Battle # 4 : Investment Bankers and Consultants add Little Value to the Real Economy- IIM Bangalore FOR Counterpunch by IIM Calcutta

This is an article written as a rebuttal to IIM Bangalore`s article  for the Great Indian B-School debate 24 hours earlier

The classical economic theory teaches that firms produce at the outermost boundary of the production possibility frontier. If firms are producing at optimal levels, any increases in production must be brought about by increased capital investment in assets or through improvements in technology. If this theory is correct, there is little reason for companies to spend their money on consultants because they would be better off investing in more assets or greater research and development. But instead companies spend a fortune on Consultants? Why?

According to Plunkett Research, The Global Consulting Industry revenues for 2014 is a staggering 431 Billion USD. Nasscom predicts that India`s Consulting revenue for 2015 is about 99 Billion USD. Though, it does not really compare to GDP of the nation, there are lot of intangible ways in which Consulting Industry contributes to Nation`s GDP. Consultants are hired, not to only to provide expert solutions to create profit or increase sales. A consultant`s job is also to advise company on reducing expense, increasing operational efficiencies, turnaround strategies or devising restructuring plan. The savings resulted from these is never accounted in the GDP nor is not accounted for the economic growth of the country. Additionally, the job created by Consulting Industry is not really accounted for.

Consultants provide Independent assessment as they are external advisors with no bias to marketing or operations or product development team. As long as no problem comes up, the above proposed team of two consultants and six non consultants do a fine job. But the moment a problem or a crisis arises, blame games starts within the team. Our Professor, Shoji Shiba, a world renowned expert on TQM calls this “Passing the Buck”. The blame game never ends and marketing points finger at Finance whereas Operations would cite that lack of effort from sales team was the problem. As long as there is no sign of crisis, everything seems well. That is why, in most of the cases, external consultants are bought in to revive the company.

Let’s take the case of Tata Nano. The product was deemed to be a successful product with in-house consultants providing the best possible domain knowledge available within the company. But, eventually, as the product did not meet its expectation, everyone in the organisation start passing the buck. A CEO of a major corporation knows his company inside out. But consultants bring in the best practices followed by other companies including competition companies. Along with it, consultants are armed with propriety frameworks and Methodologies that has stood the test of time. These are time tested solutions which has worked in most of the cases.

The management consulting industry has grown in USA after Second World War. Traditionally, many economists and psychologists took up management consulting assignments. In the early stages of this profession, the consultants were known as Industrial Engineers. Those industrial engineers mainly consulted to manufacturing industries with time and motion study assignments.  It’s a no shocker that MBA graduates are choosing this management consulting profession in most B-schools. India and China are investing heavily in their own upper-level education systems, and they are now graduating large numbers of MBAs, scientists, researchers and engineers from their own universities. Many Asian nations have already achieved excellent success in this regard, including China, South Korea, Singapore, Taiwan and Japan. This means that a growing global cadre of young people with graduate degrees and high ambitions are seeking entry-level work in consulting of all types.

Emerging countries like India, Brazil, China and Russia (BRIC) are the consulting hot spots. The whole concept of off-shore consulting, in particular, IT consulting provided by firms like Wipro, Infosys, TCS provide have a strong foothold across the world. The engineers who constitute majority of the employees merely tend to provide technical solutions that works pretty well in the those cases. This is just the case of IT Consulting. How do these Indian companies fare when it comes to Management Consulting. They themselves hire external consultants.

It is very difficult to isolate a cause and effect relationship between companies hiring consultants and increases in the value of those companies. The reasons are many. For example, by hiring a consultant, if there is an increase in Morale of the employees, this leads to higher productivity. Do we attribute this increase in productivity as an increase in value for the company?

The future of Consulting Industry is very bright and the big boys (Mck, BCG, Bain) will continue to expand and venture into new industries, new geographical locations. At the same time, client is also demanding more specialization. It is more of a requirement than a bonus. There is also a burst of freelance consulting, niche consulting and academicians who provide consulting and research. These will continue to grow. Thus, Consulting and IB have a symbiotic relation with the Economic growth of a country

References: http://www.plunkettresearch.com/consulting-market-research/industry-statistics

 

Arun Prasad

I am currently pursuing my PGDM in Manufacturing (PGPEX-VLM) From Indian Institute of Management, Calcutta. I have about 6 years of experience in Design, Manufacturing and Analysis in Aerospace and Industrial sectors. I am one of the Placement Representatives of the Program and the External relations representative. I have written various articles on MBA admission on various MBA Admission forums. I also occasionally blog at my site www.aroundyanmics.com

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