Bridging uncertainty in management consulting: the mechanisms of trust and networked reputation

Abstract

This article analyzes the market of management consulting and identifies institutional and transactional uncertainty as its principal features. Based on these uncertainties, we argue that competition in this market takes place on entirely different grounds than in other business sectors. We suggest that the main drivers of competitiveness are neither price nor measurable quality, but rather experience-based trust and a mechanism we label 'networked reputation.' An embeddedness perspective is employed to develop the concept of networked reputation as an intermediate mechanism that complements the duality of system versus personal trust and accounts for firm growth. We reinterpret secondary data on the German consulting market, illustrate the significance of these mechanisms, and demonstrate how management consulting is situated in structures of social relations.

Keywords: management consulting, business services, reputation, trust, networks, embeddedness

Introduction

The management consulting sector had remained a field largely neglected by scholarly investigation until academic interest emerged in the 1990s. The consulting market has grown worldwide significantly faster than gross national products, and has become one of the most dynamic service industries. In the 1 990s in particular, the consulting market experienced immense growth (FEACO 1999; Kennedy Information Research Group 2000), and much debate has accordingly centered around the reasons for this boom. According to a structure-functionalist set of arguments, the development of the consulting sector is to be attributed to ongoing economic changes and the matching features of the knowledge-intensive firm (Tisdall 1982; Greiner and Metzger 1983; Starbuck 1992; Maister 1993). It is argued that the rapid progress of information technology and the increasing internationalization of markets prompt clients constantly to change organizational procedures, structures, and technology. Hence they hire consultants who deliver services based on up-to-date management practices and market information, and the consultants' knowledge about analytical procedures and change offers a variety of services and tasks that clients cannot perform on their own (Werr et al. 1997; Werr 1999; Armbrtister and Kipping 2002; Ruef 2002). In transaction cost-based approaches, this line of thought has been formalized and suggested as a reason for consulting firms to exist and for existing as independent firms (Canback 1998, 1999; Kehrer and Schade 1995; Kaas and Schade 1995). The underlying rationale is based on Williamson's work and argues that clients economize on transactions with regard to asset specificity, frequency, and uncertainty. Markets, hierarchies, and hybrid forms of organization are distinguished as efficient organizational forms of economic exchange. It is argued that a market transaction of a consulting service prevails over in-house solutions if the frequency, asset specificity, and uncertainty of transactions are comparably low.

Whereas this debate has delivered explanatory approaches to the boom in management consulting, it has paid only scant attention to the competitive mechanisms of the consulting market and the specific constraints and characteristics of consulting transactions. Although empirical findings strongly suggest that competition in this service sector is not primarily based on price or cost (Dawes et al. 1992; Page 1995; Clark 1995; Lindahl and Beyers 1999), contributions to a theoretical account of the market mechanisms and the competitive logic in management consulting have remained rather scarce. Nayyar (1990) and Clark (1993, 1995) have suggested an important account from the perspective of informational economics. They have analyzed the information asymmetries in the consultant--client interaction, and their findings indicate that, under conditions of uncertainty, neither price nor institutional regulation can reduce information asymmetries. Instead, personal experience that evolves from interaction between clien ts and consultants becomes most important in reducing uncertainty and controlling for opportunistic behavior. In this paper, we further explore the impact of informal social institutions on competition in the consulting sector and analyze their implications for firm growth. Based on data obtained from the German consulting market, we theorize the market mechanisms from an economic sociology perspective, develop a sequential model of how clients select their consultants, and thus outline how the competitive advantage of client networks contributes to firm growth.

The article starts with an analysis of uncertainty in the consulting industry. We identify the two most significant types of uncertainty in the consulting sector as (1) institutional uncertainty, which derives from the lack of formal institutional standards such as professionalization, industry boundaries, and product standards; and (2) transactional uncertainty, which derives from confidentiality of information, service-product intangibility, and the interdependent and interactive character of the co-production of consultants and clients. Whereas the latter group of characteristics generally apply to many knowledge-based services, the former are specifically characteristic of the open terrain of management consulting. Both kinds of uncertainty are proposed as aspects of the limited extent of institutional or system trust (Zucker 1986; Giddens 1990).