Tyler Cowen, Arnold Kling, Robin Hanson, and others have been discussing why many smart college graduates want to enter consulting, and what value consultants really add. Consulting is a word that covers a multitude of sins, but in practice the discussion was focused on strategy consulting.
Robin Hanson asks:
The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quick-made advice from ignorant recent grads be worth millions? Why don’t firms just ask their own internal recent college grads?
Tyler Cowen argues that consulting is a way for such very young, but smart, people to add value without the years of apprenticeship that are required in other fields:
The rest of the world is increasingly specialized, so the returns to your general intelligence, as a complementary factor, are growing too, in spite of your lack of widget knowledge. “Hey you, think about what you are doing! Are you sure? How about this?” often sounds bogus to outsiders but every now and then it pays off and generates a high expected marginal product.
Strategy consulting is a pretty big industry with thousands of projects every year, so it’s possible to find anecdotes that support basically any theory, but I spent about ten years as a strategy consultant, and none of this sounds very realistic to me.
A consulting team is sized to the project, but a typical team might include three research analysts with 0–2 years of experience each, two associates with 3–5 years of business experience each, an engagement manager with 5–7 years of experience, and a junior partner with about ten years of experience. Such a team is ultimately supervised by a senior partner who has overall responsibility for the relationship between the firm and the client, reviews the outputs, and attends key client meetings, but does not directly lead the specific project.
No competent consulting firm is going to have a bunch of unsupervised “kids fresh out of college” standing in front of a Fortune 500 CEO telling him what they think. In a typical CEO-level final presentation, a good senior partner will let the engagement manager do a lot of the meat of the presentation, so that he or she gets experience. The partners lay out the overall recommendations at the start of the meeting, and then fly air cover for the rest of it. The associates and research analysts sit at the table or against the wall, and answer questions when data or analysis is challenged. The recommendations of a typical consulting project are the product of the 23-year-old research analysts in about the sense that a published biochemistry paper is the product of the graduate students on the research team.
It’s been a very long time since the work product of a good strategy-consulting project has been something like the observation that “No, you’re not in the railroad business, you’re in the transportation business.” The consulting projects that I worked on were usually much nerdier than this. Not all projects add value — like all real activities done by people, they are a mixed bag — but a typical set of recommendations might be something like raising the prices for the following list of products, based on a combination of: (1) historical price elasticity analysis, plus a conjoint analysis piece of market research intended to forecast consumer response; (2) activity-based costing of the integrated manufacturing / logistics economics of the resulting changes to production levels to predict margin change; and (3) competitive analysis to estimate the likely competitor price response based on their production capacity and costs by manufacturing line. This kind of work can sometimes go awry, but usually for the opposite reason: The work becomes an arcane art form that gets too disconnected from practical reality.
A good partner on such a project has done each of these types of analyses many times, supervised them at the engagement manager level many times, delivered them to clients many times, and seen the results play out. Further, he or she probably has lots of general experience in the industries and/or the analytical methods in which he or she specializes. This is why career consultants typically work their way up through these ranks over many years, and are subjected to up-or-out at each stage. As a rule of thumb, you might spend two years as a research analyst after college, then two years doing an MBA, then seven years to partner, and then 10–20 years as a partner, if you are successful. In fact, strategy consulting is a mature industry in which a multi-year apprenticeship is required before you are actually put in control of a project, never mind a client relationship.
Hanson answers his own question with the following theory:
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. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.
The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant.
Big companies, like all human organizations, are much more dysfunctional than our idealized representations. But this specific dynamic is very rare in my experience. To take a practical example, it’s often the case that a CEO wants to institute a new CRM system for the sales force, but the head of sales and her entire team resist this because it will involve them surrendering all of the data they keep in their phones and laptops into a corporate system which makes them more vulnerable, and will also allow more direct management of their time and expenses. That’s a real principal-agent problem. But having McKinsey write a report on the value of the CRM system is unlikely to make the head of sales yield because she just can’t “resist the further support of a prestigious outside consultant.”
If anything, when a CEO uses a report, in part, to get a stamp of approval, it’s more likely to be for upward management of the board. This isn’t crazy from the board’s perspective, since a long-term successful consulting firm doesn’t want to sell its reputation in return for the fees from one project. This is much like a board paying a good law firm to do a review of some high-stakes internal legal issue, or an auditor to review the books. Again, imperfect, but not irrational.
