Why consultants?

Robin Hanson, via MR, has this explanation for paying exorbitant amounts to hire reputed management consultation firms with inexperienced but smart consultants,

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. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant...

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.

I will add four more reasons

1. Most often, the leadership (or atleast critical parts of the leadership) knows what is wrong. However, any major transformation cannot be done based on hunches or anecdotal evidence. The consultant provides the convenient cover for the executives to push through the transformational changes. The consultant's report provides the gravitas and credible justification for the reforms proposed.

2. A reputed external consultant, specifically hired to develop and/or manage a transformation program, has significant symbolic value. This can provide the required change momentum and discipline to push through the proposed reforms. The transformation blue-print prepared by a reputed external consultant after a "stakeholder consultation" (and this jargon is important) process, provides a platform to galvanize the entire organization into embracing change.

3. The organization generally contains the knowledge for its failings, its prospects, and an idea of its road map. However, the transformation blue-print is never available in one place and in an implementable format. The consultant talks to all stakeholders and puts together everything in an implementable shape.

If the organization does not have an idea of its broad failings and its future direction, then it is an indictment of the management itself. Such organizations require a change in their management, instead of consultant quick-fixes. If the management is not revamped, such organization cannot turn-around or achieve its objectives even with the consultants' advise.

4. Apart from the broad transformation components, the consultant's transformation blue-print contains certain details (like the sequence of changes, its pace, etc) which are not always evident and does require some basic information collection and problem solving. Ultimately, this may be the biggest substantive value addition by the consultant.