Puzzles of Management Consulting

So this post is a bit outside the normal scope of this blog, but Robin Hanson has a couple of interesting posts up on the puzzle of management consulting which dovetail nicely with something I’d been thinking about of late, so I thought I’d take the opportunity to quickly put it out there; after all, the euro crisis will still be there tomorrow…

The puzzle Robin addresses is why firms pay so much to hire management consultants, when what they’re getting is advice from a bunch of (admittedly very smart) kids just out of college who don’t know anything about their industry; surely there must be cheaper ways to get better advice. Robin’s answer is essentially that firms are crippled by dysfunctional internal politics / principal-agent problems, whereby even when there are clear reforms which are known to benefit a firm, powerful actors within the firm who would lose out from the reforms are able to block them. By bringing in the outside “expert” opinion of very prestigious management consultants, a reform-oriented CEO can shift this political balance and overcome blocking coalitions. (Side note: would accepting this frame change how you view the Monitor Group / Qaddafi scandal?) Management consultants thus trade primarily on their prestige, which in turn is cultivated by hiring smart pretty kids from very prestigious colleges. Like picking what university to go to, it’s all about status and signalling.

Which brings us to the puzzle I want to talk about. Like lots of other students unsure of what to do with their futures, I’ve been shopping around some career centre events of late, including a few recruitment nights put on by the big management consulting companies (which, I’ll add up front, I’ve decided I don’t particularly want to do…). But in any case, what struck me most about these events is how expensive they must be to put on: renting out a nice space, food and drink for all the students who show up to listen to the pitch, not to mention the time of the consultants who are there to serve as recruiters. Aren’t we supposed to be in an (almost) recession? It would seem all but impossible to justify these expenses based on the outcome: at the end of the day each company is going to hire maybe a handful of people, so why are they wining and dining dozens? It seems hard to believe the marginal quality of successful applicants is going to fall much if they cut back on the drinks a little, or had only five employees present to sing the firm’s virtues rather than fifteen. (And with the average lifespan of an employee at something like 2 years, it’s also not like they should be that afraid of getting stuck with sub-optimal workers who will be around forever.) Shouldn’t one of these consultants be able to look at this situation and realize it’s a waste of money, that there must be cheaper ways to get the same quality of recruits?

But then I realized that thinking of the cost of these events as coming out of the “recruiting” budget is probably the wrong way to think about, because really it’s as much or more about advertising, or, in Robin’s terms from above, cultivating status. Sure, the management consulting companies want to find a handful of smart kids to work for them, but they also want to impress as many smart (or perhaps even more to the point well-connected/well-positioned) kids as they can, so that when those kids grow up to be running their own companies they’ll have a favourable impression of consulting as an industry in general and of their particular company in particular, and hence more likely to become a client. Hell, if they can talk you into applying and then reject you, all the better; “Of course those McKinsey/BCG/etc/etc folks must be brilliant, even I wasn’t up to their high standards!” All of which serves to cultivate social facts about the skill/expertise/brilliance of these companies, which then confers upon them the status to come in and effectively tilt the scales in internal political disputes within a firm, which allows them to earn their outrageous fees…

As a final note, I’ll also echo Robin’s earlier observation about the bizarre, disproportionate attractiveness of the management consulting industry as a whole – seriously, I don’t think there was a single overweight person at any of these events. I’m not sure if as potential applicants you’re supposed to find that appealing, but I definitely found it much more disconcerting. Are we supposed to want to work at Gattaca??

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