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CONSULTANT: FRIEND OR FOE? A guide to the effective use of a consultant in a business in the Former Soviet Union

by

Douglas Keene President, M. Douglas Keene & Associates Copyright 1997, M. Douglas Keene

The complaints are growing about the costs of Western Consultants working in Russian business and industry, even though these consultants often work at considerably lower hourly rates than for the same work done in the West. Much of this noise is the result of a feeling that the consultant's work is not paying for itself in the growth of business or profits, even though often this is not the fault of the consultant but perhaps a much more basic and ingrown problem in the management of the business or the understanding of the new economic realities in Russia today. It is my belief, however, that if a consultant is chosen carefully, and if the consultant is utilized properly, the benefits can potentially be great. Here is a typical quotation coming recently from a Russian businessman commenting on Western consultants:

The problem is that there's not enough evidence of the potential benefit. [Russian] Directors can't sense the benefit. No one would like for the money they spend for professional consulting services to result in, "no, you are not suitable for the market." Those who need advice usually are short of money. Those who have money are usually not in need of advice, since money usually comes from good performance [or from crime]."

Of course this observation is mostly correct, but part of the problem is the current usage of consultants in Russia. They are either providing "basic classroom training" or "Evaluation of Resources and Proposals". I'm told that the former is now getting tiresome and repetitive since the availability of free classroom training and seminars is common in almost every city and the messages are always the same. The Directors feel that this training never brings orders or investors , so it is felt to be a waste of time. Of course this is a faulty expectation, but it still prevails. The latter use, evaluation, is guaranteed to disappoint the Director, frequently leaving him feeling he hasn't been served if the evaluation is negative, which it often necessarily is. I think this is a wrong use of a consultant,, or at least it shouldn't be his primary role. In the U.S. we don't hire a consultant to tell us whether our business is OK or not. We usually hire a consultant to provide specific technical or procedural guidance, to provide a specialized view of an issue or a market as an independent researcher, and when an issue is critical [like the survival of our business is at stake] we hire more than one to get a broader range of information and possible solutions.

The speaker above, for instance, rather than bemoaning the negative consultant analysis, could just as easily have been led by a good consultant to realize that this analysis was only describing current obstacles, but that each of these obstacles when overcome may represent the very foundation of a successful enterprise. Then the task would be to develop plans for winning this "war against obstacles". This is where good consulting goes beyond the analysis and report and continues on as a trusting relationship where he and the company are working toward common goals, effectively using the resources available and affordable in the business plan (which hopefully the consultant also assisted in developing).

We think that the proper use of a consultant by a Russian manufacturer, is as a facilitator, a second set of eyes that can see the market from a non-Russian viewpoint [if the plan is to sell to non-Russians] and a person who can guide and teach rather than judge. He should be a source of new ideas, or new possibilities, and should act as a guide in leading the clients to these visions. He should also be capable and willing to pay close attention to the unique elements and issues of the Russian business environment and assist in the integration of goals and objectives from both differing cultures.

In our work we have been amazed at the daily misunderstandings among the Russian managers as they attempt to work with the American marketplace and its demands on suppliers. We are equally amazed at the lack of understanding of simple accounting and cost analysis by company directors and managers. We include not only Russian factories who wish to sell their products, but also those who want to sell production capability as an offshore provider to U.S. manufacturers, and those who want to establish joint enterprises. These are all viable areas where the guidance of a good consultant can help the company to overcome these weaknesses, helping them to avoid the "potholes" in the road.

We have repeatedly visited Russian factories who want to do everything at once. Pay all the bills, get rich, hire back all the old employees, and do this all on a small assembly project that is primarily being offered to begin a relationship, not provide wealth to either party. The typical Russian Director will quote an outrageous price for something like a recent 300,000 piece golf club head project, because he would expect this project to cover all of his unsupported overhead and expenses as well as guarantee himself a profit. Another example comes to mind when our client attempted to buy dental drills in Russia, and the Director of the empty plant quoted a number over 10 times the actual market price as he attempted to cover all of his expenses with this one little order. In reality, a first order like this should not ever expect to be profitable and no one should take any profit money out of the business till the profit break even point is reached after all the startup and capital expenses are paid off.

The U.S. investors are also often at fault in bringing about this situation as they commonly over-promise because they don't understand the environment, and they also are so price driven [which is why they are looking to Russia for production in the first place] and have a tendency to squeeze so tight that the Russian side leaves the bargaining table feeling defeated. The resulting sour relationship usually leads to a failure and lost opportunities for both sides. Often this squeezing is unnecessary and the plant should be allowed to build up its capability to offer lower priced production in stages. This leads me to the final role of the consultant and that is acting as a mediator between the foreign and Russian organizations, guiding both sides, both technical and management, to take reasonable and prudent steps, paving the road between them to assure good long-term communication and understanding.

