even those that may

experience periods of relative stability tensions arise as a result of competing

interests and structural demands. Change also occurs as a consequence of theinteraction, over time, between structure and agency. According to Reed (2001: 216):


17/33

realist explanation is necessarily [] historical to the extent that it must

attempt to account for the complex interplay between structure and agency

as it works its way through reproducing and/or transforming the institutional

arrangements that temporarily precede them and the dialectical interaction

between them.

Archer (1995) usefully describes this process as a morphogenetic cycle, involving

three (analytically) distinct phases of: structural conditioning, social interaction and

structural elaboration. The former relates to the context that predates action (or social

interaction) and establishes constraints and opportunities for it. According to Archer

(1995: 201) emergent structures represent objective limitations upon the situations

and settings which agents can encounter shaping what resources are available to

them, their cultural beliefs and even perceptions of vested interest. However, as we

noted earlier, these structural conditions do not determine social interaction in a

straightforward way. Over time social interaction leads to the elaboration of

structures, either reproducing them (effectively maintaining the status quo) or, more

likely, modifying them in, largely unintended, ways. Hence, what is emphasised

above all in this approach is the importance of history and the dynamic nature of

social systems.

These ideas are not of course new and, arguably, have already influenced (if only

indirectly) a great deal of organisation theory (Ackroyd and Fleetwood 2000). One

example of this in the US, in the growing body of work focusing on the co-evolution

of organisational forms (Lewin et al. 1999; Lewin and Volberda 1999). This approach

arose from a desire to reintegrate accounts of organisational change that emphasise

either selection (namely population ecology theory) or management adaptation

(strategic choice theory). The result is an attempt to account for the development of

organisational forms (or indeed of entire sectors) as a process of co-evolution in

which both environmental conditions and organisational adaptations are important

(Lewin and Volberda 1999). As in critical realism, the focus is on looking at the

interaction between different levels of analysis (organisations, markets and national

systems) and on investigating change over longer time periods. Considerableemphasis is also given to path dependency and historical legacy in shaping the


18/33

development of organisational forms and sectors. Djelic and Ainamo (1999), for

instance, look at how pressures for globalisation in the world fashion industry (no

relation to the above) led to different kinds of responses in terms of organisational

change in Italy, France and the US. In each case structural pressures for more

flexible patterns of organising were mediated by organisations located within

national business institut ions and culture bound, management traditions. Hence, co-

evolution theory represents one way in which ideas, very similar to those articulated

by critical realists, might be applied in organisational analysis. The result is a more

satisfactory way of understanding historical change, one that focuses both on the role

of both corporate agency and founding conditions that shape and present opportunities

for that agency.

In the following section of the paper we use the development of the management

consultancy industry to illustrate how these ideas would help to explain the rise of

consultants and the changes within the industry in a long-term perspective.

Applying our approach to the development of consulting

We believe that the ideas introduced above are useful for helping to explain major

transformations in the consulting business as a function both of (a) structural

conditions, which opened opportunities for existing or new consultants to grow and

(b) the entrepreneurial activities of consultants themselves. The latter helped new

ideas to spread and, sometimes modified these ideas and, possibly, even the structural

context as a whole. In this section we will use some examples from the three waves

identified above to illustrate these mechanisms. For the structural changes that drive

the shifts in the management consulting business, we draw on existing studies of the

development of managerial capitalism (Chandler 1962, 1977, 1990; Whittington and

Mayer 2000; Fligstein 1990; Barley and Kunda 1992; for the dominant ideologies see

also Guilln 1994). While these accounts differ widely in their underlying

assumptions about the drivers of change, they show remarkable similarity in terms of

periodisation and the major characteristics of each period (see Appendix). We will

combine these with the literature on the history of management consulting to see howconsultants (some better than others) took advantage of new opportunities and, at the


19/33

same time, helped spread new ideas more widely and how they eventually become

victims of their own success, once structural conditions changed again.

The first wave of consulting development (scientific management) is clearly linked

to the emergence of the large-scale mass-producing manufacturing enterprise towards

the end of the 19th century (Chandler 1977) and the rise of engineers to positions of

responsibility (Fligstein 1990; Shenhav 1999). All this generated pressure for more

systematic organization of the production process and for new forms of control over

the large number of workers involved. This in turn created the opportunity for a new

type of consulting engineer, the so-called industrial engineer or efficiency expert.

There were a number of entrepreneurs exploiting these opportunities with new ideas.

