Why Companies Hire Consultants
The US may be unique in how prevalent and accepted consultants are. (I can’t really tell anymore, since I’m a fish well-accustomed to the water; the water being consulting — as an industry, as a term that others freely use and refer to and feel like they understand.) My parents still can’t wrap their heads around it: What do you consult on? What can you offer as a new graduate that is useful advice to seasoned industry veterans? How do you know how to solve their problems? Why you (i.e. your company)?
There are three main reasons why a company will hire a consulting firm. These reasons can be stand-alone reasons or a combination of any two or all three.
First, to solve a problem they truly don't have the expertise for.
Second, to get an independent opinion on something.
Third, to outsource liability and risk.
Let's dive into them.
1: Rent-a-Brain (or Pair of Hands)
This is the most classic case of hiring a consultant. This is also what most case interviews are set up to imitate — the idea of a completely blue-sky, brand new initiative. We want to expand into a new market for which we have no idea about. How should we approach it? We want to launch a brand new service line. What should we be thinking about as we get started? (If this seems a little unrealistic, it should. It would be extremely risky for any organization to undertake something they have not one iota of a clue about and rely entirely on external experts. The reality tends to be less “completely out of the blue” and more “not really that familiar at all, but we know just enough to know this exists and that we want to explore it.”)
These are the types of projects where you're solving a truly difficult problem and maybe even building a brand new thing. Maybe it's adopting a new technology. Maybe it's setting up shop in a different part of the world. Whatever it is, it's something that the organization currently has no perspective on and very limited expertise, so they will hire someone externally to help them solve the problem.
It’s also in this category that independent consultants are brought in for their expertise. (I mean specific individuals; it’s the same concept — bring in one person who can guide you or bring in a firm that offers you a team of humans to do so.) Sometimes companies seek, for a limited time and for a specific use case, the expertise of an industry veteran, perhaps to help guide them through a specific transition, or to carry out a specific deployment of a new initiative. There isn’t a need to hire them full-time because eventually you want your own people to develop the capability and start doing this stuff, or maybe once the set-up is done you really don’t need to go through the set-up process anymore. It’s usually cheaper to hire an external consultant for a fixed engagement, so you bring in the expert, get their advice and input, and wave goodbye to the cost of their time once you’re all set. And yes, in case you’re wondering “aren’t you just describing a contractor?” — you’re right! The term “consultant” is often used in place of “contractor” because it sounds more intellectual and more respectable; “contractor” becomes more of a tax classification term instead.
To recap: reason one to hire consultants is that you truly need to learn from someone who knows what you do not. A variation on this is you may have the capability but not the capacity, so you bring in trusted expertise to act as an extension of you to make the things you want to see happen a reality. You have a short-term need to augment your organization’s capabilities and need some extra brain and human power to tackle a fairly well-defined, somewhat isolated project. You define the “scope” and tell the consultants: here, figure this out, please and thank you.
2: Independent External Assessments
There are times in corporate life that you need an independent assessment from an external party. Accounting audits, for example (and this is the reason why the “Big Four” consultancy firms are all accounting firms — Deloitte, EY, KPMG and PwC). Merger and acquisition due diligences are another example.
My previous firm, L.E.K., did a lot of “independent market assessment” due diligence projects where they compile a dossier on the competitive landscape a target company of interest is in. These assessments didn’t necessary contain recommendations on what to or not to do; they were simply “fact files” with some forecasts (no matter how rigorous or scientific, a forecast is always based on opinion and judgement). In these instances, the consultants are hired to do a lot of research and to intelligently synthesize that research to make an educated guess at what the future could hold. The consultants offer that opinion to their client, and their client ultimately makes the decision on what to do with all that new knowledge. It’s like sending someone else to attend a semester’s worth of lectures and then asking them to give you a crash course tutorial before the exam — presuming your assistant is good, you’ll get all the highlights and key points without having to do all the dry reading that was purely “for context.”
Side bar: L.E.K. was my first consulting job, and I had to adjust from being accused by my MBA classmates of making too many assumptions in our consulting projects to being the person not comfortable enough with all the assumptions we had in our client deliverables. At one point I questioned our methodology for a forecast and how much we were backing up our assumptions — “Don’t we need to example why 12% instead of 13% or 11%?” — and I was told “we’re just providing an estimate; the client would be foolish not to do their own homework.” I was so perplexed: didn’t the client just pay us $750K to do their homework for them? Eventually I came to understand that many businesses support the business of mergers and acquisitions, chiefly many consulting firms that will do various types of due diligences for both sides, at various stages of the potential deal. It’s a whole business in itself!
Lots of financial investment firms also put out detailed analyst reports on industries and individual companies within industries. These reports are deeply researched and contain the firm’s opinion (”outlook”) of each company’s position in the industry. However, it’s still presented as information for you to consider: you, the consumer of the information, remain accountable for the outcomes of the decisions you make based on your interpretation of the information presented.
3: The Liability Shield
A cliched disappointment for new consultants is how little “innovative problem-solving” there is. The majority of clients seem to have a preconceived notion of what the answer should be, and the consulting team has just been hired to confirm it in their recommendation…or straight up implement the vision and bring it to life.
Why hire a consultant to solve a problem that has already been solved? Even problem-discovery and -solving projects very often involve interviewing internal stakeholders (folks who work a couple rungs further down on the corporate ladder than the client; folks who are on the “front lines” of whatever business operations are) and compiling their perspectives and suggestions as the final recommendation. Isn’t there a more cost-effective way to get someone to play telephone and relay sentiments from the masses to the overlords?
In these projects, the client is primarily interested in a liability shield, and secondarily interested in the outcome. They want to be able to say they took the advice of the really smart people at McKinsey in case something goes wrong; how could they be blamed when they made such a reasonable bet on the McKinsey team’s intelligence and expertise? Critically, if things go well, the client gets the credit. The client will be recognized (by their organization and/or superiors) for brilliant ideation and/or execution. They will get promoted for the remarkable impact they made implementing the ideas the consultants they hired recommended to them.
That’s why in so many consulting projects it will seem as if you’re not really doing a lot of net-new creation; you’re just repackaging and regurgitating and validating existing viewpoints. You might have a client that tells you on the surface they’re interested in your fresh, external perspective, but subtly steers you in a certain direction and puts their thumb on the scale of your judgement.
Whether it’s the main objective or the added bonus, the liability shield is a key reason why consulting remains attractive and will likely survive whatever an AI-infused future brings. You can try to blame AI but it won’t be the perfect scapegoat that carries all the blame thrown at you. Leaders at organizations big and small always need a fall guy. Hiring a consulting firm to vet and validate your ideas is a great way to buy career insurance: if things go well, you bask in the glory of success; if things go sideways, you activate the built-in escape clause and lament that you made the mistake of putting your trust in supposedly smart consultants.
Pair this “feature” of hiring consultants with promotion cycles in the corporate world, and you’ll find something even more interesting. Many times the client, backed by their hired consultants, can reap the benefits of whatever new initiative they champion and put in place from the initial excitement and get promoted purely on that first blush of success. Most problems only show up over time, and by the time an initially promising new initiative is exposing poor design, inefficiencies or unintended negative consequences, the initial champion is long gone further up the ladder, and someone else is responsible for cleaning up the mess. But fear not! This is an opportunity for someone else to hire consultants and potentially have a big successful turnaround story for their resume. It wouldn’t even be out of the ordinary for the same consulting firm to be engaged. The consultants that designed and implemented the problematic new initiative can get more business to fix what they didn’t build well the first time!