Management consultants are known for their expertise in business strategy and operations. However, because most large businesses rely heavily on numbers, most consulting firms provide advice based on financials as well. After all, ultimately what matters most to any corporation is increasing profits. As a result, one growing practice that represents a relatively untapped potential opportunity for consulting firms is financial engineering.
What is Financial Engineering?
Of course, it is first important to define financial engineering, also commonly referred to as quantitative analysis. Financial engineering utilizes technical practices from fields like statistics, computer science, applied mathematics, and economics to solve a company’s financial problems.
Financial engineering can also be used to develop new products, analyze markets, and guide business strategy - areas where consultants usually try to add value. As a result, we believe that financial engineering can be adopted more heavily in the consulting world to bring real value to clients regardless of industry.
How Financial Engineering is Currently Used
Currently, financial engineering is used regularly at finance companies, including investment banks, hedge funds, asset management firms, and insurance agencies.
These companies help create new financial products for both companies and investors. Through statistical modeling, mathematics, and computer science, financial engineers test new potential financial products through quantitative models. Through these simulations, financial engineering allows users to test multiple outcomes depending on the underlying variable assumptions. Engineers are then able to identify the key risks and potential profits based on their analysis in order to make stronger, data-driven recommendations.
The Potential of Financial Engineering in Consulting
Management consultants are all about data. They love using data to provide strategic advice while also explaining the risks and merits of their recommendations.
Consulting firms are also increasingly hiring consultants with extensive quantitative backgrounds, including those with experience in computer science, data science, mathematics, and statistics.
Putting the two together, consulting firms have all the fundamental tools and resources they need to implement financial engineering into their practices, regardless if the industry is technology, healthcare, or oil and gas.
Any company that requires advice from a financial perspective (which is basically every company at some point) may become a lifelong client to consulting firms who apply financial engineering adeptly in their strategic advice.
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Further Diving into the Opportunity
Most consulting firms mainly rely on more traditional methods of collecting and analyzing data. This could include any of the following:
- Large scale customer or market surveys analyzed through Excel formulas
- Analyzing client databases with information on items like price, costs, and volume
- Focus groups through curated Q&A sessions
These forms of data collection and analyses are no doubt useful and in many regards may be all that’s needed by some clients. Some of the aforementioned methodologies are essential to receive personal insights about company problems and will likely be needed until the end of time.
However, they are also simplistic and are not as scalable. They don’t have the potential to provide complex, multi-dimensional analyses compared to the following:
- Statistical models providing probabilities of profits depending on various assumptions
- Analysis of extremely large datasets using big data and data science techniques
- Quantitative models that analyze data in real time and provide instant recommendations
Through the application of financial engineering methodologies, consulting firms can provide some game changing types of analyses that can place them far ahead of their peers.
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Concluding Thoughts
Financial engineering is a dynamic and insightful practice that consulting firms will likely increasingly learn the importance of over time. The ability to test various scenarios with advanced technological and mathematical techniques in many situations can provide incredibly valuable recommendations. We call it: a new consulting frontier.
Additional Reading:
- How to Get Consulting Jobs From an Engineering or Technical Background
- 5 Reasons to Choose Strategy Consulting Over Financial Advisory Consulting
- Consulting Resume: Complete Guide
- Case Interview: Complete Prep Guide