An anonymous reader on talent misallocation and bureaucratization

Building upon my recent Bloomberg column on old people getting the interesting jobs, a reader writes the following on his blog:

I do not think that the main explanation for this is the increasing age requirements for America’s best jobs. Instead, I contend that this sorting is an efficient response to the standardization of entry-level jobs and bureaucratization of hierarchies . Most firms are not well-equipped to efficiently utilize the top tier of smart, talented but raw new employees. Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies.

(Since the number of startup founders and scientists is relatively small, the real cost of this talent allocation is to Fortune 500 companies. I will therefore focus on large companies. I will also just focus on consulting, though I believe the arguments apply equally to law, finance, and perhaps big tech.)

Most corporate entry-level programs do not offer much stratification between the smart, highly motivated individual and the more average performer. Fifty years ago a bright, ambitious new college graduate had no choice but to pay one’s dues by starting at the bottom like everyone else and then work one’s way to the top–albeit at a faster rate than today. Today that same graduate can select into the fast track via consulting.

Moreover, this is an equilibrium that–at least in the short- to medium-term–makes sense for all players. The ambitious young graduate receives a wage premium in exchange for higher productivity. The consulting firm gets to hire the smart people it needs to build its pyramid. And even the Fortune 500 company gets to gain from the intelligence of the new graduate when it hires the consulting firm; arguably this company is a loser on net compared to fifty years ago (when it received access to the talent but did not have to pay the consulting firm to act as a middleman), but the equilibrium is still tenable.

My own experience at GE and a top management consulting firm is a good example of this in action. I joined GE through one of its leadership development programs but found my peers to be less talented and hard-working than I had hoped. Unsurprisingly, I also found the roles to be uninspiring and poor uses of my time. After less than two years, I left to join a top consulting firm. I was challenged from day one and at times was not sure if I would make it. My bosses asked much more of me, but they also better resourced me. My productivity was an order of magnitude higher than at GE, and I was accordingly paid nearly twice as much.

For further evidence, consider that 90% of US companies have predefined pay bands based on experience. Given one’s experience level, it is difficult to make considerably more than one’s peers in the first few years (which is the purpose of pay bands). Contrast that with consulting: an average graduate with an engineering degree (the highest earning of all degrees) earns $69k but a new associate at McKinsey earns $105k. The disparity only widens for lower-earning degrees.

One counterargument is that the sorting done by consulting firms is based mostly on the prestige of one’s university education (whether undergraduate or graduate). Obviously all the smart people did not go to the Ivy League, and besides, don’t those schools screen for a narrow type of excellence anyways?

Yes, this is certainly true. However, I think it is also true that most people who can gain admission into one of these schools and pass the rigorous battery of consulting interviews are, by most reasonable measures, smart. Their willingness to self-select into consulting indicates their work ethic. It is far from a perfect screen, but it is a relatively effective one given how easy it is to utilize.

Thus, it is rational (at least in this narrow sense) for young people to self-select into consulting…

There is a bit more at the link.

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"My productivity was an order of magnitude higher than at GE, and I was accordingly paid nearly twice as much."
Wow, nearly twice the pay for only ten times as much output!

Well, assuming "productivity" is the same thing as output. After all, GE outputs power plants, jet engines, and dishwashers, so a minuscule contribution to GE's productivity might be larger than an ORDER OF MAGNITUDE greater contribution of McKinsey's contribution of, I don't know, social status.

It's very easy to make fun of consultants, just as it's very easy to make fun of middle management in large corporations. Surely many in both groups make mistakes, and are sometimes even ridiculous. On the other hand, people still pay lots of real money for the services of both groups.

The quoated blogger at least has his own experience to draw on. What do you have to contribute?

Given his comments mirror those I would write, I'm guessing experience in engineering and manufacturing, two inseparable aspects of producing stuff.

GE became a great company by the 50s by most workers being involved in that. Then in the 80s, GE became a bank that gave premiums, eg, toasters, TVs, turbines, to borrowers, like GM, et al, until they became insolvent circa 2007. GE stopped manufacturing the things that got them into consumer finance, TVs, toasters, stoves, when they focused on banking. GE outsourced products to China, the GE brands are owned by Hiaer.

