Why Do Major Corporations Hire a Management Consultancy?

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I mean, seriously, corporate leaders are very well paid—shouldn’t they be able to do their jobs without having to hire outsiders? Average compensation of an S&P 500 CEO is about $19 million a year. Median compensation is around $17 million a year. Median age is about 55, so 30ish years of work experience. You’d think at that level of compensation and industry experience, they’d know how to do their jobs.

CEO direct reports are being paid $3-5 million a year. And their direct reports are being paid $1-2 million a year. CEOs and their teams generally hold MBAs and graduate degrees from the finest schools in the world. Why does a CEO (or other senior officer) need to hire a management consultancy – where the median worker experience of the management consultants assigned to the account – will be about 5 years?

And, how many of the current reasons for hiring management consultants will remain robust against the challenges of AI?

What You’re Actually Buying

Well, first keep in mind that you’re hiring the management consulting firm, not the consultants. The full-time consulting team might be low on work experience, particularly relevant work experience, but partners at the consulting firm have far more experience—sometimes they will literally have seen hundreds of client situations. Management consultants can also draw on the institutional capabilities of their firm. Additionally, the consultants and their team have a structured approach to problem-solving which is a big benefit.

Best Practices and Knowledge Transfer

Consultants bring knowledge transfer. Presumably, they know best practices and can help your organization align to them, boosting productivity and profitability. On the other hand, if your firm is considered best practice, do you want these consultants learning what you’re doing? Maybe hiring them isn’t such a good idea? I’ll come back to this issue in a later discussion.

But by definition – the vast majority of firms are not best practice. After all, not everyone is above average in performance (except, of course, at Harvard College where the median grade for undergraduates is an A). However, in the corporate sector, the evidence shows that we have a big tail of low performers. So, getting someone in who could help improve corporate practices is likely to be value-adding – unless you’re truly the ultimate best practice firm in your field. Even successful firms hire consultants to pull ahead and fine-tune. If you’re absolutely positively sure your corporation is in the top 0.001% of firms in your industry, you probably don’t need a consultant—but if even you’re in the top 10% in performance, hiring somebody who can get you to the next level is a good thing.

Functional Expertise and Surge Capacity

Consultancies will often bring deep functional expertise that your firm might not want to fund to keep in-house (e.g., strategy, marketing, change management, and AI). They can also bring surge capacity. You may have a major project coming up, about rethinking your organizational efficiency or marketing plan. You can bring in 5, 10, 20, 50 people from a management consultancy – who can dedicate themselves 100% to the project and ramp up quickly. Beyond making recommendations, management consultants can provide implementation support with hands-on execution, or they can staff a project management office to make sure recommended tasks are getting completed.

Legitimization and External Validation

Additional benefits of hiring consultancies: they legitimize; they provide external validation. They may justify a decision that’s already been made or challenge that decision. Outside consultants are (or at least appear) impartial and rigorous—although if the CEO has told you he wants to do x, being the consulting firm that tells him x is a bad idea may not be the best thing for business. On the other hand, if a decision has been tentatively made, outside consultants can help conceptualize doubts; they can help firms articulate uncertainties and challenges to their ambition. If it’s a bad decision, the consultancy will find it easier to say so; if it’s a good decision, outside feedback can help improve it.

Political and Psychological Dimensions

Since we’re dealing with human beings, there are also political and psychological dimensions. An outsider may be able to reduce resistance to tough decisions and identify inefficiencies overlooked by the internal team. If you’re working with colleagues and you want to downsize a colleague’s division, that might be awkward. Having somebody come in from outside to deliver the bad news can be helpful—and from a career point of view, if you need to deliver very bad news, it can be useful to have someone to share the blame with and to show the decision was objective.

Leadership, particularly senior leadership, can be lonely, and having someone to talk to in confidence can be helpful. A CEO I know has a very close relationship with a senior partner at one of the major consultancies—honestly, the partner acts partly as his therapist, providing reassurance, morale, and emotional support. You can be flippant about that, but it matters.

Career Enhancement and Networking

Other, less legitimate reasons: career enhancement and networking. Hiring a major management consultancy broadens your network and is prestigious. If you’re a client to a consultancy, they may invite you to important events. If for some reason you separate from your employer, management consulting partners can be a helpful reference or resource when looking for your next job.

The Matching Problem

Clients want to hire the best consultancy firm they can (and we’ll be more precise about what “best” means in a later discussion). On the other hand, all other things being equal consultants would prefer to work for financially stable clients. Arguably, the clients who need the best consultancies are the ones struggling with economic inefficiency—and they might be the corporations least attractive to a consultancy or least able to afford outside consultants.

In practice, this is less of an issue for the consultancies themselves (though some are trying to address it, by getting paid on a contingent basis), and more of a broader policy issue. The economy has a long left tail of companies that are underperforming, many of whom either can’t or won’t pay for consulting services. So, if you’re doing economic development, helping laggard firms improve is almost always a good thing.

In reviewing these reasons for hiring management consultancies, at least for the immediate future, I think most will remain robust over the next few years. Corporations will need and want outside consulting talent – indeed the change management, operations management and strategic issues generated by AI may very well drive increased demand for consulting services. But as we’ll discuss, the type of consultancies clients need to hire will change in a world of ubiquitous AI, and the staffing needs of those consulting firms will also evolve due to AI.

Summary

Management consulting delivers expertise, capacity, and legitimacy. Client motivations range from strategic needs to political and psychological concerns. Engagements are shaped both by what clients demand, and by the consultancies’ choices and standards about who they’ll work for and who can afford to pay them.

By the way, there’s a u-shaped pattern to hiring consultants: They tend to be hired by the bottom third of firms who clearly know they have a problem, and the top third of firms who want to improve. There appears to be a middle tier that maybe doesn’t quite get it.

In the next section we will discuss the academic evidence that – on average – management consultants are value adding, but note the words “on average”.

About Steven Strauss: From 2014 to 2025, Strauss was the John L. Weinberg/Goldman Sachs Visiting Professor at Princeton University. Immediately prior to Princeton, he was on the faculty of the Harvard Kennedy School and was a 2012 Harvard University Advanced Leadership Fellow. Before Harvard, he served in the Bloomberg administration in New York City and as a management consultant with McKinsey’s London office. He holds a Ph.D. in Management from Yale University.

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