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Multi-level marketing

keywords: multi-level marketing, word of mouth, pyramid selling, referral marketing
Multi-level marketing (MLM) is a marketing strategy in which the sales force is compensated not only for sales they personally generate, but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the participant's "downline", and can provide multiple levels of compensation.[1] Other terms for MLM include pyramid selling,[2][3][4][5][6] network marketing,[7][8][9] and referral marketing.[10]
Most commonly, the salespeople are expected to sell products directly to consumers by means of relationship referrals and word of mouth marketing.[1] Some people use direct selling as a synonym for MLM, although MLM is only one type of direct selling, which started centuries ago with peddling.[1][7][11]
MLM companies have been a frequent subject of criticism as well as the target of lawsuits. Criticism has focused on their similarity to illegal pyramid schemes, price fixing of products, high initial entry costs (for marketing kit and first products), emphasis on recruitment of others over actual sales, encouraging if not requiring members to purchase and use the company's products, exploitation of personal relationships as both sales and recruiting targets, complex and sometimes exaggerated compensation schemes, the company making major money off its training events and materials, and cult-like techniques which some groups use to enhance their members' enthusiasm and devotion.[10][12]
In contrast to MLM is single-level marketing, where the salesperson is rewarded for selling the product directly to the consumer.[13]

Direct selling, network marketing, and multi-level marketing

Network marketing and Multi-level marketing have been described by author Dominique Xardel as being synonymous, and as methods of direct selling.[1] According to Xardel, direct selling and network marketing refer to the distribution system, while the term "multi-level marketing" describes the compensation plan.[1] Other terms that are sometimes used to describe multi-level marketing include "word-of-mouth marketing", "interactive distribution", and "relationship marketing". Critics have argued that the use of different terms and "buzzwords" is an effort to distinguish multi-level marketing from illegal Ponzi schemes, chain letters, and consumer fraud scams.[14] Some sources classify multi-level marketing as a form of direct selling rather than being direct selling.[13][15][16]
The Direct Selling Association, a lobbying group for the multi-level marketing industry, reported that in 1990 twenty-five percent of members used MLM, growing to 77.3 percent in 1999.[17] Companies such as Avon, Electrolux, Tupperware,[18] and Kirby all originally used single level marketing to sell their goods and later introduced multi-level compensation plans.[19] By 2009, 94.2% of members were using MLM, accounting for 99.6% of sellers, and 97.1% of sales.[20] The DSA has approximately 200 members [21] while it is estimated there are over 1,000 firms using multi-level marketing in the United States alone.[22]

History

There is a large amount of debate as to when multi-level marketing started; some say it started in the 1920s[23], 1930s with Nutrilite, 1940s with the California Vitamin Company[24], 1960s[25], and even as late as the 1970s[26]

Setup

MLM binary tree structure. The blue individual will receive compensation from the sales of the downline red members.

Independent, non-salaried salespeople of multi-level marketing, referred to as distributors (or associates, independent business owners, dealers, franchise owners, independent agents, etc.), represent the company that produces the products or provides the services they sell. They are awarded a commission based upon the volume of product sold through their own sales efforts as well as that of their downline organization.
Independent distributors develop their organizations by either building an active customer base, who buy direct from the company, or by recruiting a downline of independent distributors who also build a customer base, thereby expanding the overall organization. Additionally, distributors can also earn a profit by retailing products they purchased from the company at wholesale price.

Income levels

Several sources have commented on the income level of specific MLMs or MLMs in general:
  • The Times: "The Government investigation claims to have revealed that just 10% of Amway's agents in Britain make any profit, with less than one in ten selling a single item of the group's products."[27]
  • Scheibeler, a high level "Emerald" Amway member: "UK Justice Norris found in 2008 that out of an IBO [Independent Business Owners] population of 33,000, 'only about 90 made sufficient incomes to cover the costs of actively building their business.' That's a 99.7 percent loss rate for investors."[28]
  • Newsweek: based on Mona Vie's own 2007 income disclosure statement "fewer than 1 percent qualified for commissions and of those, only 10 percent made more than $100 a week."[29]
  • Business Students Focus on Ethics: "In the USA, the average annual income from MLM for 90% MLM members is no more than US $5,000, which is far from being a sufficient means of making a living (San Lian Life Weekly 1998)"[30]
  • USA Today has had several articles:
  • "While earning potential varies by company and sales ability, DSA says the median annual income for those in direct sales is $2,400."[31]
  • In an October 15, 2010 article, it was stated that documents of a MLM called Fortune reveal that 30 percent of its representatives make no money and that 54 percent of the remaining 70 percent only make $93 a month. The article also states Fortune is under investigation by the Attorneys General of Texas, Kentucky, North Dakota, and North Carolina with Missouri, South Carolina, Illinois, and Florida following up complaints against the company.[32]
  • A February 10, 2011 article stated "It can be very difficult, if not impossible, for most individuals to make a lot of money through the direct sale of products to consumers. And big money is what recruiters often allude to in their pitches." [33]
  • "Roland Whitsell, a former business professor who spent 40 years researching and teaching the pitfalls of multilevel marketing": "You'd be hard-pressed to find anyone making over $1.50 an hour, (t)he primary product is opportunity. The strongest, most powerful motivational force today is false hope."[33]