The same happened to the products I worked on at DEC. Consultants decided DEC should not engineer and manufacture anything. Outsourcing to Intel. Intel, without US competition is losing to China eg, TSMC and Korea, eg Samsung which source Huawei, et al, but Trump is forcing China to engineer and manufacture on par with TSMC and Samsung.

I was at DEC WRL and SRC in the late 80s and early 90s, and I remember with some sadness when DEC killed the MIPS-based DECstation line to make way for the homegrown Alpha. I thought at the time that the extra performance of the Alpha could not justify its high cost relative to cheaper x86/MIPS, and the market proved me correct.

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Consultants, lawyers, anything with a partnership structure is set up so that you're underpaid for a while so you can be overpaid at the top, if you make it to the top.

It's not too different from the way people are paid with stock options, although the outcome is a little more (although not completely) under your control.

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The interesting implication of your comment is that you need to think about how leveraged you can be, and there's a limit to how leveraged you can be as a consultant. You can't get rich billing by the hour. Oh, you might get a decent upper-middle-class pay package in the low seven figures, but very few people get FU money from consulting, and those that do so are near the top of large pyramids and, well, old.

At a product firm one guy can have an idea that leads to billions in sales. It's possible to have much greater levels of success at a product firm. It's just higher risk, because it probably won't happen to you. Though, it's almost certain not to happen to you at GE.

"a decent upper-middle-class pay package in the low seven figures, but very few people get FU money from consulting"

Typo?

More of a weak attempt at a joke.

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Their other post is also thought-provoking: https://vanities.blog/make-jobs-for-young-people-interesting-again/

Personally, I think one big element that reduces society-wide risk-taking (so not solely for elites as these blog posts focus on) is the astronomical basic cost of living/housing in productivity meccas compared to America's past. With a higher constant burn rate, is it really surprizing that people aren't willing/able to take more risks?

Not to mention the constant burn rate of needing to pay off student loans, which was much less of a factor in the past.

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Of course, it is wonderful for the young and ambitious, individually, that was never in doubt but the question was always if this is a good idea for the nation as a whole. The conclusion reached at the end is similar to what Tyler and others in social media have been saying:

"Whether this is a net gain for the larger economy or for that specific young person (in a holistic sense) is a larger question than I can address here. I will say that I think the risk is that young people get stuck in a local maximum, resulting in a worse long-term outcome for the new employee as well as America’s economy."

I'm not sure I see how having smart hard workers focus on problems that are difficult and important (evidence for this is that people are willing to spend $600/hour to solve them) is somehow a misuse of their time. Particularly when I contrast it with academia where many smart people go to rot, working on problems nobody cares about because they have too much freedom and no disciplining pressure from the market. I buy that some consulting is too mindless and some academia is really productive and helpful, but in both cases that's the exception and not the rule.

With respect to the firms, it doesn't make sense for GE to maintain an internal McKinsey to do the hard stuff anymore than it makes sense for GE to maintain an internal Nike to make their employees shoes.

Is the idea that working on important problems is somehow not giving them enough freedom of movement early on? And outcomes like Bezos are just flukes?

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This is amongst the more thoughtful and well articulated comments posted on this blog.

It might be part of the consulting skill set.

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One aspect of this is that the economic value of consulting firms to their clients is outsourcing of responsibility. If you bring in McKinsey or other big consulting firm and they make some recommendations, and they turn out to be bad, you can point at the big brand and say, well, we got the best in. The economic value usually benefits the managers themselves rather than the business, in that it provides comfort blanket to their decision making while the consulting firm creams off the profits of the business via fees. A similar point can be made about a lot of financial services.
Of course they also provide other benefits such as an independent perspective. Still, while consultants tend to be intelligent and highly motivated, this isn't necessarily sufficient. My experience is that they as often as not, they only offer a superficial structure, necessarily because they do not fully understand the businesses they are advising or have any real expertise, other than generalities. The exception is specialist consulting firms that really understand the sector.

