I Consult, Therefore I Am: A New Freakonomics Radio Podcast

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(Photo: Acid Pix)

There are more than 500,000 management consultants in the U.S. – more than 700,000 if you count the self-employed. And even more are on the way. So we thought it was worthwhile to ask a few questions about the industry. For instance: Where did management consultants come from? What do they actually do? And … does it work?

Our latest Freakonomics Radio podcast is called “I Consult, Therefore I Am.” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript below; it includes credits for the music you’ll hear in the episode.)

It was inspired in part by a provocative Robin Hanson blog post called “Too Much Consulting?” As Hanson puts it in the podcast:

HANSON: Two puzzles stand out. One is that people who are closely involved tend to say that the advice you get isn’t spectacularly insightful. It’s often puzzling why companies pay often millions of dollars for sort of generic, straightforward advice. If you had asked around in your company, you would have gotten some similar advice. And then it’s also puzzling, the companies that give this advice, what they tend to do is hire people out of the very top schools, immediate graduates, and then a large fraction of their work force are these immediate graduates of top schools. And you got to wonder, well I’m sure they’re sharp but, you know, doesn’t it help to have some experience?

You’ll hear from a former (and admittedly disgruntled) consultant named Keith Yost, whose experience seems to justify Hanson’s skepticism:

YOST: I had conversations with sort of fellow consultants and associates and their advice was that fifty percent of the job is nodding your head at whatever’s being said, thirty percent of it is just sort of looking good, and the other twenty percent is raising an objection but then if you meet resistance, then dropping it. That was sort of the breakdown of my role as a consultant.

But you will also hear stout defenses of the consulting industry. Traci Entel, chief human resource officer at Booz & Co., has her say; the Stanford economist Nicholas Bloom talks about his study “Does Management Matter? Evidence from India,” which unequivocally shows a strong return on consulting investment; and our own Steve Levitt talks about his consulting past and present:

LEVITT: The question is, can a really talented generalist come in and help a bunch of specialists? And I think in general the answer to that question is probably yes, that my own experience has been that even though I know nothing about an industry, if you give me a week, and you get a bunch of really smart people to explain the industry to me, and to tell me what they do, a lot of times what I’ve learned in economics, what I’ve learned in other places can actually be really helpful in changing the way that they see the world. And the implementation is always a hard part, but my own view is that business is so unbelievably complicated, and the tasks are divided into so many tiny pieces that are done by hundreds or thousands of people that there’s tremendous scope for improvement. And especially in big firms you hardly have to improve at all to make the consulting fee look trivial compared to the value that you add.

And Christopher McKenna, an Oxford historian and author of The World’s Newest Profession: Management Consulting in the Twentieth Century, gives us a fascinating history lesson on the topic.

Given that most of us carry around pretty strong biases on just about everything, whether we can see it or not, I am curious to hear reactions to this podcast from people within the consulting field and from those who have nothing to do with it. I expect there will also be a fair number of jokes, as I’ve already started getting e-mails from listeners. Steve Cohen, for instance, writes to say:

The definition of a consultant is a guy that can tell you 50 ways to make love but doesn’t know any women…


Noname

I was lucky to work with several consultants. Some came from prestigious firms such as McKinsey and others from not so well known as here is what I learned.

Smart people within any firm can come up with similar solutions if not better.

If execs cannot keep their egos and cool heads at the door to think about solution, then the company is dysfunctional and there need to be a leadership change

If a consultant is not there to provide technical advice ( implementation of a software, engineering... Etc) you do not need him/ her

Skip Montanaro

There's a big difference between Levitt and recent Harvard MBAs in what they bring to the table, methinks...

Jenny

I think the point is that by paying a consulting firm, management isnthen motivated to listen to, consider and perhaps even act on, their advice. Yes people within the firm have probably already thought of these same ideas. But there are lots of vested interests with regards to taking advice from within your own company. Management consultants are an expensive but hopefully independent form of arbitration.

Trevor Jacobs

There are three reasons that companies hire consultants:
1) They need specific, technical knowledge that's missing in the organisation (e.g. programming)
2) They need generalist head-count for a short(ish) period of time, and don't want to increase the permanent staff (e.g. for a specific project)
3) They need independent arbitration on a decision (even if the answer is already known), that can't come from within the company (e.g. the CEO knows the answer, but the board disagrees)

Very rarely are consultants called for simply because they're 'really talented generalists'. The trick of consulting firms is to convince clients that they need 'really talented generalists' to fill one of the above roles.

Dennis

This episode seemed to draw a lot of negative opinions of consultants based on pretty much nothing. (I suppose you did have an anecdote and a couple random opinions.) The one study cited showed that consultants were extremely valuable. Freakanomics always thinks they need to be contrarian, but its possible that in the majority of cases consultants provide value. You could say this and you'd still have an interesting show.

I am not a consultant nor have I ever been one.

mhenner

On your podcast, you discussed the rise of consultants in the 1930's.

But I recall a lot of industrial studies from an earlier period, with time/study consultants, and the proposals that giving people breaks increased productivity, etc.

