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Inside job: Consultants don’t need to be outsiders

American Express CEO Ken Chenault got his start at the company in its internal consulting department.

When Delta and Northwest Airlines announced that they would merge in 2008, David Rabkin, the vice-president of the Delta co-brand at American Express, already had a plan for how his company should react.

He did not have any deep sources within Delta (DAL) tipping him off about the deal. Instead, he had just moved from American Express’s (AXP) internal management consulting group, the Strategic Planning Group (SPG), where, two years earlier, he and his team developed a case about what would happen if Delta, the company’s largest co-brand partner, merged with another airline.

“We were prepared for this,” says Rabkin, who spent two years in SPG at American Express before moving to its Delta co-brand division.

Mention the idea of bringing in outside consultants, and it will inevitably lead to grumbling from someone in management. While top consulting firms bring a fresh perspective mixed with years of industry experience, hiring them can raise concerns that it could open the door to leaks to competitors, threaten a company’s culture, or lead to nothing once the consultants have made their recommendations and packed up their PowerPoint presentations.

And then there’s the price. “If you have to ask how much it costs, you shouldn’t hire McKinsey,” says Lawrence Hrebiniak, a professor of management at the Wharton School of the University of Pennsylvania.

Most large organizations rely on outside consultants to advise them on new initiatives, but many big companies, from Dell (DELL) to Wyeth, have developed internal consulting groups that offer flexibility to launch new initiatives and stay ahead of the competition, Hrebiniak says.

While concrete numbers are difficult to come by, in part because different companies call their internal consulting groups by different names, Hrebiniak believes the number of businesses relying on insiders is increasing as companies look to supplement or even replace outside consultants.

To be sure, there are inevitable risks to relying on inside talent, Hrebiniak says. Insiders may lack the industry knowledge and experience of a seasoned consultant who has worked on dozens of similar projects. And being told what to do by fellow employees can breed resentment and a feeling among managers that “the internal group is checking up on us,” Hrebiniak says.

“They become the cops on the cops,” he says. “No one likes internal affairs.”

But a well-designed and well-executed internal consulting group can be a powerful weapon for a company that is looking to grow and develop talent internally. Hrebiniak points to Johnson & Johnson (JNJ), IBM (IBM), and Motorola (MMI) as businesses that use internal consultants successfully.

On projects that require a lot of technical knowledge, internal consultants often offer more know-how than an outsider. There also are the benefits of internal relationships, the connection that the consultants have to the business and the advantage that the consultants will stick around through the implementation process, where unexpected problems often arise, Hrebiniak says.

These internal groups can also serve as executive training programs, giving top talent the chance to get a handle on several businesses before being promoted to lead a group.

“I’ve watched many alumni of the strategic planning group move throughout the organization and have enormous impact on our success,” says Ken Chenault, CEO of American Express, who started his career at the company in SPG. “Behind many of our most impressive triumphs, you find people from strategic planning.”

Rabkin came to SPG after working at a consulting firm. He was lured by the idea of sampling several businesses in a major company before settling in as a leader of one of those businesses.

“You’re welcomed in for a set of skills you already had, but you develop new skills you need to succeed in this corporate environment,” he says.

Rabkin’s experience in SPG is fairly typical of the group, which American Express created in 1977. He spent two years in the group, getting some say in which projects he wanted to work on. Each project lasted about three to six months.

About 18 months into their time in strategic planning at American Express, most employees start thinking about where they want to go within the company. By that time, Rabkin says, SPG staffers typically have had a chance to work with several departments and are ready for a promotion.

Moving to the Delta co-brand was a natural fit for Rabkin, and when the Delta-Northwest merger happened, he brought in SPG to help work through different scenarios.

To avoid some of the pitfalls common among internal consulting groups, American Express’s SPG group has a strong alumni network. And when SPG teams up with another division to work on a project, they are seen as part of the team and not cops telling other employees they are doing things wrong, Rabkin says. SPG staffers are encouraged from the start to think about where they want to land, so the people they are consulting for often end up being the people they work with in the future.

American Express also hires many former management consultants to work at SPG, giving the group industry experience.

“They are people who have benefited from an unusual vista,” Chenault says. “They have seen the organization both from a distance and under a microscope, worked with a number of our business units, looked at our strengths and weaknesses with an objective eye, and worked with senior managers from around the world. They simultaneously wear the hats of insider and outsider, and thinker and doer.”