Notes on the overreliance of organizations on consulting firms

Reading this article from Antonio Nieto-Rodriguez that explores this reality of corporate life, which is the overuse, and overreliance on external consultants, spurred me on to write this piece exploring the topic a little bit more on top of the reasons examined by the article. This is a topic I've often pondered about, and an interesting multi-dimensional one, too. Institutional theory brings interesting insight too on said multidimensional reasons and causes for this corporate reality. This piece is not a value judgement, just an exercise in exploring causes and reasons.

Certainly, big consulting firms are good in selling and marketing their services, putting forward their readily available expertise and, especially, solutions at hand, and wrapping them in an aura of prestige, especially in the case of the top tier firms, but that does not obviously explain the overreliance phenomenon, although probably some clients will enjoy the pandering and the association with certain firms.

Political reasons

• Risk Management and having a shield of liability. This is the "no one was ever fired for hiring IBM" adage; If projects fail, decision makers can always point to having followed "expert" advice.

• Having a prestigious consulting firm's name attached to decisions serves as a form of insurance.
• Diffusing responsibility in certain high-stake scenarios.
• Put a facade of third-party neutrality before diverse internal constituencies with different interests or overcoming their resistance to change.

Human factors

• Confirmation bias, having a prestigious name confirming decisions that have already been taken by the executive team, even if only tacitly.
• Added credibility and support when dealing with external partners or even at board / investor levels.
• Once you are deep in the loop, resorting to bringing in consultants can become somewhat of a instinctive reaction, reaching out to your partners for every scenario, problem or project for which you are not sure how to operate.
• The need for validation and legitimacy in uncertainty, and also "safety in numbers". This runs the risk that consulting will also tell you what you want to hear, for a nice fee.

Corporate reasons

• The fact seems to be that business often flies more blind that it would like to admit and operates in a climate of uncertainty with poor situational awareness. This makes business instinctively reach out for external advice and delegate strategic thinking. People would do well to read the "Wardley Maps" book to get great insights on improving their situational awareness and avoid the knee-jerk reaction.
• Organizations often operate by meme copying what their peers are doing, so the use of the same consulting firms by everyone tends to be contagious. This has consequences explored later on.
• The prevalent short-termism favors the ramp-up and ramp-down flexibility based on changing needs and save you a lot of HR and legal headaches, vs the difficulties and long processes and risk in hiring processes. The fickle whims of the stock market do not reward long-term investment in staff either, better to justify external spend than headcount increases.
• On top of that, shorter tenures and executive turnover discourages investment in long-term organizational development, as often happens with politicians in the 4-year cycle mindset.
• Skills gaps are a reality, but by resorting to consulting you do not remediate this if that means you omit training your people, who then will probably lose morale. More on this later.

Consequences

Consulting firms are well aware of these things and use them in their favor to cultivate that dependency making it easy and cement the relationships so that companies become dependent fast. It's rather easy to fall into that and the knowledge gap widens fast. Thinking that you can internalize later on easily is easier said than done, and knowledge transfers are notably inefficient, so you struggle to internalize consultant knowledge, and also because the headcount thing. This inertia implies that it is increasingly easier to continue existing relationships for new projects than build new capabilities. It's a bit of a slippery slope.

This is not to say that everything is negative and consultants offer no value. I've been a consultant myself for many years and most of us were always striving to contribute to clients value in things like

• new knowledge, approaches, best practices and different perspectives, since organizations tend to settle into fixed forms of doing things in the same manner, and as a consultant you can bring expertise from other sectors and new frameworks and cutting-edge methodologies.
• consultants can also bring in data from their exposure to a wider industry, different ideas, benchmarkings and data that are often to procure internally
• support organizations in their struggle and lack of expertise to trigger and manage transformational change.

At the same time, consulting firms are trying to optimize their own business and reduce costs, so they will tend to reuse recipes from previous engagements. The risk for you here, and what you need to watch for, is being served reheated dishes. This tends towards

• Increase the reuse of generic strategic frameworks across companies and sectors.
• Standardization of approaches across industries and less diversity of approaches and solutions.
• Reduced strategic differentiation.
• Homogenization of industry practices (everyone copying everyone else).
• Similar solutions applied across competitors.
• Spread of systemic risks as everyone is adopting the same tools, framework and methodologies regardless of their particular scenarios.
• Risk of concentration of industry expertise in consulting firms.
• The eventual appearance of the "seagull consulting" meme figure.
• Firms that offer too much "advice" but offer little execution ability thus launching ideas at the organization that will struggle to execute, mostly because of the headcount factor mentioned and/or the skills gap and lack of investment.

Applying precooked generic recipes will most likely not fit the unique strategic needs of your organization and the challenges it faces. So you need to be watchful of this precisely for the reasons cited above.

The problem critically lies in knowing what you can delegate to consulting firms and in what proportion too, that is, to strike a sane balance. As Simon Wardley explores in his book that I mentioned earlier, outsourcing strategic thinking is rarely a good idea if you do not keep your hands firmly on the rudder as well. By all means, bring new expertise and ideas in, but do not let go and delegate thinking completely because you're too busy or things are complex. Tactical pressure of the day to day operations can make it tempting to delegate all of that because you're quite busy already. Reliance on external solutions easily becomes self-reinforcing, something that consulting firms will likely seek to foster.

