From Megan McArdle’s blog:
“Corporations spend gargantuan sums of money on projects of little or no value all the time, for which management consultants should get down on their knees and thank God every day.”
Let’s ignoring McArdle’s slight to my current employment, and instead consider the interesting point that her quote brings up here. Just who are the clients that turn to management consultants and why do they do it?
On the one hand, companies that turn to management consultants tend to have challenging problems which they need outside help to solve. This suggests that the clients should tend to be distressed companies.
On the other hand, these firms need to have sufficient cash flow to pay the fees that consultants charge. A good example of this comes from the 2001 recession, where almost every consulting firm experienced significant setbacks, with some firms even canceling extended offers and slashing their staff, as a result of the lack of firms willing to put up cash for outside consultants.
This balance suggests that a management consulting firm’s clients will tend to be one of three types:
- Healthy firms in healthy industries reacting to unexpected bad news (e.g. two competitors merging)
- Healthy firms in healthy industries attempting to gain market leadership position or grow into an adjacent market
- Firms expecting bad news (e.g. a recession, change in government regulation, change in competitive pressures)
Because firms in the first category come and go at random, the successful and stable consulting firms have partners who excel at:
- Identifying quick and new growth opportunities - This probably represents the majority of non-due-diligence/deal-related consulting business during good economic times, as it is during boom times that firms have surplus cash which they will want to convert into greater growth. For this reason, it is imperative that the partners at a consulting firm are constantly aware of new business expansion opportunities (e.g. the best way to get into Asia, the best way to break into a new customer segment, etc.) and are very “fluent” with strategic mergers and acquisitions (e.g. quickly buying up current players to quickly build market share). Such expertise can help the firm attract clients who need to react to sudden bad news by quickly growing, or to clients who would like to invest windfalls on future growth engines.
- “Pitching” potential threats to potential clients – While a consulting firm may not be able to control or even predict bad news to come, they should be able to paint a negative picture of the future for potential clients, all the while pointing out the insufficiency of the client’s current plans to deal with these problems and simultaneously pointing out the firm’s expertise in creating contingencies to specifically address those threats. I would venture a guess that this is probably the stable core of most consulting firms’ revenues, as it is a revenue source that always exists, regardless of economic environment, and is tied more to the firm’s talents at selling cases than to chance.
So, back to the original question — who uses consultants and why? The who are the companies that are either responding to bad news, expecting bad news, or have extra cash to spend on future growth. The why is a belief in the competency of the firms to either quickly identify growth opportunities or to defend against potential threats.