Are Management Consulting Firms Failing to Manage Themselves?


After nearly a decade of uninterrupted growth, strategic consulting firms are now facing one of their most challenging periods in memory, prompting widespread cutbacks in staff and changes to recruiting. How did these firms get to this painful point? In response to unprecedented client demand before and during the COVID-19 pandemic, strategy firms initiated a growth-driven hiring spree. However, as economies slowed, these firms faced a significant imbalance between their staffing “supply” and the declining demand for their consulting services.

“The irony is clear: These strategy firms, who are experts at diagnosing and solving a variety of issues for their clients, are struggling to apply their own management principles internally.”

To regain equilibrium, over the past two years, some major consulting firms have meaningfully slowed recruiting and have delayed start dates for new recruits by five to 10 months. McKinsey, for example, has laid off both non-client and client service staff, and for the first time in its history, has offered buyouts to hundreds of senior associates. Meanwhile, public consulting firm Accenture has laid off an additional 2.5% of staff, raising its attrition rate to 13%.

The irony is clear: These strategy firms, who are experts at diagnosing and solving a variety of issues for their clients, are struggling to apply their own management principles internally. The problem, however, runs much deeper than COVID-era woes. Closer analysis reveals a series of systemic issues that have gradually worsened since the 2007-2008 financial crisis. At the heart of the problem lies the consulting firms’ aggressive pursuit of growth as their primary objective, which has fundamentally reshaped their scale and has challenged their reputation of providing superior top-management, CEO-focused client services.

Consulting firms make growth their primary objective

It’s worth recalling that these strategy firms were founded on the core principles of professionalism and highly selective client engagement. Growth was the result of their singular focus on top-management counsel, hiring the most qualified staff, and an apprenticeship process that built excellence. For example, Marvin Bower, founder of McKinsey, preached that partners had to focus on serving the right senior clients on their most critical issues with the most qualified people, while commercial interests were to be minimized. Bill Bain conceptualized his firm to serve one company per industry to ensure a focused, client-centric approach. Most firms established an unwavering culture where growth was an outcome, not the objective, of their client service.

The past decade has seen this drive for growth become a primary objective, pulling these firms away from their foundational north star: CEO and C-suite management consulting. In pursuing additional opportunities, consulting firms have widely diversified the industry breadth and functional depth of their offerings. Most have developed large research and practice infrastructures to produce in-depth insights for a staggering array of public companies, private entities, investment firms, public sector organizations, academic institutions, not-for-profits, and governmental clients.

“This created heterogeneous professional staffs, with many overlapping career pathways to partnership, requiring further non-client service staff to support and manage expansion.”

This emphasis on growth has reshaped their company culture and personnel priorities. Broadening offerings requires increasingly specialized skills at the associate and partner levels. Firms therefore began aggressively hiring over the last four to five years, which in turn has significantly increased firm size and highlighted the limitations of existing partnership governance structures.

Many firms further accelerated this drive to build their skills and broaden their offerings via acquisitions. McKinsey alone bought over 30 smaller firms to seed new skills and open new client opportunities, which produced challenges in integration and cultural alignment. All of this created heterogeneous professional staffs, with many overlapping career pathways to partnership, requiring further non-client service staff to support and manage expansion.

The war for talent

To realize aggressive hiring goals, particularly from 2015 onward, consulting firms broadened their efforts to recruit from the same talent pools. Competition became fierce.

In this “war for talent,” many firms ushered in increasingly accommodating policies to attract and retain staff. Turnover rates steadily decreased, while compensation expectations increased. This has fundamentally challenged the long-standing “up or out” model: As fewer associates have left and partner election numbers have exploded, the strength of the apprenticeship process has weakened, and partner quality has likely been diluted. Turbulence in the tech and private equity labor markets have also closed off opportunities for consultants wishing to leave, further exacerbating the issue.

This mismatch between staffing levels and demand post-COVID has resulted in firms seeking a return to the meritocracy of old through significant layoffs, restructuring, and new promotion practices. Though effective in achieving balance in the short term, such actions will likely fracture a historically trusting commitment from associates and partners to their firms.

How new fee structures have shifted firms’ priorities

The prioritization of growth has also led to record increases in the use of performance-based fees tied to client-achieved outcomes. While justified as aligning incentives with client success, within firms, this structure effectively rewards partners with larger clients able to sustain multi-team, multi-month programs.

This fee structure and the overarching drive for growth invariably de-emphasize the importance of mid-size and smaller project-based clients. It also incentivizes taking on riskier client engagements, what many have suggested has led to pushing ethical standards that has tarnished some firms’ reputations.

The pursuit of higher compensation

One of the most notable shifts is the expectation among partners of increasing financial rewards. Compensation rose annually during this decade-plus of high growth, such that an entire generation of partners has never experienced a downturn.

“While there was once an acceptance that consulting yielded moderate financial returns vs. other investment professionals, many now enter the profession focused on significant monetary gain.”

And yet, when compared to the outsized results of private equity, venture capital, and hedge fund investment banking professionals, consulting partners have asked, “Why not us?”

While there was once an acceptance that consulting yielded moderate financial returns (still considerable by any standard) vs. other investment professionals, many now enter the profession focused on significant monetary gain.

As compensation discussions have ramped up, so, too, has the drive for growth intensified in dialectic fashion. This attitude––what many clients have suggested is driven by greed––runs counter to the primacy of client service and threatens to further accelerate misguided growth.

The way forward

There appears to be a misalignment between management consulting firms’ internal practices and the advice they offer their clients. While most are taking immediate action to regain balance, their focus is on the short term. To address the root of their problems, they should follow the counsel they would give their clients:

  1. Take a step back to reassess. Consulting firms should hone back in on the fundamentals, reset around the core principles of top-management consulting, and use transformative innovations, particularly AI, to refocus on their top-management product and service offerings. In so doing, they should also rethink the breadth and depth of those practices and support infrastructures.
  2. Staff behind demand. It’s time to take advantage of the retrenchment in staff numbers and greater client selectivity to staff their firms in response to demand. Growth goals should return to a method of deriving from––not providing the primary impetus for––firm management goals.
  3. Adapt governance. The massive increase in scale of today’s partnerships requires revised firm processes to balance the wishes of distributed, independent partners with the centralized oversight needed to manage growth, ensure risk compliance, and maintain firm cultures.
  4. Embrace the return to meritocracy while (re)building internal trust. While firms need to execute short-term actions to get in balance, they must also acknowledge the need to work far harder and longer term to rebuild the trust of the associates who are rightfully wary of their true commitment to the apprenticeship model and employees’ future. To start, they should return to the mentorship model of the past.
  5. Reprioritize excellent service and deprioritize financial expectations. Partners need to be reminded that their primary role is to leave their firms stronger and more vibrant than when they joined. Monetary rewards should not be the priority.Top of Form

The compulsion to prioritize short-term solutions is understandable, but consulting firms should instead take the sort of advice that they’ve constructively given to their clients for years. By using this challenging moment as an opportunity to address the root causes, they will better ensure that this situation does not arise again in the future.

David Fubini is a senior lecturer in the Organizational Behavior Unit at Harvard Business School. He is the faculty chair of the Leading Professional Services Executive Program at HBS. Previously, he was a Senior Partner at McKinsey & Company for more than 34 years.

You Might Also Like:

Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.

Image: Illustration created using image from AdobeStock/Boocys and an image generated by Midjourney, an artificial intelligence tool



Source link

About The Author

Scroll to Top