I Consult, Therefore I Am

Stephen J. DUBNER: So, Levitt, between college and graduate school you worked as a consultant. Can you tell us a little bit about that?

Steven LEVITT: I did. I worked for a little company called Corporate Decisions, Inc.

DUBNER: That sounds so made up, Corporate Decisions, Inc.

LEVITT: CDI, and it was a Bain spinoff, which was later acquired by Mercer, and it had four partners. And maybe there were seventy or eighty of us young people. And…

DUBNER: Was it a job that you were excited to get, or was it kind of a fallback?

LEVITT: No it was exactly…It was a great job. See I had trouble getting jobs because I had never really worked. And the fact that I had spent my summer before my senior year of college when most students were doing internships, I had decided the right thing to do was to go start a little horseracing/gambling hedge fund, and to lose all the money of my investors in the previous summer didn’t really speak to many of the employers. So it turned out it was harder to get a job than I thought. But the thing is, CDI, they actually took that as a positive that I’d had the initiative and the chutzpah to go out and lose a bunch of money at the racetrack.

DUBNER: Okay, so you got a job at Corporate Decisions, Inc., and what kind of consulting were you doing? What kind of firms were you going into?

LEVITT: Strategy consulting, so I worked mostly on pharmaceuticals while I was there.

DUBNER: And how much did you know about pharmaceuticals generally before you got there?

LEVITT: I knew that you could buy aspirin at the grocery store.

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Raise your hand if you know somebody who works as a consultant. Yeah, I thought so – pretty much everybody. There are more than 500,000 management consultants in the U.S. – more than 700,000 if you count the self-employed. And there are even more on the way. The Bureau of Labor Statistics estimates the consulting field will grow another 22 percent over the next decade, which means there will be more new jobs for consultants than there will be for computer programmers or lawyers. Now, how does consulting pay? Quite well, thank you. A median salary of about $78,000. That’s more than architects, postsecondary teachers, and a lot of scientists and engineers. So, if you’re Steve Levitt – that’s my Freakonomics friend and co-author, who was telling us earlier about his first job at Corporate Decisions – or, more precisely, if you’re like Steve Levitt was 20 years ago – a bright new college graduate, not quite sure of the next step – then consulting looks pretty good. In fact, at his alma mater, a certain school up in Boston, 11 percent of the 2012 graduating seniors become consultants, with another 11 percent going into finance. The only more popular destination, at 17 percent, is graduate and professional school.

Robin HANSON: I did not go to a top school and did not get snapped up by one of the top firms to be paid obscene amounts of money to say relatively straightforward things.

Oops. That’s Robin Hanson, an economist at George Mason University. He’s a little bit skeptical about the value of consulting:

HANSON: Okay, so it makes perfect sense that sometimes companies will want to get outside advice about stuff, how to do things, how to change things, and of course those companies have to hire somebody, so it makes sense that the people who do that should be knowledgeable, somewhat intelligent, and experienced. But what we see in the world, I think, is companies willing to pay a lot for management consulting advice if it comes from a few really top firms that everybody knows the name of.

When Hanson talks about the “really top firms,” that means the big three in the consulting world: McKinsey, Bain, and BCG, or Boston Consulting Group. They tend to get a lot of the glamour jobs, offering strategic advice to the biggest and most important companies in the world, and they charge accordingly. And then you’ve got industry workhorses like Accenture and Deloitte, which are a little bit more likely to give operational advice –- how to restructure a division or make a factory as efficient as possible. There are thousands of consulting firms out there, very big and very small, but according to industry experts, the top 25 handle the bulk of the work, which generates hundreds of billions of dollars a year in global revenues. But, to Robin Hanson at least, the numbers don’t quite add up:

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 workforce 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?

In today’s episode, we’ll try to answer some of Robin Hanson’s questions, like: are consultants worth the money? But let’s start with the basics – like, what does a consultant actually do?

Keith 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.

That’s Keith Yost. Back in 2009, he went to work for BCG. He was 23 at the time, just out of M.I.T. with a double bachelors’ in economics and nuclear engineering and a master’s in nuclear engineering. That master’s degree made him especially valuable. He was sent to Dubai:

YOST: And the starting salary was about a hundred and thirty thousand dollars. Signing bonus of twenty thousand dollars. A housing allowance, which was roughly another twenty thousand dollars Performance bonuses which varied between zero and twenty-five percent of your base salary. And then there was profit sharing. So, on top of your base salary and whatever performance bonus you got, you got an automatic extra fifteen percent at the end of the year.