As our Russian associates and friends have stated often to us, many Russian Directors are desperate and want to see immediate results, and failure to achieve this expectation quickly then looks like a failure in the Director's eyes. While many of the projects that we have reviewed sound interesting as projects, they are generally somewhat limited in scope and do not provide the long term view of eventual prosperity that most Directors are seeking. The Directors are often not willing to take this process one step at a time [like most of us have had to do in the U.S.], and we of course understand the reasons why [capital, heavy social responsibilities, pressure from above, desire for quick wealth, stockholders, etc.]. The proper consultant facilitator will work carefully but purposefully with the Director and customer/investor to devise and implement a plan to bring the new program into existence in the proper step by step manner, with realistically achievable solutions to the critical issues that appear as obstacles to progress. Both sides must be left with a feeling that they are achieving their goals, even if the achievement is incremental.

Finally, we want to mention that the Russian observation that "if you have no money you cannot afford consulting" [or anything else], is often a product of another missing element of the Russian business model. The concept of starting small and building as you earn your way toward growth. The typical Russian factory is an large old vertically integrated facility that once was healthy and busy and now has a tremendous physical plant that is almost empty and has thousands of workers on leave, and tired equipment that is rusting away [sorry for the generalization, but bear with me please]. In this scenario, of course they cannot afford anything because the unsupported overhead is killing them.

What is often needed is the concept of the "spin-off" company. That is, an entirely new company that "spins off" from the old, is financially and physically independent, and "down sized" to include only the people, facility and equipment necessary to get started and begin to bring in some revenue. A typical U.S. entrepreneur starts in the proverbial garage of his house with maybe himself and one employee [maybe an engineer] and he doesn't expand until he has done enough sales to support it, or has enough business to support a loan. Overhead is usually the least of his concerns in the beginning, rightfully so. His attention is focused on market penetration, including developing products and customers. Until this part is complete he cannot even dream of talking to an investor. We might add that often another early "employee" of a new company is a contractor/consultant, offering his services at a low rate in return for a share of the business ownership if it survives. Often this consultant later joins the firm and becomes one of its senior managers or executives. A similar role may be appropriate for a trusted consultant in a Russian venture. His experience in dealing with the unique and varied problems of the spin-off model can be helpful, and if some equity (stock) or joint management role as a Joint Venture Director or something similar is offered, the consultant will feel more of a personal commitment and responsibility toward the success of the venture. This approach is most successful if implemented by the foreign partner, but it can be successful on either side or even with a simple non-JV Russian startup company.

We are not offering these comments as criticism or analysis, but as some brain-storming material for the Russian [and Foreign managers] to think about. Its time for these Russian Directors to start being more creative and more aggressive in their entrepreneurship.

We work also in China now and then, and I can tell you that the primary difference between Russian and Chinese entrepreneurship is evident in the scenarios just described above. We just finished a project transferring a precision tool manufacturing job from a U.S. manufacturer to a Chinese factory, and the Chinese director did a spin-off from an older factory, had a minimum of employees on the payroll, worked in very minimal production space, and built his business one order at a time until he had expanded to provide a broad range of services. He had no government subsidies. In the 8 yrs we have worked with the Chinese, We have never once heard of a Director asking for money up front [except for occasional special tooling charges] or complain about the U.S. clients paying too little (after the negotiation was complete, of course). The Chinese government provides 5 years tax moratorium for new Joint Ventures, and the law protects the foreign investors pretty well. Most Chinese joint venture we have seen, was initiated by the U.S. investor, not by the Chinese.

The Chinese ask for purchase orders, the Russians ask for investment [and provide little safety to the investor's money]. Believe me, most of these Chinese plant directors have just as many problems or more than the Russians do; old factories, old employees, extremely low skill levels, poor equipment, etc., but they just do the work, take the money and build their businesses. The Russians have an advantage in the quality of workers and engineers, but it is wasted by all the fumbling around that is done that this wasteful activity often drives away the business. I might add that the new bankruptcy law of China has been a great benefit to some of these older under-utilized factories, allowing the liquidation of assets and restart of a cleaner business without the worry of debt or long standing social responsibilities.

We are still optimistic that the lessons will be eventually learned, and we intend to continue to assist in that process through our own consultation work. Looking down the road about 10 years we can see Russia as a world leader in manufacturing and supplier to the world, with quality and performance better than from Asia. Its going to take some thoughtful and diligent work in the near term to reach that position in the marketplace and properly utilized consultants will most likely be working shoulder to shoulder with the new Russian managers and directors who have the vision to strive for this goal.

M. Douglas Keene & Associates Worldwide Consulting for Industry Rancho La Costa, California USA

Phone: 1-760-944-0397 FAX: 1-760-944-0619 E-mail: mfgman@cts.com Internet Web Pages Start At: http://www.geocities.com/WallStreet/1280/index.html

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