Tag Archives: hiring

Why do companies hire consultants?

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On the face of things, it doesn’t make much sense to hire someone to tell you how to do your job. Ostensibly, the CEO of a company knows more about the business than any outside person. Plus, to the average person it may seem like consultants just offer tired advice (“Work more as a team! Find synergies!”)

However, it’s becoming clear that despite what economists say, firms aren’t really that efficient. Lots of times, managers may be unaware of strategies that would save them money, or boost profits, or they may be unaware that they are unaware. For example, Reenen and van Bloom went to India and offered strategy tips to a sample of textile manufacturers. The firms that implemented the strategies boosted profits by 15%. Why didn’t they implement that stuff earlier? The primary reason they cited was they just didn’t know about the management tools. This is one example of how consultants can be useful. It’s their job to keep abreast of the newest and best practices in management, strategy, and human resources and then impart that information to clients.

To that end, consulting firms do a significant amount of research, and knowledge sharing. Individuals within a consulting firm have access to wide databases and the accumulated knowledge of their peers, which means that there are probably increasing returns to scale among consulting firms. They also publish lots of research, to convince clients that they’re smart and can help out the firm.

There’s another reason firms hire consultants, however; to tell them things that they already know. Consulting firms can reliably signal authority and intelligence; bosses may hire consultants to confirm that they’re correct. To cite one recent example, the US Postal Service hired two consulting firms so that they could go to Congress and implement a restructuring plan. Another example is the firm that has to cut ten percent of staff. Maybe the manager knows which 10% he’d like to cut, but he would also like to maintain a good reputation as someone who is not ruthless, or cruel. So he could hire a consultant to tell him what he already knows, e.g. whom to fire and whom to keep on.

In sum, consultants facilitate knowledge transfer, but there’s also a signaling answer – that firms, or bosses, hire consultants to give credibility to a specific decision or strategy.

Is it true that to do the best work, you need to hire the best people?

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I’ve read a few posts by prominent Silicon Valley people that say this.

Here’s a quote about hiring from Slava Akhmechet at RethinkDB:

I look to Bell Labs for inspiration. At its peak, the folks at Bell Labs developed radio astronomy, the transistor, the laser, information theory, the C programming language, and the UNIX operating system. These are the kinds of people you should be trying to hire. Think Dennis Ritchie before he developed the C language. Think Claude Shannon before he invented information theory. When in doubt, ask yourself: “would this person have been good enough to be hired for a junior position at Bell Labs during its peak?” If the answer isn’t a resounding yes, it’s a No Hire.

Joel Spolsky also stresses the importance of hiring good people. Similarly, HR consultants often stress the importance of hiring only the best. As the Boston Consulting Group puts it, A players hire other A players, B players hire C players and C players hire F’s. Are they right to focus so much attention on hiring only outstanding people?

It’s clear that if you are trying to sort through an applicant pool, you need to get the best possible sense of what an applicant will look like once they’re hired. It’s not good to make mistakes in your interviews, or fail to interview candidates thoroughly enough. Two, it’s possible that people will be biased toward hiring too low quality employees, and emphasizing hiring good people will help HR raise hiring standards.

It’s also true that in a startup, any one individual has a much greater effect on the final shape of the company than at Wells Fargo. So startups and small firms might be right to exercise lots of caution in hiring. Furthermore, the best programmers can be five times as productive as average programmers.

But as Bob Sutton and Jeffrey Pfeffer point out, it’s a myth that the best companies are best because they have the best people. Usually the best companies have great systems that bring out the best in people.

Take a look at urban poor schools that dramatically outperform their peers and even richer schools, like the KIPP schools, or Jaime Escalante’s calculus program, which brought a bunch of kids from inner city LA through Calc BC and sent many onto the nation’s most prestigious colleges. Where so many others have seen kids who were unwilling to learn, they have succeeded and turned ordinary street kids into superstars. Escalante and KIPP don’t have the luxury of hiring the best people, like Philips Exeter, Wharton, or RethinkDB. Instead they built a great system that brings out the best in their students, which is far more impressive than doing great things with people who are already great.

Another example is Toyota, which has such a great production system that the upper management’s role is largely to simply support the system. Sutton and Pfeffer write, “One study showed that Toyota was the only major automobile company where a change in CEO had no effect on performance. The system is so robust that changing CEOs at Toyota is a lot like changing lightbulbs; there is little noticeable effect between the old one and the new one.

The supply of talented people isn’t fixed. Furthermore, our ability to measure talent is limited at best; people have off days, or bloom late, like Kurt Warner, for example.

Furthermore, if you’re a firm that can’t afford to hire the top 10%, implying to your staff that their ability level is fixed would be disastrous. As Columbia University researcher Carol Dweck has shown, mindset is extremely important; people who believe intelligence is fixed become worried about hiding their true level of cleverness, where those who believe it’s malleable work on their skills and continuously improve. If your staff became too enamored of the first mindset, they wouldn’t be doing their best work.

In summary, bad systems are more damaging than bad people, and good systems can turn average workers into stars. Like anything else, hiring workers has tradeoffs; with the best staff come long periods of unfilled positions, increased search costs, and high salary, etc. The importance of hiring “only the best” is probably overstated; clearly hiring good staff is important but it may not be crucial.

If you want to be a consultant, what skills should you learn?

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Ideally, consulting is about giving firms better strategies, and to some degree consultants have to provide useful information and strategies to companies to stay in business. So you’re going to need a basic level of intelligence and analytical skill. Microeconomics is a useful framework for understanding how people make decisions, thinking about things in terms of cost-benefit analysis, thinking at the margin, etc. Accounting is also important, because you need to be able to look at a firm’s books and get an idea of what’s going on at the firm. Also I’m guessing that being knowledgeable about the world, having some idea of what strategies are good, is helpful.

Additionally, a lot of your job as a consultant is selling your services and acting knowledgeable. Many people are stuck in Dilbert-like situations and will look at you as a knight in shining armor. For this you’re going to need to be friendly, personable, and high status; you’re going to need to sell yourself as an Answer Guy, that will come in when everything else has failed, increase profits and make everyone happy. People don’t really practice these skills very much, but you can learn more about them by filming yourself, reading Dale Carnegie or Neil Strauss’s The Game, practicing conversational skills, or practicing conversation in front of a mirror.

From a hiring perspective, Bain and McKinsey and Deloitte and BCG and the other consulting firms are going to get a lot of applicants that sound exactly the same; you have to have something that lets you stand out from the crowd. You can only do this with your GPA to a limited degree; to score a home run, you should work on your impressiveness; on doing things so unique and cool that other people find it hard to imagine that they could have done the same if only they’d put in enough time. The only person I know who talks about this regularly is Cal Newport, so start there if you’re clueless. Maybe impressiveness predicts how people will eventually do in a job and maybe it doesn’t, but it definitely will help you get through the gate.

Note that it doesn’t take much money to learn most of these skills. There are tons of courses online, and there’s the library, of course. There’s also probably a big gap between the skills you need to have to get in the door and the skills most relevant to consultants on a daily basis.

I’m not a consultant so these are just my best guesses. If you are a consultant, which skills have come in the most handy? Which skills were most important for you to get your foot in the door?