We should say here that Keith Yost didn’t actually earn all that money, because he was fired after about five months. Which, frankly, is why he’s here today, telling his story. If he were still a consultant in good standing with BCG, he wouldn’t be. In any case: when Yost started out, he was nervous. This was his first real job. He was sent to work at a startup, an industrial firm, that had hired BCG for a special project.

YOST: And they basically handed us a big tub full of consulting reports they had commissioned.

Looking at the reports, Yost could tell that the company didn’t quite know where it was headed.

YOST: Almost to the level where, you know, they couldn’t tell whether or not they wanted to make hamburgers or automobiles? And they had four years of consulting reports, by my estimate probably $20 million worth of consulting that they had done.

So his job was to help sift through the old consulting reports and recommend the best of the old recommendations.

YOST: We basically had this process where we went through all the consulting reports and any time two independent reports said the same thing we’d put it in our report and make a slide. And it seemed difficult to justify charging that much money. I don’t know, it’s rough for me to assess the good or bad that we did in that case.

Traci ENTEL: Clients should not hire management consulting companies just because they don’t know what to do.

That’s Traci Entel.

ENTEL: Chief human capital officer and partner at Booz & Company.

Booz & Company is one of the biggest, and oldest, consulting firms in the United States. In the 1950s, it helped MGM cut filmmaking costs; in the 60s, Booz worked with Lockheed Martin to build a better nuclear sub. More recently, Booz helped General Motors try to spiff itself up during the government bailout.

ENTEL: I think that companies hire us when they have a really hard problem to solve and they’re looking for a team of people who will connect with them, who will understand them, and who they have confidence in, in terms of helping them craft a problem.

DUBNER: And Traci, let me just ask you, tell me what you find to be the most common negative stereotypes of management consulting, and then dispel them for me.

ENTEL: I think the most common myth about management consultants is that all we do is cost cut, so the “Up In The Air” movie, which I quite enjoyed, but didn’t seem like the profession I was in. And I would say that cost-cutting is certainly part of management consulting, but at Booz & Company, we think about cost-cutting as a step in order to grow stronger and gain or regain a competitive advantage in your industry.

DUBNER: So I just want to help listeners understand the specific functions that management consultants serve. If you would, just play along with me a little bit in some parallel thoughts. So, for instance, if you could compare consulting to a few other professions tell me in what ways is a consultant like, let’s say, a doctor?

ENTEL: A consultant is like a doctor in that they need to be able to connect with the person that they are talking to and try to understand perhaps the underlying need versus the presenting need, similar to the way a patient might come in to a doctor and talk about presenting injury, but it might be something quite different, that is the underlying reason. And that is a very common occurrence in consulting, where the consultants really need to understand the question beneath the question, or the problem beneath the problem.

DUBNER: What’s the symptom and what’s the cause, in other words, yeah?

ENTEL: That’s right.

DUBNER: How is a consultant like a therapist?

ENTEL: A consultant is like a therapist in that they often are asking a client a set of questions that help them achieve a self-discovery around the answer to that question in a way that enables them to own the answer and drive the change from within their company.

DUBNER: Okay, and one more. How is a management consultant like, let’s say, a golden retriever, man’s best friend?

ENTEL: A management consultant’s like a golden retriever, or what I would say, a boxer, given that boxers are my favorite, in that they need to form lasting, trust-based relationships with their clients.

DUBNER: You are good, Traci. I see why they sent you.

All right, so we’re starting to get a feel for what management consultants do. Next, we look into the harder question: does it actually work?

Nick BLOOM: The answer we found quite simply was yes, massively.

That’s coming up on Freakonomics Radio.

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We are talking today about management consulting. It is a massive industry and massively misunderstood. We’re asking some basic questions: who are these consultants? What do they actually do – and, most important, does management consulting work? But before we plow forward, let’s take a giant step backward. Let’s find out … how consulting was born.

Christopher McKENNA: Americans were always worried about the power of bankers and about the power of monopoly and what those kinds of experts might do for competition.

That is Christopher McKenna. He’s a business historian at Oxford University.

McKENNA: And particularly after the great crash of 1929 and the Depression, they grew particularly worried about the power of banking. And so they famously passed a series of laws in the 1930s, Glass-Steagall being the most important of them, which separated investment and commercial banking, but other related banking acts. And all of those laws, we know, led to a series of professions in effect, because as commercial bankers and investment bankers broke apart, investment banking grew rapidly. Once you were required to have quarterly and annual financial reports, auditors also grew rapidly. But what’s less understood is that management consultants also emerged from this. And they came out of a mix of actually accountants and bankers, because they would have worked for bankers, they would have been inside the banks, but all of a sudden they were prohibited from being inside either the commercial or the investment banks. And so a mix of people who were cost accountants who worked for bankers emerged, and the firms that you now know, particularly McKinsey and Company, James McKinsey was a cost accountant who was also trained as a lawyer who largely worked for bankers out of Chicago. And that was the early origin of the firms.

