Scott Policy Seminar
Regional Innovation and Business Services
by
Prof Peter Wood
Wednesday 16
thMay 2001
Malone House, Belfast
Biographical Note
Peter Wood
Peter is a Professor and Head of Department of Geography at University College London. He joined UCL approximately 30 years ago after having completed his postgraduate studies at the University of Birmingham. His research interests include the role of business services in providing technical and managerial expertise, and the implications this has in the process of globalising economic conditions. During the past 15 years his work has focussed on the implications of the growth of producer and business services for modern regional restructuring. More recently his research has revolved around four funded projects supported by the ESRC and the European Commission. Much of this work is collaborative, involving researchers in the UK, the EU and North America. Research is currently proceeding on the service underpinnings of innovative regional clusters, including those associated with large cities in Europe.
Abstract:
This paper addresses three issues in the context of business service development, related to the competitive base of urban regions and the degree to which they possess distinctive sources of innovativeness. The first is, how may growing business services, or consultancy, use influence client innovation? Although this is inherently difficult to demonstrate, the expertise and modes of operation of consultancies suggest that they do influence technical and organisational change amongst clients. The second issue is the segmentation of consultancy influence, especially by sector and types of firm. Finally, how far does the urban base of consultancy supply imply local,
specifically urban, benefits for client innovation? Consultancy services are often delivered over wide areas from their urban bases, within national and international nexuses of corporate and public sector service exchange. This question cannot be answered by focusing only on local exchange. Regional client-consultancy interaction needs to be set within a national and even international context of specialist expertise exchange.
Introduction: Consultancy and the milieu of regional innovation
Urban agglomeration theory suggests that the quality of business services in and around cities compared with elsewhere should benefit from economies of scale, and especially from economies of scope, with competition and specialisation supporting a greater variety of high quality service provision (Marshall and Wood, 1995). For some services these benefits may be countered by other influences. For example, functions which depend on easy road transportation or extensive space provision, or which serve more routine needs, may better operate outside congested urban areas. The benefits of metropolitan location are probably greatest for the most knowledge-intensive services (KIS), delivered through various forms of `consultancy', or active exchange with business or public sector clients (O'Farrell, et.al. 1992).
KIS include many forms of technical, including computer, and management consultancy, and diverse types of specialist, for example, in financial management, marketing and advertising, staff recruitment and development, property acquisition and management, trade promotion, or
distribution logistics. Their growth should not be seen as an autonomous trend. It is largely
demand-driven, reflecting changes in the ways in which large private and public sector service and manufacturing clients have focused more on core activities. As a consequence, they increasingly seek outside expertise both to control costs and to respond to a turbulent and uncertain technical, commercial and regulatory environment (Wood, 1996a).
The supply response of business services has also promoted demand for their services (Bryson et.al. 1993; Wood, et.al., 1993; Enderwick, 1989; Gentle and Howells, 1994; Morris, 1988). Both specialist practitioners and diversifying international consultancy firms offer a quality and range of expertise that far exceeds the requirements of the simple `externalisation' of established client functions. They often include strategically significant technical or organisational knowledge that client staff do not possess or could not exploit without consultancy support. New social divisions of expert technical and management labour have been created between client in-house and consultancy functions to complement those between key client personnel (Wood, 1996a/b). Rather than
employer-employee relations, their interdependence is based on consultancy forms of contract supporting particular projects. KIS growth has thus opened-up new avenues for the dissemination of knowledge and experience. These must have affected processes of change amongst clients,
including presumably their competitiveness and even innovativeness.
The rapid growth of KIS has been dominated by the major metropolitan regions over the past twenty years, suggesting that this is where client-consultancy demand-supply interactions are best developed (Daniels and Moulaert, 1991; Howells, 1988; Marshall, 1988). The modern growth of KIS may particularly have enhanced the innovative milieu of large cities, countering the effects of decline in urban manufacturing and other services. In practice, we do not know how significant the development of KIS has been as a metropolitan asset for the complex of `multiple specialisations' supporting urban innovation (Simmie, 1999). These include the business and financial services, the media, culture and entertainment activities, consumer and tourist functions, information technology and data processing, professional services, the public sector, and the limited remaining forms of urban manufacturing.
