Posts Tagged With: consulting

There’s hope for consulting

From the comments at Overcoming Bias:

As a consultant with one of the leading strategy consultancies, I take serious issue with that – well except the part about spending your day drawing slides, that sound way too familiar. In fairness, slides are a good reality check, if you cannot put it on one or two of them, it is probably not synthesized enough.

Furthermore, I have seen some serious analytical firepower (maybe not always with quite the rigor of an academic paper but for sure at several orders of magnitude the pace those are developed at) being thrown at what originally seemed like simple problems – generally things turn out to be neither simple nor elegant in the end. The art of the trade is to come up with a coherent story in light of that.

And while there might occasionally be the client who does not really know what they want, it is part of a consultants mission to find out.

And I have never fit an analysis to what the client expected. If anything, the opposite rings more true – painting darker scenarios than what the client expects (even then, within what I could honestly believe)

Let me make a hypothesis: For those that hire consultants, the real reason for hiring one is often so that they can avoid responsibility for any negative consequences that come from making a specific decision.

I fear there is a lot of truth to that. But it honestly reflects more on them than on the consultants.

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Consulting Links

Dallas

Dallas Regional Chamber hired BCG to conduct a survey of the region. The fact that they’re willing to hire a consultant signals to me that they probably have good government and don’t need consultants as much as the places that aren’t hiring consultants. In short, consider a move to Dallas.

Two Bain executives wrote an op-ed in Forbes Magazine about how health insurance companies can cut costs. They studied large companies to find out how the companies managed health care costs and then cherry-picked the best practices of those firms.

Their main recommendations are that insurance companies should try to motivate employees to stay healthy. Healthy employees have lower healthcare costs (and, according to Eric Barker, get fired less often). For example, they could charge higher premiums to smokers or award prizes for healthy behavior.

They also recommend that insurers motivate sick patients to take treatments that will make them get better. Sometimes chronically ill patients don’t take their medications or follow through with recommended treatment, which delays recovery and increases insurer costs.

A third recommendation is to design healthcare systems so recommendations and decisions about care come from a patient’s primary doctor. When the recommendations are made in this fashion, rather than through an anonymous far-away bureaucrat, patients are much more likely to be agreeable.

I’m not sure that insurers will be able to follow through with these recommendations. People who get their health insurance from their company may respond more to motivation because they affiliate with the company, and the health insurance costs of the firm are pooled amongst other employees. With health insurance in general, affiliation is much weaker (Americans or Californians instead of Target employees), and people probably won’t feel any social pressure to change their behavior. Furthermore the regulatory or political climate for insurers might be more restrictive than that for firms, but I’m not an expert.

Here’s a recent piece from McKinsey on some problems with IT product design. Software is showing up in new products, for example, cars, as features and knowlege about the benefits diffuse slowly throughout the economy. However the recommendations in this report are mainly things that Silicon Valley design types have been saying for years: don’t jam your product full of features, make the code reusable, create product interfaces that are user-friendly, etc.

This reminds me of a piece I read yesterday by Scott Berkun about how the main challenge facing IT and user-experience (UX) professionals is convincing other people in their organizations of the importance of good design, and budgeting for product design. IT people often were brought up in a different culture and don’t do a good job of selling themselves or pitching the need to the management people. Management often likes intervening as a way of reinforcing their control of a design; the problem is that management doesn’t know much about usability or IT and can harm the project, or budget too little money to do a good job.

So that article can be useful by explaining the principles of user experience and product design to management types, and explaining why it’s valuable.

This Bain “capability brief” explains some basic principles of human resources, and how to cut down on bloat in your organization structure. They discuss reducing a firm’s “layers” and increasing its “spans” – “spans” are the number of people reporting directly to you, and the layers are the number of boss levels. The best firms have fewer layers and more direct reports than the worst. Fewer layers helps decision making, effectiveness, saves money, but is really difficult to achieve.

They go on to explain how to cut organizational bloat; it’s difficult but can be done. First, map the firm to figure out where you have excesses and duplication of work. Then set a target, like 7 layers of management or increase everyone’s direct reports by 2. Finally be really careful to avoid employee shifting and management excuses to avoid cuts (Get it Done), and implement automatic checks to avoid the process repeating itself. Everyone needs to be on board for a restructuring, because it is painful and there will be a status quo bias.