I agree with Jim on this, but would add one other reacon that consultants are used. Each company does not do every activity all of the time, think integrating a major acquisition or entering a new market. They cannot afford to hire the experts to be employees and these activities are not regular, so they hire firms that have helped companies do this many times and they evaluate them on their track record and references.
I also strongly echo how disfunctional many organizations are. If companies were always well run, there would be significantly fewer consultants in the world. My job is to help make my clients successful in the midst of all of the disfunction and uncertainty that is the corporate world today and they tend to hire me again because I did help make them successful.
Now if you want to really start talking disfunction, we can talk about my two experiences dealing with government disfunction during consulting engagements....
Reply to this commentLinkReport AbusePlease (re-) read "The Great Gatsby," which has been frequently mentioned recently, here on NRO.
In the book - yes, the printed book - the narrator (not Gatsby) is recently out of college (Yale?). He knows nothing about the bond market, or much about anything else. But it is the Roaring Twenties, and bonds are fashionable. He had moved to Long Island, near NYC, with the intent of becoming a salesman (nowadays "financial advisor") of bonds. He admits that he knows nothing whatever about them. He gets some books to read about the bond market, so as not to appear totally ignorant.
That was written more than 80 years ago.
Reply to this commentLinkReport Abuse"No competent consulting firm is going to have a bunch of unsupervised “kids fresh out of college” standing in front of a Fortune 500 CEO telling him what they think. "
While that may be true, notwithstanding the known brilliance of recent graduates, especially those who have done case studies in their courses, how much do they really understand in depth about actual functioning organizations they encounter briefly, yet, of course, brilliantly, without experience?
Further, and this applies to both consultants and management: part of experience is seeing and experiencing how what you recommended actually turned out. Frequent job rotations and consulting assignments make that experience disappear. The result is "when I was at X we did this" without having the slightest idea of how X actually turned out.
Also, upper management seems not to believe things about changing an organization when it comes from people within its own organization based on the data, reason, logic, and experience of that organization, while it will believe the exact same things if an outside consultant paid lots of dough says it.
Conversely, it also seems that upper management ends up believing the most preposterous and destructive and expensive things come up with by an outside consultant paid lots of dough even when warned against them by its own organization based on the reason, data, logic, and experience of that organization, things that actually come to pass.
Reply to this commentLinkReport AbuseA related & also interesting question might be: "Why do academics believe a bit of their idle musing on a seemingly nonsensical basic practice in an industry with which they have little to no direct experience will allow them to either discover the underlying rationale of the apparent contradiction or otherwise provide useful input about the industry & the world more generally?"
It must be difficult for such smart academics to live in a world that is so full of such stupid people doing such stupid things when it is so easy for them to not only fully understand a new industry but also identify seemingly idiotic practices in it as well as possible reasons these foolish ways persist despite their obvious stupidity. Just think what might happen if these brilliant academics were ever to demean themselves by hiring out their genius for understanding & solving problems about which they have no relevant experience or knowledge. Why, it would be precisely like their ignorant caricature of the consulting industry!
Reply to this commentLinkReport AbuseWhat company needs consultants to approve a CRM project? Consultants get hired to conduct bake-offs or to install a CRM system, but the decision itself is uncontroversial, especially if the company already has an ERP system. "We spent $3 million on the SAP system, do you think we should install the CRM seats (that we already paid for anyway)? Yes, let's hire some expensive consultants to tell us that spreadsheets are not the best solution." Is that the best example Manzi can come up with?
Reply to this commentLinkReport AbuseThe answer is simple. It's called upper-management butt covering.
Not only do the consultants tell them what they want to hear, but it's understood that they'd better say nothing except what the client wants to hear, else that multi-million dollar contract turns to tp.
And after the deed's done, brave management now has their brilliant strategy validated with a nicely prepared report.
And if things don't go as planned? Why, those no-good consultants came in and disregarded our brilliant strategy while they rammed this fiasco down our throats!
Reply to this commentLinkReport AbuseIsn't the main trick as a consultant to know more buzzwords than the customer does?
Reply to this commentLinkReport AbuseAs a Partner at a strategy consulting firm I mostly agree with what you have to say on this topic. If nothing else the fact that you've been involved in selling consulting services means that you have access to facts about the process that Mr. Hanson and Mr. Cowen (I didn't read the Kling piece) presumably do not, given that their entries into this debate made no reference to any data or anecdotes on the mindset, preferences or behavior of buyers of consulting services.
