The origins of management consulting
After a slow start in the 19th century, management consulting came into its own during the Great Recession, in the early 1930’s. If you want to read more about the dynamics behind the growth of the profession, there are worse papers to read than Christopher D. McKenna’s paper on The Origins of Modern Management Consulting. The paper provides a non-traditional view on the reasons for the growth of the profession which ring true to most veterans of the profession reading it. In addition, it shows that what is currently often marketed as new or groundbreaking is anything but. Deep collaborations between management consultants, bankers, accountants and engineers form the basis for the profession, not a new opportunity.
Whatever the drivers, management consulting has provided organizations with access to independent, external expertise in areas which were not core to these organizations. Just as it doesn’t pay to have a plumber in your house at all times, a management consultant was often called when the need arose. Given the assymetry of access to information, the one stop shop for management consulting was a good deal for many companies at that time.
Recent evolutions in the traditional hunting grounds
Recent years have seen a steady increase in the level of professionalism of support functions in a lot of organizations. Quality management, for example, long a function outsourced to experts, has been internalized by most organizations and is seen as core to its functioning and reputation. By building these competencies internally, often driven by former consultants who joined the organization, enterprises have steadily been cannibalizing the most profitable areas for management consulting: those areas in which management consultants can use low level resources to provide the brunt of the work. That model, often called the 1to3 model, is the basis of leverage. And well leveraged jobs are the key to management consulting profitability.
A second evolution is the advent of the internet as a true business tool. Where before there was a real information assymetry and as a client you had limited to no information on other compentencies outside of your traditional providers, unless you actively went and spent a lot of time looking for it, nowadays information on similar or comparable service offerings is at most a couple of clicks away. The only real barrier to switching is the experience with and knowledge of the organization the incumbent consultant has gathered over the years working for you. However, if you can transfer the responsibility and especially the cost of onboarding and learning to a new management consultant, you can start shopping around as a client.
The tipping point
The pressure on the traditional management consultants has been mounting for a number of years, as witnessed by fee pressure, which was apparent even before the 2008 crisis. On the other hand, the market has never been more accessible. And lots of smaller management consulting teams, often composed of a handful of consultants, put their stake in the ground and declare their intent to serve. Often at very interesting fee levels, as they are not burdened by the significant overhead and higher level personal revenue expectations traditional management consultants have.
I have a strong feeling a key tipping point has been reached that will redefine this service area forever. I’m making abstraction of the IT implementor and integrator arena, which requires significant numbers of technically proficient consultants but which has been under pressure since the late 1990’s, as witnessed by the steady decrease in fee levels and the emergence of new players in that market. No, I’m on the contrary talking about the core management consulting as provided by the Big 4, by Bain, McKinsey and the Boston Consulting Group.
What the future holds
The future holds, in my opinion, a significant redefinition of the market. Consulting firms, which have been growing since the early 1930’s, will start to become smaller again. Their intake of new recruits will slow down and they will start to invest in building a deeper understanding of the issues. Partners and directors, which are currently mainly sales people, will need to invest in deep knowledge development and will need to commit to invest multiple years in really learning and understanding a market. I predict this will be a bridge too far for an entire generation of older partners, who will not be willing to make the investment, will cash out and retreat from the business.
The possibility to leverage will decline to a fraction of what it currently is. People who enter into the profession will need to take in account that while it will still be possible to make very good money in this market, the traditional structures of past consulting practices are over. For good. The projects which allow for the past level of leverage just won’t be there, and clients will refuse to pay for the education of people not on their own payroll. After all, at the market you don’t pay for both the grain and the bread. You only pay once, and that once contains the cost of the expertise of one who knows how to make bread.
People entering the market will do so with a true passion for the issues or for the profession of assisting organizations in their development and growth. With the need for continuous and continued investment in content development to a high required level of expertise, you will need to be very passionate to succeed.
A new opportunity for modern consulting practices
However, and that is a very positive evolution, gaining access to the market will become easier and easier. As mentioned above, I note many smaller firms being established with a very limited number of partners, with a very specific and targeted focus area and with a clear vision of what they can and especially cannot do. These niche consulting boutiques find each other through the internet, through networks such as LinkedIn and the like, and are able to come together around a specific project for a limited period of time. After the project, each organization goes its separate way. Project management of both the project itself and the relationship between the multiple providers is slowly becoming a separate consulting market, or even a meta-market. After all, the participating consulting organizations attract a third party to manage the project and the interdependencies between them without getting bogged down in the specifics themselves.
Experience by practicing what you preach
Their partners are partners in the consulting organization but retain the independence to do stints of a couple of years in organizations, further developing their knowledge and trade. They may return or they may not. If they don’t, they exemplify the McKinsey concept of keeping the vast McKinsey allumni network alive. If they do return, they bring both a network and newly gained knowledge and understanding which can only enhance the quality of service delivery.
The internet, combined with the internalization of core non-traditional skills in enterprises is leading to the bursting of the 80-year bubble of management consulting. In my opinion it will in time lead to a significant enhancement of the added value consulting can bring to the table and show that McKinsey had it right all along. Combining the network with deep skills and access to information developed in depth can only enhance market positioning.
A word of warning
However, a last word of warning: as with many markets, a significant change results in a period of Wild West behavior in the market. Exercise due diligence and avoid the snake oil salesmen you find in every market.
Full disclosure: the organization I am employed by will until November 11th 2011 be providing services to one of the Big 4 advisory companies. Since 1995, I have worked for Big 4 advisory companies and with a number of consulting companies active in the same space. I have also been active in strategic consulting. This text represents my personal opinion and is not representative of any opinion held in the past, present and future my past or current employers or clients.
This text is a curation of an article I wrote a couple of weeks ago for my blog “Risk & Reengineering”