I am not hopeful about the ability of government to restructure.

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Why do companies hire consultants?

On the face of things, it doesn’t make much sense to hire someone to tell you how to do your job. Ostensibly, the CEO of a company knows more about the business than any outside person. Plus, to the average person it may seem like consultants just offer tired advice (“Work more as a team! Find synergies!”)

However, it’s becoming clear that despite what economists say, firms aren’t really that efficient. Lots of times, managers may be unaware of strategies that would save them money, or boost profits, or they may be unaware that they are unaware. For example, Reenen and van Bloom went to India and offered strategy tips to a sample of textile manufacturers. The firms that implemented the strategies boosted profits by 15%. Why didn’t they implement that stuff earlier? The primary reason they cited was they just didn’t know about the management tools. This is one example of how consultants can be useful. It’s their job to keep abreast of the newest and best practices in management, strategy, and human resources and then impart that information to clients.

To that end, consulting firms do a significant amount of research, and knowledge sharing. Individuals within a consulting firm have access to wide databases and the accumulated knowledge of their peers, which means that there are probably increasing returns to scale among consulting firms. They also publish lots of research, to convince clients that they’re smart and can help out the firm.

There’s another reason firms hire consultants, however; to tell them things that they already know. Consulting firms can reliably signal authority and intelligence; bosses may hire consultants to confirm that they’re correct. To cite one recent example, the US Postal Service hired two consulting firms so that they could go to Congress and implement a restructuring plan. Another example is the firm that has to cut ten percent of staff. Maybe the manager knows which 10% he’d like to cut, but he would also like to maintain a good reputation as someone who is not ruthless, or cruel. So he could hire a consultant to tell him what he already knows, e.g. whom to fire and whom to keep on.

In sum, consultants facilitate knowledge transfer, but there’s also a signaling answer – that firms, or bosses, hire consultants to give credibility to a specific decision or strategy.

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What’s the downside to hiring a consulting firm?

For one, consultants are expensive. Consultants might be able to help you a lot and they might be able to help you a little, and you probably won’t be able to trust the consulting firm to give you an honest answer. You might want to hire a consultant to help you figure out whether hiring a consultant is a positive-NPV idea.

Second, you’re hiring someone to give you advice, which means you might not have the strongest grasp on the issue for which you hired the consultant. If that’s the case, you might over-weight the advice the consultant gives you (say, one possible decision of several) or be unable to replicate the thought process behind the strategy later. Furthermore, if you want to seek more advice later you’ll have to pay for it.

Third, it’s possible that the consultant doesn’t understand your situation and/or gives you bad advice. They might know that they don’t know very much and conceal that information from you, or they may be unaware of the depths of their unaware-ness and thus unknowingly give you bad advice. Fortunately, I don’t think this is a very big issue. Consultants have reputations, and clients can communicate: if you give bad advice too often your clients will talk and you may find yourself out of business.

Fourth, the nature of the advice-giving game is to be vague and give shaman-like answers. If your answers and predictions are specific and wrong, you can lose credibility; just ask a fortune teller. Especially because a firm’s hiring you to give them advice in an area about which the firm doesn’t have much knowledge, they’ll believe most of the things that you say to them. This may lead a firm to believe that consultants are telling them useful things, when in fact the firm is not giving very profitable, or actionable, advice. You’re hiring the firm to give you profitable advice but it may not be in their incentive to do so, if they can get away with delivering shaman-like answers.

Fifth, there’s a selection bias at play. Despite the problems listed above, it’s likely that consultants provide firms with value in excess of the costs of hiring them. Smart firms realize this, and want to hire consultants. But because they’re smart firms, they’re probably ahead of the curve and consultants can only provide them with limited amounts of profitable advice. The firms that need consultants the most are unlikely to hire them.

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Why firms don’t experiment – they want to hire consultants!

