Good to Know: Why Companies Really Hire Consultants
The other day, I was having a conversation with a friend of mine named Morgan. Morgan owns a firm that specializes in provision of IT services to corporates. Due to an increasingly competitive marketplace, Morgan had been forced to bring down his rates in order to retain clients, but this ate into his profits.
The firm was barely surviving.
At his wits end, Morgan decided to bring in consultants to help him figure out how to return the firm to profitability. After examining the firm’s operations and marketing strategy, the consultants recommended operational changes that helped reduce costs.
They also recommended a new marketing strategy that helped the firm attract clients while charging a higher fee than most competitors. In the long run, Morgan’s firm was able to return to profitability. The conversation with Morgan got me thinking about the importance of consultants to companies.
Consulting has become ubiquitous in almost every industry. SMEs in the UK spend about £60 billion per year on average, while companies in the United States spent $58.7 billion on consulting in 2016. The figure in the United States represented a 7.1% increase from the previous years, which points to a likelihood that expenditure on consulting will continue increasing.
Despite this, the use of consultants remains controversial. Hiring consultants is essentially paying third parties to come into your organization, try to understand your operations and then come up with strategies on how you can further improve on what you are already doing.
This brings about an important question: why leave such an important element of your organization to third parties? Why would these outsiders be better at strategizing for your organization than your in-house employees who already know the business inside out?
Sometimes, hiring consultants has been compared to giving someone your watch so that they can tell you the time and then paying them top dollar for telling you the time.
Because of this, many businesses and organizations struggle with the decision of whether to hire a consultant or not. Should your business spend money on consultants? Do they add any value to your business? To make it easier for you to make this decision, let us take a look at some of the top reasons why companies really hire consultants.
TO BRING IN EXPERTISE
Running a business is a very dynamic experience. Very often, businesses will come across situations they have never had to deal with before, such as launching a new product, entering new markets, merging with another company, and so on.
These situations are very critical, and might put the whole business at risk if poorly managed. At the same time, these situations require specialized skill sets that the company might not have access to in house. It is next to impossible for a company to have on staff all the expertise needed to successfully navigate unfamiliar situations.
To navigate such situations, a company might turn to consultants to bring in the expertise and specialized skill set required to properly handle these situations. Consultants often specialize in specific niches.
They will have handled similar situations a couple dozen times. They know what to do, the potential pitfalls to avoid in order to minimize risk, and they have a track record that speaks for itself.
By bringing in consultants, companies have a way to fill in any talent gaps on demand whenever they need it. Once the challenging situation has been successfully navigated, the company can then let go of the consultants without having to worry about any continued costs.
TO GAIN EXTERNAL PERSPECTIVE
Remember writing essays back in school? After writing the essay, you typically went through it a couple of times in a bid to find and correct any mistakes before submission. Here’s the funny thing. Even after proof-reading your essay several times, asking a friend to go through your essay one time would reveal some glaring mistakes that you had missed all through. In this case, it takes a fresh pair of eyes to find obvious mistakes you might have missed. The same happens in business.
Since you are too close to your company, you might become blind to obvious mistakes that an outsider can easily spot. This is especially true for small to mid-size companies where the management and owners are too attached to the company since they have invested a lot of their time, resources and energy into the company.
The only difference is that while an error in your essay may lead to a low score, mistakes in your business can have very significant consequences.
To avoid missing the obvious because of their attachment, senior management might decide to bring in a fresh pair of eyes to provide an external perspective of the business.
Since consultants have no emotional connection to the company, it is easier for them to spot and call out the issues that might be holding the company back, especially if these issues arise from an error of judgment on the part of the company’s management.
In addition, it is easier for outsiders to question how things are done. In many situations, in house staff may be reluctant to point out problems because they are afraid that it will be equated to causing trouble and lead to their dismissal.
This creates an environment where staff may be aware of problems but opt not to address them, leaving the problem to escalate. Since consultants are not worried about being labelled as trouble-makers, they are more likely to question assumptions and call out strategies that don’t seem to be working.
TO BENEFIT FROM EXTENSIVE KNOWLEDGE OF THE INDUSTRY
Consultants often have extensive experience and knowledge about their respective industries. They have worked with several companies within this industry, studied and implemented different strategies and are aware of everything there is to know about the industry. They might even have worked with your competitors and are aware of the strategies they are using.
They have seen what works and what does not. By bringing consultants in, you get the chance to tap in into their extensive knowledge and experience and get recommendations that can help your company to easily outsmart your competitors.
