The Asymmetry Problem In Management Consulting
By: Vighnesh Nayak
Tags: Consulting, Strategy, Risk, Management And Leadership, Nonfiction

Duff McDonald’s book, The Firm, mentions that McKinsey and Company has a remarkable ability to be at the right place at the right time that you wonder whether it can really see the future. McDonald argues that McKinsey created one of the most flexible business models in the world — they sell what their clients are buying and where the clients are buying it.

McKinsey and Company is a management consulting firm.

As organizations scale up, they face unique problems concerned with increasing revenues, controlling costs, entering new markets, launching products, potential acquisitions, etc. The senior management team seeks advice from management consultants for such problems. There are broadly two reasons to rely on management consultants — to leverage the consultant’s range and depth of previous experiences where clients faced a similar problem (and hear the proposed solution) and to get market insights on the latest ideas pursued by their competitors.

Management consultants position themselves as the evangelists of strategic thinking. A management consulting job occupies the top position among MBA graduates from premier MBA schools alongside its close cousin — Investment Banking. Graduate students prefer this job as it pays you really well, exposes you to senior management of various companies, makes you travel a lot (even if it is hotel ballrooms or corporate conference rooms) and helps you build your generalist thinking skills. The consultant gains money, power, prestige and the pretense of an intellectually stimulating pursuit in the corporate sphere.

This intellectual posturing creates a halo effect which makes you prefer consultants so that they make you feel better about yourself (even if their advice is crap). Who would not prefer such an association?

Internal vs External

Every organization spends a significant amount of its time and budget on hiring employees, training and onboarding them in the organization and paying them fairly and competitively. Some organizations also have dedicated programs designed to provide “stretch assignments” for their high performing employees who seek new challenges at work.

When organizations face such unique challenges, the senior leadership team employs the services of management consultants rather than relying on their internal employees. Management consultants, by their very nature, are external to the organization. Are internal employees not capable enough to solve these issues? Are insights provided by credible outsiders more valuable than solutions suggested by homegrown insiders? Does the existence and thriving business of management consultancy point towards a lack of trust shown by organizations in their employees?

This is a paradox of management consulting.

True problem solvers for any organization are their employees who understand the nuanced operating realities of the organization and also bear equal risk and reward for their decisions. Employees have more skin in the game than management consultants in an organization.

Hierarchy or Reputation?

I have a few theories on why management consultants are popular among senior decision-makers of various organizations.

One theory is a view that innovative ideas and solutions are provided only by those at the top of the hierarchy. Ideas requiring strategic thought and visionary thinking is the domain of the senior management and not of employees at the lower levels. As management consultants interact only with the top leadership, they are perfectly positioned to produce solutions. This view endorses the concept that people have specific roles assigned to them and they need not deviate from their formalized job description. Bureaucracies with a high degree of formalization are particularly susceptible to this kind of thinking.

The second theory is a strong preference for the status quo. A belief that management consultants have always worked for the organization and there is no strong cause to deviate from the preferred position. “You don’t know how things work here, this is how it always has been” is a common answer received by employees. A rigid mindset and inability to adapt to change are two major factors that drive this attitude. A status quo mindset causes decision debt which ultimately kills organization effectiveness.

Another popular theory is the ability of consultants to bring an “external perspective”. A senior HR leader once told me that interns from MBA schools are like management consultants. They give you an external perspective that helps you come out of the “corporate tunnel syndrome” (which was his rebranded version of the ostrich effect used by investors) as interns are not colored by organizational realities. This is a classic preference for idealism over realism. Idealism is nice to hear and understand but organizations have different realities that differ from the ideal solution. Consultants will always be less equipped than internal employees to understand organizational realities and obstacles.

The fourth theory is associated with reputational risk. Senior decision-makers in organizations guard their reputations like right-wing patriots guard their countries. The last thing any decision-maker in an organization would like to feel is incompetent. Hence, management consultants sometimes provide the same solution which the leader might have thought of, only to guard the leader’s reputation.

This creates a win-win and asymmetric dynamic for everyone. The consultant pitches the idea, if the idea succeeds, the consultants get paid heftily and the organization is rewarded. If the idea fails, the consultants have still made the money and the leader saves face by hiding behind the consultant. The consultant exercises influence while being insulated from responsibility. The focus is less on quality work and more on protecting your turf.

What matters to decision making authorities in business is not always a successful outcome but the ability to defend their decision through logical arguments, whatever may be the outcome. This logic is provided by management consultants.

Nassim Taleb writes about such asymmetric relationships in his book, Skin In The Game

If you get the rewards, you must also have a share of the risks associated with the reward and not let others pay a price for it. If you inflict risk upon others by your advice, you cannot be insulated from the harm arising out of the advice.

This problem of asymmetric dynamics between organizations and consultants is seldom recognized. A solution is to rely on the inputs of employees to solve the problem. This would encourage the employee to feel a key stakeholder in the strategic decisions of their organization. Another solution is to structure commercials with consultants in a manner that penalizes them for a flawed recommendation.

This would ensure the golden rule, which comedian Larry David follows in the series Curb Your Enthusiasm, is implemented — do not treat others the way you would not like them to treat you.

(Disclaimer: Views expressed in this article are personal)