Abstract
In this paper we provide empirical evidence on the consequences of Consulting for Equity for the client-consultant relationship. When consultants start to accept an outcome contingent compensation scheme such as Consulting for Equity, their incentives might be better aligned to those of its clients, compared to the traditional fixed fee arrangements, where conflicts of interests prevail. Moreover, clients who cannot afford high fixed fees get access to high quality advice. Based on our empirical analysis in the German consulting industry we argue that the acceptance of equity stakes imposes a variety of unintended consequences on the consulting firm. By accepting equity, the consultant risks that part of his reputation is rendered to the clients’ fate. Also, especially the internal organisation of big consulting firms requires major adjustments to prevent internal conflicts of interest when applying Consulting for Equity.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Achleitner, A.-K./ Engel, R. (2001): Situation und Entwicklungstendenzen auf dem Markt für Inkubatoren in Deutschland, Finanz Betrieb, 1/2001, 76–82.
Bartlett, J. W. (1999): Fundamentals of Venture Capital. 1st ed., Lanham, Maryland.
Coveney, P./ Moore, K. (1998): Business Angels: Securing Start-up Finance, Chichester.
Ernst, B./ Kieser, A. (2001): In Search of Explanations for the Consulting Explosion, in: Engwall, L.; Sahlin-Andersson, K. (eds.): The Expansion of Management Knowledge: Carriers, Ideas, and Circulation, Stanford, 47–73.
Gaston, R. J. (1989): The Scale of Informational Capital Markets, Small Business Economics, Vol. 1(3), 223–230.
Gebhardt, G./ Schmidt, K. (2001): Der Markt für Venture Capital: Anreizprobleme, Governance Strukturen und staatliche Interventionen, Working Paper, University of Munich.
Glückler, J. (1999): Management Consulting — Structure and Growth of a knowledge intensive Business Service Market in Europe, IWSG Working Papers, No. 12-1999, University of Frankfurt.
Gompers, P. (1995): Optimal Investment, Monitoring, and the Staging of Venture Capital, Journal of Finance, 1461–1490.
Gompers, P. A.; Lerner, J. (2000): The Venture Capital Cycle, 4th ed., Cambridge.
Greiner, L./ Metzger, R. (1983): Consulting to Management, New York.
Grossman, S./ Hart, O. (1986): The Cost and Benefits of Ownership: a Theory of Vertical and Lateral Integration, Journal of Political Economy, Vol. 94, 691–719.
Hellmann, T./ Puri, M. (2002): Venture capital and the professionalization of start-up firms: Empirical evidence, Journal of Finance, Vol. 57, 169–198.
Henderson, J./ Leleux, B. (2003): Untangling Service for Equity Arrangements, in: von Zedtwitz, M. et al. (eds.), Management of Technology, Oxford, 159–174
Jensen, M. C./ Meckling, W. (1976): Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure, Journal of Financial Economics, Vol. 3, 305–360.
Kieser, A. (1998): Immer mehr Geld für Unternehmensberater. Und wofür?, Organisationsentwicklung, Vol. 17, No. 2, 63–69.
Larew, J./ Deprosse, H. (1997): Erfolgshonorare für Berater?, Harvard Business Manager, No. 1, 107–113.
Leonard (2003): African Traditional Healers and Outcome-Contingent Contracts in Health Care, Journal of Development Economics, Vol. 71, 1–22.
Nippa, M./ Petzhold, K. (2001): Functions and Roles of Management Consulting Firms — An Integrative Theoretical Framework, University of Freiberg, Freiberg Working Papers No. 10.
Prowse, S. (1998): Angel investors and the market for angel investments, Journal of Banking & Finance, Vol. 22(6–8), 785–792.
Rubinfeld, D./ Scotchmer, S. (1993): Contingent Fees for Attorneys: an Economic Analysis, RAND Journal of Economics, Vol. 24, S. 343–356.
Sahlman, W. (1990): The Structure and Governance of Venture-Capital Organizations, Journal of Financial Economics, Vol. 27, 473–521.
Sharif, A. M. (2002): Professional Services Organizations and the Role of Consulting in the New Economy, Information Systems Management, Spring, 19–30.
Sharma, A. (1997): Professional as Agent: Knowledge Asymmetry in Agency Exchange, Academy of Management Review, Vol. 22(3), 758–798.
Silver, A. D. (1985): Venture Capital: The Complete Guide for Investors, New York.
Wetzel, W. (1994): Venture Capital, in: Bygrave, W. D. (ed.), The Portable MBA in Entrepreneurship, New York, 172–193.
Wooldridge, A. (1997): Management Consultancy Survey, Economist, 22.3.1997, 3–22.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2005 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Lowinski, F. (2005). Do Consulting for Equity-Arrangements Align the Interests of Clients and Consultants?. In: Achleitner, AK., Klandt, H., Koch, L.T., Voigt, KI. (eds) Jahrbuch Entrepreneurship 2004/05. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-26823-5_11
Download citation
DOI: https://doi.org/10.1007/3-540-26823-5_11
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-22517-1
Online ISBN: 978-3-540-26823-9
eBook Packages: Business and Economics (German Language)