What do they have in common? Management consultancy and call center
Hello world,
I want to share my story. I had always thought of management consultants as a group of super-smart people with specialist skills (PhDs, MBAs, accountants, tax-specialists, legal counsel, ex-Wall Street bankers). Now I think they are just smart people who are exploiting an arbitrage opportunity. They have found free money between LinkedIn and market research.
In a M&A world (or PE world), you have 3 people. (1) People with money who want to buy a company, (2) people who know the inner working of the industry the company operates in. These are specialists. The people of (1) use the people of (2) to make the decision whether they should purchase a company or not. Finally, (3) people who connect these 2 groups of people. Up until the invention of LinkedIn, the people of (3) were management consultants who offered impartial advices/their contacts in a relevant industry or area.
I recently became familiar with the working of introduction agencies that connect investors with specialists. If a PE firm is looking to buy some company and wants to do a DD on the company and industry, they now don't have to go to a management consultancy, they can just call one of those introduction or "sourcing" companies that bring them specialists that they want to speak to. Engineering is one of the areas outsiders have trouble understanding. Japanese companies are still a mystery to most Westerners. PE firms can talk to specialists with relevant knowledge after paying the introduction fees to these agencies/sourcing firms. The DD process can now be internalized to an extent (well, I say 90% can be internalized).
Inner working of these sourcing firms is simple. Their employees are on LinkedIn all the time. Once they get the name of a person that might be good "for consultation," found a person who a PE firm might be interested in talking to, they call the corporate/listed number (as most headhunters do) and ask for that individual. Once the individual agrees to act as a consultant for the sourcing firm, the sourcing firm arranges a conference call with the PE firm that commissioned them to look for a specialist in that certain industry/sector/niche. The specialist gets paid (by hour), the sourcing firm gets their cut, the PE firm got the confirmation/knowledge that they sought. Everyone won!
I now have a question. What does a management consultant do now? What have they been doing up until now?
Of course, management consultancies also use these sourcing firms to bring in an expert for some of their "revenue generating/front office" reports once their client agrees to the full payment that allows them to budget. But for a white paper that does not bring in any revenue (which is basically equivalent to a teaser in Wall Street), how do management consultants collect necessary information and insight they need to write reports? You can get numbers and staitsics from industry bodies for free of charge (for example, you can get the number of washing machines produced in Japan last year by googling). For industry expert views, these consultants have to cold-call washing machine manufacturers and ask to speak to experts? Think carefully here. By speaking to these experts free of charge (because specialists are caught off-guard and are led to believe that they are taking part in market research), a washing machine specialist is giving up his knowledge and time for free. The management consultant who cold-called became wealthier. In short, it's "stupid to work."
This is a clear arbitrage opportunity. If you are paying for what you can get for free, you are being stupid. You are the idiot in town.
I have a problem here. When these "management consultants" cold-call to seek a view from a specialist, no money changes hands. No one becomes better-off by entering this transaction. Often these "cold-calls" are disguised as "market research," but essentially the same thing. These consultants (who really are call-center workers) gave up their time (which should be the minimum wage) and got what they wanted for lower than the market price.
How long does it take for these "call-center workers" to bring down the fees (eventually to zero) and cease to exist? I am thinking another couple of years. The "sourcing" firms/ introduction agencies will still be with us in 10 years time. We need them to do the dirty work and they are selling legitimate products/services which we need for a fee. However, these management consultants who write up reports based on information they obtained through cold-calling (or "market research," I don't care!) are first movers and exploiting the arbitrage opportunity. All they need is Microsoft Office (which they can get as little as $10 a month) and phone line or even Skype credit.
We don't have to stop there. These call center workers can now be full-fledged management consultants because they can write reports they can sell for a fee in the same fashion. Just cold-call people until they find a stupid and innocent specialist who is willing to share his knowledge for free of charge. You haven't lost much given how low the wage of a call center worker is!
This questions the integrity of management consulting industry. Maybe all we need is "sourcing" firms where employees use LinkedIn non-stop and other means to source those who we wish to speak with before entering into a M&A or buyout deal.
Why are people (these specialists) still answering calls from these "management consultants"? We should be screaming at them for trying to buy things for less than the market price!
Just think about it.
Sounds like you're talking about expert networks like GLG, Alpha Sights etc. This is hardly a new development in the industry. These guys have always been around.
Yes, management consultants will use these experts and pass through the information to the clients. I can see how this seems like being an unnecessary middleman, but you're wrong. It's very very difficult to get maximum value out of these expert calls. Asking the right questions to the experts to get to the insights that are critical and important to a diligence is a very difficult process that involves a lot of time and effort into developing thoroughly structured interview guides. Synthesizing the information and tying it in with quantitative analysis is also hard. That's what you pay management consultants for.
+1. I think the op doesn't have a clear grasp on what consulting overall is and is confusing it with the GLG's of the world. I'm not and never have been a consultant but a good consultant does far more than make an intro or cold call a bunch of Japanese washing machine experts and tell you what they said.
From a PE perspective, if replacing consultants were that easy and cheap we all would have done so a long time ago. I don't like paying those consulting fees, believe me. In my world we run as lean as possible so paying a consulting firm a lot of money to look at our deals/portfolio companies to give insight we don't have internally to make investments or improve performance or to perform due diligence is a lot cheaper than bringing on senior people with expertise in that particular field or function full time.
As for replacing GLG, the value of my time or even using the time of my first month associate to cold call dozens of Japanese Maytag men with the hope that one spills the beans is a gigantic waste of both our time. I don't want to glean the intelligence of an appliance repair man, I want to talk to the CEO, the govt minister who has regulatory expertise or the successful entrepreneur who made 8 or 9 figures on an exit in their field. Even though I consider myself the ultimate BSD baller, they're not picking up even my awesome cold call.
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Uh, I 'consult' for an MBB firm and I get paid 250 bucks an hour. I dont know what you mean by no money changes hands.
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