Agreed. Experience of clients with outside consultants is that they often bring them in to recommend how to cut the workforce. One consultant from McK did only that.

There work on pricing strategy is no different than what you would get from a well aware marketing prof; the problem academic consultants have is that they often don't have the workforce behind them to do the dirty work like data clean up.

Also, some accounting firms are in this space as well, and are just as good.

Going to take the troll hat off for a second.

Our type of work on pricing strategy is not “no different” from what you would receive from a marketing professor. Absurd claim.

We don’t only advise you, we advise your competitors!

Solve for the equilibrium.

A lot of the comments about this type of work revolve around a The Bobs from Office Space level of understanding how the industry works.

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+1

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What do you do if you're young and not merely smart, but smarter - both wanting to get paid reasonably for your smarts but not willing to spend your weekends, nights and sanity working for very little extra utility? If you're young and quite smart, you ought to know about the diminishing utility of your income, a problem compounded by progressive taxes.

Surf more?

It is only money.

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There are lots of paths for people who are smart but don't want to work hard. Academia is the obvious one. But as the quoted blog is suggesting, there are places in big firms where you can hide. Tech, in particular, sometimes pays to have people think about stretch goals. Maybe less than it used to, but this sort of thing still exists.

The not wanting to work hard is probably limiting in the long run for any path. And the premium in consulting might be a little more on the "work hard" side than the "smart" side, at least in the early years.

At least in economics, an academic career is pretty demanding for about the 10 years between starting a Ph.D. program and getting tenure. People burn out all the time.

It's more "difficult to succeed" than it is "hard", though. Part of the problem is you have early career people operating without a lot of skilled supervision, so they mismanage time or misallocate resources.

And many people go into PhD programs because they're afraid of getting a real job when they're younger, because they aspire to the life of the tenured professor when they're older, or just because it makes it easier to get a visa, so there's an element of work-aversion at the core of the system.

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I worked in government on energy policy.

Consultants were smarter, harder working and more efficient than us.

But there are massive limitations imposed by tendering/contracts and the fact they only stay for a limited time.

The result is we pay smart people to tell us basic economics and do some statistical analysis, and they never deal with the messiness of fitting theory to the real world. This where the real value is, and it often requires brains, experience and a flexibility that tenders and contracts fail to deal with well.

They also prevent in house staff developing.

Some join in senior roles later in their careers. And they're generally better than those promoted in house. My judgement is this is mostly due to being smarter to start with.

Compared to a world where these people work in house to start with, its sub optimal. The value of moving talent to where its needed is far outweighed by the limitations discussed above.

I expect this doesn't apply to things with more specific skills than economic policy.

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Back in the day, that's why we became consultants rather than salaried programmers or engineers. Pay bands.

It wasn't really consulting, but it did bring in higher productivity, for a price.

Exactly. Much better to be a line item on a multi million dollar project budget than under the scrutiny of HR. In my case, some of it is consulting for long term planning, architecture, and some execution. Better for the company to pay me 2x for a few months than hire a full time position.

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Even without the consulting option, young employees often job-hop to beat the pay bands. Those who feel they have more to offer might hop more.

And all this might in turn shape the training companies offer to employees. It should focus on the median, rather than the high performer who will hop(?).

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Consultants don't do real work. They aren't responsible for execution. Any monkey in a suit can deliver Powerpoints full of buzzwords and razzle dazzle the audience with vague business jargon. A 25-year old fresh out of college hasn't enough business experience let alone life experience to solve business problems like telling GE how to build nuclear power plants.

A nuclear power dinosaur (1950's technology), a three billion user internet network and eight billionaires hoarding half the planet’s financial assets leaves what? An intergalactic misallocation of talent perhaps?

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Most firms are not well-equipped to efficiently utilize the top tier of smart, talented but raw new employees. Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies.

I agree, and I'll add one more positive that I think is probably just as or more important than what the author mentioned: a wider range of experience. When GE hires young people for its management training program, they learn how GE does things and they learn The GE Way. If those same people go spend 4-5 years doing consulting instead, they learn how a dozen or so different companies operate and how they manage themselves. That's valuable experience you really can't get elsewhere.

