The Big Con

1. The Big Con: How consultancies exploit organizational weaknesses

The Big Con is of course not responsible for all the ills of modern capitalism, but it thrives on its dysfunctionalities—from speculative finance to the short-termist business sector and the risk-averse public sector.

Consultancies as opportunists. The consulting industry has positioned itself as a solution to organizational challenges, but often exploits and exacerbates existing weaknesses. By promoting themselves as experts, consultancies have gained unprecedented access to decision-making processes in both government and business.

Rents without risks. Consultancies extract significant economic rents - income far exceeding their actual value contribution - while bearing minimal risks. This skewed risk-reward relationship is at the heart of the consulting industry's business model. When projects fail, it is usually the client organizations and ultimately the public that bear the costs.

Systemic impact. The influence of consultancies goes beyond individual contracts, shaping broader trends in governance and business practices:

• Promoting short-term thinking and quick fixes over long-term capability building
• Encouraging outsourcing of core functions, leading to loss of institutional knowledge
• Legitimizing controversial decisions through the veneer of external expertise

2. The rise of consulting: From scientific management to global influence

Throughout the twentieth century, consultancies would go on to develop and commercialize many ideas and tools, often in collaboration with business schools.

Historical roots. The modern consulting industry traces its origins to the early 20th century, with the emergence of scientific management principles and cost accounting methods. Firms like McKinsey & Company grew by promoting these new approaches to business organization.

Expanding influence. Consultancies rode successive waves of change in the global economy:

• Post-WWII reconstruction and expansion of multinational corporations
• Privatization and deregulation trends of the 1980s and 1990s
• Digital transformation and e-government initiatives
• Structural adjustment programs in developing countries

Global reach. By the end of the 20th century, major consulting firms had established a presence in nearly every country, shaping business practices and government policies worldwide. This expansion was facilitated by:

• Growing demand for standardized management practices
• The spread of Anglo-American business models
• Consultancies' ability to position themselves as neutral experts in new markets

3. Outsourcing governance: The perils of relying on external advisors

Prime contracting is paradoxical because where the costs of failure would be great, risk is transferred to the contracting public sector body in order to incentivize third parties to bid on the tender in the first place.

Shift in governance models. The "Third Way" policies of the 1990s and 2000s promoted a vision of government that "steers more, rows less," leading to increased outsourcing of public services and decision-making processes.

Unintended consequences. This approach has often resulted in:

• Loss of internal expertise and institutional memory
• Reduced accountability and transparency
• Higher costs in the long run, as consultancies extract rents and public bodies lose negotiating power

Case studies of failure. High-profile cases like the HealthCare.gov launch in the US demonstrate the risks of over-reliance on external consultants for critical government functions. Despite spending billions on consultants, many projects have failed to deliver promised improvements in efficiency or service quality.

4. Conflicts of interest: Serving both sides of the street

McKinsey is alone in operating an investment fund on behalf of its current Partners and alumni; none of the other Big Four or Big Three have one. In any case, though they are more shocking and headline grabbing, such potential direct conflicts of interest—where a consultancy stands to profit directly through investments from the choices its clients make—are only the tip of the partiality iceberg.

Dual roles. Many consultancies advise both governments and the industries they regulate, creating potential conflicts of interest. This "both sides of the street" approach allows firms to profit regardless of outcomes.

Hidden influences. Consultancies often shape policies and regulations in ways that benefit their other clients or their own business interests. Examples include:

• Advising on privatization while also working for potential buyers
• Developing tax policies while advising clients on tax avoidance strategies
• Promoting climate action plans while working for fossil fuel companies

Lack of transparency. Unlike many other professional services, consulting contracts are often shrouded in secrecy, making it difficult to identify and address potential conflicts of interest.

5. Hollowing out capabilities: The dangers of over-reliance on consultants

To respond to changes in political, social and—increasingly—environmental demands, both government and business sector organizations must be able to adapt in order to govern complicated systems and provide goods and services that people want and need.

Loss of institutional knowledge. Excessive outsourcing leads to a erosion of internal capabilities, as organizations become dependent on external advisors for core functions.

Stunted learning and innovation. The constant influx of consultants and turnover of projects can prevent organizations from developing:

• Deep, context-specific expertise
• Long-term institutional memory
• The ability to learn from failures and successes

Reduced adaptability. Organizations that rely heavily on consultants may struggle to:

• Respond quickly to changing circumstances
• Develop innovative solutions tailored to their specific needs
• Retain talented staff who seek meaningful, challenging work

6. Climate consulting: A new frontier for profit extraction

Climate consulting is a burgeoning source of economic rents. Although it is a relatively new growth area for consultancies, and so research on its impacts and variety is thin, there are many indications that in the era of climate crisis, the consulting industry is playing the same roles it has throughout the history of industrial capitalism.

Opportunistic expansion. As climate change becomes a pressing global issue, consultancies are positioning themselves as essential advisors on sustainability and climate adaptation strategies.

Potential for greenwashing. There is a risk that climate consulting may serve more to create an illusion of action than to drive meaningful change:

• Developing metrics and frameworks that lack real impact
• Advising on sustainability while also working for high-polluting industries
• Promoting market-based solutions that may not address the scale of the problem

Shaping the response. Consultancies' involvement in climate policy and corporate sustainability efforts could have far-reaching consequences for how societies address the climate crisis.

7. Reclaiming organizational capacity: Building internal expertise

Meeting today's great challenges of course requires that governments also work in partnership with businesses, but doing so effectively requires that public sector organizations are able to understand their landscape, decide who best to collaborate with, and manage the necessary contracts.

Investing in people. Organizations need to prioritize developing and retaining internal talent, creating meaningful career paths that allow for continuous learning and growth.

Redefining partnerships. Rather than outsourcing core functions, organizations should seek partnerships that genuinely enhance their capabilities:

• Collaborating with research institutions and universities
• Engaging with local communities and stakeholders
• Fostering knowledge-sharing across sectors

Transparency and accountability. To reduce the risks associated with consulting contracts:

• Mandate disclosure of potential conflicts of interest
• Develop clear metrics for evaluating the impact and value of consulting engagements
• Ensure that knowledge transfer is a key component of any consulting project

By reclaiming their capacity to innovate and adapt, organizations can reduce their dependence on external consultants and better serve their stakeholders and the public interest.

Last updated: October 3, 2024