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The Rise of Consulting

McKinsey & Co.

Consulting as a separate industry was born with the launch of McKinsey (the Firm) by James O. McKinsey, an accounting professor, in 1926. And this would change the business landscape forever and bring with it fortunes (and its fair share of criticism) to the peddlers of advice on how to run a business.

The story of McKinsey is, in a way, the story of consulting. The Firm (as McKinseyites past and present call it), did not have its start as a management consulting firm. It sold “management engineering”. This was an era when Taylor’s time and motion studies were in vogue, and companies were embracing Taylorism as the way to corporate nirvana.

After a life in academia, James O. McKinsey was not satisfied being a consultant. Leaving his recruit Martin Bower in control, he left the company he founded to join his client, Marshall Field’s & Company. What followed was a failure of epic proportions, as under his stewardship, the company flirted with bankruptcy, initiated massive layoffs antithetical to the company’s established culture, and McKinsey won the ire of his employees. Partly as a result of the toll this took on his health, James O. McKinsey died a pre-mature death. His company, meanwhile, was flourishing.

Martin Bower had a vision for McKinsey. He wanted it to run like a law firm, whose professionals worked keeping in mind the best interests of the client. McKinsey was a partnership, and would always remain so. The firm had its clear ethos on what’s important: the client, the firm, the individual consultant- in that order.

The company rode the wave of post-WW II growth in the US economy, under Martin Bower’s leadership, and seemed all set to dominate the consulting space. There was McKinsey- and there was no one else.

Enter Competition

But McKinsey had mis-read what its customers wanted, and in the 1960s and 1970s, it would face an identity crisis with the emergence of competition from the Boston Consulting Group (BCG).

Bruce Henderson founded what was to later become the consulting powerhouse BCG, as a subsidiary of a local bank, in 1963. He had no roster of clients to call on. What he did have, was experience looking at numbers and deriving insights from them which he could sell to clients.

It was this ability that would lead to the first ever consulting product: the experience curve. The concept was pretty simple: as companies increased production, they accumulated organizational learning, which would help them bring down costs. Companies should initially price below cost in order to drive sales, use their learning to improve their production process, and make more money with higher volumes and lower margins.

BCG’s clients lapped it up. As a one-two punch to McKinsey, this was followed by the growth-share matrix and BCG was soon the poster boy of the consulting industry, throwing McKinsey into a crisis.

Apparently, clients wanted these BCG products as well as the advice they were paying McKinsey for.

But BCG was having problems of its own. While McKinsey had instilled a one firm culture, BCG wanted an internal culture that fostered competition. BCG therefore divided its consultants into three teams: red, blue and green. The strategy backfired as one of its consultants quit to form his own company- and took most of his team with him.

Bain & Co.

BCG gave birth to its rival, Bain & Co. in 1973, a decade after it was born. Bain & Co. was different from its rivals- while consultants typically engaged on short-term assignments with multiple companies in the same industry, Bill Bain went to them with a different proposition. Bain would work only with one company in an industry, thus ensuring confidentiality of information. In return, the client had to agree to a long-term engagement. The strategy paid off. Bain & Co. was hot.

Competition from a different industry

The industry got its next major dose of competition from accounting firms. With their already well-established client networks, they started jumping onto the consulting bandwagon with its promise of high returns. Anderson Consulting, a subsidiary of the accounting firm Arthur Anderson, would come to eclipse McKinsey in terms of revenues. There was a race by the heavyweights in accounting and audit to set up their own consulting arms. Deloitte, PwC, KPMG, E&Y all had their own consulting divisions. They were not merely advisors; they promised implementation as well. This coincided with the rise of IT and the increased perception in the marketplace that IT was the key to company strategy.

Now, the consulting industry has evolved further and IT companies are vying for their share of the consulting pie. With IT being the backbone running all global commerce, these companies are in a powerful position to offer consulting services to their clients. Consulting has become a way to add new clients for IT services.

What’s next?

The growth of the analytics industry and the nature of their work makes it seem likely that soon pure-play analytics companies will disrupt the consulting industry.

Note: I have only skimmed the surface of this industry’s growth. I’m sure to have missed out quite a few events of significance, most notably the rise and fall of Monitor Consulting.

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