Best know today is certainly Frederick Taylor even if as a consultant he was not

particularly successful. Others include Henry L. Gantt and his famous chart

(popularised in particular by Wallace Clark) and Lillian Gilbreth, famous for motion

studies. More successful as businessmen were Harrington Emerson, whose firm

already had several offices within the United States by the turn of the century, and

Charles E. Bedaux. A relative latecomer he founded his firm only in 1916 Bedaux

managed to create the most important scientific management consultancy worldwide

by the 1930s, employing several hundred consultants (compared to McKinseys 11

employees in 1936).

What were the reasons behind his success? First, according to all accounts, he was a

tremendous salesman. Probably more importantly, he had a great capacity for creating

publicity, for example by organizing semi-adventurous trips through the Rocky

Mountains (Champagne Safari) and the Sahara desert. (Incidentally, the negative

publicity due to his Nazi connections played an important part in his down fall in the

1940s). He also was excellent at building networks with important business people in

each of the countries where he operated; many of them sat on the board of his local

office (cf. Brownlow; Kipping 1999). He apparently managed to simplify the often

complex scientific management systems sold by his competitors. His system

standardized every task carried out in a factory (or an office) to 60B per hour, with

bonuses paid to workers achieving higher B values. This was not only highly intuitive

(an hour has 60 minutes), but also allowed managers to compare performances tasksacross a wide variety of tasks, allowing the system to be used in many organizations,


20/33

even those which were not strictly speaking mass producing. According to HBS

accounting Professor Thomas H. Sanders (1926: 19), this elasticity of the Bedaux

system, its serviceability for general management purposes, as well as for technical

cost-accounting purposes, rather than its effectiveness as an incentive wage system

was the reasons for its widespread application. Numerous articles in the journal of the

National Association of Cost Accountants (NACA) in the United States show indeed

how many companies used the system not only to reduce unit labour costs, but also

for cost accounting purposes.

Salesmanship was also behind the temporary success of another well-known first

wave consulting firm, George S. May. He literally bombarded potential clients with

letters extolling the virtues of hiring his consultancy, which experienced rapid growth

from the 1930s onwards, first in the United States and then abroad, making him one

of the largest service providers worldwide by the 1960 (cf. Table 1). But his promises

often went beyond what his consultants could deliver, which lead to complaints from

clients and even a number of law suits creating bad publicity not only for himself

but also for consulting as a whole (e.g. Tisdall 1982). Another consultant, H.B.

Maynard took a different route to success, one that took more account of worker

resistance against being measured. His so-called Methods-Time-Management (MTM)

system established optimal working time and procedures under laboratory conditions

before applying it to the shop floor. This approach allowed Maynard and the Methods

Engineering Council (MEC) to be particularly successful in countries with strong

labour influence, e.g. in Scandinavia, making him the largest American service

provider in Europe well into the 1970s (Kipping 1999; cf. Table 1).

Once involved with clients, all these consultants would first try to install their systems

in the whole organization, which sometimes could take years, depending on the

number of factories and the number of workshops in each of them, and then update it,

whenever manufacturing technology or process had changed. The success of Bedaux

and the other firms prompted both spin-offs and imitation again, spreading their

ideas more widely. Most scientific management consultancies started in the United

States, but expanded quickly to Europe and, often with the help of their multinational

clients, also into the colonies or former colonies, for example in the case of the BigFour British consultancies. But their fate changed when structural conditions


21/33

changed, leading top managers to focus less on operational matters. Since their modus

operandi in terms of their particular competences and their reputation were wedded to

optimising operational management, these consultancies gradually lost influence from

the 1960s onwards and most of them eventually disappeared. The opportunities

created by the new structural conditions were exploited by other consultancies from

the 1930s onwards.

Much of the literature on the evolution of capitalism sees the next major changes in

the inter-war period, but differs about the nature of these changes. Some others

highlight the rise of human relations ideologies, particularly from the 1930s (Barley

and Kunda 1992; Guilln 1994). Others point at organisational changes in the large

firms, namely the separation of strategic decision-making in a central office and

operational execution and control in product- or regionally-based divisions (Chandler

1962; Whittington and Mayer 2000). This so-called multi-divisional or M-form was

invented by a few large, diversified American companies, namely DuPont and GM,

in the inter-war period. It expanded more widely both in the United States and abroad

after the Second World War, before eventually degenerating into conglomerates,

marked by unrelated diversification. Fligstein (1990) links these changes with the rise

of marketing and sales-oriented managers in the interwar period and finance-oriented

managers from the 1950s onwards. One could also relate it to the growing importance

of the MBA degree after 1945 (cf. Engwall and Zamagni 1998), promoting and

implementing the idea of general management (cf. Locke 1996).

