The choice and use of professional management consulting services by senior management (CEOs, CFOs, business unit heads) and Boards can occupy a lot of time and thinking. Because the issues faced and decisions made by this senior management group tend to be strategic in importance, this choice often needs to be made at critical points in the business’ evolution.
The decision to use management consultants, what ever their type or capability, is in essence a decision to outsource a job that would otherwise be done by the client’s staff or would not be done at all. Given the relative infrequency of this outsourcing decision, the experience for both client and consultant can at times fall short of expectations.
I have identified three areas where this choice is critical; namely where the:
- decision process to use consultants can be improved. Most clients know what you can get consultants or a consulting firm to do and why they are used but are less clear about the outsourcing options and the different payoffs of success versus the risk of the job failing to deliver the desired outcomes. The net expected payoff for each option will also depend on whether the job is ‘simple’ or ‘complex’;
- decision framework for choosing the right management consultant can be enhanced: Knowing your own organisation and its capabilities can often be more important than what you need to know about the consultant; and where the
- greatest strategic insights are likely to exist: The greatest value, especially with more complex jobs, comes from the counter-intuitive observation that clients tend to know least about their customers and in particular about their competitors. Therefore the consultant’s ability to obtain difficult-to-access, new primary data on customers and competitors is critical to providing the greatest insights on where existing business value can be protected and new business value can be created.
A number of observations that may help to improve the effectiveness of the interaction as well as improve the returns to the investment made are presented in a three-part series of articles covering each of these areas and available on our website.
Part I: When to Use the External Management Consulting Option
The decision process to use consultants can be improved. Most clients know what you can get consultants or a consulting firm to do and why they are used but are less clear of the outsourcing options and the different payoffs of success versus the risk of the job failing to deliver the desired outcomes. The net expected payoff for each option will also depend on whether the job is ‘simple’ or ‘complex’.
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Clients usually know what you can get consultants or a consulting firm to do. Essentially, a management consulting assignment will include one or a sequence of:
(a) obtaining specific information or data, for example, on
- a market, e.g., size and growth of an emerging market
- a client’s customers or suppliers, say via a survey
- its competitors, e.g., market shares in a particular segment;
(b) finding the solution or answer to a question or problem, for example
- quantifying the competitive strategy and impact of a new market entrant
- understanding why market share has been falling and finding the preferred option to reverse the share erosion
- quantifying the likely value and integration synergies of a potential acquisition to your business versus the value to competing bidders
- where and how best to reduce corporate overheads; and
(c) assisting with internal project management and implementing the proposed recommendations and changes
- integrating an acquired business with current operations
- implementing a new cost control system.
Clients also have a fair idea why consultants are used. Usually, this is for sound reasons, although sometimes they are used for less justifiable reasons, such as influencing or controlling ‘political’ outcomes specific to the management of the client business. Nevertheless, consultants typically are called on to provide:
- fresh thinking and new ideas on, e.g., future direction and growth of the business. Because it is difficult to diagnose your own problems and remove the internal politics this often involves providing an external, objective viewpoint to management;
- a second opinion or to validate a particular decision to be taken. This may concern a strategic option being considered or the merits of entering a new market segment or acquiring a new business;
- unique, specialised expertise not available internally. This may include a one-off, one-time job where it does not justify training or employing the capability; where deeper experience is required in a particular area; or where specific primary data is difficult for the client to access, e.g., a competitor’s cost structure or segment strategy; and
- in each of the above instances, a catalyst for change or to gain momentum for a particular initiative by management.
All these reasons under the right circumstances are justifiable. However, for each of these reasons there are options in the ‘do-it-ourselves’ versus ‘buy-in-the-services’ decision to get a particular job done. Moreover, almost every time you buy in consulting services, you will to some extent be using your own resources to direct or manage the consulting effort. Therefore, it is important to be aware not only of the options but also the potential payoff of success and the risk of failure of each option. These potential payoffs and risks also depend on the whether the proposed outsourced job is ‘simple’ or ‘complex’.
Using some simplifying assumptions, Figure 1 illustrates the payoff and costs of these options for a ‘simple’ job which is assumed here to be ‘less critical’ to the client. As you would expect with a simple job, the payoff of success with using consultants is not significantly greater than cheaper options of either training your own staff or employing someone to do the job; but the cost of the job including the opportunity cost of failure is significantly greater in this case with the consultant option.
Figure 1: Choosing a Management Consultant: ‘Simple’ Job – Payoff & Cost of Outsourcing Options
However, as shown in Figure 2, where the job is ‘complex’ and assumed therefore to be critical to the client, the payoff of consulting success can be very large. Interestingly, the cost of the job including the opportunity cost of failure is likely to be similar across the options. In addition, these other non-consulting options not only have a lower potential payoff of success but also have a greater opportunity cost due to taking longer to achieve a successful outcome. Therefore, their net payoff likelihood will usually be negative compared to engaging a consultant for complex jobs.
Figure 2: Choosing a Management Consultant: ‘Complex’ Job – Payoff & Cost of Outsourcing Options
The pitfalls of the outsourcing choice of a complex job can be illustrated by a recent example in the beverage industry. Management had made thee decision to build its internal acquisition capability by employing the staff to undertake the acquisition due diligence of what was in this case an unrelated beverage business. However, the company’s due diligence involving the estimation of future growth and integration synergies and the determination of the purchase price was exposed to an internal-only perspective, subjective management ‘inertia’, the unwitting bias of the internal team to please their bosses, and hence the absence of objectivity. The company overpaid significantly for the business which subsequently underperformed and later had to endure a substantial write-down of its book value.
If you would like to find out more and how this issue might apply to your business then contact us via the Contact Form.
