Random thought of the day: management consulting firms will always be lagging indicators of the business cycle

I am not quite sure what the starting salaries are at management consulting firms these days but for argument’s sake let’s say it’s $50,000 for analysts and $100,000 for associates. Given that management consulting firms “rent” their services for at least 5 times the employment costs, the downside of being understaffed is much greater than the downside of being overstaffed. As a result, they will always be over-staffed at the beginning of a recession.

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  • That is the normal business model of consulting firms. Also they have a higher “flexibility” of the workforce which other companies don’t, so they can react and do not need to prepare in advance. So they can easily maximize their profitability, if they can attract enough talents and if they can maintain their reputation.

  • Using the same argument, if I expect the economy to recover, will I not be incentivized to hire more BAs and ASCs, in case the economy recovers? B/C the cost of being understaffed is so much higher (missed revenue opportunity), I would rather be overstaffed if I think the economy will recover.

    Therefore one can predict the expectations of consulting firms’ true expectations about the economy by looking at the % of staff on the beach.
    Is this not correct?

  • Absolutely. They would rather be overstaffed than understaffed so they will not cut early in the downturn and will probably keep more people on the beach rather than let many go. Likewise, they probably will hire ahead of an expected recovery.

    That said at the beginning of the downturn you will also see a swelling of people on the beach. It does not mean that they are expecting a recovery – it’s just that they have not adjusted their headcount and hiring volume yet.

  • For those who have not worked in consulting – you are on the beach when you are in between projects. When on the beach other than being reachable you can usually literally go to the beach. Once in a while you get roped in to internal projects instead.