Dr Neil Béchervaise

NB Consulting (Australasia) Pty Ltd

Reputational Capital in Consulting Communities of Practice

The Global Business & Finance Research Conference, London, 14-18 July, 2003

Kevin M. McKenzie
and
Neil E. Béchervaise

Dr. Kevin McKenzie is the Principal of McKenzie Roic Consulting Services, and is an experienced Project Manager, Project Director and Management Consultant, having managed projects and organisational change programs in theTelecommunications, IT and Utility industries. Kevin holds a Certificate of Technology in Electrical Engineering, a Bachelor of Business (Monash) and was awarded the best student award for his Master of Business Administration (RMIT). Kevin has recently completed research in the area of specialised consulting communities of practice at the Australian Graduate School of Entrepreneurship to qualify for the award of Doctor of Business Administration. His research interests include knowledge management, the informal organisation, communities of practice, corporate strategy, consulting and project management processes.

Key Words: Knowledge Management, Strategic Advantage, Consultants, Reputational Capital, Reputation, Communities of Practice, Relationship Management Reputational

Abstract

In a global economy increasingly focused on knowledge and services, the long-term strategic advantage of the professional service firm is directly related to the reputation created and maintained by individual staff. Based upon case study findings from a consulting company, these individual reputations were found to directly impact the effectiveness of knowledge exchange and the strength of individual relationships held with their direct clients.

In an expanding company, the firm's reputation grew with the collective individual reputations of consultants. However, reputational and relationship capital were shown to co-exist in a fragile interdependence, demanding clear understanding and careful management.

Introduction

Reputations matter in business; they are crucial to strategising competitive enterprise. Functionally, they are acknowledged as prerequisites for extending existing business whilst facilitating the conversion of new opportunities.

In professional service organisations, particularly consulting firms, reputations are seen as critical to maintaining a viable, ongoing and competitive position (Petrick, Scherer, et al, 1999).In this paper, it is argued that organisational reputation capital is built from, and depends on, the reputation brought to and established within the company by individuals. Reputations are initiated, substantiated and extended by individuals within the organisation, and facilitated through membership of multiple communities of practice. Along with manipulable reputation building mechanisms such as public relations and marketing initiatives, organisations can leverage reputation as strategic advantage to boost profitability.

Since the organisation's reputational capital is presented as being built on a foundation of individual relationships and reputations, the interaction amongst these individuals, in turn, influences the collective reputation of the professional community of practice in the firm. It is the interactions between individuals and the collective that allow corporate reputation to evolve and form the basis for new or ongoing relationships. Over time the corporation can draw on that intangible form of intellectual capital that resides within the domain of the individual and comes to be identified with the professional community (see figure 1 - Foundation pillars of reputational capital).

Figure 1: Foundation pillars of reputational capital

Using this framework, the paper first identifies the role of the individual consultant's reputation within a consulting firm (A). It then establishes the necessary interrelationship between individual reputation and the personal relationships which lead to acceptance into, and recognition within, the collective community of expertise upon which the company depends for its reputation (B). The paper then discusses the conversion of individual and collective reputations into organisational capital (C), and highlights the fragility and interdependence of the corporate intangible capital construct.

The paper concludes that corporate reputation, rather than being independently assessed as the exclusive domain of the organisation, is the result of a cumulative sum of individual reputations forged into effective relationships within and outside an organisation over time. As such, reputation is best considered a defining element in the building of the more commonly recognised relationship capital. Whether it can ever be realistically quantified apart from human capital then becomes debatable.

The study

The theoretical development reported in this paper is based on findings taken from a qualitative case study undertaken in Australia between 1999 and 2002. The study site was a medium sized Australian consulting firm (500 employees) initiated by a charismatic leader, developed to international scale as a mature stage organisation and acquired in a friendly take-over by an entrepreneurial IT company before the dot.com crash.

In a series of semi-structured interviews, a sample of 16 experienced consultants working across a range of fields was initially asked about how they established their expertise as consultants, how they maintained their expertise and how they worked with fellow consultants and clients to create timely solutions. Data obtained from the in-depth interviews was subjected to a modified content and discourse analysis (de Araugo, 2000) to create models of consultant-consultant and client-consultant interaction and knowledge-exchange.

In a second round of data collection, focus groups responded to a preliminary presentation of the interaction and exchange models. These findings were used to refine and confirm the robustness of the models in the workplace.

