Accelerating tangible growth or just a way to outsource responsibility — What role do Management Consultants play in our economy?
By Dheer Sanghi, Kellogg Branch
On college campuses across the country, aspiring consultants are a dime a dozen. Northwestern University — my home for the next few years — is no exception, with 15% of the 2020 graduating class entering the industry in what student magazine ‘North by Northwestern’ labeled “The Consulting Craze,” (Ramos). Known for high salaries straight out of college, strong exit opportunities, and prestige, it’s not a surprise that the nation’s best and brightest line up for a chance to interview with consulting firms like McKinsey & Company, Boston Consulting Group (BCG), Bain & Company, and more (Cho).
This article seeks to examine if this lucrative industry is deserving of the large cheques they cash from companies and governments around the world. To judge how effective management consultants truly are, we must first understand who the key players are and what exactly they do.
As aforementioned, The three most well known consulting firms are McKinsey, Bain, and BCG (MBB). These companies primarily focus on strategy, working to solve the biggest problems plaguing other companies and governments while helping them plan for the future. There are also implementation oriented firms such as Accenture and Deloitte, which focus primarily on helping companies implement solutions seamlessly, as well as firms that specialize in select industries such as Oliver Wyman and the financial sector (Kivestu). However there is a lot of overlap between these organizations, with MBB firms looking to incorporate more implementation into their services and Deloitte looking to perform more strategy consulting. Other important names in the industry include PricewaterhouseCoopers and Ernst & Young, which both have consulting arms (Kiri).
Generally, consultants work with management in other companies to help them improve their businesses, often through finding ways to cut costs, increase sales, or shift focus or marketing. Teams of around five to ten consultants of varied seniority work on these projects that can take anywhere from one to six months, meaning that those working in the industry gain exposure to many different companies and sectors. When working on a project, consulting firms do everything from market research to data analysis to expert interviews before creating a plan of action for a client company (Caseinterview).
You may be asking, what exactly is the problem? It seems like businesses consensually contract consultants to help them perform better, and they do their job. But it isn’t that simple. Popular discourse, especially on social media, argues that it is unlikely that a consultant with little expertise in a company or field can provide more value than experienced professionals and employees. This somewhat makes sense — what could a fresh college graduate tell a CEO about their company or industry that they didn’t already know (The Economist)? This leads us to question why businesses hire and pay consultants in the first place — after all, consulting is a $400 billion industry (some estimates say up to a trillion dollars), and that value must come from somewhere (Peachman). Well, many posit that consultants simply act as bona fide responsibility takers for decisions that a company wants to make already. For example, if a corporation wants to lay off 5% of its workforce, it could hire consultants to conduct an evaluation and come to a similar conclusion. In fact, journalist Duff McDonald called McKinsey (representative of the consulting industry), “a convenient scapegoat on whom to blame [savage cost cutting],” (McDonald). This allows a business to fire employees and lay the blame squarely with the external consultants, making it more digestible and maintaining a better workplace culture for current employees as they don’t feel like management is looking to remove further jobs. This is a mutually beneficial relationship as these firms are happy to take the heat for firings as long as they get paid — highlighting a unique attribute of the consulting industry: they tend to keep a relatively low profile and don't feel the need to loudly pronounce their impact or their clientele list, unlike other businesses.
Consulting companies also claim to provide unique, creative solutions tailored to their clients, but some believe that this is far from the truth. Fortune Magazine wrote about McKinsey “much of the time the firm merely reorganizes sales forces or designs by-the-numbers downsizing to reduce overhead,” (Huey). Apart from layoffs and superficial reorganization, critics blame consultants for the huge rise in pay inequality. The ratio of CEO pay to median employee went from 21:1 to 344:1 from 1965 to 2022. The Economic Policy Institute states that “from 1978–2022, top CEO compensation shot up 1,209.2% compared with a 15.3% increase in a typical worker's compensation,” (Bivens and Kandra). This incredible discrepancy has some pointing fingers at Arch Patton, consultant at McKinsey, who wrote a book about executive compensation as an instrument of leadership. He proposed raising compensation for management, the same people who decide to bring on consultants in the first place, making him very popular with CEO’s across the country to the extent that he personally accounted for 10% of McKinsey’s business at one point (Oliver). Arch Patton has been labeled ‘The Godfather of CEO Megapay,’ by Observer (McDonald) and was described as a “major contributor to skyrocketing executive pay,” by the New York Times (Canedy). It isn’t impossible to see a world where executives bring on consultants knowing both parties will benefit financially!