One thing I'd add: a common critique of consultants in these debates is that companies (or their CEOs) already know what they want to do and hire consultants to provide external validation for a pre-determined course of action. In my career I've only seen one instance (on a very small project) in which this was even remotely plausible, and even then it was by no means obvious that this was the motivation of the buyer.
I think the origin of this complaint is that the following is a common situation: A business has a "strategic plan" that lists 20 "critical initiatives" that it intends to implement over the next 3 years to grow profitably. These 20 initiatives are either not being actively pursued by anyone, or are all being pursued with roughly equal effort and seriousness. Consultants come in, remove 12 of the 20 initiatives because they are illogical, impractical or self-destructive, then spend months doing complicated analysis to value the financial impact of the remaining 8. This work uncovers the fact that of the 8, 2 are wildly attractive, 2 are marginally attractive, and the other 4 fall into the category of "nice to pursue but for goodness sake don't let any of your best people be distracted by this piddling nonsense." The end result is a recommendation to pursue the 2 gold mine initiatives with exceptional force and enthusiasm. But of course the naysayers (who frequently haven't been privy to the process that has effectively de-prioritized 16-18 of the original list of 20 initiatives), are quick to point out to all who will listen that "those guys just told us to do something that we were already doing." Well, sort of...
Reply to this commentLinkReport AbuseExcept most biochemistry papers are 95+% the product of the graduate students...
Reply to this commentLinkReport AbuseMaybe not the best analogy
Companies do this for one reason and one reason only: CYA Decision Making.
Every coward in charge of anything in business or government (and a LOT of those in authority at all levels ARE cowards or have become cowards from experience with the cowards above them) wants to have a good excuse if the excrement hits the aerator when they make a decision. Saying "The Consultants Told Us To Do It" is modern management's equivalent of comedian Flip Wilson's famous "De Devil Made Me Do It!" excuse.
They don't really care about the value or ability of the consultant, just the fact that they ARE "consultants" is enough to diffuse blame. Furthermore, many government agencies and contractors who work for them are required to hire such consultants, ostensibly as a defense against nepotism and favoritism in management decisions on things like contracts. And since preference is given to the consultant firms with a track record of past work for the agency (whether good or, as in many cases I know of, horrendously and expensively bad) these things just repeat and repeat.
Its really no different than the cult of credentialism that has led us to empty "degree" requirements for hiring, occupational licenses that are really about controlling competition, and the rest of the "expertise" that modern society puts its trust in not because it is trustworthy, but because it provides a good excuse. In fact, you might say that this is the "Its Bush's Fault!" equivalent in business and bureaucracy. No wonder Obama, who came from academia and government, knew how to do it so reflexively and extensively.
Reply to this commentLinkReport AbuseMost of the people I work with disdain consultants as "people who borrow your watch so they can tell management what time it is."
The ones you really have to watch out for are the kind that borrow your watch and tell you what time you WANT it to be.
Reply to this commentLinkReport AbuseAgree with all the points made in this post - strategy consulting is dramatically misunderstood by those without direct experience with it. And it is often misunderstood by those with only partial exposure to it (e.g., low- or mid-level management in client companies). Calling it mere CYA activity is a gross oversimplification and misunderstanding (it may be sometimes true, but it is rarely the case in my experience).
I have been both a strategy consultant AND a client of strategy consulting firms. Individual projects can be hit-or-miss; certainly not every project I worked on as a consultant nor every project I have been a client on has been a success.
When I was an intern on a project with an airline, I asked another analyst on the team, "Why did [Airline X] hire us instead of one of those boutique firms with 30 years experience in the airline industry?"
He replied, "[Airline X] is full of people with 30 years experience in the airline industry. They don't need more of that. They need a dedicated team of smart people who can spend 12 weeks full-time to focus on this problem with a fresh perspective, informed by what works in other industries." It totally changed my perspective.
Part of it is capacity - many organizations can't take their top-performers out of their job for a few months to focus full-time on a critical project. So you hire a strategy consultancy that can deliver a team of 5 top-performers on demand for exactly the time you need.
Part of it is access to talent. Smarts aren't everything, but they matter sometimes (like when designing advanced pricing analyses), and hiring a strategy consulting firm gets a company short-term access to some very capable people that the company may not have on the payroll from their standard recruiting at the local state college.
