Strategy Consulting Discount? conclusion, management, companies, executive, therefore

Daniel1985

Casually observing the performance of companies that hired top 4 strategy consulting teams to support executive management I noticed that all of the firms underperformed the respective benchmark. I am wondering if this is a pattern and if others have observed such a phenomena in more detail as to derive a definite conclusion.

Reasons I could think of why this might be a pattern:
- Consultants are even less tied to firm success than managers, they extract cash immediately, therefore short term goals a likely the primary focus
- Consultants are far removed from operations, many concepts may look nice in Excel but never work in practice
- Consultants may want to change too much, too fast, failing to recognize that firms are made of people thinking and changing at different speeds, and therefore good ideas fail to realize material benefits
- Much of the advice is best practice observed and learned over the years from other clients, and therefore average at best

Reasons why the observation is not part of a pattern:
- Failing to realize material benefits will result in mandate termination
- Most consulting teams follow a sufficiently rigorous study plan to capture operational and political aspects of a firm to derive realizable improvement options
- I have only a limited sample for firms that hire consultants and imperfect information on the engagement types, duration and targets
- Consultants may decide to reject a mandate they think will not realize benefits in order to not taint their track record (selection bias).

Therefore, do you increase or decrease the discount rate of firms known or rumored to have hired consultants to support executive management?

Without initiating a discussion on consultants vs bankers, I an genuinely interested in the topic. Any pointers to research and treatment in valuation practice is greatly appreciated.

dandman

I am looking at 5-7 years after the teams have started the mandate. Actually the firms were going ok (in line with market) before the consulting work started.

busterbluth

Well, those firms are usually about restructuring and process reform. This means expenditures up front in order to realize efficiencies down the line that will (hopefully) result in higher profits. That means higher up front-costs with benefits accruing down the line, so short term performance is likely to drop or stay constant. What kind of time frame are you using to measure "outperformance"?

AndyNZ

I am looking at strategy consulting firms BCG, MCK, Bain, Booz, ...

ap0258

I guess what you have to do is look to see how they performed before hiring consultants and afterwards. Do they underperform less afterwards than before? Did they underperform and now they look like they are performing in line or perhaps outperforming. How do they compare to other underperformers who did not get any consulting?

Are you talking about corporate strategy people, like McKinsey & Co., who consult on how to improve the process of creating goods and services and marketing them to people, or are you talking about investment consulting, like Mercer, or Russel Reynolds, who advise about asset allocation and fund manager selection?

Assuming you are talking about the investment consultants, I think there is an innate problem with looking at "Top 4" (whoever they are). Presumably, to be in the top 4, you need to have the largest investors with the greatest amount of capital using your services, or else you wouldn't be "Top." If that's the case, it is probably very difficult for these guys to outperform, because they compose so much of the market that they would move the market itself upwards if they outperformed, and they just can't outperform themselves. The liquidity problems involved in managing large funds are huge too. Institutions can't just trade in and out...basically they need to build positions over time and increase them or decrease them.

Consulting firms can help identify 1) key problems you might not otherwise notice, and 2) possible ways to address those problems (whether you knew about them before or not). They can also help you learn from the experience of other firms, so that something a typical firm might do once in a while can be handled with the knowledge of people who have done it many many times, and therefore are less likely to make "newbie" mistakes.

The challenge with consulting firms is that in the marketing side of stuff, they need to project the image of being cutting-edge and forward thinking, which by definition means that they want to recommend at least some stuff that hasn't been tried before. It's still useful to use consultants for helping to manage change, because they may identify a number of issues that are change-related that ordinary people might not have thought of, but there is a very strong incentive for them to project a greater degree of expertise and confidence than is in fact warranted.

MiniMe7

All I have is anecdotal evidence. I wonder if this has been analyzed in more detail by anyone.

ba736

What you are saying sounds like anecdotal evidence more than anything else...
How did you "observe"?

Maybe in any case you are mistaken on the causality ? Companies don't suck because they hire consulting firms. Firms suck in the first place, so they hire consulting firms who in turn don't help much.

My feeling is that consulting firms don't create much value on average. Just my 0.02, but I think they get most of their business from executives who want to validate their strategies and cover their a$$es by submitting an expensive 200 pages report from BCG to their board which states that said strategy seems plausible under assumptions a, b, c....,z.