The history of strategy consulting starts with Frederick Taylor and the Scientific Management movement but took many twists and turns as it evolved into its current state, an industry looking inward and pondering where it fits in the new technology-powered business world.
Starting as an engineering-focused discipline in manufacturing plants, the consulting industry has reinvented itself many times and played many different roles while always being shrouded in secrecy.
The history of the consulting industry can be told in eleven short chapters, starting with Taylor and his peers who were the first to look at businesses as a place of experimentation and optimization.
Chapter 1: Frederick Taylor: “The System Must Be First”
In “Principles of Scientific Management,” written in 1913, Frederick Taylor argues to fellow engineers that management needs to be thought of as “a true science, resting upon clearly defined laws, rules, and principles.”
Taylor is extremely optimistic about the potential for adopting his thinking and believes that it will benefit not only mangers and business owners, but broader communities and society at large.
The general adoption of scientific management would readily in the future double the productivity of the average man engaged in industrial work. Think of what this means to the whole country. Think of the increase, both in the necessities and luxuries of life, which becomes available for the whole country, of the possibility of shortening the hours of labor when this is desirable, and of the increased opportunities for education, culture, and recreation which this implies.
Taylor felt that felt that one of the biggest imperatives for embracing this new way of thinking about management was that it could help align workers and managers on the same goals. This was in an era in which two natural and competing beliefs prevailed:
- Workers were already working as hard as they would, it was no use in trying to convince them otherwise and the best thing you could do was to try to find “better men”
- Workers thought that if they worked harder, it would result in the elimination of jobs
He saw an embrace of “scientific management” as the way out and a way of uniting workers and managers together working towards the same goals.
The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee.
Instead of trying to find “extraordinary men” the managers should focus on the thinking about increasing efficiency, eliminating waste and looking for ways to improve productivity. As he states:
“In the past the man has been first; in the future the system must be first.”
Taylor is often credited for popularizing the school of “scientific management,” but it is impossible to see how this shift in thinking about work impacted most of the business world, not to mentioned inspired the first generation of management consultants.
Chapter 2 (1880s — 1920s): Taylor’s Squad Sets Up Shop
The new interest in thinking about business optimization led by Taylor was inspired by the emergence of mass markets in what Professor Pankaj Ghemawat has called a “second industrial revolution”:
The Second Industrial Revolution (mid-1800s to early 1900s) saw the emergence of strategy as a way to control market forces, because of improved access to capital and credit, along with the development of mass markets. Mass markets encouraged large-scale investment to exploit economies of scale in production and economies of scope in distribution
So in the last 1800s, Frederick Taylor and several others in the US started exploring new ways to think about running a business. This movement was centered around Philadelphia and contained a mix of people who worked on cost accounting, engineering optimization and shop management, centered around Philadelphia.
While Taylor came from a family of some means, college was not the first stop in his career. In a move that would make him ineligible for today’s consulting firms, Taylor decided to turn down enrollment at Harvard to work in a manufacturing plant in Philadelphia as an apprentice.
After four years he started working in manufacturing at Midvale Steel and later moved to Manufacturing Investment Company of Philadelphia where he would hone his methods before becoming an independent consultant in 1893. From a 1895 presentation to a group of engineers, we find that consultants called themselves “consulting engineers.”
Taylor was part of a scenius during his time and many of his contemporaries also established their own practices:
- Morris Cooke, who launched his own firm in 1905
- Arthur D. Little, who’s chemical firm starting doing analytical work in the late 1910s
- Edwin Booz, who founded a consulting firm in 1914
While Taylor gets most of the credit for the emergence of these new ideas, they were a group effort which had a lot of energy especially in Boston and Philadelphia. Taylor’s contemporaries also included people such as Henry Gantt, inventor of the famous Gantt chart, the Gilbeths, who inspired the movie Cheaper by the Dozen by using the efficiency principles in their family, and Harrington Emerson who helped introduce many of the principles to the railroad industry.
Taylor’s ideas not only influenced his peers, but ended up shaping the curriculum of the first class of Harvard Business School in 1908. From not going to college to shaping an industry that would eventually only hire people that went to college, Taylor and his peers built a foundation that give inspiration to the first iterations of the consulting firms we know today.
Chapter 3 (1920s): James O. McKinsey’s GSO
Most of Taylor and his peers were engineers, often using the title of consulting engineer or management engineer. This title undoubtedly influenced James O. McKinsey when he opened his own consulting firm in the mid 1920s. While the firm would go on to become McKinsey & Company, its original name was the wordy “James O. McKinsey and Company, Accountants and Management Engineers.”
Despite the similarities, McKinsey distanced himself from the manufacturing focused work of the Scientific Management crowd. Instead of shop floor experience, McKinsey was a Professor who had taught at schools like Columbia University and The University of Chicago, had obtained his CPA and also wrote a book titled Budgetary Control.
McKinsey went out of his way to distance the kind of work he wanted to do from Taylor and his friends. From Duff McDonald’s book detailing the history of the firm:
From the very beginning, James McKinsey went to great lengths to distinguish his firm from its less savory predecessors — he and his partners had multiple university degrees and strong connections to the establishment. And just as McKinsey flipped accounting on its head, he and his contemporaries likewise turned Taylorism on its head. Instead of focusing on line workers at the bottom of the organizational chart, they zeroed in on the growing white-collar bureaucracy and top managers.
Part of the toolkit McKinsey developed was a 30-page document called the “General Survey Outline” (GSO) and it stood out for how it was different than Taylor’s “how-to” approach. Here is McDonald again (emphasis mine):
“The emphasis in the GSO was more on why managers did things, as opposed to how they did them. Using the GSO, consultants started every engagement by thinking of the outlook for the industry of their client, the place of the client in the industry, the effectiveness of management, the state of its finances, and favorable or unfavorable factors that might affect the future of the firm.”
This type of data gathering is still in the DNA of modern consulting firms, often called a “diagnostic” phase of an engagement. However, at the time it was a genuine innovation and distinctive shift away from Taylor’s engineering mindset and McKinsey’s own accounting roots.
As McKinsey aimed to become the first firm to advise companies on all aspects of business the strategy consulting industry was born.
Chapter 4 (1935–1963): Marvin Bower Takes Over McKinsey and Helps Industry Take Root
The shift towards advising firms at a broader level would lead McKinsey himself to leave the firm in 1935 to help support a turnaround at Marshall Field as CEO & Chairman.
Two years later, James O. McKinsey died of pneumonia and it led to a reshuffling of the firm. The Chicago office split from the New York office and went on to become A.T. Kearney, while New York remained McKinsey & Company, led by Marvin Bower.
Despite the fact that McKinsey & Company had broader ambitions than accounting, the Chicago office was still depending on a lot of accounting work, which Bower had fought to eliminate in New York:
Bower had foreseen the conflict between a consultant who openly rooted for his client and an auditor who was supposed to lack prejudice.The Firm, Duff McDonald
While Mckinsey came from an accounting background, Bower did not. His law and business background set him up to lead the firm into the new era of business — one that would focus on business strategy.
From 1950 to 1963 led the firm as Managing Director and had a profound impact on the culture. He built the firm around a McKinsey “persona,” which McDonald detailed as someone who would “be selfless, be prepared to sacrifice money and personal glory for the sake of building a stronger firm, never take public credit, and always be confident or discreet.”
These kind of visions don’t work unless leaders walk the walk, which Bower did. In the 1960’s when he walked away from the firm, he sold back his shares at book value instead of cashing out with guaranteed riches.
Chapter 5 (1960s-1970s): Bruce Henderson & BCG and The Consulting-Idea Complex
As McKinsey started to have success and earn prestige in the business world, it inspired other firms. In the 1960’s Bruce Henderson, an alumnus of Arthur D. Little, founded the Boston Consulting Group.
Boston Consulting Group’s founding aligns with a shift in the role of the consulting industry from one that provided advice behind the scenes to one that helped shape the narrative and ideas of business leaders.
The demand for these ideas came out of a period in the 1960s when the easy money of the post-WWII economy was drying up and firms were finding increased competition with their peers:
“diversification and technological changes increased the complexity of the strategic situations that many companies faced, leading to the rise of quantitative tools and qualitative framework to evaluate and compare many different types of businesses.” — Professor Pankaj Ghemawat (link)
A year after BCG’s founding in 1964 both McKinsey and BCG established magazines to highlight business thinking. The McKinsey Quarterly and BCG Perspectives would introduce many ideas over the next 20 years which would help the growing class of knowledge workers think about leading and managing their organizations.
A few notables include:
- The Experience Curve (1965, BCG): The effect of experience and learning on cost savings within an industry
- SWOT Analysis (1960s, Unknown): A way to analyze strengths, weaknesses, opportunities and threats
- Growth-Share Matrix (1970s, BCG): A way to identify the most profitable opportunities within a company
- Rule Of Three and Four (1976, BCG): Henderson’s idea that “stable, competitive” industry will never have more than three significant competitors.”
