Integrating Behavioral Economics and Consulting

Over the past few years, I have been involved with a number of projects that utilize behavioral economics principles to improve outcomes or change people’s behavior. Since this blog has a long history covering management consulting, I thought I would share some thoughts on integrating behavioral economics into the practice of consulting.

For those unfamiliar with the term “behavioral economics”, I generally describe behavioral economics as a combination of psychology and a traditional science like economics or finance. Whereas models in traditional economics and finance often assume that people are supercomputers and can maximize complex notions of utility over a number of parameters, behavioral economics tries to account for the beauty and shortcomings of the human mind and spirit. For example, why do some people help or punish others when it is not in their best economics interests to do so? Why do some people not help themselves (e.g., fail to save enough for retirement) when they clearly can from other measures and/or field testing? How do we know when a commercial or public system has been set up in a behaviorally unfriendly way, and what can or should be done about it?

These last questions get at the heart of one model I have seen for integrating behavioral economics into the consulting model.  This model is the notion of integrating behavioral audits and recommendations into the consulting process.

In the book, “Save More Tomorrow” http://www.amazon.com/Save-More-Tomorrow-Practical-Behavioral/dp/1591844843, Dr. Shlomo Benartzi introduced the notion of a behavioral audit for 401(k) and defined contribution plans. In such an audit, questions are asked to the effect of:

  • Do employees have to opt-in or opt-out relative to joining the 401(k) plan? (This question addresses the behavioral challenge of inertia)
  • Are employee savings rates automatically escalated when a person gets a pay raise? (This question addresses the behavioral challenge of loss aversion)
  • Do participants get 401(k) statements that show projected income at retirement? (This question addresses the behavioral challenge of myopia)

The behavioral audit then opens the door for strategic recommendations such as defaulting employees into plan or at least providing them easy ways to get into a plan, changing employer match rates, restructuring choices in the investment menu, etc. If a company wants to go really deep on implementation, they have an opportunity to work with their consultant or financial advisor to create options, prioritize, and work on an implementation plan.

More generally, the notion of a behavioral audits and recommendations can be designed to assess many other processes. For example, how well does a software application work from a behavioral perspective in terms of getting people to take action? How effective are our management dashboards and processes for managing a portfolio of projects? How good is our website in terms of disseminating information and facilitating choices?

Beyond audits and strategic recommendations, there’s also a tremendous opportunity to apply behavioral economics principles to a second area: the design and implementation phases of consulting projects. Behavioral economics recognizes that people are influenced by things that won’t make a difference to a robot but do matter to humans – we have to pay a lot more attention to design, because design is there whether intended or not. And any design architecture, explicitly or implicitly imposes a value system. Such a value system could be to maximize value for a specific party.  Another value system might be to do the most good for the most people.

So where to start?

A first step is to open your eyes more broadly to behavioral economics. I think that cross-functional disciplines (whether behavioral economics or other) tend to be underappreciated because appreciation requires knowledge that cut across areas that are not traditionally combined.

A second step is developing a good base of knowledge regarding behavioral economics and applications. You can do this by working with people experienced in the area. You can also start to get introduced to these concepts through reading books like “Nudge” (by Thaler and Sunstein) or “Thinking, Fast and Slow” (by Kahneman). Although I am biased (since I was part of team to help with the book), Benartzi’s “Save More Tomorrow” book is a great book for shedding light on how behavioral economics principles are applied in detail to a very specific problem (i.e., design of defined contribution plans for retirement savings).

A third step is recognizing that while it is important to draw from research and core principles (done by academics and from certain areas of the industry), it is important to test your application of behavioral economics, whether that application be for consulting, a solution, or a product. Sometimes we think one behavioral principle will apply in a scenario when something else turns out to be the case. The use of solid behavioral principles based on research should improve the odds of success. Yet in my experience how we make judgments and decisions as people is, at times, both scary and fascinating. So remember that your application of behavioral economics should be tested before it is rolled out.

Eight Secret Weapons of the Modern Consultant

Although I’ve developed a number of blog posts addressing the practice of management consulting, I have spent little time tying things together into a framework of secret weapons of the modern consultant. Secret weapons are a spectrum of tactics and skill areas – while some may be used widely, they are often passed through mentorship or apprenticeship in bits and pieces. A modern consultant is a professional that can work in dynamic industries, operate within multiple types of consulting organizations (e.g., niche, large traditional), and has experience as both an operating manager and an advisor.

So here are eight secret weapons of the modern consultant (arranged roughly in order from foundational to more advanced)

