Western consultancy companies are facing questions in China. Can Chinese companies capitalize on the moment?

On June 9, 2014, in an interview with China Daily, veteran management consultant in China and Founder of Gao Feng Advisors Ed Tse had some choice words for American executives in his industry of management consulting, claiming that CEOs “just want to sell the same thing everywhere”

Tse, who had previously served as Chairman and Managing Partner of Booz &Co.—before it was acquired by PricewaterhouseCoopers to become Strategy& and Boston Consulting Group (BCG) respectively—would later soften his stance, but not back down from the idea that there was a detachedness that was endemic to foreign consultancies in China.

If true, China arguably needs to build the profile of its own consultancies, such that they can compete not just domestically but internationally as well. “China has no representation in the knowledge-based industries outside of China,” Tse says, hoping that his still-young Gao Feng can change that status quo.

Tse is apparently not the only one whoʼs seeking to reshape the consulting landscape in China. In May, the Financial Times reported that the central government had banned state-owned enterprises (SOEs) from having ties with US consultancies, which was seen as a tit-for-tat move after the US governmentʼs indictment of a handful of Peopleʼs Liberation Army officials. To compensate for any consulting gap, the same report stated that the government was in the process of forming its own consulting institute of sorts.

The governmentʼs moves unearthed a question that undoubtedly crosses every consultancy clientʼs mind at one point or another: what value are the household name consultancies bringing in China, and is there an alternative?

Zennon Kapron, founder of Kapron Asia, a financial and technology consultancy, says the entanglement of the big-name consultancies and say, the state-owned banks for example, is significant, and not without good reason.

“The level of penetration that [these consultancies] have with some of the banks in China leads me to believe that thereʼs a significant benefit to having the companies involved,” says Kapron. The enterprises wouldnʼt go out of business if no longer allowed access, but some of the significant growth that has occurred over the past five years as a result of those relationships would definitely slow.

A Country Un-consulted

Emerging from the pre-reform era without any significant expertise in management, China represented fertile ground for the titans of the consulting industry.

“Twenty years ago, there was no notion of what management was,” says Tse. “A lot of [good] management principles came from the large consultancies in the past.”

And those prospects for growth still hold true. In 2013, the market grew to roughly $2.9 billion in size, a 10 percent increase from the market size in 2012 according to UK-based Source Information Services. But numbers can vary widely from one research report to another. In 2012, IBIS World estimated that total revenue from the industry stood at $14.7 billion. Nonetheless, industry insiders and researchers agree that overall, the domestic management consulting industry is young, and can only grow going forward.

A few things contribute to the lack of consensus on what this industry is worth in China. Firstly, the most well known firms are private companies, making information contingent upon their own openness.

That said, they do give some indication of the scope of their operations—on its website, McKinsey states that its Chinese operation has 55 partners, over 300 consultants, 100 research staff and more than 200 professional support staff. The company states that it has 9,000 consultants in total.

Others are less forthcoming, but BCG still reveal that they have 250 professionals and 200 clients, while Bain and Company say they have 150 consultants in China.

The second reason for the lack of clarity surrounding the consulting industry is that the definition of management consulting can vary, but it is generally understood that there are two different kinds.

One is operational management consulting, for example supply chain optimization in the fabrication of medical equipment parts. The other is strategic management consulting, which deals more in overall strategic questions such as market entry, marketing and change management.

The former has typically been the province of Chinese consulting firms says Tse, as theyʼre more connected to the operational players. The latter on the other hand, has been cornered by large Western firms. In either case, consultancies can benefit from Chinaʼs numerous fast growing industries.

For Chinese companies, the benefits of large Western consultancies can sometimes be reduced to share-price padding. When a Chinese company has an interest in an IPO in the US, hiring a big-brand consultancy is one way to boost the initial valuation of the shares—it instills confidence in investors that the company in question has a handle on their strategy. However, at times a company may have no intention of using the services provided by the companies in earnest, and merely use the consultancies as window dressing, says Ken Zhong, Business Development Director for building materials company CRH in China.

“This can make their image to the public a little better,” says Zhong. “The value is still there, but I think that if I just weigh the recommended strategy, whether it [can] work or not, thereʼs no guarantee [of the value beyond branding].”

Window dressing may be the starting point, but the ʻhigh-caliberʼ organizations will make good on the opportunity to show what they can really do, solving one problem and identifying several more along the way, says Kapron.

