The Good Kind of Consultant#

Let’s say a business wants to start using a new online system for processing payments, but no one inside the company has ever set up something like that before. A smart manager might hire a consulting firm.

• That firm could have a team whose only job is setting up payment systems for other companies.
• Because that’s all they do, they are likely very good at it.
• If the business hires this firm, the consultants will get everything set up.
• They’ll also train someone in the company on how to keep the system running after they leave.
• This can often be cheaper and cause much less downtime than trying to train or hire an employee just for this big, one-time project.

Some consultants who specialize in things like this might not even call themselves “consultants.”

The Other Kind: Management Consultants#

Experienced consultants like the payment system experts? They aren’t the group causing problems. The problems often come from the management consultants.

The harm they’ve caused people around the world, whether in the United States or elsewhere, through their work is a big deal.

The three biggest management consulting firms are:

• Bain
• Boston Consulting Group (BCG)
• McKinsey & Company

These firms make billions of dollars every year. How? By telling corporate executives and government leaders how to do their own jobs.

Consultants can be valuable if they are giving advice in an area they have a lot of experience in, or even better, something they do over and over again for different businesses. But big challenges for senior management are usually unique. And these famous firms might not know nearly as much as they make people believe.

Management consulting doesn’t just cost businesses and governments billions yearly in direct fees; it might also be costing us all billions more because of poor business performance and unnecessary layoffs.

And as bad as that is, these consulting firms also have a few semi-legal tricks that probably mean they aren’t going anywhere soon. But we’re getting ahead of ourselves.

The Three Big Problems#

There are three reasons why this relatively simple process often goes terribly wrong.

Problem 1: They Lack Real Experience

• Most regular, non-management consultants usually move into that role after having a long career doing the exact thing they’ll be giving advice on.
• However, senior manager roles in companies are much rarer than typical jobs.
• By the time someone has years of experience as a C-suite executive (like CEO, CFO, etc.), they are usually thinking about retirement, not starting a new career phase as a consultant.
• This means the group of people who could give advice based on actual experience at the top level is small and expensive. This makes it hard for consulting firms to build teams with that kind of background.
• But management consulting firms don’t really try to find these experienced people anyway. They take a different path.

Hiring Model of the Big Three

• The Big Three firms hire almost only from universities.
• They recruit top students from prestigious colleges, often through graduate programs that students fight hard to get into.
• These young graduates become analysts at the firms.
• They do the bulk of the grunt work on consulting projects.
• They work under the watch of a managing director or partner.
• Unfortunately, when many of these students start working, they quickly realize the reality isn’t like the lofty goals they expected. They often work on things that have nothing to do with those high-level goals.
• The managing directors and partners usually got promoted from within the firm.
• The Big Three management consulting firms have an “up or out” staffing policy.
• This means if a junior analyst isn’t promoted after about three years, they are asked to leave.

Why This Model is Problematic

• The people doing most of the consulting work (the analysts) don’t have any senior management experience.
• Often, they don’t even have any experience working in a big company at all.
• Despite this clear flaw, management consulting firms keep doing this because it’s become deeply set in their corporate culture.
• A partner who started as an analyst and worked their way up might not want to hire someone for their team who has too much real-world experience, because that person might actually challenge the partner’s expertise.
• Also, graduates are much cheaper to hire.
• Management consulting is based on billable hours, so analysts are expected to work very long weeks.
• Average salaries for first-year analysts at McKinsey range from $90,000 to$110,000. This sounds like a lot, but it’s not that competitive when you’re expected to work 80-hour weeks with high stress and very little job security.
• It’s also lower than what those same graduates could make if they went into Investment Banking, Private Equity, or Fintech.

The Real Reason Graduates Take These Jobs

• They choose these consulting jobs over more profitable options because of the “exit opportunities”.
• Since their job is basically just helping companies run better, workers with management consulting experience become highly sought after for management roles in regular companies once they have a few years under their belt.
• This is the reverse of how it should work! Consultants should ideally get experience doing the things they are going to advise on before they give the advice.

To make things worse, the fact that management consultants often lack experience in the field they are advising on is actually the least troubling of the three big problems with these firms.

Now, if you want to understand how Corporate America got so hooked on consulting and why it seems like it’s here to stay no matter how bad it gets, it’s time to learn how money works.

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Back to the problems with management consulting firms.

Problem 2: Taking On Any Assignment

• Management consulting firms will take on jobs no matter how unprepared they are to actually deliver good results in that area.
• Bain, McKinsey, and Boston Consulting Group do not accept direct legal responsibility if their recommendations go wrong.
• The worst that can happen to them is reputational damage.
• This means there’s very little reason for partners, who want their share of profits, to turn down a job that pays well, even if they know they can’t give great advice for it.
• The culture has become to oversell how incredibly smart they are (“infallible business acumen”) and then figure out what they hell they’re doing after they get the job.

Rosie Collington, a college professor and business reporter, talks about how much damage this strategy can cause in her book The Big Con. She highlights how bad it can be, especially with government contracts.

• For example, in 2019 and 2020, the British government spent nearly a billion pounds (that’s about $1.3 billion USD) on consulting for their Brexit strategy.
• Even though that was a huge waste of taxpayer money, it’s hard to even understand what these consultants were really doing. Why? Because nobody had any experience in a situation like Brexit.
• The firms surveyed lots of businesses and created lots of reports, but they didn’t add anything that elected public servants couldn’t or shouldn’t have done themselves.

Problem 3: Extremely High Costs

• The $1.3 billion spent by the British government is not unusual.
• The French government has also had big problems involving consulting firms getting overly generous contracts.
• Here in the US, a massive government project like healthcare.gov involved over 55 consulting contractors and subcontractors.
• That’s right: the government hired consultants, who then hired their own consultants, to consult their consultants on how to consult!
• All this happened to roll out an online service that still failed big time.

Big companies often run into the same problem. Consulting fees can become a major cost for the business. Some company managers spend 10% of their operating budget just on consultants telling them how to do their jobs.

But the money spent directly on fees isn’t even the biggest factor compared to the indirect costs of relying on consultants.

• Governments and businesses that keep hiring consultants will actually stop themselves from being able to build their own skills and teams internally.
• If consultants are hired to solve every problem that pops up, then the business or government doesn’t need to hire teams of people internally to handle those kinds of problems themselves.

Also, consultants brought in to “improve business operations” often really like reducing the number of employees (headcount).

• There are lots of people in big companies whose job it is to fix things when they go wrong.
• If consultants ignore the actual, important role these people play, they can point to these jobs as “easy cost cuts.”
• By firing these people, the consultants can look like “business geniuses” because they quickly lowered costs.
• If something does go wrong later, after the consultant left and the person responsible for fixing that problem was fired? Well, the business can just hire more consultants.