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Internal vs. External Consulting: Which is Right for your Business?
When companies face opportunities such as business strategy development, process optimization, cost reduction and / or organizational designs (amongst others), they usually bring in help in the form of a management consultant. While an external consultant may have experience solving a variety of complex issues, from business strategy to streamlining operation processes, it can take an external consultant time to understand the nuances of the corporate culture (and often times the various group or departmental cultures), evaluate the situation, and develop the best-fit solution. In many cases the external consultant’s work will also be limited to the preparation of nicely bound reports full of charts, graphs, but lacking proper context for guidance with implementation. This has traditionally been the approach of some of the industry best known and most established consultancies.
Put more clearly, the issue is not a lack of guidance, but that the guidance lacks context. In effect, most consultants are able to recommend a solution and provide a roadmap for implementation. However, what is often missing from the equation is the degree to which the company culture and organization will be impacted by the project and, in turn, how this impact will affect implementation effort. Typically, these consultants advise client that implementation would be more successful if there is a comprehensive (expensive!!!) change management strategy and plan. If this is true, why do most business transformation programs not able to deliver the business benefits promised by their respective business case(s)? The problem is not change management – rather it is change management without organizational and cultural contexts. External consultants can be beneficial with building strategies and recommending solutions. What they often lack is an understanding of the client culture and more importantly how to best integrate change management into the existing culture. Typically, change management’s goal is to provide a structured method on what needs to be changed and how – paying limited attention to the existing culture (or cultures).
External consultants can be a valuable resource when a company needs an objective analysis of the situation or expertise in a specific area. At the same time, companies that have traditionally hired consultants are now finding that they could achieve a higher return on investments if they could build an internal consulting capability. This capability, coupled with external SMEs, could be deployed to deliver significant value compared with just hiring outside consultants. These companies realize that with the exception to the experience and knowledge of subject matter experts (SMEs), consulting firms, for the most part, share a common approach to delivery including:
- Assessment – understanding the situation and problem or opportunity that need to be addressed; building the business case to support the overall project
- Define – defining the strategic context, establish baseline and identify and prioritize opportunities
- Design – designing and building the solution and developing the implementation plans
- Implement – developing detailed implementation plans, deliver benefits and monitor process for optimization
The approach is typically wrapped by a project management and change management layer which is responsible for managing the day-to-day activities relating to the project. Additionally, this layer is also responsible for identifying and managing project risks and ensures that communication with stakeholders is properly managed.
Companies that have invested in internal consulting capabilities realize that the value of a consulting firm is directly correlated to the quality of their SMEs. Internal resources, if trained properly, can be just as effective (if not more) in managing and delivering projects. There are a host of benefits for companies that leverage this model including more efficient cost structure and an environment that challenges and motive employees to grow their careers. Many organizations have achieved significant results by leveraging their existing or building new internal consulting capabilities with external SMEs.
Where to Start?
William Trotter, Managing Director of the Association of Internal Management Consultants (AMIC), noted that one of the most rapidly evolving areas of internal consulting is change management. This is significant because change management plans from external consultants have been found to deliver limited value without organizational context. And organizational context is best framed and managed by internal employees.
As this capability grows, these internal consultants can be trained to workingng with executives at the top-level of organizations to develop and implement transformative process and integrate these new processes into existing systems throughout every functional area of the firm, from corporate strategy to such functional areas as finance, human resources, marketing, and technology.
According to Tim Creasey, Prosci Director of Research and Development, internal consultants play an important part in fostering the human side of change within organizations--- developing and implementing structural change and processes (e.g. organizational realignment). In many cases, internal consultants come from backgrounds within human resources or organizational development.
Most internal consultants utilize a facilitative consulting approach and act as advisor and coach to the project team. They help develop and deliver change management strategy to the team who are then responsible for implementation. This is a concept that is widely used – both externally and internally. External consultants tend to have better facilitative skills than their internal counterparts. The main reason is that external consultants can start with a white board and facilitate the design from the ground-up. Internal consultants typically start with some form of bias. Additionally, their knowledge of the organization often prevents them from asking the ‘dumb’ questions – questions that often drive significant value. As per Mr. Creasey of Prsoci, the role of the Internal Consultant consists of three primary tasks:
- Educate about change management: Internal consultants define change management as the processes utilized to foster the human side of organizational transformation.
- Develop strategy and plans: As facilitators, internal consultants collaborate with project team members to develop change management strategy and create possible solutions.
- Enable the project team to begin the process of change management. While the internal consultant has responsibility for developing strategy and planning, actual execution will be carried out by project team members.
As an example, we can review one finding from Prosci’s 2007 Best Practices in Change Management benchmarking report which included 426 participants from 56 countries. Participants were asked who in the organization they prefer to be notified by regarding upcoming changes. The results showed two strong preferences as to senders:
- Top executives to explain the reasons for the change in terms of corporate mission and strategy;
- Direct supervisors about specific departmental impacts of the change (how it will impact day-to-day-work).