- Nine-Box Matrix (1970s, GE/McKinsey): A visual nine-box matrix that enables companies to prioritize business investments in different industries
- 7S Framework (late 1970s, McKinsey): Seven key strategic lenses: structure, strategy, systems, skills, style, staff and shared values
- Porter’s Forces Framework (1979, Harvard): A way of measuring the attractiveness of industries
These ideas have had a large impact on the broader business world. However, it is notable that the generation of profound ideas coming from consulting firms slowed after the 1970s?
Why? One reason is due to an innovation of a new entrant, Bain & Company, which figured out that a better business model for consulting was to become a long-term partner of its clients rather than short-term strategy assignments.
Chapter 6 (1973): The Split of BCG and Bain & The New Formula of Consulting
In the Lord Of Strategy, a book about the history of consulting, it is noted that until the 1980s, the typical consulting project was still a short-term engagement lasting “perhaps six weeks, culminating in a written report to the client.”
Within BCG, the seeds of disruption had been planted by Henderson who was embarking on a bold organizational experiment. After being inspired by Darwinian anthropology, “he divided the Boston Consulting Group into three minifirms within the firm — the red, blue, and green — and set them to competing with one another.”
The blue team, led by Bill Bain, was experimenting with a new type of engagement. Instead of a fixed fee for a short engagement, they wanted to become long-term partners with a client. With this approach, they proposed a monthly ongoing retainer of $25,000 a month to one of its biggest clients, Union Carbide.
While this was well received with the client, the other BCG leaders were not as pleased. At this time it was seen as very risky for a consulting firm to tie itself up over a long period with one client and Henderson and others wanted to serve competitors in the same industry.
Bain wanted his work to be unique and give Union Carbide and advantage. In 1973, he left to start his own firm, Bain & Company.
At Bain their success with long-term client relationships would change the dynamics of the industry. Instead of senior leaders spending half their time looking for new work, they could dedicate more time to client work. As Walter Kiechel wrttes, “by the early 1980s, the Bain formula was triumphant, at least in the eyes of other strategy consultants.”
Chapter 7 (1970s — Present): McKinsey Leads The Globalization of The Strategy Consulting Industry
With innovations on strategic thinking and Bain’s new long-term consulting partnership approach, the top three consulting firms were set to take advantage of the unprecedented globalization that kicked off in the 1970s. Despite the new energy injected into the industry by Bain and BCG, McKinsey was still a strong competitor and even stronger globally, with more than 50% of its revenue coming from outside the US by 1970.
Though the firm cites the 1970s as one of its toughest decades, it was also when it was building relationships globally that would enable it to take advantage of the massive shifts in the business world ahead.
With 12 offices globally by the 1970s, McKinsey had already spent years cultivating local relationships and it aggressively started to expand in the 1980s. It’s ability to expand while also positioning itself within the local business community apparently drove competitors “slightly berserk” according to Walter Kiechel.
The consulting firms are an underrated force in the globalization of the economy, something Tyler Cowen argued in 2018, crediting consulting firms with spreading positive business practices around the world:
One of the biggest, most positive (and most neglected) global trends over the last 30 years has been the spread of managerial and technocratic expertise to what used to be called “third world governments.” In most countries, the central banks, the public health authorities, the treasuries and many other public-sector institutions now collect good data, hire Western-educated advisers, and try to implement good solutions.
While consulting often gets criticized for partnering with questionable governments and pushing a myopic shareholder value view of the world, it is hard to ignore the fact that consulting also spread many good ideas across the world.
Chapter 8 (1980s-1995): The Industry Matures
As the consulting industry matured around the new business model of long-term partnership to leading global organizations, it inspired many new firms to emerge.
By 1995, The Arthur D. Little lineage inspired the most new firms, giving us BCG and Bain and then eventually, L.E.K. and Parthenon. McKinsey did a better job of keeping its own Partners within the firm and did not have a major competitor emerge from within its ranks after the firm split with A.T. Kearney in the late 1930s.
By 1995 the industry also saw three other key players emerge including PRTM, Monitor (built around Michael Porter’s work at HBS) and Roland Berger (in Germany). Other professional services decided to get in the fun too with IBM, Deloitte and Arthur Anderson all having strategy consulting offerings by the mid 90s.
McKinsey, Bain and BCG were still the leaders of this industry but they were much closer in scale to the other firms. This would change over the next 25 years. They had bigger ambitions
Chapter 9 (1995- 2009): Peak Consulting
From 1995 to 2009 the consulting industry exploded as the business world tapped into enormous wealth through globalization and technology. No person is more emblematic of this period than Rajat Gupta, who led McKinsey & Company from 1994 to 2003. During the period of his leadership, the firm cemented its position as the clear #1:
Between 1994 when he was first elected and 2001, in his third term, the Firm more than doubled its number of consultants (3,300 to 7,700), partners (425 to 891), and annual revenues ($1.5 billion to $3.4 billion). Starting with 58 offices in 24 countries, it expanded to 81 outposts in 44.
