The Role of Networks in the Internationalization of Management Consulting Firms: A critical View on traditional Theory

Bachelorarbeit von Nils Laacks

Introduction:

The French economist Jean Fourastié had already predicted the expansion of the service sector in his early work in 1949. Accordingly, the economies of the developed countries were prognosticated a division into the three major branches agriculture, manufacturing and services with an increasing domination of the latter over time. In fact, the actual growth of the tertiary sector even surpassed Fourastié’s expectations. ‘Knowledge-intensive business services constituted the fastest growing sector in Western economies at the end of the twentieth century’. Within this group of knowledge-intensive business services management consulting represents one of the fastest growing business models.

Before the first economic slowdown in the consulting industry started in 2000, the global market for advisory services had grown at rates between 10 and 15 percent. In Europe, the turnover of the consulting sector rose about twenty-seven percent annually during the second half of the nineties. Growth today represents one of the key success factors in the consulting business and firms have to reach certain growth rates in order to stay competitive. There are mainly two different strategies for enterprises to achieve the goal of prosperous growth. Firms can either follow the strategy of diversification or internationalization.

An increasing number of consulting firms decides to expand business activities into international markets in order to stay competitive and take advantage of new possibilities associated with globalization. Empirical studies have shown that the propensity of firms to internationalize not only accounts for large multinational corporations but also for small and medium-sized firms. Therefore, scientists and economists have put attention to the internationalization efforts of management consulting firms. Nevertheless, scientific literature about the internationalization of these business models is still scarce. Most of the existing theories are based on empirical findings that refer specifically to material goods and are thus often criticized for not adequately reflecting the unique characteristics of services.

Numerous internationalization theories have been developed during the last forty years. While common theories focus on aspects such as transaction costs or knowledge about a particular market, approaches that are more recent underline the central role of relationships and international networks.

In my study, I will challenge systematically the traditional approaches of internationalization and examine if a more complex view has to be favored. This relates specifically to the role networks play these days in the internationalization process of management consulting firms and the way this is being reflected in different theoretical frameworks.

In the first part, I will give some general definitions of key terms that represent the basis of my analysis. The following section cites some of the particularities of the industry as evidence for the high environmental uncertainty on the management consulting market.

Subsequently, the main internationalization theories are introduced and critically reviewed in reference to their transferability to the service sector and the respective consideration of networks. Do the prevailing internationalization approaches still reflect the altered conditions of today’s economy, particularly those in the service sector? Which theoretical framework does recognize the specific characteristics of management consulting services in the most appropriate way?

Afterwards, different motives for the internationalization of management consulting firms are reviewed before I will conclude the main part with different market entry strategies. Finally, I will reiterate the main points and assess the implications for future theory and research.

Table of Contents:

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Chapter 3.3.1, Institutional Problems:

One reason for the industry’s strong dependence on factors such as trust and reputation is the missing status of a true profession. Because the title ‘consultant’ is not legally protected, there exist no accepted quality standards and only low entry barriers. The lack of a professional status has cleared the way for dubious service suppliers who damaged the image of the whole consulting sector.

It is widely agreed that firms have less problems to acquire future assignments if there is an institutional arrangement such the status as profession. ‘Where no such profession exists, such as in management consulting, it becomes much more critical for the firm to develop and promote its own culture, norms, and reputation in such a way that the firm name can serve as the quality guarantee, rather than the profession’.

The management consulting firms and their associations such as FEACO in Europe or the BDU in Germany have insistently tried to establish professional and ethical standards in order to come closer to the status of a real profession. In 1998, the BDU therefore introduced the Certificate of Management Consulting (CMC) for individual consultants. However, the significance of this certificate is low due to the denied acceptance on the part of the largest forty consulting firms. It is quite apparent that the leading firms are not interested in protecting titles, and further pursue a policy that is based on individual selection and training methods. Although many experts recommend further efforts towards the obtainment of the status of profession, the strongest resistance is encountered from the industry itself.

Chapter 3.3.2, Transactional Problems:

As already mentioned, consulting is defined as ‘credence good’ whose quality is uncertain not only before but also long after the purchase. It is very hard for the client to calculate the impact of the service before it has been implemented. At the moment of transaction, i.e. when the contract about the provided service is signed, the consultant possesses relevant information that the client is unaware of. Consequently, the market for consulting services is characterized through information asymmetries and the client is exposed to a high uncertainty. Reputation and the size of the service supplier are criteria that help reducing the client’s insecurity .

In addition to information asymmetries, the mutual dependency from client and consultant is a further factor for transaction-based uncertainty. Because consulting services are usually only produced in collaboration with the client, the whole communication process between the individual consultant and the client is essential for the success of a project and shows the consultant firms’ high dependency on qualified individuals. Furthermore, recent studies have shown a shift in significance from firm-related reputation to person-related reputation, which further underlines the meaning of the transaction process for a successful assignment.

As will be outlined in the following section, the particularities of consulting services have a great impact on all stages of the internationalization process of consulting firms.

Chapter 4, Internationalization Theories:

The beginning of capital market liberalization in the 1970s and the following development towards a global world market have set the stage for the emergence of a vast number of internationalization theories. Most authors agree that multinational enterprises need firm-specific advantages in order to compensate the higher costs of doing business in a different country. These firm-specific advantages are commonly believed to derive from economies of scale or economies of scope.

The underlying findings of most frameworks are based on empirical research illustrated by manufacturing firms. However, service firms are very different from manufacturing businesses and it is mostly impossible to generate similar fixed cost degression effects due to the high dependence on individual skills and, in the case of management consulting, the low level of standardization. The following sections therefore aim at analyzing the adaptability of some common internationalization theories on service firms.

In the past, some multinational actors in the consulting market have successfully standardized part of their services according to ‘best practice’ models. However, the professionalization on the part of the clients has made necessary more individual business solutions. On the side of management consulting suppliers, the belief that today’s complexity of management problems requires more individual solutions has also won increasing recognition during the last years.

The fact that there are successful global suppliers on the market today in spite of the low level of standardization points to the existence of other success factors and mechanisms than in the manufacturing industry.

In order to obtain a more detailed picture of these success factors the most influential internationalization theories and their respective shortcomings are presented in the following section.