Legality and legitimacy

United States of America

MLM businesses are known to operate in all 50 U.S. states of the United States of America.[citation needed] New businesses may use terms such as "affiliate marketing" or "home-based business franchising". Many pyramid schemes try to present themselves as legitimate MLM businesses.[11] However, there are many people as well as courts who maintain that all MLMs are essentially pyramid schemes even if they are legal.[10][34][35][36]
The U.S. Federal Trade Commission (FTC) states "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people - except perhaps those at the very top of the pyramid - end up empty-handed."[37]
In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:
Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.[38]
The Federal Trade Commission warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."[39] and states that research is your best tool, giving eight steps to follow:[39]
  1. Find — and study — the company’s track record
  2. Learn about the product
  3. Ask questions
  4. Understand any restrictions
  5. Talk to other distributors (beware of shills)
  6. Consider using a friend or adviser as a neutral sounding board or for a gut check
  7. Take your time
  8. Think about whether this plan suits your talents and goals

Criticism

The Federal Trade Commission issued a decision, In re Amway Corp., in 1979 in which it indicated that multi-level marketing was not illegal per se in the United States. However, Amway was found guilty of price fixing (by effectively requiring "independent" distributors to sell at the same fixed price) and making exaggerated income claims.[40][41]
The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically. The FTC also warns that the practice of getting commissions from recruiting new members is outlawed in most states as "pyramiding".[42] In April 2006, it proposed a Business Opportunity Rule intended to require all sellers of business opportunities—including MLMs—to provide enough information to enable prospective buyers to make an informed decision about their probability of earning money. In March 2008, the FTC removed Network Marketing (MLM) companies from the proposed Business Opportunity Rule:
The revised proposal, however, would not reach multi-level marketing companies or certain companies that may have been swept inadvertently into scope of the April 2006 proposal.[43]
Walter J. Carl stated in a 2004 Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985), pyramid schemes (Fitzpatrick & Reynolds, 1997),[44] or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999), such as the questionable use of evangelical discourse to promote the business (Hopfl & Maddrell, 1996), and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)".[44][45] In China, volunteers working to rescue people from the schemes have been physically attacked.[46]
MLM's are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms.[47] There are even claims that the success rate for breaking even or even making money are far worse than other types of businesses:[48][49][50] "The vast majority of MLM’s are recruiting MLM’s, in which participants must recruit aggressively to profit. Based on available data from the companies themselves, the loss rate for recruiting MLM’s is approximately 99.9%; i.e., 99.9% of participants lose money after subtracting all expenses, including purchases from the company."[48] In part, this is because encouraging recruits to further "recruit people to compete with [them]"[10] leads to "market saturation."[12] It has also been claimed "(b)y its very nature, MLM is completely devoid of any scientific foundations."[51]
Another criticism is that MLM has effectively outlived its usefulness as a legitimate business practice. The argument is that, in the time when America was a series of relatively small, isolated towns and rural areas not easily accessible to small companies, MLM was a useful way to let people know of and buy products or services. But the advent of internet commerce, with its ability to advertise and sell directly to consumers, has rendered that model obsolete. Thus, today, nearly all modern MLMs ostensibly sell vastly overpriced goods and services (if there even is a real product or service involved at all) as a thin cloak of legitimacy, while their members are driven to recruit even more people into the MLM, effectively turning these programs into pyramid schemes.[35]
Because of the encouraging of recruits to further recruit their competitors, some people have even gone so far as to say at best modern MLMs are nothing more than legalized pyramid schemes[10][34][35][36] with one stating "Multi-level marketing companies have become an accepted and legally sanctioned form of pyramid scheme in the United States"[34] while another states "Multi-Level Marketing, a form of Pyramid Scheme, is not necessarily fraudulent."[36]
In October 2010 it was reported that multilevel marketing companies were being investigated by a number of state attorneys general amid allegations that salespeople were primarily paid for recruiting and that more recent recruits cannot earn anything near what early entrants do.[52]