  1. Problem Statement Articulation Skills – This skill requires a consultant (or manager) to define the boundaries of a scope of work. Implicit to this is being able to define what decisions points need to be met and the managerial significance of the issue at hand. Because the organization is preparing to commit resources to investigating a problem, this is core to getting started. For some further discussion on this topic, I wrote a management consulting post awhile back on “Articulating and Rearticulating Problem Statements” (https://steveshuconsulting.com/2007/04/articulating_an)
  2. Structured Problem-Solving Skills and Industry Knowledge – Facility with structured approaches may be developed by learning key frameworks such the popularized McKinsey MECE approach (see here http://firmsconsulting.com/2010/09/22/a-complete-mckinsey-style-mece-decision-tree). Skills can also be gleaned from thinking about how one would practice consulting science versus giving simple advice (see post by me here https://steveshuconsulting.com/2006/12/an_illustration-2). Aspects of industry knowledge come through experience and specialization and can be augmented by reading trade magazines, etc.
  3. Engagement Management Mastery – This skill ties together problem statement, structured approaches, and industry knowledge. Mastery goes further by synthesizing the resources that will solve the problem at hand along with managing advisor-level relations with the executive sponsor. For more info on the engagement management topic, readers may consider reading my post at https://steveshuconsulting.com/2007/05/perspectives_on.
  4. Interpersonal, Facilitation & Leadership Skills – Interpersonal and leadership skills are pretty well-documented in other areas. One of my favorite foundational books on leadership is the Leadership Challenge by Kouzes and Posner (http://www.leadershipchallenge.com/WileyCDA). On facilitation skills, I have seen less documentation on the subject in a concise format. Facilitation skills are especially important because they help a professional in cases where authority does not exist and where influence must be used to achieve management goals. Here is a post on facilitation skills that I wrote before https://steveshuconsulting.com/2008/01/a-perspective-o.
  5. Storytelling and Executive Analysis Skills – At least two core frames of thinking come to mind, when I think about this subject. The first frame is best illustrated by how one ties together presentation slides in a storyboard using “bottom-line titling” versus “topical titling” as described here (https://steveshuconsulting.com/2007/02/what_a_sample_c). The second key frame is driving towards answering “So What?” questions all along the way in an analysis presentation. An example of answering the “So What?” question might be, “Client needs to focus on improving six red-flagged areas which cost the client $X per annum in above average churn.” Without bottom line or prescriptive messages to analyses, consultants may find themselves in an unfortunate spot of brain-dumping information with no end purpose or goal.
  6. Adaptation Skills – When I think of developing adaptation skills, I think of developing skills that improve behavior and communications skills “in the moment” a la Business Improvisations at http://www.businessimprov.com (Disclosure: Client). I also think of changing one’s reference of thinking with concepts such as “there are no sacred cows”. Something that I have a lot in consulting environments is the idea of constantly seeking better ideas, better ways to describe things, and new approaches. With this in mind, one can’t get too protective of one’s work because one’s goal is really to further the quality of work of the engagement team and ultimately the end goals of the client.
  7. Business Development and Management Skills – Consulting services sales and marketing are unique topics, and turning to folks like Michael McLaughlin at http://www.mwmclaughlin.com, Ford Harding http://www.hardingco.com/blog, and Ian Brodie http://www.ianbrodie.com are some of the best investments that one can make. For the management of consulting firms, one of my go-to references is Managing the Professional Services Firm by David Maister http://www.amazon.com/Managing-Professional-Service-David-Maister/dp/0684834316/ref=ntt_at_ep_dpt_2.
  8. Forecasting and Envisioning Skills – The eighth secret weapon is quite elusive. Do you develop these skills by understanding systems thinking (a la Peter Senge and the “Fifth Discipline”)? Does it come from understanding economics or innovation processes better? Does it come about by trying to apply social responsibility concepts (a la Umair Haque and “New Capitalist Manifesto”)? It is possible that the eighth secret weapon is analogous to the mysterious Dragon Scroll from the animated movie, “Kung Fu Panda”. For me, I see three prototypes of people that develop the eighth secret weapon: those that have innate talent and vision already, those that develop such skills by mastering a craft (or a practice area), and those that use their networks to help develop insights into the future.

So there you have it. Eight secret weapons to further one’s mastery of consulting.

What To Do When Your Professional Services Organization Is Not Professional Enough

In helping companies develop, tune-up, or reboot their professional services organizations, here are some example of complaints I’ve heard that reflect the need for change:

  • Customer: “Instead of providing consulting services, your organization is marketing its products to me and asking me to pay the bill.”
  • General manager of services organization: “I am not sure we know what services we sell versus what services are provided as part of the product pre-sales cycle.”
  • Manager of services organization: “We have project in XYZ area, we’re doing another thing with company ABC, and we also have a lot of internal work on DOG. It’s really hard to report on where our time is spent.”
  • Customer: “The consultants you’ve assigned seem to have good technical and analytical skills. I am not sure what they are doing to help me though.”
  • Field manager: “Customer A is pretty much dead and will need a restart. We got to step 10 in the process before we realized our services team forgot to perform step 2 for quality control.”
  • Manager of services: “How do we price jobs? How do we cost jobs? No particular method.”
  • General manager of services: “Our folks have traditionally provided services for free, and now we are trying to charge money for them because the services have value. But our quality is not there, and we don’t have the discipline built into our DNA.”

One way to think about fixing these organizations is from the ground-up (roughly from delivery to project management to sales to strategy):

  1. Inventory the delivery team – What skills do these folks have on the technical side? What soft skills do they have in terms of dealing with clients? How can we develop the team’s leadership skills?
  2. Inspect either the project management or engagement management areas – To what extent is a cadence and communication structure established between the organization and the customer? Have there been frameworks or tools developed to support the customer-facing processes? Are there knowledge management processes in place to help with delivering greater value to the customer? What role does mentorship play in the organization?
  3. Analyze the sales process and key contacts with customer organization – What is the strategy for services? Do we have a crisp story on getting from needs to solutions and services? Do we proactively manage the sales pipeline? Who owns and follows-through on key customer contact points? Is there a customer satisfaction process that involves both direct parties delivering and independent parties objectively evaluating the quality of services delivered?
  4. Assess what’s next for customers and how your company’s boundaries fit into a larger, whole solution for the customer – What role should thought leadership play? How can the services organization figure out how greater value can be added to the customer experience? Should we expand the offerings? Should we partner with other companies? Or maybe we should change the total mix of products and services so that the customer can derive additional value on their own?

Professional services organizations are complex, and the above framework enables one to start to think about how one can make improvements that affect services delivered today, while keeping other areas in perspective for handling somewhat further down the road.

Please feel free to let me know about your thoughts and experiences. Thanks!

Related post: Special Discussion On Starting Consulting Services Organizations Within Product Companies