What a Difference a Year (with a Consultant) Makes
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Organizations May 2, 2018

What a Dif­fer­ence a Year (with a Con­sul­tant) Makes

A study in Mex­i­co finds that con­sul­tants can help small- to medi­um-sized busi­ness­es expand.

Businessman leaps up steps.

Yevgenia Nayberg

Based on the research of

Miriam Bruhn

Dean Karlan

Antoinette Schoar

In 2007, a Mex­i­can pet store was on the brink of dis­as­ter. The own­er had fall­en behind on a loan and had tak­en out anoth­er loan to pay off the first. Now all of the store’s rev­enue was being thrown at a grow­ing mound of debt — and its eight employ­ees couldn’t be paid. 

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The sto­ry is not unique. Small to medi­um enter­pris­es fre­quent­ly have trou­ble expand­ing past a cer­tain size, par­tic­u­lar­ly in devel­op­ing economies like Mexico. 

There are all sorts of the­o­ries about why that is,” says Dean Kar­lan, a pro­fes­sor of finance at the Kel­logg School, and one of them is about man­age­r­i­al cap­i­tal.” That is, busi­ness own­ers might lack the unique set of skills and busi­ness savvy, such as man­ag­ing peo­ple or cre­at­ing a busi­ness plan, required to help their com­pa­nies reach the next level.

Could tai­lored advice from an expe­ri­enced con­sul­tant make up for gaps in man­age­r­i­al know-how? And would fill­ing those gaps help com­pa­nies over­come hur­dles and keep growing? 

In 2008, the state of Puebla’s Min­istry of the Labor decid­ed to offer high­ly sub­si­dized con­sult­ing ser­vices. And crit­i­cal­ly, they want­ed to learn whether such con­sult­ing actu­al­ly worked. They reached out to Kar­lan and econ­o­mists Miri­am Bruhn of the World Bank and Antoinette Schoar of MIT, as well as Inno­va­tions for Pover­ty Action (a non­prof­it orga­ni­za­tion found­ed by Kar­lan), to help eval­u­ate the con­sul­tants’ efforts. 

Eighty ran­dom­ly select­ed firms end­ed up with con­sul­tants. The con­sul­tants con­duct­ed a day­long diag­nos­tic ses­sion with each firm and then designed a con­sult­ing rou­tine for the next year. Mean­while, a con­trol group of 282 com­pa­nies con­tin­ued oper­at­ing as usu­al, with­out expert advice. 

The aver­age firm that had received con­sult­ing grew its staff by 57 percent.

A year lat­er, the researchers found, the firms that were offered con­sul­tants saw both their pro­duc­tiv­i­ty and their return on assets increase rel­a­tive to the con­trol group.

Then, using data from Mexico’s social secu­ri­ty agency, the researchers tracked the com­pa­nies for anoth­er five years — long after the con­sult­ing ser­vices had end­ed — to see what hap­pened to payrolls. 

They found that the aver­age firm that had received con­sult­ing grew its staff by 57 per­cent over that peri­od, while the aver­age firm in the con­trol group remained rough­ly the same size. Fur­ther­more, total wages paid by firms that had had con­sul­tants increased 72 per­cent, indi­cat­ing that they were increas­ing employ­ees’ pay over that peri­od as well. As for the strug­gling pet store, it saw prof­its increase a full 50 per­cent, despite start­ing on the brink of bankruptcy.

The results were remark­able. But the researchers could not help but won­der: What, exact­ly, had the con­sul­tants changed? 

After the first year of the exper­i­ment, the researchers con­duct­ed a sur­vey ask­ing firm own­ers what had made their con­sul­tant so valu­able. The answers var­ied wide­ly: some said the con­sul­tants improved their mar­ket­ing or account­ing, while oth­ers point­ed to dif­fer­ent dimen­sions, like pric­ing or human resources. 

The researchers also mea­sured the own­ers’ entre­pre­neur­ial spir­it” and found that own­ers who had been ran­dom­ly select­ed to receive sub­si­dized con­sult­ing said they were more goal-ori­ent­ed, more dri­ven, and more con­fi­dent in their prob­lem-solv­ing abil­i­ties than they had been before the consulting. 

While this is an intrigu­ing result, it is com­pli­cat­ed to inter­pret, Kar­lan explains. It is pos­si­ble that the con­sul­tants pro­vid­ed the firm own­ers with new skills and infor­ma­tion, which they used to grow their com­pa­nies, just as the Min­istry of Labor had intend­ed. And then that new­found growth gave them high­er lev­els of entre­pre­neur­ial spir­it. Alter­na­tive­ly, maybe the con­sul­tants imbued the own­ers with a new­found con­fi­dence, which empow­ered them to make the tough, risky deci­sions they knew would ben­e­fit the firm. 

One of the main ques­tions Kar­lan felt remained unan­swered: If the con­sul­tants were so good at help­ing oth­er busi­ness­es grow, why weren’t the con­sul­tants’ own busi­ness­es grow­ing with leaps and bounds? This is an area Kar­lan is keen to pur­sue: Are there con­tract­ing chal­lenges, trust prob­lems, infor­ma­tion prob­lems, liq­uid­i­ty prob­lems? What is hold­ing back the mar­ket for these consultants? 

Featured Faculty

Dean Karlan

Professor of Economics and Finance

About the Writer

Jake J. Smith is a writer and radio producer in Chicago.

About the Research

Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. 2018. "The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico." Journal of Political Economy, 126(2), 635-687. DOI: 10.1086/696154

Read the original

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