Introduction

Consultants are often the butt of jokes or criticized.

The stereotype of a consultant is a 20-something yr old person fresh out of undergraduate. They’re handed a laptop, told to go visit a client, and bullshit their way through life.

Talk to the average person and they might tell you how consultants seem to never say anything substantial. And consulting Partners are constantly trying to sell you work but then pawn it off to junior staff.

You might have even watched the Last Week Tonight episode about McKinsey and the terrible things they did.

And yet, companies keep hiring consultants. In fact, they hire a LOT of consultants!

I asked a friend who works in consulting to recommend a reliable research analyst projection of consulting spend over the next few years. Here’s what they sent me:

So the consulting industry is expected to keep growing then over the next five years. So not this is not an industry in decline.

But won’t AI replace consultants and put them out of work then?

BCG says AI consulting will supply 20% of revenues this year

The chief executive of BCG has said the $12bn consulting firm expects to generate a fifth of its revenues in 2024 from helping corporations integrate artificial intelligence into their businesses, a share it projects will reach 40 per cent by 2026.

A jump in sales at BCG’s AI division also partly offset a slowdown in other parts of the business last year amid a tougher economic backdrop. BCG’s total revenues climbed just 5 per cent in 2023 to $12.3bn, the firm’s weakest growth in at least seven years. 

FT: BCG says AI consulting will supply 20% of revenues this year (Anjli Raval and Simon Foy, 2024)

Oh okay.

So companies really, really want to hire consultants and AI is not going to stop this.

Which begets the question: Why?

If people hate consultants so much and they claim consultants are terrible, what are the reasons for hiring them?

1. Consultants as unique subject matter experts

This is the traditional idea people have about hiring consultants. A company needs particular expertise in a specific area but doesn’t have it. So they hire an expert to acquire niche or unique skills to help them solve the problem they have.

Examples: Hiring a tax structuring specialist on a merger or acquisition, or a market research firm to prepare market intelligence.

This can also occur when a company needs certain skills, but the company would be deeply unappealing to work for.

For example, a private prison company might need data analysts but people may not want to apply to such a company. So instead, this company may be forced to hire consultants instead to access the skills it needs.

1a. Consultants as market intelligence

Let’s say you’re the Head of Supply Chain at a major manufacturing company. You’re thinking of moving some of your facilities out of China into other countries to re-risk your operations. However, you’re not confident about the decision.

• Which countries should you move to?
• How much confidence do you have that now is the right time to make the decision?
• How many other companies are thinking of doing the same thing?

This is a pretty hard question to answer! Wouldn’t it be great if you could just ask your competitors?

Obviously you can’t just call up your biggest competitor and ask them point blank about their operational plan. But… a consultant could!

Consultants can aggregate information across their entire client base (e.g. through a survey) and then share the results in an aggregated and anonymized output. For example, if you participate in the survey you might get a report that says:

• 21 out of 32 companies have plans to move facilities out of China;
• The average investment in supply chain derisking is $50M this year;
• All 32 companies who responded said they intend to maintain a significant presence in China.

This is extremely valuable information to know! For example, now when you go to your CFO and they ask “How do you know $50M is the right order of magnitude?” you actually have some real world data to refer to.

The consultant therefore acts as an expert by proxy and allows companies to gather market intelligence on each other (without directly leaking confidential information to a competitor).

But subject matter experts alone don’t explain why the industry is so full of 20-something yr old fresh graduates. So what else is going on here?

2. Consultants as OpEx

Companies love flexibility, especially when it comes to cost and the ability to quickly increase or decrease costs based on how many resources they need.

People however are not an easily scalable variable cost. It takes time to hire, onboard, and train an employee. It is also difficult and time consuming to fire an employee.¹To be clear, this is a good thing that employees have worker protections!

The consulting industry offers a way to turn permanent headcount into an operating expense. You may also hear this called expressions such as Business Process Outsourcing or Staff Augmentation.

For a company or a company manager, this can be an attractive proposition.

