First off I really enjoy your economic writing. While I still enjoy reading analysis that discusses broadly "how should we regulate financial activity" or things along those lines, I find there is very little written for a lay audience about what exactly it is these companies do. For example there was a really good piece in NY mag about McKinsey's shady activity with Perdue Pharma, but it didn't quite explain the actual workings of that relationship.
I'd be interested to know your opinion about private equity and business consultants. If McKinsey, BCG, and Bane are so good at analyzing markets for private equity, why don't they just do private equity themselves? The answer I seem to get is that they do do some of it, but if you were really confident in your ability, why sell any of this knowledge out of house?
This is not a comprehensive answer to your question but in the case of Bain, Mitt Romney had the same question and then went off and founded a private equity firm called Bain. Also many PE firms hire consultants to work for them.
PE is much more about financial engineering so they mostly hire bankers. Consultants do get recruited into PE firms but it's usually a tougher path. Instead they just outsource some of the strategy work to consulting firms
Is there a reason companies *don't* do stuff like this on their own? For some of them maybe they don't do it often enough but it seems like if the work lasts years you could hire some people for three or five years in house to do it.
The short answer is that they're starting to — Oracle has done some deals entirely in house without the use of investment banks. One key barrier to this, however, is that these deals need to be financed, and to get financing you need a bank, and once you have a bank lending you money, they're more than happy to throw in other stuff as well. So the companies that do deals without banks tend to be very-cash-rich tech companies — Oracle, Facebook, Apple. https://www.cbinsights.com/research/report/disrupting-investment-banking/
couple thoughts: 1. on-and-off: advisory work might be more ad hoc and you don't need people working full time on these 2. talent retention / scale: some F500 company in indiana might struggle to attract the same level of talent and train them to be effective at this 3. culture / work environment: professional services firms thrive at driving their insecure overachievers through hellish hours and getting 150% out of them - large corps don't do that (ex-advisory people typically quit advisory to get cushy corporate jobs at their former clients). All this means doing this stuff is typically not going to be very good. And even at top companies FAANG, their internal corp. dev. teams don't work as hard and work on more niche items
First off I really enjoy your economic writing. While I still enjoy reading analysis that discusses broadly "how should we regulate financial activity" or things along those lines, I find there is very little written for a lay audience about what exactly it is these companies do. For example there was a really good piece in NY mag about McKinsey's shady activity with Perdue Pharma, but it didn't quite explain the actual workings of that relationship.
I'd be interested to know your opinion about private equity and business consultants. If McKinsey, BCG, and Bane are so good at analyzing markets for private equity, why don't they just do private equity themselves? The answer I seem to get is that they do do some of it, but if you were really confident in your ability, why sell any of this knowledge out of house?
This is not a comprehensive answer to your question but in the case of Bain, Mitt Romney had the same question and then went off and founded a private equity firm called Bain. Also many PE firms hire consultants to work for them.
The other bit may be that in a gold rush, it's best to be selling shovels?
Interesting! I have to admit to being completely ignorant of this Bain distinction and Mitt Romney's specific role.
PE is much more about financial engineering so they mostly hire bankers. Consultants do get recruited into PE firms but it's usually a tougher path. Instead they just outsource some of the strategy work to consulting firms
Is there a reason companies *don't* do stuff like this on their own? For some of them maybe they don't do it often enough but it seems like if the work lasts years you could hire some people for three or five years in house to do it.
The short answer is that they're starting to — Oracle has done some deals entirely in house without the use of investment banks. One key barrier to this, however, is that these deals need to be financed, and to get financing you need a bank, and once you have a bank lending you money, they're more than happy to throw in other stuff as well. So the companies that do deals without banks tend to be very-cash-rich tech companies — Oracle, Facebook, Apple. https://www.cbinsights.com/research/report/disrupting-investment-banking/
couple thoughts: 1. on-and-off: advisory work might be more ad hoc and you don't need people working full time on these 2. talent retention / scale: some F500 company in indiana might struggle to attract the same level of talent and train them to be effective at this 3. culture / work environment: professional services firms thrive at driving their insecure overachievers through hellish hours and getting 150% out of them - large corps don't do that (ex-advisory people typically quit advisory to get cushy corporate jobs at their former clients). All this means doing this stuff is typically not going to be very good. And even at top companies FAANG, their internal corp. dev. teams don't work as hard and work on more niche items