Too Much Consulting?

16 Trackbacks

1. [...] Hanson opens with this: The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from [...]

   By Human Capital Links | feed on my links February 1, 2012 at 8:53 pm

2. [...] As Strength By Robin Hanson · February 1, 2012 11:25 pm · Comments (0) · « Prev [...]

   By Overcoming Bias : Status As Strength February 1, 2012 at 11:26 pm

3. [...] Too much consultin?, por Robin Hanson. Por que é que as empresas de consultoria são tão bem pagas? [...]

   By Anonymous February 2, 2012 at 10:54 am

4. [...] Here is a bit more. [...]

   By Robin Hanson’s theory of young consultants — Marginal Revolution February 2, 2012 at 2:05 pm

5. [...] this post is a bit outside the normal scope of this blog, but Robin Hanson has a couple of interesting posts up on the puzzle of management consulting which dovetail nicely with something [...]

   By Puzzles of Management Consulting « Tomorrow's Economy February 2, 2012 at 6:06 pm

6. [...] reflexión de Robin Hanson sobre por qué las empresas están dispuestas a pagar ingentes cantidades de dinero a grandes [...]

   By Estatus y consultoría « Vapor de hojalata February 2, 2012 at 6:12 pm

7. [...] recently suggested that a big part of what management consulting sells is status, to cow firm opponents into [...]

   By Overcoming Bias : Status In Law, Finance February 3, 2012 at 8:06 am

8. [...] by Lawrence Krubner, however indented passages are often quotes) This raises a very good question, and then answers it with a believable story about status signallin… The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from [...]

   By Consulting depends on the social status and good looks of the of the agencies | We Always Have The LOWEST Pharmacy Online-Offers » Spermamax Online Without Prescription February 3, 2012 at 11:48 am

9. [...] Do we have too many young consultants? [...]

   By Stuff of the Week: 2/03/12 « 2moneythoughts February 3, 2012 at 6:43 pm

10. [...] Overcoming Bias : Too Much Consulting? [...]

    By Bookmarks for 2012/02/03 | Davide Tassinari February 3, 2012 at 6:57 pm

11. [...] Bias voices something I wonder about – fresh grads straight out of business school going into consulting companies with no actual [...]

    By Link love (Powered by bike rides and Brandon Boyd) | Musings of an Abstract Aucklander February 5, 2012 at 12:36 am

12. [...] theory about why companies hire management consultants, and why we become consultants: Neutral credibility, and credibility is expensive. (Consultants weigh in in the [...]

    By Reads for Feb 6, 2012 « Watch-Borrowers and Time-Tellers February 6, 2012 at 2:48 pm

13. [...] “so many young people go into finance, law, and consulting.” (Tyler’s post, Robin’s post.) I do find this topic interesting for some reasons that are more and less personal. My own [...]

    By Christina Cacioppo : Other reasons why so many smart young people go into finance, law, and consulting February 9, 2012 at 7:47 am

14. [...] the economics blogosphere has been discussing why firms are willing to significant amounts of money for the [...]

    By The mismanagement of firms and economics models : David Jinkins Webpage February 12, 2012 at 5:38 pm

15. [...] Robin Hanson and others, I have often wondered “why firms pay huge sums to big name consulting firms, when their advice [...]

    By <3 of the week: TV with a social message, management consultant pay and on being awesome « Learnings and Lovings February 15, 2012 at 4:16 pm

16. [...] by a great post on why college students choose consulting I decided to re-post my series of posts on consulting, written in 2008 when I was considering a [...]

    By The consulting blog post series | Kevin Burke February 19, 2012 at 11:40 pm

57 Comments

1. Rahul

   January 31, 2012 at 6:40 pm | Reply

   As an ex-consultant I agree with you. Your views on this topic are not particularly original though. Most of us whilst in consulting thought the same, though you have fleshed out what was an instinctual point of view for us.

   • Someone from the other side

     February 1, 2012 at 3:04 am | Reply

     As a current consultant, I agree as well. However, it never ceases to amaze me that after doing something for 3-6 weeks, you end up having a better understanding of what is going on than the guy who was in the role for 5 years. In part it is fresh perspective, but in part I blame many corporate employee’s laziness to think…

     • Finch

       February 1, 2012 at 11:02 am |

       I agree as well. There are twenties on the floor waiting to be picked up.

       I think you underestimate the importance of experience in consulting, though. After a while you learn where all the twenties are hiding, not just the obvious ones.

     • Andrew

       February 2, 2012 at 5:39 pm |

       Haha. Yeah that’s funny, and amazing that corporate employees all seem to suffer from the same “laziness to think”.

       I think it would be even more hilarious if the article didn’t explain the reason for that, and you hadn’t made such a glorious generalization right after reading the story that explained the reason for that.

