Why should companies hire management consultants?
By Yohan Albo
Management consultants provide companies with solutions to improve their performance by typically analyzing a company’s current problems. Management consultants are utilized by companies for a variety of reasons, including to receive external and ostensibly objective advice by professionals with deep industry knowledge that is not emotionally invested in the company. Consequently, management consultants typically are not prone to falling trap to cognitive biases such as the sunk cost fallacy, groupthink, and the status quo bias.
“Let’s examine the biases mentioned above so as to demonstrate how management consultants can make better-informed decisions about a company than those who are actually employed by it.“
The "sunk cost fallacy"
The “sunk cost fallacy” is the case where companies give a justification for prolonging a project, based on the fact that they have already invested significant resources in it, even though it is almost certain that investing more in the project will result in even larger losses than if they cease it now. It is not just companies that fall to this bias but ordinary people in their everyday lives.
For example, you bought tickets to a sporting event which are not refundable and cannot be re-sold. However, the weather is miserable and if you had not already paid for the tickets, you would prefer to stay home and watch the game. A rational decision maker would merely decide to stay home because it gives him/her greater utility. It is clear that staying at home and watching the match will give you greater utility but often one’s line of thinking is that “I’ve already paid for the ticket so I may as well go even though I’d rather stay home if I didn’t buy the ticket.” As compared to a miserable night out in the cold for the person who ended up going to the sporting event even though he/she really did not want to, a company that yields to the sunk cost fallacy can cost itself millions of dollars in losses.
To quote the Turkish proverb, “No matter how far you’ve gone down the wrong road, turn back.” Unfortunately, it is easier said than done.
“Groupthink” is a psychological occurrence where a group of individuals avoids voicing controversial issues and alternative solutions to problems in order to steer clear from conflict and evade marginalization, leading to decisions being made without critical evaluation and irrationally. Employees at a company are often scared to raise concerns with their bosses for fear of irritating them and potentially not receiving that promotion they so dearly covet. Management consultants have no vested interest in currying favor with a company’s bosses so as to receive some sort of reward. Therefore, consultants are able to make rational, independent and critical evaluations of a company’s future without fear negative repercussions.
The "status quo bias"
The “status quo bias” is the tendency for people to prefer things to stay relatively the same. It is often the result of people being unable to see past their existing paradigm. Companies are subject to this bias, having often been established for many years and failing to adapt their business practices to changing times. Management consultants are new at these companies they provide consulting advice to and are therefore not predisposed to continuing the status quo at the company but rather adopt a fresh approach that best ensures the future viability and growth of the company.
These are only three of many cognitive biases that compromise a company’s performance. Accordingly, management consultants are crucial in preventing these types of biases from undermining a company’s ability to optimize its performance. Not necessarily because they are more intelligent or superior than the employees and managers at a company but rather they are a lot less susceptible to these cognitive biases, which are almost unavoidable.
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DataToCapital is a boutique management consulting firm that supports global tier-1 firms and start-up companies operating in Israel in their route to excellence and market dominance. Our core services, designed for CEOs, Executives (VP-level and above) and Entrepreneurs, can be divided into three areas: Market Intelligence, Corporate and Product Strategy, and Execution Support on top-down strategic initiatives.
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