Suppose you hire a painter to slather your Victorian-era house in bright red paint, with purple accents. The painter’s brow furrows as they warn you that such colors are rarely a good look. But, you proceed: you just want a red house and you’re sure Vogue said that purple is in this season. Your painter proceeds with love and care while your neighbours look on in shock.
When it’s finished, you gaze lovingly at the creation. You adore how the purple pops against the red. Passersby recoil in shock. Neighbours give you incredulous glances. After a few months of people snickering, you start to feel self-conscious. You tell neighbours that the painter chose the wrong shade. You really wanted a subdued yellow with lilac highlights. The painter messed up. You’ll hire another one to fix it.
Is it the painter’s fault that your house is ugly? Or is it your fault for setting a ridiculous brief?
That’s precisely the question we face with consultants. Consultants are often blamed for giving bad advice while charging princely sums. To this end, the NSW government is attempting to reduce the use of consultants. Universities have been criticized for relying on consultants as cover for, and to prepare, restructuring plans.
But are consultants really the problem? Or do they get a bad rap? And, here, I want to focus on three core issues.
1. What do consultants do?
Let’s start with what exactly consultants do. Much like the painter in that example, the company, government department, or university hires the consultant to perform a specific task. Sometimes the task is relatively self-contained, such as advising on making a building energy efficient. Sometimes the task is significant, such as how to turn a structural deficit into a surplus.
Regardless of how large or small the task is, the task always starts with the brief. The client tells the consultant what they want to achieve. The consultant is beholden to the client’s parameters and requirements.
Thus, if the client incompetently allocates expenses between departments, then the consultant is stuck with shoddy accounting. For example, if different departments have different capital expenditure requirements; and thus, different depreciation expenses, but the depreciation is treated at the parent level, you will get an incorrect picture of each departments’ actual costs. This, allegedly, is how universities come up with the nonsense suggestion that business schools are more expensive to run than hard sciences.
Garbage in, garbage out thus describes the situation: set a bad brief or give bad information, and you will get a bad result.
2. Why do you hire consultants?
The next issue is precisely why you hire consultants. Sometimes it is necessary. For example, a heritage consultant for a development application provides essential skills. But, in the corporate context, you hire them because you want to make an unpopular decision.
Want to cut a department without wearing the blame? Hire a consultant. Want to put off making a decision until your term is up? Hire a consultant. Want to promote a pet project that really makes no economic sense? Hire a consultant to tell you how to do it, while pretending the consultation also justifies why you are doing it in the first place.
In all cases, the consultant gets a brief. They can perform the brief competently, but they will still be blamed if the implementation is bad or if the brief was unpopular to begin with.
In short, consultants exist so you can blame someone if things go wrong or if the decision is unpopular.
3. Can you replicate consultant work in-house?
What about when the consultant is hired for their expertise, rather than to blame shift or to justify a terrible decision: could you not just internalize the role and do it cheaper?
This is the logic underlying the NSW government’s push to reduce its reliance on consultants. It is inherent in the question of ‘if universities have so many experts, why don’t they just use their own academics’.
Leaving aside the problem with a bloated public service, and a nebulous bureaucratic blob that can entrench political parties, there are clear issues with internalizing consulting functions.
The short answer is incentives. If you want the best, most motivated, hard-working people you must incentivize them. It’s basic economics that when you own your own business, you work harder. Various academic studies confirm that if you want people to go above and beyond, then they must have incentives, preferably tied to the value they create.
Consultants have those incentives. Internal hires typically have little, if any, upside to working hard. There is no incentive mechanism. A public servant has no incentive to, and is not paid to, work late nights or weekends. A consultant is. The difference in workload is clear. Furthermore, if we work on the premise that people like money, then many of your top workers will go to the private sector unless they prefer a more stable job, with greater job security, and better hours. In short, the private sector will always be more productive because the incentives in the public service do not motivate people. Indeed, a rational public servant should ‘quiet quit’ given the incentives in play.
To use an analogy: suppose you run a superannuation fund. You can choose either: (a) internalize portfolio management and pay portfolio managers a fixed salary, with minimal bonus, (b) pay those portfolio managers like at Macquarie Group, with nigh unlimited bonuses, or (c) outsource to an external fund manager whose fees and industry reputation are directly tied to their performance and whose pay scales align with their skill. It is very obvious that if you choose (a), then many of your talented portfolio managers will defect to the likes of Macquarie or will establish their own fund.
Consultants also have significant expertise and limit insular group think. By working for multiple clients, consultants see myriad different projects, workplaces, and outcomes. This enables cross-learning. To use an analogy, it is well-documented that directors learn skills and expertise by sitting on other companies’ boards. Similarly, a consultant can improve outcomes by seeing what works, and does not work, at other companies.
The net result is that consultants are not useless or disposable. Rather, consultants serve a useful purpose. They wear the blame for unpopular decisions. They can be a scape goat. They can also perform good work. Consultants are necessary.
Mark Humphery-Jenner is an Associate Professor of Finance at the UNSW Business School and is Founder and CIO of Otso Capital.