Another reason why clients use consultants

For some time now I’ve talked about the Four Ps of consulting, the four fundamental reasons why an organisation will use consultants: people (the access to specialist skills not available internally); process (methodology and momentum); perspective (the ability to see the wood for the trees); and politics (validating a decision already taken if not actually articulated).

To these, I think we should add a fifth: getting things done.

As The Economist recently reminded us, its more than 70 years since Ronald Coase published “The Nature of the Firm”. “His central insight,” says The Economist, “was that firms exist because going to the market all the time can impose heavy transaction costs... A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome.” Coase did, however, suggest there is a limit to the size of organisations: as they grow and become more complex, their own internal transaction costs grow. At the point where internal transaction costs exceed external ones (which could be either because the former have risen, or because the latter have fallen), an organisation will switch from internal to external transactions.

We know, of course, that the vast majority of consulting is bought by very big organisations. Extrapolating from Coase’s theory, we can infer that the more internally complex they are and the higher their costs, the more likely they are to use consultants. An organisation where activity is mired by internal process will bring in consultants get things done. Consultants don’t have to turn up to all those dull internal meetings; they won’t be distracted by their day job or have to invest hours in keeping people in the loop or making sure that they’re not treading on toes. On the basis of productive time – and taking into account that consulting fee rates are lower today than they were ten years ago while managers are typically paid more – it can be cheaper to use consultants.

Consulting firms are searching for the Next Big Thing, the new idea that will stimulate demand for consulting in mature markets where economic recovery remains sluggish. But they might do better to look a little closer to home: by demonstrating they can get things done faster and cheaper than clients.