In the consulting industry, these changes find their reflection, on the one hand, in the

formation of the first human resources consultancies, like Hay, in the 1930s. On the

other hand, and more importantly, they also saw the gradual rise of a new generation

of management consultancies, providing advice to top management on strategic

issues. Again, entrepreneurial skills played an important role in determining which

firms were well placed to take advantage of these opportunities. One of the early

innovators was Chicago accounting professor James O. McKinsey, who saw

budgeting as a new form of controlling the growing and diversifying enterprises

(Wolf 1978). He wrote a highly influential book on this topic in 1922 and established

his own consultancy in 1926. In the early 1930s he developed a standardized tool, theso-called general survey to allow his consultants to make an initial assessment of


22/33

any company. As mentioned above, he also took advantage of the vacuum created

by the new banking regulation in the 1930s, offering his services to those who had

previously sought advice from their merchant banker. He even successfully asked

banks to provide him with introduction to their clients (McKenna 1995). Nevertheless

McKinsey remained somewhat stuck in the dominant tradition of consulting, linked to

existing professions like engineering and accounting. He also could not take his

consultancy further, since he left it in 1935 to join one of its clients and two years

later died of pneumonia.

The role to move management consulting beyond the realm of the existing

professions, to create its own professional identity (albeit modelled on the legal

profession), and to tie it firmly to top management decision-making fell to Marvin

Bower. Bower, who held both a law degree and an MBA from Harvard had joined

McKinsey in 1933. After McKinseys death, Bower and the other partners in the New

York office severed ties with the other offices and with the accounting and

engineering traditions, gradually building up what is still by many considered to be

the archetype of professional management or rather strategy consulting (cf. Bhide

1995, Edersheim 2004, Kipping and Kirkpatrick 2004). The cornerstone of this model

is the so-called one-firm policy: The whole partner group decides overall strategies

and policies, thus setting a fairly tight framework for the managers of each office;

new consultants become members of the firm, not of a particular office; and profits

are shared among all offices and partners. In the 1950s, the consultancy changed its

recruitment policy, taking advantage from the success of the MBA degree. Rather

than experienced executives, it hired recent MBA graduates who were charged out to

client firms at high rates based on the reputation of the consultancy as a whole rather

than their individual experience. They were also easier to mould into McKinseys

specific culture. Moreover, under Bower, McKinsey not only offered analytical tools,

like McKinseys general survey, but complete solutions. It actually became

instrumental in transferring the M-form to Europe, decentralising many large

European companies and equipping them with the planning and budgeting tools to run

a more decentralized operation (cf. Channon 1973; Dyas and Thannheiser 1976;

Whittington and Mayer 2000). The reliance on one major fashion proved

counterproductive in the long run. In the 1970s, when most companies haddecentralised their operations, the phone stopped ringing (McKenna 2000).


23/33

McKinsey had to look for new ideas and tools to offer to their clients, also because its

success had generated a large number of competitors, often offering new innovative

approaches, such as the Boston Consulting Group and its portfolio matrix (Bartlett

2000). One could argue that it is around that time when the whole cycles of

management fashions started, in particular with the best-selling bookIn Search of

Excellence, written by the McKinsey consultants Tom Peters and Robert Waterman.

As mentioned, McKinsey was not the only consulting firm benefiting from the

structural changes. Other firms, such as Arthur D. Little, a chemical research

company founded in 1893 (Kahn 1986),.also expanded their activities from the 1930s

onwards. While focussing mainly on contract research this firm had always offered

some advice. This activity expanded in particular after the Second World War, when

the consultancy became heavily involved in using operational research as a tool for

planning and control. One of its former consultants, Bruce Henderson left in 1963 to

set up the Boston Consulting Group (BCG), which became very successful based on

the use of other decision-making tools such as the portfolio matrix and the experience

curve (the latter apparently originally developed during the Second World War). In

1973, a former BCG consultant, William Bain, set up his own firm, mainly based on

the idea to help managers learn by shadowing them during a limited time.

All of these consultancies and their tools no longer focussed on controlling the output

of (shop floor or office) workers. Instead, they helped top managers retain control

over their expanding enterprises and the growing hierarchies of middle managers.