2. Chip Morris

   January 31, 2012 at 6:44 pm | Reply

   As an Information Technology management consultant to Fortune 100 companies for about 15 years (specializing in “business process re-engineering”), I can attest that your signaling interpretation is spot on. Usually the organizational structure or the funding model, or both, were making the company look neurotically self-defeating. Somebody in the firm knew what had to be done, but didn’t have the juice to fly solo, so they angled for some high-prestige consultants to carry the banner. There were always factions interested in preserving the status quo (regardless of the harm to the firm), and a few (usually lower status people) who knew what needed to happen. But the prestige of the consultants was what got things done. Except – about half the time the consulting firms attached themselves like leeches to the firm, extracting their fees as long as possible with really doing anything.

3. Stephen R Diamond

   January 31, 2012 at 6:44 pm | Reply

   This was one of your best, probably because your topic is one to which your analysis actually applies.

4. Vaniver

   January 31, 2012 at 6:45 pm | Reply

   The Five Minute Rule, from The Secrets of Consulting by Gerald Weinberg (1985): “Clients always know how to solve their problems, and always tell the solution in the first five minutes.

5. aretae

   January 31, 2012 at 7:19 pm | Reply

   Just piliing on. I’ve done some consulting and a lot of dealing with consultants (in IT). In my experience it’s very rare for the consultants to know much that the locals don’t know…I was pretty unimpressed by the consultants in general. However…when I have been on the consulting side, it’s at least as frequently as not been explicitly a justification-move, having NOTHING to do with discovery.

6. Ely

   January 31, 2012 at 7:21 pm | Reply

   As a good-looking, semi-inexperienced graduate student at one of these elite schools, being aware of this has been a primary reason why I’ve avoided working in consulting.

   In the circles I spend time in, consulting is something of a joke; an admission of no real talent and no real ambition so to speak. A career counselor here also once told me that I’m setting myself up to be unhappy “because I have principles” (i.e. I measure interestingness of a job prospect mostly as a tradeoff of the technical challenge of doing it well, the value added to society as a by product of my man hours (narrowly defined by things that I personally think are value adding), and the compensation, which makes the prototypical law/finance/consulting jobs that graduates are vetted for here seem far less appealing to me than relatively lower paid developer positions, etc. The career services office doesn’t seem to like this.)

   • Mark M

     February 1, 2012 at 1:54 pm | Reply

     Ely – You’re missing out. A few years at a top consulting firm gives you broad exposure to actual real-world business practices – both good and bad. You should consider that experience as part of your education rather than a part of your career.

     • Finch

       February 1, 2012 at 2:29 pm |

       +1

     • Ely

       February 1, 2012 at 11:44 pm |

       The narratives of several friends who work in consulting is at odds with this. Many of them tell a tale extremely similar to this one: The Story BCG Offered Me $16,000 Not To Tell

       Also, I worked for a bit as an analyst for a technical laboratory that evaluates military contracts, doing scientific computing work. I was shielded from having to deal with the consulting side of the business as part of my day job (I just wrote code), but I did witness a lot of useless flexing of credential. If other people are happy doing that and can earn a living, that’s great, but I consider it to be a big part of my education that I learned that it would be a waste of brain cycles to spend time getting good at that stuff. For me at least.

     • 10 yr consultant

       February 4, 2012 at 12:09 pm |

       Ely –
       Sounds like your friends are the ones that lack principles, if we are to judge by your quoting that article. The author did not learn a thing about being a consultant, it is no surprise that they were dissatisfied with the experience. (and probably ‘managed out’ as well).

   • JustMe

     February 2, 2012 at 5:22 pm | Reply

     My experience is that this is what people who come to elite colleges with relatively low levels of social capital and are content to stick to low- or middle-paid professions tell themselves.

     And the lower-paid developer positions are just as bad, because it’s basically assembly-line programming of uninteresting work. Sure, you can tell yourself that the C# middleware to grab information out of a database is “changing the world,” but it’s really not.

     There are basically three things available to graduates of elite colleges that other students, no matter how hard they work, have little or no access to: elite consulting jobs, investment banking, and corporate law. On a more academic side of things, people with PhDs from top-5 schools in their respective fields have a much better chance of getting a good professor position. If you connect well with venture capitalists and other entrepreneurs, you might have a better chance at doing well at a startup. But not exploiting those things, which are the few advantages that are given to students at elite universities is just pissing your opportunities away for the chance to feel self-righteous.

     • Ely

       February 2, 2012 at 9:50 pm |

       What do you mean by “relatively low levels of social capital”?

       A little more about me: I’m a grad student at a top-5 school in mathematics and scientific computation. I worked for two years (as mentioned above) prior to coming to grad school.

       My experience in grad school has shown me that academia isn’t really worth much. Most of it is structured as a scam: reduce number of expensive tenured faculty, balloon number of grad students, leverage visa related issues to create cottage industry of underpaid post-docs. And this is at a private Ivy school with a massive endowment. All of my professors have told me from day one that getting an academic job is a pipe dream and to just gear up for industry.

       I know folks from all over who attest to the linked MIT narrative about consulting above. Some are from mid-range schools, one is from Australia, others are recent grads from my institution. Let me put it this way, I have yet to meet someone who actually thinks the day-to-day work in consulting is a useful use of human effort.