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I set up my now gone Venezuelan consulting company after at least ten years of extremely diverse Main-street experience. I would be wary of someone recently graduated going straight into consulting.
As Daniel Patrick "Pat" Moynihan is supposed to have opined: “There are some mistakes it takes a Ph.D. to make”
https://teawithft.blogspot.com/2017/10/no-one-but-phd-or-mba-could-have-come.html

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A few random comments, as an ex-consultant myself:
1. a reason to hire consultants (with all the many negatives that entails) is the client firm can bring them in and then send them away when done: if the hiring firm builds up its own internal staff to do this work, it now has a higher fixed cost base, and a stickier fixed cost base
2. a (bad) reason to hire consultants even if it is management who is doing the "real" work is to shift blame: SVP X wants to lay off 5,000 people? first hire Bain to come to that same conclusion, then do the layoffs, and watch company employees blame Bain, not management; they can be a lightning rod for employee resentment (as seen in some of the other comments)
3. a reason young people go first into consulting (with I would assert no more than 10% of them expecting to make a career of it) is for job search: in the first 2-3 years a consultant will see 10 or more industries and make connections in all of them... and then is better equipped to make the longer-term job choice
4. remember that consultancies treat departing consultants VERY well , since they are all potentially future clients; thus the pitch to new people is "join us, work really hard (which you can do especially if you don't have kids yet), we will pay you 2x what industry will, give you a look at all sorts of future career paths, and then assist you with an outplacement program the likes of which no regular corporation will ever offer;" as the old joke goes, "McKinsey's primary product is alumni."

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The salary comparison is wrong--the author compares average undergraduate salary for engineering to top-tier consulting firm salary.

+1

He's arguing that the top-tier engineer can't escape the salary bands in big business, but that's just not true. I made much closer to the McKinsey number than the average engineering number he quotes in my first year as an engineer, and that was over twenty years ago. You won't find that pay at GE, but that's because GE mostly doesn't need that engineering talent to make some minor improvement on a valve or something.

McKinsey has a reputation for _underpaying_ young talent, not overpaying them. People go there mostly for the training, because it's great to spend your twenties working on a lot of hard problems and learning about a lot of companies, and secondarily because of the exit opportunities and the long-term pay prospects if you don't exit. Not because $100k at 23 is anything special in 2020. Go talk to Goldman or Google if you want to get paid now.

I worry more about the top 0.1% talent getting soaked up by Facebook, Google, and a handful of prop trading firms (Jane Street, Citadel, Jump, etc.). These are the kids that will be the true innovators, and it’s pretty hard to turn down $300-400k in cash (or close to that in total comp from G or FB) as a 22 year old. The average person going to McKinsey is smart and ambitious but in my experience not always deep enough to make true innovations happen.

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"Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies."

Why is no one disputing this?

This is only rational insofar as companies can have X-(tens/hundreds/thousands) of employees that perform steadily at low level in an environment that has negative demand for innovation and improvement - i.e., absolutely zero competition.

Today the department store business is paying the price for this mentality. Stores are closing by the hundreds and companies are shrinking. The collapse of the Department Store edifice is imminent now, but It's not like no one saw this coming. Amazon has been steadily eroding these companies' market shares for nearly two decades, while they continued to hire the same stupid people to do the same stupid things.

The truth is that the aging of CEOs is just a reflection of the boomer buddy system that keeps the people who know each other - competent or otherwise - in the driver's seat.

Actually, I wonder if there actually *is* a bit of a sorting effect - the smaller number of motivated people shift to the small number of growing companies, while the larger number of less motivated and useless people wind up in the declining industries - where, eventually, they accumulate in large enough numbers to cause the final collapse.

