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What Value Do Consulting Firms Like McKinsey, Bain, Et Al. Really Add To An Operation?

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This article is more than 10 years old.

Raj Ramanan, Co-Founder of Loku (remember.loku.com)

I interned at Bain & Co., started my career at McKinsey & Co, worked in the operations/turnaround group at KKR with ex-BCG consultants, worked at an internal consulting function at Bear Stearns, and was an independent consultant to small and medium businesses before co-founding a company (Loku).

I first want to make the distinction between generalist strategy consulting shops (McKinsey, Bain, and BCG) vs. specialized or technical shops (Accenture, boutiques). I can only speak credibly about the former (though, as a former consultant, a lack of credibility has never stopped me from talking on any subject...).

Cynicism aside, the real value a consulting firm provides is:

1. Political leverage: CEOs that want or need to make an unpopular decision often bring in a consulting firm to help. This provides ammunition to recommend an unpopular or risky decision to the board (expansion into a new business line or geography, or shutting down a plant). The CEO can also distance herself from an unpopular decision by blaming the consultants. Finally, if things go wrong, consultants are a handy scapegoat.

2. Pool knowledge across functions: Consultants are not part of the client's culture, politics, or organization culture. In the first month, as the firm builds a fact base, consultants usually interview people across functions. In large companies, cross-functional problem-solving rarely happens. Just getting different functions in a room typically unlocks creative problem solving.

3. Pool knowledge across levels: Similarly, consultants interview, watch, and tag along with people down the organization's structure, often starting with customers and moving through sales and line roles. CEOs and the exec team of large companies rarely do this (exception being their largest customers). There are tremendous insights to be had by doing this.

4. Deep focus on one problem: The biggest value is that you have a dedicated team of pretty smart people who are generally unbiased that can focus deeply on one particular problem. At a company, in any role, you have a day job, and at best can focus only a portion of your time on a particular issue. Nowhere is this more true than at a startup, but that's another Quora post.

I want to point out that even though you could group all of this as "telling you what you already know," all of this is real value that impacts the bottom line however you measure it, and that in the absence of strong leadership or a big, risky culture change, could not have been accomplished without the consultant.

What value does a consulting firm NOT provide?

1. Subject matter expertise: The people who are doing the bulk of the work are fresh out of college (like I was) or business school, often from a range of majors, with little-to-no work experience. They don't know anything. They are really smart, very hard-working, resourceful, and well-trained, but they know absolutely nothing coming in about your industry, company, or particular issue. More interestingly, the director or partner on the project is not really a subject matter expert either. She has built her career in a particular industry or practice area and has served a range of clients across a range of problems. Her value is pattern recognition, but there is no way she can know more about the client's industry, company, or problem then someone who lives it every single day for years. And most partners and directors are career consultants, not industry vets (certainly true at the big three shops).

2. Executive coaching: The firms love to provide long-term, ongoing, ambiguous projects on a retainer. If you are a CEO, get a therapist. Or some friends. Or a board that is actually helpful. Or a best friend. You don't want a partner at a firm who spends a half hour a month thinking about you or your problem to bill you on a retainer.

3. Actual decision making: Consultants are great at assembling facts from the outside world, bringing in perspective from all functions and levels of your company, finding interesting patterns, and providing you with a point of view. They will jump in the line of fire on controversial decisions and fall on the sword if things go wrong. But they can never actually make the tough decision. No outsider can every truly understand the needs of the various stakeholders. No outsider has as much at stake personally and professionally. It is so incredibly different to recommend layoffs for 10% of a plant (100 people) vs. actually firing a single person. I've done both, and the former does not have the emotional or cultural consequences of the latter. Only the CEO or other leader at a company can actually pull the trigger; the consultant can at best show you how to hold the gun and maybe give you a few targets to aim at.

Would I ever hire a consultant?

I believe good leadership (promoting cross-functional decision-making, a flat or open organization structure, autonomy across roles; spending time with customers, talking to folks on the front line; and all the other stuff HBR publishes) can provide much more value than hiring an outside consultant can.

But, if I could do the following, in certain cases, I would hire a consultant:

1. Impose limits: Make sure it is a defined, narrow problem well before the consultants show up. Make sure it's a project of defined length, with a defined number and type of resource. Demand frequent updates and check-ins. Have the option of aborting the project if you are not getting what you want or if the directional answer is good enough.

2. Use a bid process: The big three will lecture you on their individual differences, and when I interviewed at the firms, I was obsessed about what made them different. They are the same. They hire from the same talent pool. They are interchangeable. Put them through a competitive bid process (sealed bid or auction), with pre-set milestones. They will hate this. They will tell you that they don't participate in auctions. They will try to wiggle out by defining the problem differently or changing the milestones or taking you out to dinner. Don't do it. Force the process. They will comply. I've done it myself by sourcing consulting services on behalf of Bear Stearns.

3. Demand partner time: It's your (or really your investors' or shareholders') money and you are paying a fixed monthly fee. Demand partner time. Earlier objections notwithstanding, I'd rather spend time with someone with 10 or 20 years of consulting experience who has at least seen my problem in a different industry or knows anything about my industry than a 22 year old with a fresh diploma who has never actually made a business decision. I know because I was that kid. Best of intentions and a killer work ethic, but I'd want partner time.

I have a ton of respect for the firms I worked at and the colleagues I worked with. I learned a tremendous amount and made lifelong friends. Consulting as an industry and these three firms in particular provide real business value; companies just need to know how to appropriately use these service providers.

This question originally appeared on Quora. More questions on Management Consulting Firms: