Internal vs External Consultants: The Definitive Guide (2023)

Key Takeaways

• One of the most noticeable trends in the ever-changing consulting industry over the past 20 years has been the expansion of in-house consulting groups.
• Internal consultants are employees who work for a company or organization and provide consulting services to other departments within the same organization.
• External consultants, on the other hand, are independent contractors or consulting firms that are hired by organizations to provide expertise on specific projects or issues.
• Several factors should be taken into consideration by companies when choosing between internal and external consultants including the level of independence, skills and experience, costs, talent, relationships, behavior, and implementation.
• Working with both internal and external consultants has its benefits. The secret resides in where, when, and how they are utilized.
• All things considered, when it comes down to making the right decision for your business, choosing between internal consultants and external consultants simply boils down to understanding and assessing your unique needs and wants.

This month, let’s shine the spotlight on internal consultants – the in-house superheroes who play a crucial role in driving their organizations’ long-term strategies. Whether they’re called center of excellence, competency groups, or any other fancy name, these consultants are truly the prized assets of any company. It’s no surprise that major players like Bayer, American Express, Google, Airbus, Samsung, Dell, SNCF, BASF, and Deutsche Post have established their own internal consulting groups.

These groups come in various sizes, ranging from small ad hoc teams to fully-developed groups consisting of 100 consultants or more. SNCF, for instance, the French railway company, has developed an independent subsidiary called SNCF Consulting of roughly 150 consultants that handle more than 100 projects a year for the company.

As their name suggests, internal consultants are permanent employees of an organization, and they usually focus on serving a single client – their organizations. But that does not mean they are less competent than their external counterparts.  Some argue that internal consulting represents the pinnacle of specialization in the consulting industry. However, others contend that companies may sacrifice the best practice dimension and independence in doing so.

Needless to say, the debate surrounding this topic can go on for hours, considering the pros and cons of both approaches. Amid the debate, the fact that stands out is that the population of internal consultants is ever growing. Therefore, it is worth exploring the reasons why companies are forming these internal groups.

Unveiling the Motives: Why Companies Embrace Internal Consulting Groups

To Decrease Consulting Costs

Consulting services are expensive, yet growing companies cannot do without consulting. After large Companies have professionalized their procurement, they come to realize how much they spend on Consulting.

Cost-Conscious CEOs then want to decrease their Consulting expenses and tend to stop hiring only the large strategy players such as McKinsey, Bain or Boston Consulting Group. Thus, high costs are often cited as the first reason for creating an internal consulting team, according to CEOs.

Obviously, the internal group’s lower expenses have nothing to do with their competence. So, how come they cost less? Employees in internal consulting groups are most of the time compensated on the same grids as internal employees. Their full cost is, therefore, two to three times lower than external consultants.

After all, it does not include the cost of the partners or the cost of the beautiful office in central Manhattan. If internal consulting teams can provide performance close to the external ones, the trade-off will almost always lean in favor of the internal team.

To Strengthen Their Talent Pipeline

Letting your trusted, long-term employees go after they have gained a lot of experience and expertise under your wings is pretty frustrating. But they are bound to fly the nest if they fail to find a growth path in front of them. Forming a center of excellence with high-potential employees gives companies a way to nurture and keep talent in-house.

Thus, many companies use their internal consulting groups as a career accelerator for their star performers and domain experts. GE was the one to have inspired this trend through its black belt concept. High-potential individuals get trained in consulting problem-solving and managerial concepts. They also acquire the structure and discipline of consultants.

They also get exposed to the top management and highly strategic projects giving them a broader perspective on the company. After a few years in the Consulting Group, they take a senior position in the organization. And in this way, talent remains with the company.

To Ensure What happens in Vegas Stays in Vegas

For some top-secret projects, the management wants to keep everything strictly confidential without any outside involvement whatsoever. It can be because it is a highly strategic decision or very touchy Intellectual Capital. The more people are at the party, the higher the risk of breach of confidentiality.

Besides, clients love to have access to benchmark information on the competition, but are not that keen when it comes to sharing their data. Of course, most consulting firms will argue that they have established Chinese walls and that all information stays private.

However, it is at times difficult to disconnect the right and left side of one’s brain.  Working with internal consultant decreases the risk of using the information collected as benchmark or reference with another client.

To Leverage the Expertise of a Dedicated Team

Not long ago, working with consultants was seen as a necessary evil, and we all know the joke about the consultant and the watch. However, Executives have seen the benefits over the years to work with external experts. Their image has shifted to a more neutral position, from judgment to support. As you can imagine, the growing population of ex-consultants in the Executive ranks helps as well.

