Management Consultants: Are they worth it?

Episode #220 Management Consultants: Are they worth it?

Many companies use consultants of one type or another, and the consulting market can be pretty complicated. There are many different types of consulting firms, and it pays to know your way around the market – at least well enough to work out which ones might be able to help you solve a problem that you can’t solve yourself.

Whether it’s developing a new corporate strategy, embarking on a restructure, improving workforce productivity, or reducing the baseline costs of your business, there is absolutely a consultant for every occasion. But it’s also easy to spend money with the expectation of achieving stunning results, and then finding out a year or two down the track that you’re no better off than when you started.

HOW THE CONSULTING MARKET IS SEGMENTED

During my corporate career, I engaged consultants from all ends of the spectrum for a variety of reasons. I was extremely fortunate to be able to work closely with McKinsey on a range of projects over the course of several years. I learned a huge amount from this experience, and in the interest of full disclosure, I even gave a keynote presentation at a McKinsey customer conference in Bangkok in 2012. I also had the opportunity to work with Boston Consulting Group, better known as BCG, but to a slightly lesser extent.

I’ll predominantly take a look at the high-end of the management consulting market, the firms known as the ‘MBB’s. This is an acronym for the three top management consulting firms:

• McKinsey

• Bain; and

• BCG.

These are genuinely the Rolls Royces of the consulting world, but there are plenty of other options too.

For example, I worked extensively with another management consultant, Partners in Performance (PiP). Companies like PiP are generally full of ex-MBB partners, directors and consultants. They’re experts at finding and extracting productivity improvements.

I’ve also worked with all of the big four accounting firms:

• Ernst & Young (EY)

• PricewaterhouseCoopers (PwC)

• KPMG; and

• Deloitte.

Although the big four are known for their accounting and audit work, they offer quite a broad range of services. Typically you would appoint one of them to audit your corporate accounts, but they also do consulting work and the hands-on implementation of things like technology transformations. In my experience, some of these engagements were a roaring success and others… well, the stuff that nightmares are made of.

Way back in my CIO days, I worked frequently, and deeply, with the likes of IBM, Accenture, Fujitsu, and CSC – more tech-oriented firms. Now, I have to say, for every one successful engagement in the tech space, there were two others that were unmitigated disasters. I guess that’s technology, right? There are very few (if any) major IT implementation projects that genuinely hit their time and budget constraints, while still delivering the value and benefits that were promised at the outset.

Then, there are other boutique specialist firms: they create value by bringing expertise that the company doesn’t have internally. For example, firms that do complex economic modeling, or companies that specialize in highly complex mine planning. When I think of deep experts in relatively narrow specializations, I think of companies in Australia like ACIL Allen, which is run by Paul Hyslop. They are unparalleled experts in modeling and predicting market outcomes against a backdrop of an incredibly complex and dynamic energy industry.

And then of course, there are a million individuals who hang a shingle and look to do consulting work for anyone who’ll hire them. And don’t get me wrong: many of these can be incredibly effective in the right situation.

WHY HIRE A MANAGEMENT CONSULTANT?

No matter which consultant you decide to hire, they’re going to cost you a bunch of money. So why would you hire them? Well, I have three basic criteria:

1. Capability

This is probably the most common reason why companies engage management consultants. There are many times when you’re going to need a short-term injection of skills that you simply don’t have internally.

But it’s not just the extra smarts, it’s also the access to the intellectual property that a consultant has acquired by working with other clients like you in many different industries and markets. Used wisely, this is a really good reason for bringing in a consultant.

2. Capacity 

It’s often the case that you need to implement some changes to the way your company operates, but you simply don’t have the people power and capacity to focus on it and to get it done.

If you don’t bring in external resources, trying to stretch your own people more can often damage the day-to-day business – and this can have long-term implications. So the ability to flex your capacity with capable resources who can focus on a specific task for a short period of time can be a really effective way to solve a problem.

3. Independence 

With things like financial audit, external stakeholders need to know that there’s been a level of independent scrutiny. Independent peer review of major investment cases is another manifestation of this. Many management teams suffer from moral hazard. They’re incentivized to get certain outcomes, and they sometimes feel as though it’s acceptable to bend or break the rules to achieve that.

Boards love to appoint independent consultants to report directly to them and to give them direct feedback on what’s going on in the parts of the company that they can’t necessarily see. Well, that sounds pretty useful to me too.

THE POINTY END OF THE CONSULTING MARKET

Let’s just swing back to the MBBs: what makes them different?

Let’s start with price:

They are eye-wateringly expensive, which is why not many companies can afford to use them. They’re at the top of the pile, and by definition they command very significant fees.

How significant? Well, confidentiality obligations prevent me from divulging the sorts of fees I’ve seen paid to the MBBs over the years… But what I can say is that even when I ran a relatively large company in Australia, over $1 billion dollars in annual revenues and almost $450 million in EBITDA, I couldn’t justify engaging an MBB when there were other less expensive options available.