Accepting the strictures of Ansoff's (1984) paralysis by analysis effect, reference to the study is only made where it is believed that directly drawn observations support a specific interpretation of generally observable behaviour.

Individual Reputations and Relationships

To create a competitive advantage through reputation, and to maintain a high standing within a professional community, an individual's focus must be maintained on the ongoing reputation enhancement process. Illustrating the components of reputational image at an individual and corporate level allows the pursuit of practices that may build reputation in the eyes of relevant stakeholders. In consulting firms, individuals create professional reputations through personal achievement and observable activity. Deliverables are often as ill-defined as artistic masterworks, ensuring that clients come increasingly to trust and value their individual consultant's competence when specific problems are efficiently and profitably solved. In turn, their valuing of the parent firm directly increases as the consultant's individual 'brand' increases (Aaker, 1991).

Individual and organisational reputations are usually the product of years of demonstrated superior competence. However reputation is a fragile resource; it takes time to build, cannot be bought, and can be easily damaged (Petrick, Scherer, et al, 1999). Further, the study identified that individuals may have multiple reputations for individual achievements that are summed cumulatively to form an overall reputation, which will then be perceived differently depending upon the nature and orientation of multiple perceivers.

Reputations attend to something; that is, you have a reputation for X, and a different reputation for Y so that both X and Y are an important focus for the perceiver. Reputations also appear to depreciate slowly over time unless destroyed by damaging actions or events, and will often provide years of ongoing value to an individual depending upon the value ascribed by the perceiver to the achievement that formed the reputation capital - a Masters, a PhD or a prestigious senior organisation appointment may provide a lifetime of reputation capital (Moore, Newman and Turnbull, 2001). Finally, the study identified that reputations do not appear to be transferable between individuals, though they can be built through association with people or groups of higher reputation status in a community.

Within consulting firms, as specific examples of service directed organisations, individual reputations depend as much on peer acceptance as they do on client or investor assessment. For a consulting firm, knowledge exchange is the core competency and the major source of competitive advantage in the market. However, it is only through creating, exchanging and leveraging existing knowledge to create a desired 'payload knowledge' product - a timely solution to the clients' context-specific problem - that the firm can offer a sustainable value proposition and distinguish itself from its competitors (Park, Jaworski and MacInnis, 1986). Consultants define 'Payload knowledge' in this context as 'that specific distillation of knowledge, both tacit and explicit, required to resolve an applied problem in context - for which the consultant (or the company they represent) receives fees for service from a client' (McKenzie, 2002, p.133).

Knowledge exchange in consulting firms has been the topic of only a few studies (eg Rich and Duchessi, 2001; McKenzie, 2002). However, a common finding is that when consultants are engaged to seek out and create payload knowledge, personal reputations matter.

Few successful consultants employed within consulting companies work alone and, when seeking specific knowledge, they tend to rely on the existing reputation of fellow consultants within their own firm. Individual reputations are discovered through word of mouth or through personal networks. However, as Snowden (2002) has observed, this information is seldom volunteered. In fact, identified experts may not recognise their own capacity until an agreed context is identified (Snowden, 2000; 2002).

Once the expert knowledge source has been found, usually through an interpersonal knowledge exchange process as opposed to a codified IT based system (McKenzie, 2002; Rich and Duchessi, 2001) a negotiation of meaning takes place between two individuals - one with a problem in context, the other with a reputation for expertise in the field.

The quality of the ensuing exchange is personal and it is individual. It is based upon shared mental models, language, cultural norms and a social etiquette for knowledge exchange which enable efficient transfer to the exact context required by the client (McKenzie, 2002). This process confirms reputations (in the case of the expert with the knowledge), enhances reputations (as word gets around that the expert helped in this new context), and creates individual reputations (in the case of the receiving consultant now having a reputation for solving this type of problem).

Reputations are fundamental to the knowledge exchange process. Early in the search for expertise, consultants discard potential explicit or interpersonal exchange sources based purely upon their perception of the individual who created the knowledge. In fact, individuals confirm and discard notions of other's reputations based upon brief interactions during the search process itself:

I know within the first few minutes if what they are saying is rubbish. If so, I don't ask them again. Otherwise, I file it away for when I might need it again. (Otto)

Intra-firm reputation confirmation is an ongoing part of the consulting firm's operation. Individual reputations are formed, maintained and, at worst, destroyed through social interaction and relationship development within the firm. As a result, they become inextricably woven into the social fabric of the organisation and, ultimately, become the fabric in which the firm will dress itself.