For example, let’s say your team is extremely under-resourced and you need 2 more workers. However, your Finance department really dislikes adding to the fixed cost of the business and HR keeps denying your requests to raise a hiring requisition.

Finance however may be more willing to approve an annual consulting budget that they have the power to suddenly decrease if market conditions change. And since this isn’t a hire, HR typically has no power to say no to you.

If you just need “butts in seats” doing work for you, then consulting offers a quick and scalable solution.

It may be a worse quality solution than just being able to hire 2 talented workers in the first place. But convenience can sometimes be more important than doing things the best way.

Examples: Almost anything counts here. Data analytics, invoice processing, HR administration, almost all types of employees can be turned into OpEx if you try hard enough.²Whether it’s a good idea or not is a very different question however…

2a. Consultants as outsourcing training

Hiring and training new college graduates can be expensive, especially if your company is cutting training budgets.

Consulting firms train their employees. It is debatable how much training some firms offer. However, some forms of training are very hard to fake. For example, consulting firms pay for professional certification and examinations (e.g. Chartered Financial Analyst, Six Sigma Belts, etc.)

Hiring a consultant can therefore allow you to skip paying for training. Instead of hiring a fresh graduate, you get to “skip the line” and go straight to the fully qualified person instead.

If you really like the person, you can also choose to offer them a job to leave their consulting company.

In this fashion, consulting is a “try before you buy” approach to hiring.

Examples: I gave examples of roles with certifications such as a Chartered Tax Adviser. But this can also apply to anything you outsource as OpEx. If you really like the consultant, you can just offer them a job and “steal” the training.

The airline industry is notable for recruiting former military pilots to reduce training costs. The pilot still has to be certified on a specific plane rather than learning the basics of flying from scratch.

2b. Consultants as demand aggregation

Let’s say you want to hire some engineers. Ideally, you’d like to have an engineer running the recruitment process, and screening the initial candidates to test their capabilities.

However, it’s expensive to have a full-time engineer solely working on recruiting. Many companies only recruit at specific times of the year or only when they specifically have a job position to fill. So your demand and need for a specialist recruiter is not enough to justify the cost.

But what if you combined all the demand across multiple companies? Now there’s enough to justify the existence of a specialist engineering recruiter.

This is the idea behind demand aggregation.

Some companies need tasks performed but only some of the time. The consulting company therefore acts as a mechanism to combine small pockets of “demand” or need across multiple companies to justify the supply of this skill.

Examples: Typically skills that are needed on a random or infrequent basis such as recruiters, legal advisory, forensics, etc.

However, demand aggregation also provides another benefit. Outsourcing companies have economies of scale that you don’t have or exploit labour arbitrage you cannot.

People may be familiar with the idea of the Indian call center. Lower skilled labour following explicit scripts and hired at a lower cost than in other countries.

However, it is also a growing trend to offshore increasingly complex tasks. For example, the banking sector is increasingly outsourcing more complex tasks and core banking processes such as payments processing and even fraud / risk assessment.

2c. Consultants as outsourcing your brain

This is where consultants become a scourge to businesses.

Consultants are incentivized to want to sell you more work. So the more important they are to you, the more you need to buy their services.

One approach is to outsource even your decision making to consultants. Oops! Now you don’t know how to run your own company.

You need to be very careful and properly understand as a business what functions are absolutely core and vital to you. Never outsource these functions and retain them internally in your company.

3. Consultants as independence

Sometimes a company needs an independent opinion from a third party. This could be due to:

• legal reasons (e.g. regulation, compliance, etc.); or
• because the PR / “optics”³How something will be perceived of the situation look bad if the company does it themselves (e.g. investigation into a data leak or sexual harassment claim)

Having a third party perform the task for you therefore is not about the company necessarily lacking capability. But rather about buying a 3rd party opinion and independent perspective.

Examples: Typically will be very legal or PR driven such as legal or audit services.

3a. Consultants are also independent to tell you the obvious

Sometimes consultants are hired to provide a fresh perspective. Independence is valuable because the company has some form of baggage or culture which is causing an inability for them to make decisions or get things done.

