The Role of Management Consulting

The hearings on the Galleon insider trading case have begun. Two of the accused Anil Kumar (turned witness) and Rajat Gupta are former McKinsey consultants. So naturally, there is light being shone on McKinsey and management consulting.

John Gapper in the FT

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, 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 practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

The value in hiring management consultants lies in broadly three (overlapping) areas:

  1. Superior analytics skills – Firms like McKinsey do hire some of the best business brains.
  2. Expertise – industry or functional expertise.
  3. Best practices

The third – best practices – 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 function like Marketing or HR) for many years. But best practice is just about knowing what the best companies are doing.

Hiring consultants to get industry best practices 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 commoner in the industry as business schools kept churning them out. This redressed the IQ balance somewhat. Which forced management consulting firms to shift more towards hiring people from the industry (acquiring expertise) and to offering best practices.

In many cases, hiring a management consultant for best practices is perfectly alright. In functional areas like HR for instance. Although, hiring somebody with the expertise as an employee might be better.

But if you hire a McKinsey for core business strategy you have to be pretty convinced that your executive row has the wrong people. Even then, if you were the CEO, wouldn’t you make changes to your exec team rather than seek outside help?

Outside of management consulting I see no dilemma. In IT consulting for instance, there is a certain complementarity in the expertise that the IT consultant brings. Assuming that IT is not core to the company (i.e. you are not amazon.com) there is every reason for the company to tap the technology expertise with a consultant.

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 them for core stuff have admitted to themselves that a) their exec team cannot rise to challenge and b) in the inflow-outflow that Chris McKenna speaks of above, they will definitely gain from the inflow more than they can lose from the outflow of information.

You know who’s never used consultants? Warren Buffett.

Cross posted at my blog 6 AM Pacific.

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Basab Pradhan writes about enterprise technology and services and other things on his mind at his blog 6 AM Pacific.

9 responses to “The Role of Management Consulting”

  1. Aditya Raghavendra

    As a former management consultant, I could spend hours on this but I want to address two specific points:

    Re: best practices – Management consultants bring best practices to the table but the best ones also understand how to apply these best practices in the context of a specific client situation. This comes being able to quickly gauge what’s applicable/relevant/important in a particular client context and is derived from having seen multiple client situations. In my experience, most clients have the intellectual firepower to do this on their own but go with consultants because the right ones bring focus, avoid the typical traps and get it done faster.

    You say: But if you hire a McKinsey for core business strategy you have to be pretty convinced that your executive row has the wrong people.

    Have to disagree. Contrary to popular belief, consultants don’t go off into their massive ivory towers, develop strategy in a vacuum, foist it on companies and walk away. (Ok, some do but they should be avoided). The ones who know what they’re doing get that strategy development is a collaborative process in which executive management is actively engaged. Consultants provide industry data, insight, analytics and fresh perspectives but it’s combining all that with expertise on the inside (executives and line management) that produces concrete and actionable strategy.

    May be Warren Buffet doesn’t use consultants but it’s a fair bet that almost all of the Fortune 500 have used a management consultancy in the past 1-3 years.

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  3. Aditya Raghavendra

    > I’d worry if a company hired a mgt consultant to fix these
    I’d actually worry more if a company didn’t know when they needed help. If companies have the chops to do it internally, that’s great too.

    >My guess is that consulting is shifting to non-core areas.

    I don’t have industry data to back me up so my guess would only be as good as yours.

    Having said that, let me offer up two pertinent points from experience.

    - Management consultants are too expensive to hire to work on non-core areas.

    - From 2006-2010, I worked on 10+ engagements for large clients in the high-tech space. Every engagement was a “Top 5″ business priority for the company or BU for that year. Every engagement was in a core area – product, go-to-market strategy, core ops. I can’t speak for other firms but this certainly applied to an overwhelming majority of the projects at my firm.

  4. Jenny Sutton

    People tend to lump a lot of types of external resources into the management consulting category – strategy consultants, operations consultants, IT consultants and ofter even outsources. But I think that they all have to manage the double edged sword of industry knowledge / confidentiality.

    I use the term “industry knowledge” loosely – what is best practice for one company is not always the answer for the next; and industry knowledge is just competitor information in disguise.

    Consultants have wielded this sword without clients truly understanding what is happening in the background when they receive and, in turn, provide best practices. Consultants have knowledge databases of clients deliverables (often unsanitised), consolidate confidential data to produce research, and often other staff from the consulting firm (research, quality assurance) are involved in an engagement that the client isnt even aware of, and roll continuosly from client to client. Indeed we know of one strategy consulting firm that has undertaken strategy work for several companies in the same industry in Hong Kong over the past year – and we wonder if these companies truly got value – the first client was essentially training the consulting team, and giving up their information for now relevant local experience, and the latest client .

    Perhaps this will spur clients to more carefully weigh up the risk versus the value of “Industry Knowledge” in consultants.they hire!

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    so what are the indicators of best practices of management consultancies in global perspective and its application

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