Looking the other way, regulatory pressure on foreign tech companies has them seeking out more consulting from providers who can anticipate the chess moves of the government and correctly interpret the implications of them. For consultancies, these companiesʼ woes have a silver lining—now more than ever these foreign tech companies in China need boots on the ground to assist in navigating hostile regulatory waters, says Kapron.

What the People Demand

There are a few different categories of consultancy consumers.

Firstly, there are Western companies wanting to enter China for the first time. For all of the punditry claiming the end of Chinaʼs appeal to foreign companies, the country hasnʼt completely lost its luster yet. Foreign direct investment actually rose in the first half of 2014 by 2.2 percent reaching $63.33 billion according to official government data.

The second category is smaller private Chinese firms looking for operational consulting in niche areas, the demand that really drives smaller and more specialized Chinese consultancies such as Shanghai-based Younger Niche Logistics, which consults mostly on companies navigating customs in China. Another example is Beijing-based HeJun Consulting, which focuses on IPOs.

Tse says smaller local consultancies thrive in this area as small and medium-sized enterprise owners really seek consulting services through personal relationships, and these clients want a how-to guide on implementing the strategy set forth by the consultancy. This varies from what strategy-focused consultancies tend to offer.

Western clients, however, want strategic consulting without the follow-through guide, whereas Chinese clients want a practical guide to implementation.

The third category is the most contentious: SOEs. The banks in particular have benefitted at home and abroad from their work with large Western consultancies according to Kapron. They are of no small importance to the consultancies either—McKinseyʼs website states that 30 percent of the clients in China are SOEs, with only multinationals making up a greater proportion of their client list.

As such, itʼs doubtful that any of the big consultancies would want to compromise these relationships. Kapron says itʼs highly unlikely that McKinsey, Bain or BCG would risk corruption compliance to provide Chinese company secrets to the US government or US corporations, which was no doubt a consideration when the reported ban was being brought in.

These relationships donʼt only have a short-term value, and Kapron feels that SOEs are extremely important to the long-term expansion of a company like McKinsey. The mutual desire to collaborate is driving some Chinese companies to go through intermediaries that are fronting for the larger consultancies in order to avoid any illicit collaborations, according to Kapron.

End of an Era?

Thereʼs been a demographic shift in the talent at large consulting firms, according to Tse. Whereas in the past companies favored the recruitment of seasoned industry experts, now they have evolved to favor young talent fresh out of business school. Tse says that up-market strategy consultancies now prefer to train up young recruits, made more appealing by their markedly cheaper salary requirements.

The workforce also tends to skew toward the young in the big consultancies in part because of the culture—given the cost that comes with hiring them, consultants are expected to put in the work, leading to burnout for many, and expectations of rapid progression results in a high turnover when inevitably some donʼt make it up the ranks.

Whatever the exact reason, this tendency towards younger personnel suits Western clients that are seeking strategy consulting, where business fundamentals play a bigger role. But for Chinese clients who want a practical growth guide, this personnel make-up does not instill confidence.

Large consultancies like Bain, BCG and McKinsey have been called out over the course of decades for simply recycling proposals from previous clients for new ones, no matter how different the circumstances. Such was the accusation of Martin Kihnʼs 2006 ex-insider memoir “House of Lies: How Management Consultants Steal Your Watch and Then Tell You the Time,” which was published after having worked a three-year stint at Booz Allen Hamilton.

Tse philosophizes that the Western companies donʼt have the Chinese market in their business “DNA.” Itʼs a criticism that the large consultancies are no doubt aware of and familiar with—McKinsey boasts that over 90 percent of its consultants in China “are of Chinese descent and speak fluent Mandarin as well as one or more dialects of Chinese.”

Not that Zhong, Tse or Kapron shy away from professing that the consulting agencies mentioned in the Financial Times report have added great value to their clientsʼ business, including SOEs.

A spokeswoman for BCG told Fortune in October that there has been no discernible change in their China business since the May Financial Times report. As predicted, in the absence of an official announcement, SOEs are proceeding with their established relationships. If the government has truly reneged, thatʼs a strong affirmation of the importance of the consultancies to Chinaʼs national champions. But experts agree that there is an increasingly high premium placed on practical implementation issues, where Chinese firms have an edge.

Ultimately, though, Chinese consultancies will have to rely on their own prowess and evolutions in the marketplace to make a place for themselves in management consulting, since the government is plainly not intending to undermine some of Chinaʼs largest companies, at least not yet.

[box] This article has been reprinted with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China’s leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge. [/box]

(Photo by Chris Marchant via Flickr)

Posted by Suzanne Edwards