The History of Consultancy

“Moses’ father-in-law replied, “What you are doing is not good. You and these people who come to you will only wear yourselves out. The work is too heavy for you; you cannot handle it alone. Listen now to me and I will give you some advice… select capable men from all the people and appoint them as officials over thousands, hundreds, fifties and tens. Have them serve as judges for the people at all times, but have them bring every difficult case to you; the simple cases they can decide themselves. That will make your load lighter…all these people will go home satisfied.”
Exodus 18:17-23

The rich and powerful have always needed advice on how better to manage their affairs and make effective decisions. Biblical kings had prophets, Persian sultans had viziers, and Greek city states had the oracle at Delphi. Even the Mafia had their consigliere. Yet formal organisations that specialised in management advice didn’t emerge until relatively late in the industrial age.

The demands for mass-produced goods (initially weapons, but later consumer products) drove thousands of new employees into large, unfamiliar factories where there was little expertise on organising people, processes and machinery to maximise efficiency. Specialist engineers such as Charles Babbage and Frederick Taylor turned their hands to these management problems and achieved significant improvements by deploying new methods for work organisation.

The first recognised management consulting firm was formed in 1890 by Arthur D. Little, initially specialising in technical research, later building a specialism in what became to be known as ‘management engineering’. The first management consultancy to serve both industry and government clients was Booz Allen Hamilton, founded in 1914 and the first modern, pure management and strategy consulting company was McKinsey & Company.

Whilst the industrial revolution provided the key driver for the emergence of consulting firms, the trajectory of their evolution was influenced by other factors. The early alignment of companies such as A.D. Little, McKinsey and Booz Allen Hamilton with the banking and financial institutions provided a strategic advantage that later competitors found it hard to compete with. Various government interventions, such as the Glass-Stegall Act (1933), prevented banks from engaging in non-financial activies, thus enabling the growth of early consulting firms.

Seeking credibility for their new firms, the founders sought to model themselves on legal practices and adopted the partnership model. Central to the ‘style’ of early consulting firms was Marvin Bower, the CEO of Mckinsey from 1950-1967. He developed the ‘professional’ status of consultants, focused on top MBA graduates (thus insipring the growth of Business Schools and MBA courses around the world) and implemented the infamous ‘up or out’ policies that have plagued aspiring consultants for years.

The History of Consulting from Joe O'Mahoney on Vimeo.

After WW2, the growth in globalization aided the boom in consulting and saw the development of a number of tools, methods and products that are now taught in business schools around the world. Very much a demand-driven industry, consultancy grew off the back of economic development, first in the USA, then Europe and the rest of the world. Whilst most of the first consultancies have maintained their stronghold of strategic advice, growing demand for expertise in implementation, IT and outsourcing have allowed other companies to develop advisory services in these areas. The result has been strong growth in consulting services for companies that originally focused their advice in different areas: IBM, Deloitte, PWC and Accenture.

In more recent history, consultancy had continued to expand on the back of increasingly globalised companies, the information revolution and cost-cutting in government. The expansion has not been constant however, and two important breaks in this trend have been:

  • The Dot-com crash (2000-2002) where the high-tech / e-business bubble popped with severe consequences for clients and, therefore, their consultants. This lead to a plateauing of income for consultancies rather than a decline.
  • The Credit Crunch (2009-2011) where a collapse of liquidity in the money markets triggered a sharp drop on the stock markets and a decline in consumer confidence. The resulting recession witnessed private sector clients cutting back on discretionary spend which lead to the first decline in global consulting revenues for decades. The debt burdens of central governments was worsened by their attempts to improve confidence and ease liquidity by pouring billions into financial institutions. This debt has meant cut-backs in the use of consultants by most western governments.

To some extent, the shifting fortunes of the consulting industry disguises deeper transformations in what consultancy actually is. One of the major shifts has been away from the privately owned strategic partnership towards a highly commodified PLC. Whilst the McKinseys and Bains still exist, stereotypical high-margin, highly paid strategy consultants in discussion with blue-chip CEOs are increasingly rare. Partnerships have increasingly given way to publicly owned companies, strategy has given way to imlementation and profit margins have declined significantly over the last ten years. As I discuss elsewhere, this raises significant problems, not just for the challenge of running a consultancy but also in the very meaning of what it is to be a consultant.

Keenan Orfalea