Photo Credit: Marooned on Flickr, link:http://www.flickr.com/photos/marooned/235289077/Dan Ariely has a thought-provoking piece in the Harvard Business Review about firms that don’t want to experiment, and change. Based on his description and my experience I think that his assessment of the situation is accurate. Here’s a bit from the article:

This is a typical case, I’ve found. I’ve often tried to help companies do experiments, and usually I fail spectacularly. I remember one company that was having trouble getting its bonuses right. I suggested they do some experiments, or at least a survey. The HR staff said no, it was a miserable time in the company. Everyone was unhappy, and management didn’t want to add to the trouble by messing with people’s bonuses merely for the sake of learning. But the employees are already unhappy, I thought, and the experiments would have provided evidence for how to make them less so in the years to come. How is that a bad idea?

Experimentation and consulting are substitute goods, in terms of providing firms with useful information about how they can grow. However, getting advice from consultants is high status, whereas experiments are low status (like Steven Levitt, who became popular by running experiments that other economists thought were below them). It’s important to note that we should expect consultants to recommend less experimentation than actually makes sense, because experimentation is a substitute of advice-giving.

It’s well known that experimentation and change are necessary if a firm is going to prosper in the long run. In From Poverty to Prosperity Arnold Kling and Nick Schulz make the eye-opening observation that only one firm that was in the Dow Jones in the 1930’s is still there today, and that firm’s product is now completely different. As firms grow, entrenched divisions hold more sway and change becomes less popular.

At the same time, it may be hard for shareholders or board members to measure the amount of experimentation that goes on within a firm, on things like price points or marketing strategies. Furthermore, it’s pretty clear that individuals have an incentive to minimize the amount of experimentation that goes on.

Ariely’s guess is that the tradeoff between short-term costs and losses and long term gains, and the false sense of security provided by experts, are the reasons why firms don’t experiment as often as they should. I would add that in a firm where data is not king, managers believe that experimentation can undermine other workers’ confidence in their ability level. Sure, the firm might lose out in the long run, but they will maintain their status by hanging on to the status quo.

Ariely’s frustration is one that I often share. I always want to try out new things; the upside’s high and the downside is fairly limited (you can always end a new initiative if it doesn’t pan out). Unfortunately this isn’t really met with enthusiasm by many people I’ve worked with, so I resort to experimenting in my personal life, or getting really good at something even if it’ll never get implemented.

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Should you invest in the world’s poor, Iraq, or in your heating closet? Three new consulting reports

Most consulting companies have newsletters; the goal of these newsletters is to convince you to try and hire the company. Many newsletter articles focus on investigating new markets. From a business point of view, this makes sense, because the consulting firm is positioning itself as an expert on the new market, firms will have a learning curve any time they enter a new market, so it’s natural for a firm to want to hire some help. Here are three recent examples of consulting firms telling you where you should invest:

The world’s poor
(Source:McKinsey & Financial Access Institute: Half the world’s poor are unbanked)
The report notes that tons of the world’s poor don’t have access to formal credit, and that the regulatory climate for microfinance firms is mixed. This is part of the “double goal” of providing social services to the poor.

Quality of the report: There are many poor people without access to formal financial services – are you surprised? What is perhaps surprising is that the poor are already sophisticated borrowers and lenders. As Daryl Collins et al.’s new book, Portfolios of the Poor, explains, most poor people have uneven incomes, but need to be ready for emergencies, save for big expenditures (weddings, school fees), so they turn to credit and savings out of necessity. Most lending is done with a neighbor or a savings club (a neighborhood group) although microfinance is becoming more prevalent.

Business Opportunity: Storing cash with neighbors is risky and not useful over long periods of time (5-10 years) for instruments like term life insurance. There’s an opportunity for microfinance firms to start profitable, and helpful, businesses if they can provide a reliable service, flexible repayment schedules and logistical support to get to poor neighborhoods.

At the same time, the poor are poor, and while there’s a huge volume of people demanding financial services, and the potential to charge high interest rates, the margins per customer served are small. Furthermore there’s bound to be excessive rent-seeking from people and firms who aren’t worried too much about profits.

