Choosing the Wrong Partner Companies Can Ruin a Business
It hardly needs explaining, but companies have several partner companies that support their business activities.
For example, consulting firms that formulate and design corporate strategies on behalf of companies; advertising agencies that promote companies’ products and services by producing advertising for media such as TV commercials, newspapers, magazines and the web; and IT vendors that build companies’ core business systems and IT infrastructure.
Beyond these partner companies, there are also partners that support companies’ business activities from the sidelines using professional qualifications, such as tax accountants, lawyers and patent attorneys.
What I want to address here is the reality of partner companies and how to choose them. The three most important are consulting firms, advertising agencies and IT vendors. That is because, depending on how you engage with these partner companies, they can have a major impact on your business performance.
Top-tier companies with ample funds set up departments equivalent to these partner companies and recruit talent to keep in-house. Even so, when running a TV commercial, for example, they surely rely on a major advertising agency.
And most companies, apart from such “wealthy companies,” commission the partner companies they need according to their budget, timing and challenges.
However, partner companies do not possess any definitive corporate strategy know-how for supporting their client companies either. So how are they able to continue existing as companies’ strategic partners?
Well-known partner companies attract excellent talent. Major firms in particular have a track record of earning profits by supporting top-tier companies, so newcomers form “teams” with their seniors to meet companies’ requirements.
Training in such cases is close to an apprenticeship system in which, like Japanese craftsmen, one “steals the techniques,” making it quite difficult for a single senior employee to develop many juniors.
Since what companies require of these “teams” differs case by case, once they have a certain level of shared know-how, the rest is simply a matter of succeeding through on-the-ground responses.
Through this repetition, individual experience grows, but I suspect they do not share the know-how learned there horizontally with the aim of raising the skills of the company as a whole. As a result, the quality of employees tends to vary widely (know-how becomes dependent on individuals). That is my supposition.
The Reality of Consulting Firms
When I visit companies to support their corporate strategy, I often hear things like, “We used another consulting firm before and it was a failure.” Such stories are nothing new.
I have wondered since my days working at an advertising company, “Why are consulting firms so disliked?” So even now, whenever the topic comes up, I make a point of asking for details.
The reasons are many and varied, but let me give one example. This is the story of a certain railway company.
While talking with the corporate planning office, I was shown the management plans that previous consulting firms had prepared. There were two plans, each proposed by a different firm. Both had been prepared by major consulting firms that everyone knows. The plans were thick, probably about 300 pages each.
I flipped through them, and frankly I couldn’t help sighing, “What terrible content.” I have prepared more planning documents and proposals than I care to count since I was a newcomer, so I can tell the quality of a document after reading just a few pages.
The main reason I found the management plans so terrible was that they had clearly been written by several people; there was no overall consistency, and the content at the beginning did not connect with that in the latter half.
Probably because the work had been divided up, each author’s own “color” came through, their arguments differed subtly, and because each competed to write their own part at length, the documents had grown to an abnormal volume. Even if one took them at face value and tried to put them into practice, it seemed utterly impossible to realize them.
The person in the corporate planning office had also noticed the lack of consistency and lamented, “These are simply unusable.” When I asked how much these management plans had cost, I was told that one cost 100 million yen and the other 30 million yen.
Since this was a large company with plenty of money, it may have been settled as “a failure this time,” with some minor disciplinary action for the person in charge, but for an SME it would undoubtedly have been a severe blow.
What is truly frightening, however, is the case where a company trusts a management plan of this quality and puts it into practice. If it pours large sums into something that cannot possibly succeed, the losses would be immeasurable.
Thinking about that sent a chill down my spine. Since the damage was kept to a minimum, in a sense the corporate planning office’s decision to put a stop to it was the right one.
Recently, I was also asked to design the corporate strategy for a company with annual sales of around 20 billion yen. At that size, consulting firms have naturally been involved before.
When I asked about it, they said, “Well, we commissioned a major consulting firm for about 30 million yen, but the result was completely useless. The only output was ‘Your strength is your people.’ Seeing that, even our president was furious.”
There are cases where companies have made good use of consulting firms or where proposals have fit well and improved business performance, but failures like this also frequently occur in reality.
Some time ago, I spoke with several people to learn about the reality of consulting firms. One of them was a professor at the MBA school I attended.
Before teaching at the school, he had worked at a major consulting firm. So I asked him frankly what actually goes on at consulting firms.
Major consulting firms hire highly educated people to begin with. He said they also have a systematic training program for new employees, but there are no unified basic rules or know-how for formulating management plans.
After training, newcomers are taught through practice by senior employees, but since everyone is inherently smart, education is apparently centered on “learning on the job.”
As a result, because the guidance is individual, the management plans produced depend on each person’s ability: talented people produce high-quality management plans, while those without aptitude produce poor ones.
In short, even at major consulting firms, the quality of consulting varies depending on the person in charge.
There is another phrase that executives who dislike consulting firms often repeat: “They can formulate strategy, but they won’t teach us the tactics.” This carries a very deep meaning.
There is hardly any need to explain the difference between strategy and tactics. No matter how excellent a strategy is, a strategic design that does not take into account tactics, that is, methods of execution, ends up as mere theory. In other words, it is “all idealism and not realistic.”
Consulting firms earn their revenue strictly by designing strategies. Moreover, the higher the fees they can charge, the more they are evaluated as having accomplished excellent work.
To put it in extreme terms, all they need is the ability to produce proposals and plans that look like they can be sold for a high price. What happens on the ground does not concern them. That is because providing such hands-on support would make it hard to wrap up the engagement. And of course, they likely have almost no on-the-ground experience, since they do not actually work at that company.
And so people who don't really know the front lines, with widely varying abilities, put together armchair theories and assemble them into a single plan. That is the true nature of an expensive strategy design document.
Of course, among my acquaintances and colleagues there are many excellent management consultants who deliver results worth their cost. Even so, dispelling the negative image that leads executives to say such things is an important issue that the consulting industry as a whole must reconsider.
So how can you choose an excellent consulting firm while avoiding waste as much as possible?
Ultimately, the only way is for executives and senior managers to enhance their own knowledge and skills and acquire the ability to properly formulate and execute corporate strategy themselves. That is the executive's job. Companies fail because they hand everything over to other firms.
If executives raise their own literacy in corporate strategy, they can then simply ask a consulting firm for partial support only where it is needed.
If anything about the support seems even slightly off, you can stop there and have it corrected, or switch to a different firm. With a sharp eye for the support you receive, you can achieve your corporate strategy while preventing damage from spreading and keeping costs low.
The Troubles Facing Advertising Agencies
For some time now, a series of major incidents, such as an employee suicide and controversies over Olympic-related vested interests, have shaken trust in the advertising agency industry.
I don't mean to defend advertising agencies, but because they are also important business partners for our company, we know a fair amount about what goes on behind the scenes, and I can understand the troubles their executives face.
What are the troubles of advertising agencies? They are declining cost-effectiveness and the inability to keep up with the diversification of media used to deliver information. Let me explain in a little more detail.
Normally, when a client company wants to run an advertisement, an advertising agency handles everything from producing the ad to placing it in one package. The fact is, however, that the very word and concept of “advertising” is becoming out of step with the times.
As the word suggests, advertising is about broadly announcing a company's products and services to consumers. In the past, people encountered products and services by seeing them directly in nearby stores, through salespeople, or by word of mouth. In addition, companies with budgets grew their sales using mass advertising in newspapers, radio, magazines, and so on.
Then, during the period of rapid economic growth from the late 1950s (the Showa 30s) onward, it was the spread of television that helped large companies grow even larger. It was an era when family and friends gathered in front of the TV, and the next day everyone at school or work would excitedly talk about what they had watched.
A single successful TV commercial could even give birth to a listed company; the influence of advertising was enormous.
Today, however, due to factors such as more overtime, more dual-income households, and the diversification of entertainment beyond television, family members lead separate lives even under the same roof.
Furthermore, with the development of the internet and the spread of SNS (social networking services), good products and services now spread through word-of-mouth information.
Likewise, “exaggerated advertising” is quickly exposed as a lie and the exposure spreads. There are also bad cases where people believe plausible-sounding false rumors to be true and spread them further. If there is a failure or mistake, it immediately sparks a firestorm on social media, and companies are often knocked down so hard that they cannot easily recover.
As a result, companies begin “self-regulation” with safety first, and the impact of advertising weakens. Another major factor is that people's incomes have been steadily declining, so they no longer spend money on things.
For these various reasons, companies are reconsidering whether advertising itself is meaningful, and more and more are working to optimize or cut their advertising expenses.
Having said all this, the truth is that corporate advertising budgets have actually been increasing since the “Lehman Shock.”
A simple comparison is not possible due to factors such as rising placement costs, but advertising expenditure itself is higher than in the “bubble” era. While some companies are cutting their marketing and promotion budgets, others are investing heavily. Especially notable is internet advertising spending. Eating into TV placement costs, internet advertising expenditure has continued to rise steadily since the mid-2000s.
Mass advertising in television, newspapers, magazines, etc. (*mass advertising refers to mass media such as TV commercials, newspaper ads, magazine ads, and billboards) has decreased, but only the direction of advertising has changed. New advertising design models that did not exist before have emerged, such as guiding people from mass advertising to the web, and the way companies design their advertising has changed.
However, advertising agency executives find it hard to make a move. Herein lies the weakness of traditional advertising agencies.
The first reason is that a scramble has begun for a fixed pie targeted by mass advertising, and the number of companies that can afford mass advertising has become limited.
One cause is the decline in TV viewing time mentioned earlier. Television is watched frequently mainly by middle-aged and older people, but among younger generations in their 30s and under, smartphone use has overwhelmingly increased compared with TV. The amount of time people spend with media has not changed much from the past, but where that time goes has changed dramatically.
Furthermore, because the incomes of young people are not growing, they are kept busy with overtime and come home late; even if they marry, as dual-income couples they are in no position to have children, and marriage itself is becoming difficult.
They have no time to watch TV during the so-called “golden time” from 7 to 9 p.m.
Even for automobiles, one of Japan's key industries, more and more people in major metropolitan areas (though not in rural areas) cannot afford a car or consider one unnecessary. If fewer people buy things, corporate sales will only keep declining. It is really quite simple: if the population does not grow due to the declining birthrate and aging society, the number of buyers is limited no matter how much you advertise.
Another weakness is the lack of know-how in producing online advertising.
In recent years, there has been a sharp increase in emerging companies that are better at producing online ads than the advertising agencies that have traditionally created TV, newspaper, and magazine ads.
Mass advertising online can be produced more cheaply than TV commercials and the like. As a result, mid-sized advertising agencies that stuck to the old ways have been put in a difficult position.
In addition, the cost-effectiveness of TV commercials can basically only be measured roughly by comparing viewer ratings with sales, whereas with online advertising, where data analysis has also advanced, it is becoming possible to measure detailed cost-effectiveness through methods such as tracing customers' browsing histories. Perhaps for this reason, some companies have begun to question running TV commercials that cost enormous sums.
Currently, the products and services featured in commercials aired on TV are said to number about 7,500 brands per year. Multiple advertising agencies are fiercely competing over just these 7,500 brands.
In marketing there is the term “red ocean,” describing a bloody battle as the competitive environment intensifies, and the advertising industry has truly become a “sea of blood.”
There are also problems with how advertising agencies produce advertising. When an agency receives an advertising order from a client, it outsources most of the planning and production work, such as various market surveys and commercials, to external vendors.
What happens then? The know-how of “producing advertising” does not accumulate within the advertising agency itself, and the “strength” of production capability passes to the external vendors.
Major advertising agencies end up with functions centered only on sales, and their in-house production capabilities weaken considerably. When new advertising agencies that are also skilled at IT-related production enter the market, the agencies have no choice but to compete with each other on sales service toward client companies.
To develop new sales targets, advertising agencies are also expanding their sales activities to small and medium-sized enterprises, which they had not paid much attention to before.
However, because SMEs have had little experience dealing with major advertising agencies, they sometimes seek support not only for advertising but even for corporate strategy. I deliberately bring this up because such cases occasionally occur around me, and almost all of them fail.
As I will explain in Chapter 2, corporate strategy has six stages, including Marketing, Management, and Operations.
Marketing, one of these, is classified into the 4Ps (Product, Price, Promotion, Place). Of these, Promotion is further subdivided, and advertising plays only a very small part of it.
Viewed from the perspective of corporate strategy activities as a whole, advertising is merely one element, and advertising alone cannot possibly solve management issues.
Even large advertising agencies do not have the know-how to support corporate strategy, so if you casually ask them for corporate strategy support, you will end up in serious trouble.
The High Failure Rate of IT System Implementation
Finally, let me explain the current situation of IT vendors as corporate partners.
Once companies reach a certain size, they begin introducing IT systems in pursuit of efficiency. Starting with small-scale accounting systems, the scale gradually expands to systems with diverse purposes, such as sales management and customer management.
In recent years, software itself has evolved remarkably. There are packaged software products and inexpensive options that use cloud systems. There is also a method called “scratch” development, in which a system is built from the ground up to fit a company’s business structure and needs precisely.
However, implementing IT systems is also accompanied by failure at a considerable rate.
There are various data on the probability of failure, but on average it is said to be around 50-70%.
IT orders range from several million yen to tens of millions or even hundreds of millions of yen, so the costs are by no means trivial.
In general, costs are calculated from the “man-hours,” i.e., the processes, number of people, and number of days required for system development, but this depends on what the vendor claims. Moreover, depending on the development content, it can take anywhere from six months to several years, requiring both time and money.
Yet quite a few systems turn out to be unusable once completed, and all that effort simply “goes down the drain.” In some cases this has even led to lawsuits, and it can have a serious negative impact on corporate management.
So why do IT solution implementations fail like this?
The reasons are that the ordering company does not know how to work with IT vendors, and the IT vendor receiving the order cannot understand the company’s needs. Because of these two factors, IT implementations often fail.
Let me start by explaining the problems on the company side.
It would be a different story if the company had employees with knowledge and experience in implementing IT solutions, but most companies, especially SMEs, have no experience implementing IT solutions, so they first struggle to choose an IT vendor to order from.
