Why do Companies Hire Management Consultants: Expert, Best Practice, Contacts, Objectivity, Knowledge, Signaling…?

“A management consultant is someone who saves his client almost enough to pay his fee” ~Arnold H. Glasgow

Management consulting indicates both the industry and practice of helping organizations improve their performance primarily through the analysis of existing business problems and development of plans for improvement. Organizations hire the services of management consultants for a number of reasons, including gaining external (and presumably objective) advice and access to the consultants’ specialized expertise.

Because of their exposure to and relationships with numerous organizations, consulting firms are also said to be aware of industry “best practice”, although the transferability of such practices from one organization to another may be problematic depending on the situation under consideration.

Consultancies may also provide organizational change management assistance, development of coaching skills, technology implementation, strategy development, and operational improvement services.

Management consultants generally bring their own, proprietary methodologies or frameworks to guide the identification of problems, and to serve as the basis for recommendations for more effective or efficient ways of performing business tasks. There are four basic types of consulting firms:

  • Large and diversified services organizations; offer a wide range of consulting services, information technology, and strategy practices. Some very large IT ‘service providers’ have moved into consultancy and are developing strategy practices, as well.
  • Medium-size management consultancies; offer a blend of consulting services and technologies with specialties similar to both the large consultancies and boutique firms.
  • Management and strategic consulting specialists; offer primarily ‘strategy consulting and business intelligence models’ for many industries.
  • Boutique firms; focus consulting expertise in specific industries, functional areas, technologies, or regions of the world.

Management consultants are often criticized for overuse of buzzwords, reliance on and propagation of management fads, and a failure to develop plans that are executable by the client. A number of books critical of management consulting argue that the mismatch between the management consulting advice and the ability of business executives to actually create the change suggested can result in substantial damage to the existing business.

In his book Flawed Advice and the Management Trap”, Chris Argyris believes that much of the advice given today has merit. However, a closer examination shows that much advice also contains gaps and inconsistencies that may prevent positive outcomes… Disreputable consulting firms are often accused of delivering empty promises, despite high fees. They are often charged with “stating the obvious” and lacking the experience on which to base their advice. Some consultants bring few innovations, instead they offer generic and “prepackaged” strategies and plans that are irrelevant to the client’s particular issue…

In the article “When to Hire a Consultant” by Steve Tobak writes: You hire a consultant for: 1) expertise, 2) objectivity, 3) credibility, 4) leadership, and 5) time. Here’s a hypothetical example:  ‘Let’s say a company has been exploiting a leadership position in the marketplace and executing well on its operating goals for a number of years. Now, competition is getting stiffer and the company is suffering from margin pressure.

The company has reached an inflection point. That happens from time-to-time. The CEO realizes the company may need new strategic direction. It may need to cut some projects and businesses and add others to meet its new direction. Moreover, the company lacks a process for developing and implementing new corporate and product strategy’. In this hypothetical case, it would be a good idea to bring in a consultant.

As for common pitfalls, aside from the obvious–expertise, track record, chemistry, etc.–remember these three and you’ll do fine:

  • Be careful what you wish for.
  • Garbage-in, garbage-out.
  • Set-up the problem and commit.

The bottom line: Just like with lawyers and doctors, working with consultants may be distasteful or even painful, but there are times when you need them if you know how to recognize those times. While trying to go it alone sounds noble or courageous, it isn’t. It can cost your company big-time.

In the blog “The Role of Management Consulting” by Basab Pradhan writes: The value in hiring management consultants lies in broadly three (overlapping) areas:

  • Superior analytics skills
  • Expertise
  • Best practice

‘Best practice’– does overlap with ‘expertise’, but differs in a crucial way. ‘Expertise’ could be acquired either because you were a part of industry or because you have been a consultant to that industry (or, functions like Marketing or HR) for many years. But ‘best practice’ is what the ‘best companies’ are doing. Hiring consultants to get industry ‘best practice’ is quite common.

There was a time when smart MBAs were concentrated in management consultancies and were hired by companies just looking for smart analytical types to fix problems that their own managers were not able to. But hiring MBAs became  common practice in the industry as business schools kept churning them out. This redressed IQ balance (between consultancies & companies)  somewhat: Which forced management consulting firms to shift more towards hiring people from the industry (acquired expertise) and to offering best practice.

In the article “Why Do Firms Hire Management Consultants?” by Peter Klein writes: Academics, economists, and management scholars are often skeptical of management consulting firms: “Their advice seems fluffy, ad hoc, unscientific…” But consulting firms continue to prosper. Are their clients irrational? I have always assumed that the ‘signaling game’ plays a role.

One can imagine a ‘Spence-style (Michael Spence) separating equilibrium’ in which high-quality firms signal their unobservable characteristics to customers, suppliers, rivals, etc. by hiring an expensive consulting firm, while low-quality firms find this prohibitively costly. Of course, all consulting firms are not alike, and there are many different types of consulting services (e.g., strategy—more fluffy; IT implementation—less fluffy).

An article in the JMS by Donald Bergh and Patrick Gibbons look at the ‘signaling game’ value of consulting, measuring the stock-market reactions to firms’ announcements of hiring a consulting firm. The stock-market likes it when “good” firms hire consultants, typically the returns are positive and significant even with the client’s prior performance. There are many reasons for hiring consultants:

  • Rent rather than own specialized skills.
  • Break up internal political deadlocks.
  • Provide better rationalizations for what you want to do already.
  • Take advantage of consultants’ exposure to other firms and their practices.
  • Signaling various things to the market–lack of complacency, growth opportunities, etc.
  • Building the entourage for image-polishing or ego-building purposes.
  • A sounding board for managers who are afraid to say what they really think to their intramural colleagues.

In the article “McKinsey’s Corrupted Culture” writes: The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them. But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors.

So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information. The accumulation and sharing of privileged knowledge is integral to how it works…

In the words of Christopher McKenna, Oxford University’s ‘Saïd Business School’; the calculation every client makes is that “consultants will carry information ‘in’ and information ‘out’. The client has to decide which of those flows is worth more.” Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised ‘best practice’.

The consultant is broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels. In this sense, a management consultant is a bit like an art dealer or anybody else who traffics in valuable information asymmetries. The consultant knows more than the client, when it comes to strategic issues within the industry in question. If the client wants access to that knowledge, he has to open his own kimono to get it, thereby putting the consultant at yet more of an information advantage.

Management consulting is the only kind of consulting where most of what they do is not complementary to what the client’s leadership is doing: It makes up for their deficiencies. The companies who therefore use consultants for core stuff have admitted to themselves that (a) their executive team cannot rise to the challenge, and (b) they will definitely gain from the in-flow more than they can lose from the out-flow of information.

In March 2008, Apple CEO, Steve Jobs, told Fortune that Apple doesn’t hire consultancy firms and instead focuses all of its efforts on creating great products. “We do no market research. We don’t hire consultants. The only consultants I’ve ever hired in my 10 years is one firm to analyze Gateway’s retail strategy so I would not make some of the same mistakes they made [when launching Apple’s retail stores]. But we never hire consultants, per se. We just want to make great products.”

Consultants bring expertise, a fresh perspective, and focused energy… How you manage a consultant may be the most important single factor in getting good advice.  Motivate a consultant the way you would motivate a valued employee.  Involve them in the business.  Make them feel part of the team.  Encourage them to affiliate emotionally, and get them to over-deliver because they care…

“My greatest strength as a management consultant is to be ignorant and ask a few questions” ~Peter Drucker