One of the immediate consequences of all of these factors is that consulting costs and fees become fixed costs of making business, and one that can easily keep growing and not so easy to cut later on, as dependency on high-cost external advice becomes structural. As resorting to consulting becomes and one-size-fits-all there is the opportunity cost of not developing your people instead. You can count on those fees to increase yearly. Another cost that I am not sure is often measured or paid attention to is the cost of managing consultant relationships (all those meetings, steercos etc), the overhead from parallel structures and the impact on projects in terms of delays, reworkings of SoW's and scope and so on.

The article explores as well other consequences, namely the ultimate lack of ownership and the fact that eventually consultants will leave, taking the knowledge with them. Cultural misalignment will be another issue. After all, consultants belong to a different firm with a different culture and values. Your own organizational culture risks weakening if not cultivated as an explicit effort.

How does it all hurt your competitive advantage?

The consequences of overreliance on consultancies can extend to

• Key decision-making can shift too much from internal leaders to external consultants (undue influence). Especially with with top tier consulting firms, there is the risk that the third party ends up having more empowerment and enjoys more confidence than internal people, which has dire effects in the organization and the culture.
• Disempowerment.
• Critical institutional knowledge becomes externalized.
• Mindless meme-copying and adoption of generic "consultant-speak", trends and hypes, herd mentality and bandwagon effects are well known corporate phenomena (agile, digital transformation, big data, AI, you name it).
• Atrophy of thought leadership and problem-solving capabilities.
• Reduced self-sufficiency, which hampers organizational confidence.
• Reduced capability to respond to crisis without external support and advice.

Impact on your people

Resuming this aspect mentioned earlier, the organization is harmed as a whole by being staffed with people that do not advance their skills very much. I have doubts on how much you can glean from just rubbing shoulders with some consultants. The problem is that without an explicit intentional effort to cultivate internal expertise as well, the organization's ability to innovate and adapt will probably diminish, as organizations resort to relying on external ideas rather than developing their own.

This will often result in:

• Perceived devaluation and stunted growth of internal expertise
• Reduced initiative and innovation from staff
• Reduced confidence about leadership's ability to solve problems
• Possible difficulty attracting and retaining top talent
• Limited career development

So, what can you do?

Some ideas to counter overreliance on external expertise and advice are:

• Clearly identify core competencies that should never be outsourced and be adamant on that. Identify what projects belong where, and when you bring third party expertise in core domains, ensure you remain in control. Do not delegate strategic thinking as mentioned earlier.
• Develop a strategic knowledge management practice to ensure you retain the knowledge consultants bring in and that you pay for. Ensure key people from the organization work alongside the consultants and keep the reins (this often means hybrid teams (internal + consultants) with clear knowledge transfer goals, but this needs oversight and governance)
• Invest in internal strategy and transformation teams, and/or skunkworks teams for innovation.
• Try to avoid full service and focus on specific expertise engagements. This also means clear scopes and clear exit strategies for engagements.
• Require that engagements include capability building.
• Consider using consultants for capability building, organizational change and enablement and knowledge transfer rather than execution.
• Cultivate internal talent, expertise and thought leadership. Give it opportunities to contribute in strategic projects.
• Develop your own internal consulting and advisory capabilities in key functions and areas.
• if you are a member of the top leadership team, evangelize internal capability building at board level and the rest of the TLM and create buy-in to cultivate and use it.
• Create centers of excellence for critical functions and units or champions for change, but be aware that just that is not enough if you don't engage them as well.

Conclusion

The phenomenon of consulting dependency in modern organizations embodies a mix of organizational behavior, social expectations and human psychology. While consulting firms undoubtedly provide valuable expertise and insights, the tendency toward overreliance reveals a self-reinforcing deeper structural issue in how organizations operate in environments of uncertainty, often because organizations tend to operate with deficient situational awareness. The self-reinforcing nature of consulting relationships, bolstered by institutional pressures for legitimacy, short-term thinking, and risk aversion, can create a cycle that gradually erodes internal capabilities while making organizations increasingly dependent on external expertise.

The challenge for modern leaders lies in striking the right balance between using external expertise while maintaining and developing internal capabilities, especially in core areas. This requires conscious effort and strategic intent to resist the pressures towards excessive use of consulting advice. This requires a comprehensive approach that encompasses knowledge management, talent development, governance structures, and cultural transformation. Organizations that can master this balance will be better positioned to maintain their strategic autonomy, develop internal innovation capabilities, and build sustainable competitive advantages. It's not about eliminating consulting relationships altogether, obviously, but about developing an intentional approach to external expertise that complements rather than substitutes for internal capabilities.

Appendix : a note on Institutional Theory

Institutional Theory is a fascinating field of organizational studies and social sciences that examines how social structures, including rules, norms, and cultural beliefs, influence organizational behavior and shape social reality. It focuses on understanding how organizations are affected by their environments beyond merely by first-order economic or technical factors.

• The processes by which organizational structures, practices, and routines become established as authoritative guidelines for social behavior
• How organizations adopt and spread formal structures, policies, and practices to gain legitimacy in their environment
• The ways in which organizations respond to social pressures for conformity and legitimacy, often prioritizing these over technical efficiency (on point for some of the reasons explored above)
• The diffusion of organizational forms and management practices across industries and sectors
• The role of isomorphism, where organizations in similar environments come to resemble each other over time (also explored above)
• The processes of institutional change, including how new practices emerge and become institutionalized, and more precisely...
• The persistence of certain organizational forms and practices, even when they may not be technically efficient

I will probably explore this interesting topic in a later article.