Companies have understood the interest of dedicated teams working on projects independently from the rest of the organization. They have indeed identified a potential lever for improvement in creating teams with the same focus and ways of working as external consultants.

Also, there used to be an experience and impact gap between internal and external consultants. However, as the value chain is evolving, internal consultants now have access to better talent and methodologies. On some mainstream projects such as commercial excellence or lean, the impact from internal consultants is now equivalent to the one brought by external consultants.

Last, organization structures are now optimized to get synergies and make the most of the existing talents. If you put together the needs of all the business lines and support lines, most companies will be able to get a critical mass of similar projects that could justify building a dedicated team.

To Capitalize on an Existing Concept

Interestingly, Internal Consulting goes by many aliases. Only a handful of companies are now “calling a cat a cat.” If you want to simplify the debate, you can reduce Internal Consulting to its core characteristics: internal teams, experts in their domains, working on project mode to improve the effectiveness and efficiency of the company.  You will then realize that many functions in the organization fall under this umbrella.

What about the excellence functions newly created to work on commercial or purchasing excellence? Or the customer experience task force? The internal audit team working on processes? The business process management group?

Setting up improvement teams is not a new concept, but it is worth exploring the evolutions. You can organize them as a single group or community to professionalize the ways of working. Or manage the demand and optimize the resources by creating fluidity across the teams. Afterward, you can decide to refer to it as Internal Consulting or to keep it stealth.

Internal Vs External Consultants – Spotting Differences

INTernal and EXTernal consultants are only distinguished by three letters. Beyond the shared characteristics, a few factors distinguish the two groups from one another. Here are some key factors to take into account when choosing between internal and external consultants.

#1. Level of Independence

Internal consultants are subject to organizational hierarchy, whereas external consultants operate at a distance from the organization and, in principle, provide impartial and independent advice.

External consultants, on the other hand, have a vested interest in acquiring recurrent business when internal teams must consider influential stakeholders that could affect their future careers.

Therefore, they are typically very cautious with their conclusions and how they convey them if they pose a substantial threat to future revenue streams. Independence from stakeholders, certainly; from power, possibly.

#2. Skills and Experience

When it comes to skills and knowledge, there are many things that both groups have in common. Most internal consultants are experts in their area or have just joined the company after working as consultants.

External consultants have an advantage when it comes to consultative selling and advanced skills. Internal consultants will do the same thing with the trade-off between cost and performance for skills that have started to become more like commodities.

One thing that makes the company stand out is how close you feel to it. Even though some outside advisers work with companies for years, nothing beats being a part of the company to understand its culture and main tasks.

For some projects, you need to know a lot about the company in order to fit in or give an insider’s view. Most likely, the internal consultants are the best partners. But sometimes you need to add the experience of other companies in the same area or with the same capabilities to the project. Then, it will be hard to beat the outside experts.

Top consulting companies live and die by how well they can come up with new ideas. They have to be on the cutting edge of their field to stay important. For consultants to move up in their company, they have to write white papers and research papers.

It doesn’t matter as much for internal advising roles because they are the same as other jobs in that they focus on projects and getting things done.

#3. Costs

Internal consulting groups are often viewed as cost centers within organizations. They typically charge back for their services, just like an engineering team would charge for their time on a project.

This practice helps establish a check and balance system with their internal customers, ensuring that the services provided are valued and used appropriately. However, there are a few companies, such as Deutsche Post and Thales, that have taken a different approach.

They have positioned their internal consulting groups as internal business units with their own profit and loss (P&L) responsibilities. These internal consulting groups may even offer their services outside of the company, generating revenue and acting as profit centers.

In contrast to external consulting firms, which charge their clients directly for their services, internal consulting groups’ costs are typically absorbed by the business units or departments benefiting from their services. This can sometimes create a lack of visibility on the actual consolidated consulting fees paid by the organization as a whole.

It is also worth mentioning that internal consulting groups are often more cost-effective compared to external consulting firms. This is because they do not have significant sales and marketing expenses, and the salaries of internal consultants are usually lower than those in the consulting industry.

Therefore, leveraging internal consulting resources can be a cost-saving measure for companies while utilizing their internal expertise effectively.

#4. Talent

The acquisition and retention of talented individuals can indeed be a challenge for internal consulting groups within companies. The consulting industry, in general, offers highly competitive compensation packages, making it difficult for industrial companies to match those standards.

Hiring senior consultants or partners can become unattainable for many companies, requiring them to be creative in attracting the right talent and providing growth opportunities.