TO SUPPLEMENT STAFF
In some cases, a company might be aware of the problems it is facing and what it needs to do to resolve the problem. Unfortunately, the company’s staff might be tied up in other important tasks that cannot be placed on the back-burner.
Most likely, the available staff will be needed to focus on their day-to-day operations and other tasks that maintain the cash flow of the company. They cannot simply be transferred to the new task. In this case, it makes sense for businesses to hire consultants to supplement their staff.
Why not hire additional staff instead? The problem is that hiring full-time staff is an expensive affair. With full-time employees, you have to factor in the costs of salaries and other benefits, onboarding and training, advertising for the open positions and other recruiting expenses, employment taxes, space needs, equipment, and other costs associated with management of employees. While a consultants fees are typically hire than an employee’s salary, hiring a full-time employee is more expensive in the long run. In addition, most projects that require a company to hire consultants are one-off projects lasting just a few weeks or months. If you hire full-time employees, you might not have enough work to keep them busy once the project is done, yet you have to continue paying their salaries and benefits.
Hiring consultants also allows you to get value for your money. In the case of full-time employees, their remuneration is not directly linked to their performance. Once you hire a full-time employee, you have to pay their monthly salary regardless of how they perform on the job.
With consultants, you have the option of discussing deliverables and performance metrics, such that you only pay once these deliverables and metrics are met. Hiring consultants is a way of ensuring that you get your money’s worth. In addition, hiring consultants is more efficient on your time.
According to a report shared on Glassdoor, it takes an average of 23.7 days to make a hiring decision.
This does not even factor in the tie taken to onboard and train the new employees. Consultants, on the other hand, are used to switching around companies and are therefore used to faster learning curves. Because of all this, companies might opt to hire consultants to supplement their staff temporarily instead of hiring full-time employees.
TO BRING ABOUT CHANGE
Hiring consultants can also be a great way of bringing about change within a company. People don’t like change, both in their personal and professional lives.
Bringing about change in an entire organization is particularly difficult. Before implementing change, the organization’s management have to consider things such as employee morale, corporate culture of the organization and so on. This can make it quite challenging to implement the change. In such situations, it might be wise to hire consultants to implement the change.
Consultants are good at implementing change for a number of reasons. Since they are outsiders, they don’t know about and are not afraid of impacting the corporate culture. In addition, consultants do not suffer from status quo bias, which is the tendency of people to want things to remain the same, thus making it difficult for them to see things beyond their current paradigm.
People within the companies are subject to this bias because they have gotten used to established ways of doing things. In this case, it might be difficult for them to realize that their current practices might be to blame for their current problems. Since these practices worked for the company before, they keep implementing the same practices even if the changing times demand new practices.
There is a story about a company that used to deliver goods three days a week, on Monday, Wednesday and Friday. On the remaining days, the company’s lorries sat idly in the garage, despite the fact that there were delivery runs to be made. A newly employed manager thought that this was very inefficient, and he set out to find out the reason behind this delivery schedule. His first inquiry was met with a very common and popular answer: we’ve always done it that way.
Not satisfied, he inquired further.
In the end, he discovered that having been started a century ago, there were no automobiles, therefore the company used to make deliveries using horse carriages. Since the horses had to rest, it was decided that deliveries would be made three times a week so that the horses could rest in between deliveries. The same schedule was adopted even after the company switched to lorries. Can you imagine that?
Just like the new manager, consultants do not have the status quo bias. They are not predisposed to using the same outdated practices because that is the way things have always been done. They don’t have qualms about questioning the thinking behind established practices. This makes them great catalysts for change.
In addition, companies might be afraid of change because suggested changes are untested, therefore there is some concern that they might not be successful. Consultants, on the other hand, might have tested these ideas on another company and confirmed their effectiveness, therefore making it easier for them to implement the changes with full confidence that the changes will actually be effective.
TO PROVIDE OBJECTIVITY
Very often, business decisions are usually influenced by emotions and office politics. This is not a huge problem for normal, day to day decisions. However, businesses cannot afford to have serious decisions that affect the future of the company influenced by petty things like office politics.
For instance, an employee might keep their concerns to themselves even when they think the wrong decision is being made because they are afraid that their boss will take credit for their ideas, or simply because they don’t like their boss.
This leads to decisions being made irrationally and without critical input. In this case, hiring consultants is a great way of providing much needed objectivity when making decisions. Consultants do not care about office politics, allowing them to make rational, independent and critical decisions.