Intra-firm individual relationships

Relationships within a consulting company are fundamental to producing a sustainable offering. In relation to knowledge as their core product, McKenzie (2002) has previously argued that consultants clearly prefer personal networks and interpersonal knowledge exchange to IT-managed solutions in solving client problems. For a field-oriented consultant, the knowledge exchange process is socially constructed within a consulting community of practice, where shared approaches and interpersonal negotiations facilitate common understanding of both knowledge requests and knowledge solutions. The intra-individual relationships formed within this community of experts facilitate knowledge exchange and create contextualised client solutions.

In a consulting firm, the interpersonal relationships that exist within the firm, often termed 'personal networks' by consultants are, in effect, webs of loosely coupled one-on-one relationships extending into various formal and informal groups within the company (Orton and Weick, 1990). An individual may be a member of an expert panel with two close friends, working on a consulting site with five other consultants and, simultaneously, maintaining involvement with several further groups.

Working as the glue between people who have not yet formed relationships within the company, consultants use their personal networks to identify experts who their network colleagues may have a pre-existing relationship with. When pre-existing relationships have yet to be established, personal networks facilitate intra-network introductions. Apparently informal social banter, coffee catch-ups and lunches effectively broaden the community net. In this context, as Wheatley (1992) anticipates, leadership demands the effective management of relationships between a complex network of people who now define the organisation. Whether it can ever be realistically quantified apart from human capital then becomes problematic.

It's as though management and outsiders don't give a damn about these relationships - they undervalue them immensely. Things consultants see as essential to maintaining their network, such as lunches, drinks and coffee, are often seen as unnecessary expenses of time and cash to accountants and shareholders. It's only when these networks break down that shareholders will be concerned - their profits will fall and they will lose capital value on their shares. (Judy)

While the community's social etiquette is maintained, relationship formation is encouraged as identifiable elements of reciprocity extend beyond self-interest to focus on the health of the firm's broader community. Ultimately the consulting company's greater community draws its identity from this complex web of internal relationships. The reputational capital of the organisation becomes assessable on the basis of this internally acknowledged collective of individual reputations.

The reason people use [our consulting firm] is that clients all know we have excellent networks. They know that we can call on out colleagues for help in solving their unique problems. We earn our revenue, and potential future work, based upon our reputation for facilitating knowledge between our consulting networks. Without these networks, the company could not survive. (Keith)

Personal reputation at an intra-firm level is established within the community of expertise according to individual ability to 'speak the language', follow the procedures of the group and respect those who have already been acknowledged for their expertise. The apparently 'close-knit' nature of the organisation is reflected in trust relationships between individuals as they utilise the interpersonal knowledge exchange process to solve client-specific problems.

Individual and organisation

Discussion of relationship capital, as opposed to reputational capital, tends to focus on the external relationships that an organisation has forged between suppliers, customers and stakeholders, and which it can draw on as an asset to produce future returns (Wileman, 1999). If the goal is to determine the market value of an organisation over and above its physical assets (eg Sveiby, 1997, et al), this model is relatively practical. Nevertheless, the Arthur Andersen collapse remains inexplicable under this model. In fact, the incomplete construct of intellectual capital achieved by artificially splitting relationship capital from human capital denies the value of the loosely coupled intra-firm associations that define the networked consulting organisation. In the consulting firm, company relationships are leveraged through individual reputation.

When our consultants leave, the company loses something. It's more than the employees as a revenue stream. It's the relationships they hold that walk out the door. The company's balance sheet remains the same. The company's name may be mud, and be worthless for one reason or another, but the people are still there. The individual still keeps the relationships even if the clients won't deal with the firm. It's why these employees can still be employed quickly. (Anna)

Capitalisation at the micro level between clients and consultants is merely the proverbial 'tip of the iceberg'. Consultants maintaining strong relationships with specific clients call upon their entire individual network to assist in solving client problems. The client who engages some reputable XYZ Consulting Company, engages an individual who then draws on both personal and network capacity to frame a one-time-only and client-specific solution.

The problems we solve are often unique to the client and exist only at the time we are called in. They may never be experienced again once we leave. This is the nature of our work - solving these unusual problems. That's where we are fortunate to be able to share this stuff between us to come up with the best solution. (Adam)

Client and consultant

In the consulting company, plant, equipment and support staff provide the identifiable infrastructure of a quaternary organisation that is too often and too easily accounted as 'the firm'. The identifiable IT databases and published reports associated with 'second generation' knowledge management technology (Snowden, 2002) represent further structural capital but they are 'least-preferred options' for the consultant (McKenzie and Béchervaise, 2002; Rich and Duchessi, 2001).

