External vs internal consultants

As a rule of thumb internal consultants are often used for their deep company knowledge which is vital to the successful implementation of a strategy. When confidentiality is crucial, or when a consulting project must tackle issues of internal conflict, in-house advisors are in their element. Understanding the language and culture of an organization is an immense competitive advantage over external consultants when implementation, rather than broader strategy, is the benchmark for success.

Internal advisors can count on existing relationships with the client’s leadership structure (in effect their bosses) and workforce (in many cases their colleagues). These established lines of communication can prove invaluable in project management and maximizing efficiency. Internal advisors might, however, encounter resistance from colleagues, who consider them informers rather than consultants, and less independent than external advisors.

Issues of trust exist also exist at the senior leadership level. Research indicates that clients often have more confidence in external advisors — who are more comfortable with a ‘take it or leave it’ approach — than in-house units who depend on them financially all year round. In turn this dynamic can negatively impact the performance of internal advisors, who may feel discouraged from prodding certain people, or are keenly aware of the skeletons in a particular corporate closet. Even if an internal consultant enjoys full autonomy, should the client’s workforce or leadership suspect that independence is impossible, their task becomes that much harder.

Counterbalancing their extensive company knowledge may be a lack of broader business experience. External consultants — who have travelled the world working with different clients in varied markets and on a range of projects — bring fresh ideas and perspectives to the table. Internal advisors may also lack intensive consulting industry knowledge, while their external competitors are completely focused on consultancy, and work alongside some of the field’s best and brightest.  

Beyond the individual, this disadvantage impacts in-house consulting teams which usually have a much shallower pool of consultants than specialist firms. They are limited to in-house talent that may not have the experience or functional knowledge necessary to execute a uniquely complex project. On the other hand, investing in such in-house expertise would have a positive impact extending far beyond the success of one individual project. A highly capable internal consulting unit would be in a position to not only recommend an effective new strategy, but continue to work on its long-term implementation, adjusting it as necessary over time.

As outlined above, there are cases of internal consulting teams developing such functional expertise that they are themselves recruited as external consultants to other clients. Porsche is a notable example. The automotive giant has two in-house consultancies — MHP and Porsche Consulting. MHP in particular enjoys renown as a leading digitization specialist and management consultancy which works even with its parent company’s most ferocious competitors. Cultivating an internal consultancy can therefore be a source of transformational potential for any organization, enabling them to penetrate the consulting economy and lure top talent from the field to strengthen their own human capital.

There are some instances in which it would be unwise for a firm to even consider using internal advisors. Crisis management, which might necessitate the hiring of large numbers of consultants — many with specialist financial advisory skills — is a major example. A demand for deep functional expertise in an area out-with the client’s industry is another case, as are situations where it is important to make a consultant’s findings public.

Though not essential, external consultants are also traditionally favored for strategic projects, such as M&A deals or decisions to enter into new markets. In deciding whether to use internal or external advisors, clients will have to decide whether the more objective and inquisitive eye of an outsider is absolutely necessary. Cost considerations (in-house solutions are usually cheaper), timeframes, and the desired consultant profile, are all key parts of the decision-making matrix.