The final critique of the management consulting industry is their interactions with governments and the public sector. Unlike investment banks or auditors, companies do not have to disclose how much they spend on consultants leading to a shroud of secrecy behind how much money consultants receive (The Economist). This is especially important when clients include pharmaceutical, tobacco, and oil and gas companies — sectors with large negative externalities. Made worse is the dubious relationship between consulting firms and government entities. Local, federal, and international governments hire consultants all the time to help solve problems, but the issue is that consulting firms have a profit motive and have commercial interests. Handing over the reins of governance to private companies can result in biased decision making, seen through the fact that McKinsey advised both Purdue Pharmaceuticals and the US Food and Drug Administration concurrently. While these firms claim to try to manage conflicts of interest, the lack of transparency is concerning to the public. As representative Katie Porter put it in a congressional hearing, McKinsey had “the identical humans working for both [Purdue Pharmaceuticals and the FDA] at the same time,” (Porter). McKinsey isn’t the only firm to get into hot water, with BCG, Bain, and almost every other consulting titan facing accusations of misconduct. Bain & Company was even barred from UK government contracts after being found to have aided and abetted in furthering state capture and corruption in South Africa (Reuters). More transparency and accountability through tighter regulations could definitely have a positive impact for the industry.
However, even after the information presented above, consulting is not a corruption-infested swamp that has no place in society — that would be far from the truth. There are many concrete advantages from bringing in consultants.
The ‘outside perspective’ consultants bring is hugely helpful to businesses. Partners at consulting firms are almost always specialized in certain fields and hence gain a huge swathe of knowledge in their respective practice areas (The Economist). This means that they are able to impart valuable information about the industry a client is in, such as the average research and development expenditure of companies of a certain size in a certain sector.
In a conversation with Amitabh Jhawar (Ex-McKinsey, Ex-CEO of Venmo, CEO of Attentive) about the role of consultants, he stated that “One of the big problems that exec teams try to solve is what else is happening in the industry,” suggesting that the lateral knowledge consultants bring to the table can be hugely valuable. Additionally, he posits that the “vertical… and shared expertise” consultants have allow businesses to keep up with competition and solve common problems faced in the industry. According to Jhawar, it is extremely difficult to get industry benchmarks and metrics without consultants. Furthermore, consultants spend a lot of time interviewing staff at companies, something which is helpful for an outside party to do. If management decided to interview employees to gauge their thoughts and hear their ideas, employees would be incentivized to be inauthentic and say things their bosses want them to hear (Jhawar).
This idea is expanded upon by Lauren Meagher (Ex-McKinsey, Founder and Managing Partner of Evolute Consulting) in an exclusive conversation with GRC. She believes that “even when companies know what direction they want to go toward, consultants act as the collaborators. In huge organizations, management consultants are forced to bring a lot of different people from different silos together.” Meagher put it best when she described consultants as the “interstitial fluid” that big companies can’t replicate on their own (Meagher). After all, if businesses could do what consultants do, they would save money and do it themselves. Consultants also actively spend time thinking about the future and how trends will impact industries decades from now. A scroll through BCG’s LinkedIn account shows the sheer amount of brain power that goes into forward planning by these firms — something unfeasible for regular companies to do. Moreover, there is a recognition that consultants are highly capable and talented. Northwestern’s own Professor Walker in the Economics Department said in a conversation with me that “Partners at these firms are some of the smartest people in the world,” (Walker). This sentiment is echoed by Jhawar, who puts his money where his mouth is, mentioning that he “definitely hires a ton of ex-consultants,” (Jhawar).
When asked about consultants being a way to outsource responsibility, Jhawar admits that one role consultants play is “CYA — Cover Your Ass,” but he sees this as a beneficial thing. Ultimately, consultants are there to help businesses, and if they are able to allow the executive team to take risks, or successfully convince the Board to sign off on changes while taking responsibility, they are still creating value (Jhawar). Professor Walker concurs, stating that “whatever allows a business to get better is good, even if it springs from the inefficiencies of companies.” Consultants filling in the gaps left by inefficiencies is a recurring theme in what they do. Professor Walker witnessed this firsthand as a consultant economist with The Cambridge Group in Chicago. He once offhandedly mentioned that Nigeria was the most populous country in Africa and should be a point of focus for a company’s expansion, and was met with high praise for knowing that fact, commended for his “thought-leadership.” Professor Walker stated that many employees in the company would know the same thing, but management takes such comments more seriously when coming from external consultants. While unfortunate, the ‘authority’ of a consulting firm gives executives more trust (Walker).
Professor Walker and I also spoke about an article by Donald D. Bergh in the Journal of Management Studies titled “The Stock Market Reaction to the Hiring of Management Consultants: A Signalling Theory Approach.” The article found that when a public company announced they were hiring a management consulting firm, the market “responded positively and significantly,” driving up stock price (Bergh and Gibbons). I questioned if companies therefore used consultants as a way to make it seem like they were adapting their business even when they have no intention of doing so. Prof. Walker insightfully responded that the Signaling Theory approach was actually a great case for the efficacy of consultants. Institutional and retail investors clearly believe in the tangible effects of consultants so much that they consistently change their investing positions based on whether a company hires a consulting firm (Walker).