Notably, these employees did not want to be notified about the change from the internal consultant or even the human resource department. The role of the internal consultant is to enable the “actual doers” to deliver the change message by suggesting tools of communication; e.g. arranging corporate events, creating presentations, divide the audience into departments and form discussion roundtables.
Building an internal consulting team may seem an expensive process but the benefits to be gained can far outstrip the costs involved.
Case study: Laura McCoy was initially resistant to building an internal consulting team. Why take on the added expense when individual project teams seemed perfectly able to resolve departmental issues. She then reviewed the figures for the internal consulting team’s first year performance. The figures were showing that the efforts of the group were significantly improving net revenue as the internal group was able to participate in three projects with departments that were undergoing significant realignment. High profile executives, who were also initially reluctant to the idea, were now extolling the virtues of the internal group. In addition, the growing reputation of the group attracted four high performing “superstars” both within and outside the firm. Survey of employee satisfaction were “off the charts”—the highest of any division within the company. The entire internal consulting team was performing as a cohesive team---a genuine business within a business.¹
Value Add – A Critical Measure of Measure of Success
For internal consultants to be viewed as an asset to an organization, they must add more value to the organization than their external counterparts. Value may be defined as driving improvements in the following areas:
- Reduction in capital expenditures
- Lowering or elimination of costs
- Generate revenue for the firm
- Improve the competitive positioning of the firm within its market niche
- Time efficiencies with regard to implementation
- Penetration into new markets or product/service lines
- Improvements in processes, products, and services.
- Enhanced value for shareholders
- Internal consultants are able to easily and quickly address new challenges as they arise and/or spot them the problem can escalate
Considerations in Building an Internal Consulting Team
Companies that are exploring the option of building should recognize that the initial investment can be significant. It will be necessary to hire an experienced team of highly experienced professional consultants. This team is then able to establish a framework for building the department and provide training for new team members. Although the recruitment costs to build an internal consulting team can be significant they are a one-time expense. Once the internal consulting team is established, it will provide a much more cost-efficient method of addressing company challenges than the use of external firms. Once the team has developed a strong reputation, it will also attract top talent to your firm. Because an internal consulting team is not profit driven, it is able to invest a greater amount of time in guiding the project team through the entire process. However, even internal consultants are driven to enhance the company’s overall revenue.
In short, by building an internal consulting capacity a company is able to lower overall long-term costs and obtains greater value by developing faster solutions to various challenges and attracting top talent to the firm. The knowledge gained by the internal consulting team as they progress through various projects provides a company with real benefits as they are able to develop greater insight into its systems, processes, resources, potentialities, and limitations. This type of insight can best be gained through the use of internal consultants as external consultants may not become involved with client companies to the same extent.
At the same time, companies should still consider the use of external consultations for certain situations. External consultants may be needed when a project requires a certain level of expertise in any given area or in situations where an objective opinion is needed. External consultants are more likely than internal consultants to “tell it like it is” without need to consider the company political environment. In contrast, an internal consultant who delivers unwelcome news may lose credibility or have their career with the firm be put at risk. External consultants have also been witness to various systems and processes of other firms in other industries and can bring this knowledge to their work with each client. This type of insight in hard to develop internally.
Talented internal consultants will need to be well compensated so that a company may have to set up a pay structure that is very different from that of other employees. This can lead to significant internal friction if the compensation package is ever leaked. Internal friction can also arise from the adjustment all staff will need to make with regard to the development of an internal consulting function. Time and effort will need to be spent in creating an environment that will allow internal consultants to ‘fit’ in with the company culture while still having the distance to drive business transformation.
External consultants are, by their nature, temporary employees and do not need to be kept on payroll or offered medical and other benefits. In contrast internal consultants will need to be paid whether the company has a project on the calendar or not.
Although this article has focused on building an internal consulting team, each type of consulting model, whether external or internal, has its benefits. And in some situations, it may be that a collaborative effort between internal/external consultants may be the best method to ensure a project’s success. This is especially the case for any projects that require a high level of expertise in a given area that only an external team can provide.
There are important considerations with regard to both internal/external models. If your organization spends tens of millions of dollars annually for consulting services, you should consider building an internal team. If you only use consultants on an as-needed basis, it will probably be best to utilize the external model.
We hope that you have found the information contained in this article useful in terms of understanding the genesis of the management consulting industry. We invite you to share your thoughts and comments below. Additionally if you would like to learn more about Perluxi and how we can help your organization in the areas either strategy consulting, operational efficiency, or technology implementation, please don’t hesitate to contact us at firstname.lastname@example.org.