See also

Notes

  1. ^ a b c d e Xardel, Dominique (1993). The Direct Selling Revolution. Understanding the Growth of the Amway Corporation. Blackwell Publishing. pp. 1–4. ISBN 978-0-631-19229-9.
  2. ^ Edwards, Paul (1997). Franchising & licensing: two powerful ways to grow your business in any economy. Tarcher. p. 356. ISBN 0-87477-898-0.
  3. ^ Clegg, Brian (2000). The invisible customer: strategies for successive customer service down the wire. Kogan Page. p. 112. ISBN 0-7494-3144-X.
  4. ^ Higgs, Philip; Smith, Jane (2007). Rethinking Our World. Juta Academic. p. 30. ISBN 0-7021-7255-3.
  5. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. p. 4. ISBN 0-566-08281-0.
  6. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1-84480-162-4.
  7. ^ a b Vander Nat, Peter J.; Keep, William W. (2002). "Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes". Journal of Public Policy & Marketing 21 (1): 139–15. doi:10.1509/jppm.21.1.139.17603.
  8. ^ Mendelsohn, Martin (2004). The guide to franchising. Cengage Learning Business Press. p. 36. ISBN 1-84480-162-4.
  9. ^ Kitching, Trevor (2001). Purchasing scams and how to avoid them. Gower Publishing Company. p. 4. ISBN 0-566-08281-0.
  10. ^ a b c d e Carroll, Robert Todd (2003). The Skeptic's Dictionary: A Collection of Strange Beliefs, Amusing Deceptions, and Dangerous Delusions. John Wiley & Sons. pp. 235–36. ISBN 0-471-27242-6. Retrieved 2009-06-29.
  11. ^ a b "Pyramid Schemes". FTC. May 13, 1998. Retrieved 2009-06-24.
  12. ^ a b "What's Wrong With Multi-Level Marketing?". Vandruff.com. Retrieved 2009-06-29.
  13. ^ a b (Edwards, Paul; Sarah Edwards, Peter Economy (2010) Home-Based Business For Dummies, 3rd Edition pg 38-39 Wiley ISBN 978-0-470-53805-0
  14. ^ Charles W. King; James W. Robinson (2000). The New Professionals. Prima Publishing. p. 80. ISBN 0-7615-1966-1.
  15. ^ "Person to person" sales plans... "dream" opportunity or business nightmare? Amway Ad LIFE Feb 27, 1970
  16. ^ Brown Caryne (1992) "Door-to-door Selling Grows Up" Black Enterprise Vol. 23, No. 5 (Dec 1992); Page 76
  17. ^ Michael L. Sheffield (Feb/Mar 1999). "Comp Plan Conversion:Direct Sales to MLM Compensation Plans". Direct Sales Journal (citing Neil Offen, president of the Direct Selling Association)
  18. ^ Zoe Brennan (January 18, 2007). "How Tupperware has conquered the world". The Daily Mail. Retrieved May 19, 2009.
  19. ^ Edwards, Paul; Sarah Edwards, Peter Economy (2009) Home-Based Business for Dummies Wiley
  20. ^ US Direct Selling in 2009. Direct Selling Association. 2010.
  21. ^ "Direct Selling Organization Membership". Direct Selling Association. Retrieved April 29, 2011.
  22. ^ Zig Ziglar; John P Hayes, PhD (2001). Network Marketing for Dummies. Hungry Minds. ISBN 0-7645-5292-9.
  23. ^ Pareja, Sergio (2008) "Sales Gone Wild: Will the FTC's Business Opportunity Rule Put an End to Pyramid Marketing Schemes?" McGeorge Law Review, Vol. 39, No. 83
  24. ^ Attri, Rekha (2011) "A Study of Consumer Perceptions of the Products Sold Through Multilevel Marketing" Prabandhan & Taqniki, Management Research Journal, Vol. 5, No. 4, pp. 97-103
  25. ^ Stockstill, Lowell E. (1985) "Multilevel Franchise or Pyramid Scheme?" Journal of Small Business Management, Vol. 23
  26. ^ Gummessonm, Evert (1994) "Making Relationship Marketing Operational" International Journal of Service Industry Management 5:5 pg 5-20
  27. ^ Brown, David (November 27, 2007). "Marketing group merely ‘selling a dream’". The Times. Retrieved July 13, 2009.
