Thursday, February 9, 2012

The Psychic Value of Consultants

I have long wondered how so many consultants do so well creating reports that find their way to the bottom of desk drawers at prestigious companies around the country. I have had plenty of clients laugh bitterly about the hundreds of thousands of dollars spent on a report from McKinsey or BCG that was completely wasted, either because it was un-implementable or because it was so obvious in its recommendations that it was totally unneeded.
But I had never stopped to think about what benefits a client might be getting from consultants besides the economic value of their actual advice. But a recent string of posts from very smart guys explored just that question, and came up with some interesting conclusions about the psychic and persuasive benefits of hiring consultants. Take, first, Tyler Cowen
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.
 Cowen makes a simple point: sometimes having an outsider who can credibly claim to be really smart challenge the conventional wisdom, even in obvious ways, can be helpful to an entrenched organization. In my experience, this does happen, but rarely, and it requires an organization that has struggled enough that most of its leadership are willing to take a sledgehammer to the familiar way of doing things. More often, that what about this? idea gets dismissed as unworkable (usually because of the internal politics of the organization) and the report gets shelved.

But one response to Cowen's original post, from Robin Hanson, captured an important truth about consulting:
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.
 Hanson captures something real about the psychology of organizational change. As corporations get larger, executives get more and more autonomy to run their little fiefs the way they want to, regardless of whether all the parts are working together to optimize profits. To these chieftans, it is better to protect what they have built for themselves than take a risk on change that may make things better for everyone but also makes their position near the top less secure. In that world, a consultant can provide a spiral-bound kick in the pants that energizes those who would benefit most from change and neutralizes those with the most to fear. However, I think Hanson is slightly off in describing how this works:
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.
 I may be splitting hairs, but what it seems Hanson is describing is a world in which a CEO has a great idea, but can't get support for it. Then a consultant comes to the rescue by backing up the CEO. This seems a bit off to me: in my experience, consultant reports are usually used by one of the other C-level executives (say the chief marketing officer), who tells the consultant firm what 'recommendation' he wants the report to make, and then uses that document as part of his up-sell. In this case, it is less the prestige of the consultant that helps make the sale (though that does add credibility) and more the perceived neutrality.

To challenge the notion that consultants are primarily pimping out their Ivy League pedigrees to help pathetic clients make obvious decision, Jim Manzi of National Review offers some first-hand observations of how consulting firms are set up:
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.
 This is undoubtedly true, but I doubt anyone thinks the 'kids' are making the recommendations. But the 'engagement manager' Manzi describes is probably not much past 30, if that, and that person is probably doing the bulk of the brain work on the project. So why should this hypothetical CEO listen to someone with 5-7 years of experience, much of which is probably not directly relevant to the problem at hand?

In the end, my belief is that we develop a certain amount of contempt for the people we work with on a day to day basis. We stop hearing each other, stop listening when we think we can anticipate our colleague's ideas and objections before they articulate them. So when a 29 year old consultant comes in in his (or her) nice suit, with the backing of a prestigious firm and a prestigious degree, the novelty and perceived neutrality of the recommendation gets it a better hearing than it could hope for if it came from in house. In other words, you pick a consulting firm not because of how good their ideas are, but because of how receptive they will make your organization to those ideas.


  1. Nicely written post, Dan. And very informative. To a large degree I will defer to the logic that I find within it, as it pertains to larger corporations in the "Big Cities" of the world. As a 25+year veteran of large-scale business planning and development projects, but a relative newbie to the "consulting game" myself, and far removed from the big city lights here in rural Northwest Ohio --- where the companies are much smaller, and large consulting firms tend to largely stay away --- I find that companies here are not only seeking real innovative ideas, but they're looking to consultants/out-sourced service providers to "get their hands dirty" (if you will pardon the cliche), and do more than simply provide "ideas". In most cases (at least here in my neck of the woods) they're expecting consultants to be able to follow up with assistance in implementing their proposed solutions, with an expectation of meeting measurable objectives. -- And rightfully so.

    With that said, I would have to say that in each individual circumstance, each company has it's own reasons for wanting to hire a consultant. And whether or not the employment of a consultant turns out to bring some real solutions (of the consultants own making) to light... or if they merely add outside expert-level credence to the vetting process of existing ideas within the organization --- the employment of consultants --- with their outside perspectives and their wider-ranging understanding of how business systems actually work in the real world (which is often a lot different from what you might read in books, or learn about on college campuses) --- can be a very positive experience on many levels for an organization.

    Therefore, when the assistance of outside expertise may be deemed necessary for any reason... I would suggest that outside consultants should be considered. --- And I'm not saying this just because I, myself, am currently seeking work as consultant. But as an entrepreneur first, and a consultant second... I understand the real value that consultants can often bring to the table.

    Again... nicely written post, and thanks for sharing it with us.

  2. Dan,

    You say vis-a-vis the quote from my post that:

    "I doubt anyone thinks the 'kids' are making the recommendations."

    The post to which I was replying, and to which I linked, said this:

    "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?"

    Also, as I I described in my post and as is implicit in the section you quote, the engagement manager is part of a team, and the fact that (s)he is the one standing at a projector doesn't mean that (s)he is solely or even primarily responsible for developing any recommendations.

    Jim Manzi
    Jim Manzi

    1. Mr. Manzi,

      Thanks for the clarification. I guess I should have said that I doubt anyone at these companies believes they are getting advice from the most junior members of the team. I agree that the original posts were too simplistic in their depiction of where the advice comes from.

      I appreciate you weighing in. I enjoy your work for National Review.