Iraq
(Source: McKinsey Quarterly, interview with Paul Brinkley of the Department of Defense)
Paul is charged with managing and growing business in Iraq. I like Brinkley because he’s a realist, and willing to embrace things that have worked in Iraq, instead of staying beholden to an ideology. For example, state controlled enterprise has worked better in the short term than free market “shock therapy.” Paul says:

“I honestly believe Iraq is one of the last great “ground floors” we will ever have in the world. China in the late 1980s and early 1990s was a ground floor—if you got in at that time, you did very well. India followed. Iraq today is a ground floor. It doesn’t have the population of China or India, but it has a huge amount of mineral wealth, oil wealth, and agricultural wealth. Geographically, it is positioned to become one of the most prosperous countries in the world. And I don’t think that ground floor is going to stay open for too much longer. I think we have a few more months, and then the acceleration of investment in Iraq will take place. I expect that to happen during 2010.”

Quality of the report: It’s clear that Brinkley has his head screwed on straight but it’s difficult to evaluate the opportunity, because I know zero about the current state of Iraq. How has Vietnam done after the war? Afghanistan? Former British colonies have done remarkably well, but that was a completely different situation than we are in today. Many countries that are rich in resources use them to become rich and don’t invest in other parts of their economy (Venezuela, Uganda, Iran). Dubai has tried but that’s still being worked out.

Cutting energy costs.
Boston Consulting Group and MIT Sloan,
The Business of Sustainability.
Industry leaders are going green, and by going green I mean reducing their energy use, not engaging in wasteful signaling. However, the managers that do look into the issue are often surprised by the large amount of possible savings.

Quality of the report: As a survey of people actually involved in the industry, I’m likely to trust the included findings.

Business opportunity: This one’s actually pretty strong. Because the IPCC’s estimates of oil reserves are too high world oil supply may start to decrease sooner than most people estimate, and world demand for energy will only increase, potentially leading to higher prices (certainly high demand for energy-reducing devices).

There’s lots of politics surrounding the issue and many managers don’t think there’s much profit there. Because of the politics, it’s difficult for managers to evaluate the actual opportunity; if managers aren’t strong believers in global warming then they won’t be stirred by the global warming argument. However the stronger argument is that firms can save a ton of money by going green.

Words like “sustainability” are not helping. “Sustainability” implies lots of beliefs about global warming and a rather strict interpretation about how much energy you should be using. They discourage managers from approaching the issue as they would any other relevant cost-saving opportunity.

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Save the planet, increase workforce satisfaction, increase productivity by hiring better managers

Two economists just completed a huge worldwide survey on management practices. A team of MBA’s went to firms and interviewed them on their management practices, generating scores in three different categories (Incentives, Monitoring, and Targets) and then using the data to draw a whole bunch of conclusions about management. Everything in here is correlation (it’s not certain which way the causation runs) but when you generate enough correlations, it gives you an idea of the importance of good management, in a Bayesian sense.

  • GDP and good management practices are highly correlated (R^2 of 0.81). That is, countries with high GDP are also likely to have firms with good management practices. Greece scores even worse than India and Brazil on firm management. Portugal is just slightly ahead of India and Brazil. Their low scores can be attributed in part to government intervention in the labor market.
  • Improved reallocation accounts for a large percentage of the difference. That is, the market identifies more efficient firms and allows them to grow more rapidly in countries like the USA. Competition is highly important for this process, and also to weed out inefficient firms. It’s more important to look at the bottom of the distribution than the top to determine which countries have the best management; countries that allow inefficient firms to hang around score poorly.
  • Higher management scores are correlated with better performance at the firm level. A one standard-deviation increase in management correlates with a 38 percent increase in sales per employee.
  • Larger firms have better management. On the surface this may refute the Peter Principle, but it tends to suggest that smaller firms with better management out-grow other small firms with bad management. Over time, if a firm stays the same size perhaps management falls.
  • At the firm level, better management is associated with improved health care outcomes, employee satisfaction, and energy efficiency. Note to shareholder activists: Promote better management!
  • Labor market regulation hinders incentives management. At least half of incentives management is the ability to remove/improve low-performing workers, pay for performance and change the workstaff’s hours.
  • In terms of classes of ownership, private equity companies have the best management, followed by dispersed shareholder ownership. Government has the worst management, followed closely by family firms with a in-family CEO, firms still owned by the founders, and firms owned by private individuals. I was surprised to see that firms owned by the founder (in 100-5000 person companies) perform so poorly. The authors suggest that necessary management skills for a start-up don’t transfer well to necessary skills for a 100-5000 person firm.
  • Management practices diffuse slowly over time. Managers are not well informed about how good their own management practices are and which areas need improvement (ha! Maybe there’s a role for consultants after all.