  28. ^ Berkowitz, Bill (Jan 28, 2009). "Republican Benefactor Launches Comeback". Inter press service. Retrieved July 11, 2009. (in reference to BERR vs Amway (Case No:2651, 2652 and 2653 of 2007) in point of objectionability"c")
  29. ^ Tony Dokoupil (August 2, 2008). "A Drink’s Purple Reign". Newsweek. Retrieved 2009-07-17.
  30. ^ Ryan (Editor), Leo; Wojciech, Gasparski (Editor); Georges, Enderle (Editor) (2000). Business Students Focus on Ethics (Praxiology): The international Annual of Practical Philosophy and Methodology Volume 8. New Jersey: Transaction Publishers. p. 75. ISBN 0-7658-0037-3.
  31. ^ Peterecca, Laura (September 14, 2009). "What kind of business do you want to start?". USAToday (Gannett Company). pp. 4B. Retrieved Sept 14, 2009.
  32. ^ O'Donnell, Jayne (October 15, 2010). "Fortune Hi-Tech: American dream or pyramid scheme?". USAToday (Gannett Company). pp. 6B. Retrieved October 1, 2011.
  33. ^ a b O'Donnell, Jayne (February 10, 2011). "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USAToday (Gannett Company). Retrieved April 5, 2011.
  34. ^ a b c Coenen, Tracy (2009). Expert Fraud Investigation: A Step-by-Step Guide. Wiley. p. 168. ISBN 0-470-38796-3.
  35. ^ a b c Ogunjobi, Timi (2008). SCAMS - and how to protect yourself from them. Tee Publishing. pp. 13–19.
  36. ^ a b c Salinger (Editor), Lawrence M. (2005). Encyclopedia of White-Collar & Corporate Crime 2. Sage Publishing. p. 880. ISBN 0-7619-3004-3.
  37. ^ "FTC Consumer Alert; Lotions and Potions: The Bottom Line About Multilevel Marketing Plans". FTC. January 2000. Retrieved 2001-03-26.
  38. ^ Kohm, James A. (January 14, 2004). RE: Staff Advisory Opinion - Pyramid Scheme Analysis (reprint). Federal Trade Commission.
  39. ^ a b Facts for Consumers; The Bottom Line About Multilevel Marketing Plans and Pyramid Schemes Federal Trade Commission
  40. ^ Richard Eisenberg (June 1, 1987). "The Mess Called Multi-Level Marketing With celebrities setting the bait, hundreds of pyramid-style sales companies are raking in millions, often taking in the gullible". CNN Money.
  41. ^ In re Amway Corp., 93 F.T.C. (1979).
  42. ^ "Multilevel Marketing Plans". FTC Consumer Alert. November 1996. Retrieved 2008-05-07.
  43. ^ "FTC Press Release".
  44. ^ a b "FalseProfitsHomePage". Falseprofits.com. Retrieved 2010-03-05.
  45. ^ Carl, Walter J. (2004) "The Interactional Business of Doing Business: Managing Legitimacy and Co-constructing Entrepreneurial Identities in E-Commerce Multilevel Marketing Discourse" Western Journal of Communication, Vol. 68.
  46. ^ Hu Yongqi. "Going against the slippery slope of a pyramid scheme". China Daily.
  47. ^ Bloch, Brian (1996) "Multilevel marketing: what's the catch?" Journal of Consumer Marketing 13:4 pp. 18-26.
  48. ^ a b Taylor, Jon M. (2002). "Comparing Recruiting MLM’s with No-product Pyramid Schemes, and with Gambling". Consumers Awareness Institute. Retrieved 2011-04-28.
  49. ^ FitzPatrick, Robert L. (August 4, 2002). "The 10 Big Lies of Multi-Level Marketing". Consumers Awareness Institute. Retrieved 2009-06-25.
  50. ^ Cruz, Joan Paola; Camilo Olaya (2008) "A System Dynamics Model for Studying the Structure of Network Marketing Organizations"(peer reviewed paper that refers uses Taylor as references)
  51. ^ Sandbek, Terry Ph.D. Brain Typing: The Pseudoscience of Cold Reading American Board of Sport Psychology
  52. ^ "Multilevel marketing or 'pyramid?' Sales people find it hard to earn much". USAToday. 10 February 2011. Retrieved 3 March 2011.

