Internationalization patterns of management consultancy firms in Europe and the US.

Internationalization patterns of management

consultancy firms in Europe and the US.

EVELIEN OKKEN

S1273329

evelien.okken@home.nl

First supervisor: Mr. J.A. Neuijen

Second supervisor: Mrs. A.B. Kibriscikli

Groningen, 1

of July 2008

Msc International Business and Management

Faculty of Management and Organization

Internationalization

patterns of management consultancy

firms in Europe and US.

Abstract

There is much research about management consulting and internationalization. In current literature one can see that management consultancies have some specific characteristics that make it a unique profession. These management consultancies have different reasons to go abroad and seek other markets to enter. They can use one of five distinct strategies (international, multidomestic, global, transnational, or metanational) to expand to these new markets. These strategies are fulfilled by mak-ing use of different forms of entry, as discussed there are multiple entry forms available for manage-ment consultancies, ranging from Greenfield investmanage-ments to export. To make a good choice between all these different entry modes, the literature suggests different models and theories to make a good choice, though two factors are most important for management consultancies, namely con-trol/integration and risk. These two factors influence the choice of management consultancies most and are probably the main cause for the preference for full-control modes.

Index

Index ... 2

1. INTRODUCTION ... 3

Main Research Goal ... 3

Main Research Question ... 4

2. Theoretical framework ... 5

Characteristics of management consultants... 5

Definitions of management consulting... 6

Reasons to internationalize ... 6

Internationalization strategies ... 7

Entry modes... 8

Choices between entry modes ... 10

Patterns of internationalization ... 12 Conclusion ... 13 3. Methodology ... 14 4. Data collection ... 16 5. Results... 18 Cap Gemini ... 18 PA Consulting Group ... 18 Roland Berger... 19 IBM... 19 Accenture... 20 Deloitte... 20 ACS... 20 Hewitt Associates... 21 Bearing Point ... 21

Booz Allen Hamilton. ... 21

Mercer HR... 21

McKinsey ... 22

Towers Perrin... 22

Pattern ... 23

Comparison between firms. ... 24

Age... 24

Europe vs. US... 24

6. Discussion ... 25

Equity versus non-equity modes... 25

Choice within the equity mode: Full-control vs. Shared-control. ... 26

Patterns or phases of internationalization. ... 27

7. Conclusion ... 29

References ... 31

Websites ... 33

Appendix 1: Data European Companies ... 35

1. INTRODUCTION

The last 10-15 years, the consultancy market experienced a remarkable boom (van Coevorden, 2004). Especially in the years from 1980 to 1997, in which 80 percent of the consultancy experience has been generated (Ernst and Kieser, 1999), the consultancy market has expanded overwhelmingly. On a world level, consulting firms have grown continuously at rates far above 10 percent annually until the economic downturn in 2001 (Glückler, 2002). This remarkable growth in consulting activities indi-cates that consulting firms and their services have steadily gained importance and its economic sig-nificance has become increasingly evident within domestic economies. However, in a world of intensi-fying cross border economic activity, businesses are becoming increasingly international in scope and in their search for organizational growth; more and more firms are seeking to extend to international markets. Furthermore, as an increasing number of manufacturing firms go global, it is argued that their service suppliers must often follow (Vandermerwe and Chadwick, 1989). Whether motivated by push or pull factors, however, consulting firms as well are increasingly faced by pressures to become ac-tively involved on international markets themselves (van Coevorden, 2004). But how do they do this?

Current literature shed some light on this matter. Much is written about strategies and entry mode decisions, though there is a lack of literature addressing evolution paths or patterns over a period of time. Therefore, this thesis will analyze the internationalization paths or patterns of consultancy firms. The scarce literature on consultancy firms and internationalization are only until the end of the 1990’s, this thesis will extend that to the year 2005. If there is literature on the patterns of consultancy firms, they don’t have empirical evidence to support their suggestions, it is only based on theory. This thesis will provide empirical evidence, by analyzing the actual internationalization patterns of consultancy firms. Another drawback in literature is that it is all based on separate markets, some on only US mar-kets, some on only European marmar-kets, but none of these studies provides a cross-country analysis. Therefore, this thesis will make a comparison between the US consultancy firms and the European consultancy firms.

To summarize the above, the following goal is developed.

Main Research Goal

This will be done by a case study, including a comparison of the internationalization patterns of US and European consultancy firms. This research will be focused on US and European consultancy firms. Why these two markets? As said above, there is a lack of cross-country analysis in this field. It may be that a different home country will lead to a different pattern. Also, there is a personal interest of

By making a comparison between US and European consultancy firms, partly an answer can be given to the question whether all consultancy firms use the same pattern when internationalizing or not. Consistent with this line of reasoning, the main research goal is translated into the following research question:

Main Research Question

Because there is only existing research on the internationalization patterns of consultancy firms until the end of the 1990’s , this thesis will mainly focus on the ‘current’ patterns of the consultancy firms of the last 15 years (1991-2005). Answering the main research question will give a clear understanding on whether the same pattern can be applied to all consultancy firms or not. Also it will contribute to the discussion about internationalization patterns of consultancy firms. In order to answer the research question, first a literature research will be done to analyze what is written about the internationalization of consulting firms and how they do this.

2. Theoretical framework

Management consulting firms are different than other service firms. Kubr (2002) also sees manage-ment consulting as a ‘specific sector’ of professional activity. Following Kubr (2002), managemanage-ment consulting can be seen as a professional service, or a method of providing practical advice and help. “At the same time, it is also a method of assisting organizations and executives to improve manage-ment and business practices, as well as individual and organizational performance” (Kubr, 2002: 4).

Kubr (2002) describes management consulting as “transferring knowledge to clients required for man-aging and operating businesses and other organizations” (2002: 4). So, in management consulting it is all about knowledge, not only theoretical, but also about experience, expertise, skills, know-how and competencies (Kubr, 2002). Thus, it is not only the understanding of facts, but also about the effective application of knowledge. Management consulting’s knowledge relates to two dimensions of the client organization: the technical and the human dimension. The technical dimension “concerns the nature of the management or business processes and problems faced by the client and the way in which these problems can be analyzed and resolved” (Kubr, 2002: 5). The human dimension “concerns interper-sonal relationships in the client organization, people’s feelings about the problem at hand and their interest in improving the current situation, and the interpersonal relationship between the consultant and the client” (Kubr, 2002: 5).