       I would absolutely separate investment banking from consulting in this regard. I have many other friends who work in investment banking and they love the technical challenge of their jobs. Their day to day work involves solving complicated mathematical problems and creating efficient simulations or numerical solvers to achieve a firm’s goals. A far cry from manipulating spreadsheets. These folks work at places like Jane Street Capital, GETCO, Two Sigma, and others. I have a lot of respect for that sort of work and would consider it in the future.

       You seem to misunderstand. I don’t care whatsoever about self-righteousness and that’s precisely why I wouldn’t go into consulting. Only a person who gets a lot of satisfaction from the artificial prestige of that title would be able to be happy. I would almost certainly burn out.

       You also seem pretty disparaging about regular developer roles. Folks aren’t mucking through C# middleware anymore. That’s kind of comical. I had an interview just a few weeks ago for a job with CBS doing pretty sophisticated machine learning to construct user click models to help their advertisement monetization division. The day job was writing numerical libraries in Python and C++, including GPU computing, to mine these massive amounts of user click data.

       If that job pays 85k in San Francisco and the user click data helps bring content to people that they like and links up buyers and sellers in a less annoying way, that sounds like a great thing to do for a living. A hell of a lot better than earning 120k in New York to muck around in Powerpoint and Excel and ultimately just try to bolster a client’s foregone conclusion.

       But again, that’s just me.

7. Joe

   January 31, 2012 at 7:48 pm | Reply

   This rings true with my experience as both an IT and then later a management consultant.

   Top firms actually promote this view to the consultants as well by subtly saying things like “we only take the best applicants from [top school]” or “you were selected from over 367 applicants” when they hire you. They actively tell you they and by extension you are the best minds available, able to bring your intellect to bear on any problem. This, of course, is intoxicating to a young mind to believe, so you do.

   There were occasions where we were given stern warnings to side with the person who brought us into the engagement (a telling word in itself) or risk losing business (breaking the engagement).

   On one occasion a senior manager at a client had brought in 4 previous consulting firms to say essentially the exact same thing to a group who was blocking progress. My texhnical recommendations stayed the same, but my approach to that group changed and subsequently changed the dynamics of the relationship between the manager and the opposing group where the opposing group could then be SEEN as causing harm, which they were. Certainly worth high prices for the manager and the company, but 4 wasted attempts speaks clearly to the dysfunction of the opposing group and large organizations as a whole.

   I also remember distinctly winning an argument between myself and another consultant from a competing firm on a different engagement by saying “your advice costs $125/hour while mine costs $250, so who’s is more valuable?” thereby putting my price as a signal of quality. Completely besides the point in the argument and the product of a young mind, but people in the real world don’t really notice things like ad hominem attacks.

   The most insidious of the status seeking behaviors exhibited by consulting firms is outsourcing to “lesser” consultants and still charging high rates for the brand name. That includes assigning jobs to consultants from separate firms.

   Consulting firms, especially the top ones with hundreds of thousands of employees worldwide are not immune to these inefficiencies either and often will recruit outside firms to help them in the same ways that they help their clients. They of course would NEVER admit to this and will make you sign so many NDAs your head spins. All to save face and continue the story that they are the best.

   Lastly, firms pay millions for information that is mostly free or very cheap because the people paying are usually vastly disconnected from the people getting results. The people writing the checks are in the employee mindset of having a (usually large) budget to spend, so better spend it all. Also, they are paying for the information to be delivered in a way that lets everyone save face.

   In your example, the CEO gets to look good by bringing in the solution, not the firm or even the info since that is sometimes known already, but the actual resolution of the problem. The opponents get to acquiesce to a third party, which signals that they will listen to reason, but not necessarily to the CEO, so their status remains high. They can hate the consultants all they want, especially after they are gone, further signaling their status, because the consultants are not part of the organizational hierarchy, so there is really no one to offend. It is also hard to counter the label of “best practices” from industry even if they should be called “common practices”. The firm gets to solve yet another high value problem (usually only because of scale mind you) that they can tout in white papers and conferences that make them look superior to competing firms.

   There’s a reason consultants call management consulting organizational therapy. You aren’t giving much new information since that is not what changes people or organizations. If it did, there would be no reason for the consultants in the first place. Consultants use many of the same skills as a therapist to help organizations and even individuals within it to see their own problems in a different light and make changes, and then most importantly, leave with the least amount of social hierarchy changes to the organization. That’s where the true value in consulting lies.

8. Peter

   January 31, 2012 at 8:31 pm | Reply

   As a internal auditor by trade we have a saying for this: “A prophet is never welcome in his home town”

9. David

   January 31, 2012 at 8:52 pm | Reply

   I think you’re exactly right. I once asked a professor of human sexuality who also had a private practice about how his actual therapy sessions looked. He said that he basically instructs his patients to masturbate. His comment was “Yes, they could get the same advice for much less money ($1200 minimum), but the expense really helps my patients actually take the advice.”

10. Douglas Knight

    January 31, 2012 at 9:38 pm | Reply

    This is definitely sometimes the role of consultants, but how often? 10%? 90%?

11. AJ

    January 31, 2012 at 9:44 pm | Reply

    I’ve worked in consulting for a bit, and Robin is right on…many firms are really dysfunctional.