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I joined GE in 1966 in the finance entry level training program. My education was in liberal arts (about half the total entrants) and I needed the internal courses and job rotations to become capable. I rotated jobs every six months for three years (the program was later shortened to two years) while taking finance courses from GE managers after work. Almost all the GE financial managers went through the same drill. Many trainees left for successful careers in other companies. I worked for 36 years and retired as a vice president. Several changes in compensation occurred when Jack Welch became CEO. Salary bands were widened and managers given more discretion to retain talent. Stock options became a larger component of compensation. Employees lower in the organizational structure became eligible (my assistant received stock options). I think these were very effective in rewarding, motivating and retaining talent.
Regarding consulting. GE had an internal consulting operation. Welch shut that down and hired outside consultants as needed (which wasn't very often). He did recruit outside consultants into mid-high level positions which was contrary to the old "work your way up" approach. I'd guess the yield of successful hires was around 50%. By the way, the notion that Welch converted GE into a finance company is not true. When he retired, GE Capital was 45% of earnings and capped at that level. GE had the number one position in technology driven global markets for aircraft engines, power generation and diagnostic medical equipment, locomotives and specialty plastics.

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Unfortunately the consultancy companies don’t make good use of the talent either, because they are moral mazes and thus much of the energy is focused inwards on useless politics.

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Some good points by the anonymous poster... but I'd add that this is true mostly for a certain subset of fancy-schmancy consulting companies. It's a different situation in say, a top accounting consultancy. Similarly, they offer a much more fast paced and broad experience for their employees and a quicker promotion timeline. In contrast however, pay is not outstanding and it's quite a slog (so pay relative to effort is even lower than it may appear). In the big picture, it is a bit of the same result.... smart kids can do their time in an accounting firm and then move in to a relatively cushy manager job at a standard firm at a quicker time table than they would have starting from the bottom in the standard firm. But that starting pay disparity of $100k+ compared with 69k is not necessarily typical.

I would add something on pay bands too. In the context of manager self-serve human resources systems in which we want to empower managers to make pay raises directly, pay bands and pay increase guidelines create safety and perceived fairness for the firm. The reality is that most managers don't have the where-with-all to make good pay decisions and they often aren't well supported by HR Business Partners. So the solution is to empower them to make decisions.... within in a safe, limited range so they can follow their instinct to reward person X without creating an inappropriate pay disparity.
Another benefit of bands and guidelines is to prevent different internal departments from bidding up the price of the same employees. Before bands, we'd have employees get raises 5 times in two years as they changed from department to department 5 times. Pay bands, pay grade structure and pay guidelines reduce the degree to which the firm bids against itself.

I worked in risk energy trading risk management for years and then moved to HR, leading among other things our compensation team. I had a whole lot more respect for our pay policies once I got to see the decisions the typical manager makes... my god they on average make some pretty damn awful decisions. The problem with self-serve HR is that we expect leaders to be great people leaders, great technically and also experts and talent management and frankly that's a lot to ask. In my experience most managers are good at 1 of those, some are good at two, and a only a handful good at all 3.

Theoretically, the super smart hi-po folks would be handled on exception basis. The problem is that managers all think they have a couple super smart hi-po folks, when in reality the population is much smaller than that. So HR gets jaded by constant requests for exceptions and they over-react with firmness, which in the end makes it very difficult to make exceptions and everybody gets angry. One way to deal with that is to give each business unit X amount of exceptions per year... still not efficient, but hopefully you increase your chances that they go to the most deserving people.

All of you business leaders...if you haven't spent a year or two into HR I highly recommend doing a rotation there. Your eyes will be opened to the chaotic trash can your organization actually is.... it's worse than you think! On the other hand, a rotation into HR may send you into a spiral of bitterness and despair, so beware.

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you have to be a percentage of the profits to get rich.

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"Contrast that with consulting: an average graduate with an engineering degree (the highest earning of all degrees) earns $69k but a new associate at McKinsey earns $105k. The disparity only widens for lower-earning degrees."

This seems like a piss-poor comparison.

The McKinsey associates aren't average graduates. They aren't even average consulting graduates...they are the top of their pool.

The same source says the average CS major makes $67k, but everyone knows that's not what google pays a new developer.

I buy the argument that young people look to consulting for the career progression and exit opportunities, but I don't buy that it is for the money or the presence of pay bands. Somebody can get an MBB job can find similar pay elsewhere.

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