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Curbing consultant opportunism: What works, what doesn't

Opportunism in business relationships, such as those between consultants and clients, goes beyond harmlessly stretching the truth. It is, as Gregory Dawson notes, “self-interest seeking with guile,” and its intent is to gain an advantage over others via lying, cheating or other forms of chicanery. So what’s the best way to constrain this behavior? Dawson has been researching your options, and he’s found that legal constraints may not work as effectively as the stigma of a tainted reputation.

2012-07-23

Anyone who has ever tried their hand at Internet dating knows there are plenty of unscrupulous suitors out there. Romance websites are filled with people who stretch the truth about their height, weight, income, hairline and ability to tell an even halfway comical joke. These are the pudgy among us who post pre-flab photos and, under “body type,” check the box that says “athletic.”

There’s a reason folks now download smartphone apps that ring the device 20 minutes after a blind date begins so the cell phone owner can make a polite, but hasty, exit.

Gregory Dawson, assistant professor of information systems at the W. P. Carey School of Business, likens the sales process, contract negotiations and work relationships between clients and their consultants to the whole hairy Internet dating scene.

Since there is no app to help clients or consultants slink out of a bad consulting gig, other remedies must come into play. Dawson has been researching them, and he’s found that when you’re trying to constrain opportunistic consultants, legal constraints — or contracts — may not work as effectively as the stigma of a tainted reputation.

Shady dealing

Opportunism in business relationships, such as those between consultants and clients, goes beyond harmlessly stretching the truth. It is, as Dawson notes in a recent paper, “self-interest seeking with guile,” and its intent is to gain an advantage over others via lying, cheating or other forms of chicanery.

It’s certainly nothing new in the consultant-client relationship, and it’s been studied before. In the late 1980s, researchers posited “agency theory,” which holds that, in a world where companies hire professional services firms to do work, the goals of the company and consultant may be at odds, but contracts that align the two parties’ interests can keep everyone in check.

Dawson didn’t agree. He teamed with Richard T. Watson and Marie-Claude Boudreau of the University of Georgia to expand on agency theory and developed their “theory of relationship constraints,” which maintains that contracts would only work fully when both parties have the same amount of information at their disposal or, put another way, they have information symmetry. Similarly, both parties would need the same levels of explicit and tacit knowledge from which to draw.

Explicit knowledge is the type that you can get from a book, while tacit knowledge is acquired through experience. So, as Dawson notes, an example of explicit knowledge would be knowing the rules of the road. An example of tacit knowledge would be knowing how much acceleration room to leave yourself when you’re trying to get on a busy highway while driving a friend’s beautifully restored but gutless ’57 Chevy to a car rally.

Dawson et al. maintain that constraints on opportunism in consulting relationships will be affected by the level of information asymmetry between consultants and clients, as well as the levels of explicit and tacit knowledge each party has. Given that belief, the team decided to test which constraints work best under a variety of circumstances.

“We looked at eight different constraints, and found that every constraint is effective in some circumstances, but no constraint is effective in all circumstances,” Dawson says.

Curb appeal

The constraints Dawson and his colleagues evaluated included four legal protections: fixed-price contracts, in which a set amount of work is performed for a set price; a time-and-materials contract, where clients buy a certain number of the consultant’s work hours; a purchase order outlining the product or service to be delivered and its cost; and incentive contracts that reward consultants with a bonus if they meet certain conditions, such as faster delivery or a low number of errors in the work.

The researchers also looked at four social constraints. These included the hiring of another consultant to oversee the work; bureaucratic control, which means the client can move up the chain of command at the consultancy if workers don’t deliver adequate service; self-control, or simply relying on the consultant’s personal ethics; and professional reputation, or the consultant’s desire to maintain a reputation for honesty, integrity and high-quality work.

To evaluate these various constraints and how well they might work in differing circumstances, the researchers turned to some of the hundreds of contacts in Dawson’s personal network of IT professionals. After 25 years of consulting for Gartner and PricewaterhouseCoopers, his network is extensive.

Among the systems workers who participated in the study, 76 percent were men, 68 percent had work backgrounds spanning both the client-side and consulting end of the IT business, and the average number of years working with consultants was 13. The average number of consultants that participants supervised was 78. Each study participant was asked to examine seven scenarios presented by the researchers and, based on personal expertise, choose which constraint mechanisms were most likely to curb consultant opportunism.

The scenarios presented by the researchers covered several project types, such as complex software development, greening of a data center, equipment installation and assessment of disaster-recovery readiness. For each of the seven projects presented, the researchers also identified the levels of information asymmetry, as well as explicit and tacit knowledge held by the consultant.