One example from a friend who works in consulting was a medical supply company who saw a +200% increase in business in 2020. They were then deeply puzzled why their orders significantly fell from 2022 onwards.

It took a consultant to come in and tell them that COVID was basically over and everyone had stopped panic stockpiling medical supplies. The company leadership genuinely believed that they would experience 200% growth every single year!

Examples: Typically management consultants or market research consultants.

3b. Consultants are also independent to tell you what you already know

A more common criticism is that consultants just repeat back to a company’s leadership what the lower level employees were telling them anyway. And then the company suddenly agrees and goes along with the consultants.

This is a reflection of a company with a broken internal culture and management systems.

Fixing internal culture and processes is very difficult. And there may not be political willpower within the organization to do something about the problem.⁴For example, fixing the problem may require a deeply uncomfortable discussion that could erupt into civil war. Companies are run by people, whose personal interests may not always align with what is best for the company (within reason).

Hiring consultants is therefore a “cheaper” solution to the problem. It won’t solve the long term problem. But it’s like taking a decongestant such as pseudoephedrine for dealing with a cold or flu. At least it alleviates the symptoms and you can worry about dealing with the underlying sickness later.⁵Maybe.

4. Consultants as a way to de-risk a problem

Companies sometimes have problems that are extremely complex and very annoying for management to want to deal with.

For example, let’s say your company uses SAP ERP Central Component (ECC) for their internal finance IT system. SAP is scheduled to end support for ECC in 2027. So as at time of writing, you have about 3 years before the end of life.

This puts a lot of pressure on you to transition to the newer SAP S/4HANA system. However, migrating your entire internal finance IT system is a massive pain in the ass and there are millions of ways it can go very, very wrong.

It is not impossible for a company to try and solve this problem by themselves. But it would also cost a lot of money and there’s still a likely chance they get it very wrong. Once the SAP S/4HANA implementation is over, they’d then need to fire everyone so applying for this very temporary job might be unappealing to someone who wants a stable career (See Section 1)

Examples: Any large project where it’s a massive pain to do. This could be IT related (e.g. changing an IT system or data center), merger & acquisition related (e.g. consolidating company accounts and assets), doing something for the first time (e.g. hiring a local advertising agency the first time you enter a new country), etc.

4b. Consultants as project management supervision

Just running a large project can take a massive amount of time and energy. And you as a business manager or executive might want to spend as little time as possible getting involved.⁶After all, you still have your day job. Who wants to be stuck in another 4 hrs of meetings a day?

So your attitude might be “Oh god please someone just take this problem away from me!” And you might be very willing to pay to make this problem disappear.

In fact, managing large projects is so complex that it is actually its own discipline with its own skills and theories. So companies may even set up a dedicated project management office.

Therefore, you may also hire consultants in a purely project management capacity even if you have the technical skills internally.⁷Very large companies such as Amazon have dedicated Program Manager roles where people shuttle around between projects to oversee the logistics and project management aspects. However, only the largest companies can afford to have a permanent team of people doing this.

4b. Consultants as a way to limit liability

If you’re the CFO of a company and the SAP implementation goes wrong, you could lose your job. So you need to cover your ass.

Hiring a consultant covers your ass for you. If it goes wrong, you have someone to blame and you can maybe sue the consulting company to get some money back too.

• 1
  To be clear, this is a good thing that employees have worker protections!
• 2
  Whether it’s a good idea or not is a very different question however…
• 3
  How something will be perceived
• 4
  For example, fixing the problem may require a deeply uncomfortable discussion that could erupt into civil war. Companies are run by people, whose personal interests may not always align with what is best for the company (within reason).
• 5
  Maybe.
• 6
  After all, you still have your day job. Who wants to be stuck in another 4 hrs of meetings a day?
• 7
  Very large companies such as Amazon have dedicated Program Manager roles where people shuttle around between projects to oversee the logistics and project management aspects. However, only the largest companies can afford to have a permanent team of people doing this.