This paper addresses three issues in the context of KIS development, in the form of consultancies, related to the competitive base of cities and the degree to which they still possess distinctive sources of innovativeness. The first is, how may growing consultancy use influence client innovation? Although this is inherently difficult to demonstrate, the expertise and modes of operation of consultancies suggest that they do influence technical and organisational change amongst clients. If
so, which clients are most likely to benefit compared with others? There are appreciable barriers to consultancy use by SMEs, particularly in manufacturing. The second issue to be addressed
therefore examines the segmentation of consultancy influence, especially by sector and types of firm. Finally, how far does the urban base of consultancy supply imply local, specifically urban, benefits for client innovation? Consultancy services are often delivered over wide areas from their urban bases, within national and international nexuses of corporate and public sector service exchange (Allen, 1992; Sassen, 1991; Daniels, 1991). This question therefore cannot be answered by focusing only on local exchange. Urban client-consultancy interaction needs to be set within a national and even international context of specialist expertise exchange.
How do consultancies exert innovative influence on clients?
We know that innovation has occurred once a market has been affected. This impact may arise from a new product, or the increased market share of a supplier because of improved price or quality competitiveness. The basis of such change may be technological, the traditional focus of attention in innovation studies, but it will also require new marketing, organisational and human resource developments. In fact, such `non-technical' innovation seems to be about as important for market impact as the outcomes of R&D, even in manufacturing (Dodgson and Rothwell, 1994; European Union, 1995, Table 26). Further, although effective technical innovation requires the support of marketing, organisational or personnel changes, innovations in these functions do not necessarily depend on technical innovation.
Consultancies, of course, may support technical innovation, facilitating learning and change among engineering or construction clients, or supporting the adaptation of information and
communications technology (ICT) to many client needs. As the recognised scope of innovative action has widened beyond the narrowly technical, however, so has the apparent potential influence of consultancies. Their most general impacts over the past twenty years have been on non-technical and, for manufacturing, `non-core' change, especially in management, organisational and
marketing processes.
There is unfortunately no easy way of unravelling the influence of business consultancy, like any other specific type of agency, from broader developments in the innovative environment, in cities or elsewhere. In many cases, consultancy creates no investment in specific systems or processes, nor any tangible outcome. Clients may nevertheless benefit from access to widened sources of information, new organisational structures and procedures, or more effective training or marketing. Business consultancies are also never solely responsible for the outcomes of their work. Even, for example, in the design and implementation of ICT systems, outcomes depend on how the client adapts its wider management or production processes to the consequent changes. This is especially important for SMEs, whose scope for adaptation is limited, and for manufacturing firms more generally, which are often preoccupied more with technical production methods rather than organisational or marketing adaptation. On the other hand, good consultancy is itself a significant influence in promoting such client adaptability.
We must nevertheless assume that consultancies have some influence on technical and organisational change, if only because this is presumably why they are now so universally employed. Assessing their influence is made more difficult by the common client wish to manage its own affairs and to be the primary `owner' of change, even while drawing on wider sources of expertise. Only intensive project-based studies might allow an objective assessment of the relative roles of in-house and external actors. It is well established from survey evidence, however, that at senior levels in large client organisations, consultancies are valued, at different times or in
combination, for their specialist knowledge, their detachment from the internal preoccupations of client managements, or the extra management capacity they can bring to bear at particular times (Wood, 1996a).
Consultancies must also exert a distinctive dynamic influence, augmenting client approaches to change, based inter alia on:
- Their ability to recruit specialist technical, ICT and management skills and employ them across a range of client applications. These can augment or complement client expertise even in their core activities. Generally, the rise of consultancy has facilitated the mobility of specialist expertise throughout the economic system.
- Their distinctive change methodologies and specialist sources of information and intelligence.
- Their flexible modes of operation, cutting across the rigidities of formal organisations, employing project-based teams, with close working links with client staff at various levels adapted to individual project experience.
- Their role in codifying current `state of the art' knowledge about production techniques or business methodologies and employing it, often tacitly, in collaboration with client staff in relation to individual client requirements
Business consultancies may thus not be dominant forces in devising and delivering specific
innovations, but their manner of working may have become a significant catalyst of wider technical and organisational change. Bessant and Rush (1995) emphasise that the innovative outcomes of consultancy activities, or of public advisory agencies seeking a similar impact, depend essentially on sustained interaction with clients, (`process consultancy'). This applies as much to
organisational change as to the technology transfer with which these authors are primarily concerned.
