Comment by bkrausz
16 years ago
The tl;dr version:
Large consulting companies often tell their clients what they want to hear, which more or less negates the point of consultants but can often pay better. There are ethical concerns here.
I like the story, but the article itself has way too many metaphors that cloud the point.
Or maybe I'm just too used to having all my stories condensed into 140 characters...
There was another important point: a guy new to the consulting business and with no significant amount of relevant training or support wound up being marketed as an expert and became the senior person on each project he joined.
I've seen this in action, both from the client side (management brought in absurdly highly paid consultants to back up what they wanted when their own people wouldn't support it) and the other side (friends and friends of friends who went into consultancy firms; few of them have stayed there much longer than this guy).
What I don't get is why shareholders (for big companies) or government auditors (for government organisations) don't openly criticise the policy of wasting money hiring these completely unqualified people who either offer no real benefit or actively cause harm to the projects they join. Obviously a genuine expert could offer useful consultancy in their field of expertise, but that doesn't seem to be the MO of these big multinational consultancy shops.
Shareholder activists will usually argue how companies stupidly waste money on consultants. It's just that there aren't a lot of them.
In the past, Buffett has criticized consultants.
1995 Letter:
Concluding this little dissertation on acquisitions, I can't resist repeating a tale told me last year by a corporate executive. The business he grew up in was a fine one, with a long-time record of leadership in its industry. Its main product, however, was distressingly glamorless. So several decades ago, the company hired a management consultant who - naturally - advised diversification, the then-current fad. ("Focus" was not yet in style.) Before long, the company acquired a number of businesses, each after the consulting firm had gone through a long - and expensive - acquisition study. And the outcome? Said the executive sadly, "When we started, we were getting 100% of our earnings from the original business. After ten years, we were getting 150%."
“I would rather throw a viper down my shirtfront than hire a compensation consultant.” -Charles Munger
I think shareholders might not widely realize how it works. Often, shareholders are actually the ones who demand bringing in outside consultants, because it's seen as getting an independent third opinion. It looks more self-interested for the company's executives to set their own pay, than it does for an executive-recruitment consulting firm to recommend what the going rate is. Of course, executives have gotten good at getting the right consulting firms to answer those questions, and consulting firms know that if they don't answer appropriately, they aren't going to be asked back.
Shareholders care only about relative performance. Absolute performance is irrelevant. So as long as all big companies in a particular sector waste X on consultants, that's fine for the shareholder. It doesn't even affect the dividend as you might think, because if everyone does it the cost can be passed on to clients.
Shareholders start to care once a lean competitor enters the scene. Someone who does away with all the fluff and is more profitable. These things happen. But my reaction as a shareholder is to become a shareholder of the better company and dump the stock of the inefficient one. I'm not trying to make the inefficient company more efficient. Some activist shareholders do that, but most don't.
There is one very important truth that too few people are considering: Shareholders are not entrepreneurs. Most shareholders have no interest in improving a particular company. Their interest is in choosing undervalued companies and selling them when they are not undervalued any longer, preferably at a higher price.
The distinction between investors and speculators is a lie. There is no difference between the two. The important difference is the one between owners and entrepreneurs.
Shareholders used to try to improve a company - it was quite popular in the 70's and 80's. Ever watch the movie "Wall Street?
What happened since then is that legislators and courts have become hostile to corporate raids, and have mostly made it toothless. We would have plenty of shareholder activism if it wasn't for that.
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So as long as all big companies in a particular sector waste X on consultants, that's fine for the shareholder.
That's incorrect. As a shareholder, I can sell my stock and reinvest the proceeds into a company in a whole different industry. Thus, companies must compete for shareholders.
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Consultants are often brought in order be blamed later. In the article, the development company could always try and blame BCG when their shareholders wonder how come $1B was wasted. By that time, the CEO of the development company would have left deploying his golden parachute, and BCG would have been able to somehow cover their legal ass with some small print on a back of their contract agreement.
Perhaps because they have connections? A lot of their almumni go on and have jobs as managers, who then hire consultants.
Maybe the presumption of connections is all that is needed. Managers have connections. They need to hire people with connections because connections are important.
tl;dr version:
Consultants suck.
It was TL, I DR it.