From the Indian context I've seen, I'd add the following:

1. Engaging the prestigious consulting firm helps raise funds or assists company finance (banks approving loans, HNIs or funds investing money, media reporting on it positively and people trading its shares if it is a publicly listed company) since it helps increase perceived value for all. (Adds to the signalling and status story)

2. It can sometimes be rather useful since the bright-eyed fresh perspective of first principles questioning that the high-status consultant brings can allow for large dysfunctional organisations to mine and connect information or insights within the company itself, which can be an extremely hard people problem to solve because most parts don't talk to each other or want to when pushed.

3. It allows companies to shift blame and thus negative consequences onto the consulting firm for any difficult decisions that need to be taken. For eg: layoffs, hires/fires, restructuring, technical or technological shifts etc.

4. On a project basis (for its outcome, for #1 and for #3), consultants can help put together a new frontier or business opportunity when the existing organisation doesn't have the bandwidth or incentive to do so. Their value may possibly be seen in the longer run as their input pays yearly payoffs.

Do you know of any consultants or consulting firms that are able to charge their fee in terms of equity or pitch their services as a percentage of the payoffs they deliver? Anyone with some skin in the game? That might straighten out the incentive structure a bit maybe?

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So many people will spend there money on consulting. It is great to take advise or suggestion on some topic like law, insurance or higher education. Some time too much consulting is very dangerous for some people. 

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I worked for a Big-4 firm as a management consultant for 3 years. Hated the work, but I was told I was lucky to get such a position. Graduated from Kalamazoo College in 2005 and I was informed by Sr. Mgmt that my hire from a school other than elite (Notre Dame, U. Chicago or Northwestern) was uncharacteristic of their hiring practices.

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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).

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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.

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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.

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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.

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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.

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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.

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"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.

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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.

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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.

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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.

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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.

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Don't forget the blame game!

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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.)

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