No place was more emblematic of this period than Davos, the mountainside village in Switzerland that hosts an annual summit with the most powerful leaders from around the world. It is hear that the consulting firms aspired to be in the mix of every conversation. Instead of pushing ideas as outsiders as they did in the 60s and 70s, they wanted to be in the room with the most important institutions.
This aspiration from McKinsey led to both unprecedented wealth and scandal. In 2001, McKinsey was involved with the Enron scandal, as an advisor to the company and the training ground from one of the architects of the fraud, Jeffrey Skilling.
In 2009, the firm took another blow when Gupta and Anil Kumar both faced insider trading charges that were due to their close relationships to many powerful institutions. Kumar, in addition to Gupta held powerful positions at McKinsey during the 1990s.
Despite the firm not being financially harmed by the scandal, the association between McKinsey and scandal has stuck and marks a shift in the consulting industry towards a mature industry stuck in a state of searching for “what’s next?” while still dependent on the globalized order of the modern business world.
Chapter 10 (2008 -2015): The Industry Matures & Accounting Firms Build Strategy Teams
In the 1990s and early 2000s, technology had started to transform every industry. While consulting firms had awkward attempts to harness the transformations happening in these industries for the most part they stuck to the high-level strategy and operations work with senior executives.
This left an enormous opportunity for the firms like Accenture, BearingPoint, IBM and others that were willing to do the technology implementation work. After the Glass-Steagall act was repealed in 1999, accounting firms also slowly started to expand their services, adding consulting arms. The “big four” firms — KPMG, Ernst & Young, Deloitte and PwC — added technology consulting and eventually, strategy consulting.
In the mid 2010s as the smaller niche strategy firms struggled to compete with the increasingly dominant “big three” (McKinsey, Bain & BCG), they looked for exit options. Over the course of a couple of years Parthenon, Booz & Co, PRTM and Monitor Group were all acquired by the big four accounting firms as ways to expand or establish strategy consulting groups.
This led to a three-tiered structure for the industry.
- Tier 1 (Large + High Prestige): McKinsey, Bain & BCG dominate the strategy consulting industry with a moat of profits, growth rates and prestige among executives
- Tier 2 (Medium-Large + Low Prestige): A second tier of accounting firms with large consulting divisions are able to compete broadly with much more global coverage than the big strategy firms, but tend not to get the best work
- Tier 3 (Boutique + High Prestige): Small firms like L.E.K. opted not to pursue being acquired and operate at a smaller scale but with higher levels of prestige than the large consulting firms
Chapter 11 (2015 — Present): A Mature Industry Searching For What’s Next
Industries tend to progress through certain “life cycles” ending with maturity and decline. The decline phase is typically exhibited by declining profits.
It would be easy to see the consulting industry in this phase, but the reality is that the big three consulting firms are more dominant and financially successful than ever. Firms like BCG continued to grow at 10% or more even through the global financial crisis in 2008 and show no signs of slowing.
Despite this, the industry sees the writing on the wall. As technology reshapes every industry, the consulting industry knows that it may be disrupted as well. Clayton Christensen predicted in 2013 that “the same forces that disrupted so many businesses, from steel to publishing, are starting to reshape the world of consulting.”
The consulting industry, especially the big three, have made aggressive bets to avoid this fate. In the past five years all firms have invested in startups, acquired digital and analytics capabilities, made acquisitions of smaller consulting firms and have developed broader capacities in analytics, design and technology.
This has had a dramatic effect on the industry. The talent pools of these firms are more diverse than ever. No longer solely recruiting from Harvard and Stanford, the firms are hiring based on in-demand skills and trying to figure out what the next chapter looks like.
Despite all these bets, the big three still derive most of their income from traditional long-term consulting engagements with large businesses, which are still performing well. Externally, however, they are losing credibility as technology firms who are more skeptical of strategy consulting, have become the largest businesses in the world.
In 2009, McKinsey was one of the first first to quickly react to the global financial crisis and set the tone for the “new normal.” This was a playbook they had perfected over the previous 30 years as business leaders looked to see what McKinsey had to say about global events. Yet over the past 10+ years, the consulting firms have lost their relevance with business leaders. We can see a symptom of this with McKinsey’s attempt to push “The path to the next normal” during the Covid-19 crisis. An old recipe in a new environment.
The next ten years for the consulting industry will be the toughest yet as they attempt to maintain their elite connection to business leaders and hope to reposition themselves in a new technology-powered business and economic paradigm.
Special thanks to Antoine Buteau for his contributions to this essay.