Individual consultants accounted as human capital generate the net relationship capital for their organisation because, as members of developed communities of practice, they bring their reputation to every new job.

My [current] client asked for me by name. He heard from his network that I had done a good job for [another company] and he called someone in his network inside that company to confirm this. As it turns out, because of the work we have done, he recommends [my company] to others for similar problems. Even other types of problems. (Thomas)

The introduction of the consultant to the client organisation's representative initiates the inter-organisational relationship from which relationship capital will be calculated. The quality of that relationship initially determines the value of the consultancy and, later, the reputation of the consulting firm. Timely delivery of appropriate solutions appears as the agreed deliverable. It is usually overlooked, perhaps conveniently due to the complex nature of the analysis, that output quality and future employability is usually assessed by clients at an individual level.

The external organisation's evaluation of the consulting firm depends on individual relationship building skills displayed at initial contact between the two organisations, and the perceived, then developed, reputation of the contact consultant.

Reputation capital and the organisation

Reputation capital is commonly assumed to be the financial value to an organisation of the reputation it has created and now maintains in the market-place (eg Joia, 2000).

In essence, reputation can be regarded as the outcome of a competitive process in which firms signal their key characteristics to stakeholders in order to maximise their socioeconomic and moral status (Fombrun, 1996). In this context, reputational capital is described as that portion of the excess market value that can be attributed to the perception of the firm as a responsible domestic and global corporate citizen (Fombrun, 1996).

Public relations and marketing efforts, in this model, leverage the company's products, competencies and achievements to establish a reputation. This reputation, it is hoped, influences consumer and client behaviour to the extent that it can be realistically audited as an element of company market value (eg Joia, 2000).

The market value model of reputation capital suggests that it is associated with brand recognition and product or service identification, the 'hard intangibles' usually identified with structural capital, with intellectual property (Wileman, 1999). In the extreme, however, reputation capital may equate with the net worth of the organisation. The fall of Arthur Andersen involves no tangible product. Nor are the competencies of its individual auditors in question - except possibly for a few directly involved in recent high profile events. Its achievements remain impressive. Save one! The destruction of its reputation reduces the market value of the organisation to zip.

Nevertheless, in the wake of their company's demise, and to the surprise of many, former Arthur Andersen employees became a much-sought-after commodity. Their reputation as individuals survived the reputation of their organisation. To explain this apparent anomaly, it is necessary to revisit the paradigm where the foundations of reputational capital, and subsequent estimation of its market value, are based at the organisational level.

Despite the frequent product orientation of organisational branding (Murphy, 1990), it is well accepted, though not necessarily internally acknowledged, that every organisation is the sum of its people. Nowhere is this more important than in an industry whose only product is the re-description of existing knowledge to suit a novel or unusual context.

Market capitalisation is the capitalisation of reputation and reputation is based on interpersonal relationships. In this context, relationship capital becomes a valuation of how effectively reputation has been leveraged into the market at an organisational level. A client with a difficult problem invariably seeks to leverage an existing relationship with an individual consultant from a consulting firm. It is this individual's reputation, coupled with the pre-existing relationship with a client, which facilitates the engagement of the consulting firm.

As the individual's reputation grows in the eyes of the client, so does the perception of the consulting firm as a company that can solve tough problems. Individual reputation becomes organisational reputation and the reputation capital of the organisation grows with the success of its contacts.

When we have a problem we start by calling Sasha at ABC. She has the runs on the board and we know that she understands our needs. Besides, she seems to be able to drag in the right people for the job even when she doesn't know how to solve it herself É For us, Sasha is ABC. If we could get her over here, we probably wouldn't need them at all (Mark, longstanding ABC client).

Mark's profound misunderstanding of Sasha's capacity neglects her access, through the networks she has been accepted into at ABC, to levels of expertise she would be denied if she were to leave. In a people centred organisation (Roos, Bainbridge and Jacobsen, 2001), the personal reputation of the individual within the organisation affects every transaction between the organisation and the client.

More importantly, the reputation of the organisation is leveraged from the individual reputations of those few who established the start-up relationships upon which the entire social dynamic of the organisation was created during its early growth stages.

