Using external consultants versus internal consultants

Consultants solve problems. At times, the best place to look for a solution is within the organisation. In recognition of this, businesses often develop a team of internal consultants that can advise on a whole variety of factors. Other times, leaders can benefit from hiring external consultants. Choosing between an external consultant and an internal consultant boils down to the priorities of a specific business, and the nature of the specific problem.

Consultancy.org outlines a number of factors that differentiate internal consultants from external consultants.

Cost-benefit analysis

The need to solve a business problem is rarely a one-time occurrence. As businesses grow and navigate market forces, they are likely to face significant challenges periodically, if not regularly.

External consultants – particularly prominent firms – are known for their hefty price tags. Studies have shown that for projects, hiring one of the big three strategy consultancies – McKinsey & Company, Bain & Company and The Boston Consulting Group (BCG) – can be up to six times more expensive than using an internal consulting team.

Therefore, hiring one of these firms every time a business challenge comes up can be a significant financial strain. Alternatively, in many cases, having a talented team of internal consultants on the payroll can be a more cost-effective solution

However, this is not always the case. A business might not require consultants throughout the year, which would make having an internal team on the payroll an unnecessary strain on funds. In addition, the internal consulting team could lack the same expertise as an external consultant would bring, which would make them consume more time and resources to achieve the same task.

External consultants would be more effective in such scenarios, as the cost burden only lasts as long as the project itself, while their expertise and resources might make them quicker at solving a problem. Additionally, the hefty price tag that comes with external consultants is often justified by their wealth of expertise and reputation.

External consultants have vast pools of versatile talent that can take a multifaceted approach to problem solving. These teams are also backed by strong sectoral expertise, a wealth of experience with other clients, and a substantial pool of resources and infrastructure to support businesses. External consultants also rely on their reputation in the market to appeal to businesses.

Examples include the Big Four accounting and advisory firms – Deloitte, EY, KPMG and PwC – as well as the top strategy consulting firms, Accenture, Kearney, Alvarez & Marsal and a number of others, all of which have glittering reputations in the global consulting market. Hiring an external consultant with a strong reputation can guarantee a minimum standard of quality in service.

At times, the reputation of these external consultants alone can benefit a business. Clients and customers who know that a reputable external consultant has been brought on board could gain confidence in a business, the same is true for shareholders.

As a result, the cost differentiator between internal and external consultants is a product of individual business priorities, and the specific business problem.

Familiarity

Over time, an internal team of consultants will grow familiar with a company’s internal systems, culture and dynamics. This can be both an advantage and a disadvantage, depending on the context.

On the plus side, familiarity with the company allows internal consultants to seamlessly understand the challenges, and possibly identify the potential problem areas much quicker. An external consultant would first have to be briefed about the specifics of a client organisation. Internal consultants are aware of the company hierarchies and pressure points, as well as the best way to get things done with the available resources.

By virtue of serving a wide variety of businesses, external consultants have often been accused of having a one-size-fits-all approach to problem-solving, leveraging previously developed solutions to help all kinds of businesses. Internal consultants are familiar with a specific organisation, which will likely make their solutions more tailored to specific business needs. They have knowledge of a business’ objectives, and they can not only solve current problems but can proactively plan to solve issues that they anticipate at a later stage.

This team would also be aware of internal politics, making them less likely to be swayed or misled by agenda-driven information. Familiarity is also an advantage on the flipside. Businesses that appoint internal consultants have a professional relationship with them, which creates an environment of comfort, trust and credibility. Such an environment allows both the business and the consultants to focus on the problem at hand.

However, all this is assuming that the internal consulting team is able to stay above internal politics and hierarchies in their approach. By virtue of being a part of the hierarchy, the team might be susceptible to subjectivity driven by internal politics or their own position within the organisation. At times, the team might have become so immersed in an organisation’s culture that they lose their objectivity. A lower position in the organisational hierarchy might also damage the team’s authority in its recommendations, as others might resist their advice.

Familiarity can also make business problems appear mundane to internal consultants. Dealing in the same professional context makes them lose the novelty and excitement of tackling a new challenge – something that is crucial for a consultant. The weight of their voice is further undermined by this lack of novelty, as business leaders also miss that injection of excitement that comes with bringing someone new on board with a problem.

As an integral but flexible part of the organisation, internal consultants also run the risk of being overstretched. A variety of business segments might require their services at the same time, which not only stretches their resources, but also potentially dilutes the effectiveness of each solution that they develop. External consultants are likely to be unaffected by these dynamics, giving them space to view the problem in isolation. They are focused in their mandate, not afraid to offend anyone, and more often than not have credibility and authority in their recommendations.

As a result, familiarity as a differentiator comes into play based on an organisation’s internal dynamics and the effectiveness of the internal consulting team.

Objectivity

Objectivity doesn’t just relate to culture. As mentioned above, internal consultants have a slight upper hand due to their familiarity with an organisation and its unique challenges. On the other hand, this very familiarity can create a block for these consultants to think outside the box.

External consultants are often brought on board because company leadership is unable to solve a particular problem. Those directly invested in the business and familiar with its journey tend to get bogged down by their specific context and a predetermined set of ideas and practices. External consultants can bring a fresh perspective to the problem, often informed by a wide variety of experiences in the broader market.

This objectivity can also come in handy to make difficult decisions. The best solution for a company might often have collateral effects – either going against the thoughts of a senior leader, or making parts of the staff redundant. Where internal consultants might hesitate at times like these, external consultants will have the leeway to speak freely and make tough suggestions.

On the other hand, such changes have far-reaching repercussions, and might require the depth of knowledge that external consultants may not have. Internal consultants might be aware of teams or organisational segments that are consistently problematic, or at odds with company objectives, making them better equipped to make such a big decision.

Meanwhile, the independence of external consultants adds credibility to the recommendations provided, and places them in an ideal situation to navigate between stakeholders without having to fear any potential politics. In some cases, external consulting independence is a must, as for example in the case of large mergers & acquisitions. During pre-closing talks, companies are due to antitrust regulations restricted in how they communicate and share information, meaning that independent consultants are needed to sit in between the two parties and act as a filter.

The same is true in cases of litigation, where consultants conduct independent analysis for one party or mitigate between two parties in a conflict situation, or in the case of impartial studies such as financial audits and forensics, where independence is paramount to ensure that conflict of interests do not interfere with uncovering misconduct.

As a result, objectivity as a differentiator boils down to individual decisions and the level of internal or external expertise required to make them.

Commitment

Over the years, external consultants have developed the reputation of being self-serving. These firms offer support and solutions for the duration of the contract, but not by definition involved all the way through to the implementation process and beyond. By virtue of being outsiders, these firms are more focused on developing their solutions properly, and less involved in the broader business journey and the long term benefits.

Internal consultants are obviously more inclined to keep an eye on the long term business goals. They have a long-term relationship with an organisation, and are bound to see a project through from the strategy phase to the execution and post-implementation phases. If any issues come up at a later stage, the team of internal consultants will be present to understand the problem and try to solve it. Being personally invested in the business, these teams are also more dedicated to seeing a long-term benefit of their solutions.

On the other hand, external consultants rely on reputation more than other factors to gain more business and clients. As a result, these firms are likely to have a less personal but equally significant stake in developing a quality solution. In recent years, this has seen a growing number of consulting firms expanding their positioning to become an end-to-end business partner across areas of work and services, rather than just provide one-dimensional services or solutions.

As a result, commitment as a differentiator boils down to the approach of individual consultants and their service offerings.