The Management Consulting Business

Christopher Ingraham, writing in The Washington Post, links to an old working paper of mine in his article, How consulting companies like McKinsey optimized American inequality. The paper began as my co-author, Ajay Prakash's senior thesis, which I advised and then helped revise. This topic is in the news of late due to Pete Buttigieg's experience working at McKinsey and the perceived need by the chattering class to demonize just about everything on everyone's resume. I currently have no intention of casting a vote for Mayor Pete in 2020, but I don't hold his McKinsey experience against him.

The subtitle of the article is, "Two things tend to happen when businesses hire a management consultant: Stock performance rises and payroll falls." To be clear, the announcement effect is negative but the long-term effect is positive risk-adjusted returns on a scale that more than offsets the bad news at the announcement. That shows that whatever happens after the consultants are brought on board, it tends to turn the company around. The article should suspend its focus on distributional issues between shareholders and workers long enough to acknowledge that this is consistent with the consultants adding value to the economy.


What I found frustrating about the article is that it doesn't seriously engage with the counterfactual. Our paper also found that "announcing companies earn negative risk adjusted returns prior to their announcements." This means that the company was underperforming, and that underperformance was going to have be addressed, whether through the consultant's advice and actions or some other way. Imagine the firm failed instead. The workers who lost their jobs would be in the same position, but every other worker is better off due to the consultants. To give some sense of the scale of the two groups, we found that the median employment growth (relative to the industry) was -5% for firms that announce they've hired a management consultant. Is it really unacceptable to lower employment by 5% if it means shoring up the other 95%?

I would say 'no.' What I would say as well is that I would like to know that the workers who are displaced are treated fairly, whether through unemployment insurance or some other mechanism. For example, publicly traded companies that lay off workers under such circumstances might be required to offer severance in the form of warrants (stock options issued by the company to those workers). If the company does well as a result of the layoffs, then those who were laid off share in that improvement.