So, for example, on the complex software development project, the consultant had much more knowledge than the client, which meant high information asymmetry. In this scenario, the consultant also had high tacit and explicit knowledge. On the disaster-recovery project, the consultant’s information asymmetry and tacit knowledge were high, while explicit knowledge was low. In the scenario about developing and rolling out a new organizational structure, information asymmetry and explicit knowledge were low, but the consultant’s tacit knowledge was high.

High regard for high regard

Among the eight constraints against consultant opportunism that were examined, professional reputation turned out to be the one respondents considered most effective. However, it was only the best constraint in three of the seven scenarios presented. “Professional reputation was only effective when there was a lot of tacit knowledge involved in the project,” Dawson notes. Still, with experienced professionals, tacit knowledge is often the main thing consultants are selling. Dawson calls such knowledge “their tools of the trade.”

Why was professional reputation thought to be so effective at keeping consultants ethical? “Most consultants are quite aware that their reputation is gold,” Dawson explains. “If a consultant is caught being opportunistic, his or her social and professional circle will freeze that person out.”

High levels of tacit knowledge also came into play with the other social constraints tested. Hiring a second consultant to serve as a project advisor was viewed as an effective constraint when the consultant enjoyed high information asymmetry and had high tacit knowledge. Moving up the chain of command with complaints was considered a worthy restraint, mostly when tacit knowledge was high. Consultant self-control — and client trust in it — rose when the consultant’s tacit knowledge was high. Overall, though, it wasn’t considered a winning constraint approach.

Under contract

Each of the legal remedies had some value, too, according to study participants.

Fixed-price contracts, the most common form of constraint used in the various projects the researchers reviewed prior to conducting their study, were perceived to be more effective as the level of information asymmetry rises. The researchers think this is because such contracts limit the client’s exposure to an opportunistic consultant, plus such agreements specify an outcome from the project.

Time-and-materials contracts are perceive to be less effective as information asymmetry rises. That’s because clients, lacking as much information as consultants, have no guarantee of a formal deliverable under such contracts.

Building incentives into contracts adds cost, and study participants didn’t see it as particularly justified unless the information asymmetry was very high and the consultant’s tacit knowledge was not all that vital to project success. The researchers reasoned that this was because such contracts give consultants incentive to be honest but, if tacit knowledge is what it takes to get the job done, clients will have a hard time writing the specifications for such knowledge into a contract deliverable.

Ultimately, the researchers concluded that each constraint mechanism reviewed is effective in some circumstances. It’s up to clients to choose which ones.

And what about consultants? Given that most IT projects now involved teams comprised of both consultancy- and client-based resources, should consultants be concerned about opportunistic clients?

“The belief has always been that the innocent client will be taken advantage of by the smooth-talking consultant,” Dawson notes. “We have evidence that shows a client will be opportunistic at roughly the same percentage of time that a consultant will be opportunistic.”

Effective safeguards

Dawson recognizes that a substantial number of consultants and clients will never be opportunistic: ”"It simply is not in their DNA.”

“Those aren’t the ones that I’m concerned with, since they will consistently do the right thing even in the absence of constraints,” he said. “My research is concerned about stopping those clients and consultants who need legal or social guardrails to behave ethically. Ultimately, if we can get all the actors in a market to behave honorably, it benefits everyone.”

So what constraints might protect consultants from crooked clients? Dawson plans to find out this summer. Leveraging a grant sponsored by Amy Hillman, executive dean of the W. P. Carey School of Business, he now is showing those scenarios he used in past research to a new group of study participants to see what constraints could safeguard unwary consultants.

“We believe there will be different constraint mechanisms that operate to keep clients from being opportunistic than those that prevent consultant opportunism,” Dawson says. He’s not even sure professional reputation will come into play at all, as clients aren’t selling their services, the way consultants do.

One thing he does know is that clients and consultants react to the possibility of opportunism in completely different fashions. Consultants have risk premiums they can build into their pricing, so they’re more accepting of an opportunistic client than the client would be of them, he says.

“A client will try to stop the consultant from being opportunistic,” he adds. “A consultant simply tries to minimize the damage so he won’t get hit quite so hard.”

Bottom line

Researchers have long examined opportunism among consultants, believing that they hold asymmetrical knowledge that far exceeds what their clients possess and use it to take advantage of clients in deals.
Traditionally, clients have used contracts as a constraint against consultant opportunism.
Gregory Dawson, a profession of IT at the W. P. Carey School of Business thinks constraints against opportunism will be affected by the level of information asymmetry between client and consultant, as well as their levels of explicit and tacit knowledge.
When Dawson tested legal constraints against opportunism, such as contracts, as well as social ones, such as the consultant’s professional reputation, he found that IT practitioners identified professional reputation as the top constraint against consultant chicanery.

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