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The Efficiency of Consulting Firms, 1994
 

by Jordan Markov and Daniela Bobeva

Center for the Study of Democracy

 

Introduction

The beginning of the reforms in the economy brought about the establishment of a market for consulting services. Its formation was determined on the one hand by the appearance of demand for consulting services, and on the other - by the wide range of legal and economic analyses, expert evaluations and recommendations offered by the rapidly growing number of private persons and firms engaged in this specific sphere of the economy. The extremely liberal conditions for economic activity in Bulgaria allowed the mass registration of consulting firms unrestricted by any licensing procedures. The lack of such restrictions makes it impossible to make even a rough estimate of the number of firms working in this field. The absence of restrictions with respect to Bulgarian natural and legal persons carrying out such activities also applies to foreign persons. Unlike Poland, for instance, where the activities of foreign consulting firms are subject to licensing, Bulgaria is more liberal. This allowed for the registration of most of the largest international consulting firms - Price Waterhouse, Deloitte &.Touche, Arthur Andersen, Moore Stephens, KPMG, and others. The overall effect has been beneficial both in terms of a wider range and of higher quality of the consulting services offered. The increasing competition has proven to be of benefit above all to potential clients. Providing technical assistance in company management, as a normal practice in market economies, has very rapidly become common practice in Bulgaria. These processes are characteristic of all countries undergoing transformation. The role and efficiency of consulting services in the countries in transition are of particular interest not only to macroeconomic theory and to decision-makers, but likewise to the consumers and producers.
 

A survey aimed to investigate the effect from the consultancies on the economic performance of the enterprises was carried out by CSD in May, 1994.

More specifically, the survey collected information on:
 

- the financial state of the company;

- why and how the consulting firm was hired;

- the client's evaluation of the performance of the consultants and whether the conditions of the assigned task were met;

- are there any observable results of the work, assessment of these results;

- what measures have been undertaken as a result of consultations, how successful was the work with the consulting firm.
 

The survey considered 125 state-owned companies with over 500 employees.

The principal method of collecting information was the semi-standardized interview with executive managers of enterprises and deputy managers.
 

The survey included enterprises from the entire territory of the country (small, average and large towns).

The branch structure of the sample represents the branch structure of the economy.
 

Branch structure of the surveyed enterprises
 

value percent
 

1. Industry 1 78.8

2. Transport 2 3.5

3. Agriculture 3 2.4

4. Communications 4 1.2

5. Construction 5 3.5

6. Other 7 9.4
 

Survey Results
 

One surprising finding of the survey is that almost every third state-owned enterprise has sought the services of a consulting firm in the course of the last five years, and a considerable number have concluded more than one contract for consultation.
 

Concluded contracts with consulting firms
 

Number of contracts Share of the enterprises
 

none 62.4

one 16.5

two 14.1

three 3.5

four 2.4

five 1.1
 

The demand for consulting services tends to increase the larger the size of the enterprise. This is accounted for by the greater need for professional expert evaluations and analyses of the new market environment on the one hand, and the financial resources of the enterprises, on the other. This is one of the specific characteristics of the demand for consulting services in the countries undergoing reforms. In the developed countries public resources are being invested mainly in technical assistance to small business, which has the greatest need of consulting in the elaboration of the strategy of the company, the business plan, the investment programs, accounting, etc. The practice in this country has shown that the principal clients are above all the large state-owned enterprises. The latter are finding it more difficult to adjust to the new market economy conditions and therefore need professional analyses and recommendations. In addition they can more easily afford these costly services. In the countries under transition there has emerged a complex pattern of client-consultant relations, unlike the traditional bipolar structure in the developed countries.
 

The price of consulting services
 

The planned restructuring of the state-owned enterprises prompts the central administration to commission sector analyses, privatization valuations, elaboration of business plans and others from well-known consulting firms established in the respective field. In this sense, the central institutions are typically the ones to make the commissions, while the concerned enterprises are the immediate clients. In a considerable number of cases these consultations are paid by foreign financial institutions. The survey has shown that of all enterprises which have used consulting services, 68% have paid for them with the company's own money, 11% with PHARE funds, 9% with funds from the World Bank, 8% - from the European Bank, and 4% - from other sources.
 

This complex commissioning institution-financing institution-client-consultant pattern gives rise to a number of internal contradictions and more often than not is the reason for lack of interest on the part of the specific enterprise to make use of the offered recommendations and expert evaluations, in which case the service proves to be quite pointless.
 

