How Management Consulting became a favorite for MBAs

Arthur D Little, the Chemical Engineer, was a pioneer in Industrial research and introduced Unit Operations, the bedrock for Chemical Engineering. He was also key to discovering Cellulose Nitrate, which eventually became Celluloid that had applications in Photography, X-Ray and moving pictures. Arthur began practicing in technical research and consulting from 1894. In 1909, he incorporated the  Arthur D Little Inc., the first company to offer professional services in Scientific Studies – a comparative study that designs and tests hypothesis, and identifies the multiple variables and causal relationship between risk factors and the output. Scientific studies evolved and later became Management Consulting, which was first offered as a standalone service by Frederick Winslow Taylor, in 1893.

Taylor's method

Management Consulting started as a mean to address the complexities of the industrial revolution – managing cost in Factories, developing an efficient supply-chain and offering solutions that created systems to solve the recurring problems in Manufacturing. When Founders took their companies public, shareholders, who had no oversight into the daily challenges of the operations, became part owners. The demand for growth in Earnings Per Share brought in the new breed of 'Managers', who was paid for advice on decisions that had a high impact on the entire Business and mitigated the complexities of the process. Unfortunately, these Managers who were specialists in Resource Management didn't have the expertise to streamline the process. They turned to Operation specialists for advice, and thus began the first Engagement between Companies and external consultants.

Taylor's method became the Foundation for Scientific Management that involved dividing the entire operations into smaller units, and setting up metrics to measure and compare the productivity for each part. By improving productivity for each unit and developing a communication framework for the organization, Taylor introduced the first Scientific Management methodology, which he offered to organizations for a fee. Frederick Winslow Taylor condensed his knowledge in the Book, The Principles of Scientific Management(1919).

1929 crash

The first Management Consultants were Engineers and reflects the rising industry of the era. When the dust settled on the burst of industries, partnerships turned into Corporations, and so did the focus from efficiency at Factory floors to managing costs at Corporations. Bankers found stardom in the new power dynamics. They offered corporates with advice on improving price structure and managing expenses across the organization. This went on until the Stock Market Crash of 1929, a culmination of speculation and strong positive numbers in Manufacturing (Steel), Retail, car sales, and Constructions. When the first half of 1939 saw a 36% rise in stock prices compared to the same period in 1938, brokers found a new breed of retail investors who were willing even to borrow 90% of the stock price as loans.

When the agricultural output decreased, the wages remained stagnant, and the demand for automobiles didn't reach the market's expectations, Stock prices began to crash. Despite industry leaders purchasing stocks at above the market rates, retail investors fled the stock market. The one who got out late lost their life savings. The retail investors allocated the funds to deposits in commercial banks. Unfortunately, the Banks, which had no distinction between Investment and Commercial activity had overleveraged the borrowing for purchasing stocks that created an imbalance on the reserve. The panic withdrawal nearly collapsed the Banking system.

The 1929 crash and the great depression that followed was a lesson for the industry on the need for separating commercial and investment banking. The Glass–Steagall Act of 1933 laid out four new provisions that separated commercial and investment Banking.

How Management Consulting Rose to new Heights?

If you are wondering why the Crash of 1929 is relevant, the Management Consulting industry would not have reached new heights had the Bankers been allowed to take on consulting roles in Corporations. With the legislation of 1933, external consultants with no affiliation with the Banks began offering strategic advice on expansion plans, new products and employee incentives. 

The period from the 1940s to 1970s can be termed as the growth phase in Strategic Consulting. The 3 Big Cs (McKinsey, BCG and Bain & Co.) dominated the market. As of 2016, the percentage of Strategy Consulting engagement is only 11-12% of the total Management Consulting market.

MBAs became the favorite for Strategic consulting as the Masters in Business Administration program built the foundational skills in General Management. With a solid understanding of how the various departments in a company inter-operate, MBAs were better equipped to offer strategic advice that had wider implications. The Finance and Technology consulting boom followed from 1970 to 1990, bringing in MBAs with a background in the industry into consulting roles. The craze for Business process outsourcing and consulting for e-commerce business began from 1990 and reached its peak in early 2000 until the IT bubble burst.

Why you should Choose Strategy if you have plans to get into C-Suite roles

Most MBAs prefer Strategy engagements in Management Consulting. One reason is the wisdom that those who work in Strategy are likely to receive the chance to take on the role of a CEO. Since the consultants have already worked on the Strategy of mid-sized Businesses to multinationals, they might have offered career-saving advice to a wide variety of enterprises. The 3 Big Cs – McKinsey, BCG and Bain & Co. are known for Strategy. But if you look at the market share, the combined share is below 15%. Joining the largest Management Consulting companies doesn't naturally translate to responsibilities that have the highest impact.
 
The three Big Cs continue to dominate the Strategy market, with a notable list of Alumni. Before the 2008 bust, USA Today did a study to find the odds of a McKinsey consultant making it as a CEO of a publically traded company. The odds was 1 in 690; a close second was Deloitte at 1 in 2150. In 8 years, the odds has drastically changed. Silicon Valley has a particular distaste for the MBA type with shallow pre-MBA experience in the industry. If you are planning to move to consulting, you should have a natural inclination towards sales as well as advisory roles. The value of the advice is often calculated as the percentage of the profit. If you didn’t bring in high order value, the return on revenue from advisory role would not be sustainable for the Management Consulting company. The disclaimers in the contract absolve the consultants from the repercussions of the decisions made by the CEO. We saw that with Enron and the recent 2008 financial bust.

The legacy of 80-year-old companies and the founding stories of the 3 Big Cs still hold sway on the 50-year-old board members. If your career path needs any guarantee on moving towards C-Suite roles, Strategy is still the best bet.

Are you good enough for a post-MBA role in Management Consulting?