Characteristics of management consultants

Consulting is essentially an advisory service (Kubr, 2002). This means that consultants are not re-sponsible for taking actions, the clients are rere-sponsible for that. Next to this advice, consultants also offer ‘assistance’ to their clients; assistance when the client implements the consultant’s advise (Kubr, 2002).

The following feature Kubr (2002) mentions is independence. A consultant should be independent from its clients in different areas. A consultant should be technical independent (Kubr, 2002), so he/she can give a technical opinion without being influenced by what the client wants to hear. A con-sultant should be financial independent as well (Kubr, 2002), meaning that he/she is not influenced by its own financial interests, like a following assignment with this client. Then, a consultant should be administrative independent (Kubr, 2002), which means that the client is not the boss of the consultant and administrative decisions will not affect the consultant. Political independence means that nobody from the client’s organization can make the consultant using political power (Kubr, 2002). Lastly, the consultant should be emotional independent from the client (Kubr, 2002), so he/she should not de-velop any emotional relation with the client. He/she should stay objective.

con-Definitions of management consulting

Following the above characteristics of management consulting, Kubr (2002) comes with up with the following definition of management consulting: “Management consulting is an independent profes-sional advisory service assisting managers and organizations to achieve organizational purposes and objectives by solving management and business problems, identifying and seizing new opportunities, enhancing learning and implementing changes” (2002: 10).

Another definition comes from FEACO (1991): “Management consulting is the rendering of independ-ent advise and assistance bout managemindepend-ent issues. This typically includes idindepend-entifying and investigat-ing problems and/or opportunities, recommendinvestigat-ing appropriate action and helpinvestigat-ing to implement those recommendations” (Glückler, 1999: 5).

Greiner and Metzger (1983) define management consulting as: “an advisory service contracted for and provided to organizations by specially trained and qualified persons who assist, in an objective and independent manner, the client organization to identify management problems, analyze such problems, recommend solutions to these problems and help, when requested, with the implementation of solutions” (1983: 7).

Reasons to internationalize

Like every other industry, management consulting firms have internationalized their businesses. Kubr (2002) gives several reasons why consulting firms want to internationalize:

- “to find new markets for services;

- to respond to demands received from foreign clients;

- to satisfy multinational clients, who expect their professional advisers to provide an interna-tional service, matching the client’s multinainterna-tional profile;

- to tap the resources for funding of technical cooperation, provided by a wide range of national and international agencies;

- to satisfy the consultants’ intellectual curiosity and quest for challenging new work opportuni-ties” (Kubr, 2002: 635).

Roberts (2001) adds four other forces for international expansion of knowledge intensive business industries, to which consulting firms belong:

- “the general ongoing restructuring of production with firms concentrating their efforts on core activities and externalizing the supply of peripheral intermediate goods and services;

- economies of scale and scope may be achieved by business service firms when supplying a large market, however, in many cases, a market of sufficient size is one which is international in scale;

- a search for exclusive access to privileged information, thereby making it costly for clients to change suppliers by increasing the opportunity cost of such changes, encourages firms to ex-tend international coverage to cater to the needs of client firms” (2001 : 18-19).

Internationalization strategies

The above reasons will lead to different internationalization strategies. There are some well known internationalization categories much discussed, namely the international, multinational or global strat-egy (Bartlett and Ghoshal, 2002). The international stratstrat-egy’s key capability is “exploiting parent com-pany knowledge and capabilities through worldwide diffusion and adaptation” (Bartlett and Ghoshal, 2002: 18). It is about innovations and learning. The multinational strategy’s key capability is “building strong local presence through sensitivity and responsiveness to national differences” and that of the global strategy is “building cost advantages through centralized global-scale operations” (Bartlett and Ghoshal, 2002: 18). In the same book, they come up with a fourth strategy, namely the transnational, which means building and maintaining long-term global competitive advantage by applying all three mentioned strategic capabilities (Bartlett and Ghoshal, 2002).

These internationalization forms can be characterized by two dimensions: integration and local re-sponsibility. These two characteristics come from the IR-grid of Prahalad and Doz (1987). They devel-oped the ‘integration-responsiveness’ grid which combines three building blocks that refer to the na-ture of relationships between headquarters and subsidiaries. The three building blocks are:

- _{“global integration of activities, which refers to the centralized management of geographically} dispersed activities on an ongoing basis;

- _{global strategic coordination refers to the central management of resource commitments} across national boundaries in the pursuit of a strategy…the goal of strategic coordination is to recognize, build and defend long-term competitive advantages;

- _{local responsiveness refers to resource commitment decisions taken autonomously by a} sub-sidiary in response to local competitive or customer demands” (Prahalad and Doz, 1987: 14-15).

High Low Global In-tegration and coordi-nation Local Responsiveness Low High High

Figure 1: Global integration versus local responsiveness

(Source: Bartlett and Ghoshal, 2002)

Doz, Santos and Williamson (2001) present a fifth strategy to the previous four, the metanational. Doz et al. (2001) say that the above four strategies are all about 3 steps: “Step 1: Build on the core strengths from your homeland to gain international advantage. Step 2: Project these strengths into the global arena along the international product life cycle. Step 3: Balance local responsiveness with global integration” (2001: 37).

In turn, the metanational strategy is about learning from the world. Doz et al. (2001) explain that the metanational organization is an organization that is “charged with sensing new knowledge from around the world; charged with leveraging innovation; charged with innovating by mobilizing knowl-edge scattered around the world” (2001: 77). This sensing occurs by placing subsidiaries (plants) in knowledge-rich areas of the world, and let the people working there collect much information knowl-edge. Than, this information needs to come to headquarters to integrate all information and knowledge into new products and services. At last, this new product or service needs to be exploited around the world by improving efficiencies, flexibility and the financial discipline (Doz et al., 2001).

Entry modes

A critical issue in international market entry strategy is the selection of an appropriate entry mode (Sanchez-Peinado, Pla-Barber and Hébert, 2007). The most common forms of service entry modes are direct entry or indirect entry. Direct entry means “that the service firm establishes a service-producing organization of its own on the foreign market” (Grönroos, 1999: 294). Following Pan and Tse (2000) these modes of direct entry represent a form of equity investments. These equity modes can be divided into wholly owned subsidiaries and equity joint ventures. Wholly owned subsidiaries include the Greenfield investment which means that the service firm establishes a new organization of it own (Grönroos, 1999).