Finally, consultancy qualities are brought to bear on a huge variety of circumstances, and can be potentially innovative only in specific circumstances of interaction with clients (Bessant and Rush, 1995):
1) Many exchanges involve no more than the long-established routine outsourcing of specialist functions, such as legal, accountancy, patent or transportation services. In some
circumstances, the extension of such practices, for example to data processing or wage and salary payments, may release resources for core, including innovative activities.
Consultancy inputs may thus facilitate client innovation by offering complementary specialist support.
2) Consultancies may do more than this by actively conveying innovative ideas to clients from other firms, sectors or countries, although not developing these themselves. This may occur, for example, through the preparation of reports on alternative choices from which clients themselves chose a course of action.
3) Although consultancies can act as a `messenger' to clients, this role increasingly requires the consultancy also to adapt wider innovative experience to different client needs. This adaptive expertise, common in management and especially in ICT consultancy, is probably
the most substantial general innovative contribution of consultancy.
4) Consultancy involvement in the initiation of innovation is probably rarer, since product change, at least, is an essential client core capability. On the other hand, consultancies often advise, for example, on the market potential of alternative technological trajectories. Specialist technical, including ICT, consultancies also often collaborate intensively with clients in process innovation. Within the wider context of organisational change, also, the consultancy ability to apply up-to-date experience to new circumstances is often itself innovative.
The innovative impacts of consultancy depend fundamentally on achieving an effective process of consultancy. Consultancy inputs are most likely to exert an innovative effect when there is close and continuous interaction of client and consultant expertise. This enables organisational or technical consultancy skills to be fully integrated into the client's innovation strategy. Which clients benefit most from consultancy support?
Corporate and public sector clients dominate the markets of large and, perhaps more surprisingly, small consultancies (Wood, 1996a). The reasons for this are not difficult to see. Large clients can support the scale of projects that most effectively absorb the costs of consultancy. They possess the resources required to implement change, especially in the computer-based and information system (ICT) and associated organisational and market adjustments that have increasingly dominated consultancy work in the past decade. Of course, the very complexity of such activities actually requires such consultancy inputs. These support interlinked technical, organisational, management, human resource and market planning in ways that is often difficult for in-house management. On the other hand, corporate clients also posses the range and quality of complementary in house expertise necessary for successful consultancy management and implementation (Wood, 1996a). Table 1 indicates selected major sources of fee income from the top ten UK management
consultancies for 1999. These firms share around two-thirds of the market for the major
consultancies monitored by Management Consultancy magazine. The most important UK markets are in private service activities, dominated by the financial services, but also including, retailing and distribution. Manufacturing, the utilities and the public sector are each significant, but much less important, at least for these companies. The scale of IT-based work had grown throughout the 1990s displacing or, more probably, absorbing other consultancy skills, such as business process rengineering, project management, corporate strategy and change management. Some companies nevertheless retain such specialisms, for example Cap Gemini and McKinsey for project
management.
Private services offer the most fertile ground for consultancy because change for them is necessarily market-, rather than technology-driven. It is also often project-based, drawing on incremental/synthetic processes of innovation, applying novel combinations of generic technical, organisational, human resource and marketing expertise. This encourages a culture of openness to outside involvement. This culture, however, not only favours large consultancies. In fact, the reverse may be the case. In the early 1990s, over 80% of jobs in most types of UK consultancy were in offices with less than ten staff (Wood, 2001). Keeble, et.al. (1991) estimated 77% of UK management consultancy firms employed twelve or fewer professionals, and more than 9,600 of the 11,800 with VAT returns in 1989 had an annual turnover of less than £100,000. Large service clients provide scope for a range of consultancy specialisation, including many small consultancy
firms. These are often favoured by those clients that have regular experience of looking outside for expertise (i.e. predominantly service corporations), since they are cheaper, and this experience means that they have the know-how to direct consultancies more effectively. This demand also provides the basis for expert consultancy spin-off, both from such 'client' sectors, and from larger consultancies. On the other hand, when clients are seeking access to international standards of practice, markets and operating intelligence, this tends to favour the larger consultancies, or at least specialist small firms that have experience of working with them.