As has been shown by the survey, prices vary from 1,000 Leva to DM 1m, depending on the scope and duration of the required services and the prestige of the consulting firm. Not surprisingly, the prices set by foreign consultants are higher than those of local ones. Also, the enterprises tend to seek mostly short-term services - up to three months. 73.9% of the concluded contracts involve a term of up to three months.
 

Bulgarian enterprises still regard the prices of consulting services as high. Their management finds it difficult to accept a price of DM 1m, for instance, regardless of the obtained results. That is why, the question whether prices correspond to the quality of the work typically obtains positive answers with respect to Bulgarian firms, but negative ones with respect to foreign firms.
 

The object of consultations
 

Consultants are most often approached in connection with company strategy and its implementation. Apparently, one of the mechanisms for facilitating the adjustment of the enterprises is commissioning the strategic analyses and expert evaluations from external private - local and foreign - firms. The demand for services connected with privatization comes in the second place. This is an additional confirmation of the fact that privatization is a costly process, whose success would be unthinkable without investing in valuations, in the working out of privatization projects, staff training, etc.
 

Consulting services
 

type of service share of the enterprises
 

1. Strategy of the firm 43.4

- elaborating a strategy 26.1

- internal restructuring 17.4

2. Privatization (valuation, legal analysis, etc.) 21.7

3. Auditing and financial matters 14.1

4. Introducing information technologies 8.7

5. Staff training 8.7

6. Others 3.4
 

Selection of consulting firms
 

Of the companies which have used the services of consultants, 60.9% chose Bulgarian, and 39.1% - foreign firms. Among the foreign firms, German ones tend to be most sought after. This might be accounted for by the traditional economic contacts with Germany and the fact that the Bulgarian economy is more familiar to partners from that country.
 

The chief criterion in selecting a consultant is above all the experience of the firm. In other words, preferences favor consultants who already have a certain number of contracts and have been recommended by former clients. The second important factor in the choice of consulting firm is its international prestige. It tends to impress Bulgarian managers but also leads to unreasonably high expectations regarding the effect of the consultation, which are subsequently very difficult to satisfy. The price of the service comes third in importance.

One of the problems in consulting state-owned enterprises is that in the cases when the service is commissioned by the institution exercising the property rights (30% of consultations), the companies do not have access to the selection of the respective consultant, which subsequently gives rise to communication problems between the two sides.
 

How enterprises evaluate consulting services
 

Consulting is a complex and bilateral process which requires the building up of a certain economic and institutional culture in management. Under the deep crisis in which the larger part of the enterprises now find themselves, consulting services are sometimes viewed as a panacea, in a position to reveal the magic way to success for the firm. All of this reflects on clients' evaluation of the effect of consulting services.
 

The survey has shown that merely 4.3% of consultants failed to meet the conditions of the task they had been assigned. 52.2% fully met the agreements, and the remaining 43% on the whole fulfilled what the commissioning party expected them to do. Obviously, one of the problems in enhancing the efficiency of consulting is the clear and detailed formulation of the task.
 

The general evaluation made by the surveyed state-owned enterprises of the consultants they worked with is not very favorable. It is interesting to note, however, that even those who were not satisfied with the performance of the consulting firm nevertheless use consulting services again. On a 2-5 scale, only 4.5% of the consultants were given the highest marks, and 14.4% - the lowest. The larger part - 34.8% - were rated as passable.
 

The effect of consulting services depends on a great many factors, among which we find not only the quality of the provided services, but equally the readiness and ability of the clients to make the most of them. On the other hand, the deficiencies and the dynamic nature of the market situation in Bulgaria make the steps recommended by consultants very difficult to implement successfully. For instance, a professionally executed valuation of the assets of an enterprise under privatization may lose its value in the course of the auction or tendering procedure. This is not an excuse for the mediocre rating of consulting services, but rather, an illustration of the risky character of consulting activities in an unstable market environment.
 

The rating on a 2-5 scale of Bulgarian and foreign consulting firms tends to give slight precedence to Bulgarian ones. At first sight it might seem illogical that, even if the respondents assess the professional qualification of foreign consultants as higher than that of Bulgarian ones, the final result of their activities is nevertheless rated lower than that of Bulgarian consultants.
 

Evaluation of efficiency of consulting firms

(2 to 5 scale)
 

price qualification result

Bulgarian consultants 2.66 3.00 3.80

Foreign consultants 3.66 3.50 3.00

 
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