So as Chris McKenna sees it, government regulation written to prevent conflict of interest among financial firms gave rise to this new profession, management consulting – although, as we’ll learn in a little bit, it’s not exactly a profession. But let’s get back to McKenna, talking about how consulting works today.

MCKENNA: The easiest way to think about this is really that they divide the roles into two parts. The first part is the one that we tend to understand the best and the one that we tend to think of in the most positive terms, and that is that they bring advice to a firm that doesn’t otherwise have it.

DUBNER: So far so good, that sounds legitimate, and helpful, and probably very valuable.

MCKENNA: Terrific. Okay, so the second thing that they provide is legitimacy, and that’s the one that seems a little bit strange. So you’ve made a decision or you think you might know what you’d like to do about entering those markets or making a new product. And instead of just going ahead and doing it, you hire the consultants to confirm what you already thought. And those consultants come in and they say yes you’re right, or even imagine you’re having a political fight within the firm and both sides hire consultants and in effect they both produce reports, and somebody wins that fight with the help of that extra amount of knowledge from outside.

DUBNER: Now, Chris, you’ve written a book, it’s called “The World’s Newest Profession: Management Consulting in the 20th Century,” from which we would infer, one would infer that management consulting is indeed a profession. Is that a fact? Is management consulting in fact a profession?

MCKENNA: So there’s a double entendre in “The World’s Newest Profession,” right, because your first thought should also be the world’s oldest profession, which is prostitution, which I think we can all agree is not actually a profession. And if you think about it, partly it’s because anybody can call themselves a consultant, there’s no actual requirement that you take a state-certified test. There isn’t actually a requirement that you take a particular educational regime to get there. There isn’t necessarily a centralized body of knowledge. It’s not clear that there are particular journals that you have to read. In fact, one of the best ways to decide whether a profession is really a profession is whether it can be accused of malpractice. There it’s very difficult to say that consultants are actually a profession because they claim not to be able to be judged on the basis of malpractice.

DUBNER: Okay, Chris, so what we really want to know here is what kind of value, if any, management consulting adds to a firm. So can you help us at all answer that question?

MCKENNA: I wish I could. So the interesting problem here is that one way to do this is to go back and look, and I have looked consecutively at what people say after the fact. Okay, so after the fact people will often evaluate the consultants and say was this worthwhile that we hired these people or should we not have? And, on balance, they generally seem to say that it was a good decision. 

DUBNER: But wait a minute, wait a minute, my suspicion hackles immediately rise because the people who are being asked to answer this survey question are most likely the people who are involved to some degree in the hiring of said company in the first place. 

MCKENNA: Absolutely, sure, so there’s an automatic bias inherent. The only thing I can fall back on is to sort of say they keep hiring these people over and over again, right? So there’s some value they bring, but I see your problem.

So how can you tell whether management consulting is effective, if it works, if it’s worth the money? That’s hard, in part because most big companies do use consultants, and what you’d really want to do is take maybe 100 of those firms and tell a randomly selected half of them to keep using consultants and the other half to stop, and then measure what happens. That’s not very likely, right? But it would be a good way to find out if consulting is really effective – to run a real randomized experiment.

BLOOM: The experiment took place out in India in Bombay, the commercial capital, in large textile firms.

That’s Nick Bloom.

BLOOM: I’m a professor of economics at Stanford University, and I do a lot of research on how to make firms more productive.

Before he was a professor, Bloom had a different job. He was – yes, a management consultant.

BLOOM: Yes, I previously worked for a year and a half, or just under a year and a half for McKinsey in London.

So it made sense that Nick Bloom, along with some colleagues, were the first people to run what Bloom believes is the first-ever randomized trial of management consulting.

BLOOM: Basically we took a bunch of, twenty-eight plants, and we randomized over who got intensive five months of consulting versus a control group that got one month of very light consulting, and compared their performance going forward. So the question is, does getting intensive management consulting improve the performance of the firms?

DUBNER: Okay, so describe the typical I guess factory in this experiment, how big are they, how many employees, and what’s happening there every day, what are they doing, what are they making?

