The rise of management consultants

Three ideas that led to the creation and rise of McKinsey & Company

If you haven’t listened to the latest Stratagems episode on Polaroid, you’re missing out. It is a fantastic story of how Edwin Land willed others to do the impossible. Plus, the nostalgia factor of relieving your favorite polaroid moments cannot be beat. The episode is available everywhere you can find podcasts or on the web.

Regulatory Changes

This week I will share three ideas from the fourth Stratagems episode as I try to determine how McKinsey became so influential.

We can trace the rise of management consultants back to a specific moment in time: the passing of the Glass-Steagall Banking Act in 1933 by the U.S. Congress. 

Among the many new rules, Congress required banks to perform due diligence on the management teams of organizations while also preventing bankers and accountants from carrying out these assessments. Bankers and accountants already engaged in other services, legal advice and audits respectively, and Congress wanted to avoid conflict of interests. 

In that void, a new profession appeared, management consultants. 

Regulatory changes continued to play a big role (positive and negative) for management consulting firms throughout the rest of the 20th century. 

There’s nothing wrong with seizing opportunities created by regulatory changes but the changes aren’t always positive. You can ride the wave to higher profits but it may also throw you upside down.

Best Practices

For management teams themselves, the new regulations of 1933 prevented them from employing trade associations, industry cartels or bankers to create industry benchmarks and to learn about the latest innovations in growth and administration. The FDR administration of the 1930s was highly concerned about monopolistic behavior.

Management teams thus turned to management consultants as their primary source of interorganizational knowledge. If you wanted to know the latest best practices for how to run an organization, firms like McKinsey were the best source. They were working across industries and were up to date on what your competitors were doing.

Your organization today might not be limited by a lack of industry benchmarks but it is valuable to ponder where future insights will be coming from. Are you doing enough to seek out the latest ideas on how to best run your organization?

Market Saturation

Before the 1970s, management consultants primarily helped organizations reorganize themselves for higher efficiency and profits. At the time, the multidivisional model pioneered by Sears, GM and others was all the rage. Multidivisional calls for establishing individual divisions—think the different car brands for GM—that compete against each other while receiving support from a central team on universal matters such as legal and HR.

McKinsey and others took this model and recommended it to the biggest organizations around the world. In Britain, 72 of the 100 largest organizations adopted the multidivisional structure by 1970; 32 under the guidance of management consultants. This work was highly lucrative and management consulting firms could not keep up with the demand. 

The problem is that eventually, the phones stopped ringing. McKinsey quite literally had reorganized most of the large organizations in Europe and America. The 1970s became a decade of crisis as management consultants tried to figure out alternative services to sell, eventually settling on strategic planning, culture optimizations and technology adoption.

Organizations cannot rely on a single service if long term viability is the goal, even when that service is popular and seemingly insatiable. Products and services need to be renewed or structured in a way to encourage ongoing consumer relationships.

Ruben