Global Transnational

Another form of the wholly owned subsidiary is the acquisition which means that “the internationalizing firm can acquire a local firm operating on the same service market” (Grönroos, 1999: 294). Dunning (1998) also mentions the merger, which means that two existing firms merge into one large firm. Fol-lowing Pan and Tse (2000), the equity joint venture includes three distinct forms, namely the minority EJV, the 50% share JV, and the majority EJV. A joint venture “offers the local partner new growth opportunities at the same time as it gives the international partner much-needed local know-how” (Grönroos, 1999: 294).

Opposite of the equity modes are the non-equity modes, which complement the indirect entry modes of Grönroos (1999). Grönroos (1999) describes indirect entry modes as “the service wants to avoid establishing a local operation that is totally or partly owned by itself” (1999:294). Pan and Tse (2000) agree on this by saying that the non-equity modes “do not require the establishment of an independent organization” (2000: 539). They split the group of non-equity modes into two smaller groups of con-tractual agreements and export. Concon-tractual agreements than include licensing, R&D contracts, and alliances. Erramilli, Agarwal and Dev (2002) , as well as Grönroos (1999) add the form of franchising as a distinct entry mode for service firms. Licensing is “giving a local firm exclusive rights to use the professional concept of the firm” (Grönroos, 1999: 294). Franchising means that “local service firms get the exclusive right to a marketing concept, which also may include rights to a certain operational mode, and in this way the concept can be replicated as much as existing demand allows all over the foreign market” (Grönroos, 1999: 294), or “that the foreign entrant (franchiser) receives royalties from the host-country collaborator (franchisee) and supply-chain markups… the franchiser typically lends its brand name, and provides marketing support, technical advice and training to the franchisee… the franchiser typically enjoys some strategic control but relatively little operational control (Erramilli et al., 2002: 224). Contracts are described as “the foreign entrant may receive some combination of royal-ties, supply-chain markups, management fees, and a share of profits… the foreign entrant not only leases its brand name to a host-country collaborator, but secures a contract to provide extensive on-site technical and management support” (Erramilli, et al., 2002: 224). The export modes of Pan and Tse (2000) include direct export and indirect export. Direct export means that “consultants may have their base on the domestic market and whenever needed move the resources and system required to produce the service to the client abroad” (Grönroos, 1999: 293). Systems export or indirect export is “a joint effort by two or more firms whose solutions complement each others” (Grönroos, 1999: 293).

A new entry mode to management consultancies is coming from electronic marketing. This implies that the consultancy firm offers its services through the internet (Grönroos, 1999). Vandermerwe and Chadwick (1989) also acknowledge the power of technology on the internationalization of service firms. They say that technology is influencing the service internationalization strategies in three ways:

- the ease of modern telecommunication infrastructures which are facilitating different forms of service delivery on a global scale;

- the changing nature of services due to advanced technologies which are radically altering the methods by which some firms can globalize their services” (1989: 80).

Vandermerwe and Chadwick (1989) even argue that technology has created a new service interna-tionalization mode, the all-in-one mode:

- “the service is exported because it is transmitted to the foreign buyer without any physical movement on the part of the service provider;

- the service provider cannot, however, do this alone. They must have access to an infrastruc-ture and rely, therefore, on third parties including customers;

- through the technology located in the foreign country, rather than management itself, ongoing presence is established. Control is obtained primarily through systems procedures and man-agement arrangements with the customer network and/or owning the technology” (1989: 89).

Mathe and Perras (1994) also see the influence of technology on internationalization. They argue that consulting companies can save a lot of travelling costs from consultants by using videoconferencing, satellite linkage, and other voice/image/data processing modes (Mathe and Perras, 1994). This new service internationalization mode is useable in all service companies.

Choices between entry modes

Recent theory thus discusses many different entry modes for service firms and management consul-tancies, though how do firms choose between these modes? Strategic behavior theory says that the strategy of the first-mover or leader is determining the entry mode choice of the new entrant; firms follow the leader (Knickerbocker, 1973; Graham, 1978). The Resource advantage theory (Hunt, 2002) implies that “the specific mode of foreign market entry depends on the type of resource advantage” (Malhotra, Agarwal and Ulgado, 2003: 5). The network theory says that the specific network relation-ships influence the choice of an entry mode (Coviello and Martin, 1999). Ekeledo and Sivukmar (1998) say that the choice of an entry mode consists of two steps: the choice of a country and the level of involvement in that country. Kubr (2002) says there needs to be a balance between the degree of centralization and decentralization. Roberts (1999) agrees with Kubr (2002).

The market imperfections theory (Hymer, 1976) then argues that because of imperfect perfections in the goods market, imperfections in the factor market, and imperfect competition the FDI mode is more preferred. Eclectic theory of Dunning (1995) explains that in order to have successful FDI (instead of non-equity modes) an organization needs ownership advantages, location advantages and internaliza-tion advantages.

Pan and Tse (2000) then argue that choices need to be made between full-control and shared-control modes. Organizational capability perspective theory (OCP) says that full-control modes are preferred by larger and more experienced firms and that tacit know-how may enforce this, because it limits the transferability of information to another firm without loosing its value (Kogut and Zander, 1993). Weinstein (1977) found that early entrants preferred wholly owned subsidiaries, while later entrants were more prone to use joint ventures. Erramilli and Rao (1993) agree to this by saying that client followers are like these early entrants and that market seekers are the later entrants. Though, in both cases the firms prefer a high degree of integration, as predicted by TCA theory.

Erramilli, et al. (2002) analyzed how firms choose between contracts and franchising. They found that firms will prefer a contract over franchising when the competitive advantage generated by imperfect imitable capabilities is high, the availability of qualified managerial staff in the host market is low, the availability of qualified and trustworthy investment partners in the host market is high, and the level of development of the host country business environment is high.