Part of it is timeline - as a client, I've seen that projects that involve strategy consultancies move dramatically faster than those that do not. They push the pace, and they also work ridiculous hours. You can have a meeting at 5pm to discuss some work, and they'll have it done the next morning. Many companies can't or have no desire to push their own employees at that pace.
Last, what good is it? Well, I happen to be in a position to have seen the actual outcome 1-3 years later of several of my projects first-hand. And they range from no payoff at all to impact of over $100M a year incremental profit, and that last one I know would never have achieved the right outcome without my firm's presence. The organization didn't know how to tackle the problem in the right way, ask the right questions, or perform the key analyses to deliver the important insights. They were all set to make the wrong decision before we got involved.
Can an organization structure itself and its decision-making to avoid the need for strategy consultants? I believe so. But the fact is that most firms aren't that way today, so there is a real need that is served by these firms.
Reply to this commentLinkReport AbuseAgree with all the points made in this post - strategy consulting is dramatically misunderstood by those without direct experience with it. And it is often misunderstood by those with only partial exposure to it (e.g., low- or mid-level management in client companies). Calling it mere CYA activity is a gross oversimplification and misunderstanding (it may be sometimes true, but it is rarely the case in my experience).
I have been both a strategy consultant AND a client of strategy consulting firms. Individual projects can be hit-or-miss; certainly not every project I worked on as a consultant nor every project I have been a client on has been a success.
When I was an intern on a project with an airline, I asked another analyst on the team, "Why did [Airline X] hire us instead of one of those boutique firms with 30 years experience in the airline industry?"
He replied, "[Airline X] is full of people with 30 years experience in the airline industry. They don't need more of that. They need a dedicated team of smart people who can spend 12 weeks full-time to focus on this problem with a fresh perspective, informed by what works in other industries." It totally changed my perspective.
Part of it is capacity - many organizations can't take their top-performers out of their job for a few months to focus full-time on a critical project. So you hire a strategy consultancy that can deliver a team of 5 top-performers on demand for exactly the time you need.
Part of it is access to talent. Smarts aren't everything, but they matter sometimes (like when designing advanced pricing analyses), and hiring a strategy consulting firm gets a company short-term access to some very capable people that the company may not have on the payroll from their standard recruiting at the local state college.
Part of it is timeline - as a client, I've seen that projects that involve strategy consultancies move dramatically faster than those that do not. They push the pace, and they also work ridiculous hours. You can have a meeting at 5pm to discuss some work, and they'll have it done the next morning. Many companies can't or have no desire to push their own employees at that pace.
Last, what good is it? Well, I happen to be in a position to have seen the actual outcome 1-3 years later of several of my projects first-hand. And they range from no payoff at all to impact of over $100M a year incremental profit, and that last one I know would never have achieved the right outcome without my firm's presence. The organization didn't know how to tackle the problem in the right way, ask the right questions, or perform the key analyses to deliver the important insights. They were all set to make the wrong decision before we got involved.
Can an organization structure itself and its decision-making to avoid the need for strategy consultants? I believe so. But the fact is that most firms aren't that way today, so there is a real need that is served by these firms.
Reply to this commentLinkReport AbuseI am a consultant. Please don't hate me.
Seriously, though, I work for a niche IT consulting company that is populated with individuals with years and years of experience. We occasionally get brought in behind one of the big consulting firms, cleaning up the mess they left behind. Or, as in my current project, coming in after one of the big firms and telling them more in 3 weeks than that firm could tell them in 9. And with half the people.
It used to be, and still should be, that a consultant was someone who accumulated years of experience in a field, then provided that expertise to other companies. I can't figure out for the life of me why anyone would expect to receive new and innovative business insights from someone fresh from college. Thankfully for me, there are still many companies who value experience over diplomas.
Reply to this commentLinkReport AbuseYou have to have the right tool for the job. You don't hire "kids" to revamp your IT system if they don't have the tech credentials and experience on the system architecture. Similarly, you don't hire IT geeks to root out the problems in your incentive system or to rethink your company's supply chain. We had some brilliant IT consultants at my last firm. But I wouldn't put my unshaven, socially awkward, pajama clad techno warriors within 20 feet of a client who was looking for advice on a new strategic communications initiative.
A lot of execs turn to consulting firms for the same reasons you might turn to a trusted pastor or your Uncle Frank. You already sort of know what you need to do, and you just want someone you trust to tell you it's ok to do it.