As foundation pillars, individuals build a collective reputation over time for a range of specialties and performance capacities. When the founder of the firm whose consultants have informed this paper was the only person in a start up consulting firm, his reputation was the firm's reputation. As more consultant's joined, the firm's reputations grew in direct proportion with the number of employees and the quality of their reputations. The emphasis placed on careful cultivation of this resource signals that it is important for every stakeholder to be both a promoter and a custodian of the reputation of the organisation that benefits them or employees (Hall, 1993).

As Adizes (1994) observes, however, the individual enthusiasms of the start-up phase do not last. Structures and protocols begin to bind groups, to identify them according to their defined purpose rather than their diversity of talents. A resulting 'dumbing down' or 'de-skilling' at individual level results in decision-making becoming divorced from problem definition and action. Individual reputations that have grown over time through successful client engagements with the firm are tendered as the firm's reputation.

Relationships are offered with the firm as the quality provider. Implicitly or explicitly, the firm re-defines itself as 'a team of outcome-focussed professionals' and then as a solution provider.

In this transition, the reputation of the individual remains as an echo, appearing to emanate from a now completely impersonal 'organisation'. The founder of the firm forming the basis for this study established a very powerful team identity within the firm and an equally powerful team recognition among its clients.

Relationship capital was recognised as being built on the reputation of individuals. As a result, the cultural challenge generated by the integration effort following a take-over, albeit friendly, became a challenge to individual rather than organisational identity. The market value of the firm at takeover was rapidly and effectively reduced by the recruitment of several key consultants by their clients. It was more damagingly reduced by the impact of the dot.com collapse on the credibility of its predator. Reputation is fragile and its capitalisation is a high risk practice.

Reputation is constructed and assessed differently by different parties and, as such, it may be marketed differently to different communities. As Erving Goffman (1959) observed, we make sense of ourselves within our community and then we construct masks that allow us to maintain our integrity within our perceived community. At the same time, our community makes sense of us according to its own rules.

A consultant's reputation is probably best assessed within the community of consultants. The same individual's reputation as a pianist is best judged by a community of musicians. Unfortunately, the wider community is less accommodating.

Shareholder perception is closer to public perception and public perception is largely media driven. Since the media is usually unable to grasp the complexity of the individual relationships and reputations that exist within a firm, focus tends to be maintained at the macro level.

The reputation of a charismatic or popular leader, the loss of a major customer or the loss of a long term favourable contract with a major supplier are each reportable instances of reputational or relationship capital. Individuals within the general community of practitioners are largely ignored when carrying out valuation analysis. As a result, it is argued, the market value of reputational capital is largely media determined and, where relationships are based on reputation, the valuation of relationship capital rests on a similarly precarious foundation.

Conclusions

This paper has argued that organisational reputation and relationship capital are built from, and maintained by, the individual reputations that are brought to and established within the company. Reputations are portrayed as being initiated, substantiated and extended by individuals within an organisation through their communities of practice.

Rather than being the exclusive domain of the organisation, reputation capital is the cumulative sum of individual reputations forged into effective relationships over time, both within and outside of the organisation.

In the study underpinning this paper, individual reputations within a medium sized Anglo-Australian consulting company were found to be fundamental in the effective exchange of knowledge, which in turn allowed consultants to deliver their 'payload knowledge' - context specific solutions - to clients. The reputations of the consultants were sought and considered when these solutions for clients were formulated through the organisation's informal and interpersonal knowledge exchange process.

In delivering these high quality solutions formulated from the collective knowledge of the organisation, foundations for strong internal and external relationships were built. In turn, the individual reputation from the viewpoint of the client became the firm's reputation and, based upon this perceived reputation, the client often engaged further consultants. Individual consultants represent the foundation pillars that in turn support a precarious organisational construct.

As recent high profile corporate collapses have shown, reputation capital can quickly be reduced to zero by individuals or events, whilst elsewhere the organisation remains structurally stable and individual reputations may remain unaffected - or even become enhanced.

Despite the best efforts at marketing and public relations campaigns to rescue its reputation, events outside the control of an organisation can quickly field a rapid fall into instability and often demise. As such, the market value of organisational reputation and relationship capital is tendered as largely media driven, and its value is based upon general perceptions evaluated at a macro level rather than based on micro level examination of how individual reputations and relationships add to a firm's market value.

Ultimately, in the eyes of the media journalist, it is large customers, significant suppliers or key individual employees that fuel the market valuation of reputation and relationship capital.

As such, this paper urges a re-examination of the foundations of the reputation and relationship capital constructs, seeking to further explore their co-existence in a fragile interdependence, and aiming for a clear understanding of how they interact at an individual and organisation level.

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