One solution to address the compensation disparity and deepen the relationship with the company is to incorporate a few years in the internal consulting group as part of the career path for executives with high potential.

For example, graduates of a company’s internal leadership development program, such as Crotonville, can be mentored as black belt project executives within the internal consulting group before advancing their careers.

This approach allows them to gain valuable consulting experience while remaining connected to the company, resolving the challenge of attracting and retaining top talent.

Another notable distinction between top consulting firms and internal consulting groups is talent homogeneity. External consulting firms typically have access to a large and diverse talent pool, which may not be the case for internal groups.

Internal consulting groups are often limited by the critical mass of available talent within the company and internal HR policies. Additionally, they are often centralized at the company’s headquarters, which restricts immediate access to a global talent pool that global consulting firms can tap into.

These factors can contribute to a more heterogeneous talent profile within internal consulting groups. Furthermore, the tenure of internal consultants may differ from that of external firms. They are often advancing in their careers, and the companies cannot sustain large and enduring internal consulting structures.

This limitation also affects the internal development opportunities available to consultants. As a result, internal consulting groups may not follow the traditional pyramidal structure seen in established consulting firms. Their managers may have greater involvement in project execution, but their capacity to handle multiple initiatives can be limited.

#5. Relationships

Being at the top is lonely. CEOs and top executives frequently find it difficult to discuss sensitive topics with their executive teams. They frequently value having senior, reliable consultants who are independent of the business. Certainly, external consultants outperform internal ones in terms of political added value.

On the other hand, the internal way is often easier when it comes to communicating with teams and making changes. This is especially true when putting in place programs that don’t need a strong connection to the top.

When the impact has something to do with how influential a consultant is within a company, it will be important to connect with top management or the board. External teams often have a better relationship with this group.

#6. Behavior

External experts always have the company’s best interests in mind. Some experts even decide to buy shares of the company they are helping or to be paid in equity. Even though there is a chance of a conflict of interest, it shows how committed they are. Consultants, on the other hand, make a living by selling projects and making sure they keep going. During a job, they keep their eyes on the goal, which is to give satisfactory results. They are also always thinking about selling the next part of the project or finding a connection to another project.

Internal experts are less tied to this goal in order to sell another project internally. They are also more focused on making a difference because they have skin in the game. Still, there is no perfect case. Instead, they will focus on getting their next step in the company and, most importantly, not putting it at risk. This goal could make it harder to finish the projects in their entirety.

#7. Implementation

Do you need a consultant to help diagnose a problem or design a strategy? Or do you need support in implementing your decisions? It’s rare to find a consulting firm that excels at both, and implementation consultants are usually less expensive than strategy consultants.

Typically, the daily rates of external consultants are ranging from $1000/ day to $10,000/day depending on the capabilities and the seniority of the consultant. As a result, many companies concentrate their consulting efforts on duties they cannot perform themselves. For example, let’s say that when you have a large initiative, you will only hire consultants on the parts that you can’t do yourself and keep the rest in-house.

Another thing to consider is whether you want a hard or soft approach. Are you prioritizing getting buy-in from your team and a collaborative process? Look for a consultant with a high sensitivity to change. Or, if your priority is getting the work done, you’ll need a consultant focused on the hard aspects of the project.

Lastly, how senior do you need your consultants to be? You’ll need senior consultants with on-field experience to professionalize your team’s processes. But if you’re just after results, you can work with younger consultants supervised by a more experienced colleague. It all depends on your priorities and goals.

6 Points to Consider When Working with Internal Consultants

#1. Identify Your Recurring Consulting Needs

In order to establish an effective internal consulting group, it is important to thoroughly analyze and identify your organization’s recurring consulting needs over the next 3 to 5 years. This evaluation will enable you to determine if you have a critical mass of projects that could justify the investment in an internal structure and pinpoint the precise areas where an internal consulting group could deliver substantial value and offer the necessary expertise.

#2. Develop a Clear Value Proposition

To ensure the internal consulting group delivers sustainable results, it is important to establish a clear value proposition. Define the core expertise and focus areas of the group, emphasizing the topics where their knowledge will have the most significant impact.

At the same time, clearly communicate the subjects they will not handle under any circumstances. This clarity will help set expectations and align the group’s work with organizational goals.

#3. Demonstrate Value to The Organization

The internal consulting group should actively demonstrate its value to the rest of the organization. By delivering superior impact and tangible results, the group can win projects and gain credibility.

It is important to showcase the value brought by the group’s expertise, methodologies, and problem-solving capabilities, ensuring that their contributions are recognized and appreciated.