Reply to this commentLinkReport AbuseAt least with respect to strategy consulting, it's not really a CYA thing - everyone understands that consultants can't tell CEOs what to do, so "the consultant made me do it" adds as much protection to one's posterior as SPF50 sunscreen in a gunfight.
The real key, it seems to me, is surge staff support. The CEO who hires consultants gets an extra dollop of workforce to do the considerable amount of work involved in strategic reorientation. When the work is done, the extra workforce is dismissed. Along the way, they provide the added benefit of disinterestedness - they will not warp the strategic direction with a view to creating dream jobs in the new enterprise for themselves, as internal leaders would if tasked to work strategic reorientation.
Reply to this commentLinkReport AbuseI hope Mr. Manzi isn't discouraged by the quality of comments in response to this article. This is a thoughtful description of the strategy consulting process and very helpful to outsiders. I learned from it.
Thank you, Mr. Manzi, for the post.
Reply to this commentLinkReport AbuseThe management needs plausible deniability when things go bad. Like the president's blue ribbon committees, consulting firms are used to cover someone's ass.
The proper MBA term is CYA.
Reply to this commentLinkReport AbuseThe most disappointing thing one discovers about corporate America is just how hard vision and leadership is to come by. In my now 14 year Fortune 100 career I have seen maybe 3 executives who were true visionary leaders. The vast majority of the rest tried to avoid making enemies and in the process became more and more mediocre.
What consultants do for a business is allow them to say something needs to change without making people angry. Now, there's very little if anything any consultant can tell you that your own people can't and usually more successfully. The difference is that middle management never lets these folks get within a country mile of telling top leadership---who generally do want to listen---anything resembling a controversial idea.
An example:
A number of years ago a technology executive at a company I worked for tired of endless layoffs and finally decided to pull a team of folks together to fundamentally rethink how we provided technology services to business partners. We spent several days developing some truly innovative approaches to make us both leaner and more responsive. We presented these ideas to our middle level executives who promptly vetoed each and every one, dismissed us, and put their own pitch together. The executive who received this pitch expressed disappointment in the lack of innovative proposals, shrugged, and sent them back out to collect badges. As usual.
What this executive should have done was to bring in a bunch of consultants who would at least have been granted the privilege of an audience.
That one problem---the lack of access that the folks who do the work have to the folks who make the business decisions---is why the consultant business exists.
Reply to this commentLinkReport AbuseWell, as someone who spent 10+ years at Booz, I would suggest that Scott Adams has fairly well covered the waterfront when it comes to beating up consultants. Much of it well deserved. But, consider the laughs the consultants are having at your expense. I led projects where the abject stupidity of the customer was beyond comprehension. Misallocation of resources? Dysfunctional? Try "what resources" and "just plain broken". Where you stand on the issue of wasting money generally depends on where you sit. Sometimes, when the job went south, and the fees weren't great, man did we have some funny stories about the client that sort of made up the difference. You can't fix stupid, after all.
The bottom line is simply that there is always a shortage of Really Darn Smart people when you need them. In our age of "participation ribbons" it is easy to forget just how ruthless the bell curve is when it comes to smarts. Those frequently maligned "kids" are (at the top firms) frequently drop-dead brilliant. They are led by associates and VP's who are equally so, and who also possess a high level of industry experience (even consultants have market specialties). And the hours they work and travel are incredibly high. Projects can live and die in 8 weeks, making most consultants hunters not farmers, and intensely entrepreneurial...something the jr. and mid-level staff in a firm frequently lack. At big firms, complacency and routine are huge problems...institutional inertia...things consultants zero in on like a heat seeking missile.
They possess tools and analytical techniques your in-house business analysts do not have and may not even understand. And they can dissect your organization and pinpoint specific issues in a matter of days or weeks... and present it in a way that is objective, fact-based and professional...none of which are generally feasible with the inherent biases and politics of your average firm.
I met my share of bottom feeders who gave consulting a bad name. But I also knew a lot who just by sitting in the room with their brains switched on made everyone around them smarter. Cut the kids some slack...it's your own insecurity that's probably to blame. Some of the biggest whiners I met over the years were people who wouldn't last a week in my job.
And I can name several conslting professions whose raison d'être involves telling you a great many things you probably already know, and getting you to fork over money for it:
Reply to this commentLinkReport Abuse1) priest
2) parent (well, minus the fee!)
3) teacher
4) investment advisor
5) lawyer
6) doctor (my wife is a doctor, and she strikes me as a consultant in her choice of words and approach with patients)