All in all these suggest that one of the best things we can do for development is try to transfer good management practices to developing nations, either in the form of FDI or through education. There was a great speaker at the Ath last year whose firm provided business guidance to small companies in Mexico and helped them grow.

Another experiment by the same group took a random group of textile firms in India and provided them with free management consulting. Not only did performance grow in the firms provided the consulting, but they also said the reason that they didn’t implement the changes sooner was because they were not aware of good management practices.

Data collection is an underrated skill – this analysis was only possible because these guys arranged surveys of thousands of firms in 40 different countries. The impressiveness is in the dataset, not in the analysis; same goes for Ken Rogoff and Carmen Reinhart’s This Time is Different, which I’m currently reading. It’s usually lumped in with science or statistics but it’s something people should know how to do (and analyze)

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Why consulting?

We’re making discoveries and innovating at a pace that’s faster than ever, thanks to population growth, world markets, and the Internet. Information transfers slowly; despite what economists say, firms aren’t efficient and lots of times they can do things better. Consultants have expertise about how to improve management and become more efficient, and when this knowledge is shared/diffused to companies, everyone is better off.

Why should I read this blog?

You’d like to know more about what consultants do than you can get from reading a Dilbert comic. Maybe you’re a college student wanting to learn more about consulting or an executive considering a career change. I’m going to provide information about the consulting profession, and interviews with current consultants. I’ll also blog about what consultants are currently doing and speculate about what they’ll announce they’re doing in the future. I might also post about good management practices and business economics, which are part of an information set that makes consultants useful.

Why me?

I find myself saying to most employers, “I’ve got a lot of knowledge about what works and what doesn’t, and I’m really smart and can help you out, but I don’t have much output,” which is sort of like what consulting firms would say if they didn’t have good reputations. Two of the things I’m best at are blogging and reading; I can get a better idea about what consulting firms do, demonstrate my skills to them and practice subject-specific blogging.

I also want to practice blogging about one specific area for a long period of time; forcing myself to focus on one area. There aren’t very many consulting blogs, so I figured this would be good.

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If you want to be a consultant, what skills should you learn?

Ideally, consulting is about giving firms better strategies, and to some degree consultants have to provide useful information and strategies to companies to stay in business. So you’re going to need a basic level of intelligence and analytical skill. Microeconomics is a useful framework for understanding how people make decisions, thinking about things in terms of cost-benefit analysis, thinking at the margin, etc. Accounting is also important, because you need to be able to look at a firm’s books and get an idea of what’s going on at the firm. Also I’m guessing that being knowledgeable about the world, having some idea of what strategies are good, is helpful.

Additionally, a lot of your job as a consultant is selling your services and acting knowledgeable. Many people are stuck in Dilbert-like situations and will look at you as a knight in shining armor. For this you’re going to need to be friendly, personable, and high status; you’re going to need to sell yourself as an Answer Guy, that will come in when everything else has failed, increase profits and make everyone happy. People don’t really practice these skills very much, but you can learn more about them by filming yourself, reading Dale Carnegie or Neil Strauss’s The Game, practicing conversational skills, or practicing conversation in front of a mirror.

From a hiring perspective, Bain and McKinsey and Deloitte and BCG and the other consulting firms are going to get a lot of applicants that sound exactly the same; you have to have something that lets you stand out from the crowd. You can only do this with your GPA to a limited degree; to score a home run, you should work on your impressiveness; on doing things so unique and cool that other people find it hard to imagine that they could have done the same if only they’d put in enough time. The only person I know who talks about this regularly is Cal Newport, so start there if you’re clueless. Maybe impressiveness predicts how people will eventually do in a job and maybe it doesn’t, but it definitely will help you get through the gate.