Public sector clients have been a significant element of the consultancy market in recent years, especially as they have undergone privatisation, other forms of restructuring, such as outsourcing, and intensified efficiency scrutiny. This work may be innovative in terms of the procedures and norms of public agencies, but is generally regarded by consultancies as less innovative than commercial work, and also less profitable.
For manufacturing clients, innovation is more technology-driven, internally generated, and protected, with outside involvement limited by much stricter intellectual property/contractual arrangements than are common for consultancy. Specialist technical consultancies are closely tied to the dominant clients in their sector. They often depend on client investment, and only
occasionally appear to be independently innovative (IMIT, 1997). In effect, they primarily spread specialist technical capacity around a number of clients so that it can be offered at lower cost. Nevertheless manufacturing has become increasingly open to wider consultancy influence. This is because of the prevalence of competitive restructuring, including mergers, takeovers and corporate rationalisation, and the importance of ancillary technologies, such as ICT. Process innovation to reduce costs and improve marketing has become an increasing preoccupation, along with the need to know about international market capacities and trends.
For SMEs, much interaction with outside advisers is necessarily 'routine', including contacts with suppliers, clients, banks, accountants and lawyers. Responsiveness to these various agents
necessarily dominates SME change. They may exert either an innovative or a conservative influence, often based on individualistic social networks (Storey, 1994). Less routine uses of outside expertise tend to be imposed by regulatory needs, including advice on taxation, employment regulations, training needs or trading standards. There are generic difficulties for SMEs in gaining access to and absorbing genuinely innovative outside influences. These are based on their cost, the time needed to do so, the dominance of short-term over longer-term priorities among SMEs, and the independent attitudes of their entrepreneurs and managers.
There are, however, exceptions. 'Leader' SMEs, already orientated to innovation or growth in new markets or technologies, can benefit from consultancy advice. This often comes from small-medium consultancy firms, including to support the difficult processes of managing growth itself. Such engagement is more likely in sectors where incremental or synthetic, market-led innovation is possible, for example in consumer and personal service markets, the media, travel and tourism, or software applications.
In many European countries the establishment of non-commercial agencies, offering advisory services to SMEs, has become common. In effect the main beneficiaries are the minority of innovative SMEs who know they need such support. These agencies are often most effective in providing information, general advice and contacts, rather than acting as 'process consultants' themselves. They may also benefit from operating within a broader policy of local SME 'seedbed' encouragement. In some cases, however, such as the Steinbeis Foundation in Baden Wurrtemburg, intensive and sustained technical consultancy, sometimes incorporating wider organisational advice,
has been successful in supporting manufacturing SME innovation. This may simply reflect the wider culture of German business support for technical innovation. It also replicates the types of business service inputs available through market processes to SMEs within any successful industrial cluster.
Is consultancy influence concentrated in cities?
There is thus strong circumstantial evidence, at least, that consultancy influences the innovativeness of clients. This influence is felt most by the corporate service sector, and also corporate
manufacturing, although perhaps in different ways. The public sector increasingly employs consultancies, although in relation to different organisational norms and goals. Smaller, non-corporate business is less able to exploit consultancy knowhow, although the more innovative, growth-orientated SMEs may do so. These especially draw on the plethora of small specialist consultancies and advisory agencies, including those supported by national, regional or even local public funds.
In this context, what is the significance of the growth of consultancy for modern regional and urban innovativeness? One of the most consistent responses from surveys of consultancy use is that clients expect consultancies working for them on significant projects to have a local presence. If business location in large cities is associated with proximity to a wide range of specialist consultancy expertise, does this thus especially support the innovativeness of urban-based clients? Our analysis suggests that, if this is the case, the process applies only selectively.
Aggregate consultancy activity appears to favour the innovativeness of the corporate sector. In purely operational terms, however, this need not favour large cities. Corporate clients seldom find difficulty in engaging major consultancies wherever they operate, and even international
consultancies establish local offices where contracts draw them away from their metropolitan bases. Nevertheless, the planning of such work often originates in metropolitan-based headquarters, particularly in the financial, trading, retailing and distribution services that employ consultancies most and in corporate manufacturing. The same applies even to central government activities. The draw for these activities is the national and, in many cases, the global status of cities. So,
consultancies favour urban innovation primarily by reinforcing the metropolitan nexus of corporate strategic planning, orientated to national and international trends. Understanding patterns of 'local' exchange thus requires such wider considerations than those specific to particular projects.