Consultants clearly helped to spread this new management model worldwide. They

also contributed to its downfall, by pushing the idea that management was a general

skill that could be applied to any kind of activity, thereby fomenting the formation of

conglomerates. And they also participated in the eventual demise of conglomerates

and managerial hierarchies by selling tools such as Overhead Value Analysis

(McKinsey) and Time-Based Competition (BCG) that helped reduce unproductive

management and administrative staff. However, it was different consulting firms that

benefited from the change in structural conditions, which came about from the 1980s,

following the success of the leaner Japanese competitors and the assertion of

shareholder rights against managerial prerogatives.


24/33

To respond to these new structural conditions, companies became leaner, removing

many layers of management, and smaller, concentrating on their core competencies

and outsourcing the rest. To operate successfully, these companies needed tools to

connect and control both their internal departments and their external networks. Since

these were IT based tools, those who could take advantage of the new conditions were

the large accounting and audit firms, who were among the earlier users of large IT

systems, as well as the hardware and software providers. While all of them had

traditionally offered some form of advice to their clients, they became major players

in the industry during the 1990s, also attracted by the higher margins in consulting.

Rather than designing the new systems, which was done by companies like SAP or

Oracle, they helped clients adapt their organizations to the system requirements, train

their staff etc.

It is more difficult to identify the major entrepreneurs among this new generation of

management consultants. One could mention Serge Kampf of Capgemini and Lou

Gerstner of IBM. Kampf left the French computer firm Bull in 1967 to set up the

software, data processing and consulting firm Sogeti, which grew through a long

series of acquisitions to become the worlds fourth largest consulting firm at the

beginning of the 21st century (Gaston-Breton, 1999). Gerstner, a former McKinsey

consultant, was instrumental in changing IBM from a production to a service

company a development completed by his success with the acquisition of the

consulting arm of PriceWaterhouseCoopers in 2002 and the sale of the PC division to

Lenovo of China in 2004. In general, what actually characterises these firms and

distinguishes them from those of the second generation is their systematic way of

generating and management knowledge. They do no longer rely on skilled

professionals, but on elaborate systems to capture, store and disseminate knowledge,

which allows them to hire young, inexperienced undergraduates and train them in-

house for the application of a standardised, but also highly specific set of blueprints

(cf. Kipping and Kirkpatrick 2004).

Given their worldwide presence (which predates their massive entry into the

consultancy business), these firms have been able to spread the new control

technologies (such as ERP) very fast around the globe. Since much of the structural


25/33

changes underlying the success of this third generation of consultancies are still

ongoing, it is too early to tell whether they will also fall victim to future changes.

The following table 3 summarizes the main results from this brief narrative, based

largely on the existing historical research. What it represents is an attempt to develop

a general illustration of how one might analyse change drawing on notions of critical

realism and co-evolution. The first three rows therefore relate to the structural

conditions that pre-date and contextualize the development of consultants. Here we

emphasise the nature of corporate firms and their organisation, the education and

orientations of clients and the availability of different kinds of control technology.

Following this the next three rows consider how consultants, as corporate agents,

were able to take advantage of these structural conditions, developing new tools and

methods of salesmanship to increase their influence. Finally we stress how, as a

consequence of this entrepreneurial activity, consultants played some role in

modifying their environment and generating client dependency.

TABLE 3 ABOUT HERE

Conclusion

Fashion theory, as we have called it in this paper, has made a very important

contribution to our understanding of the most recent growth of the management

consulting industry. It has highlighted the role of agency in developing and selling

new or repackaged ideas to unsuspecting managers, leading to a succession of

management fashions or fads. These have been observed empirically in the bell-

shaped curves depicting the growing and then declining popularity of these ideas.

Many authors in this literature suggest at least implicitly that these ideas have little

intrinsic value and only help consultants to maintain their own business. In this

scenario, managers benefit little if at all, possibly using the ideas to introduce

change, and certainly assuaging their own fears of control loss (callously exploited

by the consultants).


