Understand the Agency Problem when hiring a consultant.

Just as a mathematician finds a solution to a problem, a consulting with find a problem for a solution.  This is why consults are always pitching new ideas, tools, and fabulous new ways to run your business.  Very few though will actually say ‘this will make you more money’.  It is as if this doesn’t matter or is a natural benefit of they elixir they prescribe. 

Do a quick Google search on success fee based consulting and many results pop up deriding the practice as sleazy and even unethical.  Once common result even goes as far as to say it is not fair to the consultant to put their earnings a risk since it is out of their control if the client will listen to them.  Hence the consulting pitch is ‘I will give you exactly these service spelled out in detail in this master statement of work and you will pay me this fee exactly as determined’.  

This is accepted as being more ethical. But why?  I give you X with zero recourse on me for the benefit or loss you incur and you give me Y.  Oh, but the market will punish firms that do not add value to their client you say.  Really?  Who were the consultants of the headline grabbing firms that went bust over the last decade?  Most are still in business.

The rub that is apparent here in is the Agency Problem.   This is a conflict between the consultant (the “agent”) is able to make decisions that impact the firm (the “principal”).   Even worse is that many cases the consultant is impacting yet another agent being management who is impacting the principal which is the shareholder. 

Next time you hire a consultant be sure to structure the compensation so they can win when management and shareholders win.  They lose when management and shareholders lose.  If they won’t do this then it is time to keep looking for a better consultant.   

agency problem, consulting, Ethics, non-consulting, skin-in-the-game

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