BLOOM: These factories make cotton fabrics. So they make, you know, reams of fabric that’s made into shirts, and trou- … pants as I guess they’re called in the U.S. They’re pretty horrible. I wasn’t around in Dickens’s time, but I can imagine that if you went back a hundred and fifty years, these factories are dark, dirty, very noisy, very smelly, a lot of accidents, I mean incredibly unsafe. I nearly broke my finger just walking around one of them. Disorganized, there’s a lot of yarn fabric lying around, broken machines, you trip up over pieces of equipment. Quite horribly unimpressive compared to factories I’ve seen in the U.S. and Europe. Just walking around them, it’s clear you could dramatically improve the performance of the factories by tidying them up and making them more organized.

So Bloom’s research group sent consultants to these factories, consultants from an Indian branch of Accenture. They mostly preached basic management practices: inventory control, quality control, regular maintenance of their equipment. Now, for the sake of the experiment, some of the factories got a lite version of the consulting treatment – just one month’s worth of consulting. And the rest got the full version: five months of consulting plus follow-up monitoring. The big question was this: would the firms that got the much bigger dose of consulting actually perform any better?

BLOOM: The answer we found quite simply was yes, massively. So going in and giving these guys intensive consulting led to about twenty percent higher productivity and around $300,000 extra profit a year.

DUBNER: Wow. What was the value of the consulting services that you gave them for free?

BLOOM: So we spent a couple of million dollars. It was funded by a number of organizations, people like the World Bank, for example, and research foundations. It would cost the firms probably about three, four hundred thousand dollars a year. It improved their profits by about three hundred to four hundred thousand dollars a year in the first year. So for them, after the first year, they would have broken even.

DUBNER: So, what you were offering here was hardcore operational advice and then kind of monitoring it sounds like, which had a huge effect you say. What about, however, the other, you know, brand, or kind, or flavor of consulting that we think of as more strategic consulting? Can you tell me anything about that and the efficacy or the ROI thereof?

BLOOM: Sure, so there are really two types of consulting. There’s operational consulting, you know, down on the factory floor, in the shop type improvements. That’s probably ninety-five percent of the industry. Most of it is done by firms you’ve never heard of. And those guys are very much like seasoned, gnarly, ex-manufacturing managers that have spent twenty years working in Ford and are real experts, and are now getting paid as consultants to hand out advice. That stuff typically has pretty big impact because you’re paying someone to give them long-earned advice. And then there’s the very small elite end, strategy consulting, about five percent. And that’s much more helping CEOs make big decisions. So I’m in charge of, you know, a peanut company, do I enter into cashew nuts? Do I make peanut butter? So this is going to be some senior manager in a big retail firm decides that, you know, she wants to extend the brand, maybe move into Mexico. She’s used consultants from, say, Bain for the last five years. She’s had good experiences; it’s turned out to work well. She’ll go back to Bain again. Often it’s the case that she herself is, you know, ex-Bain – that’s why she started working with them. I think it’s very hard. It’s like the value of all good advice. When I go to my doctor I keep going back because I like my doctor. Could I do a scientific valuation? No, not really, but I have my own sense. It’s a repeat purchase based on did you like it last time.

DUBNER: Looking around at the economy in the US, what industry here would you think is most in need of empirical consulting let’s say? You know, coming in, finding through a randomized set of experiments what best practices actually work, letting consultants do that work, and then implementing them. Where would you love to unleash it if you could?

BLOOM: So I would love to do something in healthcare. There’s a revolution going on in healthcare now with lean management. There are hospitals like Virginia Mason up in Seattle, for example, that have reduced patient death rates by about twenty-five percent, reduced waiting lists by fifty percent by putting in place lean management practices, incredibly successful. And the question is how can we roll this out? How can we persuade the rest of the industry this works?

DUBNER: Now, one would think, however, in an industry like healthcare in the U.S., that these best practices would spread like wildfire. Why in your view aren’t they?

BLOOM: Many hospitals aren’t facing that much competition. They’re the only hospital in their area. They have a pretty captive audience. It’s a bit of effort to improve management practices. It maybe involves a bit of risk, so why bother?

DUBNER: So, Nick, are you saying that a typical hospital, let’s say, has a smaller incentive to hire a consultant, therefore, who might spread best practices because that hospital faces less competition than the typical let’s say, auto manufacturer?

BLOOM: Yes, if you’re an auto manufacturer, if you’re making, I don’t know, fasteners, you’re probably competing with fifty companies around the world. It’s brutally competitive. If you’re not well run you’re out of business. If you’re a hospital, particularly in rural America, you probably have a captive market of people around you. If you’re not very well-managed, well, you may lose a few patients, but in terms of impact, it’s nowhere near as much as your entire business going out. So, competition we see time and time again tends to drive better practices.