Juan

Having used consultants I found another important benefit.
They attempt to evaluate methodically and quantify ideas that employees had. It is easy to have many ideas floating around in a company, but usually nobody sits down to fully evaluate the implications, costs and benefits. Consultants have smart people paid to take the time to do this.
Well used they are definitely useful,

CI

I am "smart" enough to know my limitations. I did not attend a big name school, not because it was a choice of mine but mainly because I was not 'cut-out' for it. I could never compare myself to any of my counterparts that came out of U of C, however, I do have a keen interest in how a business operates. I love being around entrepreneuers and I enjoy reading from the likes of Jim Collins, Michael Porter, Michael Gerber, Clayton Christensen etc. As a recent college grad, I have interned and worked at a commercial bank as an analyst. With that in mind, I have never taken a course on strategy, consulting etc. but I've had a buddy, who now works at the CME as a trader, with whom throughout college bounced ideas back and forth regarding a consulting business. Today, we sit down with small business owners (Chicago suburbs) and often surprise ourselves of how much value we are able to offer them. The quality of our projects is probably nothing like compared to the Greater Good folks and what they have to offer but we realize our client base also isn't as sophisticated as they would be with those guys. Levitt was right on with his assessment in that we learn so much from our clients that sometimes we feel guilty for charging them fees.

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Skip

I have worked as a Mechanical Engineer for several years and recently switched to Consulting. The thing I've found is that while I had many good ideas for improvement while working as an engineer, few were truly considered. Also, the day-to-day responsibilities of my job as an engineer kept me from really exploring ideas fully. I would need buy-in from a manager so that some of my work could be shifted to someone else to have time to work on any of my ideas. An idea from a consultant is handed down the chain, ensuring it has the resources necessary to work.

I believe that I am able to make a much larger impact on a company's bottom line as a consultant, even if I'm just fleshing out others' ideas than I ever could have had as an engineer.

sheez

Keith Yost did not belong in this story. If you ask any 23 year old fresh-face college grad what his company does, whether its management consulting or rocket science, you are not going to get a well-informed answer. You are going to get the perspective from a single low-level cubicle. Every 23 year old in every industry is busy doing grunt work and complaining about how inane it is. Not a credible source.

Khasha Mohammadi

Interesting program; shows consultant values despite some negative opinions or stereotypes.

Mark Stephenson

Nick Bloom touches briefly on the experiences of Virginia Mason hospital in Seattle. Is anyone aware of more in depth articles on this? I've taken a quick look at his research history and google didn't surface anything instantly.

Abby

I have never been with a management consultancy, however with mircoeconomic consulting firms. The majority of these micro consulting firms also do management consulting using economic tools. During my time there, I really enjoyed seeing the text book theories are really valuable in real markets (or some not at all). And I still think we were able to help solving some problems firms had. And I learned a lot about several markets and a lot about thinking out of the box!

However, very often we had to to come and pick up the pieces of management consulting firms. Unfortunately, my experience with their work was horrible. Why do consultants (also from the big three) struggle using economic tools as econometrics, apply IO theories...
So for each economist, I can only recommend to join a microeconomic firm to get some consulting experience!
Some examples below:
http://www.oxera.com/
http://crai.com/
http://www.fticonsulting.com/services/economic-consulting/index.aspx
http://www.micradc.com/
http://www.frontier-economics.com/
http://www.compasslexecon.com/
http://www.rbbecon.com/
http://www.microeconomix.eu/

I am not paid by any of those firms :-)

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amy

It seems to me that all of the things that Levitt says he learned are pretty much common sense--that the people doing the jobs have good ideas, that you should maybe listen to them some of the time, and the the people in the corner office often have no clue how things really work....and while HE maybe learned a lot on the job, what was the proof that this helped any of the businesses he worked for?

Seems to me that if a company needs an stranger to come in, take information that is readily available to them and tell them what it means, it indicates that those highly paid execs should be fired....

And I think it a sad commentary that he said he was not encouraged to THINK in college...

www.consultantsmind.com

Thanks for the podcast. 6 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% 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.

Thanks for all your great work. Freakonomics is wonderful.

www.consultantsmind.com

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Jim Althof

Consultants are often hired to introduce changes that the management doesn't have the balls to make. Consultants most often miss the real problem which is that the management is incompetent, which is evident because they had to hire a consultant (the messanger) who gets the blame for laying off people and making changes often voidimg the corporate vision. Most management create social gridlock, something they either miss in school or they are purposely taught in graduate school, either way, it is a rare company that doesn't have a severe case of it. So, on must assume that the structure of delivering their education is disconnected from the real corporate world adding useless costs to the production and sale of products with real demand. Such products sell themselves without management.

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% VAT tax, give him a bit (4% to 10%) and tadaa! 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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Bobby

Another thing to keep in mind when people hire consultants is how it impacts their financials. It is true that it is cheaper to hire an individual to do a job and pay him a salary and benefits. However, an analyst will then see this annual cost as a perpetual cost. This directly impacts SG&A and therefore the bottom line, EPS, etc. However, a consultant is considered a one time cost and therefore impacts the balance sheet and cash flow.

k43r

I think that job of consultant is to get things done in company. There are often tons of good floating ideas in the air, but to implement them you'd need someone who have skills and time. You need very strong position in company to make changes, and person who is day to day worker usually does not have it. And time - making changes takes time, and not every company will allow any worker to take 2-3 weeks to work on something that he is not contracted for.

Jim A

Consulting is too large of a subject to have a simple view. On one hand, I am sure small companies get much value from consultants due to their lack of size. However, my personal past experience working for one of the country's largest life insurance companies (with plenty of resources) was much different. What I witnessed was consulting used as a massive CYA (cover your ass) exercise by senior management. If a major decision worked it was management's wisdom that made it happen but it didn't you can fall back on the consultant's recommendations.