#4. Avoid Forced Implementation

You should not force the use of the internal consulting group on projects where they may not be the best fit or where the project’s failure could be attributed to other factors.

Forcing their involvement in unsuitable situations can lead to negative perceptions and hinder their effectiveness. The internal consulting group should be utilized where their skills, experience, and collaborative approach can make a meaningful difference.

#5. Ensure Sustainable Funding

While the initial setup of the internal consulting group may require corporate funding, it is important to establish a funding model that allows the group to sustain itself in the long term.

Consider charging internal clients for the consulting services provided by the group. This approach incentivizes internal clients to see the value in utilizing the group’s expertise and ensures the group’s financial viability.

#6. Select The Best Fit for Each Project

Like any other consulting firm, an internal consulting group has its own Consulting DNA, which takes its roots in the creation of the group and the profiles of the managers. Unless you have an extended internal consulting group, the skills and experience of your consultants will probably be focused on a few capabilities: this is where you want to use them.

If you are dealing with a project that will span over a long period or requires to connect strongly with the teams, blend in to create buy-in, or potentially manage sensitive issues, the Internal Consulting team will be your preferred option.

6 Points to Consider When Working with External Consultants

#1. Leveraging Specialized Expertise and Fresh Perspectives

External consultants can be brought into the scene even when there isn’t an internal consulting group. Their specialized expertise and extensive experience can help bridge the gaps within a business’s internal capabilities. For instance, when it comes to strategy, external consultants can provide a fresh perspective and offer innovative approaches that may not have been considered internally. This external input can help organizations overcome challenges, uncover untapped opportunities, and achieve their strategic goals effectively.

#2. Clear Communication for Successful Consulting Engagements

Hiring an external consultant can be a total game-changer for businesses looking to make a real impact. But here’s the deal: clear communication is key. You need to be crystal clear about what you want to achieve – think project definition, clear goals, and specific tasks.

If things are left up for interpretation, misunderstandings can occur and lead to unsatisfactory results. To make the most out of your relationship with external consultants, keep the lines of communication open, and define your tasks with precision – that way, there’s no room for misunderstandings.

#3. Overcoming Challenges with External Consultants

Consultants help you with tough decisions like cutting costs or improving team collaboration. Internal consultants may find it challenging to make these decisions because of their relationships with colleagues. On the other hand, external consultants don’t face the same dilemma since they transition out after the project. This makes them a better choice for projects that require tough decision-making.

#4. Objectivity and Client Focus in Consulting

External consultants often bring a fresh perspective that is free from biases that can arise from working within a specific company for an extended period. While they have a client to answer to, their external position allows them to offer objective insights and recommendations based on their expertise.

It’s important to note, though, that the objectivity of external consultants can still be influenced by factors such as their client’s interests or their own need to secure future projects. These considerations may occasionally take precedence over solely assisting the client.

Nevertheless, the external consultants’ ability to provide an unbiased viewpoint remains a valuable asset. They can offer objective insights without being entangled in internal politics or personal agendas, allowing them to focus on delivering recommendations that are genuinely beneficial for the client’s specific needs.

#5. Broad Perspective and Industry-Specific Knowledge

Both internal and external consultants have valuable years of experience, meaning they have accumulated knowledge and expertise in their respective fields. However, external consultants tend to have a higher level of exposure compared to internal consultants.

This exposure is a result of their work with multiple clients, both within and beyond their specific industry. Because external consultants work with various clients, they have a greater likelihood of encountering and working on similar projects to the one they are currently engaged in.

This means they have a broader range of project experiences to draw from when tackling new assignments. In contrast, internal consultants typically work exclusively within their organization and may have limited exposure to different types of projects or industries.

#6. Integrating Internal and External Consultants for Optimal Results

When your make-or-buy strategy covers both options, you can integrate your Internal Consulting Group into the competition for projects where their skills and experience could be advantageous. Using a hybrid team of External and Internal Consultants can also be a viable option for obtaining the expert support you need, ensuring knowledge transfer, and reducing costs simultaneously.

How to Decide Which Type of Consultant Is the Best?

When it comes to choosing between internal and external consultants, taking an ROI (Return on Investment) approach is highly recommended. The decision can sometimes be based on value, while other times it may be driven by cost considerations. However, ROI always provides a solid foundation for decision-making.

Operational projects typically focus on generating value through factors such as productivity improvements and regulatory compliance. While they are crucial for the smooth running of the business, the impact generated may be relatively limited. In these cases, opting for lower-cost consultants, including internal consultants, can help maintain a favorable ROI.