Of course, there are going to be abuses of the system, for example, when executives hire consultants in order to drive up their own salary, but this underhand behavior could occur outside of consulting too. Many companies have CEOs that have close relationships with those on the board, who approve compensation leading to conflicts of interest. This is a failure of business oversight rather than a consulting specific problem. The industry definitely has its flaws, especially regarding interactions with the public sector, but claims that consultants are useless and unhelpful are unfounded.
Works Cited
Bergh, Donald D., and Patrick Gibbons. "The Stock Market Reaction to the Hiring of Management Consultants: A Signalling Theory Approach." Journal of Management Studies, vol. 48, no. 3, 2011, pp. 544-567, doi:10.1111/j.1467-6486.2010.00957.x.
Bivens, Josh, and Jori Kandra. "CEO Pay Slightly Declined in 2022: But It Has Soared 1,209.2% Since 1978 Compared with a 15.3% Rise in Typical Workers’ Pay." Economic Policy Institute, 21 Sept. 2023, www.epi.org/publication/ceo-pay-in-2022/. Accessed 27 Mar. 2024.
Canedy, Dana. "Arch Patton, 88; Devised First Survey of Top Executives' Pay." The New York Times - Breaking News, US News, World News and Videos, 30 Nov. 1996, www.nytimes.com/1996/11/30/nyregion/arch-patton-88-devised-first-survey-of-top-executives-pay.html. Accessed 27 Mar. 2024.
Caseinterview. "How Do Management Consulting Teams Work?" Caseinterview, 23 May 2023, caseinterview.com/how-do-management-consulting-teams-work. Accessed 27 Mar. 2024.
Cho, Emmy M. "The Consulting Conundrum." Harvard Political Review, 16 Aug. 2021, harvardpolitics.com/consulting-conundrum/. Accessed 27 Mar. 2024.
The Economist. "Do McKinsey and Other Consultants Do Anything Useful?" The Economist, 5 Oct. 2022, www.economist.com/leaders/2022/10/05/do-mckinsey-and-other-consultants-do-anything-useful?. Accessed 27 Mar. 2024.
Huey, John. "HOW MCKINSEY DOES IT The World's Most Powerful Consulting Firm Commands Unrivaled Respect -- and Prices -- but is Being Buffeted by a Host of New Challenges. Here's the Inside Story. - November 1, 1993." Business News - Latest Headlines on CNN Business | CNN Business, 1 Nov. 1993, money.cnn.com/magazines/fortune/fortune_archive/1993/11/01/78550/index.htm. Accessed 27 Mar. 2024.
Jhawar, Amitabh. Personal Interview. 15 Jan. 2024.
Kiri, Sian. "Types of Consulting Firms: An Industry Breakdown." My Consulting Offer, 8 Jan. 2024, www.myconsultingoffer.org/what-is-consulting/types-of-consulting-firms/. Accessed 27 Mar. 2024.
Kivestu, Kenton. "A Field Guide to the Different Types of Consulting Firms." RocketBlocks, 18 May 2022, www.rocketblocks.me/guide/firm-types.php. Accessed 27 Mar. 2024.
McDonald, Duff. The Firm: The Story of McKinsey and Its Secret Influence on American Business. Simon & Schuster, 2014.
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Meagher, Lauren. Personal Interview. 15 Jan. 2024.
Oliver, John. "McKinsey: Last Week Tonight with John Oliver (HBO)." YouTube, 23 Oct. 2023, www.youtube.com/watch?v=AiOUojVd6xQ.
Peachman, Rachel R. "AMERICA’S BEST MANAGEMENT CONSULTING FIRMS." Forbes, 12 Mar. 2024, www.forbes.com/lists/best-management-consulting-firms/?sh=4afaa4a2b878. Accessed 27 Mar. 2024.
Porter, Katie. "The consulting firm McKinsey & Company got $140 million in taxpayer dollars to help the U.S. Food and Drug Administration build drug safety programs—at the same time it was working for opioid giant Purdue Pharma. I demanded answers from the head of McKinsey on why the company hid this clear conflict of interest." Facebook, 27 Apr. 2022, www.facebook.com/repkatieporter/videos/the-consulting-firm-mckinsey-company-got-140-million-in-taxpayer-dollars-to-help/1277392532669373/.
Ramos, Joseph. "The Consulting Craze." North by Northwestern, 28 Apr. 2022, northbynorthwestern.com/the-consulting-craze/. Accessed 27 Mar. 2024.
Reuters. "Reuters.com." Reuters.com, 29 Sept. 2022, www.reuters.com/article/idUSL8N3103OQ/. Accessed 27 Mar. 2024.
Walker, Richard. Personal Interview. 2 Feb. 2024.
