Arnold Kling  

The Wisdom of Robin Hanson, #n

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He writes,


My guess is that most intellectuals underestimate just how dysfunctional most firms are.

This is part of a discussion of why businesses pay consultants. I think a pretty standard view is that CEOs bring in consultants to help overcome resistance in the internal bureaucracy. Intellectuals do not get that concept, because they assume that the CEO is a dictator with complete autonomy in the firm. As I have said before, that model is incorrect.

At Freddie Mac, I would have told you that they brought in McKinsey when it would have been easier if senior management had just listened to me in the first place (I was sort of full of myself in those days). I really resented the consultants, because I was jealous of all the power they could wield based on relatively little knowledge. But they probably helped me on net, because I tended to be pushing for things that a lot of executives did not want.

One of my fantasies is to have Cabinet Secretaries hire McKinsey to go through their agencies and whip them into shape. The problem is that a Cabinet Secretary has even less power than a CEO in dealing with the internal bureaucracy. And, unlike a CEO, a Cabinet Secretary has nothing to gain by making his organization more effective.


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CATEGORIES: Business Economics



COMMENTS (9 to date)
Mm writes:

My father was CFO at a large multinational corp- he always said if you need consultants to tell you how to run your business you should be fired.. He maintained you hired consultants to tell stakeholders (employees & stockholders) things that needed to be said but you did not want to say it. The initial interview with the consultant was often a kabuki dance where the consultant tried to discern what you want him to find without expressively asking.

Shangwen writes:

The power-flaunting that one often sees in some CEOs is really directed primarily at their immediate rivals in the executive, and relevant external parties. Managers who read this behavior correctly can significantly increase their own power in addition to the odd symbolic "managing up" gesture to assuage the executive. When I ran a few small clinics I had far more power over program innovation, staffing quality, and patient outcomes, than I do now.

Publius The Lesser writes:

Keep in mind there are consultants and there are consultants. Some "consultants" are effectively temps - they are brought on to ameliorate a labor shortage by performing a lot of low-level "grunt" work that the firms employees would otherwise have to do themselves, with the advantage that the consultants can be easily let go when no longer needed. Then there are the consultants brought in by management to perform some task management ostensibly believes is outside the firm's "core competency" whether that's true or not. Invariably, these consultants come from a firm the manager or someone in the manager's reporting chain has a strong prior relationship with. Among other things, the relationship provides the manager with job security - if he or she ever loses his or her current position, he or she can get a job with the consulting firm or with a firm the consulting firm has contacts with.

Finch writes:

Mm's story of his father actually supports Arnold's argument.

Senior management is often overconfident that they know what's going on with their business, when in fact every middle-manager below them acts like a bad-news filter, hiding the true state of the firm. Consultants can help cut through that.

Mm, I don't know your dad, and I don't mean to over-interpret your anecdote. Maybe he was correct in this case. But it certainly sounds like a very familiar situation in business in which C-level executives are disconnected from the reality on the ground. Sometimes they are aware of that disconnect, sometimes they aren't.

steve writes:

I think the power of the CEO in a firm runs the gamut and can not be easily pigeonholed as dictator or dysfunctionally weak. I think it varies a lot between companies and even different CEOs within one company over the years.

However, I would suspect a strong correlation between dictator and percentage ownership of the company. After all, if your the sole owner, then nothing but your own personal qualms about potential loss of revenues, being a jerk, etc. hold one back from being a dictator.

Michael Wiebe writes:
I think a pretty standard view is that CEOs bring in consultants to help overcome resistance in the internal bureaucracy.

Is this the consensus view in the literature? Is there even a literature on this?

Mr. Econotarian writes:

Prices focus the mind. The choice to hire a high-priced consultancy may encourage management to believe that the facts they obtain have more value because there is a clear price on it.

Dysfunction in business often rises the farther you get away from the actual exchange of money - again, without prices, the information dissipates. Unfortunately, often the people tasked with innovation are very far away from real commerce interactions.

Bob Knaus writes:

As one of those "consultants" I have told clients many times "The answer already exists within your organization. It is out job to bubble it to the surface."

For my particular practice area (strategic IT planning, public sector) the process of engaging a consultant is often one of the major benefits. We bring a rigorous approach, ask difficult questions, and generally expose weaknesses in management and reporting systems merely by our presence. We estimate 40% - 50% of our recommendations are accepted. That's high for this industry.

Jim Glass writes:

I think a pretty standard view is that CEOs bring in consultants to help overcome resistance in the internal bureaucracy.

And also, boards and intra-firm alliances bring in consultants for leverage in dealing with CEOs who have jumped the tracks.

One of my fantasies is to have Cabinet Secretaries hire McKinsey to go through their agencies and whip them into shape. The problem is ... unlike a CEO, a Cabinet Secretary has nothing to gain by making his organization more effective.

Another classic problem case for consultants: The owner of a business brings in a consultant to find out what the problem harming the business is. The consultant finds an obvious answer -- it's the owner.

How does the consultant deliver this information to the owner and attach a bill with hope that it might be paid?

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