External vs internal consultants

An internal consultant is, at first glance, just like an external consultant: a professional that is hired to solve an organisational problem and implement the solutions in order to improve the performance of an organisation. Both types of consultants can work within all possible management and organisational areas – from strategic planning to mergers and acquisitions, finance, organisation efficiency, process improvement and technology. Similar to external consultants, their sometimes competing internal colleagues can also function as advisors, change agents, execution facilitators, coaches or trainers. The difference lies in the relationship with the client organisation; internal consultants are on the payroll or limit themselves to full-time advisory within one organisation.

The main underlying reason for the rise of internal consulting is the fact that organisations are in agreement that there is a constant need for expertise from third parties. Thus, to limit the trend of long term dependence on advisory firms charging exorbitant sums of money, some organisations build up their own internal consulting units. These advisors report back to a central consulting department, which selects certain employees from different business units within the organisation to run the project. Technically, everybody on the team works for the same organisation, but the consulting division functions as an outsider, since the consultants do not work for that specific business unit.

Depending on the definition of internal consulting, the actual size of the internal consulting market may vary by orders of magnitude. Merely a small part of the typical ‘consulting’ roles function in formal internal consulting groups. Many consulting and implementation roles are spread over diverse departments and functions, collectively supporting internal clients with specific problems, like Corporate Development, Corporate Finance, Human Resources, Finance, Project Management Offices and IT business units. In addition, many people fulfill a consulting role, either full-time or as part of their daily tasks, without carrying the title of consultant. If these two groups are also included in the statistics, then the internal consulting market would easily surpass the worth of the actual external consulting market.

The founding of internal consultancy branches is not only done from the viewpoint of cost reduction. There are a number of other reasons why organisations build up internal teams, or give preference to internal over external consultants. Below is an overview of the main pros and cons of internal versus external advisors.

Advantages of internal consultants
Internal advisors are usually cheaper than external advisors, although this does not always need to be the case. In comparison with the most expensive (external) consultants in the market – strategy consultants – that claim definitely holds up. According to a study in the US, the cost of internal strategy advisors for a typical project is four to six times lower than the rates of one of the Big-3 strategy consultancy firms (McKinsey & Company, Bain & Company or The Boston Consulting Group).

Internal advisors have a better understanding of the organisation they advise – they understand the language and culture of the organisation better. Their deep knowledge of the organisation make internal consultants very valuable, for instance, in the implementation of strategic change trajectories or culture transformations; with managing processes and projects; or integrating initiatives within the organisation. In addition, internal consultants have existing relationships with other employees within the organisation, improving their means and channels of communication.

Another argument is that some external consultancy projects only provide an organisation with advise, without (or only partially) being involved in the implementation of the proposed solutions. The advantage of internal consultants is that they are more often involved with the realisation of their own advises, and can continue to play an important role even after the implementation.

Most internal consulting teams remain an internally focused team that, for instance, is tasked to improve the efficiency of the organisation. However, over the years some internal teams have improved their knowledge and expertise to such an extent that they can also apply their skills beyond the organisation. Several successful consultancy firms today, started out from an internal setting, like Porsche Consulting, which originated from automotive company Porsche and today provides advice within multiple industry sectors. There are countless other examples in which consultancy firms have branched out from internal practices within big corporates, such as GM, Philips and Shell, to name a few.

Finally, having an internal consulting unit can be a good way for organisations to position themselves in the consultancy market, and thereby attract top performing consultancy talent.

Advantages of external consultants
Choosing for external advisors can also come with many benefits. External consultants are seen as independent players, contrary to internal advisors who literally depend on their own organisation. This could possibly lead to a trust issue between advisor and client, which is also essentially the employer. Research has shown that clients have more confidence in external consultants than internal consultants. The function often demands an inquisitive and firm hand, a role that external advisors frequently fulfill, and one more difficult to fill by internal advisors. They possibly hold just as much expertise, but as an employee at an organisation it is conceivably harder for internal consultants to be independent – or to be considered as independent – than for external advisors.

Internal consultants, in essence, keep busy with projects involving their own organisation. External consultants, on the other hand, regularly draw from a broader business perspective gained from their vast experience with various clients, markets and sectors, and bring new ideas and best practices along to clients. Especially, the ability to benchmark in respect of other parties is a big advantage of external consultants.

Furthermore, advisors often work for specialised consultancy firms, frequently with the biggest names in the market, and due to their track record are regarded to be credible advisors. Internal consultants do not have this advantage. In general, many assume that external consultants have a higher level of expertise and experience, largely because they are completely focused on their consultancy role, and deal with multifaceted issues at various clients. Internal consultants possibly miss certain industry knowledge, which external consultants have encountered in previous assignments.

Lastly, external consultancy parties often have – particularly the bigger players – broader choice when it comes to selecting the most suitable consultants for projects. Large firms have international talent pools which they can source from, and, for certain assignments, can pick the best people for the job. Organisations with internal consultants are usually limited to the talent they have in-house.

Choosing for an option
Organisations that are faced with the decision to either build internal consultancy teams or hiring external advisors, should weigh out the advantages and disadvantages of each option ahead of time. Also, the context in which the choice should be made plays a big role in this.

External consultants can be (in some cases better) used when deeply specialist knowledge is needed for a large-scale project, or when a neutral, independent view is needed on a problem. Sometimes, an organisation simply has insufficient capacity in-house to tackle a specific issue, or the board is in need of external expertise to properly assess the risks of the alternatives at hand. Internal advisors, on their side, know the organisation well and, for example, are aware of what is taking place with the organisation – as they speak the language of the organisation and understand the culture of the professionals working there. Furthermore, hiring an external consultant can be a more costly commitment, whereby an internal advisor, from a cost viewpoint, could be the better choice. Internal advisors can, also, switch gears faster within the organisation, if necessary.

Organisations should first decide whether an external view is necessary for a particular dilemma. If so, how much expertise is required? When large organisations already have a mature internal consultancy division, the choice whether or not to hire an external consultant is often made more easily. However, when a major (change) project requires a large quantity of resources (human capital, specific expertise), it can be easier to choose for external reinforcement.