Anderson and Gatignon (1988) found that MNCs favor less control or integration in countries that re-strict ownership legally. Additionally, they found that risk is a great determinant for less integration. Hackett (1976) argues that majority EJVs were responses to local laws, and that minority EJVs and franchise modes were formed to reduce risk. The transaction cost theory (TCA) explains that firms choose between entry modes on the basis of control (benefit of integration) and cost of resource commitments (cost of integration) (Erramilli and Rao, 1993). TCA theory argues that “the propensity to integrate increases with increasing proprietary content of products, advertising expenditures, and company’s experience abroad” (Erramilli, 2001: 52). On the other hand, firms will prefer a lower de-gree of integration with increasing “host country risk, host country’s social cultural distance from the US, and scale of operations of foreign business entity” (Eramilli, 2001: 52).

Kaufman and Jentzsch (2006), also argue that the choice of an entry mode depends mostly on the amount of control of the parent firm over the subsidiary. More specifically, firms will prefer low control modes when they have low risk and favor no equity investment.

Furthermore, the shared-control modes are preferred when firms had “previous shared-control obliga-tions, market-share guarantee, access to distribution channels, integration of competitors, lower capi-tal requirements than a wholly owned mode, risk diversification, and time to market” (Kaufman and Jentzsch, 2006: 72). Lastly, Kaufman and Jentzsch (2006) say that a full-control mode is preferred when firms have no availability of EJV partners, have intellectual property rights, need fast decision-making processes, have high marketing power, must protect and attract their intellectual capital, and follow a global integration strategy. Sanchez-Peinado et al (2007) found that knowledge-intensive services choose for full-control modes when they have global approaches, asset exploitation motives and previous experience in full-control modes. Furthermore, they found that these services prefer shared-control modes when they have offensive considerations, asset exploration motives and experi-ence with shared-control modes. They also concluded that firms with tacit know-how prefer full-control modes.

Patterns of internationalization

Some authors agree that service firms, including management consultancies, internationalize by going through some phases. The IPLC theory of Vernon (1966) describes a four-stage model which is char-acterized by export modes in the first stage, the beginning of foreign production on the second stage, foreign firm competition in third-country markets in the third stage, and foreign firm competition in the U.S. market in the last stage (Vernon, 1966). According to the internationalization theory the organiza-tion internaorganiza-tionalizes by going through some stages (Johanson and Vahlne, 1990), as menorganiza-tioned ear-lier. These stages are: no regular export, export through agents, sales subsidiary, overseas produc-tion. Vandermerwe and Chadwick (1989) say that first, consulting firms send employees abroad and later on, they will invest more in the foreign country. Roberts (1999) also says that there are stages in which a knowledge intensive business service firm, like a management consulting firm, international-izes by going through a few stages:

- “provision of services to domestic clients only;

- provision of services to foreign clients in the domestic market;

- provision of services to foreign markets through embodied service exports, people mediated and wired exports;

- establishment of a presence through which to deliver a service largely produced in the domes-tic market;

Conclusion

From this literature review one can see that management consultancies have some specific character-istics that make it a unique profession. These management consultancies have different reasons to go abroad and seek other markets to enter. They can use one of five distinct strategies (international, multidomestic, global, transnational, or metanoational) to expand to these new markets.

These strategies are fulfilled by making use of different forms of entry, as discussed there are multiple entry forms available for management consultancies, ranging from Greenfield investments to export. To make a good choice between all these different entry modes, the literature suggests different mod-els and theories to make a good choice. Pan and Tse (2000) offer a structured approach to come to the right entry mode. They say that first one has to choose between equity and non-equity modes. They and some other authors agree that management consultancies prefer the equity modes. Then one has to make a choice between full-control and shared-control modes. This choice is mostly based on the level of integration between the parent firm and its subsidiaries. Another important factor in this choice is risk. Because management consultancies make extensive use of tacit know-how and this know-how needs to be protected, they often choose for full-control modes which have the highest form of integration and the lowest level of risk.

3. Methodology

From the literature review one can see that there is some research into the internationalization pat-terns of consultancy firms. In this thesis these patpat-terns will be analyzed for European and US firms by describing the patterns of all individual firms and analyzing if there is one pattern to discover.

The analysis will be based on 20 large consultancy firms from the US and Europe. To determine the country of origin, the place of the headquarters is used. These 20 firms will be selected on basis of their size; only the 10 biggest firms in the US and Europe will be used. This limit is set because data for the biggest firms is easiest to find, and the biggest firms are assumed to be the most international, which will give much data to analyze and compare. The size of the firms is determined on the number of employees. The list of all 20 firms and their data are shown in the following paragraph. This infor-mation will come from the Vault Guide to the top 50 Consulting Firms (Newman, 2006) and the inter-net websites of the companies.

To analyze the internationalization patterns of each firm, the entry modes which the firms use to enter a foreign market will be used and placed into chronological order. According to Pan and Tse (2000) the internationalization modes represent varying degrees of resource commitment, risk exposure and control. Their model is presented in figure 2. This model is extended in two ways, first the franchising mode mentioned by Erramilli et al. (2002) and Grönroos (1999) and the mergers, mentioned by Dun-ning (1998). According to Pan and Tse (2000) one first has to choose between equity and non-equity modes. Following the literature review, management consultancies tend to prefer the equity modes. After this choice is made, they have to decide between full-control and shared-control modes. From these two groups, management consultancies tend to prefer the full-control mode because of high integration with the parent firm and lowest risk levels. It will be interesting to see whether this analysis will show the same findings.

Figure 2: A hierarchical model of choice and entry modes.

(Source: Pan and Tse, 2000: 538)

Choice of entry modes

Non-equity modes Equity modes Export Equity Joint Ventures Wholly owned subsidiary Contractual agreements Direct export

4. Data collection

As said, the data will be collected from 10 US and 10 European consultancy firms. The following 20 firms are selected, based on their size (number of employees) and location of headquarters. The data is collected from information given by the Vault Guide to the top 50 consulting firms (Newman, 2006). “Vault surveyed 3,640 consultants to bring you the ninth edition of the Vault Guide to the Top 50 Man-agement and Strategy Consulting Firms. Every year, we survey the best of the manMan-agement and strat-egy firms, as well as those consulting firms with narrower focuses in fields like financial consulting and health care consulting. The 92 profiles in this year's edition are based on detailed research and exten-sive feedback from current consultants, talking about everything from company culture to compensa-tion, travel demands and diversity. And we cover everything from gigantic multinational consulting firms to boutique firms with fewer than 100 employees” (Newman, 2006: 1). Because of their extensive research every year in the management consulting field, they are a very reliable source for the infor-mation I need for this research. This inforinfor-mation is also valid, because number of employees is fre-quently used in research as an indicator of the size of a firm. Nevertheless, missing data is collected from company websites.