So what have we learned? When it comes to operations, how to actually do things, consultants do seem to earn their keep. But on the high end, strategic consulting, it’s tempting to think of it as a bit of a scam – a profession that’s not actually a profession (it doesn’t even have a college major). It’s a setup that lets one firm charge another firm lots of money to tell it what it already knows, or already should know. Or maybe it gives ammunition for the CEO, who already knows what he wants to do, to go ahead and do it but to have someone else to blame it on. But Steve Levitt, my Freakonomics friend, who before getting his Ph.D. in economics, started out as a consultant at Corporate Decisions, Inc., he thinks it’s not as bad as all that.

LEVITT: The very first project I got put on by my manager, a great guy named Gene Williams, he gave me a big stack of data. And we had a pharmaceutical client, and he said we need to help them figure out how to get their new drugs approved faster. And as any good Ivy League college student would say, I turned to him and I said, okay, so what do you want me to do? And he said we’re not paying you all this money for me to tell you what to do, you’re just supposed to figure it out. Of all the things I’ve learned, I learned a lot of things in consulting, that was one of the most important, which is that you actually are supposed to think.

DUBNER: Wait, let me ask you this, what was more surprising, that there was a problem that you actually had to try to figure out, or that the solution is being put on the shoulders of you, this twenty-something-year-old kid who knew nothing about pharmaceuticals?

LEVITT: Well, that too, but it was just the idea that you had to think. And it was, because really if you reflect back, we never ask kids to really think. The secret to getting good grades in college is to memorize a bunch of stuff. The idea that now actually I had to have an original thought was shocking. Now, again, I didn’t know anything about it, I didn’t know anything about the process. So I actually did the only thing I knew, which was to run regressions. And so I spent a week, and I typed in all this data, I ran these regressions, and when I showed it to him he explained to me very gently that the only mechanism we had for communicating with clients was on what we would now call PowerPoints. And you had two choices essentially, you could either have a big bar and a little bar on one slide, okay, and that was one way of communicating with clients. Or you could have an x-axis and a y-axis. And he made it clear to me that regressions played zero part in what we would ever be doing or showing to clients.

DUBNER: And was this enlightening, humbling, frustrating, what?

LEVITT: Enlightening. So nothing, let me just say, nothing I ever did on that project with data ever proved useful to anyone. But the other thing I learned in consulting, which was incredibly valuable to me, is that I had always been the kind of person who just thought the data could answer any problem. But ultimately what I learned is that the way I could be most valuable was by just walking the halls and becoming friends with the people in the organization, which as you know is completely antithetical to everything I believe in, talking to strangers and being nice to people, and having social interactions. So it was very difficult for me to do, and I wouldn’t say unpleasant, but very not me. But that turned out to be the magic potion, is that I learned things just by listening to people, and in some sense the lower in the organization the better that allowed me to understand what was actually going to make the project work or not. And that is a lesson I will never forget because it completely and fundamentally changed my own view of business. And so as I, believe it or not, returned to consulting twenty years later running a little firm called The Greatest Good, I think I have this incredibly deep appreciation for that the people in the middle and bottom of the organization absolutely know what’s going on a lot of times when the people at the top have no idea what needs to be done.

DUBNER: Okay, so that’s about you as a consultant from the kind of sell side, what about from the buy side? Do you think that that firm that you were working for, and that project, or, you know, subsequent projects, or just firms in general that hire consultants, talk to me a little about the value that consultants actually provide?

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.

It’d be easy to say that Steve Levitt, based on his own consulting past and present, has a positive bias toward consulting. There is evidence to suggest that he’s right, that consulting really does create value – but truthfully, not very much evidence. And given the nature of the consulting industry, especially in the higher echelons, we’re not likely to get a whole lot more evidence any time soon. But I will say this: management consulting is a perfect fit for our times – for an era in which we increasingly bring in experts and defer to them, whether it’s in order to gain legitimate wisdom or just plausible deniability. We seem to like to be told what to do. Now, can I prove this? Well, I believe I can. I’m going to try my own experiment right now, I’m gonna tell you exactly what to do. And you are going to do it. Okay, you ready? I want you to … stop listening to this program right now. Because it’s over.

Hey, you did not listen when I told you to stop. Personally, I applaud your defiance; I don’t like being told what to do either. So to reward you, we’ll tell you about the next episode of Freakonomics Radio. It’s a heartwarming story about a bunch of economists – seriously – economists who volunteer their time to help charities analyze their data. They’re in England. They’re called Pro Bono Economics:

BROOKES: For us, the pitch of Pro Bono Economics is that economists are better with a spreadsheet than they are with a paintbrush. And you should marry them up, those economists up with a spreadsheet to help a charity rather than give them a paintbrush to paint a hut.

That’s next time on Freakonomics Radio.