102. I Consult, Therefore I Am

Episode Summary

Executive Summary: This episode examines management consulting’s origins, economics, and value. It contrasts elite strategy consulting with operational consulting, using interviews with former consultants, a critic, and a business historian. The conclusion: operational consulting can measurably raise productivity, while elite strategy consulting is harder to evaluate but likely provides both advice and legitimacy.

Main Topics: Levitt’s accidental entry into consulting (Priority: 4/5): Steve Levitt describes landing at Corporate Decisions, Inc., a Bain spinoff, despite having little work experience and a failed teenage horse-racing fund, which surprisingly impressed employers with his initiative. What consultants actually do (Priority: 5/5): Former BCG consultant Keith Yost and Booz & Company partner Tracy Entel explain consulting as a mix of listening, presenting, building trust, diagnosing hidden problems, and helping clients own solutions. The origins and legitimacy of consulting (Priority: 5/5): Business historian Christopher McKenna traces management consulting to post-Depression financial regulation and argues the field grew alongside accounting and banking changes, while also serving as a legitimacy provider to firms. Whether consulting is a real profession (Priority: 4/5): McKenna argues consulting lacks many markers of a profession—standard certification, centralized body of knowledge, or malpractice accountability—making it a looser and more ambiguous occupation. Evidence from randomized trials (Priority: 5/5): Economist Nick Bloom discusses a randomized experiment in Indian textile factories showing that intensive operational consulting improved productivity and profits substantially. Operations vs. strategy consulting (Priority: 5/5): The episode distinguishes high-impact operational advice, which often improves basic management practices, from elite strategy consulting, which is more expensive, less measurable, and sometimes mainly confirms decisions already made. Why firms hire consultants (Priority: 4/5): Firms use consultants for expertise, implementation support, external credibility, and internal political cover, especially when leaders want validation or a neutral messenger for change.

Key Arguments: Consultants often add value by diagnosing hidden problems and facilitating implementation, not merely by offering abstract advice. Operational consulting has stronger evidence of effectiveness than elite strategy consulting. Management consulting emerged historically from regulatory change and the separation of financial functions after the 1929 crash. Consulting can serve as legitimacy: firms hire consultants to validate decisions they already lean toward making. The industry’s credibility is helped by repeat business, even though rigorous evidence is limited. Competitive pressure makes best practices more likely to matter and spread in manufacturing than in protected sectors like healthcare. Levitt argues smart generalists can add value by learning quickly and talking to people at all levels of an organization.

Data Points: U.S. management consultants: more than 500,000 - Estimated number of management consultants in the U.S. U.S. management consultants including self-employed: more than 700,000 - Broader count including self-employed consultants. Projected consulting industry growth: 22% over the next decade - Bureau of Labor Statistics estimate. Median consultant salary: about $78,000 - Compensation benchmark cited in the episode. MIT consultant salary: about $130,000 base - Keith Yost’s starting salary at BCG. Signing bonus: $20,000 - Part of Yost’s compensation package. Housing allowance: roughly $20,000 - Additional benefit for Yost in Dubai. Annual profit-sharing: 15% automatic bonus - Yost’s year-end profit share at BCG. Yost tenure at BCG: about 5 months - He was fired after a short stint. Number of plants in Bloom experiment: 28 plants - Randomized consulting trial in Indian textile factories. Productivity increase: about 20% - Result of intensive consulting in Bloom’s study. Extra annual profit per firm: around $300,000 - Estimated benefit from the consulting intervention. Consulting cost to firms: $300,000–$400,000 per year - Estimated annual value of the services provided. Study funding: a couple of million dollars - Approximate research cost funded by organizations such as the World Bank. Death rate reduction at Virginia Mason: about 25% - Example of healthcare lean-management success. Waiting list reduction at Virginia Mason: 50% - Another healthcare improvement example.

Pivotal Quotes: "We’re not paying you all this money for me to tell you what to do. You’re just supposed to figure it out." — Steve Levitt (quoting his manager): Explains the expectation that consultants think independently rather than simply follow instructions. "The answer we found quite simply is yes, massively." — Nick Bloom: Summarizes the result of the randomized trial showing intensive consulting improved factory performance. "The second thing that they provide is legitimacy." — Christopher McKenna: Describes consulting’s role beyond advice, namely validating choices and helping firms proceed.

Implications: Consulting can be genuinely valuable when it improves operations and execution, but elite strategy consulting remains harder to verify. For listeners, the key lesson is to judge consultants by measurable outcomes, not prestige alone.