Table 1: Top 10 European Consultancy firms.

Name of company Number of employees (2005) Starting date

Capgemini 61.000 1967 PA Consulting 2.750 1943 Roland Berger 1.700 1967 Value Partners 1.000 1984 Celerant Consulting 526 1987 LEK 500 1983 Droege 325 1988 Simon Kucher 261 1985

OC&C Strategy Consultants 200 1987

Table 2: Top 10 US Consultancy firms.

From these firms the following data will be collected: the last 15 years of foreign market entries and their modes. These modes will be placed in chronological order to determine the internationalization patterns. As an extra tool for determining internationalization patterns, the country which is entered is also added to the data.

Data will be collected from various sources. First of all, Zephyr, a databank with lots of information on company mergers and acquisitions is used. This source offers reliable and valid information about mergers and acquisitions from the above firms, except for Celerant Consulting, Droege, LEK, OC&C, Simon Kucher, and Value Partners. To complete this list of mergers and acquisitions, I used Data-monitor reports. These reports contain information on the history of the companies. They include a summary of business expansions, but not all. Though, this information is reliable and valid. I found reports on the following companies: Accenture, ACS, Bearing Point, Booz Allen Hamilton, Capgemini, Deloitte, Hewitt, IBM, McKinsey, Roland Berger, and Towers Perrin. The other firms did not have a Datamonitor. Another source for completing my data are the company websites. Some firms offer information on their websites about their history, some more detailed than others. I compared these lists to the data I already had collected and complemented it where possible. The data on these web-sites is reliable and valid, since it is placed by the company itself. As a last source for my research I used newspapers, though I could not find any relevant data here. Thus, all the sources I used to find my data are reliable and offer valid information.

Name of company Number of employees (2005) Starting date

5. Results

The data that was found is presented in tables in the appendixes. Data was found on 14 of the 20 companies. An interesting fact is that data of all US consulting firms is completed, though the Euro-pean firms’ data is missing on 7 of the 10 companies. Another interesting fact is that the EuroEuro-pean firms are much smaller than the US firms, except Cap Gemini. Most of the found data dates from the year 2000 or later.

My research question is: How do European and US consultancy firms internationalize and how can their internationalization patterns be compared? To answer this question, first the individual firm’s pat-terns will be discussed. Second, the pattern of the whole group will be discussed. Lastly, the group will be compared on the basis of age and on the basis of country of origin. This means that the group will be split up in two groups, namely old and young firms and in the US firms and the European firms.

Cap Gemini

Cap Gemini, a public company, found its start in 1967 in Grenoble. It employs 61.000 people and is operating in 35 countries worldwide and has a distinctly international flavour. The firm started as an IT services and consulting company, and now belongs to one of the largest in the world (www.capgemini.com). In 1973, the company acquired a major stake in CAP, the European IT ser-vices company. In the following year, the company acquired Gemini Computers Systems, a US-based company. In 1975, following the acquisition of CAP and Gemini, Sogeti was renamed as Cap Gemini Sogeti. The company launched its US operations in 1981, following the acquisition of DASD Corpora-tion, specializing in data conversion. In 1982, the company obtained a 42% stake in a French rival, Sesa and five years later, in 1987, Cap Gemini gained complete ownership of the company (Data-monitor Report, 2007). From the results (Appendix 1) it shows that Cap Gemini expanded mostly through acquisitions. During the 1990s the company expanded mostly in Europe and in the year 2000 Cap Gemini tripled its size in the US, also by an acquisition. As can be seen, in the years 2004 and 2005, Cap Gemini also expanded more in China.

PA Consulting Group

PA Consulting Group is founded in 1943 in London and is owned by 3.000 associates. It has offices in more than 35 countries all over the world. Its focus is on consulting and IT services. Since 1997, the firm’s goal has been expansion and growth. “Although the firm has offices around the world, sector growth rather than geographical expansion remains important. PA plans to focus on niche markets and build a reputation based on a deep, rather than broad, understanding of industries” (Newman, 2006: 573). Only limited data was found on PA Consulting Group. The only data that was found are an acquisition in the US and minority stakes in Great Britain and the US.

Roland Berger

Private company Roland Berger is founded in 1967 in Munich by its founder Roland Berger. It started of as a one-man company focusing on marketing consulting. The one-man business quickly trans-forms into a partnership-based management consultancy with a broad portfolio of services. It has 130 partners and 1300 employees. The company has an international focus right from the start (www.rolandberger.com). In the mid 1970's, the company established representative offices in Milan, Paris, London, New York, and Sao Paulo. The company started the international consultant consor-tiumTIG (The International Group Consultancy and Research) with companies from the UK, France, Italy, Switzerland, and the Netherlands in 1977. In 1979, the company established a cooperation with the Japan Management Association, one of Japan's largest consultancies. Roland Berger became the first European consultancy to be accepted to the ACME (Association of Consulting Management En-gineers) – the oldest and most renowned association of consulting firms in the US in 1980 (Datamoni-tor Report, 2007). From the data it shows that during the 1990s the company expanded mostly in Cen-tral and Eastern Europe. The most used entry mode of Roland Berger is the Greenfield. Interesting to note here is that Roland Berger was a late-arrival in the US, it started operations here only until the late 1990s.