To give you an idea of the size of the overall MBB market: in 2000, the MBB firms earned around $5 billion globally between them – but this has grown to an estimated $30 billion today.

On the upside, they are genuinely different. Not only do they get results for you that you couldn’t otherwise achieve, but they’re also a pointed example of how to do business. If you look at how they run their businesses, you’ll get an absolute masterclass in brand differentiation and customer experience. There’s nothing like working with an MBB if you want the smartest smarts, the broadest global reach and a level of VIP service that you could only dream of when trying to solve your company’s most wicked problems.

In fact, based on the model, I’d even go so far as to describe the high-end consulting services offered by the MBBs as Veblen goods. This is a term named after the economist Thorstein Veblen, who observed over a century ago that there are certain products that break the standard supply and demand relationship. What you’d normally expect to see in a supply/demand relationship is that, as the price of any product or service increases, the demand for that product or service decreases. But with Veblen goods, demand actually increases as the price increases.

Why is this the case? It doesn’t really make sense, does it? Veblen goods are typically high quality goods that are manufactured beautifully and are extremely exclusive. They’re sought after by affluent customers who place a premium on being able to attain the highest quality, which they also view as a status symbol – whether it’s a Tiffany necklace, a Gucci handbag, a Patek Philippe watch, or a convertible Bentley.

Now, my key takeaway from my years of reading, studying and observing microeconomics is this: all value comes from scarcity. So I don’t think it’s a stretch to view this as a distinction that puts some clean air between the MBBs and other consulting firms.

Alright, the $64,000 question: are MBBs worth it? What do they do well?

They are always ahead of the game

Think about emerging trends like ESG and the rapid digitization of industries and markets… Many companies are just beginning to turn their minds to these issues and they really don’t know where to start. To quote a recent article in The Economist:

“The consultants, by contrast, have often been thinking about it for years and, given their broad client base, have a good grasp of sectoral and economy-wide best practice. They have also been beefing up their digitisation practices by buying outfits with expertise in areas like big data and online marketing. It helps that the trio can point to their own successful digital transformations.”

That’s pretty true, but it’s more than that:

• They are experts in painting the upside and finding ways to unlock latent value.

• They take a whole-of-market, whole-of-company view – and sometimes it’s almost impossible to get this from inside the business, no matter how good your people are.

• They spread their learnings of best practise from their global client bases.

• They bring focus and momentum to solving the toughest problems.

• They provide expertise and knowledge that you simply can’t get anywhere else. You’ve got a problem that requires a global expert? Well, they’ll have access to a global expert, who they’ll bring into your Sydney offices for a day… from Chicago.

And don’t overlook one of their most important benefits: they provide comfort to senior management teams and boards because they have instant brand credibility. In the eighties, there was a very successful advertising campaign by IBM, and it was aimed at senior managers who were making purchasing decisions. The tagline was: “No one’s ever been fired for buying IBM.” And the same can probably be said these days for management teams in the 21st century that decide to engage an MBB.

CONTROVERSY IN THE MBBs

I’ve recently read two articles in The Economist, one of which I quoted just above. They were published last month in quick succession of each other:

1. Where Next For Management’s Consiglieri?

2. Do McKinsey and Other Consultants Do Anything Useful?

The catalyst for this interest in McKinsey and the other MBBs seems to be a recently released book called When McKinsey Comes To Town, which basically airs all the dirty laundry of top management consulting firms. I haven’t got to this book yet, but it’s definitely on my reading list.

The articles summarize the major controversies uncovered in the book, which basically talks about management consultants behaving badly. Now, it’s worth noting that McKinsey has denied that this in any way represents how they do business. But of course, every large global company – no matter how well it’s run, or how diligent its leaders are – will always find pockets of aberrant behavior. But to be honest, I find myself wanting to step in here to defend McKinsey and their colleagues at Bain and BCG.

Amongst the big allegations are price-gouging and overcharging unsuspecting clients – particularly governments. Let’s face it, in business, you need to charge your customers what the market will bear. If you don’t, you’re just leaving money on the table. Of course, this is under two provisos:

1. There is no graft or corruption behind the buying decision; and

2. It stacks up in the long term and doesn’t damage the brand or future relationship.

A poor buying decision by a client doesn’t necessarily reflect bad behavior on the part of the management consultancy.

Yes, the fees are extraordinarily high, but so is the potential scale of the value to be realized. If you can capture $1 billion of value for your company by spending $20 million with a consulting firm, well, is that worth it? Of course it is. But if you look at the relatively junior status of the consultants involved and the amount of time they spend on the assignment, their hourly rate is obscene.

This is why it’s so important to remember that you’re not paying for hours of effort. You are paying for results. And if you get the results, why focus solely on the cost? It’s just another example of value over activity.