Note that it doesn’t take much money to learn most of these skills. There are tons of courses online, and there’s the library, of course. There’s also probably a big gap between the skills you need to have to get in the door and the skills most relevant to consultants on a daily basis.

I’m not a consultant so these are just my best guesses. If you are a consultant, which skills have come in the most handy? Which skills were most important for you to get your foot in the door?

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A disastrous tale from a young BCG consultant

This story by Keith Yost, an MIT alum, was featured on Hacker News today. Yost was hired out of school to work for the Boston Consulting Group in Dubai, making about $200,000 a year straight out of school. When the world economy crashed hard, the bubble that was Dubai crashed even harder, and Yost describes living in what was for all intents and purposes a ghost town.

Here’s Yost discovering that consulting isn’t about giving good advice:

The first clue that my mental picture of consulting was off came with “training” in Munich. I expected instruction in Excel programming, data analysis, and business theory. Instead, Munich turned out to be little more than a week long social outing with other recently matriculated consultants and analysts within the BCG’s European branches. We donned name tags, shook hands, and drank often. Classes were fluffy, and mostly consisted of discussion of high-level, almost philosophical topics. I got along well – as both an American and a member of the Dubai office, I was doubly foreign and therefore double the curiosity.

The importance of appearing credentialed:

Despite having no work or research experience outside of MIT, I was regularly advertised to clients as an expert with seemingly years of topical experience relevant to the case. We were so good at rephrasing our credentials that even I was surprised to find in each of my cases, even my very first case, that I was the most senior consultant on the team.

Clients hiring consultants beacuse they think they should:

I quickly found out why so little had been invested in developing my Excel-craft. Analytical skills were overrated, for the simple reason that clients usually didn’t know why they had hired us. They sent us vague requests for proposal, we returned vague case proposals, and by the time we were hired, no one was the wiser as to why exactly we were there.

I got the feeling that our clients were simply trying to mimic successful businesses, and that as consultants, our earnings came from having the luck of being included in an elaborate cargo-cult ritual. In any case it fell to us to decide for ourselves what question we had been hired to answer, and as a matter of convenience, we elected to answer questions that we had already answered in the course of previous cases – no sense in doing new work when old work will do. The toolkit I brought with me from MIT was absolute overkill in this environment. Most of my day was spent thinking up and writing PowerPoint slides. Sometimes, I didn?t even need to write them – we had a service in India that could put together pretty good copy if you provided them with a sketch and some instructions.

Clients hiring consultants because they want to be told things they already know:

What I could not get my head around was having to force-fit analysis to a conclusion. In one case, the question I was tasked with solving had a clear and unambiguous answer: By my estimate, the client’s plan of action had a net present discounted value of negative one billion dollars. Even after accounting for some degree of error in my reckoning, I could still be sure that theirs was a losing proposition. But the client did not want analysis that contradicted their own, and my manager told me plainly that it was not our place to question what the client wanted.

[…]

At one point my manager said to me, “Change the numbers, but don?t change the conclusion.” Of course, there’s no trouble in changing the numbers – it’s not as if there was much of a basis for this set of numbers over another – but change them how, and to what? Who knows?

I signed a non-disclosure agreement when I first took the job, but that only covered BCG’s intellectual property and client identities, things that seemed entirely reasonable to protect. This agreement [BCG’s non-disclosure offer upon firing] went much further. Not only did it bar me from making any disparaging comments about BCG or my work experience, but I wouldn?t even be allowed to reveal the existence of the non-disclosure agreement itself. The implication was clear: I could either be a cheerleader for BCG or stay silent, but anything else would bring swift legal retribution. When I asked to have the non-disclosure clauses removed, I was told that the agreement was a standard offer to employees, and that its terms were non-negotiable.

I’m not in a position to evaluate how much of this is true, or how representative Yost’s claims are of the consulting industry for graduates. It’s possible, but unlikely, that he didn’t fit in and he’s now telling extravagant lies about his employers. Yost did have his blog, and lots of consulting practice revolves around secrecy, so it’s possible that he didn’t fit in and is now disgruntled.

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