IBM

IBM is a public company with a known history as an IT company, though it also has a large consulting history. In 1911 the company started as Computing- Tabulating- Recording Company (C-T-R). In 1924 the company got the name IBM. It is a very global company with more than 300 offices world-wide. During World War II, IBM’s German subsidiary Dehomag (an acronym formed from German Hollerith Machine Company) provided the Nazi regime with punch card machines. Dehomag was taken over by the Nazis in 1939. In the 1950s, IBM became a chief contractor for developing com-puters for the US Air Force’s automated defence systems. In the mid 1960s, the US Department of Justice filed a complaint for the case US v IBM in the US District Court for the Southern District of New York. The suit alleged that IBM violated the Section 2 of the Sherman Act by monopolizing or attempt-ing to monopolize the general purpose electronic digital computer system market, specifically com-puters designed primarily for business. Litigation continued until 1983, and had a significant impact on the company’s practices. During 1981, the company introduced the IBM Personal Computer or PC. The IBM token-ring local area network, introduced in 1985, permitted personal computer users to ex-change information and share printers and files within a building or complex. In 1991, the company spun off Lexmark from its printer division. IBM introduced the ThinkPad in 1992, the first in a series of notebook computers to be manufactured by the company. In 1993, IBM announced a $5 billion loss for 1992, which was at that time the largest single year corporate loss in the US history.

Accenture

Accenture is a public company employing more than 130.000 employees in more than 110 offices around the globe. “Established in 1989 primarily as a technology consultant and systems integrator, Accenture soon began offering a new breed of business integration solutions to clients—solutions that aligned organizations' technologies, processes and people with their strategies” (ww.accenture.com). Andersen Consulting began work on one of its first major outsourcing assignments in 1991. This as-signment involved managing BP Exploration’s accounting, finance and support functions from a spe-cial center in Aberdeen, Scotland. In 1994, Andersen Consulting established research and develop-ment centers in Palo Alto, the US and Sophia Antipolis, France. Until 2000, Andersen Consulting had contractual relationships with Andersen Worldwide and Arthur Andersen, an accounting firm. Follow-ing arbitration proceedFollow-ings between Andersen ConsultFollow-ing and Andersen Worldwide and Arthur Ander-sen that were completed in 2000, the company was separated from AnderAnder-sen Worldwide and Arthur Andersen. Arbitration proceeding was the result of a payments dispute between Andersen Consulting and Arthur Andersen. The name of the company was changed from Andersen Consulting to Accenture in 2001, following a major branding exercise (Data Monitor Report, 2007). From the found data it can be seen that Acccenture has a history of Greenfields, Joint ventures and minority stakes. Only until recent years, it made extensively use of acquisitions. As said, Accenture is a very global company and this shows in their market entries from the last 15 years. Most entries were in Europe and the US. Although, in 2005 IBM also went to China.

Deloitte

Deloitte Touche Tohmatsu was formed in 1989 following the merger of three auditing businesses; Deloitte Haskins & Sells, Touche Niven & Co, and Tohmatsu. In the upcoming years, Deloitte grows fast and now it employs 7.000 consultants in more than 40 countries around the world. In 2003, the consulting staff was separated from the accounting staff and since then Deloitte Consulting operates as a separate subsidiary. From the data it can be found that Deloitte makes use of mostly acquisitions and minority stakes. They also had some Joint Ventures and a merger in their history of market entry. Regarding the countries they went to the last 15 years, it reflects their global presence. They ex-panded to Europe, as well as to the US and Asia-pacific.

ACS

Hewitt Associates

Hewitt started off in 1940 and has became a specialist in the field of HR consulting. It now has 22.000 employees and offices in more than 35 countries. By the 1950s, the company was providing actuarial and related employee benefit and compensation services. In 1974, Hewitt entered Toronto, Canada and thereafter, opened offices in Paris and in St. Albans outside London in 1985. During 1995, Hewitt acquired a 33%-stake in Noble House Management Consultants (NHMC), a consulting firm specializ-ing in human resources consultancy in India. In 1997, the company adopted ‘Hewitt’ as its logo (Data Monitor Report, 2007). Its data shows that Hewitt associates also uses mostly acquisitions. This com-pany also expanded in Europe and the US, as well as India and Japan in 2005.

Bearing Point

“Bearing Point is one of a handful of consultancies that split its strategy arm from a Big Five account-ing firm a few years back. After it was spun off from Big Five heavy KPMG in 2000, the firm is known as Bearing Point operated as KPMG consulting” (Newman, 2006: 405). It now employs 17.000+ em-ployees and it has 170 offices worldwide. Since it only spun off in 2000, data is only retracted from this and upcoming years. Interesting to note is that Bearing Point unlike the other companies started with stakes in other companies and only until 2001 and 2002 started with acquisitions. They bought many firms in these two years, all over the world. Just like some other companies, they went to India and China in 2004 through Greenfield investments.

Booz Allen Hamilton.

Booz Allen Hamilton is founded in 1914 and has experience with both commercial and government industries. Booz Allen Hamilton has more than 100 offices around the globe and boasts more than 18.000 employees. In 1936, the company became four person partnership Booz, Fry, Allen & Hamil-ton. The firm expanded into manufacturing, electronics, chemicals, and energy in the 1950s. Booz-Allen Applied Research (BAARINC), a separate company for technical consulting and government contracting, was established in 1955. In the following year, the company created its Booz, Allen & Hamilton International subsidiary. The company changed structure from a partnership to a privately held corporation in 1962. Two years later, the company performed its first assignment for NASA, pre-dicting the performance of a new satellite. Booz Allen Hamilton went public in 1970. The company returned to private ownership in 1976. In 1999, the company acquired Carta Corporate Advisors, the leading Nordic management consulting firm. The company changed its name to Booz Allen Hamilton in 2001 (Data Monitor Report, 2007). The market entry history of Booz Allen has some variation. In its data I found acquisitions and minority stakes. The company expanded to countries as Sweden, France, Denmark and the US and Japan.

Mercer HR

“As the largest HR consultancy of its kind, Mercer HR employs more than 16.500 people in 41 coun-tries and territories” (Newman, 2006: 163). Its data is limited and only shows 3 acquisitions in Ger-many, Canada and Australia for the last 3 years.

McKinsey

Founding the firm in 1926, McKinsey left a legacy as a pioneer in the field of management consulting. These days McKinsey has approximately 7.000 consultants in more than 80 offices worldwide (New-man, 2006). Before the US entered World War II, the company served 35 clients in New York and nine in Boston, Massachusetts. During the war, its client base continued to grow. To serve its expanding client list, it established new offices in Chicago, Illinois, Los Angeles, San Francisco and California. In the 1960s, tariff barriers fell in the European common market, spurring many major US and European companies to reach beyond national borders. The globalization of corporations helped fuel demand for its services worldwide. The company established offices in the Netherlands, Germany, Italy, France, and Switzerland. It also added Canada and Australia to its international network. The 1970s was the company's most challenging decade, forcing it to refocus its strategies. The economic world was in a flux. Japan's emergence as a global power cast doubts on traditional approaches to manufacturing. At the same time, a troubled world economy and social unrest undermined investor's confidence. As a result, Mckinsey's growth slowed down. During 1980s, McKinsey consultants authored books such as In Search of Excellence and Beyond National Borders (Data Monitor Report, 2007). Interesting to note is that McKinsey, unlike the other companies, only has data until 2000. In the 1990s it expanded the most and countries all around the world are entered through greenfields and acquisitions.