    Even the most basic economic insights can save these firms millions of dollars, and sadly they just don’t have that ability internally.I think this is largely because many of the older people at these firms are clueless and they outrank the young people, who can’t speak up because of this.

    This necessitates hiring consultants who can circumvent the corporate structure; one might as well do this as cheaply as possible because the insights are easily detected even by someone right out of school.

    • Someone from the other side

      February 1, 2012 at 3:09 am | Reply

      +1

12. Robin Hanson

    January 31, 2012 at 11:35 pm | Reply

    I can’t recall getting such consistent agreement on a post. This suggests this is something a lot of folks already know. So why doesn’t the word get out to everyone else?

    • Douglas Knight

      January 31, 2012 at 11:59 pm | Reply

      What did Tyler and the others think? Maybe they agree with this description of what consultants do, they just don’t like to call it “getting their money’s worth” ?

    • Khoth

      February 1, 2012 at 3:34 am | Reply

      If people are consistently agreeing with a post, you clearly aren’t trying hard enough :p

    • ThomasT

      February 1, 2012 at 3:47 am | Reply

      Huh? Obviously the first rule of signaling is: You don’t talk about signaling.
      Say you’re some pickup artist who has just suceeded in signaling his high status to a girl. Don’t you think it would be counterproductive to then go on telling her about it?

      • Sister Y

        February 1, 2012 at 2:38 pm |

        Calling attention to one’s own signalling is powerful countersignalling.

    • Joachim Schipper

      February 1, 2012 at 8:03 am | Reply

      Why do you infer that lots of people don’t know? Just being able to side-step internal status games can be worth big bucks, explaining why intelligent CEOs may want to hire such firms.

    • Mark M

      February 1, 2012 at 2:04 pm | Reply

      There is no value in sending a signal if everyone already knows what the message will be. This well-known secret only works for as long as the CEO can plausibly deny the truth of it.

    • Drewfus

      February 2, 2012 at 10:49 am | Reply

      So why doesn’t the word get out to everyone else?

      Because it suggests managerial turnover rates are too low? Would these political factions that oppose change survive if performance-based turrnover rates were substantially increased? The quasi-mangerial position of the consultant or consultancy firm – displacing or negating some of the authority of factions within the org, as opposed to providing new information or ability, seems to indicate that management within firms is simply too complacement due to excessive job security. Who wants to hear that?

    • JL

      February 3, 2012 at 3:23 am | Reply

      You hit gold: your hammer has finally found a nail. (half joking!).

      Your status/signalling analysis is unique, innovative and powerful and nobody else applies it quite as well (or as often) as you do.

      You often apply it to situations where it is a minor factor such as medical spending. (The self-interested pursuit of health explains more than signalling compassion, IMHO).

      But in this case: I would certainly love to read a paper or buy a book about how signalling and status influence corporate politics, consulting, auditing and all that.

13. Joseph Hertzlinger

    February 1, 2012 at 12:12 am | Reply

    For some reason, I’m reminded of “The Catbird Seat” by James Thurber, a fictional look at an insider vs. consultant fight. (Note to insiders: I’m sure most consultants have read the story.)

    • Douglas Knight

      February 2, 2012 at 12:04 am | Reply

      The Catbird Seat attributes the phrase to Red Barber. Red claims to have picked it up from the story.

14. RM

    February 1, 2012 at 7:57 am | Reply

    Probably the result of working in an “emerging” market but I don’t completely agree with you here. In four years of consulting on 9 major cases (am excluding very brief engagements of 1-2 months here) I’ve noticed at least two more reasons for hiring consultants.

    1. Short term work – extra hands
    In spite of being fresh out of B-school, my very-first consulting assignment involved very little in terms digging out what’s already known. We had to set up an internal service-provider with new processes, policies, technology support etc. An internal project management team could have done the task equally well, but the client would have ended up with half-a-dozen people on their rolls at the end of the project with no further tasks to work on.

    2. Genuine lack of expertise
    After working on a finance engagement with the subsidiary of a US firm where the client knew much more than my team, I’ve been on a series of similar engagements with other clients who knew a lot less. The stuff I learnt from the former(“Best practices”) were actually new to these guys and we did manage to teach them quite a few things.

    But yes, most consultants I know would never admit that atleast half the time, their role is signalling, filtering inputs from clients and providing a non-refutable “third-party” perspective

15. botogol

    February 1, 2012 at 7:59 am | Reply

    I agree with the post — but I’d one other factor, again connected to the dysfunctional client, but where consultants are genuinely useful.

    Don’t underestimate the usefulness of just having a bright, available team, prepared to work at *anything* you tell them,

    I work in a big firm, and if I wanted to put together a team of 100% focussed, bright, resourceful young analysts, all willing to work 100% of their time on just about any task I give them, I would find it very difficult – impossible actually. Although we recruit 100s, 1000s of just the same sort of people as consultants do, I can’t just grab a team like that.

    But call up Accenture or McKinseys and I reckon within a week I’d have a dozen people sitting outside my office going ‘finished that, what next?’

