Management consultancy has boomed over the past decades. I recently saw a statistic which showed that in 1980 global revenues in the consultancy business equalled $3 billion. By 2005, it was more than $150 billion.
But what does it say about you, as a company and management team, when you are hiring a management consultant to help you out, with your strategy or organizational structure? On the one hand it is a good thing, right; you are not afraid to ask for help, and management consultants can bring in valuable outside knowledge, ideas, and experience. On the other hand, it could be interpreted as a bit of an admission of defeat… “we’re not able to figure it out ourselves”, “we have run out of ideas and options”, “we’re in seriously trouble; we need help” or something along those lines. Plus, these pin-striped guys do not exactly come cheap.
Whatever way you put it, it is some sort of a signal – either openness to outside ideas or a signal of brewing trouble. And signals are what the stock market is always on the lookout for, like a vulture spotting the slightest of limps in a wounded animal or, perhaps more kindly, some green shoots to announce the arrival of spring. So, it is an interesting question: does the stock market usually respond negatively or positively to a firm hiring a management consultant?
Professors Don Bergh from the University of Denver and Patrick Gibbons from University College Dublin set out to examine exactly this question. They collected information on 116 listed firms that publicly announced hiring a management consultancy, and statistically analyzed whether such an announcement increased or decreased the firm’s share price. And the answer was clear: share price increased with an average of 1.4% by the hiring of such an advisory firm. Now that’s value for money for you; the pin-striped guys haven’t even done anything yet and your company has already increased in worth.
But did everybody experience this uplifting effect? Not really: Don and Patrick also found that this entire effect could be attributed to well-performing firms; firms that already were healthy and profitable before bringing in the advisor saw quite an upsurge in their share price – apparently the market thinks that the combined forces will be able to make the company grow even faster. However, underperforming firms – firms with a more dismal financial track record – did not benefit at all from hiring a consultant. As a matter of fact, the stock market’s reaction would even turn negative for the real sub-par performers. Apparently, in that case it is interpreted as a sign that the company is in even more dire straits than originally assumed.
But might this not be dependent on who you hire, thou might wonder? Surely McKinsey, BCG, Bain or Booz Allen must be viewed differently by the market than some second-tier cheap-suit shop? Well, ehm… no. The stock market’s reaction was exactly the same no matter who the firm hired; whether it was McKinsey, some local chaps, or one of the big accounting firms doing a bit consultancy on the side; the market did not care. Apparently, it doesn’t matter whose help you ask, but it sure matters whether you ask for any at all.