Towers Perrin

The last firm in this study is Towers Perrin. “As a company, Towers, Perrin, Forster & Crosby opened for business in 1934, focusing on reinsurance and life insurance” (Newman, 2006: 295). The com-pany opened its second office in Chicago in 1946. Later it expanded into New York City in 1949. The company's communications consulting unit was formed in 1952. This was soon followed by the open-ing of its first non-US office in Montreal in 1956. The company introduced compensation and organiza-tion consulting services in 1962 and further broadened its service offering during the 1960s. In 1969, the company opened its first office in London. The firm's first Latin America office was opened in Ca-racas in 1974 and it entered Hong Kong in 1979. In 1982, the company expanded into Australia by acquiring Palmer Trahair Owen & Whittle, with offices in Brisbane, Melbourne and Sydney.

Towers Perrin’s data shows multiple acquisitions in mostly English speaking countries as Great Britain and the US. Exceptions on this are The Netherlands, China, Germany and India. They also partici-pated in some alliances and a Joint Venture.

Pattern

The first thing that can be noticed from the data is that there is much variance in the use of the differ-ent modes. This means that the managemdiffer-ent consultancy firms are not focusing on one particular mode, but use different kinds to internationalize.

A second finding in the data is that the equity mode is mostly preferred (table 3). Table 3 shows that from the non-equity modes, only the alliances are found in the data. From the equity modes, the ac-quisition is mostly used, followed by the minority EJV.

Table 3. Number of entry modes per firm.

Another interesting finding from the data in the appendices is that the Greenfield mode is only used until 1999, after this year only a few Greenfields are used to internationalize. Since 2000 the man-agement consulting firms expanded most of the last 15 years. One can also see that there is no end yet to the internationalization of these firms, because the firms are still entering new markets in the last few years.

It also shows that there is much diversity between the firms regarding their choice of modes, though it is also visible that within companies, there is some consistency. Cap Gemini uses mostly acquisitions (29 of 40), as well as IBM (28 of 32), ACS (77 of 83), Hewitt (6 of 9) Mercer HR (3 of 3) and McKinsey

Com- pany Entry

mode

PA used mostly minority stakes (3 of 4) as well as Accenture which used mostly minority stakes till 2005, and after that only acquisitions. Deloitte has a mix of acquisitions and other equity Joint Ven-tures, just as Bearing Point and Booz Allen Hamilton. Towers Perrin is a company which also used multiple alliances.

So, it is not easy to find one pattern for all consulting firms, though they do as a group prefer the equity mode, and especially the acquisitions. Though, within firms patterns can be distinguished.

Comparison between firms.

Age.

As said above two different comparisons will be made. First based on the age of the firms. The first group are the older firms (>50), the second group are the younger firms (<50). When this is applied to the group, the older firms group includes PA consulting group, IBM, Hewitt Associates, Booz Allen Hamilton, McKinsey and Towers Perrin. The younger firms are then Cap Gemini, Roland Berger, Ac-centure, Deloitte, ACS, Bearing Point and Mercer HR.

One will notice that there is no real pattern for the old and/or younger firms. There are no real differ-ences to acknowledge. Both groups contain firms that prefer one mode (PA Consulting, Roland Ber-ger, IBM, ACS and McKinsey), or use multiple modes (Cap Gemini, Accenture, Deloitte and Towers Perrin. Also in the number of entries are no real differences. For example, Mckinsey (Old firm) interna-tionalizes mostly during the 1990s, though Roland Berger (Young firm) also does this. They both do this by using the Greenfield and Acquisition modes.

Europe vs. US.

The other comparison is based on the country of origin, or place of headquarters. This distinction splits the group into European and US firms. The European firms are Cap Gemini, PA Consulting, and Ro-land Berger, the US firms are IBM, Accenture, Deloitte, ACS, Hewitt Associates, Bearing Point, Booz Allen Hamilton, Mercer HR, McKinsey, and Towers Perrin.

The European firms are much smaller than the US firms and also less data is found on this group. The European firms include one old firm and two young firms. The Us firms include 5 young and 5 old firms. No real differences are thus found in the age of the European versus the US firms.

6. Discussion

In the previous section the results of my research are presented. In this section an effort is made to combine the theoretical basis of this research with the results from the analysis. The combination of these two sections will provide an answer to my research question: How do European and US consul-tancy firms internationalize and how can their internationalization patterns be compared?

In the theoretical framework several subjects with relation to the research problem were discussed. They served as a basis for structuring the process of gathering and analyzing information. Now that the analyses have been completed, some of relationships between theory and practice can be pointed out. This paragraph will describe the most important ones.

Equity versus non-equity modes.

The market imperfections theory (Hymer, 1976) prefers the equity mode over the non-equity mode, because of market imperfections. Dunning’s Eclectic theory (1995) also prefers the equity modes. The OCP theory says that the full-control modes are preferred by larger and more experienced firms and that tacit know-how may enforce this (Kogut and Zander, 1993). Erramilli and Rao (1993) and Erramilli (2001) say that firms with customised services appear to prefer integration.

The results of this study comply with these theories because most management consulting firms pre-fer the equity mode. Though, why do they prepre-fer this mode?

The above question can be answered with help of different theories. TCA theory suggests that firms prefer equity modes, because these forms of entry offer the most integration and control to the firm (Erramillia and Rao, 1993). Erramilli (2001) than says that “the propensity to integrate increases with increasing proprietary content of products, advertising expenditures, and company’s experience abroad” (2001: 52). On the other hand, firms will prefer a lower degree of integration with increasing “host country risk, host country’s social cultural distance from the US, and scale of operations of for-eign business entity” (Eramilli, 2001: 52). Therefore, it may be so that the management consulting firms in this study have already much experience abroad. I think this is true for the older firms like IBM, Hewitt Associates and Booz Allen Hamilton. Although, the younger firms like Roland Berger, ACS, and Mercer HR also apply to this statement.

