Comment on Open Thread, Dec. 28 - Jan. 3, 2016

Sat, 02 Jan 2016 18:59:02 GMT

Here are some articles from Overcoming Bias that seem relevant:

Consulting Isn’t About Advice

Too Much Consulting?

Status As Strength

Freakonomics On Consulting

Some quotes:

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. ... Most of my day was spent thinking up and writing PowerPoint slides.

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. ... 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.

The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quick-made advice from ignorant recent grads be worth millions? Why don’t firms just ask their own internal recent college grads?

My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions. The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide.

Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. But alas those sources don’t have the raw strength of status to cow opponents into submission, opponents who in practice can block changes no matter what a CEO declares.

Fellow consultants and associates [said] fifty percent of the job is nodding your head at whatever’s being said, thirty percent of it is just sort of looking good, and the other twenty percent is raising an objection but then if you meet resistance, then dropping it.

So there are really two types of consulting. There’s operational consulting, you know, down on the factory floor, in the shop type improvements. That’s probably ninety-five percent of the industry. Most of it is done by firms you’ve never heard of. ... And then there’s the very small elite end, strategy consulting, about five percent. And that’s much more helping CEOs make big decisions.

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