Larry is a seemingly lunatic zoo keeper who knows about the true intentions of the penguins.
During Cold War, when players have made a clockwork penguin, he shrinks the player so that they can fit inside the suit. He only does this at the following locations: Iceberg, Ardougne Zoo and the Lumbridge sheep pen.
However, Larry will only shrink players in the Lumbridge sheep pen during the quest. He is apparently quite a proficient magic user as he can shrink and tele-other players during the Cold War quest, although he says that teleporting stresses him out, which is probably why he doesn't always use it to get to faraway locations during the quest.