16. David E

    February 1, 2012 at 11:33 am | Reply

    As someone who has worked for large companies but isn’t a consultant, the main advantage consultants have is they can suggest changes without committing career suicide – which is what would happen to a salaried employee who made the same recommendations.

17. steve

    February 1, 2012 at 12:03 pm | Reply

    I think your analysis is spot on with one exception. Consultants are not brought on to be unbiased. They are hired to confirm a particular bias. Consultants know this and usually spend the first couple of days confirming what bias they are supposed to have and spending the rest of their time trying to collect data and generate arguments to support it. This is why young and credentialed is often prefered over proven experience.

    A nobel prize winning economist for instance would potentially offer excellent advice. The problem is he has a public record of research and opinion that is more important to him then the bias you want to confirm. If you don’t already know he prefers your intended solution then it is best not to hire him.

    • Douglas Knight

      February 1, 2012 at 3:09 pm | Reply

      This is exactly why people might agree with a lot of RH’s details while disagreeing with the conclusions that they “get their money’s worth.”

    • Stephen R Diamond

      February 1, 2012 at 3:12 pm | Reply

      >Consultants are not brought on to be unbiased. They are hired to confirm a particular bias.

      This is a bit puzzling. Wouldn’t consultants’ servility become widely known, and wouldn’t such obsequiousness lower their all-important high status. Or am I wrong to assume that independence = high status; servility = low status?

      • steve

        February 2, 2012 at 3:51 pm |

        I think it is similiar to what happens in many businesses with conflicting goals. For example, the rating agencies where payed by the same people whose securities were being rated. Despite claims of integrity, independence and decades of investor confidence it is now clear that the rating agencies engaged in widespread inflation of their ratings.

        A consultant is in a similiar position. I doubt the consulting firm overtly tells its employees to be biased, rather I simply suspect that the ones who “please” the guy that contracted them get requested again and do better in terms of compensation and status within the consulting firm. All but the dumbest and most principaled will catch on quickly enough without anyone actually spelling it out for them. And, yes I think consulting firms are probably in constant danger of ruining their reputations.

18. LemmusLemmus

    February 1, 2012 at 1:12 pm | Reply

    I once attended an introductory workshop for young consultants at a consulting company (I worked there myself, though not as a consultant). Apparently, every textbook on the matter tells you that there are four standard reasons for hiring a consultant, one of which is justification/outside legitimacy. (I think two of the other ones are manpower and expertise; I forget the fourth.)

19. Ross Williams

    February 1, 2012 at 1:30 pm | Reply

    I did the unthinkable and actually asked a CEO why he hires and talks with consultants at rates of $1,000/hr or more. Why don’t economists do that more often?
    Reasons:
    1. Need to add large amounts of additional staff quickly is difficult. Firing all of them after a short time is difficult.
    2. Large consulting firms can credibly commit to limiting downside risk. While the majority of consultants are kids, these firms also have very capable, very experienced people who can be brought in when things go wrong, and can quickly bring in many more qualified people when needed. If a consulting firm screws up, they will do everything they can to fix it on their own dime.
    3. If you want access to people that can put out fires when things go wrong, you have to buy the bundle of kids as well.

    He thinks those that do it for reasons other than 1 should be fired, but understands their motivation.

    Ethnography should have its place in the economist’s toolchest.

    • Ben

      February 1, 2012 at 4:17 pm | Reply

      To add to this, management consultants do a lot of work with private equity firms, most of which have the prestige (and ownership stake) to implement any changes they want. What they don’t have is man-power, so they outsource strategy work to cost-effective resources.

      Much of RH’s story resonates, but “consulting” is a wide-ranging field, and the industry serves a range of functions.

20. JLS

    February 1, 2012 at 1:48 pm | Reply

    This is true of big law firms too. Corporations are buying the ability to say “Dewey, Cheatem & Howe” says this is the right legal analysis of the situation, to overcome opposition within the firm. That analysis is largely done by inexperienced attorneys and could be had for less money, but that misses the point.

    This reminds of that business school line of thinking around “the job hired to do”: What is the product actually hired by the consumer to do? In this case, what service is the corporation actually hiring the consultant or law firm to do? The “advice” is not usually the correct answer to that question.

21. Dave

    February 1, 2012 at 5:53 pm | Reply

    Calling in a consultant is like calling in an exorcist.Magic is expected. Now we are atheist,so who you going to call? A college boy from Harvard?

    Maybe this is why the churches are full. Do people in business really expect credentials and “thinking outside the box” to work? Does it?

    Still everyone who has been there and done that has their bullshit meters set on “high.” and those meters are usually right.

    Where I work the CEO had motivational consultants tell him to dressed up like a race car driver but they won’t buy new parts for the old jalopy,so it just keeps putting along.

22. Ross Parker

    February 2, 2012 at 6:18 am | Reply

    There appear to be a number of other ex-consultants reading this, so I should do the decent thing and forward a link to this site (not mine). It’s no longer active, but it is hilarious. I think it will ring true for a lot of the industry. I particularly like the guide to PowerPoint.

