Were consulting firms among those culpable for the financial crisis?
Back in 2002, Business Week (July 8th issue) raised the question in the midst of the Enron scandal where McKinsey was a major advisor “What accountability does it [McKinsey]--or any consulting firm--have for the ideas and concepts it launches into a company?”
Eight years on, that question remains unanswered, yet still relevant. Now the question is what role did consultants have in the financial crisis. Consultants are fortunate to be able to hide their involvement under the veneer of “client confidentiality” although
Businessweek (April 10th
http://www.businessweek.com/news/2010-04-07/citigroup-expanded-in-cdos-on-consultants-urging-maheras-says.html) and Consultants News (May 10th issue) have reported that Citi was prompted by advice in 2005 from its strategy consultants, Oliver Wyman, to
ramp up its business in collateralized debt obligations (CDOs) backed by high-risk or sub-prime mortgage loans. This ultimately lead to a requirement for Citi to be bailed out by the federal government due to the implosion of the sub-prime market. How many
other financial institutions were encouraged to take greater risks based on the advice of consulting firms? And during the crash how many of those same firms earned fees on advising on how to clean up the mess.
Consultants appear to have an immunity from the consequence for any advice they provide to their clients. Should organizations expect that in return for the large fees that they pay to consultants, that the consultants be accountable (legally and/or financially)
for the realization of the business and public policy objectives of the initiatives they participate in?
Consultants maintain that their fees are worth the value they create for their clients. But what happens when they destroy value?
Fortunately for them few companies track how much they spend on consultants and compare the actual outcome to what was expected in order to the calculate the value realised or lost from the use of consultants.
It is time for companies to start holding consultants to their promises to deliver value, and to hold them responsible if they do not. This requires more discipline and sophistication on the part of the client to extract this value.