Stairstep breakaway plan

This type of multi-level marketing compensation plan is characterized by having representatives who are responsible for both personal and group sales volumes. Volume is created by recruiting and by retailing product. Various discounts or rebates may be paid to group leaders and a group leader can be any representative with one or more downline recruits. Once predefined personal and/or group volumes are achieved, a representative moves up a step. This continues until the representative "breaks away" from their upline. From that point on, the new group is no longer considered part of his upline's group - hence they are a "breakaway". Most stairstep commission plans also have some small pool commissions or an infinity commission, but these commissions are typically a very small percentage of the overall payout.[1] Stairstep Breakaway plans are not level based.
Modern network marketing companies began to deal directly with all the distributors due to advances in technology. Previously, commission plans were calculated by hand and only the top sales leaders were paid by the company. These leaders then calculated what their downlines should be receiving and paid them accordingly. The stairstep evolved in the computer age; it was designed to be calculated by the computer. It is, in fact, almost too complex to be calculated by hand.[2]
  • The oldest and largest network marketing companies, like Amway and Tupperware use this compensation model.
  • Inserting and removing ranks, such as supervisors, assistant managers or regional managers and national managers, is very easy to do.
  • Changing percentages is very easy to do. Such changes may reward more distributors or may reward the fewer higher-level distributors.

Disadvantages

The chief disadvantage of stairstep breakaway plans is the tendency for inventory loading. Unless the company aggressively monitors them, distributors will tend to coach their subordinate distributors to amass inventory to gain rank.(citation?)
A stairstep plan, on average, pays the highest earners (those at the top of an organization) more money. Whereas a unilevel plan typically pays the mid range saleforce more.[3]

Notes

  1. ^ "Understanding Multi-Level Commissions".
  2. ^ Rawlins, Mark (2002). Understanding Multi-Level Commissions and Their Role in a Successful Company.
  3. ^ "How to Effectively Test Commission Plans".

Management consulting

Source Wikipedia
Keywords: management consulting, change management
Management consulting is the practice of helping organizations to improve their performance, primarily through the analysis of existing organizational problems and development of plans for improvement. Organizations may draw upon the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants' specialised expertise.
As a result of their exposure to and relationships with numerous organizations, consulting firms are also said to be aware of industry "best practices", although the transferability of such practices from one organization to another may be limited by the specific nature of situation under consideration.
Consultancies may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, or operational improvement services. Management consultants often bring their own proprietary methodologies or frameworks to guide the identification of problems, and to serve as the basis for recommendations for more effective or efficient ways of performing work tasks.

History

Management consulting grew with the rise of management as a unique field of study. The first management consulting firm was Arthur D. Little, founded in 1886 by the MIT professor of the same name and was incorporated in 1909.[1] Though Arthur D. Little later became a general management consultancy, it originally specialised in technical research. Booz Allen Hamilton was founded by Edwin G. Booz, a graduate of the Kellogg School of Management at Northwestern University, in 1914 as a management consultancy and the first to serve both industry and government clients. In 1926, James O. McKinsey, professor of Managerial Accounting at the University of Chicago Booth School of Business, founded McKinsey.
The first wave of growth in the consulting industry was triggered by the Glass-Steagall Banking Act in the 1930s, and was driven by demand for advice on finance, strategy, and organization.[2] From the 1950s onwards consultancies not only expanded their activities considerably in the United States but also opened offices in Europe and later in Asia and South America. After World War II, a number of new management consulting firms formed, bringing a rigorous analytical approach to the study of management and strategy. Work carried out at McKinsey, Boston Consulting Group, AT Kearney, Booz Allen Hamilton, and the Harvard Business School during the 1960s and 1970s developed the tools and approaches that would define the new field of strategic management, setting the groundwork for many consulting firms to follow. In 1983, Harvard Business School's influence on the industry continued with the founding of, the now defunct, Monitor Group by six professors.
The industry experienced significant growth in the 1980s and 1990s, gaining considerable importance in relation to national gross domestic product. In 1980 there were only five consulting firms with more than 1,000 consultants worldwide, whereas by the 1990s there were more than thirty firms of this size.[3]
An earlier wave of growth in the early 1980s was driven by demand for strategy and organization consultancies. The wave of growth in the 1990s was driven by both strategy and information technology advice. In the second half of the 1980s the big accounting firms entered the IT consulting segment. The then Big Eight, now Big Four, accounting firms (PricewaterhouseCoopers; KPMG; Ernst & Young; Deloitte Touche Tohmatsu) had always offered advice in addition to their traditional services, but from the late 1980s onwards these activities became increasingly important in relation to the maturing market of accounting and auditing. By the mid-1990s these firms had outgrown those service providers focusing on corporate strategy and organization. While three of the Big Four legally divided the different service lines after the Enron scandals and the ensuing breakdown of Arthur Andersen, they are now back in the consulting business.
The industry stagnated in 2001 before recovering after 2003, with a current trend towards a clearer segmentation of management consulting firms. In recent years, management consulting firms actively recruit top graduates from Ivy League universities, Rhodes Scholars[4], and students from top MBA programs [5].