23. Drewfus

    February 2, 2012 at 11:25 am | Reply

    Another way of looking at this, is what the hiring of the consultant or consultancy firm does to the vested interest groups within the company. While the CEO may not have the power to overcome their inertia and negativity to change directly, he/she still has the power to spend the relatively small amount that is required to hire the consultants. This enables the CEO to shift his/her attention away from the factional groups resisting change and onto the consultants. This signals to the members of these groups that their attention and abilities are not demanded in quite the deterministic manner that their complacent, anti-change attitude would indicate.

    The consultant needs to be highly paid, to flatter the egos (in a back-handed manner) of those losing the CEO’s attention, and young, to indicate to the old-timers that their experience is not as highly regarded as they might suppose or would like to think.

    So the purpose of the consultant in this model, actually has nothing (much) to do with the qualities of the consultant, instead its about putting uncertainty into the minds of those resisting change, by decreasing the determinicity of demand for their skills and organization-specific experience.

    My consultants advice to you is; when in doubt about human behaviour (including economics), think demand-side, not supply-side.

24. JG

    February 2, 2012 at 11:54 am | Reply

    Part of the reason is business folks do not understand the consulting firms’ business model and they have the delusion that making everything you don’t do well an externality to outsource automatically always works better.

    The basic revenue model equation for a consulting business is this:

    Revenue = Rate * Hours Delivered

    The business model for all human-resourced firms is the same. Say you want to revenue maximize (or just keep up with inflation let alone achieve compound growth). What do you do with this business model?

    You can increase hours. However there are only 2000 work hours in a year and you can’t really push much beyond that without burning people out so there’s upper bound on scaling.

    You can boost the productivity of an intrinsic human by only 10%-20% and then only for a little while (you’ll burn them out).

    You can boost the productivity with the technology/tools. But everyone else uses the same tools because most human-resourced jobs in the developed world are Trailing-Edge technology delivery so you are always at “tool equilibrium”. So tools don’t even give you much competitive advantage to allow demanding higher prices.

    The flaw in the business model is that humans can’t “scale” for shit. This is the original reason why the industrial revolution obviated the craft business model of guilds – the latter was human-resourced and could not scale.

    By scaling I mean, if you want 2x more output there is a way to adding 2x input somewhere to do it, and also the same (predictable) way to get 10x and 100x output as well without changing too much of your assets to achieve it. If your business does not have this predictable lever, you don’t have a scaling business model. Period.

    A well scaling business model can do 1000x, 100x or 10x as easily as it can do 2x. Human-resourced business models can not even hit 2x for more than week or two without major asset upgrades (i.e. hiring a duplicate person – no such exists exactly) to achieve a very small output increase or asset failure (people burn out).

    What to do?

    What you can do is organize for higher prices. Basically you sell your services with your more mature, most seasoned partners as the “value proposition” but then you deliver on the cheap with green talent. You pocket the difference as revenue growth. You use a hierarchy to pool the cheap talent and the cream rises and shit rolls down hill. ALL consulting, law and accounting firms do this.

    Sounds great huh? Well, it’s not all that. It’s scales a bit but it scales logarithmically with size: the more you growth, the more the diminishing returns. Humans aren’t interchangeable in skill sets (even with the “same” degree and experience). Humans have high logistical costs which rise exponentially with organization size. Humans organization logistics increase delay of decision making with organization size.

    And what business people who buy services from such organizations apparently don’t get is that this model doesn’t delivery what they imagined. The implied/inferred hope is that the juniors have been extensively trained by the senior partners and if they get into trouble the partners will step in. Well, it doesn’t usually work out like that. Not unless things really hit the fan (and you will never see that junior in that firm again if it gets that bad). And the bigger the consulting firm (which is always what gives corporate execs the bigger hard-on for a consulting firm), the bigger all the limitations are with the business model.

    BTW these problems are CENTRAL and UNIVERSAL limits to ALL Knowledge-Service business models. This IS the deep and fatal Achille’s Heel of the “Knowledge-Service Economy” as a national strategy. It is and will be always Epic Fail to strive for more than 10-20% KS business in any economy.

    Why? Because industrial economies based on machines can scale like orgasm. Stack a K-S economy against an industrial economy and the industrial economy will always kick ass on growth and productivity because it scales better.

    What is scaling so central? Because if you want any exponential growth, you MUST have several orders of magnitude of scaling on hand in time spans of that exponential growth. K-S can NOT deliver on that at a fundamental level. Despite what is typically taught in economics 101; not every economic structure or good is equivalent, interchangeable or mutual substitutable so aggregating as if it were is Epic Fail.

    Why is Germany doing relatively better than the US (ignoring the Euro crisis)? They have a far higher ratio and better mix of industrial and KS business models. KS is relatively small like it used to be in the US.

    Similarly China and the Asian Tigers are kicking ass only partially because of development curve difference. Most is because they have very tiny KS business compared to their industrial businesses so they are scaling more output far more cheaply than the US can.

    And since the economic score card is based on marginal (aka differential aka differences) advantage, this aggregate of productivity scaling and costs make all the difference.

25. Tadd Wilson

    February 2, 2012 at 2:31 pm | Reply

    Oddly narrow interpretation here. I think Robin is partially correct, but ignores several other reasons to hire consultants.