On the other hand, strategic projects can have a direct impact on company valuation and the long-term strategic direction. The need for value creation is paramount in these projects, and it is typically achieved through specialized skills, knowledge, and extensive experience. Therefore, companies often turn to external consultants, even though some internal consultants possess similar skill sets.

By considering the specific project requirements and the potential value to be generated, companies can make informed decisions about whether to engage internal or external consultants. Ultimately, the goal is to maximize ROI and ensure the best outcome for the organization.

Choosing between Internal and External Consultants – Why Do You Need a Well-defined Make-Or-Buy Strategy in Place?

In case you contemplate launching your project in-house, you have to ensure that resources with the right skills will be available, that they will be given the right authority and responsibilities, and that they will be able to work independently.

However, for employees, while acting as internal consultants, it often becomes difficult to challenge the boundaries. Often, people who are put into those projects are high potential individuals. The fact that the team members are part of the company can make it difficult to disrupt the established order, as opposed to external consultants, who are not part of the organization.

The internal team may be unaware of the latest trends in the industry or capability. They may waste time reinventing already well-established improvement methodologies, resulting in longer projects and higher overall costs. Again, the fact that the team members are part of the company can make it difficult to disrupt the established order.

This leaves organizations to opt for the second option, which is to work with external consultants who enjoy more freedom and flexibility. Here, however, you have to make sure that they have the right expertise and also experience in your industry to be able to understand your business needs.

Besides, there’s also the matter of confidentiality to factor in. It’s a well-known fact that consultants tend to use as a benchmark what they learn on other projects. And that’s why we hire them in the first place, don’t we? But for some specific projects, this can turn out to be a problem.

Hence the dilemma and you must have an effective make-or-buy strategy to deal with this. Your make-or-buy strategy will enable you to choose confidently between internal and external consultants.

It’s nothing but a framework that includes five strategic components – understanding of project needs, centralization of the project, assessment of the externaliza-bility of the project, strategic value assessment, and externalization value assessment. We call them Five pillars of a Make-or-Buy Framework.

To gain a deeper understanding of this framework, we recommend reading the insight 5 Pillars of Make-Or-Buy Strategy in Consulting. It provides guidance on implementing an effective make-or-buy strategy, enabling you to confidently choose between internal and external consultants. Additionally, it emphasizes the importance of considering the middle ground for optimal performance.

By adopting a hybrid approach, you can harness the benefits of both internal and external resources. Certain aspects of your projects may be suitable for standalone workstreams, where confidentiality and service availability are not compromised. In these cases, you can outsource specific parts of the projects while retaining the remainder in-house, all under the guidance of a highly experienced project leader.

Furthermore, the insight outlines how to initiate the development of your make-or-buy strategy framework and offers valuable insights on effectively collaborating with your business lines to ensure strong buy-in and support.

Closing Thoughts

All things considered, when it comes down to making the right decision for your business, choosing between internal consultants and external consultants simply boils down to understanding and assessing your unique needs and wants.

When organizations are faced with the decision to build internal consultancy teams or hire external advisors, they must carefully consider the pros and cons of each option before making a choice. Additionally, the context in which the decision is made plays a significant role.

External consultants are particularly useful when deeply specialized knowledge is needed for a large-scale project, or when an unbiased, independent perspective is required to address a problem. In some cases, an organization may lack the necessary in-house capacity to handle a specific issue, or the board may require external expertise to accurately assess the risks involved with various options.

On the other hand, internal advisors are familiar with the organization, understand the culture of the professionals working there, and can quickly shift gears if needed. Moreover, hiring an external consultant can be a more expensive commitment, whereas an internal advisor may be the more cost-effective option.

Organizations must first determine whether an external perspective is necessary for a particular dilemma and, if so, to what extent specialized expertise is required. If large organizations already have a well-established internal consultancy division, the decision to hire an external consultant is often easier.

However, when a major project, particularly a change project, requires a substantial amount of resource, such as human capital or specific expertise, it may be more practical to opt for external support.

Internal Consulting is a growing trend today. Internal Consulting groups offer organizations plenty of advantages starting from increased privacy and trust when working on sensitive projects to the most significant one – cost-effective solutions and the opportunity to lower expenses in comparison to hiring External Consultants.

When comparing internal and external consultants, we saw a few more distinctions: External consultants having bigger independence are able to provide a more objective point of view, and they often possess expertise and skill set edge too.

When making a decision about your next project, it is worth evaluating all the elements, and pick the team of consultants that is best suited for the project, and who is prepared to deliver the best results.