Additionally, the objectivity provided by consultants can help save companies from something known as the sunk cost fallacy. Sometimes, companies might opt to continue investing in non-profitable projects even though it is almost certain that the best decision is to stop the project in order to prevent further losses.
The typical justification for this is that since significant resources have already been invested in the project, the company should try and recoup the investment before ending the project. In many cases, this only leads to more losses. In such cases, consultants can objectively evaluate the project and help the company make decision to cut further losses by ending such a project.
TO DO THE DIRTY WORK
This is closely related to the previous reason. Running a businesses is not easy, and sometimes, business executives are forced to make some necessary yet unpopular decisions. For instance, in a bid to cut costs, a manager might need to lay off some staff, to eliminate a product line or do away with an entire department.
Making such decisions can be challenging. Would you be comfortable knowing that because of a decision you made, 20 people you know personally are not going to have a source of income? At the same time, such decisions have to be made for the sake of the company. In such scenarios, a company can bring in consultants as ‘mercenaries’ to do the dirty work. The CEO or management can distance itself from the unpopular decision by using the consultants as the scape goat.
TO PROVIDE VALIDATION
Sometimes, companies have an idea of what they want to do or the direction they want to take, but they are not very sure whether it is the best course of action. In such cases, the company might need someone to look at their intended course of action and give it a stamp of approval. Consultants might come in to provide this validation. To make this easier to understand, let us use an illustration.
Assume that you want to start exercising so that you can take part in next year’s marathon. While you know what you want to do, you might still see a doctor to confirm that your body can handle the vigorous exercise associated with training for a marathon. This is what a consultant does. Like the doctor, they confirm whether what you want to do is actually good for the company.
The validation from consultants can also come in handy if you want to raise resources from third parties.
For instance, if you are preparing a business plan with the aim of using it to secure funding, the bank might ask you to hire consultants to proof-test your business plan before giving you the funds. In this case, the consultant provides validation that your plan is actually workable, thus allowing you to secure the funding.
TO TEACH OR TRAIN EMPLOYEES
Employees are a company’s greatest asset, so it is important for companies to invest in developing their employees’ skills. In today’s competitive world, continually training employees allows them to perform their roles effectively and give the company an edge over its competitors.
Training is especially important when the company adopts new technology, since employees have to learn how to use new software, operate new equipment or implement a new workflow. For instance, if the company switched from Oracle to SAP, employees need to learn how to use the new ERP.
At the same time, sending employees out for external training might not be very effective, especially if a large number of employees have to be trained over a short period of time. In such situations, the best bet for a company is to hire a consultant to train employees.
Since consultants are always on top of new developments in their industry, they are best placed to teach companies’ staff what they need for the company to stay competitive. Before commencing a training program, consultants first take some time to understand the company and the come up with customized training programs that are specific to the company and aligned with the company’s culture and training needs.
Since consultants perform the training on-site, there is less interference on the day to day activities of the workforce. Using consultants to conduct internal training is also a lot more effective, since employees are trained using real-life problems, challenges and examples that they come across every day at work. It teaches employees the exact skills they need in order to effectively and successfully perform their roles.
Hiring consultants to offer internal training is also more cost effective than sending out employees for external training, especially if a large number of employees need to be trained.
TO SAVE TIME
Picture the following scenario: a company is thinking about introducing a new product or service to the market, but it first needs to conduct some research to determine whether there is a ready market for the new product or service.
Unfortunately, the company cannot afford to have its managers spending their time on an idea that might even not work. Because of this, the idea for a new product or service is placed on the backburner and is eventually forgotten.
This doesn’t have to happen. Instead of spending valuable time on a moonshot project or placing it on the backburner, a company might opt to bring in consultants to help with the market research.
The consultants can devote their time in conducting the research and then present data on the viability of the product, thus making it possible for the management to make the decision whether to move ahead with the idea or not, while saving the company the time it would have spent conducting its own research.
This is not restricted to product launches only. By taking over some not-so-crucial tasks, consultants help companies save time while at the same time allowing managers to concentrate on their main duties.
Many companies struggle with the decision on whether to hire consultants or not. As you have seen, consultants add a lot of value and can support companies in a lot of ways.
If your company finds itself in a situation where it needs to bring in temporary expertise, gain an external perspective, benefit from extensive industry knowledge, supplement staff, implement change, make some unpopular decisions, or gain validation for its strategies, hiring consultants might be a great option.
Consultants can also provide objectivity, train employees and help the company to save time.
In Palo Alto, we meet co-founder and CEO of Totango, Guy Nirpaz. He shares his story how he …