Are management consultants losing their place as masters of the universe?

Taking care of business? Kevin Harber, CC BY-NC-ND

Management consultants are powerful beasts. They can mould businesses and guide governments, both in high-profile projects and behind the scenes. They do this largely free from any specific regulation and, if revenue is anything to go by, continue to thrive in our uncertain world.

But there are constraints and scrutiny at work too – and they are increasing. A recent study by researchers at the universities of Bristol and Cardiff in the UK shows how one of the most powerful consultancies, McKinsey & Co., is facing up to new and threatening pressures from clients, governments, NGOs and market forces.

Consulting firms like McKinsey, Booz Allen or Boston Consulting exercise power in three main ways: they have vast resources at their disposal; they are able to intervene in decision-making processes; they can influence what their clients think. In terms of resources, McKinsey not only possesses significant economic capital but its CEO-heavy alumni network provides it with an instant sales route into the Fortune 500 list of major companies. Its knowledge resources are the envy of universities the world over. The McKinsey Global Institute, for instance, is one of the largest management research organisations.

Strategic thinking

In terms of intervening in decision-making processes, the firm’s elite network helps it shape the agendas of strategists. In UK healthcare for example, McKinsey and other consultancies provide “free” advice to many government and NHS boards, recruit senior government officials (such as Sir Michael Barber) and help craft crucial regulation. The resulting opening up of healthcare to private corporations – consultants' clients included – looks unsurprising. One dangerous side effect is that other players, including the public, are excluded from setting agendas – what has become known as the “consultocracy”.

Rodin: Thought leadership. EPA/TOUSSAINT KLUITERS

But use of financial, social and intellectual muscle combined with political manoeuvring is only part of the story. Leading consulting firms also deploy what is now known as “thought leadership”. This involves trying to create a need among managers to buy into the latest fashions created by consulting think-tanks, or simply the need for consulting. McKinsey has been among the most successful, aligning with high-profile publishers and universities to create popular ideas, such as the “war for talent”, that prompt lucrative restructuring in large companies – arguably not least, at Enron, which some have claimed was “the firm that McKinsey built”.

While elite occupations, such as accountancy and law are regulated, the power of McKinsey and other consultancies has been largely unchecked and attempts to legislate or professionalise have been mostly unsuccessful. Of course, it could be argued that rather than being masters of the universe, consultants are merely the servants of power. And it is indeed rare for a consultant to propose something that a client does not want (even if that “want” has been carefully crafted).

Threats at the gate

But a perception of great power often means greater scrutiny. McKinsey, for instance, attracts considerable attention from the media and pressure groups such as Greenpeace (on deforestation) and SpinWatch (on healthcare). Also, even if there is minimal regulation (anyone can be a consultant), the industry is affected by legal and policy changes. In the public sector, purchasing restrictions mean that contracts are increasingly open to scrutiny. This has had an effect in the private sector, too, putting pressure on costs and prices. Repeat sales to former clients based on the “old boys’ network” are increasingly difficult (although not impossible) to sustain.

The growth of MBA qualifications among managers and the increasing number of consultants-turned-managers, means that clients themselves are asking more of their consultants – requiring more experienced hires or pushing down day rates. While already a pioneer in employing MBA graduates, McKinsey has responded to changing client demands, placing a little more emphasis on experience and teamwork than youth and analysis.

More runners in the race. Claudio Gennari, CC BY

Stagnant profit margins in the sector now mean that McKinsey faces increased competition in the lucrative strategy space as well. While in the 1930s, McKinsey was largely successful in preventing less prestigious firms having a voice – “keeping the scoundrels out” as their MD was reported as saying – competition from the Big Four audit firms, other strategy houses, and even internal consulting teams, mean McKinsey is no longer dominant. Furthermore, managers themselves have come to resemble consultants in what they do every day, by working in change project teams for example.

There will always be a need for outside help, providing knowledge or simply legitimacy and reassurance, but the jury is still out as to whether a new cohort of big clients such as Apple and Google or new markets such as China will suit the old model of consulting.

A recent history of McKinsey identified the firm as a “great partner to the industrial era”, but wondered if it would suit post-industrial times. The same could be said of management consulting in general. Will it continue to prosper and adapt or be replaced by other would-be elite occupations?