Function

The functions of consulting services are commonly broken down into eight task categories.[4] Consultants can function as bridges for information and knowledge, and that external consults can provide these bridging services more economically than client firms themselves.[5]
Marvin Bower, McKinsey's long-term director, has mentioned the benefits of a consultant's externality, that they have varied experience outside the client company.[6]
Consultants have specialised skills on tasks that would involve high internal coordination costs for clients, such as organization-wide changes or the implementation of information technology. In addition, because of economies of scale, their focus and experience in gathering information worldwide and across industries renders their information search less costly than for clients.

Salary

Consulting salary fluctuates year by year, location by location, and sometimes individual by individual. Location is a particularly important driver of compensation. The figures shown below are compensation ranges of management consultant (including salary plus all bonuses) at various level from typical American firms: [7][8]
  • Undergraduate degree: $60,000 - $100,000 USD
  • Advanced degree (MBA, JD, PhD, or MD): $140,000 - $200,000 USD
  • Engagement manager/Project leader: $220,000 - $300,000 USD
  • Associate principal/Senior project leader: $350,000 - $500,000 USD
  • Partner/Principal: $500,000 - $850,000 USD
  • Senior partner/Director: $1,000,000+ USD

Approaches

In general various approaches to consulting can be thought of as lying somewhere along a continuum, with an 'expert' or prescriptive approach at one end, and a facilitative approach at the other. In the expert approach, the consultant takes the role of expert, and provides expert advice or assistance to the client, with, compared to the facilitative approach, less input from, and fewer collaborations with the client(s). With a facilitative approach, the consultant focuses less on specific or technical expert knowledge, and more on the process of consultation itself. Because of this focus on process, a facilitative approach is also often referred to as 'process consulting,' with Edgar Schein being considered the best-known practitioner. The consulting firms listed above are closer toward the expert approach of this continuum.
Many consulting firms are organized in a structured matrix, where one 'axis' describes a business function or type of consulting: for example, strategy, operations, technology, executive leadership, process improvement, talent management, sales, etc. The second axis is an industry focus: for example, oil and gas, retail, automotive. Together, these form a matrix, with consultants occupying one or more 'cells' in the matrix. For example, one consultant may specialize in operations for the retail industry, and another may focus on process improvement in the downstream oil and gas industry.

Specialization

Management consulting refers generally to the provision of business services, but there are numerous specialties, such as information technology consulting, human resource consulting, virtual management consulting and others, many of which overlap, and most of which are offered by the larger diversified consultancies. So-called "boutique" consultancies, however, are smaller organizations focusing upon one, or just a few of, such specialties.
The 1990s saw an increase in what has been termed a 'future-based' approach. This emphasised language and alignment of people within an organization to a common vision of the future of the organization, as set out in the book "Three Laws of Performance". The essential concept here was that the way people perform is seen to correlate to the way that world occurs for them, and that future-based language could alter the way the future actually occurs for them. These principles were increasingly employed in organizations that had experienced a market transition or a merger requiring the blending of two corporate cultures. However, towards the end of the 1990s the approach declined due to a perception that the concept outlined in this book did not in practice offer added value to organizations.