    In my experience, consultants are hired for three reasons. Clients need quick ramp-up of one of these three things: brains, bandwidth, balls. Brains usually means the “how” of assimilating huge amounts of information and distilling to actionable conclusions… it’s a skill; bandwidth – even if clients have the skill, they may not have the time (not their comparative advantage or impossible to get dedicated chunk); balls – it’s hard to fire people, and nice if those who did so go away.

    There are certainly status plays, but to assume “that’s it” look a lot like someone generally smart but without much context or experience gazing in and making a brainy but un-anchored judgment. Almost like the sins attributed to consultants.

26. Paul Collins

    February 2, 2012 at 3:00 pm | Reply

    Generally the true thought leaders in these engagements are senior-level partners or principals, and not recent college grads. Especially on large or particularly high-status engagements, the young guns merely crunch numbers and run financial models, while the senior-level ringers create the pathbreaking strategies. With this reasoning, it suddenly makes more sense to cut large checks to prestigious consulting firms that deliver their services through highly-intelligent, well-rounded, and unbiased Harvard MBAs. Essentially, the best consulting firms are in the game of renting out brains that have not been bogged down by internal politics and perspectives.

27. V

    February 2, 2012 at 4:08 pm | Reply

    Another neglected reason for consulting firms is that as you get higher up, executives face more and more pressure and competition from each other. In that pressure cooker setting, having really smart outsiders whose job it is to make you (the exec) succeed is invaluable since you can’t trust your peers or your underlings (who want your job and/or are undermotivated). The consultants moreover know that they have to make you succeed since their internal benchmarks (given the field is so highly subjective) are heavily biased in favor of something called “client leadership.” The competition becomes only more intense as multiple teams from firms like McKinsey are on the ground as all the consultants know they are competing with each other for promotion within their firm as well and are even more motivated to help the said executive…

    With that realization, much of what I saw in consulting made much more sense (i.e., projects with very weak rationales enthusiastically endorsed by intelligent people, the lenghts to which snr clients would go to keep teams on the ground, the lack of internal capability building by the clients, etc.)

28. Justin

    February 2, 2012 at 4:13 pm | Reply

    Don’t forget the blame game!

29. Bill H

    February 2, 2012 at 5:14 pm | Reply

    Having been on both sides of this topic, I don’t disagree with your analysis.

    But I think the real mystery isn’t why management hires outside consultants for advice (you’ve given reasons why that might make sense), but why they hire the consultants to implement the advice.

    I’ve seen companies spend tens, and sometimes hundreds of millions on huge IT projects that could have been done for much, much less. And often there are signals that are being ignored. There is a particular large consulting firm I won’t name, that has failed on many large ERP implementations, and the failures are known. Yet they continue to be hired to perform the same type of engagements again and again.

    One factor I didn’t see discussed above was hidden rewards. The Hawaii CIO conferences, tickets to the Masters, and potential future roles in the consulting firms, do influence behavior.

30. ChrisA

    February 2, 2012 at 7:29 pm | Reply

    Whenever I have had consultants working for me, it was an awesome feeling. I would describe a vague idea that I had, the next day I would have a fully researched massive slide pack with every variant of my idea explored. It was very ego satisfying to have people so interested in your ideas. I couldn’t get this kind of support from my employees, they had day jobs, plus were generally specialists not generalists. Perhaps I could have got this from new hires, but people that smart wouldn’t hang around for the few times a year that I needed that support. My company doesn’t really use consultants that much anymore, they are really an agency issue making the employee look good at probably the expense of the firm.

31. Phil Goetz

    February 2, 2012 at 8:24 pm | Reply

    “To me, it is easy to understand why consulting firms attract so many elite students, given the wages, prestige, and job experience they offer.”

    Do consulting firms even consider students from non-elite schools?

    Is it possible for me to become a consultant with e.g. a GMU degree? Because I’ve been asking people that question for decades, and nobody has provided any plausible plan for doing so.

32. Patrick

    February 3, 2012 at 3:45 am | Reply

    The issue being raised is pretty clear cut; companies pay prestigious consulting firms money to advise them on their own business. The consulting firms charge high fees, fees in line with specialized professionals like lawyers, doctors, finance, etc. Yet, the service provided by the consulting firm is not in line with the professions listed – instead it is a pre-packaged analysis by an often under-experienced recent college graduate. I am not sure that the signaling and status argument goes far enough in explaining the observed gap between fee and service. What you’ve done instead is explain two good reasons for organizations to hire brand name consulting firms – not explain why those consulting firms are worth what they bill.

    The truth is, often enough, recommendations from consulting companies fail -Jeffrey Pfeffer at Stanford has written several books in which he discusses this issue. The argument we make to explain the failure is that the organization failed in fully implementing the idea. But the failure was on our end by not making the idea implementable- and often this is due to a lack of real business experience by the consulting team. The client organization then goes out and hires another firm, and another, and so on. So signaling only works as a justification if the recommendation and implementation work – if not, then the value for fees is well out of balance.