Here, companies face three broad choices.
The first is the “scratch” pattern mentioned earlier, building from the ground up. If you choose this, it starts with interviews to organize business processes and requirements, so it is costly and the development period is long. Since you are creating a program that never existed before, the risk of failure is also high.
The second is the pattern of purchasing packaged software. If you purchase software that matches the company's issues and needs, it is relatively inexpensive and less likely to fail. That said, while accounting software and the like may be fine, a core-system-class package can cost hundreds of millions of yen to implement.
Packaged software can usually be “customized” to fit specific needs. However, customization is charged separately, and it is outrageously expensive. One often hears stories of companies that thought they had bought packaged software cheaply, only for it to end up unbelievably expensive after customization.
The third is the pattern using the “cloud,” which has grown rapidly in recent years. Until then, it was standard to install and use systems running on large computers in-house. Most of the scratch-built cases mentioned above are of this type.
“Cloud” literally means a cloud in the sky; these services are managed centrally on servers located in strictly controlled system centers somewhere outside the company, and are used by running software within the cloud. The locations are never disclosed.
Because all software is used via the internet, it can easily be used not only inside the company but also from outside on laptops, tablets, smartphones and the like. The cost performance is high, but like packaged software, it is not built for your company, so it is not necessarily easy to use.
Thus companies agonize over several options, but only a handful can arrive at the right answer, and there are also no IT vendors (for various reasons) that can offer accurate advice.
*For details on the reasons, please see the next column, “Will IT Vendors Soon Disappear❓ The Reasons Why.”
Next is the problem on the IT vendor side.
IT vendors that have grown rapidly and achieved excellent results are always struggling with a shortage of technically skilled system engineers and sales staff who thoroughly understand IT solutions. Under such circumstances, IT vendors assign excellent staff to “scratch” projects built from the ground up where big money is involved, but if a project looks like it can be handled by simply customizing packaged software, they decide it is fine to assign less experienced staff.
As mentioned earlier, the client company side is also not good at placing clear orders on what parts of the packaged software should be modified and how. Discussions tend to end up between people on both sides who lack knowledge and experience.
To protect themselves from such vague orders, IT vendors create a document called a “requirements definition.” This document draws out and summarizes the changes from the company’s order. While this is a natural process from a business standpoint, the requirements definition has a hidden purpose: protecting the IT vendor as a kind of contract.
Companies make various requests about the kind of program they want, but because they lack specialized knowledge, their requests tend to be vague. The IT vendor compiles these into the requirements definition as the company’s order and builds exactly what it was told. When the finished program is actually used, complaints inevitably arise, such as “it’s hard to use” or “it lacks functions.”
This is where the requirements definition created at the outset shows its power. The IT vendor asserts that “we built it exactly as stated in the requirements definition.” Any problems or complaints that arise afterward become “separate projects” not covered by the requirements definition. The company is left with no choice but to put up with a hard-to-use program or place an additional order as a new project. An additional order becomes a new order, incurring substantial costs. In this way, the requirements definition serves as the IT vendor’s insurance. This is the reality of IT solution implementation.
To avoid such failures in IT solutions, it is desirable to engage a consultant who understands the company's needs and issues, also understands the characteristics and programs of IT vendors, and can skillfully connect the two, but excellent consultants are not so easy to find. There are growing calls to reduce costs through IT, but that is only possible if you can make full use of IT. The choices you make here, and how well you implement IT, determine success or failure.
What Is a Next-Generation Partner Company?
What did you think?
Many questions remain as to whether the current business support offered by consulting firms, advertising agencies, and the like can adequately support companies.
In fact, all of these partner companies share a common corporate strategy policy.
It is:
(1) Segmenting the work
(2) Making it easy to hand off
That's it.
Certainly, providing management support requires all-round knowledge, experience, and know-how.
But with talent becoming increasingly mobile,
employees simply do not stay even after being trained,
and many partner-company executives believe that training costs come to nothing.
Therefore, what makes training possible in a relatively short time is “segmenting the work.”
And by pursuing “ease of handing off” while segmenting in this way,
they can pursue profit without spending cost or time on training.
If you choose such a partner company,
the result is that costs pile up, and because the work is not carried out from an overall perspective,
it becomes hard to achieve results.
So what kind of company should you choose?
(1) A partner company with a support structure that covers everything from strategy to tactics
(2) A partner company that focuses on developing its people
That is what I would suggest.
I would like to explain this in detail,
but this column will stop here, and I will explain it in future columns.
* This column is excerpted from “The World’s Easiest Course in Corporate Strategy Planning.”
Text: Hiroshi Ashida
●Column articles are scheduled for publication on the 1st of each month.
Column scheduled for October: “Will IT Vendors Soon Disappear❓ The Reasons Why”