Current state of the industry

Management consulting has grown quickly, with growth rates of the industry exceeding 20% in the 1980s and 1990s ([9]) As a business service, consulting remains highly cyclical and linked to overall economic conditions. The consulting industry shrank during the 2001-2003 period, but grew steadily until the recent economic downturn in 2009. Since then the market has stabilised.
Currently, there are three main types of consulting firms. Large, diversified organizations, Medium-sized management consultancies and boutique firms that have focused areas of consulting expertise in specific industries, functional areas, technologies, or regions of the world.

Revenue model

Traditionally, the consulting industry charged on a time and materials basis, billing for staff consultants based upon the hours worked plus out-of-pocket expenses such as travel costs. During the late 1990s and early 2000s, there was a shift to more results-based pricing, either with fixed bids for defined deliverables or some form of results-based pricing in which the firm would be paid a fraction of the value delivered. The current trend seems to favor a hybrid with components of fixed pricing and risk-sharing by both the consulting firm and client.

Trends

The use of management consultancy is becoming more prevalent in non-business fields including the public sector; as the need for professional and specialist support grows, other industries such as government, quasi-government and not-for-profit agencies are turning to the same managerial principles which have helped the private sector for years.
An industry structural trend which arose in the early part of the 21st century was the spin-off or separation of the consulting and accounting units of the large diversified professional advisory firms most notably Deloitte, Ernst & Young, PwC and KPMG. For these firms, which began operation as accounting and audit firms, management consulting was a new extension to their organization. But after a number of highly publicised scandals over accounting practices, such as the Enron scandal, these firms began divestiture of their management-consulting units, to more easily comply with the tighter regulatory scrutiny that followed. In some parts of the world this trend is now being reversed where the firms are rapidly rebuilding their management consulting arms as their corporate websites clearly demonstrate.

Rise of internal corporate consulting groups

Added to these approaches are corporations that set up their own internal consulting groups, hiring internal management consultants either from within the corporation or from external firms' employees. Many corporations have internal groups of as many as 25 to 30 full-time consultants.
Internal consulting groups are often formed around a number of practice areas, commonly including: organizational development, process management, information technology, design services, training, and development.

Advantages

There are several potential benefits to employing internal consultants:
  • If properly managed and empowered, internal consulting groups evaluate engagement on projects in light of the corporation's strategic and tactical objectives.
  • Often, the internal consultant requires less ramp up time on a project due to familiarity with the corporation, and is able to guide a project through to implementation — a step that would often be too costly if an external consultant were used.
  • Internal relationship provides opportunities to keep certain corporate information private.
  • It is likely that the time and materials cost of internal consultants is significantly less than external consultants operating in the same capacity.
  • Internal consulting positions can be used to recruit and develop potential senior managers of the organization.
Note: Corporations need to be conscious of and consistent with how internal consultant costs are accounted for on both a project and organizational level to evaluate cost effectiveness.
  • Internal consultants may be specifically suited to either:
  1. Lead external consulting project teams, or
  2. Act as organizational subject matter experts ‘embedded’ with external consulting teams under the direction of organizational management.
A group of internal consultants can closely monitor and work with external consulting firms. This would ensure better delivery, quality, and overall operating relationships.
External firms providing consulting services have a dichotomy in priority. The health of the external firm is in aggregate more important than that of their client (though of course the health of their client can have a direct impact on their own health).

Disadvantages

  • The internal consultant may not bring the objectivity to the consulting relationship that an external firm can.
  • An internal consultant also may not bring to the table best practices from other corporations. A way to mitigate this issue is to recruit experience into the group and/or proactively provide diverse training to internal consultants.
  • Internal consultants may face corporate politics just as any group in an organization.
  • Where the consulting industry is strong and consulting compensation high, it can be difficult to recruit candidates.
  • It is often difficult to accurately measure the true costs and benefits of an internal consulting group.
  • When financial times get tough, internal consulting groups that have not effectively demonstrated economic value (costs vs. benefits) are likely to face size reductions or reassignment.

Government consultants

The use of management consulting in governments is widespread in many countries but can be subject to misunderstandings and resultant controversy.

United States

In the US, Computer Sciences Corporation's Federal Consulting Practice, Booz Allen Hamilton, and Deloitte Consulting LLP, amongst others, have established a profile for consulting within government organizations and functions.