Another major allegation is that the MBBs have done work for regimes that ignore human rights, like Saudi Arabia. Now, I think this issue probably has a stronger line of sight. Merely associating with the wrong people can damage your brand, and they may take an uppercut for this one.

This point is further extended to allegations of illegal business practices in Angola and South Africa – which are hotly denied, of course. But this seems to be the most problematic allegation, if it’s proven to be true.

Similar to this is the allegation of working for companies in sin industries: big tobacco, oil and gas, opioid manufacturing, and so forth. But let’s just stand back and think about this for a minute: imagine if my old company, CS Energy couldn’t access the best management consultants because they refused to work with us on the basis of some virtue-signaling ethics? We made the bulk of our revenue by generating electricity from fossil fuels like coal.

So how would we then solve the wicked problem of making a smooth, fast, economically-viable transition to cleaner, greener energy without imposing massive cost increases on our customers? Something like this requires smarts that most companies simply don’t have to face into these existential problems.

The article also cites allegations that management consultants promote shady behavior, for example, encouraging insurance companies not to pay out motor vehicle claims. Having worked closely with these guys, I can tell you they will push the management team to look at ways to improve the efficiency of the business and eliminate leakage. If an insurer is denying claims that are legitimate and valid, that’s a huge problem. But on the other hand, if that company is paying claims that aren’t legitimate, that’s leakage… and that pushes up the cost of insurance premiums for everyone else.

So will these allegations see a decline in the MBBs? Will these Veblen brands lose their luster? It’s possible, but I’d be most surprised if that were the case. They’re known as the best for a reason, and despite the recent exposé, I don’t think there’s any doubt that they’re still the best.

TEN TRAPS TO AVOID WHEN ENGAGING A CONSULTANT

Trap #1: Bait and switch

All consulting firms wheel in their big guns during the sales cycle to show you their capability. You sign them up and then sometimes you look around a month or two later only to find that you’ve got the B-team.

Trap #2: Overextending to consultants non-core capabilities

It’s horses for courses, right? Be aware of the halo effect – just because a consulting firm is awesome at helping you analyze markets and competitors doesn’t mean that that same company will be able to help with people-oriented initiatives. That might not be their long suit.

Trap #3: The security blanket effect 

You’ll feel so much better when you engage a high-end management consultant. It could make you feel as though the change and value capture is up to them. It’s not. They bring expertise, but management still has to execute.

Trap #4: Over-reliance and lock-in

There’s an old saying: “If I owe you $100, I’ve got a problem. But if I owe you $1 million, you’ve got a problem”. For many companies, once you go a certain way down the track, it becomes increasingly difficult to break the reliance on your consultant – even if their performance is weak. This is particularly true for big, long-term engagements like defense force projects and major technology system implementations.

Trap #5: Insufficient internal capability 

The expertise, drive, and smarts of the management consultant is only on hire. If you aren’t building your own internal capability at the same time, things will revert to Business As Usual as soon as the consultants disappear.

Trap #6: Insufficient management appetite for change 

Like I say, if you don’t want the answer, then don’t ask the question. You’d be amazed at how many boards, CEOs and senior executives spend a small fortune on consulting reports and then don’t implement their recommendations. They just don’t have the appetite to do the hard yards. Or even worse still, they pretend that they’re implementing the recommendations when they’re just tinkering around the edges.

Trap #7: Value leakage

Be careful when a consultant dazzles you with the size of the prize. Quite often the potential value is almost impossible to capture. For example, I once saw a proposal that cited a $1.8 million saving based on the fact that a particular process improvement would save every individual in the Operations division an hour each week. Good luck capturing that, right!?

Trap #8: Culture and internal resistance 

Lots of things look awesome on paper, but it’s almost impossible to overcome the cultural resistance to the change that it would take to make it a reality. You can blow a lot of money trying to do things that the workforce will resist in ways you never thought possible. So make sure you assess this before you spend the big consulting fees.

Trap #9: Solving the wrong problem

Make sure you understand your problem properly before you bring the consultants in. I’ve seen companies react because they’ve got a problem, which they don’t fully understand the fundamental nature of. And if management doesn’t understand the problem sufficiently, it’s really hard to brief an external firm so that they understand it.

Trap #10: Sustainability of outcomes

As I said, getting the short term benefit of any organizational change is pretty important. But what happens when the consultants leave? You have to think about building your own capability before, during, and after the engagement. Otherwise, it’ll just be an expensive and painful exercise that leaves you no better off than you were in the first place.

BRINGING ALL OF THIS TOGETHER

It’s incredibly important to know when the right time is to bring in some external assistance. But the laws of value creation still apply. Make sure that you know what specific outcomes will be achieved, and that you can justify the expense of bringing in a consultant on that basis.

Many consulting firms will be all too willing to help but, at the end of the day it’s how you run your own business that determines whether or not you can turn the short-term burst of consulting activity into long-term business value.