More Thoughts on the Rise of Management Consulting

A very interesting response to our recent podcast “I Consult, Therefore I Am,” from a consultant who blogs here.

Thanks for the podcast. Six years in management consulting, and a tremendous amount of what you said is true. A few additional hypotheses on the rise of management consulting:

1) The massive turnover of executives (CMOs average less than 2 years) creates a type of rotating vacuum on the leadership team. Someone is either leaving, or just arrived.

2) CXO are running out of time to think. Drucker said that executives should have 1/2 of their time to think through problems. That is certainly not the case with reporting requirements (SOX), end-of-quarter sales push, conference calls all day long that stretch from India to California.

3) Executive have become a bit lazy. They seek “benchmarking” and “best practices” as a surrogate for real strategy (know what activities to NOT do).

4) Consulting costs have become a fixed cost (like audit, or advertising). For the budgeting cycle, it is copy/paste to the next fiscal year x 103 percent to adjust for inflation.

5) The alumni of top consulting firms go on to be very successful and have a broad reach. It only makes sense that they hire people they know and trust (i.e., from their old firm).

6) Corporate American culture has become increasingly short-term focused. This also extends to the view that human capital is a commodity and completely fungible. If we lose someone with 20 years knowledge, we can hire a 20 year veteran from a competitor. As companies are more willing to hire from outside (not promote from within), it only makes sense that they are more inclined to “buy” analysis, decision-making, and sometimes leadership.

And another comment here, from a listener named Florian:

I love this show very much but I was tremendously disappointed by this episode mostly by missing the number one reason consulting is so popular: money laundry. I live in Romania and am now 23, in my last year of a Masters, and I have and work for a small company. The “most legal” way to launder money is to hire a consulting company. If I want to get $1000 out of my company accounts, I hire a consulting company owned by a friend which only pays the 16 percent VAT tax, give him a bit (4 percent to 10 percent) and tada! — he gives me $800 “clean cash” back. This is extremely efficient because the paper trail and proof of this illegal act is minimal, and so is the risk of getting caught. It’s done by pretty big companies by having 2-3 conferences which the managers attend, eat some finger foods, and watch some slideshows for 2-3 hours and take some pictures, and it’s almost impossible to get them for the huge consulting fees…

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  1. Ray says:

    The scheme described by Florian strikes me as embezzlement not money laundering. When you get the $800 in “clean cash” it is off the books (unless you are on the books at the consulting company hired by your company, a clear conflict of interest). So it needs to be laundered before spending it in legitimate channels. For example, if you were plunking it in the bank, the tax authorities would have some questions for you.

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  2. A Management Consultant says:

    I do have several possible starting points for an explanation why management consulting is on the rise.

    One may be that the companies, who hire consultants either cannot or do not want to hire those expensive people, who work in management consulting. Just get them when you have a problem, this really keeps your “fixed costs down”.

    This fixed cost approach lead to constructs, like one of my former customers has it: They have whole departments, where the department head, as well as de deputy are the only employees of the company. The other 30 people in the team are consultants or temps.

    Another thing that made me dislike my job from time to time is that consultants, also some management consultants, are rather a highly paid form of temporary employment, than really problem solvers. They are just hired for stuff no one else wants to do, because it is time consuming or just inconvenient.

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    • Tung Bo says:

      Speaking as one who’d hired consultants and caused consultants to be hired, there are three major reasons strategy consultants get hired in today’s climate:

      1. To satisfy regulatory demand – get an ‘independent’ review/confirmation of what they are doing.
      2. For senior management (not necessarily CEO) to gain an outside authoritative voice to support what they want to do.
      3. Get an industry wide view of ‘best practices’ .

      The bigger question lurking behind this podcast is: “Is there a more efficient way for corporation to devise their strategy?”
      Dubner’s commentary contains the germ of alternate solutions. He noted that as a Generalist consultant, he often found the solutions by listening to middle management and lower level workers on the front line. In other words, senior management found their solutions by indirectly listening to the opinions of the people THEY ARE ALREADY PAYING for. So why can’t senior management access these ideas directly? I can think of a few psychological or cultural reasons:

      1. CEOs are supposed to lead, so they feel uncomfortable listening and learning from people lower on the pyramid.
      2. Management also fears that lower level staff are pushing opinions that are beneficial to their local interests instead of the broad level corporate interest.
      3. Rival managers are more fearful of advices from an external source than potential competitors.

      If these cultural fears can be overcome, I’m confident that a corporations can devise an internal team to come up with advices just as good as external consultants. Though that may not satisfy the regulators presently….

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  3. Steve Lennon says:

    In the podcast Steven Levitt, former consulting hound, says he focused on 3 activities during his time as a management consultant:

    - 50% – nod your head at your master
    - 30% – look good for your master
    - 20% – raise objections but then roll-over for you master.

    Sounds fairly straightforward to me. This is just what you might expect of an average dog/ consultant. But it’s not what you expect of the highest performing hounds in the business.

    It’s what a good dog might do, but a great dog goes much further, as I explain in my book, It’s Dog’s Job (But Someone’s Got To Do It).

    I was very excited to hear Stephen J Dubner ask Traci Entel, Chief Human Capital Officer and Partner at Booz & Company, to reflect upon three different analogies for the consulting role:

    - A doctor – who needs to understand you and find the real problem, not just the symptom.
    - A Therapist – who helps you self-diagnose your problem, and in doing so, helps you choose to fix it.
    - A dog (Golden Retriever) – who forms lasting, trust-based relationships with clients.
    Entel even nominates a Boxer as her favourite hound!

    On the other hand, Christopher McKenna, author of The World’s Newest Profession: Management Consulting in the Twentieth Century and business historian at Oxford University, does not quite get it. He says the title of his book should evoke a thought about the world’s oldest profession, which I think is a bit unfair to both ladies of the night and consulting dogs of today!

    Luckily, you guys come down in favour of the consulting hound in the end.

    Levitt notes that consultants who get down and dirty, working in amongst a client’s people to get things done, tend to earn their keep. Whereas the strategy types who wander around wielding fancy PowerPoint charts alone are much less likely to make a lasting impact.

    He says that in his own experience, it’s walking the halls and making friends with people that is the ‘magic potion’ of consulting. Learning through listening, the lower down in the organisation the better, to find out what will make the project work.

    I could not not have said it better – this is the basic instinct on any great consulting hound. In my book (www.itsadogsjob.com) you can dig up more valuable consulting bones of wisdom and enjoy playing further with the ‘(wo)man and best friend’ analogy.

    …………………………………………………………………

    Steve Lennon is a strategy, business transformation, and culture management expert. As client and consultant, banker and borrower, CEO and corporate coach he has built, bought and sold several businesses, and buried one or two as well. Steve is a Consulting Principal with Fujitsu and the author of “It’s A Dog’s Job”, a cheeky, mad-dog look at the world of management consulting. Fujitsu is Japan’s leading global IT services firm, focused on human-centric innovation.

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