United Kingdom

In the UK, the use of external management consultants within government has sometimes been contentious due to perceptions of variable value for money. From 1997 to 2006, for instance, the UK government reportedly spent £20 billion on management consultants,[10] raising questions in the House of Commons as to the returns upon such investment[11]
The UK has also experimented with providing longer-term use of management consultancy techniques provided internally, particularly to the high-demand consultancy arenas of local government and the National Health Service; the Local Government Association's Improvement and Development Agency and the public health National Support Teams; both generated positive feedback at cost levels considered a fraction of what external commercial consultancy input would have incurred.

India

In India, NABARD Consultancy Services (NABCONS) provides consultancy services in the field of agriculture, rural development and management. It is the wholly owned subsidiary of National Bank for Agriculture and Rural Development (NABARD)which is the apex bank of the country with regard to agriculture and rural development. NABARD is owned by Government of India and Reserve Bank of India. Agriculture Finance Corporation Limited provides consultancy mainly to governments and related institutions.

Criticism

Despite consistently growing revenues, management consultancy also consistently attracts a significant amount of criticism, both from clients as well as from management scholars.
Management consultants are sometimes criticized for overuse of buzzwords, reliance on and propagation of management fads, and a failure to develop plans that are executable by the client. A number of critical books about management consulting argue that the mismatch between management consulting advice and the ability of executives to actually create the change suggested results in substantial damages to existing businesses. In his book Flawed Advice and the Management Trap, Chris Argyris believes that much of the advice given today has real merit. However, a close examination shows that most advice given today contains gaps and inconsistencies that may prevent positive outcomes in the future.[12]
More disreputable consulting firms are sometimes accused of delivering empty promises, despite high fees, and charged with "stating the obvious" or lacking the experience upon which to base their advice. These consultants bring few innovations, instead offering generic and "prepackaged" strategies and plans that are irrelevant to the client’s particular issue. They may fail to prioritise their responsibilities, placing their own firm’s interests before those of the clients.[13]
Another concern is the promise of consulting firms to deliver on the sustainability of results. At the end of an engagement between the client and consulting firms, there is often an expectation that the consultants will audit the project results for a period of time to ensure that their efforts are sustainable. Although sustainability is promoted by some consulting firms, it is difficult to implement because of the disconnect between the client and consulting firms after the project closes.
Further criticisms include: disassembly of the business (by firing employees) in a drive to cut costs, only providing analysis reports, junior consultants charging senior rates, reselling similar reports to multiple clients as "custom work", lack of innovation, overbilling for days not worked, speed at the cost of quality, unresponsive large firms and lack of (small) client focus, lack of clarity of deliverables in contracts, not customizing specific research report criteria and secrecy.[14]

Professional qualifications

There are several qualifications that can lead to becoming a management consultant; they include:

See also

Areas of action of consulting

Related culture

References

  1. ^ "Scatter Acorns That Oaks May Grow". MIT Institute Archives & Special Collections. Retrieved 9 March 2011.
  2. ^ Kipping, M. 2002. "Trapped in their wave: the evolution of management consultancies," in T. Clark and R. Fincham (eds.). Critical Consulting: New Perspectives on the Management Advice Industry. Oxford: Blackwell, 28-49.
  3. ^ Canback, S. 1998a. Transaction Cost Theory and Management Consulting: Why do Management Consultants Exist?, Working Paper 9810002. Henley Management College, Henley-on-Thames.
  4. ^ Turner, A. N. 1982. "Consulting is more than giving advice," Harvard Business Review 60/5: 120-9.
  5. ^ Bessant, J., and H. Rush 1995. "Building bridges for innovation: the role of consultants in technology transfer," Research Policy 24: 97-114.
  6. ^ Bower, M. 1982. The Will to Manage. New York: McGraw-Hill.
  7. ^ [1]
  8. ^ [2][3]
  9. ^ O'Mahoney 2010[O'Mahoney, J. (2010) Management Consulting. Oxford University Press]
  10. ^ Consultants are costing us billions - and for what?
  11. ^ "Central government's" (PDF). British House of Commons. Retrieved 2007-10-19.
  12. ^ Argyris, Chris. Flawed Advice and the Management Trap. New York: Oxford University Press, USA, 2000. Print.
  13. ^ "Management Consulting'?".
  14. ^ Johann Hari: The management consultancy scam

Further reading

  • Christopher D. McKenna (2006). The World's Newest Profession: Management Consulting in the Twentieth Century. Cambridge University Press.
  • Joe O'Mahoney (2006). Management Consultancy. Oxford University Press.Link here.

External links

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