Choice within the equity mode: Full-control vs. Shared-control.

Following Pan en Tse (2000) firms first choose between equity and non-equity modes. For the consult-ing firms in this study it shows that they almost every time choose for the equity modes. Now, a dis-cussion will follow on the choice within this equity mode, or between full-control modes and shared-control modes.

The organizational capability perspective theory (OCP) says that full-control modes are preferred by larger and more experienced firms and that tacit know-how may enforce this, because it limits the transferability of information to another firm without loosing its value (Kogut and Zander, 1993). The results show that the firms in this study used 234 full-control modes, 88 shared-control modes, 15 contractual agreements and 0 exports. Therefore, OCP theory applies to this study, because this study only used the largest firms and because it are management consultancies they include much tacit know-how.

Weinstein (1977) found that early entrants preferred wholly owned subsidiaries, while later entrants were more prone to use joint ventures. This statement cannot be discussed with the results of this study. Though it may be that management consultancies also choose for full-control modes when they are new the first firm to enter a new market, and joint ventures, when many firms entered the new market already.

For example, Cap Gemini grew in the beginning through acquisitions, and even though it used diverse modes to internationalize, it still uses the acquisition mode during the last 15 years. ACS is a company that uses almost only acquisitions to internationalize and can also be applied to this statement. Sanchez-Peinado et al (2007) found that knowledge-intensive services choose for full-control modes when they have global approaches, asset exploitation motives and previous experience in full-control modes. Furthermore, they found that these services prefer shared-control modes when they have offensive considerations, asset exploration motives and experience with shared-control modes. They also concluded that firms with tacit know-how prefer full-control modes. Sanchez-Peinado et al. (2007) agree with Kaufman and Jentzsch (2006) on the point of the experience a firm has with a particular mode and use this mode when they have experience with the use of it. They also make a link to the strategy of the firm, this strategy is not analyzed in this study, but can thus be a good reason for the choice of an entry mode. This is also what Strategic behavior theory says. They say that the strategy of the first-mover or leader is determining the entry mode choice of the new entrant; firms follow the leader (Knickerbocker, 1973; Graham, 1978).

Another important factor in the choice between full-control and shared-control modes is risk (Gatignon and Anderson, 1988). Hackett (1976) argues that majority EJVs were responses to local laws, and that minority EJVs and franchise modes were formed to reduce risk. On the other hand, firms will pre-fer a lower degree of integration with increasing “host country risk, host country’s social cultural dis-tance from the US, and scale of operations of foreign business entity” (Eramilli, 2001: 52). More spe-cifically, firms will prefer low control modes when they have low risk and favor no equity investment. Furthermore, the shared-control modes are preferred when firms had risk diversification (Kaufman and Jentzsch, 2006). Therefore, it may be said that management consultancies choose the full-control modes over the shared-control modes, because these forms offer the lowest level of risk to the com-pany.

Patterns or phases of internationalization.

The last interesting topic in current literature is about patterns or phases of internationalization. The IPLC theory of Vernon (1966) describes a four-stage model which is characterized by export modes in the first stage, the beginning of foreign production in the second stage, foreign firm competition in third-country markets in the third stage, and foreign firm competition in the U.S. market in the last stage (Vernon, 1966). According to the internationalization theory the organization internationalizes by going through some stages (Johanson and Vahlne, 1990), as mentioned earlier. These stages are: no regular export, export through agents, sales subsidiary, overseas production. Vandermerwe and Chadwick (1989) say that first, consulting firms send employees abroad and later on, they will invest more in the foreign country. Roberts (1999) also says that there are stages in which a knowledge in-tensive business service firm, like a management consulting firm, internationalizes by going through a few stages:

- “provision of services to domestic clients only;

- provision of services to foreign markets through embodied service exports, people mediated and wired exports;

- establishment of a presence through which to deliver a service largely produced in the domes-tic market;

- establishment of service production facility in the overseas market” (Roberts, 200.: 19). Though, she does mention that firms can skip steps.

7. Conclusion

In current literature one can see that management consultancies have some specific characteristics that make it a unique profession. These management consultancies have different reasons to go abroad and seek other markets to enter. They can use one of five distinct strategies (international, multidomestic, global, transnational, or metanational) to expand to these new markets. These strate-gies are fulfilled by making use of different forms of entry, as discussed there are multiple entry forms available for management consultancies, ranging from Greenfield investments to export. To make a good choice between all these different entry modes, the literature suggests different models and theories to make a good choice. Pan and Tse (2000) offer a structured approach to come to the right entry mode. They say that first one has to choose between equity and non-equity modes. They and some other authors agree that management consultancies prefer the equity modes. Then one has to make a choice between full-control and shared-control modes. This choice is mostly based on the level of integration between the parent firm and its subsidiaries. Another important factor in this choice is risk. Because management consultancies make extensive use of tacit know-how and this know-how needs to be protected, they often choose for full-control modes which have the highest form of integra-tion and the lowest level of risk.

In this thesis I wanted to analyze how management consultancies in Europe and the US international-ize and which entry modes they use, by answering the following research question: How do European and US consultancy firms internationalize and how can their internationalization patterns be com-pared? The results and discussion show that the European and US consultancy firms internationalize through two distinct patterns: the diversified pattern or the choice of one particular mode. This diversi-fied pattern means that the firm has no real preference for one particular mode and uses all kind of modes to internationalize. Nevertheless, these diversified patterns do appear to be restricted to the equity modes and do not or only marginally include non-equity modes. Another interesting finding is that the firms in this study prefer the wholly owned modes of entry. In the discussion it is argued that the choice of these modes can be directed to different factors. An important factor is the level of con-trol or integration with the parent firm, because management consultancies make great use of tacit know-how and to protect this know-how they prefer integration with and control over the new entries. Another important factor is risk, which also make management consultancies to prefer the full-control modes of entry.

Another factor that may hindered this research is the use of only secondary data. This may have caused the fact that there were barely non-equity modes found. Using primary data, such as inter-views, could improve this research.

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