    Status is much overrated. A HSW grad clearly has an educational pedigree that is much more marketable than ‘State U.’ The argument made above is that beyond the consulting firm brand, the personal pedigree of the individual consultant allows the consultant to ‘cow’ the various opponents of the recommendation into submission. This is based on a big assumption – that the opponents care about a temporary worker’s educational pedigree and limited future influence over the firm more than their desire to maintain status quo and their organizational influence. A truly obstinate opponent will know that they can just dig their heels in after the engagement and cause enough issues during and post implementation that the status quo can be maintained. Pedigree flaunting can actually cause unforeseen obstacles, as most executives and stakeholders attended ‘State U’ and their experience, achievements, insight, etc in their function is usually vastly superior to that of the consultant team – it is tantamount to a recent bio major grad trying to tell a surgeon how he could be a better surgeon – the surgeon does not care if the grad is from Harvard, and most likely the grad isn’t going to cow the surgeon, but rather entrench his view that the grad knows little about surgery. This is also why experienced consultants look to the various stakeholders with the organization for the solutions opposed to parroting ‘proprietary research and data’ and in turn ‘sponsor’ the stakeholder’s insight. The status here has less to do with the pedigree of the consultant as it has to do with the consulting firm brand being able to win the engagement.

    As for brand, there is clearly a cache to the various brands. That however has been changing over the last 2-3 years though, as boutique firms have been able to eat away at big firms market share. Some of that has been self-induced (McKinsey’s black eyes as a ‘trusted advisor’ as well as methodology issues). But another issue is the prepackaged ‘grab bag’ of recommendations that many of the big firms practice versus the specialize and attentive advice boutique firms offer. The big firms have a hard time adjusting their own models to these changes, as they say, it takes a while to turn around the Queen Mary. But regardless of the changing tide, is the brand worth the fee? Again, only if the solution and recommendation produces the desired results – fall even one goal short and the value becomes discounted. Not to mention the next best alternative / substitute – could the same recommendations and results been achieved by a lesser brand and/or at a lower fee? If the answer is yes, and it is most of the time for the big firms, then the fee cannot be justified beyond the ‘well if someone pays it, then it’s a justified fee’ response – I’ll call that the PT Barnum response – which is in itself admitting the imbalance between service value and consulting fees.

33. The CXO

    February 3, 2012 at 4:15 pm | Reply

    I’m one of those young, good-looking consultants, out of an elite school and currently at a prestigious firm. I also find the profession kind of ridiculous and write a consulting humor blog that I am quite confident is the best consulting humor blog. I mean, I don’t know any others, so I’ve crowned myself.

    I can’t add much that hasn’t been said (other than, seriously, check out the site), but imagine things from our perpsective. We’re thrown into stressful situations, expected to stay calm and composed, and often work insane hours; so we make up for it by becoming alcoholic and hedonistic zombies.

34. 10 yr consultant

    February 4, 2012 at 12:00 pm | Reply

    I probably shouldn’t bother, as I’ll be drowned out by the voices of those that have apparently had a bad experience with a consultant or as a consultant (or more likely, they just have no idea what they are talking about.)

    I have been a consultant for 10 yrs at one of the big-3.

    I do not dispute the signalling value the author describes, but challenge the supposition that this is the only value consultants provide.

    Lets start by addressing some faulty assumptions:

    We only recruit at the elite schools because we need the signaling value of the student’s degree -> only partly true. The reality is that I can only afford the effort needed to recruit and win the best students at a given school for a few schools. It is economically rational for me to concentrate on the schools that have the largest talent pools, especially ones where the on campus resources are geared towards creating qualified candidates (and why Cornell does not yield a proportionate number of consultants as other Ivy league schools- its expensive in time to get there, the students are scattered across 7 different schools, …) We happily take qualified students (academic success, demonstrated leadership success, …) from other schools, but they have to find us, we cannot afford to scour the earth to find them. In the end it is transitive, we recruit at the elite schools because enrollment and academic success at those schools is a signal of the candidate’s qualifications.

    “when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about.” -> This is a fallacy.

    The CEO who hires us gets his advice from senior partners who will have 15 or more years of business experience. In order to provide that advice we need a team of junior consultants with experience ranging from 0 days to 10 years. They are not all ‘fresh out of school’, but some are. Where would you propose they learn the job, if not on the job?

    Saying the 20 year old analyst is the one is the one providing the advice to the company is like saying the paralegal is the one that provided the advice to the client. The paralegal’s work is necessary, but not sufficient.

    “My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. ” – This is much closer to the truth of what I see day in, day out.

    “The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition.”

    A common expression by those that actual understand mgmt consulting is
    “Even Tiger Woods has a coach”. In my experience it is often the strongest performers in an industry that are using consultants — NOT because it is the consultants that made them strongest, but rather because they constantly strive to self-improve and one of the many ways they do this is by bringing in outside advice and analysis to challenge sacred cows and drive consensus.

    Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. Maybe the information itself, but I fear you grossly underestimate the search cost of finding that information and validating its authority and authenticity. The Big-3 exist because the brands have a signaling value themselves – we have repeatedly and consistently delivered on client’s expectations.