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Does It Pay to Hire Consultants? Evidence from the Bordeaux Wine Industry
Article credit/source – https://hbr.org/2017/05/does-it-pay-to-hire-consultants-evidence-from-the-bordeaux-wine-industry
Does It Pay to Hire Consultants? Evidence from the Bordeaux Wine Industry
Consulting is pervasive in many industries. Yet, the use of consultants remains controversial. Why would firms give away key activities to hired guns? Why would these “mercenaries” perform these activities better than in-house employees? To evaluate the impact of hiring consultants and figure out when they might offer the most value, one study examined the Bordeaux wine industry, where over two thirds of wineries hire consultants to improve the quality of their wines. Looking at 311 wineries over a ten-year period, the study found that consultants improved wine quality at all wineries they worked with, but the ones that benefited the most were those who had the worst resources — e.g., the lowest-quality terroir. The firms most likely to hire consultants, however, were those who had good terroir (and thus could afford to pay consultants). The wineries that produced truly outstanding wines were the least likely to use consultants.
Consulting is pervasive in many industries. Yet the use of consultants remains controversial. Why would firms give away key activities to hired guns? Why would these “mercenaries” perform these activities better than in-house employees? Many employees dismiss consultants as people who “borrow your watch to tell you the time” — and then charge you for the privilege.
To evaluate the impact of hiring consultants and to figure out when they might offer the most value, I turned to the wine industry, where over two-thirds of wineries hire consultants to improve the quality of their wines. As a winemaking consultant put it: “My job is to make my client’s wine better. Even if the wine or the winery is awful, we have to do our best in the conditions we have.” The underlying rationale is straightforward: Better wines can be sold at high prices. Overall, I studied 311 Bordeaux wineries over a 10-year period. Wine quality was assessed using tasting scores from Wine Spectator and Robert Parker’s Wine Advocate.
In this study I distinguished between mean quality and variance in quality. On average, I found that wines made with the help of consultants had higher quality ratings. However, they also had less extreme quality ratings. Use of consultants, therefore, correlated with middle-of-the-road, less extreme wine ratings: neither excellent nor terrible. Many outstanding wineries did not use consultants, preferring to use only in-house talent. For instance, the owners of Pétrus have never used winemaking consultants. From 1963 to 2007, wines were made by Jean-Claude Berrouet, an in-house winemaker. When he retired, in 2007, his son Olivier took over as the in-house winemaker.
This is because the coin of the consultant’s realm is knowledge, which has two main origins: expertise, gained through education and training, and experience, accumulated by working with clients. Importantly, the raison d’être of consultants is not to provide their clients with ordinary knowledge. It is to develop best practices and to use them to improve their clients’ performance. The wine industry is no exception. As a winemaking consultant explained: “I studied the history of the great harvests we’d had here in Bordeaux, I looked for the common denominators. And what I found was that on those years there had been a lot of sun and low production. Very simple, very obvious. So I thought, OK, here are two factors that we can act on. What we’ll do is lower the production and seek to harvest more mature grapes.”
Because best practices are more tested than the practices of individual firms, they decrease the likelihood of very low performance. On the other hand, uniqueness is a necessary condition for outstanding performance. Because best practices are less unique than the practices of individual firms, they also decrease the likelihood of very high performance.
Moreover, I found that the quality of a winery’s resources make a big difference in how valuable it will find consultants. In the Bordeaux wine industry the terroir is the main resource. My study found that wineries with low-quality terroir benefit more from the help of winemaking consultants than wineries with high-quality terroir. For instance, so-called “garagiste” wineries are properties that have a low-quality terroir. They produce wines in small quantities (hence the label of “garage wine”) using the most advanced winemaking best practices. Without the help of wine consultants, some of them never would have been considered “outstanding producers” by wine critic Robert Parker.
My study focused on winemaking consultants. However, there are many similarities between winemaking consultants and other consultants. Like other consultants, winemaking consultants are essentially “knowledge workers” who create and disseminate knowledge. Thus, this study provides two important implications for firms that contemplate hiring consultants.
First, the decision to hire consultants should hinge on a firm’s strategy. If the objective is to improve performance, a firm should consider hiring consultants. If the objective is to achieve outstanding performance, “playing it safe” by hiring consultants is unlikely to be the right decision. Because their advice is not unique, consultants may actually be an obstacle to achieving success. As Steve Jobs, former CEO of Apple, once explained: “We don’t hire consultants. The only consultants I’ve ever hired…is one firm to analyze Gateway’s retail strategy so I would not make some of the same mistakes they made [when launching Apple’s retail stores]. But we never hire consultants, per se. We just want to make great products.” Importantly, uniqueness does not guarantee success; it may also lead to failure. Some of Apple’s products were huge successes (Apple II, Mac, iPod, iPhone, iPad), whereas others were complete failures (Lisa, Newton, eWorld online service).
Second, the decision to hire consultants should depend on the quality of a firm’s resources. Compared with firms with high-quality resources, firms with low-quality resources tend to benefit more from the help of consultants. When clients have low-quality resources, consultants have a lot of room to add value by leveraging their best practices. Hence, their (positive) impact on performance is very strong. Compared with low-quality resources, high-quality resources tend to be very productive no matter how well they are managed. Thus, consultants have fewer opportunities to enhance performance by implementing their best practices.
However, my research also found that firms may not be making their decisions about consultants in this rational way. Wineries with the best terroirs were actually more likely to hire consultants, despite benefiting less from their advice. The problem seems to be that these wineries were the ones with money to burn. By contrast, the firms with low-quality resources tended to be less profitable and less able to afford consulting fees. Paradoxically, the firms that could benefit the most from help are the very ones that are less likely to hire the help they need.
This article is about OPERATIONS MANAGEMENT
Originally published on – 19 May, 2017 By Jerome Barthelemy