26/33

This depiction of managers as gullible victims of consultants and other fashion setters

has been much criticised in the literature (Sturdy, 1997; Fincham, 1999). However,

there has been little attempt to provide an alternative explanation for both the growth

and the changes in the management consulting industry during the last century. Nor

have some underlying theoretical assumptions in this approach been questioned, most

notably those arising from institutional theory. In this paper our aim has been to

address these deficiencies. In doing so we have also tried to suggest an alternative

way of investigating historical change, We have tried to provide such an alternative,

arguing that critical realism can help explain both by introducing a more balanced

view between structure and agency. Based on this theoretical foundation, we have

drawn on the historical literature to show how consultants benefited from changes in

the structure of capitalism and, in the process of spreading management ideas about

management, also helped to modify them (albeit at the margins). This process, we

suggest, was not linear (as might be implied in the fashion-based literature) but rathe r

involved periodic restructurings of the field of consulting itself. In each phase of

development successful consulting firms where to some extent victims of their own

success (locked into path dependent ways of working) and were unable to change

when structural conditions shifted again.

The narrative presented in this paper is of course limited in certain respects. Space

considerations mean that we have been able to talk only briefly about the structural

conditions that pre-figured the growth of consulting. Our narrative also focused only

on the most visible and most entrepreneurial consulting firms. What remains to be

investigated is how these changes affected the population of the firms in the

consulting industry as a whole. But these limitations aside what we have hopefully

been able to demonstrate in this paper is the usefulness of a different kind of

approach to researching change. What this involves is a need to recognise the

dynamic interplay between the corporate agency of consultants in developing fashion

and manufacturing demand and the broader structural context in which this activity

takes place.

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Table 1: Top ten global consultancies ranked by revenue (in million US dollar)

1973 163

1983 1,295

1993 10,576

2003 51,638

1 McKinsey&Company

45 ArthurAndersen

218 AndersenConsulting

2,720 IBM 14,900

2 Booz-Allen& Hamilton

18 Booz-Allen& Hamilton

210 McKinsey&Company

1,200 Accenture 8,909

3 Arthur DLittle

18 McKinsey&Company

145 Coopers& Lybrand

1,126 DeloitteToucheTohmatsu

6,075

4 Alexander

Proudfoot

18 Arthur D

Little

141 Ernst &

Young

981 Cap

GeminiErnst &Young

5,394

5 ScienceManagement

14 TowersPerrinForster &Crosby

120 MercerConsulting Group

908 CSC 3,170

6 George S.May

12 William M.Mercer

120 KPMGPeatMarwick

829 HewlettPackard

3,100

7 H.B.Maynard

12 PeatMarwickMitchell

112 Deloitte &Touche

825 McKinsey&Company

3,000

8 A.T.Kearney

11 Ernst &Whinney

85 PriceWaterhouse

736 BearingPoint

2,368

9 HayAssociates

8 Coopers &Lybrand

79 TowersPerrin

641 Mercer 2,364

10

CresapMcCormick

& Paget

7 AmericanManageme

nt Systems

65 Booz-Allen

Hamilton

610 LogicaCMG

2,358

Source: Consultants News


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Table 2. Three Waves of Consultancy Development in the 20th Century

Consultancy Focus

(Service Type)

Client Firm Type

(Locus of Action)

Overall Duration

Period of Dominance

Prominent

Consultancies

ScientificManagement

Production Unit 1900s-80s1930s-50s

Emerson, Bedaux,Big 4, Maynard

Strategy &Structure

Corporation(M-form)

1930s-??1960s-80s

BAH, McKinsey,ATK, ADL, BCG

Information &Communication

NetworkOrganization

1950s-??1990s-??

IBM, Accenture,Capgemini, DTT

Source: Kipping 2002


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Table 3: Consul tancy Development between Structure and Agency

Wave Scientific

Management

Strategy &

Structure

ICT-based

Networks

Period 1890s-1960s 1920s-2000s 1960s-

Structural

Changes

Firm focus Manufacturing Sales/Marketing Finance

Dominant Actors Engineers Managers (MBAs) Shareholders/CIO

Control

Technologies

Stop watch Punch-cards /

Mainframe

computers

PCs / Networks /

Intranet

Agency

Tools Time and motion

studies, payment-

by-results

General survey;

budget planning,

OVA

ERP, e-business,

CRM

Salesmanship Personal, heroic Professional Systematic;

Competence

Entrepreneurs Bedaux, May,

Maynard

McKinsey, Bower,

Henderson, Bain

Kampf, Gerstner

Modification of

structures

Control of workers

by managers;

Americanization

Control of

managers by plans,

budgets;

Americanization

Control over all

stakeholders,

including clients;

Japanization (?)

Documents

The Development of the Management Consultancy Business: A Co-evolution Perspective