This may also be true of the use of specialist consultancy advice by SMEs in the consumer, media, tourist, or computer-related service sectors. The training and experience that supports innovative small consultancies is invariably gained earlier, through the employment of key staff by larger organisations, usually in the same region. These supply the national and international expertise that is filtered and adapted through small consultancies to their clients, including growth-orientated SMEs. The process of small consultancy spin-off is most intense in metropolitan areas, where the potential interaction with SME clients in the most receptive sectors is also greatest. Again, the incidence of particular local consultancy-SME exchanges, within cities or elsewhere, is less significant than the context of corporate activity that supports specialist consultancy spinoff, thus creating a pool of potentially innovative expertise accessible to SMEs. This favours large cities compared with other regions.
Thus the greater presence of business consultancy in large cities reflects an orientation to dynamic corporate and SME clients there. It also reinforces the benefits to clients of locating there. Other regions may benefit from urban-based, as well as local consultancy, but there is evidence that the
diversity and expertise of their small consultancies are lower than in large cities. The key
dimension of urban advantage lies in the quality of the national and, increasingly, the international exchanges that they control (O'Farrell et.al. 1996, 1998). These influence financial, circulation, consumer, professional, media, cultural, tourist and public service clients, and the control functions of primary and manufacturing corporations. In short, the dominant sections of the consultancy sector increasingly favour the `global' over 'local' attributes of cities.
The exchange of knowledge, especially non-routine innovative knowledge requiring a degree of tacit understanding, depends on the quality of interaction, in this case, between client and
consultancy. The pattern of such interaction, between international, national and regional levels, is being facilitated by the expanding system of client-consultancy exchange (Wood, 2001a/b). The most important exchanges for international consultancies are with the staff of their multinational clients. While such clients may benefit from the specialist outside knowledge and experience they acquire, what the consultancies learn becomes their stock-in-trade. It is used to advise other, including nationally- and regionally-based clients wishing to purchase international know-how. Individually-based consultancies may also spin-off, working in close liaison with large and smaller clients, including those working within particular national business cultures. Some consultancies arise directly from such national requirements, and may subsequently expand internationally (O’Farrell, et.al., 1996). They often also work for multinational clients requiring specialist or ‘local’ knowledge. These processes of knowledge exchange through consultancy also operate between regional, national and international scales. Regions possessing specialist clusters of activity, including cities, may benefit from wider demand for local expertise as well as by gaining access to outside knowledge. By working for non-local clients, region-based (including urban) consultancies acquire knowledge of international standards which potentially benefits local clients and extends their markets outside their home markets. Large consultancies also often sub-contract specialist work to smaller consultancies and, as we have also seen, clients increasingly combine the services of large and small consultancies to complete individual projects.
There may thus certainly be greater potential in cities for offering innovative support to traditional sectors. Much ICT and organisational knowledge is nowadays generic to all business. Many innovative consultancies thrive by transferring marketing or IT experience between sectors, from supermarkets to banks, or from service to manufacturing clients. Urban clustering may thus offer generic support to SMEs, especially to link them to market and technological opportunities. In spite of this potential, however, business consultancy generally reinforces change and innovation among the more dynamic sectors that tend to be their clients, including SMEs (Wood, 1996a). These national and global relationships do not necessarily enhance the innovative environment for many routine businesses or public sector functions in cities compared with elsewhere. The influence of metropolitan-based sources of advice for metropolitan SMEs in more routine functions depends on how adaptable they are to the variety and dynamism of urban market change. The clustering of urban support services, however, may as well lock them in to traditional consumer and business markets as anywhere.
In summary, cities as centres of specialist consultancy activity are predominantly a base for
articulating their relations with corporate and public sector clients. This fosters the growth of many small consultancies which also predominantly serve large clients. Much of this activity bypasses local SMEs. For the more innovation-oriented among these, however, smaller consultancies and other local advisory agencies may offer better levels of expertise than elsewhere, through various processes of information, entrepreneurial and personnel spin-off from corporate business. These may therefore be active agents for the local dissemination of best practice and globally-oriented intelligence. The quality of more routine SME client, supplier and advisory contacts and support in metropolitan areas may also be higher, although the implications of this depends on the
responsiveness of local SME clients, and the balance of other influences on them in large cities compared with elsewhere.
Conclusion: Consultancy influence on the regional innovative milieu
There is strong circumstantial evidence that the influence of consultancy on organisational change and innovation is growing, augmenting the expertise base of clients at all scales, especially through the link it provides to international standards of technical and management practice. Successful consultancy, however, requires sustained interaction with clients and is contingent on specific forms of relationship. The effects of the use of consultancies on client innovation are thus unlikely to be measurable in isolation. The analogy of consultancies as catalysts, stimulating change across a wide variety of clients (although not entirely apt, since they are themselves changed in the process), suggests that their influence can be known only by studying in detail the change projects in which they are engaged.
Much commentary on consultancy activity has focused on large consultancies and the large corporate and public sector clients with whom they have most dealings. Many small consultancies also depend on large clients for success. At this corporate scale, there is good circumstantial and empirical evidence that the growing use of consultancies has changed innovation processes, within the context of many other technical and organisational changes. Large urban-based clients draw on national and international sources of expertise, and this has enhanced the quality of local and national as well international consultancy.
It is not clear how far the use of cities by large clients and consultancies as a base for their wider global activities enhances the general metropolitan milieu of innovativeness and adaptability, apart from encouraging the development of smaller consultancies themselves. As elsewhere, there appear to be significant barriers to the accessibility of many SMEs and traditional manufacturing sectors to non-routine innovative expertise. These barriers have, of course, justified widespread public intervention, for example through the Enterprise Initiative and Business Links in the UK, to provide advice to SMEs. Such policies tend to be orientated to peripheral regions, however. Perhaps they might have greater impact if directed to SMEs in metropolitan regions, where market conditions are more favourable to client-consultancy interdependence and access barriers more firm-specific. Attention would also need to be addressed to improving the quality of the routine contacts on which SMEs depend (such to banks, accountants, clients, suppliers) as well as
facilitating strategic access to consultancies where client companies have an identifiable innovative potential.
In spite of the significant growth in consultancy activity in recent decades, and the clear a priori reasons to believe that this might have affected business innovation, consultancies still seldom feature prominently in formal surveys of sources of innovativeness. Many studies simply do not ask about them and the nature of the innovations examined is often narrowly defined and
technologically-dominated. At least in the latter respect approaches to innovation studies are changing. The significance of organisational innovation as a condition for firm growth and competitiveness (especially for SMEs) now seems to be becoming generally accepted. This, in itself, is likely to increase awareness of the presence of business consultancy, along with other influences on innovation.
The complex of service functions which now drives regional and urban economies, dominated by international corporate interests, poses a dilemma for attempts to identify specifically localised innovativeness. Nevertheless, consultancy activities, extending the exchange of expertise to the international scale, but displaying distinctive qualities of interaction in metropolitan cores, demonstrate how the global cities may enjoy enhanced innovativeness as a consequence. Some sectors, especially services are particularly receptive to these influences. It is more difficult to
assess metropolitan benefits for technically innovative manufacturing, and for SME more generally, compared with elsewhere. In practice, highly selective access to consultancy expertise, in terms of appropriate SME client capabilities and ambitions, are likely to be the main basis of success. But the potential available for this type of encounter to succeed is almost certainly much greater in core cities than in other types of region.
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Table 1
Top ten UK management consultancies: 1999 fee income (£ millions), IT share and top four markets served
Total Fee Financial Manuf. Public Utilities
Income services sector
(IT-based)
Andersen Consulting 609 (468e) 286e 31e 49e 85e
Pricewaterhousecoopers 540 (261) 157 27 43 40
KPMG Consulting 282 (70) 144 21 25 4
Cap Gemini 276e (31) 97e 74e - 52
FI Group/OSI 238e (172) 117 2 16 55
ICL Group 212e (164e) 58e 40e 60e 19e
PA Consulting Group 176 (61) 38 19 22 10
Ernst and Young 174e (14e) 59e 13e 4e 17e
Deloitte Consulting 162 (85) 21 22 32 13
McKinsey & Co 135e (nd) 47e 26e 13e
-e - -estimat-e: nd - no data
Top ten consultancies shared around two-thirds of the market Source: Management Consultancy, July/August 2000.
